oversight

Procedures To Assist U.S. Small Business and Shorten Commodity Procurement Cycle in India Need Improvement

Published by the Government Accountability Office on 1971-08-02.

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

Procedures To Assist
US. Small Business
And Shorten
Commodity Procurement Cycle
In India
Need Improvement                 E-167854




Agency for International   Development
Department   of State




UNITED STATES
GENERAL ACCOUNTING                          OFFICE
                                       UNITEDSTATESGENERAL
                                                         ACCWNTINGOFFICE
                                                WASHINGTQN,       D.C.   20548


INTERNATIONAL          DlVlSlON




                B-161854

                Dear       Dr.    Hannah:

                       This is our report    entitled         “Procedures        to Assist  U.S. Small
                Business    and Shorten   Commodity            Procurement         Cycle in India Need
                Improvement.”

                        The matters      in this report   have been covered     on an overall    basis
                by congressional       hearings    and subsequent   recommendations.         The prob-
                lems have been analyzed          on an AID-wide   basis by AID’s Office of Man-
                agement      Planning,   and resulting   recommendations      to revise    and improve
                AID’s    small business      procedures    have been approved     by AID’s    Deputy
                Administrator.

                       The purpose    of this report      is to bring these matters    to your atten-
                tion with the hope of eliciting       implementing      action as soon as possible    on
                the problems   involved--particularly          for India, where large amounts      of
                AID program    loan funds are being expended.

                       This report  was discussed             with AID officials.      Their views and
                comments     have been considered.             We did not request       formal  comments
                on the report.

                        The recommendations,     in a number   of instances,              are similar to
                several   of the AID and congressional    recommendations                 that have been
                adopted but not yet fully implemented      by AID.

                         Your attention     is invited  to section      236 of the Legislative       Reorga-
                nization    Act of 1970 which requires           that you submit written        statements
                of the action taken with respect          to GAO recommendations.               The state-
0     c         ments are to be sent to the House and Senate Committees                       on Govern-       .QFfl
                ment Operations        not later than 60 days after the date of this report                and         !
      4
                to the House and Senate Committees                on Appropriations        in connection        <Sd
                with the first     request    for appropriations       submitted      by your agency more
                than 60 days after the date of this report.               In addition,   we request      that
                you furnish     us with copies of the statements            sent to the congressional
                committees       on the recommendations            made.
    B- 161854




            Copies of this report      are being sent to the Director,      Office of
    Management       and Budget; the House and Senate Committees             on Gov-
    ernment     Operations;  the House and Senate Committees             on Appropri-
    ations;   the Foreign   Operations     and Government     Information     Subcom-
    mittee,    House Committee      on Government     Operations;     and the Subcom-       p 0
F
,   mittee    on Government     Procurement,     House Select Committee          on Small
    Business.

                                                    Sincerely   yours,




                                                    Director,   International   Division

    Enclosure

    The Honorable      John A. Hannah
    Administrator,      Agency for
      International     Development
                                          47
    Department      of State




                                                2
I
I       GENIBALACCOUNTINGOFFICE                                       PRQCEDURESTO ASSIST U.S. SMALL
I *     REPORTTO THE ADMINISTRATOR                                    BUSINESS AND SHORTEN COMMODITY
I
I       AGENCYFOR INTERNATIONALDEZELOPMENT                            PROCUREMENTCYCLE IN INDIA NEED
I                                                                     IMPROVEMENT
I
I                                                                   'Agency for International   97
I                                                                  Z-$Be;;i;gent  Department of State 73;t
I
I
I
I
I       DIGEST
        ------
I
t
I       WHYTHE REVIEWWASMADE
I
I
I               A large part of U.S. economic assistance     to India is in theform     of loans
I               to help provide essential     imports needed for its economic development.
I
I               In fiscal   years 1968, 1969, and 1970, an average $224 million      annually
I               was loaned by the Agency for International      Development (AID) to the Govern-
I
I
                ment of India, to help finance such commodities       as iron and steel products,
I               fertilizer,    chemicals, pharmaceuticals,  and machinery.
I
I
I               The General Accounting Office       (GAO) has reviewed         various   aspects of AID’s
I               management of the Commodity       Import Program because of its           size and impor-
I
I               tance.

                Because it is the declared       policy of the Congress to assist      American
                business--particularly      small business-- in participating      in U.S.-financed
                commodity export sales,       the report deals primarily      with AID’s small busi-
                ness notification      and bid solicitation   procedures    and the effect of these
                procedures     on the commodity procurement    cycle in India.

I
I
        FINDINGS AND CONCLUSIONS
                AID's Office   of 3nal.Z Business Procedures
I
I
                Indian importers    consider    AID’s small business         notification    requirement
I               to be a serious    impediment    to conducting      normal    trade transactions      with
    I           U.S. suppliers.
    I
    I
    I           Importers   claim that the requirement         has been of minimum value in secur-
    I
    I
                ing responsive     bids or establishing       reliable    sources of supply.      Because
    I           of the added delays and administrative             problems that the notification       re-
    I           quirement   creates,   Indian importers       avoid it, when possible,      by obtaining
    I
    I           waivers or by using foreign-exchange           financing    from other sources.      (See
    I           pp. 8 to 10 and 12.)
    I
    I
    I           Virtually   a71 importer   transactions   are accomplished       through overseas
    I
    I           agents or representatives.        Most of the larger,       more experienced   suppliers
    I           and importers   have agents or established      affiliations.        AID could render




    I
    I
    I
        Tear Sheet                                        1
                                                                                                  I
                                                                                                8 I
a valuable servi,~ in this area by helping the small U.S. supplier to
estahl ish agency relationships in AID-assisted countries. (See pp. 10,                           I
11 and 18.).                                                                                      I
                                                                                                  I
                                                                                                  I
AID Mission    auditors    have found that AID's business notification            procedure       ;
is so ineffective       as to cause serious delays and poor responses           from bid-         ,
ders.   (See p. 12.)                                                                              I
                                                                                                  I
An AID procurement    survey group also has found         that the small business                  i
notification   procedure   is clearly ineffective.          The group has found also               ]
that the small business notification       procedure      has become the most seri-                ,
ous problem in AID's Commodity Import Program,              (See p. 13.)                           ;

As of March 31, 1971, many of the proposals            and recommendations    made in
the procurement    group's    report     had been adopted by subsequent AID work-
ing groups in cooperation        with the Department of Commerce and the Small
Business Administration       and had been approved by the AID Deputy Adminis-
trator with the reservation          that fundamental   changes would he subject      to
appropriate   congressional      liaison.     Actual implementation    of significant
recommendations    concerning      small business,    however, had not yet taken
place as of that date.        (See pp. 15 and 16.)

GAO believes     that it may be some time before the recommendations          actually
are implemented on a worldwide       basis and that therefore      AID should pro-
ceed without     delay to alleviate    the commodity procurement     impediments      in
India. Any modification       of existing    procedures or adoption     of alterna-
tive procedures,      however3 should take into account the requirements          and
intent   of the Foreign Assistance       Act of 1961, as amended, with respect
to assisting     U.S. small business firms and providing      information     to im-
porters    abroad on commodities    produced by U.S. small business firms.
(See p. 19.)
                                                                                                       I
SmaZZ business participation                                                                           I
                                                                                                       I
AID practices   are not fully   consistent with congressional     intent     regard-                   1
ing assistance   to U.S. small business,   as expressed in section         602 of the                  I
Foreign Assistance     Act of 1961, as amended, and as reaffirmed        in recent                     I
congressional   hearings.                                                                              I
                                                                                                       I
AID has made no significant      changes in its procedures          to assist     U.S. saal’l          i
business, regardless     of congressional      criticism     and widespread     dislike  of            I
AID's business notification      requirements.          (See pp. 21 to' 29.)                           I
                                                                                                       I
AID has placed  no special emphasis on assisting    small business. AID con-                           i
tends that small business is not able to participate      in the majority of                               I

AID-financed transactions   9 because9 in many cases, small business does
                                                                                                           1
                                                                                                           I
not produce the commodities    required.

AID nevertheless      has continued    to publish procurement    information   and
                                                                                                           I
conduct activities!under        the small business label and has indicated,        at                      I
least on the surface,      that particular      emphasis is being directed   to the                        I
small business community.          (See pp. 21 and 22.)                                                    I
                                                                                                           I



                                         2
        AID has changed the title    of its principal    business publication,     deleting
      'the reference   to sma'il business;    however, the titles   of Office of Small
        Business and Special Assistant     for Small Business remain the same. GAO
        feels that AID has the responsibility      for resolving  the contradictions
        suggested by the titles   when compared with the actual activities         being
         performed.  (See pp. 21, 22, and 28.)

        Surveys and interviews       with importers     generally   confirmed    that AID's
        small business circular       was ineffective     in providing     Indian importers with
        responsive    bids and in providin        U.S. small business with a fair share
        of AID-financed    transactions.       4 See pp. 23 to 25.)

        On the basis of the results     of an AID Office        of Small Business question-
        naire,   AID officials concluded that existing          Office    of Small Business
        procedures   to assist U.S. business concerns,          including    small business,
        had been well received and effective.

        GAO believes      that   such positive   conclusions   cannot     be made because:

             --No statistics   were kept in Washington or at the Missions,             prior    to
                September 1970, to measure small business participation.

             --The questionnaire      did not present   adequately      the issues   involved    or
                the possible   alternatives.

        In April 1977 AID officials      explained      that AID's Office    of Small Business
        had changed its views regarding        the effectiveness    of its business notifi-
        cation procedures    and now supported       the worldwide  adoption of a general
        procurement  information    bul7etin     for all negotiated     procurement.   (See
        pp. 22, and 26 to 28.)

       AID has made recent efforts      to compile statistics            regarding   small busi-
       ness participation.      GAO believes  that AID should            analyze this data, to
       measure the effectiveness     of AID efforts   to assist            small business and to
       identify   areas and means of increasing     assistance           to small business firms.
       (See pp. 22, 23, 28, and 29.)

        Connnodity procwemeniz       cycle   in India

        The long commodity procurement         cycle in India,   which averages 74 months,
        tends to adversely    affect    the benefits   derived from U.S. financing      of im-
        ports to India.    Importers      find that the long cycle increases      costs of
        financing  and requires      the maintenance   of larger   inventory  levels.

        AID's business notification    requirements  contribute  about 2 months to the
        procurement   cycle.   Normal import license  processing  by the Government of
        India takes about 4 months.     The subsequent business notice publication
        procedures  average 2 months.




Tear Sheet
                                                 3
    To alleviate     some of the problems inherent    in the long procurement    cycle,                   I !
    the AID Mission in India requested       approval from AID/Washington     to allow                      I
                                                                                                            I
    importers    to submit advance notices of intended procurements.        Thus far                        I
    AID/Washington's     reaction to the request has been negative,      because there                      ;
    is no assurance of some control      over the flow of notifications.                                    I
    GAO believes    that license  processing   and business notification,    provided                       I
                                                                                                            I
    that the latter     continues to be required,     should take place concurrently
    and thus would shorten the procurement        cycle by about 2 months.     (See pp.                     j
    30 to 35.)                                                                                              I

RECOMVEflDATIOiVS
               OR SUGGESTIONS
    The   AID Administrator       should:

       --Modify     current  business notification   procedures     applicable            to Indian         i
          importers,     to make the present requirements     optional     with          importers.         I
           (See p. 19.)                                                                                     I
                                                                                                            I
       --Adopt for India,        on a trial basis, the alternative  procurement                  infor-     ;
          mation bulletin       procedure now used in several other countries,                     (See     I
          p. 19.)                                                                                           I
                                                                                                            I
       --Prescribe     procedures    to specifically       assist     U.S.   small   suppliers      in
          establishing      agent relationships      in    India and to ensure a flow of
          information     to prospective      purchasers    abroad concerning         commodities
          available    from U.S. small suppliers.           (See p. 19.)                                    I
                                                                                                            I
       --Publish      information       on all waivers that are granted,       including   commod-          ;
          ities    involved,      contract    amounts, importers,   suppliers,     and reasons              I
          for granting       waivers.      In the event that the procurement information                    I
          bulletin      procedure     is adopted, the AID Administrator        should identify              I
          in this bulletin         or in a separate business memorandum all waivers that                    I
          are granted,       including     the existing   sole agency and pro rietary       rela-           i
          tionships      between importers       and suppliers.    (See p. 19.7                             I


       --Resolve   the contradictions       suggested by the titles    of Office of Small                   i
          Business and Special Assistant        for Small Business when compared with                       I
          the actual activities       being performed.    (See p. 29.)

      --Ensure   that a continuing      effort   is made to collect       data on small busi-               [
         ness participation      in AID-financed    transactions,       to analyze the data,                ,
         and to identify    effective     ways of increasing      assistance    to small busi-              1
         ness concerns.     (See p. 29.)                                                                    I
   IIn the event that the current business notification  requirement    remains
    unchanged, the AID Administrator  should seek to have the Government of
    India process and forward to AID the required procurement notifications
    concurrently     with     the processing   and issuance         of import   licenses.        (See
    p. 34.)
                          Contents
                                                                 Page

DIGEST                                                             1

CHAPTER

  1        INTRODUCTION                                            5

  2        AID'S OFFICE OF SMALL BUSINESS PROCEDURES               8
                Business notification   requirements               8
                Findings of AID auditors    and AID pro-
                   curement survey group                          12
                Coordination   with Department of Commerce
                   and Small Business Administration              15
                Conclusions                                       17
                Recommendations                                   19

           SMALL BUSINESS PARTICIPATION IN AID-FINANCED
           PROCUREMENTS                                           21
              Conclusions                                         28
              Recommendations                                     29

           COMMODITYPROCUREMENT
                              CYCLE IN INDIA                      30
              Conclusions                                         34
              Recommendation                                      34

           SCOPEOF REVIEW                                         36

APPENDIX
   I       Principal      officials     of Agency for Interna-
              tional Development having management re-
              sponsibilities        for matters discussed in
              this report                                         39
                            ABBREVIATIONS

  AID      Agency for   International       Development

  GAO      General Accounting      Office
*   GEiERAL ACCOUNTINGOFFICE                                   PROCEDURESTO ASSISTU.S. SMALL
    REPORTTO THE ADMINISTRATOR                                 BUSINESS AND SHORTEN COMMODITY
    AGENCYFOR INTERNATIONALDEVELOPMENT                         PROCUREMENTCYCLE IN INDIA NEED
                                                               IMPROVEMENT
                                                               Agency for International
                                                               Development Department of State
                                                               B-161854


    DIGEST
    ------

    WHYTHE REVIEWWASMADE
        A large part of U.S. economic assistance     to_- India is in the form of loans
        to help provide essential    ~irn~rt~?i%ded  for its economic development.
        In fiscal years 1968, 1969, and 1970, an average $224 million annually
        was loaned by the Agency for International      Development (AID) to the Govern-
        ment of India, to help finance such commodities        as iron and steel products,
        fertilizer,   chemicals,  pharmaceuticals,  and machinery.

        The General Accounting Office         (GAO) has reviewed       various   aspects of AID’s
        management of the Commodity         Import Program because of its         size and impor-
        tance.

        Because it is the declared policy of the Congress to assist American
        business--particularly      small business-- in participatinfln-USTinanced
        co?iufiodit~~kxportsales, the report deals primarily                AID’s
                                                                      with ..___-.. .-..small...busi-
        nessnotification
                    -. .~      and bid solicitation  proc&&iFi?s    and-the    effect      of these
        procedures      on the commodity procurement   cycle in India.


    FINDINGS AND CONCLUSIONS
        AID's Office    of SnaZZ %usiness      Procedures
        Indian importers     consider AID's small business notification     requirement
        to be a serious     impediment to conducting  normal trade transactions      with
        U.S. suppliers.

        Importers  claim that the requirement          has been of minimum value in secur-
        ing responsive     bids or establishing       reliable    sources of supply.      Because
        of the added delays and administrative             problems that the notification       re-
        quirement   creates,    Indian importers      avoid it, when possible,      by obtaining
        waivers or by using foreign-exchange           financing    from other sources.      (See
        pp. 8 to 10 and 12.)

        Virtually   all importer   transactions   are accomplished       through overseas
        agents or representatives.        Most of the larger,       more experienced   suppliers
        and importers   have agents or established      affiliations.        AID could render
a valuable   service  in this area by helping the small U.S.             supplier to           *
establish   agency relationships   in AID-assisted countries.             (See pp. 10,
11 and 18.)
AID Mission auditors    have found that AID’s business notification                procedure
is so ineffective    as to cause serious delays and poor responses               from bid-
ders.   (See p. 12.)

An AID procurement    survey group also has found          that the small business
notification  procedure    is clearly ineffective.          The group has found also
that the small business notification       procedure       has become the most seri-
ous problem in AID’s Commodity Import Program.               (See p. 13.)

As of March 31, 1971, many of the proposals             and recommendations    made in
the procurement     group's    report had been adopted by subsequent AID work-
ing groups in cooperation        with the Department of Commerce and the Small
Business Administration        and had been approved by the AID Deputy Adminis-
trator   with the reservation         that fundamental   changes would be subject      to
appropriate    congressional      liaison.     Actual implementation    of significant
recomendations      concerning      small business,    however, had not yet taken
place as of that date.         (See pp. 15 and 16.)

GAO believes     that it may be some time before the recommendations           actually
are implemented on a worldwide        basis and that therefore      AID should pro-
ceed without     delay to alleviate     the connnodity procurement     impediments     in
India.    Any modification     of existing   procedures   or adoption of alterna-
tive procedures,      however, should take into account the requirements           and
intent   of the Foreign Assistance       Act of 1961, as amended, with respect
to assisting     U.S. small business firms and providing       information     to im-
porters    abroad on commodities     produced by U.S. small business firms.
(See p. 19.)

S)naZZbusiness participation
AID practices   are not fully  consistent with congressional    intent     regard-
ing assistance   to U.S. small business,  as expressed in section        602 of the
Foreign Assistance    Act of 1961, as amended, and as reaffirmed       in recent
congressional   hearings,

AID has made no significant      changes in its procedures          to assist    U.S. small
business,  regardless    of congressional      criticism     and widespread     dislike of
AID’s business notification      requirements.          (See pp. 21 to 29.)

AID has placed no special emphasis on assisting     small business.     AID con-
tends that small business is not able to participate      in the majority   of
AID-financed  transactions, because, in many cases, small business does
not produce the commodities  required.

AID nevertheless   has continued    to publish procurement    information   and
conduct activities    under the small business label and has indicated,         at
least on the surface,    that particular     emphasis is being directed   to the
small business community.      (See pp. 21 and 22.)


                                         2
* AID has changed the title    of its principal    business publication,     deleting
  the reference   to small business;    however, the titles   of Office of Small
  Business and Special Assistant     for Small Business remain the same. GAO
  feels that AID has the responsibility      for resolving  the contradictions
  suggested by the titles   when compared with the actual activities         being
  performed.    (See pp. 21, 22, and 28.)

  Surveys and interviews       with importers   generally   confirmed    that AID’s
  small business circular       was ineffective   in providing     Indian importers with
  responsive    bids and in providin       U.S. small business with a fair share
  of AID-financed    transactions.       4See pp. 23 to 26.)
  On the basis of the results    of an AID Office         of Small Business question-
  naire,   AID officials concluded that existing          Office    of Small Business
  procedures   to assist U.S. business concerns,          including    small business,
  had been well received and effective.
  GAO believes      that   such positive   conclusions   cannot     be made because:

     --No statistics   were kept in Washington or at the Missions,               prior    to
        September 1970, to measure small business participation.

     --The questionnaire      did not present     adequately      the issues   involved    or
        the possible   alternatives.

   In April 1971 AID officials       explained     that AID's Office    of Small Business
   had changed its views regarding        the effectiveness    of its business notifi-
   cation procedures    and now supported       the worldwide  adoption of a general
   procurement  information    bulletin     for all negotiated     procurement.   (See
   pp. 22, and 26 to 28.)

  AID has made recent efforts      to compile statistics   regarding   small busi-
  ness participation.      GAO believes  that AID should analyze this data, to
  measure the effectiveness     of AID efforts   to assist   small business and to
  identify   areas and means of increasing     assistance  to small business firms.
  (See pp. 22, 23, 28, and 29.)

   Commodity     procurement   cycle   in India

   The long comnodity procurement        cycle in India, which averages 14 months,
   tends to adversely   affect    the benefits   derived from U.S. financing     of im-
   ports to India.    Importers     find that the long cycle increases     costs of
   financing and requires      the maintenance of larger inventory     levels.

   AID’s business   notification    requirements   contribute  about 2 months to the
   procurement  cycle.      Normal import license   processing  by the Government of
   India takes about 4 months.        The subsequent business notice publication
   procedures  average 2 months.




                                           3
    To alleviate     some of the problems inherent     in the long procurement    cycle,            5
    the AID Mission in India requested       approval from AID/Washington      to allow
    importers    to submit advance notices    of intended procurements.      Thus far
    AID/Washington's     reaction to the request has been negative,       because there
    is no assurance of some control      over the flow of notifications.

    GAO believes    that license  processing   and business notification,    provided
    that the latter     continues to be required,     should take place concurrently
    and thus would shorten the procurement        cycle by about 2 months.     (See pp.
    30 to 35.)


RECOIL&'E~?DATIO~VS
               OR SUGGESTIONS
    The   AID Administrator     should:

      --Modify     current   business notification   procedures     applicable       to Indian
         importers,      to make the present requirements     optional     with     importers.
         (See p. 19.)

      --Adopt for India,       on a trial basis, the alternative  procurement              infor-
         mation bulletin      procedure now used in several other countries.                 (See
         p. 19.)

      --Prescribe     procedures    to specifically     assist   U.S. small suppliers    in
         establishing     agent relationships       in India and to ensure a flow of
         information     to prospective     purchasers    abroad concerning  commodities
         available    from U.S. small suppliers.          (See p. 19.)

      --Publish      information      on all waivers that are granted,         including     commod-
         ities    involved,      contract    amounts, importers,    suppliers,     and reasons
         for granting       waivers.      In the event that the procurement          information
         bulletin      procedure is adopted,        the AID Administrator      should identify
         in this bulletin         or in a separate business memorandum all waivers that
         are granted,       including     the existing   sole agency and pro rietary           rela-
         tionships      between importers       and suppliers.     (See p. 19. P

      --Resolve   the contradictions       suggested by the titles     of Office of Small
         Business and Special Assistant         for Small Business when compared with
         the actual activities       being performed.     (See p. 29.)

      --Ensure  that a continuing      effort   is made to collect       data on small busi-
         ness participation     in AID-financed    transactions,       to analyze the data,
         and to identify    effective    ways of increasing      assistance    to small busi-
         ness concerns.     (See p. 29.)

    In the event that the current business notification   requirement   remains
    unchanged, the AID Administrator  should seek to have the Government of
    India process and forward to AID the required procurement notifications
    concurrently  with the processing and issuance of import licenses.      (See
    p. 34.)


                                           4
                              cHATrEX

                            INTRODUCTION

       The General Accounting Office has reviewed selected
practices   followed by the Agency for International  Develop-
ment in the administration    of the Commodity Import Program
in India.    This report deals with AID's procedures to as-
sist U.S. small business and with the delay in the procure-
ment cycle for AID-financed    commodities caused by the pro-
cedures.

       Our review of AID's management practices      related   to the
subjects covered in this report was focused primarily          on
AID's program in India,      Seine of our observations     and comments,
however, may, and probably do, have applicability          to other
countries   receiving AID-financed    commodity assistance.

       Congress has specifically     expressed its policy with re-
spect to assisting    small business interests     in section 602,
entitled   ttSmall Business,"    of the Foreign Assistance Act of
1961, as amended, which reads as follows:

     "(a) Insofar as practicable        and to the maximum ex-
     tent consistent     with the accomplishment       of the
     purposes of this Act,      the  President   shall   assist
     American small business to participate          equitably
     in the furnishing      of commodities,    defense articles,
     and services    (including    defense services)     financed
     with funds made available       under this Act--

           (1) by causing to be made available      to sup-
           pliers  in the United States, and particularly
           to small independent enterprises,     information,
           as far in advance as possible,    with respect to
           purchases proposed to be financed with such
           funds;
           (2) by causing to be made avaliable      to pro-
           spective purchasers  in the countries      and areas
           receiving assistance  under this Act informa-
           tion as to such commodities,   articles,     and



                                   5
            services produced by small independent          enter-
            prises in the United States; and

            (3) by providing      for additional    services to
            give small business better opportunities         to
            participate    in the furnishing      of such com-
            modities,   articles,     and services financed
            with such funds.

      l'(b) There shall be an Office of Small Business,
      headed by a Special Assistant    for Small Business,
      in such Agency of the United States Government as
      the President may direct,   to assist in carrying
      out the provisions  of subsection    (a) of this sec-
      tion."

       The matters discussed in this report have been given
considerable      attention     by the Subcommittee on Government
Procurement of the House Select Committee on Small Business.
Hearings were held on May 15 and on July 10 and 31, 1969,
and House Report 91-777, entitled           'The Position    and Problems
of Small Business in Procurements Financed by the Agency for
International      Development,"     was issued on December 19, 1969.
The Subcommittee's        report contains eight recommendations,
most of which AID has implemented or has agreed to implement.
AID believes that therecommendationconcerning              class set-
asides --restricting        bidding on designated classes of items
to prequalified       U.S. small business firms--is       not practi-
cable.
        An AID procurement survey group has performed a world-
wide analysis      of AID's program assistance    procurement prac-
tices with the objective       of bringing  together the various
policies    and procedures which bear upon AID's commodity im-
port programs,       A comprehensive report was prepared and sub-
mitted to the AID Deputy Administrator         in July 1970. AID
officials    informed us that certain of the recommendations
had been acted upon or were no longer applicable.

      A large part of U.S. economic assistance   to India is in
the form of program loans to help provide essential     imports
needed to maintain and stimulate   India's  economic develop-
ment.   In fiscal years 1968, 1969, and 1970, AID annually
loaned the Government of India an average $224 million     to

                                   6
help finance essential   imports,  including  iron and steel
products,   fertilizer, chemicals, pharmaceuticals,    and ma-
chinery,   As of April 22, 1971, $170 million     had been com-
mitted to the Government of India for fiscal      year 1971 com-
modity program assistance.
                              CHAPTER2

          AID's   OFFICE OF SMALL BUSINESS PROCEDURES

BUSINESS NOTIFICATION REQUIREMENTS

        To carry out the small business provisions             in the For-
eign Assistance Act, AID has promulgated regulations                 that--
unless waived by AID--require              importers to submit copies of
invitations-for-bids          or notifications      of proposed procure-
ments to AID's Office of Small Business in Washington for
publication.         Importers cannot accept or place orders until
after 30 days of circularization               have elapsed (45 days for
formal bids or advertisements             over four pages long).

        Information     concerning proposed procurements,        including
descriptions        of the commodities in terms of U.S. standards,
are conveyed to U.S. suppliers           and other interested     parties
through the AID publication          "AID Financed Export Opportuni-
ties"     (formerly    "AID Small Business Circular").        Interested
suppliers       can submit their price quotations       or bids directly
to the importer or through their local agents in India.                  The
importer evaluates         the offers received,    selects a supplier,
and places his order after the normal waiting period or
other bid deadline set by AID/Washington.              When the mailing
time and processing          time are added to the circularization
period,      the total waiting time for the importer is almost
always 60 days, and often much longer.

        Indian importers find the small business notification
requirement     to be cumbersome and of minimal value.    AID au-
ditors,     however, have found that the importers generally
have complied with the requirement.      Further tests by GAO
showed general compliance by Indian importers.

       AID's notification   procedure covers both formal bid
procurements by foreign government purchasers and directly
negotiated    procurements between private       importers and their
suppliers.     If the procurement is to be by formal competi-
tive bid or if numerous items of various descriptions           are
included,    50 copies of the invitation-for-bid        and 50 copies
of drawings, details,     and other applicable      data must be
mailed to AID's Office of Small Business in Washington.


                                     8
(An AID procurement survey group found that a typical
spare-parts  order from India required the air shipment of
110 pounds of paper at a cost of $145, not including     the
cost to the importer for the preparation  and reproduction
of the material.)

      A test we performed at AID's Office of Small Business
in Washington showed that Indian importers           accounted for
most of the published       items requiring     the submission of de-
tailed data.    We reviewed 111 items , published         in AID busi-
ness circulars   during an 8-month period ended in January
1971, that required      the importers to prepare and ship to
AID/Washington   50 sets of detailed        data for each item.    Of
these 111 items, 86 were being procured by Indian import-
ers.    Moreover we estimated that only about 10 percent of
such detailed   material      had been requested by prospective
suppliers   and sent out to them by AID.

       AID's notification     procedure implies that the supplier
offering    the lowest price for a given commodity can expect
to receive the order.        This inference      seems to run through-
out the notification      procedure.      Only in formal procurement
must the award be given to the lowest responsive              bidder.
In negotiated     procurement lowest price is not necessarily
the major factor in the purchase decision.             Most of AID-
financed procurement is done on a negotiated             basis, which
normally does not require copies of bid invitations               or nu-
merous copies of detailed        specifications;     yet in many in-
stances the notification       procedure requires       an importer to
prepare and submit 50 copies of complete specifications,                at
his own expense, regardless        of the number of possible or
interested     suppliers.

       Indian importers have found the notification        procedure
to be very difficult.        Whenever possible   they avoid using
it by obtaining     waivers or by using other foreign exchange
financing.      As noted in chapter 4, we found that in India
the notification      procedure added an average 64 days to the
commodity procurement time.        Responsible AID officials     have
pointed out that an importer's       last preference   often is for
an AID-financed     license.    He would much prefer to import
his commodities by using, for example, European or Japanese
foreign exchange credits,       when available.


                                     9
       In regard to waivers,     our test showed that over one
third of the importer transactions        in India had been waived
with respect to AID's notification        requirements.    (See
p. 23.)     Certain firms obtained blanket waivers for all
transactions.       Transactions  for which waivers are granted
are not subject to AID's notification         procedure and are not
published     in AID business circulars.      Thus waived transac-
tions are not subject to the same, open competition          among
circular    recipients    that would otherwise occur if waivers
were not granted.

       We believe that AID should publish information             on all
waivers that are granted in a periodic           publication     or busi-
ness memorandum that would include the types of commodities
involved,    amount of transactions,      names of importers and
suppliers,    and reasons for granting waivers.            We feel that
this information      would give AID publication        subscribers    the
opportunity     to more fully evaluate prospects          for export
sales.     In addition,     it would provide interested       firms with
data and criteria       for establishing    overseas importer rela-
tionships,    including    relationships    on an affiliate,      a sole-
agency 9 or a proprietary        basis.

      It    generally    is recognized that almost all interna-
tional   trade is conducted through overseas representatives
or agents.      AID officials     have pointed out to us that ap-
proximately     99 out of 100 transactions      for India are ef-
fected on this basis.         Almost all U.S. firms engaged in in-
ternational     export business have affiliates      or agents
abroad through whom all such business is conducted.            In
many instances overseas agents represent more than one sup-
plier.     Many of them work on commission bases whereby lit-
tle expense or no expenses are incurred by the suppliers
unless sales are made. We believe that overseas agents
would be willing       to represent U.S. small suppliers    who need
representation       on bases similar   to those on which they rep-
resent their large clients.

      As a rule thelarger,more      experienced     firms are better
able to cope with AID's administrative        requirements     which
are imposed in addition     to the normal commercial procedures
of international    trade.    It is the small U.S. exporter,
manufacturer,    and producer, without established        contacts,


                                   10
who need more assistance          in obtaining      a fair   share of ex-
port business.

       AID lists various methods by which it implements the
requirement     for providing    additional     services    to afford
small business better opportunities           to participate      in the
AID-financed     commodity market.       Assisting     small business
firms in establishing       agent relationships,        however, does
not appear to be one of them. We believe that the lack of
an agent relationship       is one of the significant         impediments
to small business participation          abroad.

       With respect to section 602(a)(2)         of the Foreign As-
sistance Act of 1961, as amended (see p. 51, AID is re-
quired to make available       to prospective      purchasers in AID-
assisted countries    information      concerning commodities pro-
duced by small independent enterprises           in the United States.
AID has publicized    requests that suppliers          send in copies
of their brochures,     catalogs,    descriptive     literature,      and
price lists    to its overseas Missions for inclusion            in their
commercial libraries.       AID also has published requests for
catalogs and descriptive      material    covering specific        prod-
ucts or commodity categories       which have been requested by
its overseas Missions or foreign purchasers.                In addition,
a directory    of U.S. small business firms was published              once
in 1950; AID has considered       the subsequent revision          and pub-
lication    of such a directory     to be too expensive and time-
consuming.

       Our review of these activities             and discussions         with
AID officials      indicate     that, contrary       to the intent of the
legislation,      no material      efforts     are made by AID to elicit
and make available        to importers       information      specifically
from small U.S. producers and suppliers,                    In our view ef-
forts that have been made have been aimed at all business
firms, large and small, and any benefits                  to small business
have been incidental.           In commenting on special efforts               to
assist small business, AID's Assistant                 for Small Business
explained     that AID was making an effort,              through the De-
partment of Commerce and the Small Business Administration,
to provide information          on U.S. small suppliers           to importers
in aid-recipient        countries.       This idea has been'incorpo-
rated in an internal        AID recommendation approved by the AID
Deputy Administrator         on March 31, 1971.

                                      11
FINDINGS OF AID AUDITORSAND
AID PROCUREMENT SURVEYGROUP

       AID Mission auditors    reported in late 1968 that small
business notification     procedures had caused a variety           of
problems, including    backlogs necessitating       temporary waivers,
poor response to published notices,        and long delays caused
by the mandatory waiting period--delays         which were further
extended by recipient-government       processing.        The auditors
noted that, in several countries,       especially      in Latin Amer-
ica, the small business notification        procedures had been ef-
fectively   waived or replaced with alternative          procedures,
such as general procurement information         bulletins.      (Under
the Colombia Plan a procurement information           bulletin    is is-
sued after a loan agreement is signed.          This bulletin       con-
tains data on commodities to be procured,          probable importers
and their addresses, and other information          aimed at assist-
ing U.S. exporters.)

        Mission audit experience     in India showed that response
to small business publications        had been generally       poor and
 indicated    that there was a need for changes in the prescribed
 system.     To effect an import transaction,       Indian importers
generally     contacted a number of Indian agents for bids.
They considered       the small business procedure to be a bother-
some requirement       which did not result     in any significant
response from U.S. suppliers.          Importers were required to
send their procurement notifications          to AID/Washington
through the Government of India, which would result              in about
10 days' being added to the standard 45-day waiting period.
 (See ch. 3 for a more detailed       discussion    of delays in the
procurement cycle.)
      AID auditors     concluded that a review of the small busi-
ness notification      procedure was necessary, to determine if
procedures should be changed to develop a more practicable
and acceptable     system of complying with the requirements   of
the Foreign Assistance Act.

      As part of   a survey of AID procurement,  a report on
AID program loan    commodity procurements was completed by
AID's Office of    Management Planning in July 1970 and sub-
mitted to AID's    Deputy Administrator.   We were advised that
action had been    deferred on this procurement survey report

                                   12
pending implementation       of the President's  September 1970
directive     to untie aid.     In September 1970 AID's Deputy Ad-
ministrator     established   a procurement working group having
the responsibility       for (1) implementing the President's   di-
rective     and (2) implementing the recommendations in the AID
procurement survey report.

        The AID report identified  the small business notifica-
tion procedure as the most serious problem in AID's Commod-
ity Import Program.     The procurement notification,       which is
required by AID and publicized     to all subscribers      regardless
of size or business activity,     was found to be clearly        inef-
fective    in carrying out the legislative    requirement     to help
small independent enterprises     participate    equitably    in AID-
financed export sales.

      The procurement survey group found that the small busi-
ness notification    procedure caused ordering delays of 60 to
90 days in AID-financed     transactions   and that it was dis-
liked by many of the parties      concerned--including  the House
Select Committee on Small Business, both large and small
U.S. exporters,   foreign   importers and their governments,
trade groups, and AID overseas Missions.
        The procurement survey report suggested several ways
that AID could increase small business participation.                These
included (1) curtailing         the present circular   and making par-
ticipation     voluntary,    (2) expanding the use of the Colombia
Plan, (3) reducing the extreme AID administrative              impediments
to small business participation,          and (4) establishing     a flow
of information      to foreign buyers about U.S. producers.

        The report contains views expressed by responsible         of-
ficials    close to the AID program in India.        AID Mission of-
ficials    say that AID's Office of Small Business notification
procedure is not practicable      for the Indian program and gen-
erates very little     response0    The U.S. Embassy's commercial
attache has received major complaints       from U.S. and Indian
businessmen concerning the length of time required           to pro-
cess an AID application      owing to the notification     procedure.




                                    13
      Government of India officials      consider the notification
procedure to be a serious bottleneck        in the development of
their economy and would welcome liberalization        or complete
waiver of the procedure.      Indian importing and manufacturing-
firm officials   cite a variety     of serious problems caused by
the notification    procedure, including     ordering delays of
3 to 5 months, difficulty     in obtaining waivers, and diffi-
culty in obtaining     bids or finding U.S. suppliers willing      to
supply needed commodities under AID rules.
      We noted that trade associations            and others had gone on
record against the small business circular                notification       sys-
tem and had recommended the substitution               of the procurement
information   bulletin.      The representative         of one trade group
composed of approximately         300 companies of all sizes, ap-
pearing before a congressional           subcommittee, testified           that
a major contribution      toward the entry of small business in
the export market would be made if AID modified or eliminated
the small business advertising           requirement which had been
found to be wasteful,       inefficient,      and difficult         to keep up
to date.    This  group   suggested      that   advertising       should   be
made optional    and that AID should furnish potential                 bidders
with information      on importers classified          by commodity groups,
as had been done in other cases.




                                       14
COORDINATIONWITH DEPARTMENTOF COMMERCE
AND SMALL BUSINESS ADMINISTRATION
      AID internal correspondence   in mid-1970 indicated   that
AID was seeking to enlist    the cooperation  and support of the
Department of Commerce and the Small Business Administration
in promoting small business export participation.       This was
being done within the framework and objectives     of the Cabi-
net Committee on Export Expansion chaired by the Department
of Commerce.
       In December 1970 the AID Deputy Administrator     autho-
rized informal and exploratory    discussions    to begin with the
Cabinet Committee on Export Expansion concerning the prob-
lems of small business as they related to exports.        AID was
to present to the Committee a five-point      program developed
primarily   from the recommendations made by the AID procure-
ment survey group in July 1970. The objective        was to im-
plement the program through the joint efforts       of AID, the
Department of Commerce, and the Small Business Administra-
tion.

        Basically   AID's proposed small business assistance                pro-
gram calls for (1) periodically          publishing        updated listings
of major importers       in all AID-assisted         countries,      (2) pub-
lishing    in recipient     countries  listings        of interested      U.S.
small producers,      (3) substituting       the Colombia Plan for the
present transaction-by-transaction             notification       procedure,
(4) distributing      to U.S. producers timely and informative
data on projected       procurement opportunities           relating     to AID
loans or grants, and (5) cooperating             more aggressively         with
interested      U.S. small producers through such activities                 as
special AID seminars.
      In January 1971 AID received informal ass'urance from
the Cabinet Committee on Export Expansion that it would
stand ready to assist AID in working out measures to improve
the access of U.S. exporters   to AID-financed procurements.
The Committee indicated  that it would have no objection
should AID decide to adopt the proposed five-point    program
and seek congressional  support for it,

       As of March 31, 1971, recommendations incorporating   the
five-point   program had been finalized  and approved by the

                                       15
AID Deputy Administrator.      In   addition    to approving incor-
poration  of the original   five    points,   the Deputy Administra-
tor approved the retention     of   the circular    "AID Financed Ex-
port Opportunities,"    but only    for the continued advertise-
ment of formal bid transactions,        which represent     about 5 per-
cent of total transactions.

       Recommendations for substituting       the procurement infor-
mation bulletin    for the existing     small business notification
system and retention     of the circular     only for the continued
advertisement   of formal bid transactions,       however, were ap-
proved subject to appropriate       congressional    liaison.     The
Deputy Administrator    also directed     that consideration      be
given for a set-aside     to small business for direct AID/Wash-
ington procurement contracts.        Prior to the final develop-
ment of these recommendations for the Deputy Administrator,
a joint AID-Commerce-Small Business Administration            group had
been working to coordinate     the facilities     of these three
agencies so as to effectively       implement the new program.        As
of March 31, 1971, the significant        recommendations affecting
small business had not been implemented.




                                  16
CONCLUSIONS

        AID's business notification      requirements   have been
found to be of little,        if any, value in promoting U.S. small
business participation        or in securing responsive      bids and
establishing     reliable   sources of supply for Indian importers.
Instead,     the procedures have caused procurement delays in
India averaging 64 days and have resulted           in additional     pro-
curement costs.        There is little   doubt, in our opinion,       that
the delays and costs attributable         to the existing      business
notification     requirements    outweigh the benefits,      if any,
which result from their use.

        In some countries     the business notification         procedure
has been waived or replaced by general procurement informa-
tion bulletins.     We believe that it would be desirable              to
use general procurement information           bulletins     in India in
lieu of the existing       business notification        requirements.
Because of the size of AID program loan agreements and the
large number of Indian importers,          the bulletins       should be
tailored    more specifically     to types and quantities          of com-
modities likely    to be procured; to probable importers              of
each commodity on the basis of available              data, including
past procurements;      and to approximate time periods when cer-
tain importer procurements can be expected to take place.

       For example, in loan programs involving           upwards of
$100 million      to $150 million     and several thousand possible
importers,      merely providing    lengthy listings     of possible
importers would be of little          value to many U.S. suppliers,
particularly      small business firms.       Most suppliers    could
benefit     from the identification       of 20 or 30 solid prospects
from longer listings,        but many suppliers     could not afford
the resources and effort         necessary for establishing      contact
and soliciting       business from hundreds of only possible          im-
porters.

       We believe that, when many procurements over a long
period are anticipated        under a particular     loan agreement,
AID periodically       could issue supplemental bulletins       summa-
rizing     procurement activity      to date, including   the import-
ers, the suppliers,        and the commodities involved.       Moreover
particular      effort  should be made to provide specific       infor-
mation in these bulletins         that would assist and encourage

                                    17
U.S. small business firms        to participate     in supplying     the
commodities required.

       Because AID Mission experience in India and our work in
India indicate      that an overseas agent is almost an absolute
necessity    in export-import      transactions,    we believe that AID
assistance     to the small U.S. supplier        can best be rendered
by specifically       assisting  him in establishing       agent rela-
tionships    in AID-assisted     countries.      Assisting   in the es-
tablishment      of such relationships      may best be accomplished
in conjunction      with the Department of Commerce and the Small
Business Administration.         Larger, more experienced firms
generally    have agents or affiliates.

       If procurement information        bulletin     procedures are
adopted, it still      will be necessary to grant certain kinds
of waivers , primarily       to exempt certain       classes of transac-
tions from normal competition.           We   believe    that recipients
of the bulletins      could benefit from the publication            of such
waivers,   especially     those granted for sole-agency and pro-
prietary   relationships       between listed     importers and their
respective    suppliers.       In such cases suppliers        could seek
the business of listed         importers on a more fully        informed
basis and without unknowingly committing time and money to
obtaining    business from less likely         prospects.

      AID offers to place suppliers'    catalogs          and other in-
formation  in overseas Mission libraries,      but        otherwise AID
has not actively   or fully complied with the           legislative     re-
quirement that information   to foreign buyers            about products
produced by small U.S. independent enterprises               be provided.

       We recognize that recommendations designed to revise
and improve AID small business procedures were approved by
the AID Deputy Administrator         on March 31, 1971, subject to
appropriate    liaison   with certain congressional        committees.
AID officials      are uncertain    about when full implementation
of these recommendations will occur.           AID officials      have
expressed the belief that, subject to successful              congres-
sional liaison      and coordination     with the Small Business Ad-
ministration     and the Department of Commerce, the recommen-
dations should be fully        implemented, worldwide,       no later
than December 1971.       India is to receive the highest pri-
ority    in the implementation      process; other major aid-
recipient   countries   are to receive    the next highest     priori-
ties.

       In our view it may take some time before implementation
plans are completed and agreed to by all parties      concerned
and before implementation    actually occurs on a worldwide ba-
sis.    Therefore we feel that AID should proceed as soon as
possible in India to reduce or eliminate     the impediments
caused by the burdensome business notification     requirements.

      Any modification       of existing   procedures or the adoption
of alternative    notification      procedures should take into full
account the requirements        and intent of the Foreign Assis-
tance Act of 1961, as amended, with respect to assisting
U.S. small business firms and providing           a continuing flow of
information    to prospective      purchasers abroad concerning com-
modities available      from U.S. small business.

FUXOMMENDATIONS

      We recommend that    the AID Administrator:

      --Modify current business notification       procedures ap-
         plicable   to Indian importers, to make the present
         requirements   optional with an importer.

      --Adopt for India, on a trial       basis, the alternative
         procurement information    bulletin    procedure now used
         in several other countries.       AID should make every
         effort   to provide as much detailed      information     as
         possible on commodities to be procured,          probable im-
         porters,   procurement periods,     and specific     informa-
         tion which would benefit U.S. small business firms.

      --Prescribe,    under the authority    of section 602 of the
         Foreign Assistance Act of 1961, as amended, proce-
         dures to specifically     assist U.S. small suppliers       in
         establishing   agent relationships     in India and to en-
         sure a flow of information      to prospective    purchasers
         abroad concerning commodities available        from U.S.
         small suppliers.

      --Publish    information   on all waivers that     are granted,
         including    commodities involved,   contract    amounts,

                                  19
importers,     suppliers,    and reasons for granting   waiv-
ers.     In the event that the procurement information
bulletin    procedure is adopted, the AID Administrator
should identify       in this bulletin  or in a separate
business memorandum all waivers that are granted,           in-
cluding the existing        sole agency and proprietary   re-
lationships     between importers and suppliers.




                          20
                               CUAPTER3

                  SMALL BUSINESS PARTICIPATION

                  IN AID-FINANCED PROCUREMENTS

       AID functions      primarily    as a financing    agency and nor-
mally does not engage in direct commodity purchases from
U.S. suppliers.         Within the confines of existing       AID regula-
tions and procedures,         AID is not in a position      to ensure
that a fair share of AID-financed            importer purchases are
placed with small business enterprises.               It is the continu-
ing congressional        policy,    however, as expressed in small
business legislation         and reaffirmed    in subcommittee hearings
and reports,     that all agencies of the Government have re-
sponsibilities       for encouraging American small business to
participate     fully    in the furnishing     of goods and services
purchased either by the agencies or by others through fed-
erally    funded or financed projects         and programs.

       AID's Office of Small Business does not distinguish
between the large and small business firms it assists.              Any
individual     or firm having a U.S. address may subscribe to
AID's Small Business Circular         without charge.   Subcommittee
hearing testimony,      records of discussions     with responsible
AID officials,      and other data we have examined indicate
that, until recently,       the title    of AID's Small Business
Circular    was a misnomer.

       AID admits that much of the material          included in the
circular    is not pertinent    to small business participation.
AID estimates that small business is excluded from about 75
percent of the total value of AID-financed             commodities,    pri-
marily because of commodity types and quantities              not pro-
duced or supplied by small business. Nevertheless              AID has
elected to fulfill     its statutory    responsibility       under sec-
tion 602 of the Foreign Assistance Act by providing,                on an
equal basis, the same information         on all procurements to all
U.S. suppliers     and other interested     parties     who subscribe to
the circulars.      As a result   of hearings held by the House
Subcommittee on Government Procurement and the subsequent
report issued thereon on December 19, 1969, AID changed the
title    of its Small Business Circular      to "AID Financed Export
Opportunities,11    as of January 2, 1970.

                                    21
       AID's Office of Small Business was established              and
named pursuant to specific       provisions      in section 602 of the
Foreign Assistance Act of 1961, to assist in carrying                  out
the small business provisions        of the act.       Although AID has
changed the name of its circular,          deleting     the reference      to
small business, AID has retained the originally               designated
name "Office     of Small Business"--although         the Office has
provided no special services or guidance exclusively                 for
U.S. small business firms.         The Office continues to publish
information,making     it available     without distinction        to all
firms interested     in exporting.      In AID's opinion,       this is
consistent    with the provisions     of section 602 of the Foreign
Assistance Act and serves the interests             of many small inde-
pendent enterprises.

      Until September 1970 AID's Office of Small Business
did not maintain statistical        data or records on small busi-
ness participation      in AID-financed     transactions.     Neither
did the AID Mission in India maintain such records.               Conse-
quently AID remained virtually        uninformed,      on a current ba-
sis,  as to the extent      of small business participation.
AID's failure      to keep records has precluded it from measur-
ing the effectiveness       of its notification       and bid solicita-
tion procedures and its effectiveness           in carrying   out the
responsibility      for assisting   and encouraging U.S. small
business and for participating        in AID-financed      commodity
transactions.

      As of September 1, 1970, AID had required the U.S. sup-
plier to indicate    on a revised AID Form 11 (Application       for
Approval of Commodity Eligibility)       whether the producing
firm, or the supplier    if he is the producer,     is considered
to be a small business concern for the purpose of U.S. Gov-
ernment procurement.     AID's instructions     for responding to
the question state that a small business concern generally
is a firm that (1) is not dominant in its field of opera-
tions and, with its affiliates,      employs fewer than 500 em-
ployees or (2) is certified     as a small business concern by
the Small Business Administration.

      AID believes that this information   will enable it to
compile more complete data concerning American small busi-
ness participation   in the total AID program.    AID originally
planned to accumulate data and have a first     report on small

                                     22
business participation     by June 30, 1970. Because of delays
in obtaining   clearance for the revised AID Form 11, AID
planned to have an initial     report by December 31, 1970.
       As of March 30, 1971, data had been accumulated and a
machine test run had been made for the last 4 months of
1970.     The resulting    AID statistics--after       adjustment for
some of the more obvious misclassifications             between large
and small firms --indicated       that small firms had participated
in $19.6 million,       or 10.4 percent, of $187.6 million         worth
of commodities approved for financing            during the 4-month
period.      We did not attempt to test or verify          these prelim-
inary statistics.        Periodic machine reports are planned for
subsequent 6-month periods.          Such information      on small firm
participation      was not available      on a country-by-country      ba-
sis.

       To determine the effectiveness       of small business noti-
fication   and bid solicitations     through AID's Office of Small
Business for commodity procurement for India, we sent ques-
tionnaires    to 330 of about 3,000 Indian firms who imported
AID-financed    commodities.     The questionnaires      sought infor-
mation from January 1, 1968, on licenses          received,    bids re-
ceived, awards made, and time elapsed as a result of the
present procurement notification        procedure.

       We received replies,     in full,     from 42 importers who had
been issued 152 AID-financed       import licenses valued at about
$34.5 million.     Of the 152 import licenses,             55, or over one
third,   were exempted from AID's notification              requirements
by AID waivers.      (AID may waive notification            requirements
for importers under certain       conditions,        including     (1) spe-
cial supplier-importer      business relationships            on the order
of sole-agency    agreements, (2) proprietary            procurements,
(3) emergency procurements,       and    (4)   certain     other special
situations.)

        For the remaining 97 licenses,     amounting to about
$15 million,      an average two bids were received for each li-
cense.      Total sales by U.S. suppliers    stemming from AID's
notification      procedure involved 19 licenses,    amounting to
$7,192,000.       Of this amount, over $7 million    represented
export sales by generally       recognized large U.S. suppliers,


                                     23
leaving less than $160,000       in which U,S. small   business   may
have participated.

      Among reasons given by importers for not always accept-
ing bids submitted in response to AID's small business no-
tices were:      (1) it was preferable      to buy from suppliers
who had representatives      in India,    (2) it was desirable     to
buy from suppliers     who through experience      could be relied
upon to provide good quality       goods at competitive    prices,
(3) the prices bid were not competitive,          and (4) the'bids
did not meet the importers'       specifications.      Comments of
importers   follow.

     --An   importer of petroleum products:
            "Very few U.S. suppliers   respond to the small
            business notice,   and the prices quoted by
            those who do respond are not competitive.
            Also, the terms and conditions    of supply,
            and service after sale are not satisfactory.
            This compels us to seek offers from local
            agents of U.S. suppliers   who quote very com-
            petitive  prices."

     --An alloys importer:
          "It is our experience that the notice to
          U.S. small business does not result   in many
          worthwhile  offers.   Nearly all of our awards
          are to U.S. suppliers   that we have contacted
          ourselves."

     --An   importer of iron and steel:
            The suppliers   in the U.S. show little       in-
            terest in submitting  bids in response      to
            the small business notice."

     --An   importer of     chemicals and plastics:
            YSubmission     of the small business notice has
            not been of     any use to us in locating   sup-
            pliers,  and    compliance with this requirement
            unnecessarily     delays the placement of or-
            ders."

     --An   importer of various chemicals:
            "Suppliers contacted directly     by us quote

                                  24
          prices that are very much lower than prices
          quoted by suppliers responding to the small
          business notice."
     --A paper manufacturer:
          %ecause the response to the small business
          notification  is poor we continue to deal
          with the same suppliers  as we have in the
          past."
     --A manufacturer    of fountain pens:
          "Offers and samples received through the
          small business notice were for materials      un-
          suitable    for our purpose.  As  we had con-
          tacted no other suppliers,    our license ex-
          pired and had to be revalidated."
     --An importer of metals and alloys:
          "Issuance of the notice to small business
          unnecessarily  delays the placement of or-
          ders."
     --A pharmaceutical     manufacturer:
          "It has been our experience that most of the
          quotations    received through the small busi-
          ness notice contain the condition       that
          prices are subject to final confirmation         at
          the time the order is placed,        Manufacturers
          contacted directly     by us quote a firm offer
          valid for a certain period.        For this reason,
          and also because we have no experience con-
          cerning the quality      of the product offered
          by small business, we prefer to place our
          orders with firms contacted directly         by us."
      We recognize that the number of Indian importers re-
sponding to our questionnaire   was not large.   The responses
received, however, together with the results of interviews
with importers and other data examined, in our opinion,      sup-
port the contention   that the present small business notifi-
cation procedure in India results    in very few awards to
U.S. small business firms.



                                 25
       Until early in 1971 AID/Washington officials      in the
Office of Small Business believed that the small business
circular    should have been continued as in the past, except
for changing the title    to eliminate   the "small business"
reference,    which was done.    (See p. 21.)  These officials
held that the Foreign Assistance Act required equal assis-
tance to all businesses,     large and small.

        The opinion of these officials,      that subscribers       to
the AID Office of Small Business publications             generally
liked them and found them useful,        resulted    from responses
to a questionnaire      attached to a letter     offering    resub-
scription    to AID's business publications.         The question-
naires entitled     "Do You Want to Continue to Receive A.I.D.
Small Business Publications?t'       were sent to approximately
7,500 subscribers     in September 1969, during a period of
widespread criticism       of AID's small business circulars.

       Although resubscription    may have been the primary pur-
pose of the letter,      the main issues on which subscribers'
views were being solicited--     essentially     the questions of
abolishing    or retaining   the circular    on the basis of its
usefulness    or going to an alternative      procedure--were   not
emphasized.     Accompanying the questionnaire       was a form for
resubscribing    to the AID publications.        The recipients  were
put on notice that their subscriptions         would be terminated
as of December 31, 1969, unless they resubscribed.

       The majority    of recipients    showed a lack of concern
and interest    in answering the questionnaire       or in resub-
scribing.    Only   3,500,   or  less than  50 percent,   resub-
scribed,   and 3,154 completed and returned the questionnaires.
Since December 1969 the resubscriptions         have increased to
about 4,800, or 64 percent of the total subscribers            in Sep-
tember 1969. Most of the increase can be attributed              to
former recipients     who originally     had not resubscribed      but
subsequently    decided to do so.
       AID's Office of Small Business could not furnish us
with specific      information   as to the categories     of sub-
scribers,    because such information     was not compiled by AID.
We noted, however, that many of the recipients            of the pub-
lications    included trade groups, banks, U.S. embassies and
consulates,     assisted-country    and competitor-country

                                   26
governments,     Department of Commerce and Small Business                Ad-
ministration     field offices, and various AID offices.

        AID officials     estimated that about 7,000 of the circu-
lar recipients        in September 1969 were exporters           or
manufacturer-producer-processor           firms.      According to the
officials'     estimates,     about 500 recipients       were business
concerns or others not engaged directly               in supplying      ex-
ports.     On the 3,154 completed questionnaires              returned,
over 500 subscribers        did not respond to any of the ques-
tions addressed to suppliers          and exporters,,        This indicates
that these subscribers         (over 17 percent) were neither            sup-
pliers nor exporters.          Considering    the nonresponsiveness          of
over 50 percent of the circular           recipients,      the number of
subscribers      not engaged in exporting        or supplying exports
was possibly      1,300 in September 1969.

     AID concluded that the small business publications    had
been successful,  primarily on the basis of the response to
the question "Have you found the information   published  in
the A.I.D. Small Business Circular  helpful  in acquiring   ex-
port business?"

      Of the 2,604 responses to this question,      83 percent
were affirmative.    It should be noted, however, that (1)
1,034, or no more than 40 percent,     of the responses to this
and other questions were from respondents classified        as
small business concerns and (2) the 2,153 affirmative        re-
sponses represented    only 31 percent of the estimated 7,000
commodity suppliers    receiving the questionnaire.

      A more significant  gauge of the usefulness  of the cir-
cular can be found in the responses to two questions--"How
long have you been bidding on AID-financed     commodities?*'
and "How many awards have you received in that period?"
Just over 2,500 responded to these two questions.       Of these,
nearly one third reported never having received awards.        Of
the respondents who had been bidding over 2 years, about one
in seven never had received an award.

       It appears that the small manufacturers     have fared the
worst.    Although 768 small manufacturers    responded that the
circular   had been helpful  in their acquiring    export business,
over 43 percent of those responding never had received

                                       27
awards,   even though    over   63 percent   had been bidding   for
2 years   or more.

       The manner in which the questions were presented gave
little   choice to the subscriber    who wished to continue re-
ceiving the cost-free    service regardless      of its usefulness.
The respondents were faced with the choice of (1) discredit-
ing the publications   by answering negatively        and thus run-
ning the risk of receiving      less information    or (2) submit-
ting the answers suggested by the questions         and continuing
to receive the same amount of information.
      The questions concerning awards received and the length
of time firms had been bidding did not specifically     ask for
the total number of awards received,     or the number of awards
obtained solely through information     supplied by the circular
or bulletin,   or the number of awards obtained without the
use of overseas agents.    For example, the tabulation   made no
comparison or association    of the responses favoring  the cir-
cular and bulletin   with actual awards received through these
sources of information.

        In discussing    our report with AID in April 1971, it was
explained     that AID's Office of Small Business had changed
its views regarding the effectiveness         of the small business
circular.       The Office of Small Business now supports AID's
efforts    to adopt the general procurement information       bulle-
tins on a worldwide basis in place of the circular         for all
negotiated     procurements as part of the complete program for
assisting     small business.     (See p. 15.1
CONCLUSIONS

      Apparent inconsistencies    exist between the titles   of
Office of Small Business and Special Assistant       for Small
Business when compared with the activities      performed.
These titles   have been prescribed    by law., Even so, we be-
lieve that AID has the duty to resolve the contradictions
suggested by the titles     when compared with the actual activ-
ities being performed.

      Only recently     has AID initiated      efforts to compile and
maintain statistics      regarding     the size of firms participat-
ing in AID-financed      transactions.      We believe that AID

                                    28
should continue to obtain and record data on small business
participation   in AID-financed     transactions.   AID should
analyze, on a continuing     basis, the information     obtained,
for the primary purpose of measuring the effectiveness            of
AID efforts   to help small business while identifying        areas
and means of increasing     assistance    to small business con-
cerns.

RECOMMENDATIONS

      We recommend that the AID Administrator      resolve the
contradictions   suggested by the titles    of Office of Small
Business and Special Assistant     for Small Business when com-
pared with the actual activities      being performed.      This
seems to require a restructuring      of the duties of the Office
and the Special Assistant    to provide services    clearly     di-
rected to assisting    U.S. small business.

      We recommend also that the AID Administrator              ensure
that a continuing     effort   is made to collect       data on small
business participation       in AID-financed      transactions,    to
analyze the data, and to identify         effective     ways of in-
creasing assistance      to small business concerns.




                                    29
                                CHAPTER4

              COMMODITYPROCUREMENT
                                 CYCLE IN INDIA

       For our examination      of various aspects of the Commod-
ity Import Program for India, we made an analysis of the
procurement cycle for a representative          number of AID-
financed transactions       over the past 3 years.     An analysis
of selected procurements        showed that the average time from
application     by an Indian importer for an import license to
receipt    of AID-financed    commodities was 432 days, or 14
months.     This long processing      cycle tends to adversely af-
fect the benefits      derived from U.S. financing     of imports to
India.

       In some instances        importers have had to reduce produc-
tion or shut down operations           while awaiting the arrival        of
AID-financed      commodities.       Importers'   working-capital    posi-
tions are often strained by the need to finance the long
procurement pipeline.           Importers find it necessary to ad-
just inventory      levels upward, to counteract          the disadvant-
ages caused by waiting for spare parts or by running out of
raw materials.       Moreover delays in procurement are detri-
mental to the AID objective           of establishing     enduring
importer-exporter       relationships.

      An Indian import license generally      is valid for a
l-year period.    Issuance normally takes about 4 months.
During that l-year period, an importer must go through
AID's small business notification      procedure,   obtain a letter
of authorization    from the Government of India, place his
order with a U.S. supplier,     and trust that his goods will
be shipped from the U.S. port before his license expires.

        Often everything     cannot be accomplished within the
l-year period;     there may be delays in opening a letter      of
credit,     in manufacturing    the goods, or in arranging  trans-
portation.      The only alternatives     for the importer are to
obtain an extension of his license or to obtain a new
license-- each of which requires       additional  lengthy process-
ing within Government of India channels.




                                    30
     The following    schedule is an analysis of the procure-
ment cycle for a representative    selection  of AID-financed
commodity transactions    over the past 3 years.

                                                                Percent
                                                      Days     of total

Time elapsed between:
      Application     to Indian Government
        for license and its receipt                    126             30
      Submission of procurement notifi-
        cation to AID's Office of Small
        Business and bid-closing        date            64             15
      Application     to Indian Government
        for letter     of authorization
        and its receipt                                 22              5
      Date of order from U.S. supplier
        and shipment from U.S. port                     93             21
      Shipment from U.S. port and
        arrival    at Indian port                       63             14
Time required      for miscellaneous
   items (note a>                                      64         J-5-

            Total                                      &32-       100

aIncluding    off-loading     at Indian   port,   customs clearance,
 and internal      transport.
       Recognizing that AID has no direct control          over Indian
Government licensing      and procurement>procedures,       we believe
that the entire procurement cycle deserves careful             analysis
by AID and the AID Mission,       in cooperation   with the Govern-
ment of India, with the objective       of shortening      the overall
time period.      In this report our discussion      relates    primar-
ily to that part of the cycle concerning the submission and
publication    of proposed importer procurements through AID's
Office of Small Business for the purpose of soliciting              bids.
       The bid solicitation requirement   under AID Regulation
1 contributes   about 64 days to the procurement cycle.       In-
formation obtained during our examination      of this aspect of
the Commodity Import Program for India indicates       that the
manner in which this requirement     is being implemented un-
necessarily   adds about 2 months to the long procurement
cycle;

                                   31
       Under its present licensing      procedures,    the Government
of India fully     processes license applications       before pro-
cessing and forwarding      procurement notifications       to AID's
Office of Small Business in Washington.          Normal processing
time for the issuance of an import license varies;            however,
as shown in the preceding schedule, it averages 4 months.
The subsequent publication       procedure averages 2 months.        We
inquired    of AID about the possibility      of having the Govern-
ment of India go ahead with the publication           procedure on a
license-pending     basis, at the same time that the license
application     is being processed and thereby reduce the pro-
curement cycle by about 2 months.
      Generally an Indian importer is not permitted    to pro-
ceed with the notification   and publication requirements    of
AID's Regulation   1 until he has been issued an import li-
cense.   (In some cases he is allowed to proceed about
2 weeks prior to receiving   his license.)

      An AID official    in Washington pointed out that the
Government  of India did not favor the idea of publishing
procurement notices in AID's circulars      while licenses were
pending, because to do so (1) could imply that licenses
were issued automatically     and (2) could lessen the Govern-
ment's control    over the rate and timing of license issues.
Another AID official    expressed the belief    that simultaneous
processing would cause unnecessary solicitation        of bids on
proposed purchases for which license applications        eventually
might be rejected.

       In a letter    dated April 27, 1970, the AID Mission's
Chief of Industrial       Resources Division   requested approval
from AID's Office of Small Business to institute         a procedure
allowing   importers who normally receive or request AID-
financed licenses      to submit advance notices of proposed
procurements.      This offical    was convinced that such a pro-
cedure would
      --provide   a smooth flow   of AID imports,

      --take the pressure off AID's       Office of Small Business
         and the Mission for priority      publications and short
         bid periods,


                                  32
     --permit   a significant    reduction   in emergency procure-
        ment requests,     and

     --expedite    utilization   of AID loans.

      AID's Special Assistant     for Small Business in Washing-
ton was not receptive   to the suggested procedure.          In a
reply dated June 10, 1970, he cited unsatisfactory           results
with a similar   system in Vietnam, where the volume of sub-
missions had increased tremendously          and where only a small
percentage of items published       actually    had resulted   in
transactions.    The AID official     concluded that, unless some
control was established    ensuring that all submissions
would be licensed by the Government of India, his reaction
to the proposal would remain negative.

       In Vietnam importers send in their notifications
through the AID Mission prior to applying for or receiving
their import licenses.        The importer theoretically     can sub-
mit as many notifications       as he likes because neither     the
AID Mission nor the Government of Vietnam controls           the num-
ber of submissions.        The importer has no assurance that an
import license will be issued in time to take advantage of
the validity    period of bids that he has received;        so, to
ensure that he has a fresh, valid bid on hand, he repeatedly
advertises    in the AID small business circular.        Under these
circumstances,     according to an AID estimate in 1969, 57 per-
cent of Vietnam notices published         did not result  in com-
pleted transactions.

        The important   difference    that should be noted in our
suggestion for concurrent        processing  in India is that the
Indian Government would have full control not only over is-
suing licenses but also over processing           and releasing for
publication    the required notifications       to AID's Office of
Small Business.       Under these conditions      there should be re-
latively    few published notifications      which do not result    in
completed transactions.

      Under approved AID financing   an importer or his govern-
ment is not precluded from notifying      AID of an intended pro-
curement before an actual import license is issued.         It is
not unusual for notices to appear in the AID publications
with no specific    indication that an import license has been
issued.    In some instances procurement notices indicate
that licenses    are pending.  AID publication   procedures.are

                                 33
flexible   enough to readily    handle cancellations,   deletions,
additions,   and other changes affecting     proposed procure-
ments after the initial      submission for publication   has been
made.

      The AID Mission already has suggested controls       that
would limit the submission of advance procurement notices
to importers who fully     intended to use AID-financed    licens-
ing.   Moreover information     we have obtained indicates    that
approximately    98 to 99 percent of all license applications
eventually    are approved and result   in procurements.

       The concurrent     processing   of license applications      and
AID notifications      for bid solicitations      by the Government
of India should not adversely affect the Government of
India's    control  over the issuance of import licenses.           That
control,    in our view, would remain undiminished,          simply be-
cause the Government of India still          would be the sole de-
terminant     of the number and categories       of licenses    to be
issued and requests for procurement notifications             to be
published,     as well as the timing of such issues and publica-
tions.

CONCLUSIONS
       We believe that the long commodity procurement cycle in
India can and should be reduced by having the business noti-
fication   requirement   and related procurement publication      by
AID take place concurrently      with the import license proces-
sing by the Government of India.       Although there may be
some disadvantages     in doing this, as noted earlier    in this
chapter, we believe that the benefits       to be gained far out-
weigh the disadvantages.
      In the event that the business notification    require-
ment is modified and made optional,   as recommended earlier
in this report,   the long commodity procurement cycle in
India will be reduced by the amount of time that the re-
quirement and related procurement publication     by AID now
take.
RECOMMENDATION
     We recommend that, in the event that the current busi-
ness notification requirement remains unchanged, the AID


                                   34
      .
.
                                                   .--
    -Administrator  seek to have the Government of India process
    and forward to AID the required procurement notifications
    concurrently   with the processing and issuance of import li-
    censes.




                                   35
                                                                            .
                              CHAPTER5

                           SCOPEOF REVIEW
      Our review of AID's procedures for assisting             U.S. small
business and maintaining     an efficient    procurement cycle in-
cluded an examination of AID's policies,          regulations,     and
procedures as they relate to applicable         legislation.       It
included also the analysis of data from Indian importers,
reviews of transaction    records and associated documents, ex-
amination of AID audit reports,       and discuskons        with AID
Mission officials    and AID/Washington officials.




                                   36
.




    37
                                                                APPENDIX I

                            PRINCIPAL OFFICIALS OF

                   AGENCYFOR INTERNATIONAL DEVELOPMENT

                 HAVING MANAGEMENT
                                 RESPONSIBILITIES FOR

                        MATTERSDISCUSSEDIN THIS REPORT


                                                     Tenure of office
                                                     From            To

ADMINISTRATOR:
   John A, Hannah                            Mar.        1969   Present
   William S. Gaud                           Aug.        1966   Jan. 1969
   David E. Bell                             Dec.        1962   July    1966

OFFICE OF CONTROLLER,AID/KASHING-
  TON:
    Charles F. Flinner                       Ott     I   1964   Present
    Edward F. Tennant                        Oct.        1962   Sept. 1964

MISSION DIRECTOR, AID/INDIA:
    L. Paul Oechsli (acting)                 Jan.        1971   Present
    Leonard J. Saccio                        Oct.        1969   Dec. 1970
    John H. Funari (acting)                  June        1969   Oct.    1969
    John P. Lewis                            Nov     l   1964   June 1969
    C, Tyler Wood                             Nov.       1959   Nov   l 1964

SPECIAL ASSISTANT FOR SMALL BUSI-
  NESS:
    Edward E. Kunze                          Aug.        1963   Present




U.S. GAO. Wash.. D.C.
                                   78x 39