oversight

Need for Interagency Consideration of Applications for Investment Surveys and Guaranties Involving Potential Displacement of U.S. Agricultural Exports

Published by the Government Accountability Office on 1971-04-27.

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

REPORT TO THE CONGRESS


Need For Interagency
Consideration Of Applications For
Investment Surveys And
Guaranties Involving Potential
Displace,ment Of
U .S. Agricu Itu r,aI Exports 8-166o77
Agency     for International        Development
Department       of State.
Department      of Agriculture
Overseas     Private   Investment       Corporation-




BY THE COMPTROLLER GENERAL
OF THE UNITED STATES
              COMPTROLLERm     GENjZF$AL   OF      THE    UNITED   STATES
                             WASHINGTON.    D.C.     20548




B- 1660 77




To the President   of the Senate and the
Speaker  of the House of Representatives

         This is our report       on the need for interagency         consid-
eration    of applications     for investment      surveys    and guaran-
ties involving     potential    displacement     of U.S. agricultural
exports.      These programs         are administered      by the Overseas
Private     Investment     Corporation.

        Our review  was made pursuant   to the Budget and Ac-
counting   Act, 1921 (31 U.S.C. 53), and the Accounting and Au-
diting Act of 1950 (31 U.S.C. 67).

         Copies of this report       are being sent to the Director,
Office of Management          and Budget; the Secretary          of State; the
Secretary     of Agriculture;      the Administrator,        Agency for In-
ternational    Development;        and the Chairman,        Board of Direc-
tors, Overseas       Private    Investment     Corporation.




                                            Comptroller               General
                                            of the United             States




                    50 TH ANNIVERSARY                    1921- 1971
                            Contents
                                                               Page

DIGEST-                                                          1

CHAPTER

   1        INTRODUCTION                                         5

   2        INVESTMENTINCENTIVE PROGRAMS--PURPOSES
            AND POTENTIAL EFFECTS ON U.S. ECONOMY     AND
            BALANCE-OF-PAYMENTS   POSITION                       6
                Purposes of Investment Survey and
                  Guarantee Programs administered     by
                  AID                                            8
                Purposes of Investment Incentive     Pro-
                  grams administered    by OPIC                 10
                Potential-effect    of Investment Incen-
                  tive Programs on U.S. economy and
                  balance-of-payments     position              11

   3        NEED FOR INTERAGENCYREVIEW OF APPLICATIONS
            FOR INVESTMENTSURVEYSAND GUARANTIES                 18
                Investment surveys                              20
                Specific-risk  guaranties                       25
                Extended-risk  guaranties                       28

   4        CONCLUSIONS,PROPOSALS,RECOMMENDATIONS,
            AGENCYCOMMENTS,AND GAO EVALUATION                   34

   5        SCOPEOF REVIEW                                      38

APPENDIX

        I   Production  control,   price support, and
              surplus removal programs for agricul-
               tural commodities --fiscal  years 1967,
               1968, and 1969                                   41

   II       Letter dated July 14, 1970, from the As-
              sistant    Secretary for Economic Affairs,
              Department of State, to the Director,
              International     Division, General Accounting
              Office                                            42
APPENDIX                                                           Pape

  III       Letter dated June 30, 1970, from the Acting
              Auditor General, Agency for International
              Development, to the Director,  Interna-
              tional Division, General Accounting Of-
              fice                                                 44

      IV    Letter dated June 12, 1970, from the Di-
              rector,    Agricultural   Economics, Depart-
              ment of Agriculture,      to the Director,   In-
              ternational     Division,  General Accounting
              Office                                               48

        V   Letter dated June 3, 1970, from the Acting
              Director,    Bureau of International   Com-
              merce, Department of Commerce, to the Di-
              rector,   International   Division,  General
              Accounting Office                                    50

  VI        Principal   officials having an interest          in
               the matters discussed in this report                52

                           ABBREVIATIONS

AID         Agency for   International       Development

GAO         General Accounting      Office

OPIC        Overseas Private     Investment     Corporation

USDA        U.S. Department    of Agriculture
COMPTROLLERGENERAL'S                     NEED FOR INTERAGENCY CONSIDERATION OF
REPORTTO THE CONGRESS                    APPLICATIONS FOR INVESTMENT SURVEYS AND
                                         GUARANTIES INVOLVING POTENTIAL DISPLACEMENT
                                         OF U.S. AGRICULTURAL EXPORTS
                                         Agency for International       Development
                                         Department of State
                                         Department of Agriculture
                                         Overseas Private    Investment    Corporation
                                         B-166077


DIGEST
------

WHYTHE REVIEW WASMADE
     The General Accounting Office       (GAO) undertook           this review because   it
     observed that the Agency for International              Development
                                 hailand
                                     _),~~,~    increase
                                           , e.*r&*#.q*,'    its-eaort
                                                      I neGm*as"              o
                                                                '+"W& *Ae.%~~R~ri
                                 @h"e'princ'lpa'l         foreign      export


    The guaranty was extended by AID under a program which attempts             to
    stimulate   the flow of private   capital     into less developed countries      by
    sharing with American firms the costs of conducting           surveys of invest-
    ment opportunities   and by insuring      investors   against certain  political
    and business risks.     (See pp. 5 and 8.)

     i The purpose of the review was to learn whether sufficient     consideration
    ! was being given to the potentially   adverse effects   of investment    sur-
   t; vey and guarantee programs on export markets for American agricultural
       commodities.

     GAO wished to know whether countervailing         views of Government agencies
     having priority   interests   in domestic farm programs and problems and
     in the U.S. balance-of-payments       position   were being sought and were be-
     ing given due consideration      and whether the kinds of economic analyses
     needed to weigh the effect      of the investment     programs on U.S. agricul-
     tural  export markets were being made.         (See p. 5.)

     Until January 19, 1971, investment        survey and guarantee       programs were
     administered    by AID.     Pursuant to the Foreign Assistance        Act of 1961,
     as amended in 1969, a new agency, the Overseas Private             Investment    Cor-
     poration,    was established     to carry out incentive   programs for private
     investment    in less developed countries,       The Administrator       of AID is
     the Chairman of the Board of the Overseas Private          Investment      Corpora-
     tion.     (See p. 35.)

     GAO wishes to emphasize that its            report deals with   the administrative
     mechanism for striking  a balance           among conflicting   U.S. interests     and




                                             1
    objectives  and that the matters          discussed     are equally app?icable    no
    matter which agency administers           investment     survey and guarantee    pro-
    grams.

    GAO wishes also to emphasize that it -is not passing judgment on the
    merits of helping less developed nations to grow more, or export more,
    agricultural      commodities.    GAO's concern is in ensuring that each
    U-S. Government agency, whose vital           interests are affected by agri-
    cultural     investment   programs abroad, is consulted     and its views con-
    sidered in the decisionmaking        process.


FINDINGS AND COX'LUSIONS
    AID was not making the kinds of economic analyses necessary for measur-
    ing whether U.S. foreign        policy and economic development gains9 from
    underwriting     programs to boost foreign    production   and exports of agri-           .
    cultural     commodities   produced in excess quantity   in the United States,
    offset    the disadvantages     to the domestic U.S. farm economy and balance-
    of-payments     position.     (See pp. 34 and 35.9

    Efforts   of AID officials       were directed   primarily     toward assisting   other
    nations to increase their         agricultural   productivity      through economic
    development and, by doing so!, raise their           standards     of living.   AID
    officials   therefore     hardly could be expected to always be knowledgeable
    of, and give overriding         consideration  to, factors      which were at odds
    with their    primary objectives.

    The question   of whether to assist  other nations to increase their pro-
    duction and export of agricultural    commodities  of a type produced in
    surplus quantity   in the United States is by no means easy to answer.

    Many important    policy   issues   are involved,        such as,

      --whether    improvements  in agricultural           productivity,   worldwide,
         will   keep pace with future   population          growth and

      --whether       the United States ultimately     will benefit mores economi-
         cally,     from increases   in natjonal   income abroad and in remittances
         of income on investments        than it will lose from decreases in the
         agricultural      export markets.     be    p. 34.9
    These important     issues should be subjected      to the discipline  of inter-
    agency consideration       and coordination.    This will provide a basis for
    reducing the possibility         that programs may be pursued in furthering
    the agricultural      development of foreign    countries  that may be inimical
    to the domestic farm economy, to American exports,           and to the American
    balance-of-payments       position.    (See pp. 18, 19, 35, and 36.)

    Investment  survey and guarantee programs studied by GAO do not appear
    to have substantively  damaged U.S. exports.    Nevertheless, GAO believes



                                          2
    that,   with rising  production of many agricultural     commodities    abroad,
    aided to a great extent by U.S. economic assistance,         this would be an
    opportune    time to study the effect of possible    additional    programs
    which might be proposed.


RECOMMENDATIONS
             &WGGk?~IONS
    Applications       for investment        survey and guarantee programs involving
    potential     foreign     exports of crops in U.S. surplus should be called
    to the attention        of all executive        agencies concerned,     so that due con-
    sideration      can be given to the likely          effect   of the proposed invest-
    ment on the American economy, exports,                and balance-of-payments    posi-
    tion.      GAO proposed that the views of each agency participating               in the
    deliberations        be recorded in detail        and that the reasons for decisions
    reached be explicitly          set,forth.       (See pp. 35 and 36.)
    Policies    with respect to investment          survey and guarantee   programs should
    be reviewed and revised to ensure that they are uniform and consistent
    in their    interpretation      and application.       GAO had observed inconsis-
    tencies   in policies      enunciated   in AID handbooks for investment       survey
    and guarantee programs and in the AID manual order dealing with these
    programs.      (See pn 36.)


AGENCYACTIONSAND UNRESOLVED
                          ISSUES
    Although the executive     agencies agreed, in general,      that there was a
    need for consideration     and coordination    by all agencies concerned,
    they cautioned   about the potential      for delays in approval    of applica-
    tions if the applications     were submitted     to a formal board.    They sug-
    gested several alternative     approaches.

      --Have a representative        of the Department     of Agriculture      serve on
         the Board of Directors        of the Overseas    Private   Investment     Corpora-
         tion.

      --Have   the Development     Loan Staff    Committee    review   applications.

      --Have liaison    and staff-level     coordination     between the Overseas
         Private  Investment   Corporation     and executive     agencies, includ-
         ing the Department    of Agriculture.

    Any one of the several ways that have been suggested for better       evalua-
    tion of the impact of proposed investment     survey and guarantee   programs
    could achieve the objectives    sought.   Whatever the means adopted,    the
    Department of Agriculture    should be given an effective  voice in the
    decisionmaking  process.
    GAO is recommending to the Board of Directors             of the Overseas Private
    Investment    Corporation --which      assumed responsibility      for the evafua-
    tion of proposals       after  the completion    of GAO's fieldwork--that         the
    Corporation     (1) consult with the Department of Agriculture              and other
    executive    agencies to establish       an evaluation    procedure acceptable        to
    all parties     and (2) include in its policy directives           the necessary
    measures for analyzing        projects   which could adversely       affect   U.S. agri-
    cultural    exports.      (See P* 36.)


MATTERSFOR CONSIDERATIONBY THE CONGRESS
    GAO believes  this report  is of timely importance and interest to the
    Congress because of continuing   weakness in the U.S. balance of trade
    and balance of payments.
                             CHAPTER1

                           INTRODUCTION

       The General Accounting Office has examined into poli-
cies and practices     followed by the Agency for International
Development when it evaluated applications       by American firms
for participation    in investment survey and guarantee pro-
grams. These programs are designed to stimulate        the flow of
private American capital       and know-how into less developed
countries    of the world.

       During our review, the Overseas Private Investment Cor-
poration    (OPIC) assumed administrative responsibilities    for
investment programs that had been administered       by AID.
This report comments on the changeover and makes the point
that the same kinds of economic analyses of the effect       of
investment incentives    on U.S. exports and balance of pay-
ments need to be made by OPIC.
       The   scope of our review   is shown on   page   38.


       The principal  officials having an interest  in the mat-
ters   discussed in this report are listed   in appendix VI.




                                   5
                                         CHAPTER2

                           INVESTMENTINCENTIVE PROGRAMS--

                           PURPOSESAND POTENTIAL EFFECTS ON

                    U.S. ECONOMY
                               AND BAM!JCE-OF-PAYMENTSPOSITION

                   In providing  assistance     to less developed countries,
             the United States helps them to develop their economic re-
             sources and productive     capacities    through projects that pro-
             mote trade, increase production,       raise standards of living,
             and improve technical    efficiency.

                   U.S. assistance    efforts  take many forms.  Direct assis-
             tance includes dollar and local currency grants and loans to
             foreign countries    and businesses,   sales and grants of food
             for developmental    and other purposes9 and participation    in
             the financing   of a wide range of programs administered    by
             multinational   organizations.

                     The U.S. Government a!bso attempts to stimulate    private
             capital    flows into less developed countries    by sharing with
             American firms the costs of conducting surveys of investment
             opportunities    and by insuring  investors  against certain po-
             litical    and business risks.

                   These programs, by their very nature, are an incentive
             for business firms to increase their investments  in less
             developed countries.
     " /
   / f:            At the time of our review, investment survey and guar-
    i!
 ;; 1        antee programs were administered   by AID under title IV
             (sets. 231 to 233) and title   III (sets. 221 to 224) of the
 'j r        Foreign Assistance Act of 1961, as amended through 1968.
 I I         These programs are described under the caption "Purposes of
14‘          investment survey and guarantee programs administered    by
j!           AID," below.

                   With the enactment in 1969 of amendments to the Foreign
           ! Assistance Act of 1961, administrative    responsibility for
           ' comparable programs (relabeled   as investment incentive  pro-
             grams) was transferred   from AID to OPIC. These programs are

                                              6
described under the caption "Purposes of investment      incen-
tive program administered  by OPIC," below.

     The potent?il    effect of investment incentive   programs
is described ur$er the caption "Potential     effect of invest-
ment incentive$kograms      on U.S. economy and balance-of-
payments posi&n,l'     below.
PURPOSESOF INVESTMENTSURVEYAND
GUARANTEEPROGRAMSADPaINISTWED BY AID

Investment   Survey Program

       Title  IV of the Foreign Assistance Act of 1961
(sets. 231 to 233), as amended through 1968, authorized        AID
to pay part of the costs that U.S. firms incurred when they
surveyed investment opportunities      in less developed friendly
countries    and areas.

      AID was authorized    to pay up to 50 percent of the cost
of surveysIl provided that the applicant      did not proceed
with the investment and the survey was approved by AID as
meeting their standards.      If the prospective    investor    pro-
ceeded with the investment,      it retained exclusive    rights    to,
and use of, the survey; if it did not proceed, it could
elect to receive payment by AID and turn over its survey re-
sults to the U.S. Government for possible future use by
other interested   parties.

       These approved surveys provided factual       and analytical
data on economic and technical        aspects needed to make in-
vestment decisions,      including  analyses of market potential,
plant location,    availability    of  raw materials  and labor,
profitability,    and so forth.

Investment   Guarantee   Program

        The Investment Guarantee Program came into being in
1948, as part of the Economic Cooperation Act, to facilitate
and increase participation      by private enterprise    and private
institutions     in the development of productive     capacities   and
in the social progress of less developed countries.

      The program, as originally    conceived,dealt  with guar-
anties of convertibility    of income.    In 1950 guaranties
against expropriation    were added, and in 1956 coverage was
broadened to include losses by reason of war.

      The program was administered    by a series of organiza-
tions prior to 1955;  after   that time  it was administered   by
the International  Cooperation Administration     and its succes-
sor, AID.

                                   8
      The most definitive     legislation enacted by the Congress
in relation    to the Investment Guarantee Program was the
Foreign Assistance Act of 1961, as amended in 1969. Pur-
suant to title    III of the act (sets. 221 to 224), the Con-
gress authorized     three investment guarantee programs.
      --Specific     political      risk guaranties      against (1) ina-
         bility    to convert into U.S. dollars           other currencies,
         or creditsinsuch          currencies,    received as earnings
         or profits      from the approved project,          as repayment .J
         or return of the investment therein,              in whole or in
         part, or as compensation for the sale or disposition
         of all or any part thereof,           (2) loss of investment,
         in whole or in part, in the approved project                due to
         expropriation         or confiscation    action of a foreign
         government, and (3) loss due to war, revolution,                or
         insurrection.

      --Extended-risk      guaranties   covering up to 75 percent
         of both political      and business risks.

      --Extended-risk  guaranties  covering up to 100 percent
         of losses on certain housing projects.

      The act authorized    the President      to issue guaranties
in connection with projects,       including     expansion, moderniza-
tion,  or development    of existing     enterprises,    in any friendly
country or areas, Qith the government of which the President
had agreed to institute     the guarantee program.




                                                                               ..
                                                                                .-.
                                                                                ...
                                     9
PURPOSESOF INVESTMENTINCENTIVE PROGRAMS
ADMINISTEREDBY OPIC

Investment      encouragement

        With several exceptions,       section 234(d) of the Foreign
Assistance Act of 1961, as amended in 1969, authorizes                   OPIC
to initiate       and support-- through financial         participation,
incentive      grant, or otherwise,     and on such terms and condi-
tions as OPIC may determine--the           identification,        assessment,
survey, and promotion of private           investment opportunities,
utilizing     wherever feasible     and effective       the facilities     of
private     organizations    or private    investors.

Investment      insurance
      Section     234(a)    of the act authorizes     OPIC to:

      --Issue    insurance, upon such terms and conditions     as
         OPIC may determine,   to eligible  investors  insuring,
          in whole or in part, against any or all the follow-
          ing risks with respect to projects which the corpora-
         tion has approved.

         1. Inability  to convert into U.S. dollars    other cur-
            rencies,  or credits   in such currencies,  received
            as earnings or profits    from the approved project
            as repayment or return of the investment therein,
            in whole or in part, or as compensation for the
            sale or disposition    of all or any part thereof.
         2. Loss of investment, in whole or in part, in the
            approved project due to expropriation  or confis-
            cation by action of a foreign government.

         3. Loss due to war,       revolution,    or insurrection.

      --With several exceptions,       make such arrangement with
         foreign governments or with multilateral       organiza-
         tions for sharing liabilities      assumed under invest-
        ment insurance and, in connection therewith,         issue
         insurance to investors     not otherwise eligible     there-
        under.


                                     10
                                                       //
         --Issue not more than 10 percent    of the total face
            amount of investment insurance   to a single investor.
Investment     guaranties

       With several exceptions,  section 234(b) of the act
authorizes   OPIC to issue to eligible    investors     guaranties
of loans and other investments made by such investors            in-
suring against loss due to certain      political     and business
risks and upon such terms and conditions          as the corporation
may determine.
Direct     investment

       With several exceptions,   section 234(c) of the act au-
thorizes    OPIC to make loans in U.S. dollars   repayable in
dollars    or loans in foreign currencies  to firms privately
owned or of mixed private and public ownership and upon such
terms and conditions    as the corporation  may determine.

POTENTIAL EFFECT OF
INVESTMENTINCENTIVE PROGRAMSON U.S. ECONOMY
AND BALANCE-OF-PAYMENTS
                      POSITION
      In administering     programs of assistance,   the law and/or
agency regulations     require administrators    to consider the
effect of the programs on the U.S. economy and balance-of-
payments position.                                             ,

     Section 222(g) of the Foreign        Assistance Act of 1961,
as amended, provided, with respect        to the Investment Guaran-
tee Program, that:

         "In making a determination  to issue    a guaranty
         under section 221(b), the President     shall con-
         sider the possible adverse effect of      the dollar
         investment under such guaranty upon     the balance
         of payments of the United States."

      Although title  IV of the act (which applied to the 'In-
vestment Survey Program) did not contain a comparable re-
quirement, AID's internal   regulations  required that such
consideration  be given.   This was only logical,  considering
that an investment survey could lead to an actual investment.

                                  11
      Section '231(i) provided that, in carrying   out its pur-
pose, OPIC, utilizing   broad criteria, undertake to further,
to the greatest degree possible and in a manner consistent
with its goals, the balance-of-payments   objectives   of the
United States.

      Other sections   of the law, dealing with other sections
of the aid program,    contained provisions concerning the ef-
fect of the programs    on the U.S. economy and balance-of-
payments position.     These included:

     1. Section 620(d) of the Foreign Assistance Act of 1961,
        as amended, which provides that no development loans
        be furnished    for construction   or operation   of any
        productive    enterprise   in any country where such en-
        terprise   will compete with U.S. enterprise,      unless
        the foreign country agrees to establish        appropriate
        procedures to limit the amount of exports to the
        United States.
     2. Section 104(e) of the Agricultural     Trade Development
        and Assistance Act of 1954, as amended, which per-
        mits use of U.S. owned local currencies      for loans
        to U.S. business firms (including     cooperatives)   and
        their entities   for business development and trade
        expansion in foreign countries;    provided that the
        loans not be made for the manufacture of any prod-
        ucts intended to be exported to'the United States
        in competition  with products produced in the United
        States and that due consideration     be given to the
        continued expansion of markets for U.S. agricul-
        tural commodities or the products thereof.
      It seems clear from the foregoing provisions   that the
Congress is concerned with the possible effects    of foreign
aid and investments  on the U.S. economy and export position.
       In the agricultural   sector, particular  attention  must
be paid to the effect American investments      and aid abroad
could have on existing     American patterns of marketing and
exports.
     A number of the principal commodities (such as wheat,
feed grains, tobacco, rice, and vegetable oil) grown or

                               12
                                                                                 ‘,
                                                                                      ,:.




processed in the United States are in surplus supply either
domestically       or worldwide,    or both.     Some of these crops
are either production        controlled,     qualified     for price-
support payments, or are diverted            from normal commercial
trade channels and disposed of in domestic and foreign                pro-
grams either as gifts or on concessional               sales terms.   (See
app. I.)     Still    other commodities which the United States
imports (for example, sugar) are in worldwide surplus supply,
and increases in production           pose a problem to the producing
nations because of the relatively            fixed demand for the com-
modities.
       In effect,  programs that lead to increased production
of the above commodities might well lead to keener competi-
tion for existing    markets and to lower world market prices.
A case in point is wheat, for which increased production
abroad (stimulated     to some extent by U.S. assistance to un-
derdeveloped countries)     has been a factor explaining recent
declines   in world market prices and increases in world
wheat reserves.

      A blanket policy of denying assistance    to countries
seeking to increase their production    of crops that are in
surplus supply in the United States might not be desirable
for a number of reasons.   These include:

      --The increased emphasis being placed by our Government
         on the production of food crops in developing    coun-
         tries so as to meet the impact of the population    ex-
         plosion.1

                                                                             4
LB0th the President and the Congress have stated that in-
 creased emphasis should be placed on the production             of food
 crops in developing     countries    so as to meet the impact of
 the population    explosion.      The President    has emphasized the
 "urgency of assisting      developing   countries    to balance agri-
 cultural  productivity     with population     growth," and the Con-
 gress, in the Food for Peace Act of 1966, directed            the
 President 'Ito take into account efforts          of friendly   coun-
 tries to resolve their problems of food production            and pop-
 ulation  growth."



                                    13
       --The problems confronting      developing nations of find-
          ing ways to increase their exports so as to earn
          foreign exchange for the purchase of food and other
          goods which they themselves cannot produce efficiently
          yet but which are deemed essential       for economic de-
          velopment.    (This is particularly    true in countries
          which are heavily dependent for their export earnings
          on a few types of agricultural      commodities in world
          surplus position.)

        It might be argued that U.S. assistance,          designed to
 stimulate   increased foreign production        of farm commodities
 that the United States traditionally          exports,would    adversely
 affect the level of our exports--irrespective            of whether
 the foreign country proposes to consume the increased pro-
 duction domestically       or to export it.     In addition,     as im-
 porting nations move toward self-sufficiency,            world import
 needs would decline.        Further,  as the countries      develop ex-
 port surpluses,     additional    competition   would be created for
 existing   markets.

      Much more sophisticated economic analysis  than this,
 however, is needed to gauge the impact of these programs on
 the U.S. balance of payments, both in the short run and the
 long run.  Among the factors which have to be weighed are:

       --The growth of population      versus the growth of pro-
          duction in the country being aided.      Production would
          have to increase for the country simply to remain in
          the same relative  position.
       --The effect of greater levels of production          on incomes
&-$       and consumption patterns     in the countries    being
          aided.   Many importing   nations struggling     to become
          more self-sufficient    in food production    lack foreign
          exchange to import enough food to feed their popula-
          tions adequately.     As domestic production     increases,
          so may total domestic consumption of food.

       --The effect increased agricultural       productivity     has
          on the level of economic development of the country
          being aided.   It generally    is considered that as less
          developed countries   become more prosperous,       they be-
          come better customers for products produced in the
          United States.    Thus increased production       of food in
                                    14
        a foreign country could lead to better markets for
        U.S. fertilizer,    tractors,   farm implements, and in-
        dustrial    and consumer goods.

     --The extent to which investments abroad generate a
        stream of investment income which ultimately may off-
        set any loss of dollar exports.

       In evaluating    the effect of investment survey and guar-
antee programs on the U.S. economy and balance-of-payments
position,   AID regulations     required separate consideration
of the effects     of the investment and of the increased m-
duction it was intended to stimulate,         AID, in turn, dis-
tinguished    between production     which was intended to be con--
sumed in the foreign country and that which was to be g-
ported from the foreign country.

        On investments  it guaranteed,   AID generally   required
the procurement of American goods and services substantially
equal in dollar value to the amount of the loan it guaran-
teed.     To the extent that this was done, the investment led
to increased U.S. exports and a neutral effect on the United
States balance-of-payments      position  (e.g., dollars    invested
by American firms were spent for American goods and ser-
vices).

       As the investment led to increased production    abroad,         Q
its ultimate    effect on the U,S. economy and balance-of-
payments position     became more difficult to gauge for reasons
outlined   above.

      In line with the policy of increasing    the production  of
food crops in developing   countries,  AID accorded priority   to
production   of food crops for              in the foreign
country.    (Feed crops to be ‘consumed domestically   also were
permitted,   although this was a lower order of priority.)
       AID's position     on assistance    which was intended to lead
to the production      of food and feed crops for export was less
clear.     For example, while AID actually        had approved proj-
ects having exports as an explicit          goal, the following
sources indicate.that        such projects   ordinarily   would have
been considered     ineligible     for AID participation:
            --AID's Investment Survey Handbook (July 19681, stated
               that a proposed survey was ineligible     if the I'proj-
               ects *** would provide foreign competition      in the
               overseas sale of U.S. agricultural    surplus commodi-
               ties.$!

           --AIDPs Specific Risk Investment Guaranty Handbook
               (October 19661, stated that an investment was ineli-
              gible for a guaranty if "The investment is for a proj-
              ect of increasing   the production  or processing  of
              food, feeds, and other agricultural    commodities (in-
              cluding meats) for the purpose of export, if the
              food, feed, or other agricultural    commodity is of a
              type in surplus in the United States.gs

           --AID's &tended Risk Guaranty Policy Paper .(December
              1964, revised)      stated that an extended risk guaranty
              proposal would be ruled ineligible        if The investment
              would significantly       affect the economy of the U.S.
              in some adverse fashion ***.,I

           --AID's Policy 3.1, Revision 1 (July 19691, stated that
              'sFood products,   in world surplus (but not in U.S.
              surplus)   grown for export, are eligible   for Specific
              Risk Investment Guaranties.      *** However, food prod-
              ucts in U.S. surplus,     grown for export, remain in-
              eligible."

           On the other hand, AID's Manual Order 1016.2        (March 7,
      1968) stated that:

    t!.    "Assistance     may be given to growing and harvesting
7          food and feed crops for export:       provided that due
           consideration      shall be given to the continued ex-
           pansion of markets for United States agricultural
           commodities or the products thereof,       and that it
           is necessary to earn foreign exchange to purchase
           food and other goods which cannot be produced ef-
           ficiently    within the country and which are deemed
           essential    for economic development."1


      1Assistance  is not to be given to increase the production        of
       nonfood crops in world surplus if the foreign country
       would be enabled to increase exports appreciably.
                                     16
      As will be noted in the following    chapter of this re-
port, AID's comments in regard to the effect of the proposed
investment were concerned principally    with the benefits     that
less developed countries   would derive from private    invest-
ments.   This is, of course, an understandable     emphasis since
development was central   to AID's mission.     2
       It seemed only right to us, however, that, when AID
supported projects     which could lead to the development of
foreign competition     for U.S. export markets, the benefits      to
the foreign   country should haye been weighed against any ad-
verse effects    on the American economy, export position,       and
balance of payments.       This, in our opinion,   requires that
the likely   effects   of the projects  be subjected to careful
economic analysis     and consideration  by an interagency    group
composed of representatives      from U.S. agencies directly     con-
cerned with such matters.
       The following   chapter   elaborates   at greater   length       on
this   thesis.



.




                                                                    I




                                   17
                                   CHAPTER3

            NERD FOR AN INTERAGENCYREVIEW OF APPLICATIONS

                  FOR INVESTMENTSURVEYSAND GUARANTIES

           In our opinion,    there is a need to establish       a system
     for formal analysis and interagency         review of the merits of
     proposed investment incentive       projects     which could adversely
     affect U.S. agricultural      exports.     This need is highlighted
     by our chronic balance-of-payments         difficulties.

            USDA officials  informed us that the establishment    of
     any foreign agricultural     project which aimed to increase the
     foreign production    and exportation  of wheat, corn, rice, or
     grain sorghums (mile) could compete with our export markets.
     This is particularly     true not only for wheat but also for
     corn, since the United States has been losing ground in the
     growing Japanese corn market it traditionally      has dominated,

             AID officials   stated that, as a matter of policy,     they
     solicited    the views of USDA whenever an application      for a
e    survey or a guaranty involved the foreign production         of ag-
*c   ricultural     commodities.    They added that they were well
     aware of-the special significance       of projects   which specifi-
     cally proposed to help foreign countries        produce and export
     agricultural      commodities.

           Our review of selected applications         for investment sur-
     veys and guaranties      showed only a few documented instances
     where AID had contacted USDA or other agencies concerned
     with American exports or balance-of-payments          problems in
     the course of their review and approval of the applications.
     Although AID officials      assured us that this had been done
     as a matter of practice,      they were unable to tell us to
     whom they had spoken within USDA or whose opinions they
     had obtained.    Moreover, AID officials       in most instances
     had not made any calculations       of the likely    effect that in-
     creased production     in the foreign country would have on
     U.S. exports of like agricultural        commodities.

          Although we cannot dismiss the possibility    that there
     may have been informal conversations  with USDA that were not
     documented, the importance of safeguarding    U.S. exports

                                      18
with American exports or balance-of-payments          problems in.
the course of their review and approval of the applications.
Although AID officials      assured us that this had been done
as a matter of practice,      they were unable to tell us to
whom they had spoken within USDA or whose opinions they
had obtained.    Moreover, AID officials      in most instances
had not made any calculations       of the likely    effect that in-
creased production     in the foreign country would have on
U.S. exports of like agricultural        commodities.

        Although we cannot dismiss the possibility          that there
may have been informal conversations           with USDA that were not
documented, the importance of safeguarding            U.S. exports
seems to warrant more formal consideration            of these applica-
tions at policymaking        levels of the Government agencies di-
rectly     concerned with the likely     effects    of AID programs on
the U.S. economy, export trade, and balance-of-payments              po-
sition.      In our opinion,     the examples discussed on pages 20
through 33 support this conclusion.




                                   19
       From the beginning of the investment survey program,
in fiscal    year 1962, through June 30, 1969, AID signed
333 investment survey participation              agreements with pri-
vate firms    interested     in exploring      investment opportunities
in agriculture,       manufacturing,    transportation,     and other
sectors a Approximately        73 of these agreements were de-
signed to explore the feasibility            of making investments
for the production,       processing,     distribution,    or storage of
agricultural      commodities in less developed countries          of the
world e

      The number of investment surveys authorized      during
any one year reached a peak in fiscal   year 1967 when AID
signed 73 agreements with various private     enterprises.
Since that time the yearly number of agreements has fallen
off,   In 1969, 23 agreements were signed--five     of which
dealt with agricultural   projects.

      The recent decline is partially       attributable   to less
dynamic gromtion    of the survey program by AID. Also AID
adopted more stringent     criteria    in an attempt to restrict
its participation   to those surveys which appeared to be
solid and which were to be performed by businesses having
the know-how and financial       backing to carry projects    through
to successfu'k completion.

      Three applications     received by AID after March 1968
proposed surveys to explore the feasibility          of projects   de-
signed, among other things,       to increase foreign country ex-
ports of agricultural    commodities,      The objectives    of the
proposed surveys, AIDls comments and recommendations,            and
other pertiszent   data (e.g.,    the market situation     in the
United States) are discussed in the following          pages for
each of these projects.

Proposed project     in Brazil

      One corporation    submitted an application      on Septem-
ber 1, 1968, for AIDIs financial      participation     in a survey
to explore the feasibility      of a project    for grain marketing
and all of its aspects in Brazil.        The corporationss    survey
was to include a study of the flow of grain for domestic

                                   20
,

i

    consumption and for export and import.   The production    of
    commodities--corn, wheat, oilseeds,  and other grains--was
    to be studied.
           It was anticipated    that, if this investment project
    were successful,     it could well increase the income of Bra-
    zilian   grain producers through expanded export markets and
    more efficient    handling of their crops.

           AID's Office of Brazil Affairs    favored implementation
    of this survey.     The Office was of the opinion that the
    project   could have a significant    economic impact, since in-
    creased exports of nontraditional      agricultural  products
    was a major goal of Brazil.

          USDA officials   told us that, if rice and corn were to
    be exported by Brazil,     this possibly could have an adverse
    effect on U.S. export markets in the future.

          Although the corporation    withdrew its application     on
    September 25, 1968, we found no indication      that AID had
    considered the possibility     of turning  it down on the basis
    that the proposed investment was designed, in part, to ex-
    pand Brazil's  export market through more efficient       handling
    of its crops.    During the period the application     was pend-
    ing, AID did not solicit    t'he views of USDA.

    Proposed   pro.ject   in Thailand
           Another corporation     signed an agreement with AID on
    March 7, 1968, to perform an investment survey in Thailand.
    The purpose of the survey was to determine the feasibility
    of establishing    an agricultural        facility     in northeast    Thai-
    land and to study available        local,      national,    and export
    marketing capacity-- all for the purpose of considering                 a
    direct   investment in private       enterprise      agricultural    estab-
    lishments which would produce and market corn (maize),
    rice, soybeans, and sorghum.

          The AID Mission in Thailand stated that it was in
    agreement with the survey if AID/Washington was satisfied
    that the project would not compete unduly with other AID-
    supported agricultural  projects  in Thailand.


                                         21
       Our discussions   with AID officials       revealed that the
reference   to other AID-supported      agricultural     projects   was
more than likely     to the underwriting,      under the Extended
Risk Guarantee Program, of a corn production            and marketing
project   in central Thailand at the time this corporation
applied for the investment survey.          The primary objective
of this already existing     project    (discussed on pp. 29 to
33) was to add to ThailandIs      export potential        for corn.

        AID/Washington was of the opinion that the new proposed
project would not compete unduly with the other AID-
supported projects.       The establishment    of an agricultural
venture in northeast      Thailand was considered to be of high
priority,     since AID had financed another high-priority
project    in that area (the Northeast Agri-business        Develop-
ment Project)      and AID felt that agricultural    development
possibly     could curb infiltration    and restrain  communism in
northeast     Thailand.

      We found no reference      in AID's comments to the facts
that Thailand was a major exporter of corn and that rice
also was one of Thailand's       major export earners,   In 1966
Thailand was exporting      approximately   90 percent of its corn
production;   approximately    two thirds to the Japanese mar-
ket.

       AID's comments relating     to the project's    effect on the
U.S. balance-of-payments     position    dealt with the effect of
acquiring   U.S. equipment for the project        and potential
long-run earnings on investment.         No inquiry   or analysis
was made, however, as to what effect the potentially            in-
creased production    might have on Thailand and United
States exports of corn and rice.

      We found no indication    that AID had considered the
possible  combined developmental     impact of the two agricul-
tural projects   in Thailand or what effect these two projects
could have on United States exports of corn and rice if
both companies actively     became engaged in competing for ex-
port markets in the Far East,

      In recommending approval of the project,    AID pointed
out that the implementation    of the project  should result  in
a favorable  effect on Thailand's    balance of payments by

                                  22
producing local substitutes      for imports, by providing     ex-
port commodities,    by developing nonproductive      lands, by in-
creasing the productivity     of existing   farmlands,    and by
training   host country nationals     in modern practical    methods
of large-scale   scientific   agriculture.

     The corporation    informed AID on June 6, 1969, that it
had decided not to make an investment in a corporate        farm-
ing activity   in northeast   Thailand.     It was of the opinion
that the return on investment would be too low, although
the project might be economically       feasible  if it were Gov-
ernment sponsored.
Proposed project   in Indonesia
       The same corporation    signed an agreement with AID on
June 3, 1968, to perform an investment survey in Indonesia.
The objective    of the survey was to determine the feasibil-
ity of developing an economically       viable large-scale    agri-
cultural   operation   for the production,    storage, and market-
ing of food and feed crops.        The crops, which would be pro-
duced for domestic and export purposes, were rice, maize,
soybeans, sorghums, and cassava.        The investor   stated that
the project ultimately      could consist of an area in excess
of l,OOO,OOO hectares (2,500,OOO acres>.
      The AID Mission pointed out that the Government of
Indonesia was very much interested   in the proposed survey,
since the project would have a valuable impact on Indone-
sia's economy.
      A representative    of USDA contacted AID to inquire into
the status of the survey application,        because it was under-
stood that the corporation     intended to export corn to Japan,
a substantial    purchaser of United States corn.       The USDA
representative    pointed out that the United States market
(Japan) could be proportionately      affected   by this project.

       AID/Washington was of the opinion,   however, that the
survey was in order, since implementation     of the project
would assist in the economic development of Indonesia--a
corn importer-- by developing   its foreign exchange earnings,
providing   employment, and supplying a national    need. AID
also pointed out that corn was not in world surplus.

                                  23
       Qur discussions    with USDA officials     indicated   that the
establishment     of any facility,    regardless    of size, that in-
tended to export corn would be in competition            with the
United States.      According to USDA, the United States is a
residual   supplier    of corn even though it exports a large
volume of corn.      The reason given for this was that,
whereas foreign exporters reduce the price of their corn
to get rid of it, the United States stores the corn and
waits for a favorable price.         Thus the United States sup-
plies only that quantity        that other suppliers     are unable to
furnish.

        The corporation    completed its survey on November 20,
1969, but, as of January 6, 1971, AID had not been formally
notified    of its investment decision.      Indications   were that
an investment would be made by the corporation,          but AID
told us that, if the investment were not made, AID would
not be financially      liable  to pay funds that it otherwise
would have had to pay, since the investment determination
date had passed without an extension being requested or
granted.
                                                                         I




                                  24
SPECIFIC-RISK GUARANTIES

       From the beginning of the Specific Risk Guarantee Pro-
gram in 1948, through June 30, 1969, AID had issued 3,855
specific-risk     guaranties.     In fiscal  years 1968-69 approxi-
mately 70 guaranties       were issued specifically   for
agricultural-type      projects,   20 of which we reviewed.

       Of the 20 guaranties  selected for review, three specif-
ically   stated that the U.S. investors    intended, among other
things,   to export some of the agricultural     commodities to
be produced as a result of their investment in the foreign
country.
     An analysis    of the facts surroundingthe       issuance   of
two of the three    guaranties  follows.

Proposed projects     in El Salvador

       One applicant      signed a specific-risk     insurance contract
with AID on November 11, 1968. The guaranties              were to cover
its investment in a project          in El Salvador.     To insure
against unforeseeable         hazards of doing business in an unfa-
miliar area, the investor          obtained about $206,000 worth of
inconvertibility       insurance and about $206,000 worth of ex-
propriation      insurance,l

      The objective of the project,  as stated on the applica-
tion for insurance,   was to import poults;  raise turkeys;    and
sell live and dressed, fresh and frozen birds within the
Central American Common Market (which includes Costa Rica,
Guatemala, Honduras, El Salvador, and Nicaragua).       The in-
vestor also expressed its intention   of exporting   turkey eggs
to the United States.

      The AID Mission praised the project   as one which would
enhance the agricultural   sector and export earnings of
El Salvador, as well as increase the demand for poultry    feed
in that country.

1
 The dollar amounts shown for both specific    and extended
 risk guaranties  issued for all projects   are the maximum
 amounts AID could be liable  for if a claim was made by the
  investor.
                                   25
      Discussions with AID officials       revealed that USDA had
not been consulted       in an effort  to determine the status of
the poultry    situation    in the United States or to determine
whether the possible exportation        of fresh or frozen birds
would have an adverse effect on U.S. exports of poultry.,

     They were of the opinion,    however, that the main thrust
of the project was for domestic consumption and that exporta-
tion was something that "mightP9 be done in the future.       We
did not, however, find any indication     that AID had questioned
the investor's  objectives  in regard to the immediate or fu-
ture potential  for poultry   exports.

     We were informed that the exportation of agricultural
commodities from one member of the Central American Common
Market to another member was considered by AID to be "domes-
tic consumption."
       USDA officials      told us that the United States was not
exporting    turkeys to Central American countries      at the time
of our review.        They also expressed doubt that exports from
this project     to other Central American countries,     if any,
would compete with United States markets in that area.            They
thought, however,       that   exports to any other member  of the
Central American Common Market should be classified          as ex-
ports rather than domestic consumption.

       Although it appears at this stage that any future ex-
portation     of turkeys,   as a result of this project,    will not
be in direct competition       with U.S. exports,  it still    seems
to us that AID should have consulted with USDA at the time
the application      for insurance was being processed.      such
consultations     would have helped to ensure that the effects
of this type of project       on the status of the U.S. domestic
and export poultry markets would be given appropriate           con-
sideration.

Proposed project    in Costa Rica

     Another applicant      signed a contract with AID on Octo-
ber 22, 1968, for specific-risk        guaranties     covering aproject
in Costa Rica,     Guaranties were issued in the amount of
about $1.5 million    for inconvertibility        insurance and about
$1.3 million   for expropriation     insurance,

                                   26
                                                                              .:
        The project was for the production           and sale of agricul-
tural products (principally         rice) for the local market.         The
application     for the specific-risk      guaranties      submitted by
the corporation     stated that Costa Rica was a net importer of
rice and in the future might become an exporter.                 The appli-
cant added that, if and when Costa Rica became an exporter,
it would participate      directly     or indirectly     in this expor-
tation.

       Emphasis was being placed by the AID Mission on in-
creasing Costa Rican agricultural       production  and export of
agricultural     products.   The AID Mission felt that the pro-
posed project met this criterion      and that it should, there-
fore, enjoy top priority      status.   The Mission believed that
the project would make Costa Rica self-sufficient         in rice
and also would make rice available       for export to Japan.
The rice would also be available      for export to other Asian
countries    which currently   import rice from the United States.

      We were informed by an AID representative    that USDA was
contacted in regard to this project   on September 18, 1968.
Although documentation  showed that AID had been informed by
USDA that rice was not in world surplus and although there
appeared to be no reason for not encouraging    the project,
rice is a very important U.S. export crop and rice exports
account for nearly two thirds of U.S. production.

      This was the only project we examined into where we*
found documentation  that AID had contacted USDA during AID's
review and approval of the application.




                                    27
EXTENDED-RISK GUARANTIES

     From the inception            of the Extended Risk Guarantee   Pro-
gram in calendar  year           1963, 33 guaranties  had been issued by
AID, 15 of which were            in effect as of June 30, 1969.

        Of the 15 guaranties        in force,        two involved     projects
for the production        of agricultural           commodities    abroad,     one
of which was designed          to increase         exports.     We selected     the
latter    project     for review    together        with another    project,     not
currently      in force,    which specifically            proposed  to increase
the exports       of a foreign    country.          A discussion    of these
projects     follows.

Proposed     project      in   the   Dominican     Republic

        One applicant     signed an extended-risk          guaranty    with AID
on August 25, 1967, for about $2.8 million.                  A subsidiary
firm of the applicant          later obtained     additional      extended-
risk    coverage   for about $2.3 million         (on March 14, 1969) to
cover the increased         capital  expenditures       needed to complete
development      of the project.      This boosted coverage           on the
project     to $5.1 million.

         The guaranty     was to cover the development                 of about
32,000 acres of land in the Dominican                      Republic,    of which
20,000 acres initially            were to be used for the production                   of
mile.      It was anticipated          that some of the milo would be
sold in the Dominican            Republic      and that the balance would be
exported      to world markets--primarily               Western Europe.          The
original      financial     projections        indicated       that operations
should begin to show a modest profit                     in the fall     of 1967 and
should steadily         improve as the project              approached    full-scale
operations.         The estimated       yearly      earnings     were expected       to
reach $1 million         by 1969.

         AID correspondence       files      showed that during        1966 a
representative        of an American         company (whose investment           and
management responsibilities               later   were taken over by the ap-
plicant)      contacted   USDA to inquire          whether      corn, milo,     and
cotton      could be considered         nonsurplus      agricultural      commod-
ities     in the United     States.        USDA informed        the representative
that it would reject         all proposed         specific-risk       guarantee


                                           28
      :                                                                                    .
,-’
          i                   L.
                ;   ‘,L

                          .




              projects  which proposed to increase the production            of corn,
              mile, cotton,  or wheat in foreign countries.

                     Our review of the correspondence,     however, did not dis-
              close any evidence that AID/Washington had contacted USDA to
              discuss the merits of this project     prior to the issuance of
              an extended-risk     guaranty to the applicant,   even though the
              investors    intended to export milo to world markets.

                  The objectives    of the agricultural      project   in the
            Dominican Republic had changed somewhat by the time that the
            subsidiary    firm requested extended-risk       insurance to cover
            its portion of the investment in the project.             The revised
           plan called for early diversification          into crops which would
           bring more.revenue and a higher profit          return than milo.
          .The choice of specific      crops was to be geared to the food
           needs of the Dominican Republic and to existing             export mar-
           kets. Qn the basis of the size of domestic and export markets,
           maximum acreage would be allocated          to crops having the high-
            est earnings potential,      e.g., onCons, garlic,       tomatoes, and
            sweet potatoes,    with the remaining acreage being put into
           mile.     Foreign exchange earnings from exports were estimated
            to be from $1,5 million      to $2 million    annually.
                     The AID Mission in the Dominican Republic          informed
              AID/Washington that milo was gaining acceptance            by the
              livestock   and poultry  industry   in the Dominican       Republic and
              that, as milo continued     to substitute  for corn       as a feed,
              corn would be released for export.
                     AID/Washington believed that approval of the guaranty
              was justified    on financial   and economic grounds.  Also it
              was recognized     that the project was dependent upon AID guar-
              anties,    since the applicant   otherwise would have to withdraw
              from the project.

              Proposed project     in Thailand

                     Another applicant    first    entered into a contract     with
              AID for extended-risk      guaranties     for a corn-merchandising
              project    in Thailand on April 5, 1967. Since the initial
              contract    did not provide protection       against the risks of
              inconvertibility,     expropriation,      and war, the applicant      took
              out specific -risk coverage in the amount of $4.5 million              at

                                                 29
the same time it increased protection         under the extended-
risk contract     on April 5, 1968. The second extension       of the
extended -risk coverage was signed on June 19, 1968. This
extension brought the total amount of insurance in force to
$12 million     (extended-risk  guaranties,    $7.5 million  and
specific-r   isk guaranties,   $4.5 million).

       The project   involved a joint venture with Thailand
shareholders    for the operation    of a corn-merchandising
project   in central    Thailand.  The project was designed to
increase Thailand corn export earnings,        increase productiv-
ity through farmer assistance      programs, provide higher in-
come to the farmers by selling       a higher quality   corn, and
provide expert services in selling        corn on the international
market.
       We found no evidence that AID had contacted other U.S.
Government agencies which had the responsibility          of pro-
tecting our balance-of-trade       position,   to obtain their for-
mal views as to the feasibility        of underwriting   an invest-
ment in an agricultural     project    that had as an objective     the
increasing    of corn production    in a country (Thailand)    which
exported approximately     90 percent of its domestically       grown
corn--Japan    being the primary market.

      Shortly after the applicant    signed its first  contract
for extended-risk     guaranties, the U.S. Feed Grains Council
sent a letter    (dated April 21, 1967) to the Secretary of
State, expressing concern over the policies     being followed
by AID under the Extended Risk Guarantee Program.

      The U.S.    Feed Grains Council, which is involved -in the
promotion of     exports of U.S.-produced    corn, grain sorghums,
feed grains,     and feedstuffs  in cooperation   with USDA, made
the following     comments about the Thailand project.

               "The membership of the Council fully ap-
     preciates     the importance of increasing   food pro-
     duction in the world, as well as the need for
     upgrading human diets all over the world.         But
     it is quite another thing for the United States
     to expend funds and to guarantee loans to com-
     peting export countries      for *** that country to
     double or triple     its corn production   in direct
     competition     with the United States.
              I'*** stand aghast to think that the United
     States on one hand is spending a near unprece-
     dented amount of money to control      corn production
     in our own country and at the same time subsidize
     production     in a competing country, with the an-
     nounced intention     of that country becoming a
     greater force in the world corn export market."

       AID's reply to the Council's  ,letter placed little   em-
phasis on the Council's    primary concern--the   approval of
projects    which would be in direct competition   with U.S.
exports.     AID's comments were as follows:

                "Returning       to your primary concern, this
     project will not give the Thai corn farmer an
     unfair competitive            advantage on world markets.
     We feel your assumption that our main objective
     is to double or triple              corn production         in
     Thailand in direct competition                 with the United
     States is based on a misunderstanding.                       As you
     can see from the foregoing,                we are indirectly
     helping a program that is already under way.
     We recognize there are certain                  trade impli-
     cations.        However, taking all factors               into
     consideration         we feel the program will con-
     tribute      significantly         to the economic and
     social well-being           of Thai farmers and their
     rural economy and political                stability.         We
     feel this is especially               important at this time
     during the present unsettled                 conditions       in
     Southeast Asia.            As you know, Thailand is a
     strong participating             ally of the United States
     in supporting         certain      strategic      objectives
     in that area and we believe that the success
     of this private          initiative       based on local
     self-help,       can stimulate          our best overall
     interest.        In addition,         Thailand is an im-
     portant customer of the United States ex-
     ports, and we believe in the long run the
     net advantage to the United States both
     economically         and politically         will be sig-
     nificant.,"



                                       31
        In December 1967 the applicant        stated    again that one
of its objectives      was to provide     technical     assistance    to
Thailand    farmers.    The technique    used would be the one
proven most successful       in the United      States.     The applicant
pointed    out that the average yield        of maize in Thailand         at
that time was about 300 kilo        per rai (0.4 acres>.           By imple-
menting U.S. techniques,       the applicant       would be trying      to
bring yields     first  to 600 kilo    per rai,     then to 1,000,      then
even higher.

        The applicant  also projected    that corn production      in
Thailand    would be 4 million    metric   tons by 1973 compared
with about 1 million      metric  tons in 1967.      The applicant
also made known its plans to develop          export  markets   in
countries    other than Japan, notably       Taiwan,  and in Western
Europe.

        In preparing  the data necessary       for the approval   of the
application     for additional   extended-risk      guaranties,  AID had
this    to say about the project's      effect    on our balance  of
payments.

                 "The 5.5 million      of U.S. capital         proposed
      for Calthai      will   be spent for procurement             of U.S.
      goods and services        ***e    Positive    reflows        of capital
      to the U.S. will        begin during      the first     year.
      Interest      on U.S. debt and guaranty          service      fees
      on the U.S. capital         will  add a positive         reflow
      of dollars      to this country,        Much of the sal-
      aries     paid to Calthai's      U.S. employees will            be
      repatriated       to the U.S.

               "The U-S, will        also benefit      from future
      exports    of farm equipment         ***.   Moreover,     in-
      creasing    discretionary        incomes of the farmers
      and the positive        balance     of payments effects
      of increasing       Thai corn exports       will    cause
      Thai imports      to rise.      Some of these in-
      creased    imports    will   be of U,S. origin.

                "It    is true that Thai corn exports      will                 I

      compete with U.S. corn exports          in the world
      markets,      especially    the Japanese market.     More
      importantly,       however,    the U.S, should not

                                       32
      forget that the growing world need for food
      demands that positive   actions be taken to en-
      courage potential   food surplus countries such
      as Thailand to develop their agriculture   po-
       tential."

       AID was of the opinion that the United States, not
Thailand,  had received the most benefit   from the growing
Japanese demand for corn.    Moreover, United States corn ex-
ports to Japan would not be curtailed    by Thailand competi-
tion, because Japanese import demand for corn would in-
crease much faster than the probable future Thailand export
SUPPlY, according to AID.
        'x"rre foregoing  statement was based on agricultural  sta-
tistics      (1966) published by USDA and Japan.     The documenta-
tion showed that the United States exports of corn to Japan
had increased from an annual average 239,000 metric tons in
1955-59 to 2,088,OOO metric tons in 1964. The statistics
showed that Japanese corn imports increased from 1,353.000
metric tons in 1960 to 3,299,OOO metric tons in 1964.

     Although it is true that the United States supplied a
major portion   of the Japanese corn market prior to 1965,
and has continued to do so, USDA officials   have informed us
that the United States is losing ground in Japan because of
competition   by small exporters.




                                                                      ..,




                                 33
                               CHAPTER4

            CONCLUSIONS,PROPOSALS,RECOMMENDATIONS

               AGENCYCOMMENTS,AND GAO EVALUATION
      At the time of our fieldwork,    AID, through its invest-
ment survey and guarantee programs, was responsible       for
stimulating  the flow of private    American capital  and know-
how into less developed countries     of the world,   Since that
time, OPIC has assumed this responsibility,

CONCLUSIONS

      Some of these programs involved projects     designed to
increase the foreign production     and foreign export of crops
which the United States exports.      This means that there is a
possibility   that AID's helping foreign countries     to expand
their production    of crops could adversely affect the level
of production    in the United States and its exports and thus
add to its farm problem.

      The desirability     of programs designed to increase for-
eign production      and exports of crops and the overall           effect
of these programs on the U.S. economy and balance-of-
payments position      are not easy to assess.          The question of
whether, and how, to help less developed countries               grow more
food cannot be separated from other important questions,
such as (1) whether future world population              growth will out-
strip future agricultural       productivity,       (2) whether in-
creased agricultural      productivity      will generate increased
income abroad and thereby lead to greater American export
markets for agricultural,       industrial,       and consumer products,
and (3) whether American investments            in farming abroad will
yield returns on investment income that will offset any loss
of agricultural     dollar exports.

      The fact that it is so difficult    to measure the effect
of investment abroad makes it especially     important, in our
view, that a careful economic analysis be made before pro-
posed survey or investment projects    are approved.



                                   34
      We believe that this was not being done at the time of
our review, and we questioned whether AID, whose primary
concern was with the potential   developmental   effect of in-
vestments on the economies of the countries    it assisted,   was
the appropriate  agency to weigh the effect of these programs
on the U.S. economy and balance-of-payments    position   and to
consider whether foreign policy or economic development
should be paramount.

      Pursuant to the Foreign Assistance Act of 1961, as
amended in 1969, a new agency, OPIC, was established       to
carry out incentive  programs for private     investment in less
developed countries.    The Administrator    of AID is the Chair-
man of the Board of Directors    of OPIC. This report comments
on the changeover and points out that the same kinds of
economic analyses of the effect of investment incentives       on
U.S. exports and balance-of-payments      need to be made by OPIC.

     In our opinion,   such analyses and decisions   should be
made only after interagency   consideration,  taking into ac-
count the views of:

     --USDA which could consider effects    on its programs of
        production controls, price supports,   surplus disposal,
        and export expansion for American agricultural    prod-
        ucts.

.    --The Department    of Commerce which could     consider      ef-
        fects on other   American exports.

     --The Department of Treasury which could consider
        short- andlong-range effects on the U.S. balance-of-
        payments position.

     --The Department of State     which could consider      foreign
        policy implications.

     --AID which could consider the developmental         effect         on
        the economy of the foreign country.

PROPOSALS

     We proposed that the applications      for   investment survey
and guarantee programs involving    potential     foreign exports

                                 35
     of crops in U.S. surplus be submitted to members of an inter-
     agency review committee for advance review so that each
     agency could analyze the proposal and present its views as
     to the effect of the proposal on the U.S. economy, the ex-
     port position,     and the balance-of-payments   position  when
     weighed against the foreign policy or economic development
     objectives   sought.    We proposed also that the views of each
     agency participating      in the deliberations  be recorded and
     that the reasons for decisions       reached be explicitly  set
     forth.

            In addition,   we proposed that the policies   with respect
     to investment survey and guarantee programs be reviewed and
     revised to ensure that they are uniform and consistent        in
     their interpretation       and application.  We had observed in-
     consistencies     in policies   enunciated in AID handbooks for
     investment survey and guarantee programs and in the AID man-
     ual order dealing with these programs.
     RECOMMENDATIONS

            Because OPIC now has the responsibility  for the evalua-
     tion of the-proposals,    we are recommending to the Board of
     Directors   of OPIC that:
"8
          --OPIC consult    with USDA and other executive  agencies
             to establish   an evaluation procedure acceptable to
             all parties.

          --OPIC include in its policy directives     the necessary
             measures for analyzing projects    which could adversely
             affect U.S. agricultural  exports.

     AGENCY'S COMMENTS
                     AND GAO EVALUATION
           A copy of our draft report was sent to AID and to the
     Departments of State, Agriculture,  and Commerce.

           Although the executive  agencies agreed,in general,      that
     there was a need for consideration    and coordination    by all
     agencies concerned, they cautioned about the potential       for
     delays in approval of applications    if the applications    were
     submitted to a formal board.     They suggested several alterna-
     tive approaches.

                                      36
     --Have a representative    of USDA serve on the Board of
        Directors of OPIC.

     --Have the Development    Loan Staff       Committee review   ap-
        plications.
     --Have liaison  and staff-level    coordination   between
        OPIC and executive  agencies,   including    USDA.

       Any one of the several ways that have been suggested
forbetterevaluation       of the impact of proposed investment
survey and guarantee programs could achieve the objectives
sought.     Whatever the means adopted, USDA should be given
an effective      voice in the decisionmaking  process.




                                            P




                                37
                             CHAPTW5

                         SCQPEOF REVIEW
       Our review was conducted at AID and at USDA in Washing-
ton, D.C. It included an examination of available       records
and discussions   with representatives   of both agencies.
Shortly before we issued the report,     we discussed it with
representatives   of the newly established   OPIC.

       The purpose of our review was to learn whether suffi-
cient consideration      had been given to the potentially    ad-
verse effects     of investment survey and guarantee programs
on export markets for American agricultural       commodities.
Since AID, by its nature, places primary emphasis on the
contribution    these programs make to the development of the
countries    it assists,   we wished to know whether countervail-
ing views of Government agencies having such other priority
interests    as the U.S. agricultural   sector and balance of
payments were sought and given due consideration.          We wished
also to know whether the kinds of economic analyses needed
to weigh the effect of the investment programs on U.S.
agricultural    export markets were being made.

       We made no attempt to evaluate the extent to which AID
analyzes the effects    its direct agricultural        aid programs
(carried   out with technical     assistance     and capital  assis-
tance in the form of loans or grants) have-had on the U.S.
economy and balance-of-payments        position.     We recognize,
therefore,   that the matters discussed in this report deal
with only one small part of the greater issue of how to as-
sist developing nations in a way that will not have unduly
disruptive   effects  on specific     sectors of the American
economy.




                                38
APPENDIXES




   39
                                                                                                             APPENDIX I             '-'-
                                        PRODUCIIONCONTROL,PRICESUPPORT,AND
                            SURPLUSREMOVALPROGRAMS
                                                 FOR AGRICULTURALCOMMODITIES
                                         FISCAL YEARS 1967, 1968, AND 1969



                                                                                                               Eligible   for
                                                                                   Removed from               shipment under
                                                                                   market under               Public Law 480
                                                                                    section 32                     program
                                         Production                Price              program                     (note b)
             Commodity                   controlled              supported           (note a>            Title 1         Title fl
Wheat                                                               Yes                  No                Yes             Yes
Corn                                        ;:::z;                  Yes                  No                Yes             Yes
Rice                                        Yes(c)                  Yes                  No                Yes             (e)
Grain sorghum                               Yes(d)                  Yes                  No                Yes             Yes
Soybean-cottonseed oils                     Yes(f)                  Yes                  No                Yes             Yes
Soybeans                                    No                      Yes                  No
Soy flour                                   No                      Yes                  No                $1               pi
Soybean meal                                No                      Yes                  No
hraporated milk                             No                      No                   Ii)               Yes(j)           No
Chickens (canned or frozen)                 No                      No                   Yes               Yes
Turkeys (canned or frozen)                  No                      No                   Yes               Yes             8
Eggs (dried)                                No                      No                   0)                63)             (e)
Cattle                                                              No                   No                No              No
Tobacco                                     iti%=)                  Yes                  No                Yes             No


aSection 32 of Pub. L. 320 (7 U.S.C. 602, 612(c)), as amended, encourages, among other things,
 the domestic consumption of agricultural commodities or products thereof by diverting them from
 normal channels of trade and commerce or by increasing their utilization among persons in low-
 income groups.
kc.ltle I of Pub, L. 480 (7 U.S.C. 1701) authorizes the President to negotiate and carry out agree-
 ments with friendly  countries to provide for the sale of agricultural commodities for dollars on
 credit terms or for foreign currencies.
 Title II of Pub. L. 480 (7 U.S.C. 1721) authorizes the President to determine requirements and to
 furnish agricultural  commodities to meet famine or other urgent or extraordinary      relief   require-
 ments, to combat malnutrition,     to promote economic and community development in friendly     develop-
 ing areas, and for needy persons and nonprofit school-lunch and pre-school-feeding        programs out-
 side the United States.     Section 401 of Pub. L. 480 (7 U.S.C. 1731) spells out the restrictions
 on connnodities which can be made available under Pub. L. 480. Essentially,       this section requires
 the Secretary of Agriculture     to take production, domestic needs, price levels, commercial ex-
 ports, and carryover stocks into account in deciding whether or not commodities may be made
 available under the program.
'Acreage Allotment and/or Annual Diversion                 Program under the Agricultural             Act of 1938, as amended
  (1969 only for wheat).
dDiversion      Program under the Soil      Conservation         and Domestic Allotment        Act,   as amended,
eMade available      under title   II    in fiscal     year 1969.
fThe production of cottonseed oil was controlled   indirectly   through the Acreage Allotment                           Program
  (1967-69) and the Diversion Program (1967-68) for lint cotton.
gMade available      under title   I and title        II   in fiscal      years 1968-69.
hMade available      under title   I and title        II   in fiscal      year 1969.
iPurchased for section       32 distribution         in fiscal     years 1968-69.
jDeleted     as of December 30, 1966.
kProduction      of flue-cured tobacco is further restricted                   by a poundage marketing     quota which places
 a limitation      on the quantities  which can be sold.




                                                                          41
APPENDIX II
    Page 1

                           DEPARTMENT                OF   STATE

                                Warhinytor,   D.C.    20520


                                                                       JUL 14 1970


 Mr. Oye V. Stovall
 Director,  International Division
 United States General Accounting                             Office
 Washington, D. C.

 Dear Mr. Stovall:

       On behalf of the Secretary I am replying   to your
 request for the Department's    comments on the draft GAO
 report "Need for Interagency    Consideration of Applications
 for Investment Surveys and Guarantees Involving     Potential
 Displacement of United States Agricultural    Exports".
         The Department of State does not support the recommen-
 dation,    in the draft report,          that investment surveys and
 guarantees involving          potential     foreign exports of crops
  in U.S. surplus be submitted to the interagency                    staff
 committee or a similar          interagency       committee for advance
 review and approval.           U.S. exports of crops in surplus
 are certainly       a factor of some significance             to be
 considered in evaluating           investment guarantee and survey
 proposals for agricultural            projects.       But there are many
 other significant        U.S. interests        involved as well; for
 example,     increasing     food production        in developing countries,
 raising    living    standards,      encouraging      private    enterprise
 and productive       U,S. investment       in these countries,          and
 increasing      U.S. exports of capital           goods and services.
 Additional      considerations      are involved for guarantees and
 surveys covering non-agricultural               projects.      In our view,
 an appropriate       balancing of all these U.S. interests                and
 considerations       would not be facilitated            by establishing
 interagency      machinery to review and approve projects                 largely
 on the basis of one of these considerations.                    A balanced
 consideration      of all U.S. interests           would be preferable.
We note that the programs considered in the GAO report                      will
in the future be administered   by the Overseas Private
Investment Corporation   (OPIC). The Board of OPIC will                     include
                              42
                                                     APPENDIX'II
                                                         Page 2

representatives  of a number of executive departments and
should provide direction    to OPIC in light of the broad spec-
trum of U.S. interests   represented    by the Board's members.
Staff level coordination    with executive    agencies, including
the Department of Agriculture,     will also be needed.     I
understand that OPIC policy directives      are expected to
provide for consultation    with the Department of Agriculture
to seek its advice and recommendations on agricultural
projects.

                              Sincerely   yours,



                              Assistant Secretary
                              for Economic Affairs




                              43
APPENDIX III
     Page 1
                                DEPARTMENT            OF STATE
                       AGENCY   FQR   INTERNATiONAL           DEVELOPMENT
                                  WASHINGTON.        D.C.   20523




                                                                         JUN 30 1970


 Mr.   Oye   V.   Stovall
 Director,   International Division
 U, S. General Accounting   Office
 441 G Street,     N. W.
 Washington,    D, C. 20548

 Dear Mr, Stovall:

 I am pleased to provide herewith             the Agency's comments on the
 General    Accounting     Office's     proposed report      entitled     "Need for
 Interagency     Consideration       of Applications      for Investment      Surveys
 and Guaranties      Involving      Potential    Displacement       of United States
 Agricultural     Exports."        The Agency's response,         set forth in the
 attached memorandum dated June 23, 1970 from Mr. Salzman, repre-
 sents the results       of a consolidated        Agency review of the draft
 report.

 I appreciate your intention     to take              our commentsinto       considera-
 tion in the preparation    of the final               report.

                                                     Sincerely      yours,




                                                     Charles G. Haynes
                                                     Acting Auditor General

 Attachment:
 Memorandum from Mr. Salzman
    dated June 23, 1970




                                                44
                                                                      APPENDIX III
                                                                           Page 2




TO      :



FROM    :



SUI3JECT:   Conunentson GkO Draft. Hjeport on "Need for Interagency Consideration
            of Applications for Investment Surveys and Guaranties Involving
            Potential Displacement of United States Agricultural    E&ports"
                  The subject draf% report was prepared on the basis of pro-
            grams previously admitistered by the Agency for International
            Develoment.    Pursuant to the Foreign Assistance Act of 1969,
            a new government agency9 the Overseas Private Investment Corp-
            oration (OPIC), was established to carry out incentdve programs
            for prfvate investment in less developed countries.
                  Although OPIC will administer programs s&milar to those
            carried out WAID, the structure of the new corporation will
            differ significantly   from the structtie   of AID. OPIC will have
            a board of directors selected not only from private life but also
            from other agencies of government concerned with overseas investment.
            The board will thus provide in itself an interagency forum for matters
            affecting the domestic economy as well as overseas development(whether
            or not the Agriculture Department is directly represented).       This
            should assure that EPIC polioy formulation will involve a variety
            of interests and result in activities     consistent with U,S. trade
            and investment policies.    Indeed0 the corporation 'is specifically
            enjoined under Section 231 (j) to act in consonance with these
            policies.
                  As OPIC commencesoperations, it is clear that policies con-
            cerning the agricultural   sector, along with many other issues, will
            have to be thoroughly considered. This will also be true as OPIC
            reviews the consider.ations applicable to project approvals.    However,
            we want to stress the fact, as pointed out by the GAO, that protection
            of U.S. expmts, inclmiing    agricultural exports, is but one factor
            among many in making decisions about specific projects.     We believe
            that the Congress is aware of the problem of competiug conq%derations
            and accepts the fact that such judgments must be exercised in carrying
            out OPIC'S programs.
                 In view of the emphasis on the agriculture sector for the develop-
            ment of many less developed countries, we would be particularly  con-
            cerned if the GAOwqort is regarded as urging that U.S. agriculture
APPENDIX III
          Page     3




         \i7e ful::,      recognize        that OPIC must maintain          liaison     with the
 Dep:rt!3srrk        0-r" n;-;r I cultme      and seek its advice and recommendations
 on OPIC pcl.j.cics             involving      the agriculture      sector,       We eqxct       to
 mslre clear in CPIC polic y directives                     tha.t the Agriculture          Depazt-
 xent    mst      be consulted           regarding    such policies.          We hope to work
 out iTproved procedures                  with that Department         to accomplish        this
 objective.           (In fact,        as the GAO has noted, AID's Office                of
 Privcte      Resources has already instituted                   policies      requiring      con-
 sultation        Cth the Agriculture              Department     in appropriate         cases.)

          PLowever, we strongly      oppose the recommendation         in the draft
report      that surveys a.nd guaranty programs involving             potential
foreign       exports   of crops in U.S, surplus be submitted            to an inter-
agency review committee for approval.                 The interagency      staff
cormittce       which   reviews PL 480 programs may be an a,ppropriate
mechanism for considering            government assistance       programs directly
involving       US, agricultural         policy   and commodity availa*bility.
Rowever, OPIC will          be dealing with private       investors,     not govern-
ment-to-government          programs and must be able to respond quickly              and
with authority        to private     initiatives,

       Referral    to an interagency         committee will     cause delay and
uncertainty.       It will     constitute     the kind of bureaucratic          hurdle
which the establishment           of OPIC was intended to minimize.              One'
of the primary reasons for making OPIC a government corporation,
 separated    from A.I.D.      but governed by a. broadly representative
board, was to streamline           procedures    on investment      incentive     programs.
While coordination         with other departments         is essential,      it would be
most unproductive        to subject       OFIC operations    to a series of formal
interagency      committees.       This formal superstructure,          we think,      is
simply net necessary in the case of agriculture                  projects.

   .   The draft   report  discusses     several investment   survey, political
risk insurance     and extended risk guaranty projects        where, according
to the GAO, the views of the Agriculture           Department  were either    not
sought or not adequately       examined.      We do not think it would be useful
for us to comment in detail        on these past cases since, based upon our
discussions    with GAO representatives,        it appears that they are more



                                                  46
                                                                   APPENDIX III       ';
                                                                            Page 4




        In conclusion,   we think this respoizsib5li-k.y      is best exerc:ised
without    formal interagency      corm2ittee procedures.       CCher meam can
be devised for taking the vi-errs of -& Agricultlze              Department   into
consideratTon,      both 'on specific     projwts   and ir: -Tornolatir,g   general
policy.      OPIC can be expected to fully        explore th5.s subject with thart
Deparkment.




                                         47
APPENDIX IV
    Page 1
                          DEPARTMENT           OF    AGRICULTURE
                                 OFFICE   OF   THE   SECRETARY

                                 WASHINGTON,         D. C. 20250




   SUBJECT:     Need for Interagency    Consideration      of
                Applications   for Investment     Surveys and
                Guarantees Involving    Potential    Displacement
                of United States Agricultural       Exports

         TO:    Oye V. Stovall,    Director
                International   Division
                U. S. General Accounting                Office



   The Department of Agriculture   was asked to comment on the subject
   report.   We are pleased to provide you with our views with regard
   to the findings  and recommendations  set forth in this report.

   GAO concluded that AID was not making the kind of economic analyses
   necessary to measure whether the foreign          policy and economic devel-
   opment gains from underwriting        programs to boost foreign      production
   and exports of agricultural        commodities produced in excess quantity
   in the United States offset        the disadvantages    to the domestic United
   States   farm economy and the United States balance of payments position.
   Also, agencies having an interest         in the United States agricultural
   economy, agricultural     exports,    or balance of payments were not given
   the opportunity    to evaluate and comment on such overseas development
   projects    which were to receive AID assistance        or guarantees.     GAO
   recommends that such analyses and reviews be made.

   The Department     supports       the findings          and the recommendations   of
   this report.

   There may be an implication         in thy report        that the Department of
   Agriculture    is only concerned with- the impact which development in
   the LDC's may have on U.S. agricultural              exports.      While that is a
   highly important     consideration,      the Department         is also interested
   in using our technical       expertise     in assisting       the less developed world.
   In fact,    400 of our technicians       served on technical          assistance   and
   research projects     in developing      countries       last year.     We were involved
   in the training    of 3500 foreign       agriculturalists.

                                               48
                                                                         APPENDIX IV

Oye V. Stovall



While we are vitally       concerned with promoting       U.S. agricultural        exports
and preventing     unfair   competition   to our products      in the world market,
we recognize    that less developed nations must be accorded an opportunity
to export and earn foreign        exchange.     This is consistent       with the state-
ment in the Economic Report of the President:              "An effective      strategy
must be designed to further         their (the less developed countries)            partici-
pation in foreign      trade and attract     private   investment     from abroad.         . ..in
the long run the less developed countries            must look to a continued          and
vigorous   expansion of export earnings as an important            part of their         eco-
nomic progress".       This is also an important       point of the Peterson report.
"In administering      the sales programs,      the United States should recognize
the need for developing        countries  to export agricultural         commodities       that
they can produce efficiently."

The statement   of GAO that sound agricultural     development in               the LDC's leads
to higher income levels and better markets for U.S. products,                      is probably
well founded.    However, sufficient    economic analysis    should             be made to de-
termine whether specific    investments   are consistent   with a              sound develop-
ment policy   and are in the best interests     of the recipient               and donor
countries.

The report recommends that investment           surveys and guarantees        be reviewed
by the Interagency     Staff Committee which meets periodically              on P.L. 480
programs.    There is a question whether this Committee is the appropriate
body since it is primarily       involved    in implementation        of P.L. 480 sales.
If a representative     of the Department of Agriculture            served on the Board
of Directors    of Overseas Private      Investment    Corporation,      the Department
would have the opportunity       to review investment        policies    and consider
individual   projects.     Another alternative,       although less desirable,        would
be a review in the Development Loan Staff Committee.




                                            49
APPENDIX V
   Page 1

                                                                      ARTMEMT           c9F CQIVI
                                                       Bureau        of Internatianal
                                                       Washington,      DC.   20230



      JUN 3 1970

 Mr. Oye V. Stovall
 Director
 International    Division
 United States General Accounting        Office
 Washington,   D.C.     20548

 Dear Mr.   Stovall:

 This is in reply to your letter     of May 21 to Secretary   Stans which
 enclosed a GAO Draft Report entitled     "Need for Interagency     Considera-
 tion of Applications   for Investment   Surveys and Guarantees Involving
 Potential Displacement    of United States Agricultural    Exports."

 The Commerce Department is interested       in procedural       changes in this
 area not only as a member of the Interagency          Staff Committee which
 reviews commodity programs under P.L. 480 as referred              to in this
 GAO Report,   but more directly     as a member of the statutory         Develop-
 ment Loan Committee which reviews financial          policies    and individual
 project  proposals  of A-1-D.     We will also be involved         in the newly-
 created Overseas Private     Investment   Corporation      (OPIC).    The pro-
 grams which the GAO Report addresses have already been transferred
 to OPIC, although the Board has not yet been selected              and convened.
 It is expected that this Board, including        private      and Government
 members will be convened by approximately        July 1.

 We feel that the final GAO Report should refer to the operations          of
 the Development Loan Committee (Sec. 204, Foreign Assistance          Act of
 1961, as amended).      This Committee reviews extended-risk     guaranty
 proposals,    including  the examples cited.    The Department of Agri-
 culture    has observer status on this Committee.      We do not feel that
 a new forum would be required     for interagency   clearance   of these
 transactions.

 With regard to the specific-risk         insurance program, there is no
 such formal review.        The reason for this is that the private         in-
 vestor supplies    the capital     and takes the business risks.        Thus
 the review is less rigid       than in the case where the U.S. Government
 is supplying    any capital    or bearing any commercial risks.         An
 additional   consideration     is the need for expeditious      treatment      of
 a large volume of applications        from private    businessmen.    Most of
 these applications      present no policy     issues;  however, AID has re-
                                                                              APPENDIX V
                                                                                  Page 2

quested our views        on particular      applications      which   appeared     to have
import sensitivity.

With regard to the investment               survey program, the U.S. Government
assistance        is minimal insofar        as the private     investor    receives
partial      reimbursement       of expenses only if he does not proceed with
the project         under consideration.          However, if AID is willing          to
provide further           support with other programs to a project              being
investigated,         it should,    of course, consider        in depth the economic
factors      relating      to the project.        In some cases a referral         to
Agriculture,         Commerce or other Departments          may be necessary         even
to investigate          the commercial      feasibility    of the project.         Regarding
both surveys and political             risk    insurance,   the clearance       procedures
for particular          types of projects       should be clearly       specified     as is
recommended by the Draft GAO Report.

In sum, we feel that the OPIC should develop appropriate              clearance
procedures   'for support to projects      affecting  U.S. agricultural        and
industrial    production    and trade;   we do not feel that the ISC would
be an appropriate      forum for such considerations;     we feel that the
Development Loan Committee already         serves this function     for extended-
risk guaranties;      and we would expect that only exceptional          applica-
tions for surveys and political        risk insurance   would be subject        to
formal clearance.


=jyITfj;-          pGL

M. van Gessel   !
Acting Direct c




                                              51
APPENDIX VI
    Page 1
        PRINCIPAL OFFICIALS HAVING AN INTEREST IN

          THE MATTERSDISCUSSEDIN THIS REPORT


                                      Tenure of office
                                      From            To
                                                      -
                     DEPARTMENTOF STATE

SECRETARYOF STATE:
   Dean Rusk                       Jan.   1961   Dec. 1968
   William P. Rogers               Jan.   1969   Present

          AGENCYFOR INTERNATIONAL DEVELOPMENI

ADMINISTRATOR:
   William S. Gaud                 Aug.   1966   Mar. 1969
   John A. Hannah                  Apr.   1969   Present

ASSISTANT ADMINISTRATOR, OFFICE
  OF PRIVATE RESOURCES:
    Herbert Salzman                Nov,   1966   Jan.      1971


                DEPARTMENTOF AGRICULTURE

SECRETARYOF AGRICULTURE:
   Orville  L. Freeman             Jan.   1961   Dec. 1968
   Clifford  M. Hardin             Jan.   1969   Present

ASSISTANT SECRETARYFOR INTER-
  NATIONAL AFFAIRS AND COMMODITY
  PROGRAMS:
    Dorothy Jacobson               Jan.   1961   Dec. 1968
    Clarence D. Palmby             Jan.   1969   Present


         OVERSEASPRIVATE INVESTMENTCORPORATION

CHAIRMANOF THE BOARDOF DIRECTORS:
    John A. Hannah                Jan.    1971   Present

                            52
                                                              APPENIiIX VI
                                                                  Page 2

                                                   Tenure of office
                                                   From            To
                                                                   -
                         OVERSEASPRIVATE INVESTMENTCORPORATION
                                                   (continued)

PRESIDENT:
   Bradford                  Mills              Jan.   1971    Present

EXECUTIVE VICE PRESIDENI':
   Herbert Salzman                              Jan.   1971    Present




U.S.   GAO   Wash.,   D.C.


                                         53