oversight

Compilation of General Accounting Office Report Findings and Recommendations on the Administration of U.S. Economic and Military Foreign Assistance Programs

Published by the Government Accountability Office on 1971-03-29.

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

COMPILATION OF GENERAL ACCOUNTING OFFICE
 REPORT FINDINGS AND RECOMMENDATIONSON
 THE ADMINISTRATION OF U.S. ECONOMIC AND
  MILITARY FOREIGN ASSISTANCE PROGRAMS
                    COMPTROLLER     GENERAL       OF      THE     UNITED    STATES
                                  WASHINGTON.      D.C.     20545




B-172311



Dear Mr. Chairman:

       In   response to a request from your office,          we have prepared
for the       Committee's     use a compilation   of recent General Accounting
Office      report   findings    and recommendations     on the administration
of U.S.       economic and military      foreign  assistance   programs.

     We hope that this compilation      is responsive    to your request.
If we can provide any further     assistance    concerning   this matter,
please let us know.

                                                                Sincerely      yours,




                                                                Comptroller  General
                                                                of the United States



The Honorable J. W. Fulbright,                  Chairman
Committee on Foreign Relations
United States Senate




                           50TH +,$NNIVERSARY                    1921- 1971
                                    CONTENTS

                                                           Paffe

INTRODUCTION                                                 1

                          I.     ECONOMICASSISTANCE
DEVELOPMENT  PROGRAM ADMINISTRATION                          3
    CoLlrftry programs                                       3
    Development lending                                      7

DEVXLOPMENT
          PROJECTMANAGEl4ENT                                10

RJXVIEW,FXALUATION, ANDMANAGElMFJlT
                                  SYSTEMS                   18
     Internal audit                                         18
    Management and financial systems                        20

FINAJKIAL PARTICIPATION IN INTERNATIONALORGANIZATIONS       24

PRIVATE INVESTMENTPROGRAMS                                  30

CONTRACTOR
         ACTIVITIES                                         32

MANAGEWENT
        OF EXCESSPROPERTY                                   36

                         II.     M?;LITARYASSISTANCE
OVERALLPROGRAM
             ADMINISTRATION                                 39

MANAGEl'llQlTOFM.ATERIELPROGRAMS                            45

MANAGEMENT
        OF TRAINING PROGRAMS                                52

FOREIGNMILITARY SALESPROGRAMS                               54

                  III.         RELATEDASSISTANCEPROGRAMS
SECURITYAND SUPPORTINGASSISTANCEPROGRAMS                    56

HUMANITARIANASSISTANCEPROGRAMS                              62

COMMODITY
        TRADEASSISTANCE                                     47

MANAGEMENT
         OF FOREIGNClJRRElNCY                               49

                                    APPENDIX
 I.   U.S. AGENCYINDEX                                      73

II.   GEOGRAPHICAL
                 INDM                                       74
INTRODUCTION

       The material  contained    in this compilation    is a summary of
United States General Accounting        Office (GAO) reports     concerning
problems in the administration        of U.S. economic and military
assistance.     The compilation     summarizes GAO findings     and recom-
mendations,   and agency responses to those recommendations,           for
more than 80 reports     made by GAO to the Congress,       its committees
and members, or the executive        agencies over a period extending       gen-
erally   from 1965 through     1970.

       GAO is a nonpolitical,      nonpartisan     agency created       by the Congress
to independently       examine the financial     and management operations        of
the executive      branch.    GAO reports    its findings   to the Congress and
executive     branch agencies and recommends ways in which Government
operations     can be carried    out more effectively,      efficiently,      and
economically.

        The accounting        and auditing        functions     of GAO relating       to U.S.
Government international              programs are carried         out through the GAO
International         Division.       In addition       to its primary      emphasis on U.S.
foreign      assistance      programs,     including       the many facets      of economic
and military        assistance       and Food for Peace programs,            this Division
reviews foreign          trade programs, U.S. participation               in international
organizations,         management and utilization              of U.S.-owned     foreign
currencies,        programs affecting          the U.S. balance-of-payments             position,
the management and operation               of U.S. embassies,         consulates,       and other
installations         in foreign      countries,      and matters     of current      congres-
sional     interest      such as U.S. activities             and programs in Southeast
Asia.      The auditing         resources    of GAO's International          Division     are
directed      into tests of areas, programs,                 or agency management where
GAO believes        there are prospects           for constructive       disclosures      or
recommendations          for needed improvements.

       United States Government international       programs are administered
by the Department    of State,  the Agency for International         Development
(AID),   the Department of Defense, and a number of other U.S. Government
departments    and agencies.   Many programs require      interagency     planning
and coordination    of efforts  by several    departments    or agencies,

       The Department      of State is responsible       for establishing      and
implementing     U.S. foreign     policy    goals, including    representation
in relations     and negotiations       with other countries     and with inter-
national    organizations.

       AID administers    U.S. economic assistance       programs to selected
foreign      countries and international   organizations      under the provisions
of the Foreign Assistance        Act of 1961, as amended, and other related
legislation,
       The   Department of Defense generally           administers       defense inter-
national     activities.    These activities        include the military          assistance
program,     which is also administered        under the Foreign gssistance              Act
of 1961,     as amended, and related      legislation,          together    with Defense
overseas     activities  involving   cooperative         efforts     with foreign
countries.

       Other U.S. Goverrment departments      and agencies conducting   inter-
national    programs include the Department of the Treasury (international
financial    functions),     the Department of Agriculture (foreign   agricultural
functions),     the Peace Corps9 the United States Information      Agency, and
the Export-Import        Bank of the United States.

       The material        in this compilation         is organized under the major
headings of economic assistance,              military      assistance,     and related
assistance,       with functional      or topical        subheadings.      For reference
purposes,     the date of issuance and GAO identification                   number
(B-         )   for    each  report   have   been    included     at  the  end of the summary
of that report.          In addition,     the appendix contains           U.S. agency and
geographical        indexes to facilitate        cross-reference.

         A considerable    number of GAO reports          dealing with economic and
military     assistance    were issued as classified           reports    because executive
branch agencies consider that they contain material                    affecting      the
national     security.     To the extent possible,          this compilation        includes
unclassified       summaries of these reports,          and each such summary is
footnoted     as being an unclassified          summary of a classified          report.      For
a number of other classified           reports,     dealing with U.S. assistance
programs in Ethiopia,        Liberia,     the Philippines,        and Thailand and
aspects of the military         assistance      programs in India,        Indonesia,      Korea,
Pakistan,     and the Philippines,        meaningful     unclassified       summaries could
not be prepared.
                                I.   ECONOMIC ASSISTANCE

DEVELOPMENTPROGRAM ADMINISTRATION

        Under the Foreign Assistance        Act of 1961, as amended, the President
is authorized     50 furnish     assistance   to promote the economic development
of less-developed      countries     and areas, with emphasis on loans which assist
long-range    development plans and programs,         and on technical cooperation
and development grants which assist           the development of human resources.
 (Sections   201 and 211.)

       GAO has issued a number of reports         on problems in the overall
administration      of development-oriented      assistance   programs in specific
countries     or regions,   and has also issued several reports        dealing with
generalized     problems of development lending,         which has become the major
form of U.S. economic assistance.           Reports on these two general topics--
country programs and development lending--are             summarized below.

Country   Programs

       Administration     of Nonproject     Economic Assistance      to Colombia.     In
a 1968 report,       GAO concluded that,     despite $430 million       of U.S. economic
assistance     and $1.2 billion     of economic assistance       from other sources
during the 1946-1967 period,         Colombials     annual economic growth and social
progress had been considerably          less than planned,     due in large part to
problems encountered        in Colombia's    own self-help    perfomnance.     While there
was little     question   that AIDts assistance       had strengthened     Colombia's
development efforts       and encouraged Colombian self-help           measures to some
degree, the real issue raised was whether AID actions had stimulated                    an
optimum effort       by Colombia in its development process.

      GAO found that AID had not made systematic                or substantive      evalua-
tions to gauge Colombia's           progress   and performance     in many areas, and
had not made an independent            overall  review of the adequacy and effective-
ness of AID strategy         for achieving     U.S. objectives.       In addition,      AID had
not established       specific     goals and targets     in many areas, did not tailor
its level of assistance          to specific    levels   of country performance,         and
had not developed systems for gathering               and evaluating     basic data or for
accumulating    prior    experience      to use in developing      future    strategy,

       GAO proposed that AID: (1) ensure that systematic                substantive
evaluations    were made of Colombia's        performance      and progress     in each
key area affecting       its economic and social development;            (2) develop
alternative    annual levels     of assistance      tailored    to specific     levels
of Colombian performance;        (3) develop a method of funding under which
the release of AID assistance           would be related     to specific     levels    of
Colombian performance;        and (4) require     regular management reviews of
the overall    effectiveness     of AID program strategy          in Colombia by
knowledgeable     independent    officials.
               AID agreed+that     GAO proposals      (3) and (4) deserved further
        consideration,      but took exception      to proposals    (1) and (2), which
        they felt     were already being carried         out in Colombia.   GAO did not
        agree, however, that substantive           evaluations   were being made in
        many areas, and noted a number of key areas where they were not,
        GAO also did not believe that AID had tailored              annual assistance
        levels for Colombia to specific          levels of Colombian performance.
        In GAO!s opinion,      these measures were called for by AIDIs stated
    .   policy    and public pronouncements,        as well as prudent management,
        thus GAO believed      its proposals     deserved reappraisal.      (B-161798,
        July 8, 1968.**)
    I
               U.S. Assistance     to Nigeria.     In 1969, GAO issued a summary of
        its observations      on assistance    provided to Nigeria    by AID and the
        Peace Corps, which totaled        about $190 million   through mid-1967.     The
        report    covered the period 1960-1967 and the early stages of the war
        following     the secession of Biafra.

               GAO found in most of the AID technical       assistance   projects
        reviewed that the Nigerian       government had not met its manpower or
        funding commitments,      thereby delaying project    performance.       GAO
        concluded that it should have been apparent before negotiation              of
        the project    agreements that Nigeria     either  did not have the capa-
        bility   or was unwilling     to provide the necessary resources.

                GAO also found several cases in which project               agreements
        containing     substantially       the ssme provisions     were negotiated      year
        after year even though the host country consistently                  did not meet
        its obligations      to the project.         Other cases included disagree-
        ments on project       objectives,     which hampered the attainment         of
        project    goals, and several instances           in which work plans and
        progress reports       were not promptly       furnished   and thus could not
        be used to evaluate project           performance     and effectiveness.

               In addition,     GAO noted three instances    where development loan
        funds had been committed to Nigeria        in advance of need for long
        periods    due largely    to design problems.     The delays resulted   in
?       increased    or anticipated     additional  costs of $6.2 million.    In two
        other instances,       GAO concluded that the AID Mission was not adequately
        monitoring    progress    on the projects.
l
                GAO found indications    that the planning,       programming,     training,
        and assignment of Peace Corps volunteers            for Nigeria     was not as
        effective     as it could have been.       GAO believed    that undue emphasis
        had been placed on assigning         large numbers of volunteers        to Nigeria
        without     sufficiently   emphasizing their     assignment to positions         for
        which a demonstrable       need existed or without       consideration     of the
        effect    that other problems,     including   training,     would have on the
        assignments.


        WJnclassified      summary of a classified        report.
               GAO proposed that AID (1) seek to determine                the bauses for the'
        lack of host country support and appraise the extent to which this
        increased    U.S. project     contributions,        (2) improve in-country        manage-
        ment control     through more formalized          documentation       and emphasis on
        meeting established       requirements,      (3) identify      critical    bottlenecks
        in loan project      implementation       and initiate    corrective      action,     and
         (4) take action on a number of program administration                   matters    in
.       Nigeria.

               AID agreed with or took no issue with GAO's recommendations.
        AID informed GAO that it was placing increased           emphasis on evalua-
        tions of project   management,    centralizing     AID Mission   administration,
        and taking several actions     to improve administration       of development
        loans.    AID also advised GAO that a loan commitment for the procure-
        ment of 85,000 telephone    instruments       had been reduced by $L+OO,OOO.

                After GAO's review,          the Peace Corps reassessed       its program in
        Nigeria      and made a major reduction           in the number of volunteers       being
        programmed and, perhaps more importantly,                  placed greater    emphasis on
        better     training     and utilization       of volunteers.      GAO believed   that
        such evaluations         should be made continuously,           and in a later   response
        the Director        of the Peace Corps said that every effort             would be made
        to make evaluative          efforts     a regular   and ongoing Peace Corps planning
        activity.         (B-167677,     August 14, 1969.)

                Observations       on U.S. Assistance     to Guatemala.       In a 1970 report,
        GAO concluded that although the U.S. assistance                 provided had in most
        cases been successful,           Guatemala's    basic economic and social problems
        remained,     and Guatemalan self-help          performance    had been limited       by
        political     instability       and a resistance      to fundamental    economic and
        social reforms.           GAO found little    basis for expecting       significantly
        improved developmental           progress in the near future.

               Despite $130 million   of U.S. and $4.5 million       of other assistance
        provided to Guatemala from 1961 to 1968, GAO concluded that there was
        not a unified     effort among assistance      donors to influence    the Guatemalan
        government to begin meaningful       self-help    measures or to use combined
    t   assistance    leverage for this purpose.

               GAO recommended establishment      of a coordinating       group, consisting
    .   of the principal    donors of assistance     to Guatemala, with the Secretary
        of State taking the leadership       role in attempting       to establish  such a
        group.    AID endorsed the GAO recommendation,        and said that progress
        has been made, despite the difficulties        inherent     in coordinating     AID's
        work with that of several international        agencies.         (~-167675,
        February 9, 1970.*~)



        +Wnclassified       summary of a classified        report.
          U.S. Assistance     to the    Economic Unification    of Central   America.
    In another report     issued in     1970, GAO showed that while the Central
    American Common Market had         been recognized    as the most successful
    attempt to date at economic         unification    among developing   countries,
    a number of problems existed         in AID program management in support
    of this unification      effort.

           Twenty-four    percent   of AIDrs loan funds budgeted for the unifica-
    tion effort     were available    but unused for more than four years.            AID
    could not appraise Common Market results          and priorities      in any mean-
    ingful   sense because AID had not defined its goals and objectives                 in
    measurable terms.       Also, AID had not developed evaluative           techniques
    to gauge the impact of its programs on the Common Market effort                  or
    the impact of this effort        on the region's    rate of economic growth and
    development.       In addition,   a majority   of the AID assistance        was not
    directed    to those problems which required        solution     on a regional    basis.

            GAO recommended that AID:         (1) formulate        long-term      U.S. objectives
    and goals for the Common Market in measurable terms, accompanied by a
    statement     of priorities     and an explicit       plan and time for achieving
    action;    (2) make more comprehensive          efforts    to identify        key regional
    problems and require        AID*s Central     America regional         office     to direct
    its resources     to such problems only; (J),accelerate                 efforts     to measure
    with reasonable       accuracy the impact of AID programs on the Common Market
    and the impact of the unification            movement on the area's economic growth
    and development;        and (4) give more attention          to solving the problem of
    slow use of AID funds in Central           America.

           AID officials    disagreed     with GAO recommendation       (1) with regard
    to the need for establishing          measurable objectives.        They agreed with
    recommendations      (2) and (3) although they pointed out difficulties                in
    applying    them, and agreed with recommendation          (4) but did not comment
    on how it would be implemented.            Because of increasing       congressional
    concern with problems in measuring the developmental                achievements      of
    U.S. assistance,      GAO suggested congressional        consideration      of legis-
    lative   action to require      the formulation    of programs,      and the AID
    Central   American regional       program in particular,      in a way that would
    permit objective      measurement over time.       (B-169350,     August 13, 1970.)

          Administration      and Effectiveness      of U.S. Assistance        to Honduras.
.   In a third    1970 report    on overall     administration       of assistance   programs
    in specific    countries,    GAO found that Honduras'           economic growth had
    accelerated    during the 1960's,       but that social and political          develop-
    ment was less evident and serious obstacles                to further   economic develop-
    ment remained.
            GA3 concluded that basic changes in U.S. assistance              program strategy
    would probably       be required    if existing    U.S. objectives    were to be achieved
    in Honduras during the 19'701s.            GAO concluded that the United States had
    adopted a number of goals in Honduras without             fully    considering    the
    feasibility       of their implementation;      had focused planning       on short-term
    rather      than on long-term    progress;    had not established     specific    program
    goals; and had not developed criteria            to determine whether Honduras was
    receiving       more assistance   than it could effectively        absorb.

            Based on these observations,            GAO recommendations          to the Department
    of State and AID included           (1) a reevaluation          of the political         and economic
L   feasibility       of achieving     U.S. development goals in Honduras during the
    1970's,     (2) increased      systematic     analysis     of developmental          experience    in
    Honduras,      (3) an emphasis on a long-run            program evaluation           system, (4)
    increased      emphasis on Honduras'         self-help     actions with the U.S. assistance
    package negotiated        annually     on the basis of the actions taken,                 (5) the
    development of a long-range            program planning         and funding framework,          and
     (6) the creation       of a technical      and policy      coordinating        group composed of
    representatives       from each assistance          donor.     The Department         of State and
    AID accepted these recommendations,                with certain      qualifications,         and took
    them under advisement.

            Since GAO believed         that the State/AID         system for evaluating        the
    effectiveness        of U.S. assistance,         and for presenting       and justiffing
    annual programs to the Congress, had not been properly                       structured      to
    show long-range         program considerations          in Honduras, GAO believed          that
    the Congress might wish to consider:                   (1) whether executive        branch
    foreign     assistance      program justifications          to the Congress should be
    restructured       to show (a) the past and prospective                economic, social,
    and political        progress of the recipient            country,    (b) a more explicit
    focus on the time period required                before U.S. assistance         could be phased         _
    out, and (c) the relative             assistance     levels    during this period;       and (2)
    whether congressional           action might be desirable           to encourage the
    development       of improved analytical          tools to more objectively           and accurately
    measure the impact of U.S. assistance                  programs on a recipient         country's
    rate of development.            (B-169521,     December 3, 1970.+$"*)

          GAO is currently   preparing   reports   on the overall    administration   of
    U.S. assistance   programs in several additional      countries,    and is continuing
    its reviews of overall    assistance    programs or major program elements in
    other countries.

    Development       Lending

          AID Loan Program Financial  Statements.    In a 1966 report,   GAO expressed
    its opinion that AID financial   statements   did not present fairly   the status
    of the AID loan program at June 30, 1964, or the results      of program opera-
    tions for fiscal   years 1962, 1963, and 1964.     GAO found several overstated



    s""Unclassified      summary of a classified         report.
     and understated        financial      statement  balances,    caused by basic deficiencies
    which still       existed in fiscal         year 1966. In particular,         GAO noted that a
     substantial      part of the loan program assets,            all of which were shown at
     their full face value as of June 30, 1964, consisted                    of cash, loans, and
    interest     receivable      which were repayable       in foreign     currency with fluctu-
    ating values.         Because of the many indeterminable            factors    affecting  these
    loans and the related            interest,    GAO did not believe that a reliable         estimate
    of future      losses on loans could be made.             (B-133220, March 11, 1966.)

          An AID loan program accounting    system was designed as a result    of
    cooperative  efforts  by AID, AID contractors,     and GAO, and was approved
    by the Comptroller   General in 1968.    (B-158381, February 19, 1968.)
            Questionable   Recovery of Economic Assistance       Loans.    In another report
    on AID lending activities        in 1969, GAO reported    that AID had increased       its
    outstanding      economic assistance   loans from $7.4 billion       at June 30, 1964,
    to $12.6 billion      at June 30, 1968.     Of this increase,     $1.3 billion     was in
    foreign    currency loans subject     to variations    in exchange rates,      which
    almost doubled the total       loan amount subject to such variations.

           At June 3G, 1968, 70 percent of all outstanding          loan balances were
    owed by borrowers     in 14 countries,     where reduced currency values had
    resulted    in almost all the exchange rate reductions        in the dollar    value
    of local currency loans experienced         during the 1964-1968 period.       During
    the period,    there was a $l.l.billion      reduction  in the equivalent     dollar
    value of AID's foreign       currencies --an amount which was equal to or greater
    tnan the interest     recorded as having been earned on all loans.           Taking all
    income and direct     expenses of the loan program into account,         AID's loan
    program costs exceeded income by $105 million.

            AID recovered   relatively     little in loan repayments and interest
     collections    between 1964 and 1968, primarily         because of the terms of
    the loan agreements (e.g.,         long grace periods were allowed on many
    loans).      Recoveries  would have been larger,        however, had all of the
    borrowers     complied with the terms of their        loan agreements.     For some
    of the amounts scheduled for recovery           during the period,    AID agreed to
    amended loan agreements rescheduling          payment dates.     (B-133220,
I   September 11, 1969.)

             Procedures for Determining     Loan Availability       from Other Sources.
    In 1967 GAO reported        on a review of 35 AID loans, totaling          about $347
    million,       made to 15 Latin American countries        during 1963, 1964, and
    1965. With few exceptions,          GAO found that--except        for formal solicita-
    tion of the Export-Import        Bank's interest    on 32 of the loans--AID         had
    not documented any efforts        it might have made to assess the borrower's
    ability      to obtain financing    from other free world sources.
               GAO concluded that the significance             and magnitude of AID's lending
        operations   dictated       a need for all transactions         involving major free
        world financial      institutions        to be carried    out in a businesslike    manner
        and to be fully      documented.         GAO noted that a lack of formal solicitation
        of free world financial           resources     denied AID a key decision-making     tool
        for processing     loan proposals          and might have tied up assistance     funds
        which could have been better             applied elsewhere or could have had an
        impact on appropriation           requests.
.
                AID agreed with GAO's proposals        and said that it would develop
        loan procedures     to require   solicitation     of U.S. private        financing
         sources and an evaluation     of the applicant       countryls     efforts     to obtain
c       financing    from other free-world       sources,  together     with documentation        of
        results.     AID then notified    all Latin America Bureau Missions               of the
        procedures     to be followed.     (B-161954, August 4, 19670)

               Undercollections      of Interest   and Principal     on Loans.   In a 1965
        report   (which followed      a similar   1964 report)    GAO found that a sub-
        stantial    amount of interest       had been and was being lost because of
        unnecessary     time lags in advising      borrowers    of loan disbursements.
a
        On two loans,       GAO found that repayments in foreign        currency were
        being made at lower than necessary           exchange rates.

                In compliance with GAO's 1964 report,             AID had taken action to
        collect    an additional      $7 million  in interest       and principal    payments,
        plus about $300,000 in past underpayments               that a borrowing     government
        promised to pay.         In the 1965 report,      however, GAO found that an
        additional    $670,000 in interest       had been lost on loans to India,
        Yugoslavia,    and Morocco.       To prevent further        losses,   GAO recommended
        that AID again advise its Missions           that timely notifications          of loan
        disbursements     should be made and that steps should be taken to eliminate
        delays in issuing       loan disbursement      information      on loans disbursed     in
        the United States.         (No B-number, March 29, 1965.)

                Current   GAO Reviews.     GAO currently     is reviewing    the financial
        activities      in AID's loan program for fiscal        years 1969, 1970, and
        1971.      The results     of this review will provide updated information
    r   on the overall       status of the program, including         the effects    of manage-
        ment practices       with respect    to the furnishing     of economic assistance
        in the form of loans and the administration             of outstanding     loans.
DEVELOPMENTPROJECT MANAGEMENT

        GAO has issued a number of reports          concerning       planning,    implemen-
tation,    control,   and cooperation       probiems experienced         by AID in its con-
duct of specific      development     assistance    activities       in various     countries
and in various      economic sectors.        Some of the most significant            reports
issued between 1966 and 1970, which deal primarily                   with capital      develop-
ment loan projects,        are summarized below.         These reports       cover a wide
range of situations,        problems,   and deficiencies.           However, they do seem
to indicate      a general pattern     of management problems in all phases of
project    operations    from initial     planning   until     final    completion.

     Problems in Implementinp      Capital  Development Projects    in Brazil.
GAO's 1968 report    on $100 million    of AID economic development     projects
in Brazil  disclosed   a number of major capital     project  problems.

       A $4 million  industrial    development  bank loan was approved by AID
without   adequate financial    planning,   and bank operations had been delayed
for 18 months because the bank could not find a guarantor         to ensure loan
repayment.

        Two projects,     for power facilities         and a carbon black plant,        had
suffered      lengthy delays in completion           because of a severe inflationary
period in Brazil,       inadequate     local currency        funds provided    by Brazil,
and the Brazilian       Government's      refusal'to      permit imports     of essential
equipment and materials.            GAO felt    that these delays were caused, in
part,     because AID did not give sufficient             consideration    to the impact of
inflation       on the availability      of local currency        needs of the projects.

        GAO also noted that AID had not made dependable technical                   and
economic analyses before making some loans.                Examples cited by GAO were
(1) the construction       of a synthetic        rubber plant that was unable to
successfully      market its product,       (2) a malaria      eradication     project  that
was being conducted in such a manner that it could not achieve its goal,
(3) a power-generating       facility     that was not being used effectively,             (4)
increased     cost and delays in the construction            of a thermal power plant,
and (5) delayed performance           and limited     accomplishment       of a highway con-
struction     project   in northeast     Brazil.

        GAO proposed that AID's Latin American bureau and Mission in Brazil
undertake    a specific     program to improve the planning    and implementation    of
capital    assistance    projects*   AID informed GAO that stricter     loan standards
and a variety      of preventive   measures had been established    for all projects
planned after      the time of the GAO review.

        In a later    response,     AID commented on the political       and economic
situation     in Brazil      and informed GAO that normal AID criteria          and procedures
had had to be relaxed           somewhat because of overriding      U.S. political     con-
siderations.        Notwithstanding      this,  GAO felt that the effectiveness        of AID
capital    project    activities      in Brazil  could have been substantially       improved,
especially      since the problems that materialized          were predictable     at the
time the projects        were planned or approved.        (B-133283,    May 16,.1968.1
          Economic Assistance    Efforts in Tunisia,       In a 1969 report,  GAO found
    that progress    had been made in furthering     Tunisian   economic development;
    but that still    more could be made if AID would be more selective        in
    choosing projects    to be supported   with counterpart     funds and would control
    more closely   the receipt  and use of AID-financed       commodities.

            The following       problems had arisen with several           AID-financed      projects:
     (1) a pulp mill incurred            losses of about $5.4 million          through   1965 and
    became insolvent,         with little      prospect     of it becoming financially        sound
    in the future;        (2) an irrigation        dam and related    facilities       were being
    cor,structed     although      it was known that considerable          underground      water was
    obtainable      by drilling       less costly    wells;    and (3) construction        of an air-
    port terminal       was planned without         adequate consideration         of the economic
    soundness of the project.

           AID took action    on a number of matters   which GAO believed    would
    strengthen    the Tunisia   program, particularly   those relating    to the
    selection,    receipt,   and use of commodities   imported under AID loans.
    (B-166713,    September 10, 1969,**)

          Development Project       Problems in Pakistan.             In a 1966 report      on about
    $100 million   of projects      in Pakistan     for a water and sewer system, coastal
    embankments, highway development,           and an irrigation         project,     GAO concluded
    that these projects     had had such limited           accomplishments        that they had
    substantially   failed    to produce the benefits           intended.       GAO found that
    there had not been enough advance planning                to ensure that technical,         economic,
    and practical   obstacles     to accomplishment         of the projects         would be solved.
    GAO also found that after         the projects      were approved,       AID did not see to
    it that the problems were being          dealt    with   adequately      as a basis for deciding
    whether to consider     halting      the disbursement       of additional        AID funds.

            GAO proposed that AID (1) relate            additional      fund disbursements      for
    these projects       to the performance        of corrective       actions,   (2) withhold
    future     project  approvals     until     the technical      and economic soundness of the
    projects      was assured and the recipient          country      was willing    and able to ful-
    fill    its project    obligations,       and (3) require       that future    releases    of
    project     funds be directly       related    to the progress        of such projects.
r
          AID notified      GAO that it had taken action           to improve project      per-
    formance,  correct      the identified      problems,     and require    that releases
    of funds for all       projects    be directly    related    to specific     implementation
L   plans and control       schedules.      (B-158163,     May 31, 1966.)




    **Unclassified       summary of a classified        report.
                 Planning and Supervision         Problems of Development Projects             in Colombia.
        In 1967, GAO reported          that there was a need for improve,d planning                and
        supervision       of AID-financed     development      projects    not only in Colombia but
        in other countries         as well.     In a private      investment     fund project,      in
        which AID had invested           $38 million    in dollar     equivalents,       GAO found that
        at least $24 million         had been used for purposes either              contrary     to U.S.
        objectives       or of questionable       need and priority,         GAO felt     that the primary
        cause of this situation           was AID's release of project           funds without      estab-
         lishing     adequate criteria      and controls     to govern their        use.

               In other projects,     in which AID had invested       $30 million     in dollars
r       and pesos, GAO found that progress           had been so limited   in terms of AID
        objectives     that the intended    benefits    had not been achieved.        GAO attributed
        these difficulties     primarily    to AID's approval    of projects      without   determining
        that they were feasible       or that the Colombian Government was willing             and
        able to carry them out effectively.

               AID officials         generally   agreed with the GAO findings,            and stated that
        actions   were being taken to strengthen               control     and supervision     over the
        projects   reviewed.          GAO believed,     however, that additional          steps should be
        taken in Colombia and other countries                , and accordingly      recommended that
        AID establish       criteria      for determining      the capability     of recipient      countries
        to implement and administer             AID-financed      projects.     (B-161882,     September 21,
        1967.)

                Problems in Developmental         Assistance     to Liberia.       In a 1966 report,
        GAO concluded      that AID assistance        for Liberian     educational     and highway
        development     purposes had not achieved the benefits               that could have been
        expected because Liberian         self-help      efforts   had been too limited       to ensure
        that full     benefit   was derived     from the resources        contributed    by the United
        States.

                GAO found that the rates at which AID assistance               was provided      in
        Liberia    had been adjusted       from time to time because of Liberia's             inability
        to perform its part in the programs.                 GAO felt that AID should attempt           to
        stimulate     Liberian   self-help     capabilities      by more directly    relating      its
        educational      and highway development          programs to specific    Liberian      actions
    c   to develop those capabilities.            AID did not wholly agree with these
        conclusions.

              GAO recommended that AID (1) establish         specific,      reasonable  objectives
        that Liberia     should achieve in its educational       and highway programs,        and
         (2) obtain    specific    commitments from the Liberian       Government to increase
        its capabilities        and accomplishments  in these areas,       AID informed    GAO
        that it was in general agreement with GAO's recommendations                and was taking
        steps to implement them.          (B-159380, October 6, 1966,)
            Problems of Equipment Assistance                to African        Countries.     In a 1967
    report,      GAO showed that AID, in programming equipment and vehicles                           to 10
    of the 20 African         countries       receiving     limited    U.S. assistance,         had not
    realistically       recognized      that the recipient          countries       were unable to
    maintain      and effectively       utilize      the equipment and vehicles.               Limited    use
    and poor maintenance          was generally         due to an insufficient            number of
    operators       and mechanics,      limited      maintenance      facilities       and spare parts,
    and too low a level of recipient                 country     budgetary       support.    In GAO's
    opinion,      these countries       thus were not receiving               the benefits     which could
    reasonably       be expected from this assistance,                 GAO also found in several
    of these countries         that AID had not maintained               adequate surveillance           over
    the equipment and vehicles              and had not followed              up on indicated      deficiencies.

           AID later    made efforts    to better    plan and manage this type of
    assistance.      In their    response to the report        they recognized      the need to
    appraise    the capabilities      of the recipient      countries     more realistically,
    and to attain      specific,    meaningful    support commitments from these countries.
    AID also took measures to improve their             oversight     over the equipment through
    better    end use and financial       reviews of projects       in the field.       (B-160789,
    May 18, 1967.)

           Planning and Surveillance    Problems of Capital     Development   Projects
    in India.      GAO reported  in 1967 on its review of six capital       development
    projects    in India which were financed    by $200 million    in U.S. dollar      and
    rupee economic assistance.

           GAO found lengthy      delays and other difficulties         with several    projects,
    which indicated      a need for improved AID surveillance           of project    implementation.
    GAO noted a project       where substantially      changed conditions      had forced AID
    to belatedly     reevaluate    the project's    feasibility;     problems in industrial
    credit   subloans involving       technical   and economic feasibility         and economical
    implementation;      and a need for increased       surveillance     of two other industrial
    development     projects    and a grain storage project.

           Although AID had made available        the necessary       foreign     exchange to
    import equipment in support of major projects,               GAO found continuous         prob-
     lems in connection    with implementation       of the projects         because AID did not
    see to it that the equipment was imported.              Instead,     the Indian Government
    was following    a practice    of curbing    imports    to conserve foreign          exchange
    on the AID projects      and thus unnecessarily       restricted       the essential      imports.
    GAO proposed that AID take action          in future    major development         loan agree-
.   ments to reach an understanding         with the Indian government on timely
    importation    of needed materiel     to prevent     project     delays.

          Based on its review of the six projects,           GAO concluded that AID had
    approved projects    without  sufficient     advance planning     to ensure effective
    implementation    and had not exercised      the necessary    subsequent   surveillance
    over project   implementation   to attain      the desired   economic objectives.       AID
    was in general agreement with GAO's findings           and reported   that it was
    working to improve procedures       and staffing    and that the Indian Government
    had taken steps to encourage sound economic development.              (B-161854,
    September 21, 1967.)
           Development Loan Project         Delays in Korea.        In a 1968 report  primarily
    directed     toward capital    development     projects,     GAO concluded that,   while
    U.S. assistance      had contributed'to       significant      Korean economic progress,
    the assistance      provided   to certain     sectors     of the Korean economy was not
    as effective      as it could have been.

           GAO found (1) delays in completing       electric   power projects    which
    resulted   in power shortages,       (2) delays in procuring    diesel  engines and
    railroad   shop equipment which prevented       possible   savings in operating
    costs from being fully     realized,     and (3) Korean emphasis on importing      oil
    as a basic fuel rather     than expanding domestic coal production.
Y



           AID began a number of actions     to reduce serious and lengthy      delays
    in the implementation     of large capital    projects.    AID also informed    GAO
    that the Korean Government had commissioned a Korean institute            to make a
    study of overall    energy demands and investment       possibilities  in Korea.
     (B-164264,  July 16, 1968.)

            Problems in Economic Assistance     Management in Turkey.     In a 1968
    report    on economic assistance    to Turkey,   totaling  at that time about $134
    million     a year, GAO disclosed   a number of problems in AID's programming
    and surveillance      over the commodities    and equipment furnished   as the
    primary     component of the assistance    program to Turkey.

            GAO concluded     that AID procedures       for monitoring    the receipt    and
    use of U.S.-owned       commodities    and equipment were not as effective           as they
    should have been.         GAO found that (1) information          was not obtained    to
    identify    a significant      amount of imported       commodities,     (2) end-use checks
    were not made to determine          whether commodities      were being properly      used,
    and (3) AID was not aggressively           following     up requests    for refunds   from
    Turkey for commodities         which had been slow in clearing          customs warehouses.

           AID officials       informed      GAO that they were taking action          to improve
    their   arrival     accounting       system and to increase        their  audits   of commodity
    use.    AID determined         that it had financed         $670,000 of ineligible     commodities,
    and accordingly        issued a bill       for collection      to recover    that amount,      AID
    was also attempting          to obtain payment for outstanding            claims against
    Turkey on commodities            which had not cleared        customs warehouses in a
    reasonable      period of time.          GAO believed     that these actions,      if properly
    implemented,      could improve commodity management in Turkey and in other
    countries     receiving      such assistance.

           GAO also found that (1) AID was financing           steel product       imports   at a
    time when Turkey's    domestic    steel production      facilities      could have produced
    more to meet Turkey's     needs, (2) U.S. funds had financed             certain    commodity
    imports   although  such financing     was inconsistent         with AID policy     and could
    have been obtained    from private     sources,   (3) AID had been unable to
    encourage Turkey to use its own foreign         exchange to finance          imports   from
    the United States valued at $5,000 or less.
          AID officials       agreed, in part,      with GAO proposals   for improving       its
    programming         of commodities   and equipment,    and AID was developing      criteria
    as guidance for determining           the benefits    of importing   commodities    or
    producing        them in country.     GAO recommended that AID establish        more
    precise      lists    of eligible   and ineligible    commodities   and recognize      the
    planned use of the commodities            as an essential    factor  in proper commodity
    classification.          (B-146995,   February 28, 1968.1

         Problems in      Participant    Training    Program Management in Latin America.
    In a 1968 report       on reviews in Argentina,        Ecuador, and Venezuela and at
    AID offices    in    Washington,   GAO concluded that there was a need and
    opportunity    for    improving   AID's criteria      and management for approving and
    evaluating   its     participant   training    programs.

          GAO found that the AID missions            in Argentina         and Venezuela did not
    have a system for periodically             evaluating      the use being made of participants
    who had received        AID training,      and information        on returned    participants
    was generally       incomplete,     outdated,    or not available.           GAO also believed
    that training       provided     to 57 participants,         at a cost of about $173,000,
    was of questionable          value and, on the basis of information              available    at
    the time, should not have been initially                 authorized.       GAO noted (1) partici-
    pants trained       as expert consultants        who were not able to function
    effectively      in this role in Argentina,           (2) economists       from Ecuador given
    a 4-week U.S. tour from participant              training      funds because Department
    of State cultural         funds were not available,           and (3) training      of Argentina
    participants       under an AID-university          contract     after   it should have been
    apparent     that the trainees        were not being used in the positions               for which
    they had been trained.

          GAO recommended that AID:              (1) require      AID missions     to establish       an
    appropriate        system for periodic        evaluation      of the use of AID-trained
    participants;         (2) develop criteria        for (a) selecting       participants        for
    consultative        service   training     and (b) determining        the length of time
    that various        types of participants         are to serve in the positions             for
    which they are trained           and the actions        required    upon any noncompliance;
    and (3) develop controls             to ensure that approval         of future     training
    projects      will    require   consideration       of the use made of previously-trained
    participants.

          Although AID agreed that there were some aspects of the management of
    participant    training programs in the three countries      cited where improve-
*   ments might be possible,     it felt that the report     did not reflect  improve-
    ments made since the time of the GAO survey.         (B-163582,   March 13, 1968.)

         Improper Use of Assistance       Funds to Finance Vehicles  for Defense
    Requirements  in India.     In 1969, GAO reported     that about $8.6 million    of
    AID economic development      funds provided   to India had been used to fill
    orders for truck components and parts for the Indian Ministry         of Defense.
    AID Mission auditors    reported    in 1968 that the items were imported      under
AID loans and maintained        that a refund claim should be filed         against       the
Indian Government because the commodities          imported    were ineligible        for
AID financing.       The financing    was approved by the AID Mission,          however, with
AID/Washington     concurrence,     because it was felt    that the items were not
directly   delivered    to the military    and were not inherently       "military-type"
items.

        GAO noted that AID's general policy           is that economic assistance
funds are not intended        to finance    material     directly   for or on behalf           of
the defense establishment.           GAO believed     that AID's interpretation
limiting    this policy     to items which are exclusively          military      indicated       a
need to reconsider       the policy's    intent.      GAO also felt      that these items
were military     assistance,     and were therefore        not legally     available      for
financing     from economic assistance        appropriations.

       GAO recommended that AID reexamine its guidelines        to clarify  its
intent   in loan agreement documents,     so that the recipient    country,    supplier,
and AID officials    could better   implement this intent.      GAO also recommended
that AID reconsider    the decision   not to seek refund in this particular
case.

        AID decided not to seek refund because there was no clear,           unarguable
violation    of agreements between the United States and India.            AID did,
however, thoroughly      review its guidelines      and their application,    and issued
a Policy Determination       formalizing  guidelines    on economic and military
assistance.      (B-167196,    September 18, 1969.)

      AID Assistance   to the Transportation  Sector in Latin America.        In
1970, GAO reported    on AID's administration   of assistance    to the transporta-
tion sectors    of a number of Latin American countries.      This assistance
amounted to $500 million     for 17 Latin American countries     from mid-1962
through mid-1968,    most of which was for highway construction       and maintenance
equipment projects.

       GAO found that about $443 million          of this assistance     went to nine
Latin American countries         without   the benefit   of countrywide     transportation
studies      and plans,    In the few countries     where transportation       studies     had
been completed,       or were in process,     GAO believed   that the results        in
most   cases    showed that too much emphasis had been placed on transportation
as a whole or on particular          types of transport,    which thereby used funds
which might have been made available           for more desirable      social   and economic
development      projects.

        GAO reviewed in some detail         AID's transportation     sector assistance
in Bolivia,      Brazil, and Chile,       which had received     $364 million   of the
total    AID assistance.      The funds were programmed without          the benefit   of
overall     countrywide   transportation        studies  and plans,  and GAO was con-
sequently      unable to evaluate      the effectiveness      of the AID assistance
provided     to the transportation        sector in these three countries.        GAO
found that because local currency             funds were provided    for road projects
in Bolivia     and Brazil       without   adequate studies        and plans they cost
considerably       more than estimated        and fell    behind schedule.       A major
portion    of the AID transportation            projects    in Brazil    could not be im-
plemented largely          because, in GAO's belief,          AID loan funds were auth-
orized   before there was complete agreement as to how the projects                      were
to be implemented.            In Bolivia,    construction      problems that should have
been pointed       out in feasibility        or design studies       were overlooked     or
ignored,    particularly        for a $7 million       AID loan for a colonization        road
project,      This loan was later         raised to $11 million         even though severe
flooding     conditions       had been predicted       and had occurred      and although    the
engineering      firm for the project         believed    that construction      was not
economically        feasible,

       GAO believed       that to meaningfully           allocate      funds to the transportation
sector in a country,          AID should study the adequacy of the transportation
sector in relation          to the total      development         needs of the country           to provide
some assurance        that the projects         have the highest           priority,     are justified
in view of the country's            overall     needs and resources,              andare     making a
maximum contribution           to overall     economic and social             development      goals.
GAO believed      that AID should relate             future     transportation         assistance     to
recipient      country    efforts    to develop countrywide              transportation        studies   and
plans,    including      systematic     identification          of key problems hindering
transportation        development,      a definitive         strategy      for attacking       these
problems,      and the establishment          of priorities.

        AID agreed     with GAO that countrywide   transportation         studies  were
important     and desirable     and that they were not available          during the
period of the GAO review.          AID fel&, however,     that it could not defer
certain    transportation     investments   until overall     transportation      studies
and plans were completed.

       This   GAO report    was later   included   in a study of U.S. economic
assistance     to transportation      in Latin America,     issued by the House
Committee     on Government Operations        in June 1970.     (No B-number, March 5,
1970.1

         Current    GAO Reviews.      GAO is currently         engaged in reviews relating           to
selected      agricultural     projects     and related      technical     service    contracts
in the agricultural         sector,     AID-financed      industrial     intermediate       credit
institutions        in Latin America,       U.S. assistance        to the motor vehicle
industry      in a large AID-assisted          country    (a case study of the efficiency
of U,S. nonproject         assistance),       a review of an agricultural           sector     loan,
and a review of capital           development      projects     in a large AID-assisted
country,
    REVIEW, EVALUATION, AND MANAGEMENTSYSTEMS

            To obtain maximum benefits          from the resources        applied    to the
    promotion    of economic development           in less-developed       countries     and areas,
    the responsible       executive     branch agencies must develop effective                methods
    of managing their       activities.       This means that the agencies need system-
    atic processes      for accumulating       valid    information     so that managerial
    judgment can be based, to the maximum practicable                   extent,     on all the
    pertinent    knowledge that is available.              It means also that the agencies
    need strong internal         audit activities       to ensure that their         established
    systems are operating          and being utilized        as intended.       The need for
L
    effective     methods of managing agency activities              has been recognized         by
    the Congress in a number of laws.

           GAO has conducted a series of reviews of the review,         control,     and
    information   systems of the executive       branch agencies responsible     for
    economic assistance     programs.     Problems disclosed   by recent GAO reports
    in this area are discussed       below.

    Internal    Audit

           AID Internal     Audit Activities     in Washington,    1). C. In a 1969 report,
    GAO concluded      that AID's concept of internal       audit usefulness    was limited
    to a relatively       narrow approach that directed       audit effort   away from
    substantive     program matters      to lesser  levels   of audit coverage and
    disclosure     that were not of maximum benefit        to top management.

            GAO found that a number of significant           management areas were not
    audited.     AID also needed to improve the timeliness                of its audit reviews
    and reports      on contractor     performance    under AID contracts         and to require
    contracting      officers    to take more meaningful       corrective      action   on its
    audit recommendations.          The scope of AID's internal           audit was not broad
    enough to systematically          cover significant     aspects of all AID-financed
    activities     in Washington and in the field.            GAO also believed       that AID's
    internal    audit staff     was inadequate      in number, training,        and experience
    to provide     the needed internal        audit coverage.

            GAO believed that AID/Washington's          internal    audit could be made more
    effective    through a better     recognition     of its importance     as a top management
    tool for controlling      operations,      by placing     it higher in the AID organization,
    and by coordinating     it with other review functions.

          AID officials      generally      agreed with the GAO proposals.        In May 1969
    the President      advised the Congress of the creation            of an Auditor  General
    in AID who would report        directly       to the AID Administrator.     AID also
    informed   GAO of a revision        in its organizational       structure  to coordinate
    and upgrade its internal         audit,     inspection,   and review functions.
    (B-160759,    January 17, 1969.)
       Internal   Audit in        the Departroent of State.       In 1969, GAO also
reported     on a review of         the internal  audit activities     of the Department
of State, with respect            to the overall   management, adequacy of coverage,
and independence      of its        Audit Program Unit.

       GAO found that there was a need for the Department to redirect                       and
expand its internal      audit effort     to include     substantive     program management
rather   than confining    it to functional       or housekeeping      activities;        that
the independence and stature         of the internal      audit function        suffered
because of its subordinate        organizational     location      and fragmented        method
of financing;     and that better     work plans and audit programs were needed.
GAO also found that the scope of examination              and size of staff         needed
expansion,    that reports    should be directed       to higher levels,         and that
recommendations     should be followed       up.

          GAOTs four major recommendations                were that the Department              of State
should:       (1)    broaden     and  refine     internal       audit   objectives      to   be  more
selective      and balanced in covering               the full      range of management responsi-
bilities;       (2) relocate       the audit unit from its present                   subordinate     position
and join it with the Foreign Service Inspection                          Corps at the highest
practicable        level as a new management surveillance                     entity,     with separate
elements for internal             audit,     contract     and grant audit,          and inspections;
(3) place more reliance              on contract        and grant audits by public accountants,
and arrange maximum use of other government agencies'                              audit facilities;
and (4) increase          efforts     to recruit        qualified      auditors,      adequately     and
directly     fund internal         audit activity,          and ensure that audit recommendations
are carried        out.

      The Department   of State did not agree with GAO's findings         concerning
the fundamental   need to improve the independence and stature         of the internal
audit function   nor the need for redirection     of its effort,    although it did
inform GAO that it would attempt to rely more on public accountant             and
Government agency audits,     and to establish   adequate work plans and written
review programs.     The basic weaknesses are continuing,       and at the end of
1970 the Department had not indicated       to GAO any intent    to deal with them.
(B-160759,   December 16, 1969.)

        Actions Taken on AID Mission Audit Recommendations.       In another 1969
report,     GAO reviewed the problezn of implementation   of AID Mission audit
recommendations      in India and at AIDIs Near East and South Asia Regional
Bureau in Washington,       D. C. Since other AID Regional Bureaus had similar
problems of old uncleared       recommendations, GAO felt  that the underlying
reasons identified      in this review might also apply to these other bureaus.

       GAO found many instances        in which AID Mission audit recommendations
were not acted on for prolonged periods of time.             AID officials    felt      that
the slow follow-up     action by Mission officials        and AID/Washington      offices
was due to a shortage       of qualified    personnel,  problems in obtaining         retired
records from contractor       and AID files,     delays in assist    audits from the
Defense Contract     Audit Agency, and difficulties        in negotiating    certain
disallowed    charges with contractor       personnel.
            GAO observed that internal'audit         cannot effectively       aid management
    control    unless officials      take prompt and positive       action, on internal
    audit reports.         GAO noted AID efforts     to persuade operating       officials       to
    deal promptly       with audit recommendations,      but cited the continuing            problems
    as evidence that the underlying           problems for the delays still          existed.
    GAO recommended that if the number of unresolved              recommendations         did not
    decrease and remain at a low level in the near future,                 AID should make a
L
    high-level      study of the justification       for delays and take action           to
    eliminate     those found not to be justified.          (B-161854,     November 13, 1969,)

    Management and Financial        Systems

          Merger of Department of State and AID Automatic                  Data Processing
    Systems.      In 1967, GAO reported     that AID and the Department of State were
    using separate     automatic   data processing        (ADP) facilities,      even though (1)
    their   existing   systems were oriented         toward similar      data, (2) the planned
    uses of the systems for substantive             programs could be compatibly         adapted
    to ADP, and (3) both agencies'         activities      were geographically       located    so
    as to permit full      service   to both through a merged ADP facility.                GAO
    concluded that a merged ADP installation              could serve the needs of both
    agencies more efficiently       and economically,          GAO had also urged consider-
    ation of the possibility       of merger in 1965, when the Department of State
    was considering     a new computer configuration           which it subsequently        procured
    and installed.

          The Department  of State and AID agreed with GAO's suggestion           for a
    merged ADP facility   and were considering     a common system for the future,
    but felt  that it was not feasible    or desirable       at that time.    GAO, however,
    suggested that the two agencies reconsider         the merger of their     ADP operations
    to achieve the present benefits    of joint    utilization      and prepare for a later
    extension   of these benefits  to other appropriate        areas.

           In July 1968, the Department            of State and AID advised GAO that they
    had reestablished        a joint    working group which had set forth             a 4-step plan
    to explore not only a bilateral             integration     but a common ADP capability
    for the foreign      affairs      community.      The plan was to seek common, operational,
    ADP applications       among the agencies,         the design and establishment           of a
    Foreign Affairs      Data Processing        Center,     the linking    of agency common systems
    to the facility,       and, as a final        step, increased       use of the center facility
    and the gradual      elimination      of hardware at each user site.              GAO agreed with
    this effort      but felt    that,   since the project        had been under consideration
    since 1965, the agencies involved              should seek to complete the study as soon
    as possible      and move to the implementation            stage without     further    delay.

          In January 1970, the Department            of State and AID reported      to GAO the
    progress made thus far in considering             a common data processing      facility     for
    the foreign   affairs      community.      The agencies also indicated     their      intent
    to continue   working toward this objective,            and asked for GAO's opinion
    concerning   both their       study efforts    to date and their    intent   to proceed
    with a detailed      definition     of interagency    equipment requirements.
       In its response to the agencies'           progress    report  in February   1970,
GAO observed that some progress           had been made toward a common data
processing    facility     through several     joint   projects.     However, considering
the length of time the subject           had been under study,       GAO earnestly
suggested a shift        of emphasis toward an action         program and away from
continuing    indefinite      study.  Without     such emphasis, GAO believed       that
the distinct     economic and operating        advantages     to be gained from a
centralized     service    center installation       would continue     to be lost.
(B-158259,    July 14, 1967.)

      Management of AID Cost Reduction     Program.       GAO reported       in 1969 on
its review of AID's Cost Reduction      and Management Improvement Program.
GAO found that (1) AID had adopted a low-keyed approach to the program
and had devoted a minimum of manpower and resources             to it;    (2) the fiscal
year 1967 and 1968 programs were geared primarily            toward compiling         material
for the required   semi-annual   report  to the President         and only incidentally
toward fostering   increased   cost consciousness      throughout      the organization;
 (3) top management support for the program was lacking;             and (4) the program
was not actively   promoted and therefore     resulted     in limited      participation
by AID personnel.

        Accordingly,  GAO recommended that AID redirect       the program to stimulate
and encourage cost consciousness         within AID, demonstrate   top management
support and active     involvement     in the program, promote and publicize    the
program throughout     the year, and revise or promote closer adherence to
certain     internal guidelines    for the program.

       AID informed    GAO that it disagreed        with GAO'S overall          evaluation    of
its program.      AID felt    that,    because of staff       cutbacks and low appropriations
which occurred     during the period of the GAO review,               it was understandable
that the formal requirements           and planning    effort     involved    in the cost
reduction    program received       less enthusiasm      and interest      than in the past,
GAO felt,    however, that in a tight         budget period the effort           to reduce costs
would be intensified.         GAO therefore     believed      that its evaluation         was a
fair   one, and that AID should take action            to improve its program as GAO
had recommended.        (B-163762,     April  21, 1969.)

      AID Financial   Management Reporting   System.     In a 1968 report,  GAO
discussed   its review of the AID Financial    Reporting    Manual--a  segment of
AID's overall   accounting  system --and AID's management of its report       control
system.

       GAO found no evidence that progress          was being reported   in terms of
performance     related    to plans,   or that the concept of timeliness      or use-
fulness   of financial       reports  was being carried    out.  GAO also found a need
for coordination        in conceiving   and designing   the reporting   system as an
integral    part of the overall       management information    system.
            GAO returned    the Financial      Reporting   Manual to AID for reconsideration
    and   later   resubmission     for GAO approval      when an adequate financial           reporting
    system had been developed.           GAO suggested that in developing             a financial
    reporting     system integrated      with the overall       AID management information
    system, AID should consider          the following     broad factors:          (1) AID should
    develop a unified       and comprehensive       statement     of management information
    needs; (2) AID should        revise    the existing,     overlapping      pattern   of authority
    for planning      and designing     management information          systems and individual
    management reports;        and (3) AID should consider          whether its existing
c   organization      of staff   functions    was appropriate        for the evolution       of good
    management information         systems.

         As of early 1971, AID had not resubmitted   its Financial                      Reporting
    Manual to GAO for approval.  (B-158381,  June 19, 1968.)

          Review of AID Technical,         Capital, and Program Assistance  Accounting
    Manuals.    GAO reported      in 1970 on its review of AID's accounting    manuals
    for technical,    capital,      and program assistance--the  three major types of
    economic assistance       programs administered     by AID.

            GAO concluded     that the AID manuals did not meet, in all material                   respects,
    the accounting      principles,      standards,    and other related        requirements      prescribed
    by the Comptroller        General.      Specific    problem areas included          dual accounting
    for loans financed        with annual appropriations,           the relationship        between U.S.
    dollar-financed      economic assistance         and economic assistance          financed    with
    local currency     units,     inadequate     accrual    accounting    practices,      and problems
    of system design,       description,      and documentation.

          GAO noted AID's efforts   to improve its overall   accounting      system as
    well as the evolving    changes in the economic assistance      program.     GAO con-
    cluded,  however,  that AID needed to make additional    efforts     to develop and
    describe    an accounting      and   reporting    system   for   the   assistance     program
    manuals.    Accordingly,        GAO returned   the subject   manuals to AID for reconsid-
    eration   and subsequent        resubmission   to GAO after   the actions  recommended by
    GAO, as prerequisites         to an acceptable    accounting    system, had been taken.
    (B-158381,   January 14,        1970.)

           AID Commodity Accounting     System in India.      In 1970, GAO reported    on
    AID's commodity accounting      system in India.      The report   was part of GAO's
    review of AID management of U.S. dollar        assistance    to India as loans to
    finance   imports  needed to stimulate    Indian economic development.        In recent
    years this program has averaged over $200 million           a year in loans.

          Under AID policy,     the recipient       country   is to maintain    detailed records
    for commodity accounting       needs and summary reporting         to AID missions.     Where
    the country  does not or cannot maintain            adequate records,    the AID Mission
    becomes responsible     for this work.        In India,     the AID Mission maintained
    records  for commodity accounting         purposes.
       GAO found that,       at the time of its review in India,           AID could not
verify    the arrival    and customs clearance        status of $38.6 million       of
AID-financed       commodities.     This situation     was primarily     due to incom-
plete,    inaccurate,    and nonspecific     data furnished       the Mission by AID/
Washington,      limited   compliance    by U.S. suppliers      in providing     the AID
Mission with required          documents, and the receipt       of partial    data from
the General Services Administration.              AID/Washington     voucher filing
practices     were also found to be inadequate           and hindered    management
reviews.

        GAO felt    that AID's commodity accounting       system problems were by
no means unique because GAO and AID internal            audit    reports   over the
past decade had disclosed         similar   weaknesses in India and other countries.
GAO noted that in almost every case, AID had acknowledged                the existence
of the weaknesses and agreed to correct            them, but the long and con-
tinuing    history     of the problem,    in GAO's opinion,    indicated    ineffective
followup    action.

        GAO recommended that AID (1) evaluate        the Indian Government's
commodity accounting        system for existing    weaknesses and assist      the
Government in developing         a system to meet the AID Mission's        needs, and
(2)   strengthen   its own commodity accounting        system by following      a specif         ic
series of GAO-suggested         steps.    In view of the long history      of similar
commodity accounting       problems in other countries,        GAO also recommended
that AID distribute       the report    to other Missions    for appropriate     cor-
rective    action.    (B-158381,     March 3, 1970.)

       Current     GAO Reviews.          GAO is now in the process of directing             in-
creased attention         to the need for improved financial                management practices
in all the foreign          affairs      agencies.      This is being accomplished         by
concentrating       more heavily         on audits     of accounting    systems in operation
and related      financial       management activities.            In addition    to the increased
audit effort,       GAO is continuing          past efforts      to assist     the agencies in
developing     acceptable        accounting      system designs,       Managerial     recognition
of the need for better             information      has grown in recent years, as evidenced
by the increased        attention        now being given to the strengthening             of in-
ternal   audit activities.              Much remains to be done, however,           in converting
the desire     for better        information       into effective     methods of acquiring
it.
FINANCIAL PARTICIPATION          IN INTERNATIONAL
ORGANIZATIONS

       The United States holds membership in a large number of inter-
national      organizations        and makes annual payments to the organizations
on the basis of assessments             levied pursuant        to the charters        of the
organizations.          In addition,      the Foreign Assistance           Act states that,
when he determines           it to be in the national          interest,      the President
is authorized        to make voluntary        contributions       on a grant basis to
international        organizations      and to programs administered               by such organi-
zations.        (Section     301.)    GAO has issued a number of reports                in this
area, including         in particular       a series of reports          in 1969 and 1970 on
U.S. financial         participation      in various      United Nations agencies.             GAO
reports     on the problems of U.S. financial               participation        in international
organizations        are summarized below.

       Administration     of U.S. Financial       Participation       in the World Health
Organization.        In a 1969 report,     GAO stated that U.S. executive          agencies
had not obtained       the specific    analytical     information       on World HeaLth
Organization      (WHO) proposed and continuing          projects    and programs needed
to identify     those programs whose justification              might be questionable,
or which could be accomplished          with greater       economy and efficiency.
Budget and operational       data furnished       to members by WHO had been too
sketchy and incomplete       to make firm assessments            of WHO projects   and pro-
grams.

      GAO found that the United States had no systematic             procedure     for
evaluating     WHO projects    and programs,   and evaluative    attempts    by the
United States and by United Nations agencies had fallen              far short of
what was required      by U.S. officials     to make independent     judgments on
the efficiency     and effectiveness     of WHO operations.      In three of the
preceding    four years,    the United States had voted against         proposed WHO
budgets as being higher than the United States considered               appropriate.
The proposed budgets were adopted,          however, on the votes of other members,
and the United States thus contributed          to budgets greater      than it wished
to support.

      Although  U.S. interests      appeared to have been reflected   in certain
WHO programs,   it was difficult      to determine  to what extent U.S. objectives
had been met over the years because the executive          branch had not decided
on its relative    priorities    for the various   WHO programs.

      GAO recommended that the Departments     of State and Health,         Education,
and Welfare   take action   to obtain the necessary    factual    data for analysis
of WHO programs and budgets in order to exert meaningful           influence      on those
programs and budgets.     The two Departments    agreed in principle        with most
of the GAO recommendations,     but did not indicate     any intention      to actually
implement them.    The Department of State noted efforts        on a United Nations-
wide basis to seek improvements      in fiscal and administrative        practices
of international  organizations.         GAO believed   that more aggressive   action
was needed in order to solve        the specific    and basic problems discussed
in the report.   (B-164031(2),        January 9, 1969.)

       Administration    of U.S. Financial     Participation      in the United Nations
Children's     Fund.  In another    1969 report,     GAO found that procedures      used
by U.S. officials     to analyze proposed United Nations Children's            Fund
(UNICEF) projects     had to be abandoned in 1968 because UNICEF, despite
State Department objections,        ended its previous       arrangements   for providing
the United States the information         on which the analyses were made. Pro-
posed alternative     arrangements    for future     analyses were uncertain.
General data available       from UNICEF was not sufficient         to permit reliable
assessment of actual      projects.

        The United States and United Nations had attempted          some independent
project    evaluations,    but these were not adequate to allow informed        judg-
ments as to program efficiency       and effectiveness       or to provide  a basis
for encouraging       UNICEF to solve indicated    problems.

       GAO recommended that the State Department:            (1) obtain and analyze
information    on proposed UNICEF projects     so that it could better         judge
whether to continue       support of UNICEF activities;        (2) obtain better
operational    data from UNICEF; and (3) arrange for U.S. overseas posts
to selectively     evaluate    UNICEF projects until    internationally    constituted
evaluations    could be made.

      The Department   of State informed  GAO that it was attempting      to obtain
more complete operational     data from UNICEF, and to make arrangements      to
obtain UNICEF information     for renewed evaluation  of UNICEF projects.
(B-166780,  July 8, 1969.)

       Administration      of U.S. Financial    Participation      in the Food and
Agriculture     Organization      of the United Nations.        GAO also reported    in 1969
that the Departments         of State and Agriculture        had not obtained    the in-
formation     nor developed the procedures        needed to make adequate analyses
of Food and Agriculture          Organization  (FAO) activities,        and that the United
States had no firm basis for making informed               judgments--except     in very
broad terms --as to just what FAO was doing or planned to do with the
contributions       it received.

       GAO found that attempts        to evaluate     FAO's performance     had not pro-
vided a basis for assessing         the way in which programs were carried          out,
even though there was considerable             evidence that FAO organization,
structure,     and operating   methods were not appropriate          for the type of
programs being carried       on and had hampered effective          and efficient
administration     of the program,         GAO also found that the Departments       of
State and Agriculture,       despite      several attempts,     had not met their
responsibility     for developing       long-range     U.S. policy  objectives
and program priorities     for FAO participation.           It was therefore       difficult,
if not impossible,     to determine the extent          to which FAG activities          were
consistent  with U.S. interests.

      GAO recommended that the Department           of State,  with the assistance
of the Department of Agriculture:            (1) develop the information        and pro-
cedures needed for adequate analyses of FAO activities;               (2) evaluate
FAO performance    until      the means for internationally     constituted      evalua-
tions are developed;        and (3) establish    long-range   policy   objectives     and
program priorities       relative   to U.S. support of FAO.

      The State Department         agreed that the GAO recommendations             should be
implemented,   but both Departments            felt    that recommendation     (3) should
not be implemented at that time because of the absence of a U.S. policy
on the expansion of multilateral              vs. bilateral      aid and the lack of
knowledge of planned future           levels of support of FAO by other donors.
GAO's opinion,    however, was that the Departments                 must take the initiative
in formulating    long-range       policy     objectives    and levels     of U.S. support
for FAO, and that their         delay on this matter          raised a question     of whether
they were meeting their         responsibility        of ensuring     that U.S. interests    are
met concerning    participation         in the FAO. (B-167598,           November 17, 1969.)

       Improvements     Needed in U.S. Financial      Participation     in the United
Nations Development Program.         GAO reported     in 1970 that year after      year
the Department       of State had requested    increased      funds for U.S. contribu-
tions to the United Nations Development Program (UNDP), amounting to
$550 million      during the 1960's,   even though the Department could not
assure the Congress that the funds were being used to accomplish                the
intended    objectives.

        GAO found that the State Department had not established                policy
objectives     and priorities       for U.S. support of the UNDP. In addition,            the
Department had not been successful              in persuading   the UNDP to limit
assistance     to underdeveloped        countries   and to the priority      needs of those
countries.       Consequently,      from 1965 through      1969, the UNDP provided      $100
million    in aid to relatively         developed countries     or countries    seemingly
in a position      to pay for such assistance,          and UNDP projects     were often
reported     to be widely     scattered    and of low priority,     thus lessening     the
impact that a more concentrated            program might have achieved.

      A 1969 UNDP study had concluded that the capacity      of the United
Nations system to handle development    projects  was overextended,   and that,
unless substantial    reforms were made, the capacity  of the system to
handle projects    would be limited to a $200 - $250 million    annual level.

       GAO found that the State Department      had not obtained    adequate in-
formation    nor established   procedures   to make useful  appraisals    of
proposed projects     or to provide   adequate assurance that approved projects
were effectively      carried   out.  United States and United Nations independent
evaluation    efforts   were not adequate to determine     UNDP accomplishments or
the effectiveness      and efficiency   of project  implementation.

       GAO recommended that the Department of State:                   (1) establish      policy
objectives     and priorities        for U.S. support of the UNDP related             to the
program's     purpose of aiding the priority             needs of underdeveloped
countries;     (2) relate      future    U.S. contributions     to the extent       to which
LJNDP projects     meet these priority         needs and are well-executed;            (3) seek
support    from other governments           in improving    the United Nations        development
system;    (41 make U.S. project          appraisals    more effective;     and (5) en-
courage the establishment            of a single United Nations-wide         review body to
evaluate     United Nations activities,           with improved U.S. evaluations           by
overseas posts until          such a United Nations body is established.

        The Department of State informed          GAO that it did not have enough
staff    available    to implement many of the GAO recommendations,           but that it
was doing its best to review and monitor UNDP operations.                 The Department
agreed that U.S. policy        objectives      and priorities  underlying    support of
the UNDP were needed, and stated that it would carefully                consider   the
1969 UNDP study to quickly         implement those recommendations        which would
further     long-term   U.S. goals.       (B-168767,   March 18, 1970.)

        U.S. Participation       in the International         Labor Organization.      GAO
also reported      in 1970 that while U.S. contributions              to the International
Labor Organization         (IL01 had increased      steadily,      the State Department
could not give assurance that they were being used efficiently                     or
effectively     or that U.S. interests         were -being served by the expenditure
of the funds.        GAO concluded      that the Department and other agencies must
make vigorous      efforts     to correct    weaknesses in the administration           of
U.S. participation         in ILO.

       GAO found that U.S. policy    objectives    for participation       in the
IL0 were broadly     defined  and not easy to measure.        The GAO review also
indicated    that there had been a lack of U.S. effort          to implement a
firm policy     aimed at achieving  U.S. political     objectives,     that the U.S.
was not having any great success in achieving          these objectives,        and that
the result     had been almost unimpeded expansion of Soviet-bloc            influence
in ILO.

        GAO found that the executive      agencies had been unsuccessful         in
efforts    to increase  U.S. influence     in IL0 by substantially      increasing
the number of Americans employed by ILO.           In addition,    U.S. officials
did not have sufficient      information     on most of the IL0 programs,        what
the programs had accomplished,         and how well they had been managed.
      GAO recommended that the Departments        of State,       Labor, and Commerce
frame definite      and measurable U.S. objectives        and develop a firm policy
and workable     plan for achieving    them, specifically       including  steps to
increase    employment of Americans by ILO.       GAO also recommended that the
Department of State:        (1) obtain more complete and informative          budget
and program proposals      from ILO; (2) thoroughly        analyze these proposals;
 (3) obtain adequate information       on IL0 operations;       and (4) make effective
evaluations    of IL0 programs and operations.

      The State Department generally            agreed with GAO's recommendations
for more effective      analysis     and evaluation       of IL0 programs and activities.
Concerning   U.S. influence       in the ILO, however, the Departments            of State
and Labor felt     that the situation         had recently     improved.    GAO noted, how-
ever, that:     (1) in June 1970, the new IL0 Director-General                 appointed    a
Russian as Assistant       Director-General       without    U.S. consultation      and despite
known U.S. opposition;        (2) the percentage       of Soviet-bloc     IL0 employees
increased   by 3-l/2    times from 1956 to 1969 while the American employee
percentage   remained fairly        constant;    and (3) an American labor leader
announced in August 1970 that the U.S. labor movement's delegate                      to the
IL0 could be withdrawn        unless the situation         changed.

      GAO felt   that the responsible          agencies were directing     much attention
to their   manner of participation          in the IL0 and were overly       optomistic
about the situation.      GAO believed          that this indicated   a disinclination
by the agencies to formulate           objectives    and take the actions     required    to
deal with the remaining      difficult        problems.    In late 1970 the Congress
denied a U.S. contribution         to the IL0 for the remainder        of the year.
(B-168767,    December 22, 1970.)

       Administration of U.S. Financial  Participation     in the Organization
of American States.    In 1969 GAO issued a report      on U.S. financial    partici-
pation in the Organization   of American States      (OAS), in which the United
States is one of 22 members but provides     66 percent    of all members'
contributions,

      GAO found that U.S. representatives         to the OAS governing  body had
not obtained    the information     needed to determine   whether OAS programs
were consistent    with U.S. objectives      to the extent warranted   by the high
level of U.S. contributions,         Because other members were chronically
behind in their    contributions,     U.S. contributions   in the preceding  four
years were $10 million       more than necessary under the 66:34 ratio.

      GAO also found that the Department     of State,   other member states,
and OAS management authorities      were not actively   working to solve the
recognized,   long-standing   problems of financial    and personnel administra-
tion in the OAS secretariat,
       State Department      comments on the GAO report        pointed out a number
of recut     actions   taken to obtain better      information       on OAS activities,
improve OAS administration,         and accelerate    quota payments by other
members.     GAO felt    that these actions were encouraging,           but believed
that the State Department         should work more effectively         with other
member states and OAS management authorities             to seek correction        of the
indicated    problems.      (B-165850,   April 9, 1969.*'$*)

        In addition     to the recommendations       in all of the above reports
calling    for establishment         of U.S. objectives     and priorities,     adequate
appraisal     and monitoring       of proposed and ongoing programs,        and evslua-
tions of the efficiency           and effectiveness     with which the international
organizations       have performed,      GAO found that there was no effective
working mechanism within           the U.S. executive      branch for directing     and
coordinating      the activities       of all U.S. departments       and agencies involved
in internationsl        organization     affairs.

      In 1970, GAO made suggestions        for a more effective       executive
branch organization     for managing U.S. participation        in the develop-
mental assistance    activities    of international    organizations.         The
State Department    subsequently    advised GAO that it had initiated
action essentially    in line with GAO's suggestions.           Indications     are
that the State Department       and other agencies have not moved as quickly
to implement GAOls other recommendations.'          Hence, GAO intends to
follow up in the summer of 1971 on the progress made by the executive
agencies to implement these other recommendations.

       Current     GAO Reviews.    GAO is   currently        reviewing       the management   of
U.S.   interests     in the international     financial         institutions..




++++Unclassified     summary of a classified       report.
PRIVATE INVESTMENT PROGRAMS

      In the Foreign Assistance       Act, the Congress recognizes         the vital
role of free enterprise      in achieving     rising    levels of production      and
standards    of living essential     to economic progress        and development.
Accordingly,    among other things,      it is declared       to be the policy    of the
United States to encourage the efforts            of United States enterprise
toward economic strength       of less-developed      countries    through private
trade and investment     abroad.    (Section    601.)

        AID has carried       on several    programs directed      toward increased
private     investment     in less-developed      countries,    and recently    the
administration        of these programs has been transferred             to the new Over-
seas Private       Investment    Corporation.      GAO has issued a recent report
dealing with problems under the investment                guaranty    program and is
doing additional        work in this area.

       AID Project   Support Under the Investment      Guaranty Program.      GAO
reported   in 1970 on AID support of a project        owned primarily    by the
Calabrian    Co., Inc.,   under the investment    guaranty   program of the
Foreign Assistance      Act.   The project  was for the raising      and marketing
of corn in Thailand.

         GAO found that AID bore almost all the risk of loss in the privately-
owned venture,        although     neither    AID nor Calabrian         intended     this.       AID
issued three 100 percent            loan guaranties       during     1967 and 1968 and permitted
Calabrian      to use the loan guarantee            funds to generate         additional        loans,
all of which provided           $7.6 million      of the $8 million         invested       in the
project     from U.S. and foreign           sources.     AID intended       that future         adjust-
ments be made to limit           its final      support to 75 percent          of the planned
U.S. and foreign         investment,       but neither    the intended        adjustments         nor
the planned investment           ever took place.         Although      large-volume         grain
facilities       were constructed        in Thailand,     inadequate       project     financing
prevented      full   implementation        of the plans.       The planned farmer assistance
program was not established              and the project       suffered     from extensive
operating      losses.

       AID concluded that the actual           project    financing     differed       so much
from the intended     financing      that AID could no longer justify                its continued
support.    As a result,     project     operations      were cut back substantially
at corn-harvesting      time in 1968 and eventually             stopped.       Calabrian,    how-
ever, felt   that AID's financing         actions      had prevented     the intended
financing's    becoming a reality        and had caused the project's              failure   be-
fore its success was possible.

       In view of the financing    of the Calabrian        project,      and particularly
because the Foreign Assistance      Act of 1969 authorized            similar  financing
arrangements,   GAO felt   that the investment        guaranty     program could be
improved by modifying    the existing    legislation.         GAO believed     the im-
provement could best be made by requiring           that the owner who controls             a
Calabrian-type   project   assume a meaningful        share of the project's          total
risk before he would     be furnished   support   through   extended   risk   invest-
ment guaranties.

       AID advised GAO that the GAO recommendations         were being considered
by the officials      responsible     for management of the guarantee program.
Subsequently,     responsibility      for administering investment   guaranties   of
the Calabrisn-type       was transferred    from AID to the Overseas Private
Investment    Corporation.       (B-166077, April 1, 1970.)

      Current GAO Reviews.   GAO is     currently   engaged in a review       of the
development impact of U.S.-insured       investment   in less-developed       countries.
    CONTR.f$TOR AQZ!VITI_ES                                                      I

           The Foreign Assistance         Act encourages the contribution             of United
    States enterprise      toward economic strength            of less-developed       friendly
    countries   through private        participation       in programs carried        out under
    the Act, including       the use of private         trade channels and iL.2 services
    of United States private          enterprise     wherever practicable.          (Section      601.)
    As of mid-1970,     AID alone had more than 1,200 technical                 service contracts
    outstanding    valued at over $631 million,             not including     the contracts         with
    U.S. firms made by borrowers            under AID development loan agreements.                  GAO
    has issued a number of reports             concerning    problems of contractor          partici-
    pation in assistance        programs,      which are discussed below.

           Contracting  Practices  in the Procurement of Training   Services.      GAO
    reported    in 1968 on a survey of AID and Peace Corps contracting      practices
    for procurement    of training   services.

            GAO found that AID and the Peace Corps were negotiating                  and awarding
    training     service contracts         on a llsole-source~~  basis without      adequate
    solicitation       of qualified       sources.    For 28 of 40 contracts--l6         Peace Corps
    and 12 AID--GAO concluded that justifications                for exclusive      selection       of
    contractors      did not convincingly          show that sole-source     procurement       was in
    the Government's       best interests.          GAO believed   that the agencies'        failure
    to solicit     proposals      from qualified       sources and evaluate them on a common
    basis did not comply with existing               Federal Procurement     Regulations.         GAO
    also doubted that the agencies could obtain the best possible                      training
    programs at reasonable           cost unless more thorough consideration             was given
    to the large public,          private,     and commercial training     resources      avail-
    able in the United States.

            GAO also found little      evidence that the agencies had made even informal
    efforts    to contact    or screen training      sources.      In addition,     GAO found a
    general lack of documents in AID and Peace Corps files                   to show the justifi-
    cation for not using competitive          procurement,      the basis for contractor
    selection,     the extent of technical       negotiations,       and the extent of reviews
    of contractor     budget estimates.       GAO concluded that these deficiencies
    indicated    the failure    of the agencies!      contracting      officers   to carry on
    adequate surveillance       of training    procurement      actions.

             GAO recommended that AID and the Peace Corps direct             their  contracting
L   officers     to:   (1) solicit     an adequate number of sources based on a state-
    ment of requirements       which would advise interested         parties    of Government
    needs; (2) negotiate        technical     and price factors   with each competitive
    offerer;     and (3) exercise      greater   surveillance   to ensure that adequate
    documentation     is contained      in the files.
        GAO was later    informed that the Peace Corps was improving            its
contracting     procedures,     particularly   in obtaining   contractor     proposals
for training     needs and in reviewing       and negotiating   price factors       with
training    contractors.       The Peace Corps also undertook       a review of its
contracting     procedures     as a follow-up    to the GAO report.      (B-161724,
April 16, 1968.)

        Activities      under AID Contracts     with the American Institute     for
Free Labor Development.          In 1970, GAO reported       on its review of the
activities        of the American Institute      for Free Labor Development.        The
Institute       is an AFL-CIO-established       private  organization   which seeks
to promote free and democratic            labor unions and economic and social
development in Latin America, and which had been furnished                about $29
million     in AID funds from 1962 through 1969.

        GAO found that AID had made only limited            evaluations     of the
Instituters      programs and that under its existing           contract    the Institute
had had an unusual amount of flexibility             in the range of activities
that it could perform.             GAO also found that the concept of self-help
was generally       not being utilized       in the countries    where GAO made its
review,     that the Institute        did not have a systematic      program to evaluate
its educational        activities,     and that a number of Institute         social projects--
such as low-cost        housing-- had not achieved their        objectives.

       while there had been some improvaent           in the Institute's      financial
management since a GAO review in 1968, GAO found that deficiencies
continued    to exist and substantial        improvements   were still   needed.        In
addition,    GAO concluded that neither        AID nor the Institute     had assessed
technical    assistance    program activities      under subcontracts    with U.S.
unions, including       a determination     of whether the activities     followed
U.S. policy    guidelines.

       GAO recommended that AID reevaluate     the AID-Institute        contract     to
implement a system providing     for direct   surveillance       by AID, which GAO
believed necessary for effective     contract    administration.        GAO also
recommended that AID take action to strengthen          the Institute's       financial
management, including    more direct  AID control      over Institute     finances
in the field.

      AID recognized     the need for improvements,         and planned to make a
comprehensive    evaluation     of the Institutefs     performance.     AID also told
GAO that the Institute       was starting     an evaluation    system for its educa-
tion program.     The Institute      recognized    the need for continued     improvement,
but disagreed in general with GAOls conclusions              and recommendations.
(B-161794, April 23, 19'70.)




                                      33
          Activities  of the Center for Cultural     and TechnicsZL.Interchange
    between East and West.     In 1969, GAO reported    on the activities      of the
    East-West Center, which seeks to promote relations        between the United
    States and Asian and Pacific    nations through cooperative       study, training,
    and research.    The Center was established    under a grant-in-aid      agreement
    between the State Department    and the University    of Hawaii.

             GAO concluded that there was a need for making systematic,           objective
    evaluations     of East-West Center activities,     Center officials       were aware
    of this need and were attempting       to establish   evaluation    procedures.        GAO
    also found that there was no master plan for the location             of future
    facilities     and additional  land sites for the Center,      even though the
    University's      expansion was making land increasingly      scarce.

           GAO recommended that the Department         of State:     (1) ensure that
    Center goals are defined and evaluations           are made of the effectiveness
    of Center activities,       so that the Department and the Congress could
    properly    assess how well the Center is achieving          its statutory  purposes;
    (2) work with the various        organizations    concerned to develop an accept-
    able long-range     land-use plan for the Center;        and (3) consider revising
    the grant-in-aid      agreement to reflect     the actual responsibility      and
    consequent authority       of the University     over the Center.

          The University     agreed that a long-range      plan for future    expansion
    of the Center was needed end that additional           land should be made avail-
    able as needed.      The State Department noted the provision         for land in
    the grant agreement and the University's          commitment to make land avsil-
    able as needed.      GAO was later    informed that the University       had appointed
    a Center representative       to its Capital    Development Planning Committee,
    but both the State Department and the University            saw no need to change
    the grant-in-aid     agreement to clarify     the University's    responsibility
    over the Center.      (B-154l35,    May 20, 1969.)

            Activities      Under Contracts   with the African-American      Institute.     GAO
    reported      in 1968 on its review of activities        of the African-American
    Institute,        which administered    over $33 million    of contracts    for African
    educational        programs for the Department    of State and AID.
l



             In reviewing    Institute    programs,   GAO found that a scholarship         program
    for study in American universities             had had limited     success since less than
.   one-third      of the graduates had returned         home to work.      In a graduate
    fellowship       program, large numbers of students         were selected     from sources
    in the United States rather           than from Africa,     which was contrary      to the
    purpose of the program.            GAO found a lack of coordination        between AID
    and the State Department           in carrying   out educational     and training     programs
    for refugees from southern Africa,             and in paying different      allowances     to
    students      at the same school and using different           bases to reimburse      the
    Institute      for overhead expenses.
       GAO concluded that AID and the Institute                    were taking or considering
action which would help solve the problem of getting                        African      students    to
return    to their homeland after           getting     their degrees.         GAO made several
specific    recommendations       to strengthen         the graduate fellowship             program
by extending      the benefits      to greater       numbers of potential           candidates      and
by precluding       possible   repatriation         problems.       GAO also recommended that
the State Department         and AID consolidate           their    refugee scholarship          programs
to save money and to reduce lengthy                 student orientation          periods.       GAO
recommended that the agencies standardize                    their    educational      allowance rate
system, and the agencies informed GAO of efforts                       to uniformly       reimburse
the Institute       for overhead expenses.             (B-161632,      July 2, 1968.)

       Procurement Procedures     of the Afro-American      Purchasing   Center,  Inc.
In 1967, GAO reported      on Afro-American     Purchasing    Center operations   in
procuring    measles vaccine with $930,000 of AID funds that had been
granted to African     governments or organizations.          AID did not require
formal competitive     bid procedures     or disclosure    of the price paid for
the vaccine procurement,      and Center officials       chose to follow    the com-
mercial practice     of not revealing     the award price.

        AID advised GAO that if they had made the vaccine procurement
directly    they would have been required         to follow     the Federal Procurement
Regulation     requirement    of disclosing    the price paid.       Under the
circumstances,       GAO felt  that the safeguards       provided by the regulations
should not have been ignored,          since the purpose of the fund expenditure
was the same whether the funds were expended by the Center or directly
by AID.

        GAO proposed that,     in cases where organizations          like the Center were
used for procurements       under the economic assistance           program, AID should
require    that established      U.S. Government procurement         practices   be followed,
unless compelling      circumstances    dictated      otherwise.     GAO believed   that any
such exceptional     case should be fully        justified      as a part of the official
program record.

       AID informed    GAO that the Center had agreed to use formal competitive
bid procedures     requiring    public opening of bids on new AID-financed       business
of over $50,000, unless waived by AID in specific            cases.    AID had been
receiving    a summary of offers        and award on smaller transactions,    and would
make them available        to suppliers    on request.  (B-160789, February 1, 1967.)

        Current    GAO Reviews.   GAO is currently   reviewing     overall Peace Corps
training     program activities,    which are primarily     conducted through contracts,
and which currently        amount to almost 20 percent     of total Peace Corps spending.
MANAGEMENTOF EXCESS PROPERTY

       The Foreign Assistance     Act provides    that Government-owned
excess property     which is serviceable     and useful     in assisting    the
developmental    efforts  of the less-developed       countries     should be
used wherever practicable      for U.S .-assisted     projects     and programs
instead   of tne procurement     of new items.      (Sections    607, 608.)
GAO has issued a series      of reports    dealing with problems in the
management of excess property,        which are discussed       below.

       AID Utilization       of Excess Property.     GAO reported     in 1965 on
its examination        of AID's use of excess property      in five countries
receiving   U.S. aid.        GAO found that U.S.-financed      property     purchases
and planned purchases valued at $2,840,000            could have been avoided
and additional       purchases and planned purchases of about $660,000
probably   could have been avoided if excess property             already    owned
by AID or available        from other Federal agencies had been substituted.
AID was financing        new equipment while the military        deprtments      and
other Federal agencies were selling           or otherwise    disposing     of excess
stocks of the same or similar         items.

        GAO's review covered only a limited         number of U.S.-financed
activities,     screened only a small percentage          of the total    available
excess property,      and was conducted in only 5 of the 85 countries
receiving    U.S. aid.     Accordingly,     GAO estimated     that the unnecessary
procurements     found represented      only a fraction     of the purchases
which could have been avoided by using excess property                already    owned
by AID or available      from other sources.

      AID generally agreed with GAO's findings,        and, in accordance
with GAO's recommendation,   advised GAO that new directives         and
procedures  had been devised to assure that AID Missions          make and
document thorough screenings    to substitute     excess property    for new
items before procurement.    (B-146995,     April  12, 19653

        AID Management of Excess Property     in Turkey.     In 1967, GAO
reported    that there was a need for AID's Mission      in Turkey to more
effectively     manage the programming,   receipt,   and utilization   of
excess property       furnished to Turkey for use in AID-financed     program
and project     assistance.

     GAO found that the AID Mission in Turkey,         in many instances,
had not determined       (1) the need for equipment prior    to its approval
for acquisition    by Turkey,    (2) whether equipment had been received
in Turkey by the recipient,       and (3) whether equipment received      was
in operating    condition    and was being effectively   used.
       GAO believed     that the AID Mission,         before approving      excess
property   acquisition,       should require      the recipient     country    to
provide details      of its operating       requirements     to allow a deter-
mination   of whether the equipment was really              needed and could be
adequately   maintained       and used by the recipient.           GAO also felt       that
if the Mission had enforced          requirements      for Turkey to report        receipt
of the property      and had followed       AID procedures      for inspecting       the
equipment when received,         unserviceable       equipment could have been
located and action        taken to correct      the deficiencies.

        AID informed GAO that it was taking action           to remedy the
deficiencies      noted and to improve management of the program by
enforcing     requirements   for property    allocation    forms and utilization
reports,     by requiring  inspection     of property   received,     and by con-
tinuing    checks on proper use of excess property           throughout   Turkey.
(B-146995,     October 24, 1967.)

        AID Management of Property      Acquired   for Foreign Assistance.      GAO
reported      in 1968 that there was a critical       need for AID to strengthen
the management of its program in Europe for the rehabilitation              and
distribution      of excess property.      From mid-1962 through 1967, AID had
rehabilitated      and distributed    excess property    with an original   cost
of $119 million,      of which $39 million      was handled by AID's European
office.

        GAO found that AID generally             distributed       excess property        to
eligible     countries     on a first-come         first-served       basis without       con-
sidering    whether the intended           use of the property            was as a substitute
for new procurement--         the primary       stated objective          of the program--or
as supplemental        assistance      to the recipient          country.      GAO also found
that Government surveillance              of private       contractor      rehabilitation
work on excess property           prior     to distribution        was inadequate,        and
GAO noted a number of deficiencies                 in AID's negotiation           and adminis-
tration    of its primary        contract     in Europe for repair            and rehabilitation
of excess property.

      The results     of the GAO review were discussed    in two reports  on
congressional     reviews relating    to AID's program for advance acquisition
of excess property.       These reports   included  recommendations  to AID for
improving     its management of the program.

       AID generally      agreed with the GAO findings,           and took action  to
emphasize the use of excess property              as a substitute     for new procure-
ment, upgrade the quality         of rehabilitation       work, and strengthen     and
improve the negotiation         and administration      of present and future      excess
property   rehabilitation       contracts.      (B-146995,    August 2, 1968.)
        Need for Improved Management of AID's Excess Property                       Program.      In
1969, GAO reported         that AID's excess property              program ,in Kenya and
Pakistan     needed improvement        in:    (1) evaluating          the recipient     country's
ability    to maintain       and use excess property            before approving       such
property     for delivery;      (2) assuring       that property         was received    in the
country    in usable condition;          (3) assuring        that proper records of
accountability     were maintained          by either      the AID Mission or the recipient
country;     (4) periodically       inspecting       recipient      countries'     maintenance
and use of the property;           and (5) performing           periodic    audits   of the
program.

     Because of the actions            begun by AID to correct           these problems,
GAO made no recommendations;            however, GAO suggested           that AID ensure
that the needed improvements            were made.

       In addition   to actions    taken to improve program management in
Kenya and Pakistan,      AID instructed    all AID Missions     to restrict     further
acquisitions     of excess property     if property  already    received     was not
being adequately     managed.     AID also issued guidelines       to assist    the
AID Missions     in developing    and maintaining   a sound management system
for excess property      acquired    by cooperating  countries.       The guidelines
generally    covered the improvements       that GAO had identified       as needed.
(B-146995,    December 5, 1969.)
                                           II.    MILITARY ASSISTANCE

        OVERALL PROGRAMADMINISTRATION

                The President         is authorized     under the Foreign Assistance                 Act to
        furnish    military       assistance      to any friendly       country     or international
        organization       to strengthen        the security      of the United States and promote
        world peace.         Military     assistance      is provided      through loans or grants of
        defense articles          and services,      financial      contributions          to multilateral
        programs for facilities             for collective       defense,      financial       assistance     for
        the expenses of U.S. participation                  in regional      or collective          defense
I       organizations,        and the assignment or detailing                of U.S. defense personnel
        for noncombatant          duty, including       training     or advisory         functions.      (Section      503.)

               The purposes of military        assistance     programs in various       countries
        are, basically,      (1) to assist     a country    to develop a defensive        capability
        against    external   aggression,     (2) to maintain      internal    security   and assist
        local forces in undertaking         civic    action   programs,     and (3) to assure
        continuation      of certain   United States military         rights.

              This initial    subsection          covers several   GAO reports     on problems              relating
        to the general     administration          of military   assistance    programs.

                Manpower Utilized      to Administer       Military      Assistance.     In 1966, GAO
        reported    that the Department         of Defense (DOD) planned to continue               the
        operation     of a military      assistance    group in a recipient           country  even
        though the military        assistance     grant-aid       program for the country        had been
        virtually     completed and although         available       information     indicated   that
        other U.S. organizations          in the country        could perform the necessary           residual
        functions.

               DOD had made substantial          reductions     in the size      of the group as the
        workload had decreased because of reductions                  in the military     assistance
        program.       GAO believed,     however, that greater          reductions    in personnel    and
        resultant      savings could have been made if DOD had realistically                  evaluated
        the need to continue         operations      as carried    out in recent fiscal       years,    and
        if DOD had made a determined            effort    to phase out the group and reassign
    .   responsibilities        for essential      functions    to other U.S. organizations.

                GAO recommended that DOD take action            to (1) reduce the staff          of the
        military    assistance      group to match its present        reduced duties,         (2) eliminate
        unnecessary     functions      and transfer    necessary   continuing      functions     to other
        existing    U.S. organizations,         and (3) terminate     the activities        of the group
        at the earliest       practicable     time.

                DOD agreed that further  limited    reductions   might have been possible.
         However, while DOD agreed in principle        with GAO's recommendation  to terminate
         the group as soon as possible,     DOD felt    that it was advantageous  to continue
         operation   of the group with reduced manpower.        DOD later advised GAO of a
         reduction   in the manpower authorization,       and in 1969 the group was reduced
    from   a staff    of 85 to a staff       of 16.     (B-159341,      August   15, 1966.**)

          Military     Assistance    Furnished      to Turkey.       GAO reported    in 1967 on its
    examination      of military    assistance      furnished       to the Turkish    Air Force under
    the military      assistance    program.

          GAO found that many of the same types of deficiencies      that had been
    found in a prior   GAO review of the program in Turkey and reported      to the
    Congress in 1962 continued    to exist.   GAO also noted that some of the
    same types of deficiencies    had been found by the Air Force Auditor      General,
    and were covered in his 1967 report     on U.S. military assistance   provided
    to Turkey.

           GAO found that some improvements          had been made since its prior         review.
    However, GAO also found that (1) funds were still              being over-programmed,
    (2) excesses were not being recovered,            and (3) unneeded items were being
    requisitioned.       GAO believed     that there was a need for improved management
    of the military      assistance    furnished   to the Turkish Air Force to eliminate
    these deficiencies.         GAO also believed     that greater   efforts     by U.S. advisory
    personnel      could achieve this objective       and would thereby      substantially      reduce
    the cost of the military        assistance    program.    (B-125085,     June 7, 1967**)

            Cost Sharing of Military     Construction  Projects      in Europe, The North
    Atlantic    Treaty Organization     (NATO) has 'an infrastructure       program which
    is designed to provide       the fixed defense installations        and facilities
    required    by NATO forces.      The costs of this program are shared by member
    nations.

            In 1969, GAO reported    that improvements     had been made in administration
    of U.S. participation      in the NATO infrastructure        program since GAO's last
    report    on the program in 1965.     GAO found, however, that further           improvement
    was needed, particularly      in recovering    costs of projects       initially   financed
    by the United States.       GAO reviewed several      projects,    valued at over $9
    million,    and found delays both in the submission          of Air Force projects       for
    cost sharing     and in the subsequent recovery       of costs of initially-financed
    programs after     they were included    in the NATO program.
,
            GAO believed     that the need for further         improvement       could be largely
    attributed     to the fact that the services          did not fully        understand       the
    NATO financial       system, a lack of specific         instructions       in some instances,
    a lack of centralized         responsibility      for certain      cost-sharing       functions,
    and the failure       of the U.S. Command in Europe to fully               examine delays in
    cost recovery      and take corrective       action,      GAO also found that the U.S. Army
    in Europe, purportedly          to maintain   operational      control,      had followed        a policy
    of not pursuing       NATO cost sharing      for certain      facilities      eligible      under the



    **Unclassified       summary of a classified          report.
program.

        GAO proposed that DOD reconsider             GAO's 1965 proposal     to establish     a
s-ingle office     within      DOD to be responsible        for and coordinate   uniform
infrastructure        policies    and practices.       GAO also made several     more specific
proposals,     including       more specific     arrangements    with host countries,      which
were applicable        to all U.S.-prefinanced          projects  and which GAO felt      could
bring earlier       fund recoveries.

      DOD generally     accepted the GAO proposals         and began needed actions,
but felt   that a single DOD office        was not necessary        and that new guarantee
procedures    in U.S.-host    country   relations      and discreet    diplomatic   pressures
could bring fund recovery       without    negotiating     reimbursement     agreements    for
all possible    cases.

        GAO recommended that DOD further             consider   a central     DOD authority     with
definite      responsibility       for enforcing     and monitoring    DOD policies      and
procedures.        GAO also recommended an evaluation            of the effectiveness        of the
new procedures        relating     to the need for more specific          U.S.-host   country
agreements.        DOD subsequently        advised GAO that DOD instructions          were being
revised     to establish       provisions    for the European Command to monitor            and
enforce DOD policies           and procedures     relative    to the cost sharing      of NATO
infrastructure        programs.       (B-156489,   October 10, 1969.**)

        Payment of Taxes to Other Governments on U.S. Defense Activities
Overseas.     The U.S. and various  other governments    have arranged   for U.S.
purchases in and supply and equipment imports        into those countries    to be
exempt from taxes and import duties when the items are for the common
collective     defense or for other purposes which are in their       mutual national
security    interest.

       GAO reported     in 1970, however, that the United States had incurred
substantial     tax costs in several      countries.   Examples of significant      direct
and indirect      tax costs which the United States had incurred        over several
years for property        leases,  family  housing rentals,   local procurements,      and
imports     of supplies    and equipment were $28 million     in Vietnam,   $4 million
in Thailand,      and $2.2 million     in Germany.

      GAO believed  that when the financial        burden of a foreign     tax is passed
on to the United States indirectly          and the tax is substantial,      such action
is inappropriate,   particularly       in view of the substantial     U.S. expenditures
for the common collective        defense.

       GAO recommended      that   the Departments      of State    and Defense      (1)   jointly



**Unclassified      summary of a classified         report.
develop and promulgate    specific     guidelines      which would d&fine the U.S.
tax-exemption  policy,   (2) clearly      establish     the responsibilities of the
concerned U.S. agencies,      and (3) provide       for an adequate management system
to operate an effective     tax relief     program.

        The two departments     recognized  that tax exemption problems existed.
They generally     agreed with the GAO recommendations       and had begun corrective
action.     GAO believed    that the benefits    derived from these actions   would
have a favorable      impact on the balance of payments and would also provide
more funds for direct       defense and other assistance     efforts.

       The Departments      of Defense and State later           provided GAO a joint
response with a comprehensive           analysis     concerning     the payment of taxes to
other governments       by the United States on a country-by-country                basis.     The
gist of the Departments'         analysis     was that (1) the United States had
succeeded in obtaining        tax relief      for its expenditures       overseas,     made for
common defense purposes,         in all major respects;          (2) a joint    task force had
been formed by the Departments            of State, Defense and Treasury,           studies
were being made, and steps were being taken to strengthen                    the management
of the U.S. foreign       tax relief      program by issuance and implementation              of
revised    instructions     concerning     administrative       policies  and procedures;        and
(3) audit programs initiated           by the Departments        would be adjusted      to assure
greater    audit emphasis on the administration             of foreign    tax relief      matters.
(B-133267,      January 20, 1970.)

     U.S. Support of Philippine   Troops in Vietnam. In 1970, GAO also reported
on payments made by the U.S. Government to the Government of the Philippines
in support of Philippine   troops in Vietnam.

      GAO found that the assistance        given to the Philippine        Government,
which was funded by DOD, consisted          of approximately     $35 million    in equipment
and logistics    support,     and about $3.6 million     of direct   payments which were
appropriated   for DOD by the Congress and paid to the Philippine               Government
in a series   of payments from 1966-1970.          GAO also found evidence that other
forms of U.S. assistance        to the Philippine    Government,    such as military     and
economic assistance       funded under the Foreign Assistance        Act, were increased
during the period of the Philippine          troop commitment to Vietnam.

       GAO reported     that its work had been seriously          hampered and delayed by
the reluctance      of the Departments         of State and Defense to give GAO access
to the records      considered     pertinent     to the GAO review.     Generally,    GAO
received   access only to those records which it could specifically                  identify
and request,     and then only after         time-consuming   screening   within   the Depart-
ments.    GAO concluded       that because of the restricted        access to records        it was
possible   that the agencies might have withheld            information    which was pertinent
to the GAO study.         (B-168501,     March 21, 1970.)

       Purchase Commitment Made to an International               Organization      Prior   to
Availability    of Funds, In 1960, DOD entered    into           a written     agreement    with
    a consortium     of five NATO countries        formed to produce HAWK surface-to-air
    missiles   in Europe.     U.S. participation        included  providing     certain materiel
    and services     needed for production       along with purchasing       four of the missile
    systems.     Part of the assistance       provided     was to be offset     against the cost,
    but the total     cost was not stated      in the agreement.        Preproduction   performance
    began immediately.
.
            DOD had only a portion    of the funds available           to purchase the four
    missile    systems when the 1960 agreement was signed.               Instead   of making
    sufficient     funds available   or limiting     U.S. liabilities,         DOD had a clause
f   inserted    into the agreement stating       that the U.S. purchase commitment was
    "subject    to availability    of funds."

           In 1970, GAO reported       that no express authorization       existed   in law
    allowing    DOD to enter into the purchase commitment without             having sufficient
    funds available,        GAO believed     the commitment did not comply with the intent
    of the Anti-Deficiency       Act, which requires      government    agencies to have esti-
    mated funds available       or advance congressional       approval   before entering      into
    contractual    obligations.       This ensures that the Congress has the opportunity
    to pass on contractual       obligations     for which it will     be required   to appropriate
    funds.

           GAO concluded that by signing            the 1960 agreement and providing           assistance
    to the consortium,          which made it possible‘to        proceed with production         of the
    missile      systems, DOD firmly       committed the United States          to buy four missile
    systems at an unknown cost , and committed the Congress to appropriate                         the
    additional       funds after-the-fact,       notwithstanding       the proviso    "subject     to
    availability         of funds."    There was little      practical    control   that the Congress
    could exercise         over the amount of funds it would subsequently               be required    to
    appropriate        if the United States was to meet its contractual               commitments under
    the international          agreement.

            GAO also found that DOD funded the commitment incrementally,                consistent
    with the annual assistance        requirements     but with little     or no relation      to the
    costs of the four systems because the funding was less than the projected
    costs of the systems.      In mid-1969,     DOD estimated     the total   costs of the four
    systems in millions      of dollars , and also estimated         that several   million
    dollars    would have to be paid to the consortium          for an $11.9 million        claim
    to the consortium     for documentation,       services,   and depreciation     costs.       The
    final    cost was not expected to be known or final           payment made until       1972 or
    1973.

           GAO recommended to DOD that a report          be made to the President,      through
    the Office     of Management and Budget, and to the Congress of all pertinent
    facts    concerning     this matter and any action     taken or to be taken, as required
    by law.     GAO also recommended that the matter          be brought  to the attention      of
    appropriate     DOD officials      to point out that decisions     on the making of con-
    tractual    obligations      of the Government should be consistent      with the require-
    ments of law and pertinent           DOD directives.
       DOD did not agree with GAO's findings           and recommendations.         DOD
stated that (1) the Mutual Security            Act of 1954 was the authority         for
its actions    and the term "subject       to availability       of funds" was used
in accordance with then-current          Comptroller     General decisions;      (2) the
Congress had been clearly       advised of the agreement through the military
assistance    budget estimates      of U.S. funding support for the program on
an incremental    basis;   and (3) the obligation          to fund an additional
amount covering     the total   U.S. liability       was of a contingent     nature and
not an actual recordable       obligation.

        In May 1970, GAO was informed       that $9.1 million      of the claim had
been tentatively       accepted,   that the current     cost projection     for the
four systems was higher than previously            estimated,    and that several
millions    of dollars     had been obligated    for a tentative      payment to the
consortium.      After considering      DOD's comments, GAO still       believed   that
a violation     of the Anti-Deficiency      Act had occurred and that DOD should
take appropriate       action as recommended.

       In December 1970, DOD stated that since it disagreed with the GAO
conclusion      concerning      violation      of the Anti-Deficiency       Act and Section
13 11 of the Supplemental              Appropriations   Act, 1955 (31 U.S.C. 200), no
corrective      action was deemed necessary.            GAO is now taking steps to
report     this matter to the Congress and the Office                 of Management and
Budget for their        further      consideration.      (B-160154,     October 2, 1970."")

         Current    GAO Reviews.      GAO is currently     initiating      reviews of
military      assistance      programs in several countries          to evaluate whether
the military        assistance     is being effectively      utilized    to achieve U.S.
objectives.         GAO is also reviewing      assistance      related   to Free World
Forces in Vietnam,          to examine the costs borne by the United States to
equip and support troops from other countries,                   and to examine other
economic benefits          which these countries       may derive as a result      of
sending troops to Vietnam.




'-'sTJnclassified   summary of a classified       report.
MANAGEMENTOF MATERIEL PROGRAMS

         Military      assistance      consists     primarily    of military   hardware and
services       and is furnished         on both a grant and sales basis.             This sub-
section       summarizes recent GAO reports               dealing with the furnishing        and
use of military           hardware,     including      military   excess property.       The
types of articles            available     under the military       assistance    program include
aircraft,        missiles,     ships,     vehicles,     weapons, ammunition,      communications
equipment,        and construction         and support equipment.

       Overprocurements   from Ineffective     Supply Management in Korea.                  GAO
reported    in 1965 that,   under the military    assistance    program, about
$463,000 of overprocurements       for unneeded spare parts and assemblies                    for
Japanese-manufactured     vehicles    had been made because excesses within
the Korean Army supply system were not identified            and recovered.

        GAO believed     that inadequate     advisory    efforts   of U.S. personnel    had
contributed      largely    to this deficiency.        Additional    procurements  of
similar     unneeded parts,      valued at about $693,000,        could have followed    if
DOD had not taken timely          corrective    action   as a result     of the GAO review.
(B-125099,     May 28, 1965.)

       New Ships Provided to Iran Instead        of Reserve Fleet Vessels.       GAO
also reported      in 1965 that two new patrol     frigates,    constructed   at a cost
of about $7.4 million,       had been furnished     to Iran under the military
assistance     program even though the Iranian        navy's requirements   could have
been met by activating,       overhauling,    and modernizing    available  reserve
fleet   destroyer    escorts  at an estimated    cost of $3.8 million.

        GAO found that adequate consideration            had not been given to use of
the reserve fleet       vessels   because the responsible         officials      were reluctant
to request     congressional     approval     required   for their     transfer     to a foreign
nation,    and because cost data used in evaluating             the advantages         of furnishing
new patrol     frigates   was unrealistic.          GAO recommended that,        in the future,
DOD give adequate consideration            to the use of available          reserve    fleet
ships in fulfilling       requirements       under the military       assistance      program.
 (B-133134,    February    3, 1965.**k)

        Depot Construction   in Iran.   In another   1965 report   on the military
assistance     program in Iran,   GAO concluded  that U.S. funds of $8.4
million    were for the most part wasted in construction        of a depot.




**Unclassified      summary of a classified          report.
            GAO found that the depot           had had only negligible        use since its
     construction    in 1960, and that          current     plans called for dismantling       and
     relocating    many of its storage          facilities.       GAO believed   that the facts
     available    when construction   of        the depot began in 1958 clearly         indicated
     that the depot was not needed             or wanted by the Iranian        Army.

             In compliance      with GAO's proposals,   DOD instituted             procedures  to
     require    continuing      reevaluation  and necessary revision              of such con-
     struction    projects      to assure that they are justified.                (B-133134,
     March 22, 1965.**)

x’          Air Defense Equipment for the Republic  of China.    In 1966, GAO
     reported   on its review of air defense equipment furnished      to and procured
     for the Republic of China under the military    assistance    program.

             GAO found that the Chinese Army ordnance missile                 support unit had
     about $450,000 worth of items which were excess to its current                          needs.
     The excess items accounted for over 37 percent                  of the inventory         of high-
     value items.        GAO concluded that there was a need for increased,
     continuing     efforts     by U.S. advisory       personnel   to identify      military
     assistance     program spare parts which are excess to the needs of the re-
     cipient    country,     and to report     them for redistribution          to meet other
     valid requirements.          DOD later    advised GAO that procedures           would be
     implemented      requiring    faster   identification       and validation      of require-
     ments and that changes producing             quantitative     increases      or decreases
     would be processed more rapidly.                (B-125087,   June 3, 1966.-k*)

              Aircraft    Supply Support in a Far East Country.                   GAO reported      in
     1966 on the adequacy of supply support provided                     by the Air Force of a
     Far East country         under the military      assistance        program.       GAO found that
     the defense capability          of the country's       Air Force was impaired             because
     a high percentage         of F-104 aircraft      was deadlined         for excessive        periods
     of time because of a lack of essential               operating        parts.      Over a 6-month
     period the monthly average of inoperable                F-104 aircraft           was as high as
     32 percent        and represented    nonfunctioning       aircraft      valued at $21.5
     million,         GAO also noted evidence of decreased operational                   effective-
     ness of F-100 aircraft          because of the lack of working                jet engines.
,
            GAO recommended that DOD establish         effective      procedures     to coordinate
     supply activities      with the country's     Air Force and with U.S. supply
     units,    and increase    controls   over stock levels , priority         requisitions,
     and depot activities       to ensure availability       of priority     items.       The
     Air Force took action       on these GAO recommendations,           and DOD informed      GAO
     that a complete stock level review had been made by the recipient
     country's    Air Force and that country       repair    capability     had been increased,
     (B-125087,    February    23, 1966.**)



     **Unclassified       summary of a classified           report.
       Supply Manapement of Spare Parts and Equipment for the Korean
Air Force.     In another   1966 report,     GAO concluded  that a substantial
reduction    in costs of logistical      support  for the Korean Air Force
could be achieved through greater         efforts   by U.S. advisory personnel
in assisting     the Koreans to improve the management of materiel         provided
by the United States.

       Because of a lack of effective              supply management, the Korean Air
Force had requisitioned          and the United States had delivered                 large
quantities     of assemblies,         spare parts,    and support equipment--valued
at several     million    dollars--in        excess of actual        needs.   GAO believed
that while the large accumulation                of excess stock resulted          from numerous
problems in day-to-day          supply operations,         the major contributing           factors
were the failure        to consider       all stocks on hand at operational              levels
before computing requirements              for more stock,        the use of unreliable          re-
quirement     data, and the ordering            of supplies    and equipment in excess of
established      requirements.         During GAO's review,          U.S. advisors      began
action     to cancel $314,000 of outstanding              requisitions.

      GAO proposed that DOD (1) identify         and redistribute      the stocks
excess to Korean Air Force needs, (2) ensure that outstanding                 requisitions
were really   justified,    (3) establish    procedures    to minimize     future     excess
stock accumulations,     and (4) ensure that requirement          and requisitioning
processes   would be properly      managed.   DOD informed      GAO, in classified
comments, of corrective      actions   being taken.     (B-160122,     October 10,
1966.**)

        Procurement     of Locomotives      for Thailand.       In 1967, GAO reported         that
the U.S. Army had spent about $1 million                to buy for and deliver          to
Thailand     locomotives      which did not meet Thailand's          specific     requirements
for mainline      use --the    purpose for which they were intended.               GAO also
found that instead         of clarifying      the contradictory      technical      requirements,
Army officials       had prepared a purchase description             and begun procurement
of the locomotives         before determining       whether the locomotives           could per-
form as intended.          As a result,     replacement     locomotives     costing     $2.3
million     were to be delivered         to Thailand.

       GAO recommended that DOD require      the military    departments    to establ .sh
procedures      for review and approval   by the user of purchase descriptions
for the purchase of complex nonstandard          equipment,  with the review to be
made before the contract        award and to be documented in the procurement
contract    file.     The Army advised GAO that it was exploring       possible   uses
of the locomotives        that were found unsuitable    for Thailand's   purpose.
 (B-157421,     January 31, 1967.)




**Unclassified       summary of a classified           report.
             Disposal    of Excess Military     Property    in Turkey,    GAO reported   in
    1967 that the United States had been disposing                of excess military
    property      in Turkey for many years at prices          well below the market values
    of the property.          The major causes of this practice         were (1) the very
    restrictive       nature of the bilateral       agreement between the United States
    and Turkey for disposal           of excess property,     which permitted    sales within
    Turkey to be made only to firms designated               by the Turkish   Government,
    and (2) the reluctance          of the U.S. Embassy in Turkey to authorize         the
    sale of U.S. excess military           property   outside   Turkey,   even though this
    was clearly       provided   for under the bilateral       agreement.
.         U.S. officials      in Turkey estimated    that from early 1962 through        late
    1965 the U.S. lost about $2 million          in Turkish   lira by not selling    its
    excess property       to open-market   buyers outside    Turkey or about $3.2 million
    by not selling      to open-market    buyers in Turkey.       These officials also
    estimated   that the United States would continue           to lose more than $1 million
    annually  on disposal       sales unless action    was taken to improve the existing
    disposal  process.

            GAO concluded that the unsatisfactory       arrangements,    which had existed
    since 1959, would continue      until    the United States could negotiate         a more
    liberal    agreement with Turkey allowing      sales on the open market or until
    the United States began using the provisions           of the existing    agreement
    which permitted      disposal by export.     GAO noted that since its review some
    corrective     measures had been taken.      (B-160530,   February    28, 1967.**)

           Excess Ammunition and Weapons in a Military                Assistance    Country.   In
    another    1967 report,        GAO found that several million         dollars   worth of
    ammunition and weapons in a military                assistance   country    was excess to
    the military        assistance     purposes for which it was furnished.           The re-
    sponsible      military     advisory     group had not carried     out DOD guidance for
    obtaining      the return      of this material      to U.S. control,      and had not been
    required     to do so by DOD or the U.S. European Command. Had this material
    been available,         much of it could have been considered            for use in meeting
    other U.S. requirements,             particularly    in Southeast   Asia, instead     of
    buying new items or renovating                other available  stocks,

           During its review,     GAO notified        DOD that,       in this review and in
    other reviews,      it had found that military            assistance     advisory     groups
    in many cases had not made a concerted               effort     to identify     U.S.-furnished
    materiel    no longer needed for the purposes provided,                  or to enforce
    existing    agreements that require         recipient       countries    to make such
    materiel    available   for redistribution.




    **Unclassified      summary of a classified          report.
        DOD notified        the military      services     and unified    commands of the
importance      of'recovering          excess items which were urgently           needed by
the military        departments        because of the conflict         in Southeast    Asia.
As a result,       military        assistance    countries    declared    more than $30
million    of MAP-furnished            ammunition excess to their         needs.     GAO's
follow-up     of actions         taken showed that,        in early 1967, $14.5 million
of the ammunition had been recovered                  and an additional      $5.7 million    was
awaiting     shipping       instructions      or ballistic     acceptance.       (B-125085,
April    10, 1967.**)

       Recovery of Military        Assistance      Property    Declared Excess by
Recipient    Countries.       GAO reported       in 1967 that a significant       portion
of military    assistance      property     which had become excess to the needs of
recipient    countries    was released       to those countries        by DOD without     first
determining,     on a case-by-case         basis, whether it would be worthwhile
economically     to recover     the property       for redistribution      or disposal
by the United States,          GAO also noted that there were billions             of dollars
worth of military       assistance      property     still  being held by recipient
countries    which would eventually          become excess.

       GAO believed that the sale of this excess property           by recipient
countries   had the effect     of adding millions    of dollars   in additional
U.S. aid to those countries        which was not readily    apparent    since it
was not a part of the usual aid program.          GAO concluded that,       if DOD
had made case-by-case      determinations   of economic recoverability,         these
sales proceeds could have been received         by the United States,

       The U.S. practice       of disposing     of excess MAP property        differed      in
many recipient      countries.       GAO believed    that DOD could increase         U.S.
revenues by recovering         a greater    portion    of the excess military         assistance
property    in foreign     countries    for disposal     by U.S. disposal      agencies.
GAO also believed      that the release of economically            recoverable      property
had deprived     the United States of foreign           currency   which could have been
used by the U.S. to reduce dollar            expenditures      and improve the U.S.
balance-of-payments        position.

       The Departments    of State and Defense informed      GAO, in classified
comments, that they could not agree with all of GAO's findings              and con-
clusions,   and pointed     out some of the foreign   policy   and other considera-
tions involved.     However, GAO issued its report      to advise the Congress
of the additional     assistance   being provided   to certain   countries.
(B-161049,   July 12, 1967."")




**Unclassified      summary of a classified         report.
       Management of Equipment Held in Storage.        In another   1967 report,
GAO found that millions       of dollars  worth of equipment,   held in Army
storage for the military       assistance  program, was not be'ing used by
DOD to fill    program requirements.      Significant  amounts of military
assistance   funds were being used to meet grant-aid       and sales requirements
which could have and should have been met with the equipment on hand.
In addition,    more MAP funds were expended for storing       and maintaining
the unassigned     equipment.

       GAO attributed       the problem to a lack of accurate          inventory     data
and proper procedures          for systematically      screening    and using equipment,
a lack of controls        to ensure that operating         units were following        existing
policies,    and the use of verbal hold orders to reserve certain                  equipment
for potential      but unconfirmed      uses.     GAO also found a need for better
management to ensure that Army-owned equipment reserved                   for military
assistance     programs would be promptly          released     for general military       use
when a military       assistance    requirement      no longer existed.

     DOD and Army officials      generally  agreed with GAO's findings    and
recommendations,     and were taking action    to improve management procedures
and controls     for military assistance   program inventories.    (B-162479,
November 14, 1967.)

        Major Weapon System Provided    to Far East Countries.   In 1970, GAO
reported     on its review of the combat readiness   of a major weapon defense
system provided     to Far East countries   under the military  assistance
program.      The system was to be a part of the defense system of the U.S.
Pacific     Command, and is subject  to U.S. control   in the event of hostile
actions.

       GAO found that the combat         readiness    of the weapon system was
seriously    weakened by inadequate         supply and maintenance     support by the
United States and the recipient            countries,    The systems had not been
combat ready--fully     capable of       accomplishing     the assigned mission--for
extended periods     of time, even       though a U.S. Army, Pacific      regulation
required   full  combat readiness        at all times.

        DOD felt    that GAO's findings      were valid      for the period of GAO's
initial    review,     during 1967, but stated that since that time corrective
actions    had been taken and the situation            had improved.        GAO made a
follow-up     review,    however, and found that,         while some improvements       had
been made, a low level of readiness              still   existed,    primarily   because of
continued     inadequate     supply and maintenance         support.     GAO recommended
that DOD stress to appropriate          officials      the need for continued
improvement,

     DOD informed       GAO that    the supply     and maintenance      problems cited
by GAO were being       gradually     corrected,    and that U.S.      and recipient
country officisls      were well aware that much improvement.was        needed
before full     combat ready status could be sustained.        DOD also stated
that the U.S. Pacific        Command was being requested    to submit semi-
annual reports     of the progress made in taking corrective        action.    DOD
later provided follow-on        data that showed a slightly    improved readiness
 status.    (~-161764,   ~.I-u~     14, 1970.~3")
        Current GAO Reviews.        GAO is currently         conducting    a review,     at the
request of the Senate Committee on Foreign Relations,                     of the need for
and utilization     of excess stock available            under the military        assistance
program in countries       receiving      major amounts of excess military             equip-
ment and supplies      from the United States.              GAO is also doing a follow-on
review of the military        assistance      for the Far East country discussed in
this section,    including     an examination        of supply activities         and the
identification     of current     aircraft      operational     effectiveness.




z"TJnclassified     summary of a classified         report.
MANAGEMENTOF TRAINING PROGRAMS

       Another major component of military        assistance    programs,  in
addition    to the furnishing    of military    hardware,    is the conduct of
training    programs in military     assistance    recipient   countries.   GAO
has issued reports,      as discussed    below, on problems in administering
this type of assistance.

        Military      Assistance     Training      Program for Greece.            In 1965, GAO
reported       that the Joint U.S. Military               Aid Group in Greece was
carrying       out a multi-million         dollar      training    program without         taking
effective       action    to:    (1) identify        training    deficiencies        in the
Greek armed forces;           (2) screen and approve the most appropriate
candidates        for training;      (3) obtain proper and full             utilization        of
trained      personnel      by the Greek armed forces;             (4) properly        consider
and further         develop the training          capabilities      of the Greek armed
forces;      and (5) attain       the objectives          of in-country     civilian       specialists
furnished        by the United States.

        GAO's limited    tests of training   provided    or programmed from
mid-1960 through mid-1963 indicated         that training    valued at about
$500,000 was unnecessary.         GAO recommended that the Chief of the
Military    Aid Group in Greece be required        to obtain and maintain     the
information     needed to avoid the above deficiencies         before beginning
other training      programs.    (B-133055,  June 29, 1965.**)

        Military     Assistance     Training     Program for Iran.       In another 1965
report,      GAO showed that about $650,000 of jet pilot               training,      programmed
under the military          assistance     training     program in Iran from mid-1961
through mid-1963,          could have been saved if in-country             pilot   training
programs had been developed,             a sufficient       number of qualified       personnel
had been available          for the training        program,   trained   personnel      had been
fully    and properly       used , and the most economical means of transporting
students       to the United States had been used.

        GAO recommended that the chief of the military                 assistance      advisory
group in Iran take action          to: (1) establish        and further      develop in-
country    training    programs within        the Iranian    armed forces;       (2) deter-
mine realistic       and essential     training     requirements     for the Iranian
armed forces;       (3) ensure that qualified          candidates    would be available
to fill    programmed training        spaces; and (4) obtain and verify              infor-
mation on the qualifications           and duties      of skilled    Iranian    military
personnel.



**Unclassified        summary of a classified             report.
           DOD advised GAO that action had been taken to correct                  the
    deficiencies    found.     DOD subsequently    informed        GAO that,   based on
    a DOD review,     the DOD military    assistance     manusl had been changed
    to require    an agreement with host-country          officials      on the length
    of time that foreign       personnel  trained    under the military          assistance
    program should work in a job appropriate            to the training        that they
    had received.       (B-133134, Dee ember 10, 1965. 3t$C)

          Current   GAO Reviews.  At the request of the Chairman, Senate
    Committee on Foreign Relations,      GAO has recently  completed a review
    of the Military    Assistance Training Program in Greece, Iran,    Turkey,
    Korea, and six other countries.       Its report was issued to the Senate
    Committee on Foreign Relations      on February 16, 1971.




l




     VJnclassified       summary of a classified        report.
    FOREIGN MILITARY         SALES PROGRAM

            Under the provisions         of the Foreign Assistance             Act, DOD has
    administered      a revolving       fund known as the Foreign Military                  Sales
    Fund which has been used to extend credit                   to foreign       military      sales
    customers.      In 1968 the foreign           assistance      legislation       relating      to
    this subject     was consolidated         in the Foreign Military             Sales Act.
    The Act authorizes         the sale of defense articles                and defense services
    to friendly     countries     for internal        security,      legitimate       self-defense,
    participation      in regional        or collective      arrangements,        participation
    in United Nations collective             peace-keeping        efforts,      or for civic
    action activities        in support of a country's              economic and social
    development.       (Section     4.)

            Two recent GAO reports  dealing             with problems of foreign
    military    sales program administration               are discussed below.

           Administration      of the Foreign Military      Sales Fund. In 1969, GAO
    reported    that DOD needed to make improvements           if the accounting    records
    and related     financial      statements  of the Foreign Military       Sales Fund
    were to adequately        disclose    the Fund's financial    condition.

           GAO found that the Fund's accounting           records were not in proper
    condition    for auditing   because the records were not maintained              on the
    accrual   basis or in a current     condition,       and because the accounting
    practices    being followed   made it difficult         to attempt    to verify   the
    records.     GAO noted that because financial           statements    for the Fund
    had not been prepared on the accrual           basis,     substantial    balances had
    been left    out.   GAO also questioned      the accuracy of the stated
    balances for loans receivable       and certain       other aspects of accounting
    and reporting.

           In view of recent legislation   which initiated      an estimated
    l&year    period of Fund liquidation,    that began in 1968, and directed
    that assets of the fund be available       to discharge   fund liabilities
    and for transfers    to the Treasury during the liquidation         period,
    GAO believed    that it was quite important     to get the Fund's accounting
    records on a sound basis.

          GAO suggested that DOD place the Fund's accounting         records on
c   the accrual   basis as soon as possible    and also take prompt action
    to analyze and adjust   the accounts    to show the correct    and proper
    balances.   DOD informed GAO that it was awaiting      extension      of accrual
    accounting  to all DOD accounting    systems before fully     implementing
    it for the Fund.    DOD also stated,    however, that special      efforts   were
    being made to improve the accounting      records.   (B-165731,     April   16, 1969.)

           Charges     for   Military     Pilot    Training     Sold to A Foreign         Country.     The
Foreign Assistance        Act requires   that whenever military   training                  services
are sold to foreign        countries   DOD should charge the full     value               thereof
in U.S. dollars.

       GAO found that the price of about $62 million                established     by the
U.S. Air Force to recover            the cost of pilot    training     provided   to the
Federal Republic         of Germany for F-104 aircraft         through    1966 did not
include    all direct       and indirect   costs incurred      by the Air Force to
provide    that training.         The Air Force excluded military          pay and
allowances,     utilities,      building   and maintenance,       and facility    modifi-
cation   costs amounting to about $6 million.               The Air Force also
excluded rental         charges on the U.S .-owned aircraft         and equipment used,
and failed     to collect      for government-furnished        housing supplied      to the
foreign    students.

       DOD agreed, after         preliminary      investigation,         that training     costs
had not always been computed accurately,                  uniformly,        and in accordance
with DOD pricing         policy.      In line with GAO's recommendations,               DOD
conducted a study of the pricing               of foreign      military      sales for training.
As a result      of the study, DOD policy            and criteria        for pricing    sales of
training     were revised.        However, DOD disagreed            with GAO's recommendation
that it attempt        to collect       for those charges omitted            in the past.      DOD
later    advised GAO that DOD instructions               would be revised         to require     full
recovery     of actual      and indirect      costs applicable         to military     pay and
allowances.        (B-167363,     November 19, l.969.)
                        III.       RELATED ASSISTANCE PROGRAMS

SECURITY AND SUPPORTING ASSISTANCE PROGRAMS

       The Foreign Assistance           Act authorizes       the furnishing       of assistance
to eligible     friendly      countries,     organizations,         and bodies in order to
support or promote economic or political                 stability.        (Section   401.1
Supporting    assistance,        which   may  be   loans    or  grants,    may  be  used   to
finance capital       projects,      commodities      and services      for relief    projects  or
internal    security     activities,       general    commodity imports,        and, in exceptional
cases, cash transfers.

       GAO has issued          a number of reports    dealing   with   problems    of this
type   of assistance,          as discussed  below.

       Summary of Deficiencies    in the Administration      of Military   Budget
Support Funds for Certain      Countries.    GAO issued a summary report      in
1964 on its reviews of military        budget support   funds provided   to numerous
countries.

       GAO found that U.S. agencies had failed                    to use adequate controls      to
ensure that U.S. funds had been used to further                      those programs and
projects     considered       essential   to attain      military      goals and mutual security
objectives.        The ineffective       administration         of the support program by U.S.
agencies permitted          the recipient      countries      to use funds for other purposes
than those approved by the U.S. agencies,                   and for purposes not considered
essential      to military      security    objectives.        At the same time, the attainment
of specific       military     security   objectives      was hindered        because the recipient
countries      did not spend available          support     funds to provide,        maintain,  and
use facilities         that the United States considered               essential.

       Based on its reviews,      GAO made numerous recommendations               to DOD to
improve controls     over military      budget support    funds by releasing           contributed
funds for mutually-agreed       upon projects       and by making more adequate reviews
and inspections.      DOD subsequently       issued new guidelines          for the administra-
tion of military     budget support      funds which incorporated           many of the GAO
proposals.     The guidelines     required     that U.S. military       officials       partic-
ipate as much as possible       with the host country        in estimating          support
requirements     and make every effort       to relate   U.S. support to specific
projects    or clear categories      in the host-country       military       budgets.
(B-146943,    September 28, 1964.)

      Budget Support Loans to Ecuador - In 1965, GAO reported         on two budget-
support  loans totaling      $15 million   made to the Government of Ecuador.    GAO
found that,    in determining    the amount of U.S. assistance    needed by the
Government of Ecuador to fund its budget deficits         for 1961 and 1962, AID
did not insist,    before providing      U.S. funds, that the Government use all
potential     sources of internal       borrowing    or that it fully    develop
certain    tax sources.     AID did not adequately         consider   the Government's
borrowings     from the Central       Bank of Ecuador, and it believed        that the
use of other domestic       financial      resources   was not warranted    because of
the internal      political   situation      in Ecuador.

       GAO concluded that the economic need for these loans was doubtful
because of existing      internal    financial      resources.    GAO also believed
that it was questionable        whether this assistance         complied with the intent
of the Congress,      as expressed     in the Foreign Assistance        Act, that aid-
receiving   countries    should mobilize       their    own resources   and help themselves.

      AID admitted   that its loans to Ecuador were excessive              by about
$800,000 because of available       credit     in the Central     Bank of Ecuador which
had not been used at the time when the Government's               receipts   were lowest.
AID advised GAO that in future        transactions       it would follow    GAO's
suggestion  that recipient     countries     first   utilize    available   internal  credit
sources.   (B-146998,    April  29, 1965.)

        Military    Budget Support Funds Furnished       to Korea.      In 1967 GAO reported
on the administration         of military  budget support     funds provided      to Korea.
The United States was contributing           about two-thirds      of the total     Korean
military      budget,    and had provided  about,$l  billion     for Korean military
budget support        through   1965, of which about $375 million         was contributed
during 1962-1965.

       GAO concluded that U.S. military         officials     in Korea did not have
adequate control     over the use of U.S. -contributed          funds to assure that
the funds were effectively        used to achieve mutual security           objectives.
GAO found that:       (1) although    the United States had furnished           $1.3 million
in raw materials,      clothing    needed to support Korean troops during emer-
gency mobilization       had not been manufactured;        (2) combat rations        to support
Korean troops during emergency operations              had not been procured;        and (3)
construction    projects     needed for Korean defense and for which the United
States had delivered        over $1.3 million     of building     materials    had not
been constructed      or scheduled     for construction.

        GAO believed    that these high-priority       defense projects       could have
been carried      out if $3.5 million     of U.S .-contributed       local currency     had
been allocated       and used for this purpose.        However, GAO found that,         because
of a lack of U.S. controls        over fund use, U.S. military           advisors    had no
effective     means of persuading     Korean officials       to use available      funds for
high-priority      defense projects,    or of preventing       their    use for nonessential
purposes.      GAO found that the Koreans had used the U.S.-contributed                 funds
for items which were not essential           for defense purposes while essential
defense projects       went unfunded,   and that unexpended funds at the close of
the year reverted       to the Korean Treasury      and were lost to defense purposes.
            In 1963, GAD had renorted       on weaknesses in U.S. agency controls
    over military     budget support     funds and deficiencies        in Korean Army
    administration     of the funds.      GAO had re&ommended increased          attention        to
    more important     projects   and increased      surveillance     over U.S.-contributed
    fund uses.      DOD accepted GAO's recommendations            and began measures to
    implement them.       GAO's followup     review,   however, showed that the DO3
    efforts    had not been adequately       implemented.'
f

           GAO recommended that DOD direct      that U.S.-contributed       funds be
    allocated    to specific  projects   and the release    of funds be directly
    related   to the progress    achieved in accomplishing       such projects.    DOD's
    response to GAO was classified.        (B-125060,   January 9, 1967w.1

            AID Management of commodity Assistance             to Vietnam.      In 1968, GAO
    reported    on AID's management of its various             commodity programs in
    Vietnam at the request of a subcommittee                of the House Committee on
    Appropriations.      GAO did not solicit          agency comments on its draft         report,
    but did discuss     report    findings      with agency officials        and gave their
    comments appropriate       recognition.         GAO recognized     the essentially      advisory
    role played by U.S. personnel,            the crisis-like      conditions     under which the
    program operated,      and the nature of the commodity support programs,                  which
    sought to infuse      commodities      into the Vietnamese economy to hold down
    prices,    but also noted a number of significant              problem areas.

          While cargo congestion       at the port of Saigon had been greatly
    reduced, GAO Eound that large amounts of commodities                  were not being
    moved into the commercial       market as intended,         and that over $25 million
    in commodities   financed    under the program were being pledged to banks by
    Vietnamese importers     for periods     of up to 3 years, with significant                  amounts
    pledged to finance    non-program     commodities.         GAO also believed          that AID's
    commodity analysts    were only partially       fulfilling       their    potential       role
    since they were not trying       to independently        evaluate     requests      for commercial
    import program financing      in relation    to need.

            GAO found a need for both AID and the U.S. Army to strengthen
    accountability        control     over the hundreds of millions            of dollars    worth of
    economic assistance           program commodities       entering     Vietnam.      There was no
    effective      accountability        over the receipt,      storage,     and movement to first
    destination       of these goods.          In addition,   GAO found that actual and proposed
    levels of commodities            such as fertilizer,      medical supplies,         and boats for
    use in the pacification             program were excessive       to needs; that necessary
    security     measures to protect          U.S.- financed    economic assistance         commodities
    had not been fully          carried     out, largely    because of a fragmentation           of
    responsibilities        among agencies in Vietnam;            and that significant         cases
    existed     of nonutilization          of economic assistance        commodities,     including
    industrial       equipment.       (B-163634,     March 20, 1968.)

          Control      Over Incoming    AID Cargoes     in Vietnam.       In another     1968 report,


    *   Unclassified      summary of a classified        report.
     GAO concluded     that there was a need for AID and the U.S; Army to strengthen
     accountability      and security  control   over the hundreds of millions  of dollars
     worth of U.S. economic assistance         commodities entering Vietnam.   Over $500
     million   was expended in fiscal      year 1967 for such items as food, clothing,
     equipment,     and medical supplies.

             GAO found that accountability        over the handling         of these commodities
     was not effective,      and that security       efforts    still     seemed inefficient.
     There was no reliable        measure of the cost, quantity,            and condition       of the
     commodities     in and around Vietnamese ports or of the extent or causes of
     losses due to theft,        diversion,    and spoilage,        GAO felt     that these
     conditions     were largely     due to the fragmentation           of responsibility       among
     responsible     agencies in Vietnam,       and to the essentially           advisory    role
     played by U.S. personnel.           While GAO recognized         the difficulties      of control
     under the unique circumstances           in Vietnam,    it did believe          that improved
     efforts    could be made.

             GAO recommended that the agencies concerned              (1) develop a synchronized
     inventory     accountability       system within    existing   structures     and environmental
     conditions,       (2) arrange for local escort service           to first    destination    of
     all commodities        until  idemnification      agreements were reached with trucking
     companies, and (3) file          refund claims when the Government of Vietnam could
     not promptly       provide evidence that cargoes reported            to be stored in ports
     for long periods        of time had been removed:          GAO later    found that significant
     improvements       had been made in this area, although            some security      and account-
     ability     problems remained.         (B-159451,   May 15, 1968.)

           Planning and Management of Assistance       Programs in Laos.    GAO reported
     in 1969 on U.S. economic assistance    in Laos.       These programs were directed
     toward Laotian  security and political   stability,      and from mid-1964 through
     mid-1968 amounted to about $267 million.

            GAO found that the Foreign         &change Operations      Fund, which was the
     largest   U.S .-supported    economic stabilization       program in Laos, did not
     provide for controls      or restrictions      on foreign    exchange contributed      to
     the Operations     Fund.   It was practically       impossible    to determine     the extent
II   to which the foreign      exchange was used in gold trade,          capital   flight,    or
     for other purposes which might not be in the best interests                 of the United
     States.
1
            These problems had been studied at length by AID, other U.S. agencies,
     and the International      Monetary Fund, but no acceptable         solution     had been
     found.    GAO believed,    however, that the AID Mission        in Laos needed first
     to learn more about (1) the Laotian          economy in general,      including    the
     establishment    of a system to reveal foreign         exchange availabilities,        (2)
     Laotian   consumption    habits,   and (3) actual     uses of foreign      exchange.    GAO
     made several    proposals    concerning   the stabilization     programs in Laos,
    Agency officials  generally agreed with the proposals,  and a number of
    actions were taken or were planned.    (B-133003, August 28, 1969**.)

           Control  Over Local Currency Available        for Budget Support in Vietnam.
    In 1970, GAO reported      a follow-up   review of corrective     action   taken in
    response to a 1966 investigation        by a subcommittee     of the House Committee
,   on Government Operations.         The 1966 investigation    had found that AID had
    not established    proper controls     over U.S.-owned     or controlled     local
    currency    made available   for support    of Vietnam's   civil   budget.

           From 1966 through    1968 about $629.7 million     in local currency     was
    made available   to support Vietnam's     military   and civil   budgets,  with
    about two-thirds    provided   for the military    budget under the U.S. Military
    Assistance    Command and one-third   for the civil     budget under AID.

            GAO found that while both AID and the Military         Assistance       Command
    had improved their        controls    over budget support programs since 1966
    further    strengthening      was needed.    GAO believed that the controls        and
    procedures     established      generally  would not find or prevent improper
    payments by Vietnamese,          such as payments for unauthorized     activities      or
    for padded payrolls.

           GAO found that the AID mission had made few postaudits              of civil
    expenditures,     and that the Military     Assistance    Command relied     on an
    understaffed     Vietnamese government audit group.          As a result,     local
    currency     was released   for both the military      and civil    budgets on the
    basis of unreliable       and unverified   Vietnamese government reports.           For
    example, at the end of 1968 a few of Vietnam's            civil   agencies had accu-
    mulated about $25.4 million        in local currency,     representing     unspent funds
    released     in 1968 and prior   years.

            GAO also found that needed facilities,             which were being built       under
    military    and civil        budget construction     programs supported     by U.S.-owned     or
    controlled     local currencies,        were not constructed       on a timely   basis.     Some
    of the civil      facilities       were of poor quality,     in need of extensive       mainten-
    ance, or not in use.            This occurred    primarily   because of the failure       to
l   establish     an adequate system for inspecting            construction    in process and
    on completion.

             DOD and AID advised GAO that actions     had been taken and would be
    taken to strengthen      controls  over local currency   for support of Vietnam's
    mil.itary    and civil  budgets.   Both agencies believed    that existing control
    and review practices,      plus actions   to be taken such as procedural   changes
    and staff     increases  needed to monitor   the funds and programs, would provide
    adequate control.

           In October    1970,   the Departments     of State   and Defense     advised   GAO of



    **Unclassified      summary of a classified       report.
    the steps taken to tighten      fiscal      controls   over U.S.-owned        or controlled
    currency made available    for support         of Vietnam's     civil   budget and to
    improve audit personnel    staffing,        and of their     provision     for increased
    audit examinations   of project      activities.        (B-159451,     July 24, 1970.)

           Commercial Import Program for Vietnam.             In 1970, at the request         of
    a subcommittee     of the House Committee on Government Operations,                GAO also
    reported   on the actions     taken on recommendations           made by the subcommittee
    and in prior     GAO reports    for improved operation         of the U.S. Commercial
    Import Program for Vietnam.           Although   formal agency comments on the report
    were not solicited,      the subject      matter   and conclusions     were discussed      with
    agency officials     and their      comments were given appropriate          recognition.
    GAO found that AID had taken a variety             of corrective     actions    and had had
    some success in improving         its administration      of the commercial       import
    program.     Several problems,       however, continued      to exist.

            GAO found that AID had been only partly      successful      in persuading      the
    Vietnamese Government to keep its promise of increased              spending in the
    United States during 1969 and to use a $50 million           escrow account to
    purchase U.S. rice and/or other products.        GAO also found that AID had
    made no systematic     investigation of the reliability       and integrity        of
    Commercial Import Program importers,      and had not negotiated           with the
    Government of Vietnam to uniformly     apply newly-established           licensing
    rules to old and new importers.      The overall    dollar    coverage of AID
    Commercial Import Program audits had increased          substantially,        but veri-
    fication    of the end use made of commodities    represented        only a small
    fraction    of audit coverage.

           In addition,      GAO found that AID's use of automated arrival          accounting
    system reports       was suspended in 1968 because of inaccurate         input data and
    controls.     No formal feasibility      study or cost benefit      evaluation    had been
    made before the automated system was put into use.              AID was concentrating
    on correcting      the automated system's     mistakes   rather  than reviving      its
    old manual system.         As of early 1970, AID was virtually       uninformed     about
    Commercial Import Program commodities          arriving,    in customs, and released
    to importers.        (B-159451,   June 2, 1970.)
t
HUMANITARIAN ASSISTANCE PROGRAMS

      The United States conducts a wide variety          of humanitarian      assistance
programs under the Foreign Assistance         Act, including   disaster     relief     aid
from the Contingency      Fund (Section    451) and the furnishing      of services
and commodities     to voluntary  nonprofit    relief  agencies (Section        607),and
refugee assistance     and food programs under other related         legislation.
GAO reports   dealing with problems in these areas are discussed below.

      Management of Donated Food Programs for Mexico.           GAO reported     in
1966 that relief    programs in Mexico carried      out with U.S.-donated      food
under the Food-for-Peace      program had expanded by nearly 500 percent
between mid-1960 and mid-1964,       even though the Mexican economy experienced
a steady growth and Mexican agricultural        production    was greatly   expanded
during this period.      In fact,   Mexico was exporting    the same kinds of
commodities   that were being donated under the U.S. relief          programs.

       GAO's review,    together   with those performed by AID, showed areas
in which the program was being administered          in a manner contrary     to agency
regulations     and to agreements between the United States and the voluntary
relief    agencies.    GAO believed    that these conditions   were largely     caused
by limitations      in staffing   and financial   support by the food-distributing
agencies,     and by insufficient     support and recognition   of the programs by
the Mexican Government.

      GAO also found that commodities         costing about $700,000 annually           had
been substituted   for quantities      previously    imported commercially        by Mexico--
mostly from the United States --or had contributed             directly   or indirectly
toward Mexican exports.       In addition,     GAO found that program costs had been
increased more than $726,000 because of the donation               of cornmeal rather
than whole corn, which the Mexicans preferred,            and that claims had not been
made against voluntary    relief   agencies,      as required,     for violations     of
U.S. Government regulations.

       GAO concluded that there had been only limited              surveillance      of the
food donation       programs by U.S. agencies,        with limited    consideration       of
voluntary    relief      agency requests    for more food.      As a result,     ever-increasing
amounts of food were made available,             generally   in the amounts requested          by
the voluntary       relief    agencies,  without   any real assurance that program
deficiencies      had been corrected.

      Following      GAO's recommendations,     the responsible      U.S. agencies
generally     agreed that corrective     action was needed.       The agencies later
advised GAO that for the reasons GAO had noted, particularly                Mexico's high
degree of economic self-sufficiency           and its exports of agricultural        commod-
ities   similar    to those donated by the United States,          food donation    programs
to Mexico had been ended in mid-1965.             (B-158798,   June 30, 1966**)



~Wnclassified      summary of a classified         report.
            Ocean Transportation     Costs for Donated Surplus Agricultural.
    Commodities.      In another 1966 report,     GAO concluded that ocean trans-
    portation    charges incurred     by the United States for the shipment of
    donated agricultural        commodities  to needy persons abroad were greater
    than was necessary.

           Under procedures      then in effect,     the Department of Agriculture
    and each voluntary      relief    agency made their        own arrangements    for
    shipping donated commodities         abroad at Government expense.            The usual
    practice   was to ship small quantities          on ocean liners      even though it
    resulted    in higher costs than would have been incurred              if the com-
    modities   were accumulated in boatload quantities               and shipped in
    chartered     tramp vessels.      GAO found that,      for one type of commodity
    sent to six countries        during 1962-1963,      better    traffic  management
    could have saved as much as $1.7 million.                GAO believed    that greater
    savings could be realized         by consolidating       commodity shipments to
    other countries.

           In accordance with GAOls proposals,   the Department     of Agriculture,
    AID, and the voluntary     relief agencies subsequently   cooperated     in
    consolidating    shipments of donated commodities,    and informed     GAO that
    at least $880,000 had been saved by the consolidations.           (B-152538,
    March 11, 1966.)

          Transportation      of Food Donated for Distribution     Abroad.     In 1967,
    GAO reported    that of 107 countries     receiving   American foods in 1965
    and 1966, only four had contributed         toward ocean freight    costs,   although
    the governments of more than four of the countries           appeared to be in
    sound financial      condition  during this period.

           GAO concluded that the possible             savings to be derived from
    encouraging     recipient       country contributions       to shipping  costs would
    be significant          and would benefit     the U.S. balance-of-payments       position.
    Food-for-Peace         laws permitted     U.S. payment of ocean freight        costs for
    donated foods if a determination              had been made that such payments were
    necessary to accomplish program purposes.                  GAO found, however, that
    AID regulations          did not require     an evaluation    of the recipient     countries!
    financial     ability,      or willingness,      to pay some part of ocean shipping
    charges,    and that such evaluations            had been made only in isolated        cases.

         AID agreed with several proposals    made by GAO and began a number
f   of corrective  actions.  (B-159652,  April 28, 1967.j

             Processing    of Claims Against Voluntary      Relief  Apencies.    GAO
    reported      in 1967 that the U.S. Government had had little          success in
    processing        and collecting    claims against distributing    agencies in
    cases of reported          food loss or misuse that might create a monetary
    liability       for those agencies.
      GAObelieved that the problems involved in proces&ing claims were
created by a lack of information to establish the nature and extent of
loss and the liability     of the parties involved.  Other difficulties
arose because of the division of claims responsibilities      among U.S.
agencies, and because of the problems involved in administering         food
donation programs in less-developed countries with inadequate
administrative,   transport,    and storage support.
       The Department of Agriculture,      AID, and the principal   voluntary
relief agencies generally agreed with GAO's findings,          and advised
GAOthat steps had been taken to revise program regulations           and to
realign administrative   responsibilities.       (B-159652, June 29, 1967.)
      Audits of Food Donation Programs Administered by Voluntary Relief
Agencies.    GAOalso reported in 1967 on the extent of audits of U.S.
food donation programs administered by nonprofit voluntary relief
agencies.    GAO's survey studied the problem of providing a reasonable
balance between the U.S. need to ensure effective    operation of the
programs end the need to avoid undue restriction    on the voluntary
agencies in administering    the programs.
      GAOfound that, in 10 major recipient      countries, 10 voluntary
relief agencies and one intergovernmental      organization were administering
177 food distribution    programs. These programs were designed to feed
about 39 million recipients     through more than 200,000 distribution   points
in the countries.     About 1,9 billion  pounds of food valued at $1.42 million
was shipped abroad in the XLmonth period from mid-1964 through 1965.
      GAOconcluded that the     food donation programs abroad were so large
in size, so varied in type,     and so dispersed geographically  that there
had been only limited audit     coverage of the programs despite a signifi-
cant amount of audit effort     by U.S. agencies.
      AID and the major voluntary relief agencies generally agreed with
the GAOfindings,   and AID stated that the U.S. regulations governing
donation programs were being restudied.   (B-159652, March 7, 1967.)
      Planning and Administration   of the RefuPee Assistance Program in
Hong Kong. In 1966, GAOreported that about $3.5 million in funds for
refugee assistance had been used by the Department of State in Hong
Kong for facilities    and services that served substantial  numbers of
nonrefugees.      GAOdoubted whether this usage was fully in accord with
congressional intent, and questioned whether congressional committees
had been fully informed of the extent of nonrefugee participation.
       GAOalso found that there was a lack of clear procedures for
selecting supportable individual   projects, that numerous agreements
to participate   in construction projects were made before adequate
    planning was done, and that grant funds were disbursed        immediately
    upon agreement in some projects     rather than waiting until    major work
    began and funds were really   required.

            The State Department     agreed generally      with GAOts proposals    for
    improvement,     but disagreed    on the applicability      of those proposals
    to many of the specific        examples and situations      cited in the GAO
    report.      The Department also felt     that assistance      to nonrefugees    in
f   Hong Kong was incidental        and unavoidable    and therefore    was not
    inconsistent     with existing    laws.

            GAO recommended that the Department            of State:    (1) provide       congres-
4
    sional committees with more information               on refugee-nonrefugee         use of
    project    facilities      and services     for future   Hong Kong refugee fund
    requests;      (2) systematically       evaluate and select future         assistance
    projects     to relate     to priority    groups and meet the Departmentts             goals;
    (3) develop controls         requiring    adequate preliminary       planning     for
    refugee construction         projects;    and (4) disburse funds for all future
    grant projects        on the basis of need or percentage          of completion.

            GAO made a further    review of the Hong Kong program in 1970 and
    found that the State Department had made a reasonable        effort      to
    correct    the problems noted and to improve administration,        including
    disclosure    to Congress of nonrefugee usej improved project         planning,
    better    U.S. identification     with refugee projects, and restrictions       on
    the use of grant funds.         (B-155440, December 14, 1966.)
            Assistance    Program for Refugees from European Communist Countries.
    In 1967, GAO reported         on the Department         of State's~administration     of
    its program which provides           services    for'refugees      from European Communist
    countries      through contracts       with voluntary       agencies,   the U.S. Army, and
    an intergovernmental         organization.       GAO concluded that more effective
    financial      management control       procedures      were needed to achieve more
    effective      program management and fuller            disclosure    to the Congress
    concerning       the expenditure     of appropriated        funds.

           GAO found that a revolving        fund was established      to finance       refugee
    transportation,      administered    by the inter-governmental         organization
    under U.S. direction.         GAO believed     that the establishment       of the fund
    was not consistent      with existing      laws and operational      requirements       and
    that the details      were not fully     disclosed    to Congress.      GAO found that
    about $4l2,000 was withdrawn         from this fund to finance refugee program
    operations,     thus increasing    the funds made available        for this purpose in
    annual. appropriation      acts.   The amounts expended were not reported               to
    the Congress or the Treasury Department.

         GAO also noted that payments made to the two voluntary      agencies
    for services   to refugees included  $203,000 in U.S. payments which
    were inadequately    documented and $67,000 in U-S. overpayments   from
1960 through .l963.       GAO was informed in 1966 that a settlement     of the
$67,000 in overpayments       had been agreed to with the voluntary     agencies--
3 to 6 years after      the overpayments   were made. In addition,     GAO found
that,    as in the Hong Kong refugee program described       above, a number of
contract    payments were not correlated      with the number of refugees eligible
for assistance     under the contracts    and, consequently,   refugee assistance
costs may have been hig.her than necessary.

        The   State Department   contended that the revolving     fund was not
operated      by the U.S. Government,    but also indicated   that the Congress
had been      kept well advised of the fund's status.       GAO did not believe,
however,      that the State Department comments altered      the report  findings
relating      to disclosure   of the status of the fund to Congress.      (B-162143,
September       18, 1967.)

        Refugee and Social Welfare Program in Vietnam.          In 1970, GAO reported
on the refugee and social welfare          program in Vietnam, which is managed by
the Government of Vietnam with the aid of American advisory                personnel and,
for 1968, 1969 and (programmed)          1970, about $162 million     in U.S. direct
dollar    funding,    local currency   funding,   and donated agricultural
commodities.        GAO's review was made to answer specific      inquiries      of a
subcommittee       of the Senate Committee on the Judiciary.        GAO did not
solicit     formal agency comments, but parts of the report were discussed
with agency officials        and their comments were considered.

       GAO found that neither        the United States nor the Government of
Vietnam had established       priorities      for the U.S. assistance        programs.
GAO also found that since early 1968 the refugee reporting                   system had
undergone three major revisions,           but the information         being reported  was
still   conflicting,   confusing,       and inconsistent--in        part because it was
compiled by untrained      personnel.       In addition,        GAO found that a large
reported    decline  in the number of refugees during 1969 was misleading
because of questionable       reporting     practices;       that there was a consider-
able shortage of facilities          needed by war victims         and that many of those
that existed were inadequate;           and that,   because of slow spending in the
refugee and social welfare         program, many refugees had vacated controlled
areas and returned     to Viet Cong areas.

        GAO found that $44 million     of U.S.-contributed    food commodities,
distributed     equally by the Government of Vietnam and voluntary            agencies,
had not been distributed      according   to need, and therefore       inequities     had
resulted.      GAO noted that numerous nonfood commodities         for refugees
appeared to have been in storage for a considerable           length of time.         The
commodities     belonged to a Vietnamese government ministry,          and the United
States had been unsuccessful       in obtaining     action to redistribute        the
property    so that it might be better      used by other ministries,          (B-133001,
November 20, 1970.)

         Current GAO Reviews.    GAO is presently  conducting       a review   of United
States     refugee assistance    programs in Europe.
COMMODITY TRADE ASSISTANCE

       Commodity trade assistance--      a form of foreign     aid linked to im-
ports of specific    commodities--is      provided     by the United   States to
less-developed    countries  primarily     through the operations       of the United
States Sugar Act and the International            Coffee Agreement.     Sugar is
imported at prices generally        above world market levels,       and coffee  is
imported at prices above those likely           to have prevailed    in the absence
of the Coffee Agreement.       GAO has issued a recent report on this subject,
as summarized below.

      Administration   of Foreign Aid         Provided through the Operations         of
the United States Sugar Act and the             International    Coffee Agreement.
In a 1969 report,    GAO reviewed the         magnitude of the foreign        aid provided
through the operations    of the Sugar          Act (sugar assistance)      and the
Coffee Agreement (coffee     assistance)        , and attempted    to identify    some of
the major problems of this type of            foreign     aid and how they have been
dealt with.

        GAO estimated     that U.S. sugar assistance    averaged between $290 and
$340 million       a year during 1965-1967, and increased      total  U.S. foreign
economic aid by 7 to 9 percent during that period.             GAO found that,
despite its size, no explicit         attention   was paid to the use that re-
cipient     countries    made of sugar assistance.     AID and the Department of
State took sugar aid into account only to the extent that it decreased
traditional      aid requirements.

        GAO also estimated   that U.S. coffee aid averaged $314 million                  during
1964-1967 (of a total      average of $601 million         for the United States and
other coffee-importing      countries).      Inclusion     of U.S. coffee aid in-
creased reported     U.S. foreign     aid disbursements       8 percent a year, or
about 16 percent for both sugar and coffee aid during the 1965-1967
period.     GAO found that,    under the 1962 Coffee Agreement,            the United
States and other signatory        countries    paid no explicit      attention     to the
use made of coffee aid,        Under the 1968 Coffee Agreement, a diversifica-
tion fund was established       to help coffee-exporting         countries     diversify
their    exports,  but only a small fraction         of coffee aid was to be used
to finance the fund.

      GAO recommended that AID and the Departments          of State and Agriculture
prepare annual estimates       of the amount of sugar assistance      received  by
each less-developed    country,     and comprehensive   plans for using the aid
for development purposes in each country.           The plan would be a basis
for reviewing    and negotiating     the uses that the countries     would make
of the aid.

      In the case of coffee assistance,       GAO recommended that the United
States encourage other importing      countries   to join with it to attempt
to increase,  as soon as practicable,      the tax on coffee exports,   which
would finance   the diversification        fund at the maximum permissible
level under the present agreement.            GAO also recommended that,      if it
becomes necessary to negotiate        another coffee agreement,        the United
States in cooperation     with other‘importing        countries   attempt   to raise
the tax rate to an amount which will allocate             a higher fraction     of
total  coffee assistance      to a diversification       (or other development
purpose) fund.       '

        Both AID and the Department of Agriculture          agreed that foreign
aid is transmitted       through the Sugar Act and the Coffee Agreement.
However, both agencies disagreed with           the GAO recommendation      on sugar
assistance.      As  to  the  coffee assistance    recommendations,     AID  believed
a gradual approach was necessary for better            programming of coffee
assistance,     while the Department of Agriculture         believed  that nothing
more could be done because of the opposition            of coffee exporting
countries.      GAO agrees with AID and felt       that its recommendations        on
coffee assistance       were consonant with     a gradual approach to more
effective    programming.

      GAO concluded that the agencies had not used the flexibility            of the
present Sugar Act to review and negotiate       development-oriented      applica-
tions of sugar assistance    with recipient    countries.     GAO suggested that
the Congress might wish to consider whether the foreign           aid element
should be an explicit   objective  of the underlying      assistance   and treaty
for commodity trade assistance.      (B-167416, October 23, 1969.)
MANAGEMENTOF FOREIGN CURRENCY

       As a result    of its nonmilitary       foreign      assistance      programs,     the
United States has available          a considerable       amount of foreign         currencies
or credits     which are owned by or owed to the United States Government.
Under the Foreign Assistance          Act, U.S.-owned         foreign    currencies      can be
purchased from the Treasury          Department     for dollars        by U.S. agencies to
pay their     foreign   expenses.     U.S.-owned      foreign     currencies,     when they
are excess to normal U.S. agency needs, can also                    be authorized      for use
in programs under the Foreign Assistance               Act.      The Act states      that,    to
the maximum extent possible,          U.S.-owned      foreign      currencies    are to be used
instead of dollars.         (Section   612.)    As summarized below, GAO has issued
several    recent reports     on U.S. foreign       currency      management problems
related    to assistance     programs.

        Use of Dollars    to Finance Local Costs of Develonment Projects            in
Brazil.     In 1967, GAO reported       on AID's    use of dollars   rather  than
foreign    currency    to finance    the local costs of five development        loan
projects    in Brazil.      The loans totaled      $69.8 million,  of which $44 million
was to be converted       to Brazilian     currency    (cruzeirosl to finance    part of
the local costs of the projects.

       During its review,         GAO questioned     the need to use dollars         to finance
the local costs of the projects,             since   GAO    concluded  that   U.S.-owned    or
controlled     cruzeiros      were available      for this purpose.       Since 1955, about
$572 million       of surplus     U.S. agricultural      commodities    had been sold to
Brazil    under Public Law 480, and the sales agreements allowed reservation
of about $468 million          in U.S .-owned cruzeiros        from the sales for develop-
ment loans and grants to Brazil.               In addition,      AID had made three balance-
of-payments      loans to Brazil       in 1963 and 1964, which generated            $225.5 million
in counterpart       cruzeiro     funds which could also be used for mutually              agreed-
upon development        purposes.

       Since it appeared that adequate cruzeiro       funds were or would be avail-
able to finance       the local costs of the five development        loan projects,    GAO
recommended that AID amend the loan agreements          to permit the use of
cruzeiros      for local costs subject   to their availability       at the time loan
disbursements      were made.   GAO also proposed that future        AID budgets fully
disclose     to the Congress the extent to which dollar        funds are used to
finance    local costs of AID programs,     with explanations      for such financing.

       AID did not believe      the first proposal     was feasible    because there had
been an unexpected      reduction   in Public Law 480 cruzeiro       funds.     GAO agreed
that action was no longer possible        because of the decline        in cruzeiro      fund
availability     and because the loan expenditures        had recently     increased
substantially.       AID did not comment directly       on the GAO proposal      of full
                                                                                                     .
disclosure     to the Congress of dollar     financing    of local currency       costs.

       Regardless  of the action    taken on the loans           in Brazil,    however, GAO
believed    it to be essential   that AID, as a matter             of continuing   policy,
(1) provide   in loan agreements for the use of local currency        available   at
the time loan disbursements       are made, and (2) not consider   U.!S.-owned
local currency   as unavailable      because it is tied up in general    commitments
unsupported   by specific   project    efforts.

        GAO noted also that AID had adopted a policy              to prevent       the use of
AID dollar     funds to finance      the local costs of AID projects,              in countries
with excess or near-excess         foreign    currency   resources,       where the AID
program was directed        toward completion      of specific      projects     rather    than
the provision      of foreign    exchange.     GAO believed     that,     if properly
carried    out, this policy      could reduce the unwarranted           furnishing      of
balance-of-payments       assistance     under the guise of project           assistance.
(B-146820,     March 17, 1967.)

       Administration      of Interest     Earned on Foreipn Currency.            In 1969, GAO
reported     that U.S.-owned      local currency      funds, generated      from the sale of
agricultural      commodities     in the Philippines       and allocated      for common
defense purposes,       had been withdrawn        from a U.S. Treasury        account far in
advance of actual       disbursement      needs and invested       in interest-bearing
time deposits       and short-term     promissory     notes by the U.S. Military
Advisory     Group.

       The interest      earned on the investments          was used to finance       Philippine
construction      projects,      but GAO's review of applicable         laws showed that it
should have been deposited            in the U.S. Treasury      as miscellaneous        receipts.
GAO proposed that interest            earned on the time deposits         should no longer
be available      to finance      construction    projects,    and that,    as the time
deposits     matured,    the principal       not needed for current       expenditures,      along
with the interest,          should be returned     to the Treasury.        GAO was informed
that the Military        Group had stopped purchasing          promissory    notes and was
depositing     with the Treasury         about $210,000 in interest        and $255,700 in
principal     not currently       needed.

       GAO recommended that arrangements        with other countries        be reviewed
to determine     whether arrangements    permitted     the premature withdrawal        of
funds and the use of any interest        earned on these funds in approved pro-
grams.    GAO also recommended that the Department            of Defense review the
financial    controls    over U.S.-owned  foreign     currency   maintained    outside
the Treasury     accounts,   and the necessity     for and legality      of such arrange-
ments.

       GAO was informed    that DOD, AID, and the Treasury           Department   had
issued instructions      to all principal      posts worldwide      requesting   a review
of all program agreements        in progress    to learn whether premature with-
drawals were permitted       or whether interest      was being used to augment
country   programs.     The instructions     also prohibited      the maintenance     of
accounts outside     the U.S. Treasury.        (B-146820,   April     24, 1969.)
                Use of U.S:-Owned Excess Foreign Currencv in India.' . In 1971, GAO
         reported   on possible  uses of the large amounts of Indian currency             (rupees)
         which the United States had accumulated       through the operation        of its food
         and'other   assistance  programs in India.      In mid-1969,     the amount of
         Indian rupees available     for U.S. expenditures      equalled    $678 million     and
         would have lasted about 19 years at current          expenditure    rites.    U.S.
         holdings   were expected to increase   substantially       in the future.

                 GAO found that important    economic, political,     and legal factors
         limited     the amount of U.S.-owned    rupees that the United States could
         spend in India during any period.         GAO also believed,    however, that many
     \
r)       opportunities     existed for increasing     the use of rupees in support of U.S.
         programs.

                GAO believed   that greater     use of foreign        currencies     could be realized
         if the executive     branch would seek congressional             approval     for well-
         documented excess currency        projects    without     regard to agency dollar
         ceilings     or would seek direct     foreign    currency     appropriations.         GAO also
         felt    that the sale of foreign      currencies      to U.S. agencies at fixed offi-
         cial exchange rates was not always useful               and discouraged       greater   use of
         the currencies     by these agencies.

                U.S. officials     informed GAO that the growing balances of U.S.-owned
         rupees were a political         liability       in U.S. relations    with India,    and
         believed    that the United States should grant India large amounts for
         economic development        purposes.         GAO believed   that effective   action    in
         this direction      would require        action   by the Congress.

                 GAO recommended that:        (1) the Office       of Management and Budget ensure
         that executive      branch agencies can seek approval            for well-documented
         excess currency      funded projects      without     regard to overall     agency dollar
         ceilings;     (2) the Office     of Management and Budget explore with the appro-
         priate    committees    of the Congress the acceptability            of direct     appropria-
         tions of foreign       currency;   and (3) the Treasury         Department     establish    new
         and more flexible       procedures    for valuing      U.S.-owned    Indian rupees in
         dollars    to encourage greater       productive     use for U.S. programs in India
         without    compromising     congressional     control.

                The agencies generally    agreed with GAO's recommendations.         The State
         Department noted the urgency of the problems and stated that it had begun
         a study to complement the GAO report.          AID agreed with the recommendations,
         but expressed reservations      about the economic and political       impact of
         greater   local currency   use in India.     The Office     of Management and Budget
         agreed with the intent     of recommendation      (11, but had some doubts about
         recommendation     (2).  The Treasury    Department    responded with classified
         comments.

                GAO believed    that the Congress might        wish to favorably    consider
         foreign-currency      denominated appropriations         as an advantageous    funding
       form and, with, regard to the excessive         accumulation   of U.S.-owned     foreign
       currencies    in India,   might wish to consider      (1) whether a reduction       in
       U.S.-owned    rupees should be made to preserve        good relations    with India,
       (2) whether     executive  action   in this regard meets congressional        desires,
       (3) whether legislative      action   should be taken concerning      the U.S.-owned
       rupee balance in India,      and (4) whether authority       should be given to use
       non-Public    Law 480 excess currency      in India for grants without       appropria-
  i
       tions,   as is already    permitted   for Public Law 480 excess currency.
       (B-146749,    January 29, 1971,)
   k
fi.
                                                                                            APPENDIX I


                                           U.S.   AGENCY INDEX


         Agency for International           Development:         Peace Corps'&       32
           Accounting manuals 22
           ADP system 20                                         State,    Department      of (see also
           Basic functions         of 1                             Agency for International
           Capital    assistance      projects    10, 11, 11,       Development):
              12, 12, 13, 13, 14, 14, 15, i5, 16 .                  and Defense ,!+l, 42, 49
           Commodity accounting          system 22                  ADP system 20
           Commodity trade assistance            67                 East-West center 34
           Contractor     activities      18, 32, 33, 34,          Foreign currency use 71
              35                                                   Functions       of 1
           Cost reduction       program 21                          Internal      audit 19
           b-mhy      programs 3, 4, 5, 6, 6                        International       organizations      24,
           Development lending 7, 8, 8, 9                              25, 25, 26, 27, 28
           Excess property        36, 36, 37, 38                    Refugee and scholarship           programs
           Financisl     management reporting        system            34, 64, 65
           Fozi donation and refugee programs 62,                Treasury,    Department     of 70, 71
              63, 63, 63, 64, 66
           Foreign &rr&tcy~use       69, 70, 71
           Internal   audit 18, 19
           Investment    guarantees   30
           Supporting    assistance   56, 58, 58, 59,
              60, 61
           Training   projects    15

         Agriculture,    Department    of:
           International    organizations    25
           Commodity trade assistance       67
           Food donation program        62, 63, 63

         Commerce, Department      of 27

         Defense, Department of:
           Common defense efforts          40, LJ., 4.2, L,2
           Country programming 40
           Country staffing         39
i          Excess property         48, 48, 49
           Foreign currency use 70
    r"     Foreign military         sales 54, 54
           International        functions    of 2
           Materiel      programs 45, 45, 45, 46, 46,
              47, 47, 50, 50
           Supporting       assistance    56, 57, 58, 58, 60
           Training      programs 52, 52, 53

         Health,  Education   and Welfare,
           Department   of 24

         Labor,   Department    of 27