Status Report on GAO's Reviews of the Targeted Export Assistance Program, the Export Enhancement Program, and the GSM-102/103 Export Credit Guarantee Programs

Published by the Government Accountability Office on 1990-02-21.

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

                        United States General Accounting OflIce

For Release               Status  Report on GAO's Reviews Of the Targeted
on Delivery
Expected    at            Export  Assistance  Prqram,    the Export
9:30a.m.    EST           Enhancement Program,    and the GSM-102/103 Export
February    21,     .     Credit  Guarantee  Programs

                          Statement      of
                          Allan    I. Mendelowitz,       Director
                          Trade,     Energy,    and  Finance    Issues
                          National     Security     and International      Affairs
                          Before    the
                          Cohmittee'on    Agriculture,        Nutritian,    and
                          United   States  Senate

GAO/T-NSIAD-90-92                                                          GAO Form l@ (12,87)
Mr. Chairman and Members of the Committee:
     I am pleased to be here today to discuss                                  with you the status
of   our   ongoing work on              several          programs administered           by the
Department of Agriculture's                       Foreign Agricultural              Sentice       (FIG):

(1) the Targeted Export Assistance                              Program,      (2) the Export
Enhawsmerit Program, and                   (3)     the        GSM-102/103     Export    Credit
Guarantee Programs.               All      of these programs have been                   part      of the
effort     to increase       U.S. agricultural                     exports.
                                                                 In the course of our
work, we have identffied                  program management problems which need to
be addressed.          The new leadership                      at the U;S.. Department of
Agriculture         is taking       a constructive                 approach to the management
problems      GAO    identified          and is          in the process of taking               responsive
action.       For    example, it has developed proposed regulations                                     for the
Targeted Export Assistance                       Program and the Export Enhancement
Program to'make them more structured                               and open.    It is also
reviewing      a proposed FAS reorganization                           to improve management of
FAS operations.           Despite these actions,                       problems still          exist.      I
would now like         to discuss           in more detail              the three      above     cited
export     programs.


         As requested      by Congressman Schumer, we are reviewing                                 the
extent     to which FAS has implemented the recommendations made in our
May 1988 report          on the Targeted Export Assistance                             (TEA) Program.
                                                                                                                    .i.          _.   __   .--4--.

S ince th a t tim e ,             FAS    h a s ta k e n ste p s to address s o m e o f o u r
concerns, such as fo r m a lizin g                         its         a p p lication         procedures,
d e v e l o p i n g evaluatio n              g u idelines, a n d requiring                      th a t    evaluatio n
p lanning b e incorporate d                      in th e activity   p lans.                      It a lso
esta b lished          a n evaluatio n               branch          a n d c h a r g e d it     w ith
responsibility                for clarifyirig              evaluatio n            r e q u i r e m e n ts a n d working
w ith th e c o m m o d ity d ivisions                    in tracking              evaluatio n            results.             In
a d d itio n ,       FAS    h a s d r a fte d        p r o p o s e d regulatio n s             for th e T E A p r o g r a m
w h ich    are       currently          u n d e r O M Breview.

          O u r current review h a s s h o w n ,. h o w e v e r , th a t F A S still                                      does

n o t h a v e a n a d e q u a te system o f internal.controls                                     to e ffective ly
m a n a g e th is      program.              G u idelines            fo r   th e p r o g r a m a r e n o t clearly
u n d e r s to o d    by    p a r ticip a n ts        a n d several h a v e expressed c o n fusion,
p a r ticu larly           in such areas as c o n tractin g                         o u t, a u thorized
e x p e n d i tures,        c o n trib u tio n s ,       a n d evaluatio n              r e q u i r e m e n ts.           M inim a l
d o c u m e n ta tio n exists            o n m a jor p r o g r a m decisions,                     leaving         FAS

vulnerable            to q u e s tio n s o f a c c o u n ta b ility                 a n d fa irness.     T h e r e is
little       coordinatio n              of    fu n d ing a n d activities                  b e tween th e T a r g e te d
E x p o r t Assistance a n d C o o p e r a tor Foreign M a r k e t D e v e l o p m e n t
p r o g r a m s , e v e n th o u g h a p p r o x i m a te ly h a lf o f th e T E A p a r ticip a n ts
a lso p a r ticip a te            in th e C o o p e r a tor p r o g r a m .

          F A S exercises m inim a l oversight                              o f th e p r o g r a m .       T o d a te , th e
n e w evaluatio n             section h a s d o n e little                     to track         a n d a n a lyze
evaluatio n           results,          a n d is n o t p lanning to evaluate th e success o f

  TEA overall.           Under the proposed reorganization,                     a new and expanded
  Office      of Planning     and Evaluation         would be established.

            Based on our work to date,           we believe        that        there may be an
  opportunity      for     FAS to better      utilize       its   resources         and to improve
 the management of its           market development programs.                      By combining
 the TEA and Cooperator           programs,         FAS    would be       in    a better position
 to more effectively           manage its      programs and make more efficient                    use
 of   its     management resources.           This is an issue we are currently


            Our review of the Export Enhancement Program (EEP) is being
 conducted at the request            of the Chairman, House Committee on
‘-A'giiZulturet     Congressman Conte, the Ranking Minority                          member of the
 House Committee on Appropriations;                     and Congressman Schumer.              It
 covers three major areas-WEEP program activity,                               external   effects I
 and administration.

        On Febmary      12, 1990, we issued a fact sheet which provides
 information       on how the EEP operates and on the nature and extent                               of
 the program from its           inception.       This fact        sheet includes           data on
 the sales value of commodities                sold and delivered                under the
 program, benefits           to U.S. exporters            in the form of bonuses
 associated       with these sales,          countries       importing         commodities    under

the program;' hnd exporters                  participating             in the program.            fn
addition,       on February 7, 1990 we issued a letter                              report     to the        FAS

Administrator           on apparent program bonus overpayments.                               We are now
in the process           of finalizing             a report     on the changing role                 of the
EEP, its       effect     on world agricultural                 trade,         and the need       for

program operation             and management improvements.*

       The EEP has contributed                     to increased         U.S. agricultural
exports,       particularly         wheat, in many countries,                      including      the
Soviet Union, China, and those in the Middle East.                                        The extent          of
its   contributions,             however, is difficult                 if     not impossible         to
quantify       because of the many factors                     that         influence     exports.

       Although         in its     early     years the EEP increased                    the cost of
subsidies       for the European Community (EC), it has neither                                   deterred
the EC from using subsidies                       nor hurt     its     share of the world market.
Nevertheless,           we believe         that     the EEP has been instrumental                       in
bringing       the EC to the negotiating                   table,           and should continue              to be
available       as a U.S. trade             policy     tool     until         agreements are reached
on agricultural           subsidies.

       The effects         of EEP'are being felt                     by other,U.S.         competitors,
specifically        Australia,         Argentina,            and Canada.           While EEP was
designed to challenge               subsidizing           competitor           nations,      particularly
the European Community, the abovementioned countries                                       have been

adversely      affected     both in terms of lower prices                             for their
commodities and in reduced market shares.

      Administration         of the EEP is a complex and cumbersome
process.       In response to issues we raised                       during       recent           House
hearings     and those addressed in the Department of Agriculture's
Inspector      General's     report      on the EEP (Audit                 Report No. 07099-180
HY) t FAS has been working to improve the program.                                      For      example,
criteria  for determining the overall program level                                     and for
selecting      commodities         and countries              to target        for EEP sales have
been revised      and were published                in the Federal              Reuister           on November
27, 1989.       In addition,         FAS recently              drafted     proposed regulations
dealing     with EEP operations              and is preparing              written            policies        and
guidelines      to address borne of the following                         problems:

-- EEP proposals          have been processed through                      three        separate
   divisions      in FAS and filed             in a variety              of ways.             FAS does not
   have a central          point     where proposal              progress        is documented and
   controlled       from submittal            to approval           or rejection.                  A
   centralized       tracking        system would allow                  FAS    to provide               a full
   history      and current         status     of       any    proposal        when an inquiry                is

-- Price and bonus calculations                     are not adequately                  documented: it
   is currently       difficult        to determine              from available                records

   whether bonus payments have been excessive.                                    '

-- FAS has established               qualification           requirements          for exporters
    wishing        to participate        in-P.            However, FAS is not routinely
    verifying        certain      information           provided by the exporters.

-- FAS has lacked the internal                    controls         necessary to ensure that
    exporters        do not get bonuses for shipments in excess of the
    aaou,lt'stated        in the contract               agreement.

         On February 6, 1990, the                FAS    Administrator        testified     before
your Subcommittee on Domestic and                        Foreign    Marketing        and Product
Promotion.          His-testimony       highlighted            recent     program changes which
address issues raised              by GAO and the OIG.                  We intend  to review
these changes and the proposed regulations                              to evaluate the need for
additional         improvements.

         The EEP remains an important                   trade policy        tool    because
unilaterally         abandoning it would weaken the U.S. negotiating
position       with the EC.         In today's          tighter     wheat market,        the EEP is
appropriately         being used more selectively.                      However, in light          of
continuing         EC export     subsidies,        it     is important       to.fund     EEP at
levels     adequate' to maintain             the program's          credibility        as a trade
policy     tool.      If market conditions                change, the EEP could again be
used aggressively,             potentially       increasing         the cost of the EC's
subsidy program and applying                 pressure         on others      to negotiate.

      Our current           review      of the GSM-102/103 Export                 Credit         Guarantee
Programs was requested                by the Chairman,           Subcommittee            on Tobacco
and Peanuts,          House Committee on Agriculture.                     On numerous
occasions       during      the past two years,             we have reported              on the
Commodity Credit            Corporation's           (CCC) Export       Credit      Guarantee
Programs,       referred      to as GSM-102 and GSM-103.                   Each time we
discussed       the need      for     improved program management.                       Today I am
pleased     to say that         FAS     officials       have taken some action                   on our
concerns.        However, we believe                more needs to be done.

      FAS officials           are now more accurately                 accounting          for
outstanding       guarantees,           and they are reviewing             participants
compliance       with      program regulations.                 Other ways to improve the
management of the program could                       include     physically       verifying         that
only U.S. agricultural                products        are   being exported,             taking
suspension       or     debarment actions             against     participants           violating
program regulations,                better    defining       commodities         that     are eligible
for program       coverage,          and improving          the timely     handling             of
revisions       to GSM documents when requested                     by program participants.

      When we testified               on the GSM programs last                 November, before
House Agriculture             Subcommittees,           we noted that       a major
participating           financial       institution         was embroiled         in controversy
over its      unauthorized           loans to Iraq.             Repayment of many of the
 unauthorized          loans is guaranteed by CCC under the                           GSM   programs.            In
 light     of the circumstances             surrounding            the controversy,              we   believe

 that     FAS may want to examine the loan exposure of individual
 financial       institutions        participating            in the programs and assess the
 potential       impact on CCC's guarantee                   liability.             In response to a
 request      by the Subcommittee on Criminal                       Justice,         House Committee on

 the Judiciary,          we will     be reviewing           this     issue.

          In your letter        you specifically              asked us to comment on the
 issue of a loan loss reserve                    for     the CCC. As we have reported                       in
 recent      years,     our opinion       on the financial                 statements       of CCC is
 gualified.because           CCC has not established                      in its     financial
 statements       an allowance          for the uncollectible                 portion       of
 outstanding          loans to countries               experiencing         financial       difficulties,
   We. estimate
. ..\   -1      that cumulative losses on such loans as of September
   30, 1988, range from $5.6 bi&lion to $8.8 billion  on loans
 outstanding          of $16 billion.            Also,     we estimate             additional
 cumulative       losses of $2.3 billion                  to $3.5 billion             on guarantees             of
 outstanding          loans to foreign           countries         amounting to $6 billion.
 Our understanding           is that      CCC is considering                 including          an allowance
 for these losses           in its      fiscal         year 1989 financial              statements.             In
 addition,      the Department of Agriculture                       is considering              recognizing
 the loss in its           consolidated          annual report             for 1988 due out this
          The situa'tion             of   the CCC with respect         to loans and loan
guarantees            to foreign          countries     is analogous to the situation                   of
the U.S. Export-Import                     Bank which makes direct             loans and provides
loan guarantees                to foreign       purchasers     of U.S. exports.             For     a
number of years                 GAO issued adverse opinions                 on the financial
statements            of the Export-Import              Bank because the bank had not
created         a    loan loss reserve.               Last,month     the Export-Import             Bank
corrected            this     problem when it          established      a $4.8 billion            reserve
to cover possible                    losses on 40 percent          of its     outstanding         loans and
loan guarantees.

          Mr.       Chairman, this          concludes my statement..             More detailed
information            on the three programs is contained                      in the attached
appendices.                 I will     be happy to answer any questions               you may have.

APPENDIX I                                                                                APPENDIXI


       Our review of the TEA program, requested by Congressman
Schumer,       examines the extent       to which          FAS     has implemented the
recommendations made in our May 1988l report.                            The TEA program was
mandated by the Food Security                 Act of'1985          to cdunter  or offset the
adverse effects         of foreign     competitors'           unfair          trade   practices     and
thereby      increase      U.S. agricultural            exports.
                                                         Since the legislation
did not specify         how this     program should be carried out, the Foreign
Agricultural       Service       (FAS) decided to establish                    a market
development 'assistance            program similar           to that          of the Cooperator
Market Development Program,             for     commodities and products                   adversely
affected       by unfair     trade practices.

      This program is now in its                fifth      and final           year   of funding.
In each year of the program, the total                      authorized           amount was
allocated.        For   fiscal     years 1986 through              1988, the annual
allocations       amounted to $110 million,                and     for    1989 and 1990, they
amounted to $200 million.              Approximately             46 not-for-profit
agricultural       organizations       have participated                 in    each year of the
program and more than 200 for-profit                      private        firms    have received
benefits       under the program each           year.

1Review of Taraeted Emort              Assistance          Prosram (GAO/NSIAD-88-183).
APPENDIXI                                                                      APPENDIX I
       Over 50 percent        of TEA funds for           fiscal     year 1989 were spent
in Asian markets,         with promotions          in Japan alone accounting                      for 35
percent      of TEA funds.         European'countries           were the next largest
targeted     markets,     with promotions          in the United Kingdom accounting
for   over 12 percent        of    TEA funds.         In each     year     of the program, the
top 15 commodity organizations,                 ranked by amount of TEA funds
recei&,       -accounted for over 60 percent                 of TEA' funds.           For        fiscal
year 1989, the branded portion                of the TEA program,              in which
activities      are aimed at establishing               consumer loyalty          to a
particular      brand,    accounted for approximately                    35 percent         of    the
TEA allocation.          The generic        portion     of   the program,        in which
activities      are designed to increase               the total         market for that
commodity with no particular                brand being promoted,             accounted for
the remainder.

TEA Prouram Administration                Lacks Sufficient
vanacrement Control        and Accountabilitv

       In our May 1988        report       on TEA, we made several
recommendations relating                to management control             and accountability,
In the follow-up         review which we are now concluding,                     we examined
the extent      to which FAS has implemented our recommendations.                                    FAS
has made some improvements in program administration;                             however, we
remain concerned that             FAS    does not yet have an adequate system of

APPENDIXI                                                                                   APPENDIXI
internal        controls      and is not exercising               sufficient          oversight of the

   Jnadecruate documentation
         FAS    has not been sufficiently                documenting program decisions,
As we noted in the May 1988                  report,       FAS   was not documenting the
funding        allocation      decision      process to clearly                show how the
funding        criteria      were applied       and prioritized           and the            basis     for
those decisions.

         Our current         review indicates           that     FAS   continues         to make major
funding        decisions      based on limited           written       information             and relies
on its      marketing        specialists       to verbally         explain       the suitability                   of
the applicants,             the rationale        for the recommended funding                         amounts,
and other major program decisions.                         The marketing              specialists            are
primarily         responsible      for     reviewing       the applications              to the TEA
program and writing              summaries on each application.                         These
summaries, which average four pages in length,                                 include         a   brief
discussion         of what the applicant               proposes to do with the requested
funding        amount.       These~summaries are then forwarded,                         with a
recommendation from the Assistant                       Administrator           for Commodity and
Marketing         Programs, through the Administrator,                         FAS,     to     the
Undersecretary             for International           Affairs     and   Commodity             Programs for
final      approval.         We have been       told     by FAS officials               that       these

 APPENDIXI                                                                                 APPENDIX I
 summaries are the main source of documentation                                  for their TEA
 allocation       decisions.

          A review    of all     TEA summaries for                   funding     for    fiscal      years
 1989 and 1990 provides             little      insight         on how         FAS    applies      and
 prioritizes        the criteria.            We recognize             that     the decisions             are
 based not only on the application                      criteria             but also on such
 factors       as balancing      the needs       of     all     commodity division                 requests.
 FAS officials        told     us that       they do not have time to fully                         document
 program decisions.             We believe       that         such documentation                is essential
 to ensure accountability                and fairness.                 As currently            written,        the
 summaries do not address the importance                              of the various            criteria         to
 funding       decisions.       For example,           some participants                that      lack     prior
 market development experience                  were     denied participation                     in the
..zcogcam while       others     with a similar               lack      of    experience‘received               TEA
 funds.        This is not to suggest that                    only those with experience
 should receive         TEA tunds,        but that       sufficient             rationale         should be
 provided       for approving        or denying participation                        and to explain
 variations        in funding       amounts approved.                   Other criteria           which are
 mentioned most often            but the importance                   of which seems to vary
 depending on the applicant                  are (i) the administrative                        capability          of
 the organization            to carry     out the program,                   (2) the amount of damage
 suffered       from unfair      trade practices,                (3) the extent             to which the
 organization        represents         U.S. agricultural                product       interests,          and
 (4) whether the commodity or product                          is in adequate supply.

              .f    ..,

APPENDIX I                                                                                       APPENDIX I

       The TEA summaries were improved for fiscal                                     year 1990 by
incorporating,             on a more consistent                 basis,     information          on
evaluation         results     and findings              from the        FAS   Compliance Review
Office.      However, not all                  summaries included              this     information        and
we do not know whether there were no evaluation                                       results    or
findings     from the Compliance Review Office                             or whether they were
not significant             enough to be included                  in the decisions.
                                                                            Since FAS
officials      told       us that        these summaries are the main source of
documentation             for the funding           allocation           decision       process,      we
believe     that      sufficient             information        should be included              to enable
an objective          observer       to understand              how the process              works and why
decisions      are made.                 -

       These summaries              do       not include        information           on funding
received     through         the Cooperator             program.        Approximately half               of
the 46 not-for-profit                TEA participants               also receive funding
through     the Cooperator               program and we say little                     coordination
between the two programs.                       Also,        for fiscal        year 1990, the TEA
summaries do not include                      information        on past allocations,                 approved
budgets,     expenses, and contribution                         amounts for each participant.
While this         information           may be discussed            in closed door meetings
with the Assistant             Administrator,                 we believe       that     it    should be
included     in the summaries to ensure that                             the histories          of the
applicants         are apparent.

APPENDIX I                                                                                    APPENDIXI

          Documentation        is an essential           part     of     an adequate system of
internal      controls.         We believe        that    better         documentation         of     the
funding      process and of other major program decisions                                 is needed to
improve accountability.

      Particinant         contributions

          We continue       to be concerned that                FAS is not requiring
participant         contributions         and is not documenting the rationale                               for
the amount and type of contributions                        participants             are encouraged to
provide      to the program.             Contributions           may be in the-form              of    cash
or goods and services. and may come from a third                                  party    as well      as
from the TEA participant.                   FAS officials          continue          to stress        that
contributions            are not legislatively            reguired             and that    a uniform
standard       cannot be applied            to TEA participants,                  .since their
ability      to contribute        varies.         We believe            that     since    FAS is

providing       significant           funding   to the participants,                  FAS officials
should explain            in writing      how they determine                   contribution         amounts
for    each participant.

          FAS officials        told     us that     they are trying               to establish         a
greater       degree of consistency               in setting           contribution         amounts
without       limiting      participation;          however,           these rates        continue         to
vary substantially.               Several FAS officials                  told     us that     beginning

APPENDIXI                                                                                   APPENDIX I
with fiscal          year 1989, FAS policy              for the generic              portion of the.
TEA program was that            all     TEA participants              should contribute           at
least     5 percent      in cash.        However, there              are no formal guidelines
on this.        In the branded portion                 of TEA, reimbursement                 rates vary
among commodities.            While FAS officials                   have said that           they are
attempting       to establish          a 500percent           reimbursement           rate    for all
private      firms     promoting       their    own labels,           some firms         in practice
are receiving          a preferential          reimbursement           rate    and     FAS    has yet to
provide      a suitable      explanation         for the disparate                  treatment.

    TEA uuidelines

        During the first           3 years of the program, changes in the
guidelines      and updates on program operations                        fjere primarily
communicated to the TEA participants                          through the Planning,              Review,
and Operations          Committee (PROC).of the U.S. Agricultural                              Export
Development Council.             We criticized               FAS’    use of this        committee in
our May 1988 report           because it         did not include              all     TEA
participants.           The Council has since disbanded this                           committee and
no alternative          formal mechanism for communicating with
participants          has been established.

        Agriculture's        OIG, the Office             of Management and Budget, and
GAO had concluded that                FAS should change the TEA guidelines                        to
regulations.           We believe       that    this    would be a step toward improving

APPENDIXI                                                                     APPENDIXI
program administration.                 FAS officials        in the past had told us that
they did not believe            that      regulations       should be established                  because
flexibility       is necessary when managing a market development
program.       However,       GAOmaintains        that      establishing             regulations         in
place of the guidelines                would eliminate        much      of    the participants'
confusion      which is caused by changes made with little                               notice     and by
the differing           guideline      interpretations        offered         by program
specialists.             The establishment        of regulations              would improve
communications between              FAS    and the participants                by     providing     an
opportunity       for public        comment.

        'Currently,       FAS has considerable             discretion          in the operation               of
its   market development programs.                   Formal regulations,                 requiring        FAS
to evaluate       all     comments, along with adequate documentation                              of
program decisions,            could counter       the perception               that     some
commodity organizations                are favored       over others.               Because some
commodity organizations                have had long-term         relationships              with FAS
and because of the increased                  funding      provided          in FAS programs,            FAS
needs to avoid even the perception                      of favoritism.

        Because of these reasons and other concerns about program
management raised            by GAO and OIG,         FAS    has drafted             proposed
regulations       for the TEA program and has submitted                             them to OMB for

 APPENDIX I                                                                                      APPENDIXI
 FAS Efforts          to Evaluate            the TEA Procram

          Our May 1988 report                pointed        out that      (1)    FAS    was not
 uniformly         requiring       participants             to evaluate         their    activities,        (2)
 the TEA guidelines               provided       no guidance on how to make
 evaluations,          and (3)         FAS   was not systematically                 tracking        and using
 evaluation         results.

          Subsequently           FAS    established          evaluation         guidelines,         effective
 for     fiscal     year      1989.       To indicate         its     commitment to evaluating
 market development activities,                        FAS    has been delaying             approval       of
 participants         @ activity          plans until         those plans include              an
 explanation          of how the participants                  will     measure the effectiveness
 of their         activities.           While the new guidelines                   indicate      types of
"&l~ations            and who is responsible                  for     conducting        them, they are
 not specific           enough to prevent              confusion        among many participants.
 FAS application              of the evaluation              guidelines         does not appear to be
 consistent.           For example, some participants                       must submit quarterly
 evaluations          while      others      are required            to submit them only once a
          In August 1988, FAS established                           an evaluation        branch within
 the Marketing             Programs Division.                This branch was over a year old
 before      it was fully          staffed      with        6 professional          positions.            FAS
 established          this      branch to oversee program evaluation                          of the TEA

APPENDIX.I -- '                                                                                APPENDIXI
and Cooperator              programs.          While it      did establish              general evaluation
guidelines,          this     branch has done little                  to track          and analyze
evaluation      results.           This branch has no substantial                               coordinating
or enforcing          role with         respect        to the evaluation                requirements,          and
there     is no indication              that      it   is plaking              to evaluate        the success
of the TEA program overall.

        The Department of Agriculture                         is reviewing             a proposed FAS
reorganization              which would include               establishing             a new office          for
planning      and evaluation             within        the Marketiag.Programs                    Division.         We
believe     such an office              should take the lead in clarifying
evaluation      requirements,             monitoring           compliance with such
requirements,          analyzing         the results           of   all        participant        evaluations,
conducting      evaluations         ,of the overall                 success of the program, and
doing cross-commodity              and other types of analyses.    This office
should provide              guidance to both the commodity divisions   and the
participants          on using evaluations                   as an oversight             and management
tool.      By continuously              analyzing           the impact of the TEA and
Cooperator      programs in the various                       markets,          FAS    may be in a better
position      to alter         program direction               to    reflect          current     market
conditions.             '

        FAS continues           to rely         too heavily         on an increase               in exports
as proof      that      the TEA program is a success.                            While some level             of
increased      exports         would be expected as a result                           of a large      infusion

APPENDIX I                                                                                      APPENDIXI
of resources             into     a targeted      market,     a simple increase                in exports--
which can be caused by a large number of other variables--is                                          not
sufficient             proof     of the success       of    the program.

Combine the TE.A and Coonerator                      Prourams

             One way for         FAS    to improve the maiagement of its                   market
development programs could be to combine the TEA and Cooperator
programs.              Combining the two programs would probably                          be a more
efficient             use of FAS resources.            Marketing           specialists         and 'other
FAS      officials        presently         spend their      time dealing          with the two
programs separately                    since they operate under different                      deadlines.
Little         coordination            exists   between the two programs.                     When TEA
funding         levels         are being discussed,          there     is no documentation                on
Cooperator             funding     received      by the applicant            or   on    the applicant's
performance             in the Cooperator          program.          FAS    officials         said that
their         staff     is so busy with day to day operational                          and
administrative                 issues that      they have little            time for documentation.
Combining the two programs,                      or possibly         establishing         a new program
to replace             them, may help to overcome such inherent                          problems.

         A    combined TEA and Cooperator                  program would be able to
maintain          the same types of activities                  (consumer promotion,
technical             assistance,        and trade    servicing)           but would continue             to
tailor         them to the commodity or product                      being promoted.             Such a

APPENDIX I                                                                                APPENDIXI
combined program could provide                      more complete and accurate
information          to management cozerning                  the   scope    of market
development activities                worldwide.

         Finally,        combining both programs could help prevent
duplication          of effort,       if   all   activities         were under one program
with one Ket of criteria.                   This,     coupled with other           corrective
action     on the part            of FAS concerning           management oversight,           would
inevitably          lead to a more efficiently                 managed and more effective

         Before the two programs could be combined, the following
issues would need to be considered:

-- The merits            of using generic           and/or branded promotion               and the
   percent          of   total     funds that       should be allocated           to each type.

-- The amount of emphasis to place on exports                               representing      high
   value products                and/or bulk commodities.,

-- The priority             for providing        funds for new market development
    and/or maintaining               established         markets.

-- The merits            of allowing       large,     well     established      private      firms    to

APPENDIX I                                                                    APPENDIX I
   participate     and/or      focusing         resources   more on helping     small,
   new-to-market      firms        establish      a foothold   in the market.

-- The appropriate      balance in the program between compensation for
   unfair    trade practices           and market development.

-- The establishment          of    criteria      for the amount of time that
   participants      could remain in the program before                they would be
   expected to maintain             their      market presence on their       own.

Appendix II                                                                     Appendix II

                             E EXPORTENHANCEMENT

           Our current   review is being conducted at the request                 of the
 Chairman, House Committee on Agriculture:                  Congressman Conte, the
 Ranking Minority        member of the House Committee on Appropriations:
 and Congressman Schumer.            It updates and expands upon the issues
 addressed in our March 1987 reporta.

           Since 1987, conditions        under which the_ EEP operates           have
 changed considerably.           The number of       targeted      countries    has
 increased       from 49 to 65.      Total     EEP sales have risen        from $1.3
 billion      to over $9 billion         as of February 8, 1990, and the market
  value of EEP bonus awards has grown from $868 million to over $2.7
.-*, . *'
  billion.  Last year, the world supply of wheat became relatively
 tight      due to adverse weather conditions            and decisions         by some
 producing       countries   to reduce production.              World prices     for wheat
 have risen       as a result.      The U.S. government is now using EEP more
 selectively,       and it   continues       to emphasize the program's           importance
 as a trade negotiating          tool.         .-.

           Preliminary   findingsresulting  from our EEP review were
 presented       in our July 31, 1989 testimony before the Subcommittee on

 21mDlementation of the Affricultural                Exuort Enhancement Program
                    3   .   .   ,

A p p e n d ix II                                                                                           A p p e n d ix II
W h e a t, S o y b e a n s , a n d F e e d G rains, H o u s e C o m m itte e o n Agriculture.
In S e p te m b e r 1 9 8 9 , th e D e p a r tm e n t o f Agriculture's                           O ffice      of
Inspector           G e n e r a l ( O IG ) issued a report3 w h ich c o n ta i n e d
information             o n E E P 's a d m inistration             a n d o ffe r e d       r e c o m m e n d a tio n s for
strengthening                   p r o g r a m e ffectiveness.
                                                          O n November 16, 1989, we
testifie d          a g a in o n o u r E E P work to d a te b e fo r e th e S u b c o m m itte e s o n
D e p a r tm e n t O p e ratio n s ,          R e s e a r c h a n d F o g e ign Agriculture;                 Tobacco
a n d P e a n u ts; a n d W h e a t, S o y b e a n s , 'a n d F e e d G rains, H o u s e C o m m itte e
o n Agriculture.

         O n February 7 , 1 9 9 0 w e issued a letter                              r e p o r t4    to th e       FAs

A d m inistrator                o n a p p a r e n t p r o g r a m b o n u s o v e r p a y m e n ts resulting            fro m
weaknesses in internal                        c o n tro ls   over th e b o n u s p a y m e n t process.                    In
a d d itio n ,      o n February 1 2 , 1 9 9 0 w e issued a fa c t                         s h e e t5 c o n ta ining
information             o n activity            u n d e r th e p r o g r a m fro m M a y 1 9 8 5 th r o u g h
February 2 8 , 1 9 8 9 , w h ich r e p r e s e n ts th e m a jority                          of    activity         under
th e p r o g r a m to d a te .               A t th a t tim e ,     to ta l   E E P sales          were      valued a t
$ 6 .8 b illio n ,              o f w h ich w h e a t r e p r e s e n te d over 8 0 p e r c e n t.               Five
c o u n tries --the                 Soviet U n ion, C h ina, A lgeria,               E g y p t, a n d Morocco-
h a d b o u g h t a p p r o x i m a te ly 1 .4 b illio n             bushels o f w h e a t u n d e r th e

3 A u d it o f th e Foreicn Acricultural             S e n r ice E x n o r t E n h a n c e m e n t
procrram, A u d it R e p o r t N o . 0 7 0 9 9 - 1 8 H y .
4 1 N T E R N A T IO N A TRL A D E : E X D 1 : E n h a n c e m e n tP r o u r a m B o n u s
O v e r n a v m e n ts, ( G A O /NSIAD-9:.E3).
5 J N T E R N A T IO N AT LR A D E A c tivitv U n d e r th e E m o r t E n h a n c e m e n t
P rocram, ( G A O / N S I A D - 4 0 0 5 9 F S ) .

Appendix II                                                                              Appendix II
program, about 74 percent                    of the 1.9 billion              bushels sold.   The
remaining       EEP commodity          sales      were         in wheat flour,         barley,           barley
malt,    semolina,      rice,        vegetable          oil,     sorghum,       frozen poultry,             table
eggs, poultry        feed,      and dairy         cattle.          Seventy-three exporters                      had
received    over $2.6 billion                 worth      of     surplus U.S. agricultural
commodities as bonuses.                     Four exporters-    Cargill,             Continental,
Louis Dreyfus,        and Artfer-had                each received over              $100 million                in
bonuses (60 percent             of    all     bonus      awards):      Cargill      and Continental
each received        over $400 million                  in bonuses.

        In response to concerns raised                         by   GAO     and OIG,    FAS    has been
working to improve the program.                  For example, criteria                        for
determining       the overall          program level and for selecting                         commodities
and countries        to target         for EEP sales have been revised                         and were
published       in the Federal              Reffister      on November 27, 1989.                    In
addition,       FAS recently          drafted       proposed regulations                dealing           with
EEP operations        and is preparing                  written      policies      and guidelines                 to
address some of the identified                      problems.
                                                          We are now in the process
of finalizing        a report         on the changing role of the EEP, its effect
on world agricultural                trade,      and the need for program operation                               and
management improvements.                     As part       of this     effort,         we intend           to
review the proposed regulations                         and program changes.

Appendix II                                                                                             Appendix II
E5;p's ImBact on U.S. Aaricultural                               Extorts

         In    the last     several      years,            U.S. agricultural                exports          have
increased        significantly.           However, as we previously                             reported           it   IS

difficult        to determine         exactly          how much of these increases                            were due
to EEP.         EEP's effect         cannot      be easily                 isolated      from that           of other
policy        an& economic variables                  which have contributed                      to increased
agricultural         exports--lower             loan rates,                 availability          of    export
financing        and other U.S.          government                 assistance,          depreciation              of the
U.S. dollar        against        major competitor                   Currencies,           production
shortfalls,        and other         changes in global                      economic conditions.
Recent studies            estimate     that      U.S. agricultural                      exports        have
increased        due to EEP, but they differ                              on the magnitude.              The
additionality         estimates        range from 2 to 30 percent                               and    are    greatly
influenced        by the assumptions made and the time period                                          covered.

         Furthermore,'       the fact          that         the EEP is "targeted"                     adds more
complications          in determining                its        effect.        While exports            may
increase        in the targeted          markets,                the overall           effect     on U.S.
exports        worldwide     is uncertain.                      Competing suppliers               may respond
by displacing         potential        U.S. sales in untargeted                            markets.           In
addition,        as the OIG concluded,                      non-targeted              countries        may have
reduced their         U.S. purchases,                 thereby             creating      the need to target
those countries            to regain          lost         market shares.

Appendix II                                                                                   Appendix II
       EEP does appear to have been critical                          to making sales in
certain     markets,     such as wheat sales to the Soviet Union and
China.      During periods         of surplus         supplies        on the world market,
these importing         countries      took advantage of competition                          among
exporters     to obtain       the best possible               price    and terms.             W ithout
EEP to make U.S. exports              competitively            priced,         it    is highly
unlikely     that     these sales would have taken place.                             In addition,         l

officials     in Algeria,         Egypt,    Jordan,       and Iraq told               us that     EEP was
essential     to enable U.S. exporters                 to make sales because these
countries     are "price       buyers"       (i.e.     they buy at the best price
available     regardless       of the source).                They also noted that many EEP
sales depended on the availability                     of U.S. export                credit

Chancres in EEP Tarcretina            Strateuies

       The EEP was designed to be targeted                        and discretionary               rather
than an across-the-board              program.         Proposals         for        EEP subsidies
were to "target         a specific         market to challenge                 only the
competitors         who overtly      subsidize        their     exports,@* namely the
European Community (EC).               Originally,            the EEP's primary               targets
were countries         that   made significant            purchases of subsidized                    EC
exports.      However,        over time the program expanded to include
countries     that     had a small EC market presence and then to
countries     where the EC was only contemplating                         a presence.              As the

  Appendix II                                                                           Appendix II
  EEP displaced         the EC in one market,                   the EC turned     to another
  country's        market,       making that          country     eligible     for EEP benefits         as
  well.      The EEP grew to 65 targeted                    countries        in 4 years.

          Perhaps the most controversial                        aspects of the EEP targeting
  strategy        were the administration's                 decisions        regarding     the Soviet
 Union.       That country           was initially          excluded from the program
f despite     the fact        that    the EC's share of the Soviet wheat market
  rose from 5 to 22 percent                   from the 1981 to the 1985 crop year.
 Agriculture         initially        claimed that          the Soviet        Union was excluded
 because the non-subsidizing                     competitors        had about a 480percent
 share of the market in crop year 1985.                 Non-subsidizers, however,
 had equal or greater                shares of other markets targeted under the
    EEP, such as Egypt, Iraq, Jordan, and Sri Lanka. The Soviet Union
. ..\ I -7
    had been excluded from the program until August 1, 1986, for
 foreign      policy     reasons.
                          It was then made eligible for EEP sales
 and has since become the largest importer under the program.

 ImDact of EEP on ComDetitors

          During our review,                Australian      and Canadian officials            told   US
 that     their     countries        have been adversely             affected     by EEP, both in
 terms of lower prices                for     their      commodities and reduced market
 shares.          Moreover,      the OIG found that while the EC's wheat market
 shares have generally                increased          since the EEP's inception,            those of

Appendix iI --'                                                                                  Appendix II
Australia,          Argentina,         and Canada have decreased.
                                                           While the OIG
noted that          the decreased market shares could be the result of lower
wheat supplies,              it     cautioned     that     the continuation             of EEP could
adversely          affect         these countries'         exports         should their         production


         Australia          has been most vocal             in its         opposition     to the EEP,
stating      that      EEP has adversely             affected        its     wheat exports.          While
Australian          government and farm industry                     representatives             and U.S.
Agriculture          officials         agree that         EEP contributed          to the depression
of world wheat prices                  between 1985 and 1988 and, consequently,                            to
the reduction           in Australian            wheat export         earnings,         there     is no
consensus on the extent                   of EEP's effect.

         According          to a recently         released      Australian         study,6        the EEP
has cost Australian                  wheat growers between $150 million                      and $238
million,      due to reduced average prices                      on wheat exports                and a
consequential           decline        in wheat production;                  The study points            out
that     in 1987 the estimated                  cost to the Australian              wheat industry
was far greater              than to the EC’s, because exports                      to EEP-targeted

%J.S. Grain Policies and the World Market, Policy Monograph No. 4,
Australian Bureau of Agricultural and Resource Economics, released
in October 1989.
Appendix II                                                                                      Appendix II
markets constituted                    a far larger               proportion      of Australia's    total

         Australian              officials        told      us that      the decline        in export
prices     encouraged producers                       to move out         of     wheat production;
plantings          fell     from about 12 million                      hectares      in 1984/1985 to
about 9 million                  hectares        in 1988/1989.            Australian        resources
previously          employed in               grain       production       flowed into        the livestock
sector     and into              alternative             crops,     such as legumes.           They
dcknowledged that                   the EEP is only one of a number of factors
contributing              to the decline                 in Australian          wheat export        earnings.
However, in their                   opinion        the EEP has clearly               had'a significant
adverse impact on Australian                              agricultural          exports.

         U.S. Agriculture                    officials        stated     that     the EEP's effects         on
wheat prices              were      minimal to begin with and were mitigated                            by the
Australian          government's               guaranteed price                mechanism and devaluation
of the Australian                   dollar       in 1985.           They attribute         recent     declines
in Australian              wheat production                 to historically           high wool prices
during     the mid-1980s,                    which lured           farmers out of wheat and into
wool production.

Appendix II                                                                               Appendix II

        Canadian officials             could      not     demonstrate       a loss in market
share directly           related      to EEP: insteas             they criticized        EEP's price
depressing       effect      and the resultant              decreased revenue from
agricultural           exports.       They also complained that                    EEP@stargeting
strstug-y      %ras inconsistent          and questioned            its    continued     use for
commodities which            were     in short          supply.     For    example, the
officials       noted that          Canada, not the EC, had established                    major
wheat markets in Iraq,                Colombia, Mexico, and the Philippines,                        yet
they were all           targeted      under EEP.           In addition,       Saudi Arabia was a
large       importer     of barley       from many sources,               not just     the EC.      When
an EEP initiative            for barley          was announced, the whole balance of
the barley        trade was upset.

        Canadian officials             also questioned             EEP wheat sales during            the
last    2 years when supplies                were 'greatly         reduced due to worldwide
drought       conditions.         In their       view,     the United States was the 980nly
game in town,"           yet it      sold EEP wheat to China and the Soviet                       Union,
the largest        importers         of wheat in the world.                 Canadian officials
viewed the use of EEP as @ 'overkilll@ in these cases.

        Despite the perceived                negative        effects      of the EEP on export
strategies,        world price,          and the balance of trade,                   Canada has
derived       some indirect          benefits.           In the last       year,     Canadian

Appendix 11                                                                              Appendix II
exports      of rapeseed oil,             or canola,       have become very competitive.
in U.S. markets partly                 because of high U.S. domestic vegetable                      oil
prices      driven     up    (or    artificially         supported)       by EEP. According          to
Canadian officials,                annual sal,es of vegetable              oil   to the United
States      have increased           sixfold.       In additi0nQJ.S.              livestock      growers
have been paying higher                 feed grain        prices,     driving      up the cost of
U.S. meat products.                 As a result,.       Canadian pork products                are more
competitive          in the U.S. domestic market.

Prouram Ooerations                 and Manauement

         We recognize         the difficulty            in administering          a program as
complex as the EEP, as evidenced by the number of procedures
required      to manage program operations,                      We-r-eviewed these
procedures        and found problems in four major areas:                            (1) the
proposal      process,         (2) price        and bonus setting,           (3) exporter
qualification,          and (4) the bonus payment process.

    prooosal         wocesg

          FAS processes each EEP targeting                     proposal     through one of three
different        divisions          depending on the commodity.                  Once these
divisions        have analyzed a proposal                 it   is sent to FAS management for
review,      and then to Agriculture's                   Under Secretary          for International
Affairs      and Commodity Programs.                    Should the Under Secretary               approve

 Appendix II                                                                                            Appendix II
 the proposal,              it     is sent through an interagency                        approval            process
 and, if      accepted,             announced to exporters.

          We found that              while      each commodity division                      tracks         its     own
 proposals,         FAS has not centrally                     track     the progress                of these
 proposals          from the moment they are received                        to the time they are
 either      accepted or rejected.                      Although        some documentation exists
 which discusses                  reasons for a proposal's                    acceptance or rejection,
 the proposal's              origin      and the time that               it     takes to move within                       the
 process cannot always be determined.                                  We believe            that     FAS should
 establish         a centralized              tracking        system which will                document the
 progress      of     all         proposals      from the time they are submitted                                  until
 the time they              are     accepted or rejected.                     This system should allow
 FAS to provide              the full         history     and current               status     of     any         proposal
*-zendan inquiry                  is made.

     Settina        nrice          and bonus levels

           Our ongoing review indicates                        that     FAS does not sufficiently
 document the specific                   figures     used
                                                        .- to calculate the final price and
 bonus levels.                   In addition,      the OIG reported that FAS '@did not have
 written      policies             and procedures         for,        or sufficient            documentation                 to
 support,      world price              determinations            and bonus calculations."                             As a
 result,      it     is difficult             for an independent                reviewer            to determine
 whether bonus payments are excessive.

Appendix II            -.                                                                               Appendix II

         FAS gathers             information        from      a   variety         of sources to use in
calculating           price        and bonus levels.               We intenriewed               a number of
individuals           who       provide      EC price        and world freight                 information           and
we reviewed documents they sent to FAS.                                    We believe           that     FAS
program officials                  receive     the information              necessary to make
informed        and effective              price    and bonus decisions;                      however,     they do
not document adjustments                      made to this             information            when calculating
price      and bonus levels.                  Although        FAS officials             prepare.price
sheets which list                  each of the        figures          used in price            and bonus
calculations;               they    do    not provide         either       narrative           or statistical
support        to    explain        how they       arrived        at    these      figures.

         The    FAS     Administrator,             in his February 6, 1990 testimony,
stated      that      FAS has developed written                        policies       and guidelines             to
calculate           bonuses.         Under these guidelines,                      any adjustments              made to
price      quotes must be documented.                         We intend           to review these
policies        and guidelines               and evaluate          whether they adequately
address the problem.

    Extorter          oualification            recruirements

         FAS has established                  certain        qualification            requirements             for
exporters           wishing        to participate            in EEP.        For example, exporters
are required            to have sales contracts                    with     importers           prior     to

Appendix II                                                                                   Appendix II
submitting       bids     on EEP sales.            However,       prior      to July        1988, FAS had
not been requiring              exporters        to submit evidence of sales contracts.
Beginning      in July      1988, FAS required                 such proof          prior    to bidding
only on EEP dairy           cattle        sales.        The recent        OIG report
recommended that           FAS define           minimum requirements                for a properly
executed sales contract                  and extend the requirement                    for proof     to all
EEP commodities.            In December 1989,              FAS    clarified          the definition         of
a properly       executed sales contract,                  but did not extend the
requirement          of proof      to sales of the other                eleven commodities
because FAS contends that                  it would cause serious                   delay in the
review and award of bonuses and would greatly                                tax existing         staff

      We believe         that      requiring       exporters       tu document the existence
of sales contracts              prior     to submitting          bids     represents         a sound
control    mechanism.            In addition,           we believe        that     FAS should
randomly verify          that     the sales contracts              are valid.

   Bonus Davment srocedures

      Our review of EEP indicated                    .that internal              controls     over the
bonus payment process were not adequate to ensure that                                       bonus
payments     were     properly          made.    During our review,                we examined
contract     files      kept by the Agricultural                 Stabilization              and
Conservation         Service      (ASCS) in Kansas City.                  We also obtained            and

Appendix II                                                                            Appendix II
examined a copy             of    the data base jointly                 developed by FAS and ASCS
which contains             contract        and payment information                 and is maintained
by ASCS in Kansas City.                     We found cases where exporters                    had
apparently         received         overpayments.               These overpayments were made
because FAS did not have procedures                              set up to identify          and verify
when     an    exporter      had received                the maximum bonus amount allowed
under the contract.                     We recommended that             FAS develop sufficient
internal        controls         over     the bonus payment process to safeguard
wainst         future      overpayments.

The Future of EEP

         In today's         tighter        wheat market,             we believe      that   EEP is
appropriately           being used more selectively.                          It   remains an
important        trade policy             tool      if    for   no   other    reason than that
unilaterally            abandoning it would weaken the U.S. negotiating
position        with the EC.              However, because of large,                  continuing      EC
export        subsidies,         funding         EEP at adequate levels              is important     to
maintaining         the program's                credibility         as a trade policy        tool.    If
market conditions                change, EEP could again                 be    used aggressively,
potentially         increasing           the cost of the EC’s subsidy program and
applying        pressure         to negotiate.

    Appendix III                                                                         Appendix III

                     GSM-102/103 EXPORTCREDIT GUARANTRR

           We are currently       conducting         a    rev+ew     at the request        of the
    Chairman, Subcommittee on Tobacco and Peanuts, House Committee on
    Agriculture,       of the Commodity       Credit        Corporation's          (CCC) GSM-102
    and 103 Export Credit         Guarantee Programs.           These programs are
    intended       to maintain   or increase         U.S. agricultural  commodity
    exports     by guaranteeing      exporters           or their      assignees that       they will
    be repaid       for credit   sales made to purchasers                   in foreign     countries.
    Should a foreign        buyer.default,CCC will make good on the payment
    and then try       to recoup the loss from the foreign buyer.

           The two CCC programs are administered                      by    the Foreign
    Agricultural       Service   (FAS).      In June 1988, we issued a report7                      on
    these programs in which we concluded that                        FAS    was not adequately
    managing them.         More specifically,             we stated        that   CCC had not
    adequately       (1) accounted for       outstanding            guarantees,      (2) ensured
    that   guarantees      were being used for U.S. agricultural                      commodities,
    and (3) provided        guidance to program users.                     We recommended that
    the Secretary       of Agriculture       direct        the General Sales Manager, FAS,

    7Corrunoditv Credit CorDoration's            Emort         Credit       Guarantee Programs

 Appendix III                                                                       Appendix III
 -- enforce      compliance with the requirement                    that    exporters submit
     complete reports           of exports      to ensure accurate            accounting      of
     outstanding       guarantees;

 -- design;      develop,       test,     and implement internal             controls,
     including       random on-site         verifications,          to ensure that         loan
     guarantees       are used to obtain U.S. agricultural                        commodities;

 -- clarify      program regulations            with specific          definitions        for a
     U.S. agricultural           commodity and a firm              sale,    and require
     acknowledgement of these requirements                        on guarantee
     applications:        and

  -- provide timely and accurate decisions on document revisions
.a*, . -1
      requested by exporters 'or their assignees.

       We are pleased to report                that    FAS      has taken action         on some of
 our recommendations.  However, we believe that further FAS action
 is needed to address our original concerns about implementing
 internal     controls      and defining        an-agricultural            commodity.       Actions
 are still     needed on our concerns about the timely                        handling      of
 revisions     to   GSM   documentation.             Finally,      we have comments to make
about the participation                 of U.S. financial          institutions       in the GSM

Appendix I'r'I-‘ '                                                                Appendix III
Actions      Taken on Previous GAORecommendations

        FAS has acted on our recommendations to improve the
accounting       of outstanding           guarantees     and to establish        internal

        When Fxporters           fail   to submit the required          export    sale loan
repayment schedules for GSM-102/103 guarantees                         outstanding,       the
Agricultural          Stabilization        and Conservation         Service    (ASCS)
estimates       its    own repayment schedules.             ASCS officials,        who
perform CCC's accounting                ser?lices,     use the terms identified            on the
available       GSM sale documentation               and the current       London Interbank
Offer      Rate (LIBOR) plus one quarter                of one percent,        to compute the
repayment schedule.               If the official        repayment schedule is later
received,       ASCS will        make adjustments        as necessary.         According     to
ASCS officials,              only minor adjustments        have been required           to date.

        FAS has established              some internal     controls       over the programs.
Effective       October 1, 1988, when exporters                register       a sale,    they
must certify          that     none of the value of that            sale is foreign.         The
validity       of the certification           statements     will     be spot-checked        by
the FAS Compliance Review Office,                     which has been given additional
resources       for reviewing           compliance with this         and other GSM-102/103

Appendix III                                                                    Appendix III
         We believe       that     the actions           taken by FAS are important steps
in improving          management       of    the GSM-102/103 programs.        However,
much more is needed before                   firm control       over program operations               is

Further      Imorovements Needed in Internal                    Controls

         Recent work conducted by the Agriculture's                        OIG and GAOhas
shown that          further      internal     controls       over the GSM-102/103 programs
are necessary.            A   September 29, 1989, OIG report8                stated         that
compliance review efforts                   are needed and that        suspension and
debarment actions             should be used whenever exporters                 are        found to
be in violation           of program regulations.                Our review     also        indicates
that     controls      are not in place-to               ensure that   exporters           are
complying with applicable                   regulations.

       Additional      comoliance review efforts                are needed

         The OIG report           stated     that    "U.S. exporters       are participating
in a $6 billion           program without            FAS or CCC conducting            a review,       or
periodic      check, to make sure the program is operating                            in
accordance with applicable                   laws and regulations."           However,             some
compliance review efforts                   have now been undertaken.            Nevertheless,

8Audit of the Foreian Auricultural  Service ExPorts of the Foreim
Commodities Under GSM 102/103, Audit Report No. 07099-210Hy.
Appendix III                                                               Appendix III
our review work indicates                     that more compliance review efforts are
necessary.                                      -

          Our June 1988 report                recommendation on internal            controls
called      for    random, on-site            Verifications         to ensure that U.S.
agricultural          exports        are being financed            by the guarantee programs.
We t-alizve        this     is an important           control      because CCC and FAS
officials         deal only with the paperwork aspects of the guarantee
programs.         W ithout physically               inspecting      the commodities being
exported at both U.S. export terminals                            and foreign     import
terminals,        at least          on a spot-check        basis,      CCC and FAS officials
cannot be certain             that U.S. agricultural                commodities are being
financed      under the programs.

          W ith assistance           from U.S. Customs, we made random inspections
at U.S. ports             holding     seven     tobacco shipments destined            for   export
under the GSM programs.                   In one instance, Customs officials believe
that      over 80 percent            of the tobacco in that sale was of foreign
origin.       In another            instance,
                                          we visited an exporter who was
participating             in the GSM-102 program for grocery items and found
that      he was preparing            for shipment several             items that    contained
foreign,origin             content,     including        coffee     filters     manufactured     in

Appendix III                                                                       Appendix 111
         As a further        assurance that U.S. agricultural                   commodities
financed       under the GSM-102/103 programs are being delivered                             to
their       intended destinations,               FAS should conduct periodic               spot
inspections           at foreign      ports.
                                     This could be accomplished by FAS
staff       assigned overseas or by FAS officials, for example,
compliance review staff,                    in travel     status. the past, FAS
officials       have stated          that     time and resources were not available
for this       type of monitoring              and oversight.

         According       to foreign          government officials,           random checks at
foreign       ports     are feasible.           While conducting           work at four
overseas locations            thispast summer, we asked foreign government
officials       if     it would be possible for FAS officials  to inspect the
off-loading           of GSM commodities.           W ith one exception, we were told
that     FAS access to the ports                for inspection would be allowed.    In
that     one instance,       we were advised that               obtaining      permission         for
access would be difficult                   because the port         is used for closely
guarded military           operations          as well as civilian           operations.

      CCC should take susnension or debarment actions
      where anorooriate

         The OIG report        stated         that    FAS should use established
compliance measures, such as suspension or debarment, to
discourage       U.S. exporters             from blending       or   combining foreign
origin      agricultural       commodities or products                withrU.S.     commodities
for     export under the GSMprograms.
 Appendix       III                                                                     Appendix III

          Considerable          attention      has been focused on the suspension                    and
 debarment issue,              because a number of tobacco exporters,                     who have
 shipped       large      quantities        of foreign     tobacco as U.S. tobacco under
 the export           credit    guarantee      programs,      continue     to participate          in
 the programs.             In prior       testimony      we noted that       FAS does not intend
 to initiate           suspension        or debarment proceedings            against      those
 tobacco exporters              while     the U.S. Attorney's           investigation
 continues,           so as not to impair          his case.       However, in May of last
 year,      the Director         of CCC's Operations           Division wrote letters   to 31
 exporting          companies,      representing         92 different      GSM guarantees,
 stating       that     as a result         of the OIG audit,         it had been determined
 that     the exporters          may have violated          GSM program requirements               by
 exporting          non-U.S.     commodities,         -The letters       put the exporters           on
..r&ise      that      they may be held liable             to CCC for any amounts paid or
 that     may be paid by CCC under the guarantees.

          When significant              GSMprogram violations            occur,   we believe         that
 suspension           or debarment proceedings             would be the appropriate               agency

 response and that              Agriculture       should be prepared to initiate                  such
 actions.        According        to FAS offi&&,             they will       take appropriate
 actions       in the future            when evidence      is developed that            shows that
 violations           have occurred.          New compliance         review efforts        could
 assist      in identifying             program violators       and documenting the
 evidence of wrongdoing.

                   ‘3    -.,

A p p e n d ix III                                                                                   A p p e n d ix III

A n E lia ible Auricultural                       C o m m o d ity S till
N e e d s to b e D e fin e d

         O u r J u n e 1 9 8 8 report included a r e c o m m e n d a tio n concerning th e
n e e d for d e fin ing              e lig ible      agricultural          c o m m o d ities, especially
value a d d e d p r o d u c ts.               Agriculture's           O IG arrived a t th e s a m e

         U n til        S e p te m b e r 2 1 , 1 9 8 8 , F A S g e n e r a l p o licy w a s to provide
export credit                  g u a r a n te e c o v e r a g e u n d e r th e G S M - 1 0 2 /1 0 3 p r o g r a m s
for o n ly th o s e c o m m o d ities or p r o d u c ts c o n ta ining                      1 0 0 p e r c e n t U .S .
origin       c o n te n t.          Neverth e less,        w h ile th is      p o licy w a s in e ffect,
credit       g u a r a n te e s w e r e provided for exports o f to b a c c o th a t w e r e
s u b s e q u e n tly revealed to c o n ta in substa n tia l                        a m o u n ts o f foreign
to b a c c o ..     A lso o th e r p r o d u c ts s u c h as grocery ite m s , leath e r                       h ides
a n d skins,            a n d soft drink c o n c e n tra tes c o n ta ining                 some degree of
foreign origin                  c o n te n t w e r e provided g u a r a n te e c o v e r a g e u n d e r th e

         O n S e p te m b e r 2 1 , 1 9 8 8 , F A S a n n o u n c e d a n e w p o licy               th a t
provided credit                   g u a r a n te e s for th e export o f agricultural                     p r o d u c ts
th a t w e r e a m ixtu r e              of   U .S . a n d foreign origin.                T h e n e w p o licy
a llo w e d th e value o f exports u n d e r th e p r o g r a m s to include u p to
2 5 p e r c e n t importe d agricultural                       c o m m o d ities.      H o w e v e r , o n ly th e
value o f th e U .S . p o r tio n                  o f th e agricultural             c o m m o d ities could
receive th e C C Cg u a r a n te e .                  This p r o v e d to b e a h ighly c o n te n tio u s
                                                            44                  .
Appendix III                                                                                Appendix III
policy      change.'      Forty      members        of Congress questioned               this new
policy      and wrote to the Secretary                     of Agriculture            on October 12,
1988, asking that               it be reversed.

       On February 15, 1989, FAS discontinued the new policy and
notified   exporters that as of February 16, they are required to
certify      that     none of the value of their                   commodities is foreign.
Otherwise,          the commodities are not eligible                      for program coverage.
This policy          is still      in effect:     however, when this change was made,
FAS also announced that                   it would reevaluate the content issue.  In
a related       matter,         Agriculture~s         General Counsel stated               in May 1989
that      exports     which contain          small amounts of foreign,                   but non-
agricultural,          products.;could             be eligible      for program coverage.

          Based on our work thus far,                     we believe      that       the current    zero
percent      foreign      value content             policy     may be appropriate            for
exports      of bulk commodities such as wheat, corn, barley,                                 and
tobacco.        However, that             policy     may be inappropriate               for processed
agricultural          products,       many of which may contain                      small amounts of
foreign      origin      ingredients.           For example, powdered infant formula,
containing          foreign      origin     ingredients  that account for only 2
percent      of the total          value of the product,                is excluded from
coverage under the current                   policy,         as is soft     drink       concentrate
with a small percentage                   of foreign         content.      A comprehensive


Appendix III                                                                        Appendix III
evaluation          of the foreign           content     issue should include       an
assessment of how to handle such products.

           One way to achieve a comprehensive evaluation                       of the policy
issues is to establish                    a working group of representatives                of         l

interested          parties    to review and debate the issues and to develop
options       f&     FAS consideration.                FAS established     an internal
working group to deal with the issue.                          FAS solicited      comments in
the Federal Register                and met once with selected              industry
representatives           to obtain          others'     opinions.      We feel this effort
should be expanded to include                     full    participation     by these and other
interested          parties.

Action Still          Needed on the Timelv Handlinq
Of Revisions          to GSM Documentation

       Our June 1988 report                  suggested that      CCC be more flexible              with
exporters          and financial          institutions      when changes to GSM
documentation           are necessary.           We cited an example of a U.S. bank
that   spent 8 months trying                  to get CCC to correct the name of a
foreign      bank placed on the guarantee document by CCC officials.
This change was very important                     to the U.S. bank because a CCC
official      had stated           that    guarantees      could become invalid        if        the
documentation           was not properly           prepared.         CCC, rather   than making
the correction           itself,      wanted the U.S. bank to obtain               written
assurance from the foreign                    bank that     it would honor its       obligations
Appendix III                                                                Appendix III
even though the bank was incorrectly                      named on the document.
Eventually,          CCC did make the correction,               but the U.S. bank
officials       claimed they spent too much time and effort                          on an error
that     was   made by CCC.

         During recent discussions              with several          exporters      and U.S.
financial       institutions          participating       in the GSMprograms, we wel;e
told     of several      other similar         instances       that    frustrated      exporters
and bank officials.                 In one case, documentation             prepared     by    a U.S.
bank regarding          a repayment due in three               equal installments            was not
accepted by CCC because of the way in which the bank rounded the
cents on a whole dollar.                 Apparently       the bank showed that            34 cents
would be collected             as   part of the first          installment        and 33 cents as
part of the second and third                  installments-.      ~-CCCreturned         the
documentation          and requested that             33 cents be shown as part of the
first     and second installments              and 34 cents on the third.

Participation of Financial                 Institutions
in the GSM Proarams

         The success of the GSM-102/103 programs depends greatly                                on
the active       participation          of financial       institutions,          which pay      out

the $4 billion          to $6 billion         in GSM loans each year,               providing
direct      credit     to the foreign        buyers.       According       to CCC records,
two financial          institutions--The         National       Bank for Cooperatives                and
the Banca Nazionale de1 Lavoro- have been significant                                program

Appendix III                                                                        Appendix III
participants.               Together,   they have provided             approximately one-
third     of the money loaned under GSM-102 during the past 5 years
and approximately              three-fourths       of the money loaned under GSM-103
during     the past 3 years.       The remainder of the program loans have
been provided          by numerous other financial institutions, each
loaning      smaller         amounts of money.

         From discussions           with officials          of several     of these financial
institutions,          it     appears that      the government guaranteed loan
business      is not particularly              profitable      and is therefore
attractive only to (1) U.S. financial                       institutions       specializing     in
government loans or (2) foreign-owned                       banks trying       to establish
themselves       in the United States.

    The National             Bank for Cooneratives

         The.National          Bank for Cooperatives           specializes      in government
loans.       Officials         there said that        over 90 percent        of their
business      involves         loans with CCC, the Export-Import
                                                     Bank, or some
other government agency loan progxam.    The Bank was established
through federal legislation in 1933 to finance sales by U.S.
cooperative       farmer organizations.                Today it    is wholly      owned by its
cooperative       members.         The Bank is a member of the Farm Credit
System, which has U.S. government agency status.                            Privileges
derived      from its         agency status      allow the      Farm    Credit System to

                   ‘7     ..,

A p p e n d ix III                                              A p p e n d ix 1 1 1
raise or o b ta in fu n d s a t a lower cost th a n commercial banks,
T h e r e fo r e , as a m e m b e ro f th e              Farm     Credit Syste m , th e N a tio n a l B a n k
for C o o p e r a tives o b tains              fu n d s a t a lower cost a n d o b tains                    a h igher
p r o fit      m a r g in in th e g o v e r n m e n t l o a n business th a n w o u ld commercial

            B a n k o fficia ls        to ld us th a t,          in spite     of   o p e r a tio n a l
p r o b l e m s , th e y b e lie v e th e G S Mp r o g r a m s a r e two              of     th e b e s t
p r o g r a m s ever esta b lished               to facilitate            th e export o f U .S . g o o d s .
T h e y said th a t th e B a n k p lans to c o n tin u e its                       p a r ticip a tio n       in th e

      B a n c a Nazionale d e 1 L a v o r o

            In th e n e a r fu tu r e        w e w ill         b e g in a stu d y in r e s p o n s e to a
r e q u e s t fro m th e S u b c o m m itte e o n Criminal Justice,                          H o u s e C o m m itte e
.o n th e Judiciary,              to evaluate th e exte n t to w h ich individual
financial               institutions        p a r ticip a te       in th e G S Mp r o g r a m s a n d to
assess th e p o te n tia l              impact th a t such p a r ticip a tio n                may have on
C C C 's g u a r a n te e lia b ility.               In p a r ticu lar,       w e w ill      look a t th e
B a n c a Nazionale d e 1 L a v o r o a n d its                    involvement.w ith           Ira q .

      B a n c a Nazionale           de1     Lavoro       is Ita ly's        largest       sta te - o w n e d b a n k .
It    is h e a d q u a r te r e d      in   R o m eb u t h a s several b r a n c h e s in th e U n ite d
S ta tes.         T h e N e w Y o r k C ity b r a n c h is responsible for N o r th

                                                          49                  .
Appendix III                                                                                         Appendix III
American operations,             and its      Atlanta,           Georgia,            branch has provided
the GSM loans.           Officials       of   the Bank's Atlanta                      branch told            us that
the majority          of their     business involves               GSM loans to Iraq.                        In the
past,      Iraq has imported up to $1.0 billion                           worth of U.S.
agricultural          commodities annually                   under the GSM-102/103 program.

          Recently,     the bank has been embroiled                           in    controversy.
According       to bank officials,              its      Atlanta     branch loaned about $2.0
billion      to foreign      buyers in Iraq of which only                             a        fraction   was
authorized       by higher       level     bank officials.                     They told            us that     some
of these loans,          amounting to about $830 million,                                 were made under
the     GSM-102/103      programs and           of     that     amount, only about $130
million      were authorized.             They said other                loans to Iraq were made
outside      government programs.                The unauthor/zed                    loans and the
adequacy of the bank's               internal          controls         are        currently         being
investigated          by several      U.S. and Italian                  agencies.                The status      of
the investigation           has not been made public.

          Bank officials         are concerned about having such a large
exposure in one country:                 they told            us that         although           Iraq has been
making regular          payments and has never defaulted,                                 it     is classified
by many banks as a high credit                        risk     due to its            war with Iran and
the resulting          depletion      of its          foreign      exchange reserves.

.   ’

        Appendix III                                                                       Appendix III
                 W e were told      by officials         of the New York branch           of   Banca
        Nazionale de1        Lavoro        that   officials       in Rome will       have to decide
        whether     or    not the bank will           continue to participate            in the
        program, including            making new       GSM      loans to Iraq.

                 The Banca Nazionale de1 Lavoro's problems may or may not
        result     in CCC payouts under its                   loan guarantee programs, but they
        raise     a question concerning the wisdom                   of   allowing     one bank to
        participate        to such     a    large    extent      in the programs,       especially     if
        that bank's        loan exposure is going to be concentrated                      in a single
        country.         In light     of these problems, FAS may want to examine the
        issue of bank participation                  in the progiams.