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
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)