Foreign Assistance
USAID's Cash Transfer Program in Egypt Supports Economic Reform Activities, but Various Factors Have Limited Its Influence Gao ID: GAO-05-731 July 11, 2005Since 1992, the U.S. Agency for International Development (USAID) has focused the Cash Transfer Program in Egypt on supporting economic reform activities to move Egypt toward a more liberal and market-oriented economy. USAID has provided funds to Egypt's government as it completed agreed-on economic reform activities. In fiscal year 2002, the Department of State and USAID conducted a review of U.S. economic assistance in Egypt that led USAID to renegotiate the program's terms. USAID and Egypt signed a new agreement in March 2005. GAO's review of the Cash Transfer Program focused on the program's disbursement of funds and Egypt's completion of agreed-on activities, factors affecting the program's influence on Egypt's economic reform, USAID's efforts to evaluate the program's impact, and USAID's changes to the program in response to the 2002 review by the Department of State and USAID. GAO received comments on a draft of this report from USAID. USAID stated that the draft was fair and clear but that Egypt's completion of about 70 percent of the activities resulted from the program's structure rather than shortcomings in Egypt's policy reforms. USAID also stated that extending the target dates for completing reforms increased U.S. influence in accomplishing reforms.
Since fiscal year 1992, USAID's Cash Transfer Program has provided about $1.8 billion in economic assistance to the Egyptian government for completing reform-related activities, such as privatizing state-owned companies. USAID and Egypt have identified 196 reform-related activities, and Egypt has completed 136 of them (about 70 percent), primarily in the areas of finance and trade. Although the Cash Transfer Program supported Egypt's completion of reform activities, several factors have limited its ability to influence the Egyptian government to undertake certain reforms. First, the financial costs of certain reforms affected the Egyptian government's willingness to undertake them despite their potential benefits; although the Cash Transfer Program offsets some of those costs, its contribution to Egypt's overall budget is small. In addition, Egypt is cautious about undertaking reforms that may lead to domestic instability. Finally, USAID granted numerous extensions that allowed Egypt additional time to complete agreed-on activities, thus weakening the conditions tied to funding disbursement. Despite the difficulty of determining the impact of policy reform, USAID conducted two evaluations of Cash Transfer activities as well as a series of opinion surveys on the impact of certain activities supported by the program. Although these studies reported some positive results, GAO found limitations with some of the measures used to evaluate the activities' impact on Egypt's economy. In response to recommendations in the 2002 Department of State and USAID review, USAID (1) narrowed the Cash Transfer Program's focus to reforms in the financial sector, (2) will obligate funds when it is certain that the Egyptian government will complete activities rather than when the government agrees to undertake them, and (3) is improving its monitoring and evaluation system.
GAO-05-731, Foreign Assistance: USAID's Cash Transfer Program in Egypt Supports Economic Reform Activities, but Various Factors Have Limited Its Influence
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Report to the Chairman, Committee on International Relations, U.S.
House of Representatives:
July 2005:
Foreign Assistance:
USAID's Cash Transfer Program in Egypt Supports Economic Reform
Activities, but Various Factors Have Limited Its Influence:
GAO-05-731:
GAO Highlights:
Highlights of GAO-05-731, a report to the Chairman, Committee on
International Relations, U.S. House of Representatives.
Why GAO Did This Study:
Since 1992, the U.S. Agency for International Development (USAID) has
focused the Cash Transfer Program in Egypt on supporting economic
reform activities to move Egypt toward a more liberal and market-
oriented economy. USAID has provided funds to Egypt‘s government as it
completed agreed-on economic reform activities. In fiscal year 2002,
the Department of State and USAID conducted a review of U.S. economic
assistance in Egypt that led USAID to renegotiate the program‘s terms.
USAID and Egypt signed a new agreement in March 2005.
GAO‘s review of the Cash Transfer Program focused on the program‘s
disbursement of funds and Egypt‘s completion of agreed-on activities,
factors affecting the program‘s influence on Egypt‘s economic reform,
USAID‘s efforts to evaluate the program‘s impact, and USAID‘s changes
to the program in response to the 2002 review by the Department of
State and USAID.
GAO received comments on a draft of this report from USAID. USAID
stated that the draft was fair and clear but that Egypt‘s completion of
about 70 percent of the activities resulted from the program‘s
structure rather than shortcomings in Egypt‘s policy reforms. USAID
also stated that extending the target dates for completing reforms
increased U.S. influence in accomplishing reforms.
What GAO Found:
Since fiscal year 1992, USAID‘s Cash Transfer Program has provided
about $1.8 billion in economic assistance to the Egyptian government
for completing reform-related activities, such as privatizing state-
owned companies. USAID and Egypt have identified 196 reform-related
activities, and Egypt has completed 136 of them (about 70 percent),
primarily in the areas of finance and trade.
Cash Transfer Program Disbursements by Reform Area:
[See PDF For Image]
[End of Figure]
Although the Cash Transfer Program supported Egypt‘s completion of
reform activities, several factors have limited its ability to
influence the Egyptian government to undertake certain reforms. First,
the financial costs of certain reforms affected the Egyptian
government‘s willingness to undertake them despite their potential
benefits; although the Cash Transfer Program offsets some of those
costs, its contribution to Egypt‘s overall budget is small. In
addition, Egypt is cautious about undertaking reforms that may lead to
domestic instability. Finally, USAID granted numerous extensions that
allowed Egypt additional time to complete agreed-on activities, thus
weakening the conditions tied to funding disbursement.
Despite the difficulty of determining the impact of policy reform,
USAID conducted two evaluations of Cash Transfer activities as well as
a series of opinion surveys on the impact of certain activities
supported by the program. Although these studies reported some positive
results, GAO found limitations with some of the measures used to
evaluate the activities‘ impact on Egypt‘s economy.
In response to recommendations in the 2002 Department of State and
USAID review, USAID (1) narrowed the Cash Transfer Program‘s focus to
reforms in the financial sector, (2) will obligate funds when it is
certain that the Egyptian government will complete activities rather
than when the government agrees to undertake them, and (3) is improving
its monitoring and evaluation system.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-05-731]
To view the full product, including the scope and methodology, click on
the link above. For more information, contact David Gootnick at (202)
512-3149 or gootnickd@gao.gov.
[End of Section]
Contents:
Letter:
Results in Brief:
Background:
USAID Provided Financial and Technical Assistance to Support Egypt's
Completion of Reform Activities:
Various Factors Have Limited the Program's Ability to Influence Egypt's
Reforms:
USAID Made Efforts to Evaluate Cash Transfer Program's Impact on
Egypt's Reforms, but The Assessments Had Limitations:
USAID Is Taking Steps to Respond to Recommendations by State and USAID:
Conclusions:
Agency Comments and Our Evaluation:
Appendixes:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: Comments from the U.S. Agency for International
Development:
Appendix III: GAO Contact and Staff Acknowledgments:
Table:
Table 1: Examples of Targeted Reform Activities That Egypt Did Not
Complete, or Receive Funds for under the Terms of the Program:
Figures:
Figure 1: Cash Transfer Funding Flow:
Figure 2: Cash Transfer Program Disbursements by Reform Area:
Figure 3: Number of Privatizations Supported by the Cash Transfer
Program, Fiscal Years 1993-2002:
Abbreviations:
DSP: Development Support Program:
IPR: intellectual property rights:
IMF: International Monetary Fund:
MOU: memorandum of understanding:
PMP: Performance Management Plan:
SPR: Sector Policy Reform:
SDDS: special data dissemination standards:
State: Department of State:
USAID: United States Agency for International Development:
WB: World Bank:
WTO: World Trade Organization:
Letter:
July 11, 2005:
The Honorable Henry Hyde:
Chairman:
Committee on International Relations:
House of Representatives:
Dear Mr. Chairman:
Since 1992, the U.S. Agency for International Development (USAID) has
focused the Cash Transfer Program in Egypt on supporting economic
reform activities intended to move Egypt toward a more liberal and
market-oriented economy. Under the terms of the program, USAID provides
funds to the Egyptian government as it completes specific activities
related to reforms in a range of areas, including finance, trade, and
industry. USAID and Egypt agree on these reform areas and activities in
memorandums of understanding (MOU). In addition, USAID provides
technical assistance to facilitate Egypt's completion of the reform-
related activities. In 2002, the Department of State (State) and USAID
conducted a joint review of USAID's activities in Egypt. Based on the
review's recommendations, USAID began renegotiating the terms of the
program, to which Egypt assented when it signed a new MOU in March
2005. The review by State and USAID recommended, among other things,
that USAID narrow the Cash Transfer Program's focus, strengthen the
agency's ability to enforce activity deadlines, and improve performance
monitoring.
GAO's review of USAID's Cash Transfer Program in Egypt focused on (1)
the program's disbursement of funds and Egypt's completion of agreed-on
activities, (2) factors affecting the program's influence on Egypt's
economic reform activities, (3) USAID's efforts to evaluate the
program's impact on Egypt's economic reform, and (4) USAID's changes to
the program in response to recommendations in the 2002 joint review by
State and USAID.
To achieve these objectives, we analyzed USAID's criteria for making
disbursements, as well as the total disbursements made under the Cash
Transfer Program since fiscal year 1992. We also reviewed legislation,
USAID regulations, and other relevant program documentation. We
developed a database of all activities USAID targeted under the program
and, to better understand the range of activities targeted and
completed, we further analyzed three subsets of the reform areas
covering a range of activities that had a mix of results--
privatization, banking, and intellectual property rights. To determine
the monetary significance of the Cash Transfer Program, we calculated
the program's annual share of Egypt's foreign exchange earnings and
government revenue using relevant data provided by the Egyptian
government to the International Monetary Fund (IMF). Although we were
unable to assess fully the reliability of the Egyptian government data,
we noted that Egypt recently subscribed to the IMF's special data
dissemination standards (SDDS), which were created for nations that
already meet high data quality standards. While these data probably
have some limitations, we determined that it is unlikely that potential
errors would materially impact our use of this information in our
report. To understand USAID's efforts to evaluate the program, we
reviewed USAID studies and opinion surveys that attempted to assess the
impact of reform activities on the Egyptian economy and USAID's
performance monitoring plan. We examined State's and USAID's joint 2002
review of U.S. economic assistance to Egypt and other relevant
documents related to USAID's response to the review. We interviewed
officials from USAID, the Department of State, the Department of the
Treasury, the IMF, the World Bank, and the government of Egypt, as well
as representatives of the European Union, economists, and academics. We
performed our work between August 2004 and May 2005 in accordance with
generally accepted government auditing standards. Appendix I provides a
more detailed description of our objectives, scope, and methodology.
Results in Brief:
Since fiscal year 1992, USAID's Cash Transfer Program has provided
about $1.8 billion in financial assistance to Egypt. Additionally,
USAID had provided about $70 million in technical assistance to the
Egyptian government to support Cash Transfer Program related reform
activities. USAID and Egypt jointly identified and agreed on 196
economic reform-related activities, of which Egypt has completed 136--
for example, privatizing state-owned companies and drafting and passing
intellectual property rights laws.[Footnote 1] Egypt did not complete
or receive program funds for 60 of the 196 activities because (1) a
change in the program in 1999 allowed Egypt to select from a menu of
reform activities, and (2) the United States withdrew from a 2001 MOU
after the joint State and USAID review recommended renegotiating the
program's terms.[Footnote 2] The program's disbursement values have
ranged from $0.1 million to $150 million, with a median disbursement of
$10 million per reform activity. However, Egypt had received about $730
million, or 40 percent of the total funds disbursed, for completing 20
activities, including $100 million for developing a macroeconomic
reform plan approved by the Egyptian government.
The Cash Transfer Program has supported Egyptian economic reforms, and
USAID has provided technical assistance that aided Egypt's completion
of reform-related activities; however, various factors have limited the
program's ability to influence Egypt to undertake certain reforms.
First, the financial costs of undertaking certain reforms have limited
the Egyptian government's willingness to implement reforms despite
their potential benefits. Second, although Cash Transfer Program
payments help offset some costs related to reform activities, its
contribution relative to Egypt's overall foreign exchange earnings and
government revenue is small. Third, the Egyptian government is cautious
about undertaking reforms that may negatively affect certain groups and
lead to domestic instability. Fourth, USAID has granted numerous
deadline extensions that allowed Egypt additional time to complete
agreed-on activities, weakening the conditions tied to funding
disbursements.
USAID has attempted to assess the impact of program-supported
activities on the Egyptian economy, despite challenges involved in
evaluating the impact of policy reform; however, its measures of the
program's impact had limitations. USAID officials pointed out the
difficulty of isolating the Cash Transfer Program's influence from
other factors affecting Egypt's trade and investment environment.
Nevertheless, to evaluate the impact of the program's activities, the
agency has conducted agency-funded studies and opinion surveys of
Egyptian business leaders and academics, and has linked some activities
to its performance management plan. While each of these efforts
highlighted the activities' positive impacts, they had limitations. For
example, a study on the impact of privatization activities pointed out
that the reforms helped reduce Egypt's fiscal deficit and improved some
companies' financial performance. However, the study acknowledged the
difficulty of drawing definitive conclusions regarding the activities'
impact.
USAID has taken steps to respond to several recommendations regarding
the Cash Transfer Program made in the joint State and USAID review. To
narrow the program's focus, USAID's March 2005 MOU with the Egyptian
government targets only financial sector reform activities.[Footnote 3]
To strengthen its ability to ensure that the Egyptian government meets
reform requirements, USAID will now obligate funds when it is clear
that Egypt will complete the activities. To improve its measurement of
program performance, USAID signed a contract in January 2005 with
Management Systems International to revise the agency performance
management plan, which assists USAID in monitoring and evaluating how
well it is meeting its strategic objectives in Egypt. The details of
the changes to the performance management plan were not available
during the time of our review.
The Acting Assistant Administrator of USAID, Bureau of Management,
provided written comments on a draft of this report which are
reproduced in appendix II. He stated that the draft was fair and clear,
but that the Egyptian government's completion of 70 percent of the 196
agreed-on activities related substantially to the Cash Transfer
Program's structure rather than to shortcomings in Egypt's policy
reforms. Additionally, USAID stated that granting deadline extensions
to permit Egypt to complete activities increased the U.S. government's
influence in accomplishing reforms. USAID also provided technical
comments as did the Department of State, which we incorporated where
appropriate.
Background:
Since 1975, the United States government has provided more than $25
billion in economic assistance to Egypt. The U.S. continues to support
Egypt, in part because of its political leadership in making peace with
Israel and fostering a broader peace between Israel, the Palestinians,
and other Arab states, including its efforts in the war on terrorism.
U.S assistance to Egypt has three components. (1) The Cash Transfer
Program provides assistance conditioned on the Egyptian government's
achievement of specific reform-related activities. (2) Traditional
project assistance focuses on, among other things, economic reform,
health and education, and the environment. (3) The Commodity Import
Program supplies financing to Egyptian private sector importers of U.S.
goods and provides funding that is not specifically conditioned on any
reforms.[Footnote 4] In 1998, the United States and the Egyptian
government agreed to reduce annual U.S. economic support by $40 million
per year, resulting in a reduction of total funds from $815 million to
$407 million by fiscal year 2009. Annual Cash Transfer Program
appropriations are projected to remain constant at about $200 million
annually until fiscal year 2007 and decline to $150 million by fiscal
year 2009.
In the early 1990s, USAID focused on fostering economic reforms aimed
at achieving a stable macroeconomic environment in Egypt, then shifted
its focus to encouraging economic growth and development in the mid-
1990s. The goal of USAID's program activities in Egypt is to create "a
globally competitive economy benefiting Egyptians equitably."[Footnote
5] Although Egypt has made progress at the macroeconomic level,
including reducing inflation and unifying the exchange rate, USAID has
stated Egypt's continued state ownership of companies and banks and its
existing laws and regulations continue to hinder its transition to a
market economy.
The Cash Transfer Program began as the Sector Policy Reform (SPR)
program and complemented Egypt's economic reform and structural
adjustment program, which began in 1991.[Footnote 6] In 1999, the
program was renamed the Development Support Program (DSP) and focused
on improving the trade and investment environment and increasing
private sector employment.[Footnote 7] The Cash Transfer Program
targeted eight general reform areas until the State and USAID review in
2002 recommended that it be narrowed to a single sector. These areas
include the following:
* Financial sector--reforming the banking and insurance industries;
* Trade sector--reducing trade barriers;
* Industrial sector--privatizing state-owned companies;[Footnote 8]
* Business law and regulation--modernizing laws that affect business
and trade such as intellectual property rights laws;
* Fiscal sector--establishing tax policy and improving public access to
fiscal data;
* Monetary policy--reforming foreign exchange rate and domestic credit
policy;
* Data dissemination--improving standardization of data and statistical
transparency; and:
* Environmental protection--improving environmental regulations and
conservation.
Funding for the Cash Transfer Program is provided in annual
appropriations to the Economic Support Fund.[Footnote 9] The annual
appropriation makes this funding available for the program with the
understanding that Egypt will undertake economic reforms in addition to
those it has undertaken in previous years.[Footnote 10] Grant
agreements and MOUs between the U.S. and Egyptian governments outline
the ways that Egypt may use program funds and the types of reform-
related activities that it must undertake to receive them.[Footnote 11]
According to the grant agreements, the Egyptian government is
authorized to use 75 percent or more of the funds to purchase U.S.
commodities, such as wheat or equipment, and up to 25 percent to repay
its debt to the United States. After purchasing commodities in U.S.
dollars that the program provides, the Egyptian government must deposit
the equivalent amount of Egyptian local currency into a special
account. A separate MOU between USAID and the Egyptian government
stipulates that the government of Egypt may use funds from this account
for its general budget, sector support, or USAID activities. In
addition to providing a source of budgetary funds for the Egyptian
government, the Cash Transfer Program serves as an additional source of
foreign exchange for Egypt. Figure 1 depicts the flow and use of Cash
Transfer Program funds.
Figure 1: Cash Transfer Funding Flow:
[See PDF for image]
[End of figure]
According to USAID officials, if the Egyptian government does not meet
the agreed-on criteria for a specific activity, USAID may withhold
funding and redirect it to support other Cash Transfer Program
activities. To determine the funding that Egypt should receive for
completing each reform activity, USAID considers the activity's
significance, the cost to the Egyptian government associated with
completing it, the Egyptian government's willingness to implement it,
the U.S. government's interest in seeing it implemented, and the
contribution of the completed activity to Egypt's economic growth.
USAID Provided Financial and Technical Assistance to Support Egypt's
Completion of Reform Activities:
Since fiscal year 1992, USAID's Cash Transfer Program has provided
about $1.8 billion in financial assistance to the Egyptian government.
USAID has also provided about $70 million in technical assistance to
the Egyptian government to support Cash Transfer-related reform
activities. The Egyptian government has completed 136 of the 196
activities targeted for reform, including financial and industrial
sector reforms. The Egyptian government did not complete 60 of the
targeted activities and consequently received no money for them, in
part because of a change in the program in 1999 that allowed Egypt to
choose from a menu of reform activities. Although Egypt completed many
activities, the results of some of the targeted reform areas were
mixed. USAID's disbursements per activity ranged from $0.1 million to
$150 million, with a median disbursement of $10 million. However, Egypt
received about $730 million, or 40 percent of total funding, for 20 of
the completed activities.
USAID Provided Almost $2 Billion in Cash Transfer Program Funding and
Technical Assistance:
USAID disbursed about $1.8 billion in Cash Transfer Program funds to
the government of Egypt as it completed agreed-on economic reform
activities, primarily in the areas of finance and trade. Figure 2 shows
the distribution of program funding among the reform areas since 1992.
Figure 2: Cash Transfer Program Disbursements by Reform Area:
[See PDF for image]
[A] The Macroeconomic Reform Plan was a crosscutting activity not
included under any specific reform area.
[End of figure]
In general, the targeted activities represented the steps associated
with a major reform in agreed-on areas. For example, privatizing state-
owned companies, an aspect of industrial sector reform, required:
* initial steps such as conducting a study of the social and economic
costs and the benefits of opening an industry to private investment,
* intermediate steps such as developing a national privatization plan,
and:
* final steps such as privatizing a number of companies.
In addition, USAID provided approximately $70 million in technical
assistance, in part to support the Egyptian government's completion of
agreed-on activities. For example, USAID's technical assistance funding
supported the government of Egypt in formulating and implementing
policies, training government personnel, and purchasing office
equipment. USAID also used technical assistance funds to hire
contractors to monitor and verify the government of Egypt's completion
of agreed-on activities. According to Egyptian officials, USAID's
technical assistance helped the Egyptian government complete
intellectual property rights (IPR) reform activities targeted under the
Cash Transfer Program, such as drafting an IPR code, and provided
technical information on the World Trade Organization's (WTO) Trade-
Related Aspects of Intellectual Property Rights requirements. Technical
assistance funds were also used to promote public awareness of the
importance of IPR and modernize the patent and copyright offices.
Egyptian Government Completed the Majority of Agreed-on Activities, but
Results of Some Targeted Activities Were Mixed:
Beginning in 1992, USAID and the Egyptian government identified 196
activities for reform. Egypt completed and received program funds for
136 of those activities (about 70 percent) and did not complete or
receive money for 60 of them. Egypt had the option of not completing
some of them, because under a new program approach initiated in 1999,
USAID and the Egyptian government agreed to a broad range of activities
that allowed Egypt to select those that best fit its reform agenda. The
60 uncompleted activities included 3 of 25 activities targeted for
reform in a 2001 MOU. Egypt did not complete these 3 activities because
the U.S. government unilaterally withdrew from the program following
the 2002 review by State and USAID.[Footnote 12]
Table 1 shows some of the 60 activities that the government of Egypt
did not complete or receive program funds for under the terms of the
program. We found that roughly 10 percent of the completed activities
involved conducting studies and reviews, 10 percent involved drafting
laws and issuing decrees, and about 20 percent involved adopting plans
or implementing procedures. The remaining 60 percent involved various
sector specific activities, such as reducing the number of tariffs and
removing price controls from hotels, restaurants, and other businesses
associated with tourism.
Table 1: Examples of Targeted Reform Activities That Egypt Did Not
Complete, or Receive Funds for under the Terms of the Program:
Reform area: Fiscal policy;
Uncompleted activities:
* Establishing a system to generate and publish
revenue and expenditure data on a quarterly basis with a lag of no more
than 2 months;
* Implementing key components of corporate tax reforms;
* Creating regulations to establish and regulate margin trading;
* Revising a draft competition law submitted to People's Assembly.
Reform area: Trade sector;
Uncompleted activities:
* Reducing the cost of Egyptian air freight;
* Reducing import tariffs;
* Creating new regulations to improve customs valuation;
* Providing data for marketing approval of pharmaceutical products.
Reform area: Financial sector;
Uncompleted activities:
* Reducing state ownership in at least five
joint venture banks[A];
* Reducing Egyptian government share in at least one state insurance
company to achieve private sector majority ownership;
* Passing legislation to facilitate a public debt law;
* Amending a capital market law.
Source: USAID data.
Note: These examples include activities in all program years, although
the Egyptian government may have subsequently completed some of them
without receiving a payment from USAID.
[A] Joint venture banks are private banks that have partial Egyptian
government ownership.
[End of table]
To understand the range of activities USAID targeted and the extent to
which Egypt completed them, we analyzed reform activities in three
subsets of the program's general reform areas--privatization
(industrial sector), banking (financial sector), and IPR (business law
and regulation)--and found that the results of these targeted
activities were mixed. For example, although Egypt privatized some of
its state-owned companies and its joint venture banks, less than half
of its state-owned companies and none of its public sector banks had
been privatized as of May 2005. Likewise, according to USAID, although
Egypt has improved its IPR legal framework, the country still does not
fully comply with international standards for pharmaceutical protection.
Industrial Sector: Privatization:
USAID disbursed $169 million for the completion of 12 privatization
activities in fiscal years 1992-2004. Six of the activities supported
privatization of companies--for example, developing a national
privatization plan, reducing indebtedness of public companies, and
improving the process for valuing of them. The other six activities
consisted of actually privatizing public and joint venture
companies.[Footnote 13] In 1991, the Egyptian government identified 314
companies to be privatized. During fiscal years 1993-2002, it
privatized 118 of these companies, 3 of which were joint ventures,
according to Cash Transfer Program disbursement justifications (see
fig. 3).[Footnote 14] Privatizations slowly increased through fiscal
year 1996, peaked in fiscal year 1998, and then declined through fiscal
year 2002. Of the 196 remaining public companies, some are profitable
but others are unprofitable, including indebted textile companies.
Figure 3: Number of Privatizations Supported by the Cash Transfer
Program, Fiscal Years 1993-2002:
[See PDF for image]
[End of figure]
According to Egyptian government and USAID officials, as well as
documents we reviewed, three reasons contributed to the decline in
privatizations after 1998. (1) The companies remaining on the list were
difficult to sell because of unprofitability or were difficult to
liquidate because of concerns about mass layoffs.[Footnote 15] (2) The
Egyptian government did not fully support privatization, as
demonstrated by its unwillingness to realistically value companies. (3)
The global economic environment became less conducive to privatization,
particularly in the Middle East after September 11, 2001. According to
a USAID contractor responsible for tracking privatization progress, the
best companies were sold initially and many of the remaining companies
required large investments to stay operational.
Financial Sector: Banking:
In fiscal years 1992-2004, USAID disbursed $260 million for the
completion of 11 activities associated with banking reforms in Egypt.
According to USAID documents, banking activities focused on improving
regulations and strengthening banks' capital structure, including the
following:
* allowing foreign banks to establish branches or gain full ownership
of local banks and deal in local currency;
* removing controls on banking service fees;
* establishing new accounting and auditing procedures for all sectors,
including insurance, based on the International Accounting Standards;
* revitalizing capital markets and improve the transparency of
financial flows;
* ratifying an anti-money-laundering law, satisfying the Organization
for Economic Cooperation and Development's Financial Action Task Force
on Money Laundering, and:
* reducing Egyptian government shares in 22 of 25 joint venture banks
in Egypt.[Footnote 16]
Additionally, the Egyptian government agreed to transfer majority
ownership of at least one of its state-owned banks under the Cash
Transfer Program in 1995 and sell its shares in the four public sector
banks in 2000. Although the Egyptian government identified the first
bank for privatization in 1997, none of the four state-owned banks had
been privatized as of May 2005. In March 2005, the Egyptian government
signed a new MOU with USAID that once again made the privatization of a
state bank a priority. According to U.S. and Egyptian officials, a
public sector bank is expected to be privatized by the end of 2005,
owing in part to increased political will in Egypt's cabinet and more
experienced management in the Central Bank of Egypt.However, a Central
Bank senior official stated that the sale of the public sector bank
depends on its handling of nonperforming loans and finding an investor,
which could prove difficult.
Business Law/Regulation: Intellectual Property Rights:
USAID disbursed about $75 million for the completion of six IPR-related
reform activities undertaken to support Egypt's commitments under the
WTO's agreement on Trade-Related Aspects of Intellectual Property
Rights. According to a USAID contractor, although the reforms that
Egypt completed moved it closer to international IPR standards, more
reforms are needed for Egypt to achieve compliance with international
standards related to data dissemination and data exclusivity for
pharmaceuticals. The activities that USAID supported included the
following:
* conducting a study of the benefits of consolidating the patent,
trademark, and international design offices;
* joining the Patent Cooperation Treaty in June 2003;[Footnote 17] and:
* enacting a new IPR law in May 2002 that incorporated both the patent
and industrial design laws.
Small Number of Activities Accounted for Large Share of Program Funds:
Since 1992, USAID has disbursed between $0.1 million and $150 million
to Egypt for completed activities, with a median disbursement of $10
million per activity;[Footnote 18] however, the Egyptian government
received large disbursements, totaling about $730 million (40 percent)
of total program funds, for 20 of the 136 activities that it completed.
Our analysis showed that the largest disbursements included $150
million for passing an anti-money-laundering law and $100 million for
developing a macroeconomic reform plan approved by the government.
* Antimoney-laundering law. In 2002, Egypt received a disbursement of
$150 million for passing a law against money laundering. According to
USAID, as Egypt's economy and financial systems have opened they have
become more susceptible to use as conduits for laundering proceeds from
criminal activities such as drug trafficking and terrorism. USAID first
targeted anti-money-laundering reform in a 2001 MOU and formally
specified the requirements for passage of a law in June 2002, the same
month Egypt received a disbursement for completing the activity.
According to USAID documentation, Egypt received a large disbursement
because the law addressed the concern of the Organization for Economic
Cooperation and Development's Financial Action Task Force that Egypt
was noncooperative in addressing money-laundering problems.
* Macroeconomic reform plan. In 2001, Egypt received a disbursement of
$100 million for developing and approving a macroeconomic reform plan.
According to USAID, this activity supported major Egyptian reforms in
the face of the economic crisis after September 11, 2001, that included
Egypt's slowed growth and loss of revenues. Among the areas the plan
addressed were Egypt's exchange rate, monetary and fiscal policy, and
legislation for issues such as IPR, labor and mortgage laws, and
banking reform. According to USAID documents, the plan was added to the
program in December 2001 and was approved by the U.S. Ambassador to
Egypt, the Egyptian Prime Minister, and several of Egypt's economic
ministers before the disbursement in January 2002.
Our review of program activities showed that USAID generally paid the
Egyptian government once for each activity. However, we identified one
instance in which USAID made disbursements twice to Egypt for the
privatization of three companies. In 1998, USAID disbursed to the
Egyptian government $20 million dollars for meeting criteria to
privatize 25 companies. Egypt's privatization of three of these
companies--United Poultry Production, Ramsis Agriculture, and the
Egyptian Company for Meat and Dairy Production--were listed in
subsequent documents as justification for additional disbursements of
$2.4 million in 2000 and $1.2 million in 2001.[Footnote 19] In
commenting on a draft of this report, USAID officials agreed that these
disbursements had occurred.
Various Factors Have Limited the Program's Ability to Influence Egypt's
Reforms:
Although the Cash Transfer Program provided financial and technical
assistance to support Egypt's completion of reform-related activities,
several factors have limited the program's ability to influence Egypt
to undertake certain reforms. These factors include the following:
* Financial costs versus benefits of reform-related activities.
Although the reforms are expected to generate financial benefits by
correcting inefficiencies in the economy, financial costs are also
associated with the reforms. For example, the authors of a USAID-
sponsored study estimated the financial benefit to the Egyptian
government of privatizing the remaining state-owned companies and banks
would be over $17 billion.[Footnote 20] However, the financial benefits
are not guaranteed; privatized companies may not operate more
efficiently or produce additional tax revenues. For example, according
to USAID's privatization study, some privatized Egyptian companies
failed to undertake significant restructuring and therefore did not
produce many of the expected benefits they were supposed to bring,
including improved financial performance.
* Size of program funding relative to Egypt's overall foreign exchange
earnings and revenue. Although the Cash Transfer payment provides U.S.
dollars for the purchase of U.S. commodities and repayment of debt to
the United States, the payment represents a small portion of Egypt's
foreign exchange earnings. For example, in fiscal year 2003, the
program's funds accounted for about 1 percent of Egypt's overall
foreign exchange earnings and less than 2 percent of its foreign
reserves. Additionally, the Egyptian pounds generated by the program
and used by the Egyptian government for budget support are a small
portion of its revenue; in fiscal year 2003, the program funds
accounted for about 1 percent of the government of Egypt's annual
revenues and grants. According to a State Department official, the $200
million that the program provides annually is not sufficient by itself
to persuade the Egyptian government to undertake an unpopular reform
such as privatization.
* Reforms' potential effects on domestic stability. Since IMF sponsored
economic reforms triggered protests and domestic unrest among Egypt's
populace in the 1970s, the government of Egypt has been cautious about
reforms such as liberalizing prices and lifting subsidies because of
the potential negative impact on certain groups. For example, in
January 2003, the Egyptian government introduced a more flexible and
market-oriented exchange rate regime as outlined in its macroeconomic
reform plan. However, as a result, the value of the Egyptian pound fell
by about 30 percent in its initial months, raising the prices that
Egyptians paid for imported goods, including food. According to the
IMF, the Ministry of Finance partially negated this change when in
September 2003, concerned about rising food prices, it introduced a
special exchange rate for imported items such as grains.[Footnote 21]
* Cash Transfer Program deadlines. The Cash Transfer Program was
designed to provide funding to Egypt based on its compliance with
agreed on conditions, including meeting deadlines. Since fiscal year
1992, the government of Egypt requested, and USAID granted, 19
extensions to the deadlines originally agreed to in MOUs. The
extensions were generally for an additional 3 to 6 months; however,
certain performance periods had multiple extensions that allowed the
government of Egypt 2 or more years from the original deadline to
complete the activities.[Footnote 22] Although USAID documents
justified the extensions, the number and length of extensions may have
weakened the conditions tied to the funding disbursement by assuring
that Egypt continued to receive funds, in some cases well beyond the
established deadlines. For example, in March 1997, USAID extended the
Egyptian government's deadline to complete agreed-on activities for an
additional 6 months and then granted five other extensions, resulting
in a final deadline of September 1999. According to USAID documents we
reviewed, the 1997 extensions were granted to give the government of
Egypt time to negotiate a new IMF agreement, prepare for the Cairo
economic summit, and redefine reform priorities after a shift in
Cabinet members--factors that contributed to a delay in Egypt's
completion of Cash Transfer Program reform activities. USAID approved
additional deadline extensions for a separate set of activities in
September 1997, subsequently extending it four more times to June 2000.
The need to tighten conditions tied to the program's funding
disbursements was highlighted in the 2002 review by State and USAID.
USAID Made Efforts to Evaluate Cash Transfer Program's Impact on
Egypt's Reforms, but The Assessments Had Limitations:
Demonstrating the impact of policy reforms is challenging, according to
USAID officials and academics studying such reforms; however, USAID
conducted two evaluations related to the Cash Transfer Program
activities, as well as a series of opinion surveys that attempted to
assess the impact of economic reform activities supported by the
program. These evaluations and opinion surveys reported that the
program's activities had some positive results, but we found
limitations with the two studies. We also reviewed USAID's performance
management plan (PMP) and found that some of its measures had
limitations.
Measuring Policy Reform's Impact Is Challenging:
USAID officials and academics studying policy reform pointed out the
difficulties of demonstrating the impact of policy reforms. USAID
officials stated that it is nearly impossible to isolate the impact of
the Cash Transfer program from other factors that have influenced
Egypt's trade and investment environment. In addition, collecting
reliable data is problematic in Egypt. For example, according to a
USAID contractor responsible for tracking Egypt's privatization
efforts, basic data, such as the number of privatizations completed,
were not readily available from the Egyptian government. Furthermore,
the nature of policy reform often results in delayed impacts, thus
evaluations cannot take place until sufficient time passes. For
example, according to USAID's privatization evaluation, it was
difficult to draw definitive conclusions regarding financial
performance for some of the companies because of inadequate time
between the privatizations and evaluation. Although measuring the
impact of reforms is difficult, USAID continues to fund various
assessments.
USAID Efforts to Evaluate Program's Impact Showed Positive Results but
Had Limitations:
To evaluate the impact of Cash Transfer Program activities in Egypt,
USAID conducted two agency-funded studies, twelve opinion surveys of
private sector business leaders, and linked some activities to its PMP.
However, we found that some measures that USAID used in their
performance management system had limitations.
* USAID-funded reform area studies:
A study of USAID-supported privatization activities published in 2002
pointed out some positive impacts, such as helping to reduce Egypt's
fiscal deficit, facilitating the entrance of new companies into Egypt's
market, expanding product varieties and availability, and improving
some firms' financial performance.[Footnote 23] However, the study also
found that privatization did not increase Egypt's foreign direct
investment relative to other developing countries although this reform
was related to USAID's strategic objective of enhancing Egyptian
business opportunities by attracting private sector investment. In
addition, the study acknowledged some challenges in evaluating
privatization's impact because access to some of the Egyptian
government's data was limited and sufficient time had not passed to
assess the financial performance of some privatized companies.
A study of USAID technical assistance for Egypt's IPR reforms published
in 2004 found that this assistance, among other factors,[Footnote 24]
motivated the Egyptian government to implement reforms. The study found
that these reforms led to: a legal framework that was more compliant
with WTO IPR requirements; a modernized IPR-related facilities; a
reduction in the time required to obtain a patent from 6 years in 1996
to less than 3 years in 2003; and, increased public awareness of the
benefits of intellectual property rights.[Footnote 25] However, the
study focused on the outcomes of USAID's technical assistance to
support the completion of IPR-related activities rather than on the
impact of these activities on the Egyptian economy, such as increasing
confidence among foreign investors, with regard to doing business in
Egypt.
* Opinion surveys:
USAID conducted a series of periodic questionnaires and roundtables
with Egyptian private sector leaders and academics to gauge the
progress and impact of the Egyptian government's economic reforms and
structural adjustment program.[Footnote 26] Every 6 months for a 6-year
period, respondents were asked to score and give opinions on 24 policy
areas in three main categories: stabilization policies, structural
adjustment policies, and social policies. The surveys found that, in
general, business leaders agreed that the Egyptian government had taken
modest steps forward in stabilization policies. However, the survey
also found that business leaders were concerned about slow progress in
many reform areas, such as banking and privatization, exchange rates,
and the growth of small and midsize businesses. USAID recognized that
the survey scores and opinions are subjective. However, USAID pointed
out that respondents' perceptions of the behavior of the domestic and
international marketplace served as a proxy for the larger business
community's opinion of Egypt's progress with economic reform. As a
result, USAID said the survey could be a useful tool for evaluating
policy initiatives.
* USAID's performance management plan:
USAID uses its PMP to measure progress toward strategic goals and
objectives. Although the PMP does not directly evaluate the impact of
the Cash Transfer Program, USAID pointed us to it as a measure of the
program's progress and impact on the Egyptian economy during our
fieldwork. However, we found limitations in some of the indicators used
in the PMP in that they primarily assess outputs and do not link the
outputs to the activities' impact on Egyptian economic reform. For
example, two privatization indicators--the value of sale proceeds from
privatized state-owned and joint venture companies and the cumulative
number of qualified joint venture companies and banks divested--
measured the quantitative results of privatization rather than the
activities' effects on the companies' efficiency. Other PMP indicators
were influenced by factors outside the program. For example, USAID used
the indicator trade weighted average tariffs to show progress in
reducing trade barriers; however, other factors, such as a shift to
imports with lower tariffs, could have contributed to a reduction in
trade barriers, and thus the change could not be attributed only to the
reform's impact.
USAID Is Taking Steps to Respond to Recommendations by State and USAID:
USAID has taken several steps to address the 2002 State and USAID
review's recommendations that the agency narrow the focus of the Cash
Transfer Program, reprogram funds if deadlines for reform-related
activities are not met, and improve the USAID mission in Egypt
performance monitoring system.
1. To narrow the program's focus, USAID signed an MOU on March 20,
2005, focused on reforming the financial sector.[Footnote 27] The new
MOU aims to support financial sector modernization by:
* strengthening the management of the Central Bank of Egypt;
* creating a government securities market consistent with international
standards;
* increasing the private sector's share of the banking system;
* strengthening the legal and regulatory framework of the overall
financial system; and:
* implementing a code of corporate governance.
USAID and the Egyptian government agreed to 19 reform-related
activities that support these goals, including privatizing one of four
state-owned banks before the end of December 2005. According to USAID
officials, if the Egyptian government completes all 19 reform-related
activities by the agreed-on time frames, it will receive disbursements
of $800 million, or 67 percent of the $1.2 billion that USAID expects
to obligate for the Cash Transfer Program through fiscal year
2009.[Footnote 28] USAID has not yet determined the conditions for
disbursement of the remaining funds, but a State official stated that
the agency will likely target trade reform.
2. To respond to the review's recommendation to reprogram funds if
reform-related activity deadlines are not met, USAID changed its
process for obligating Cash Transfer funds. Beginning in 2005, USAID
will obligate Cash Transfer funds only after it is certain that the
Egyptian government will complete agreed-on activities. This change is
intended to ensure that obligated funds do not accumulate and to
strengthen USAID's ability to encourage the Egyptian government to
satisfy activity requirements.
3. To improve its measurement of the mission's programs' contribution
to meeting USAID strategic objectives, the agency contracted to revise
its performance monitoring system by updating its PMP.[Footnote 29] The
review by State and USAID indicated that the previous system did not
allow USAID to reprogram resources from programs that were not
producing desired results. According to a USAID official, the system's
measures also did not provide timely information for management
purposes. However, at the time of our review, details of PMP revisions
were not available; therefore, we were unable to determine how USAID
will address the issues raised by the review and whether the new system
will improve evaluation of Cash Transfer Program activities.
Conclusions:
Although the Cash Transfer Program has supported reform-related
activities since 1992, several factors have constrained its influence
and potential to be a more effective force for change in Egypt.
However, the recently signed MOU, which makes deadlines explicit for
the first time, and Egypt's renewed political support to undertake
certain reforms, such as bank privatization, offers a new opportunity
to better leverage this program. For example, by not making funds
available until it is clear that Egypt will complete program
activities, USAID is strengthening conditionality. Given the recent
program changes and Egypt's regional importance, it is critical that
policymakers continue to monitor Egypt's progress in achieving economic
reform and the Cash Transfer Program's contribution to those reforms,
especially in light of the broader political environment in which the
program operates.
Agency Comments and Our Evaluation:
The Acting Assistant Administrator for USAID, Bureau of Management,
provided written comments on a draft of this report, which are
reproduced in appendix II. He stated that the draft was fair and clear,
but that the Egyptian government's completion of 70 percent of the 196
agreed-on activities related substantially to the Cash Transfer
Program's structure rather than to shortcomings in Egypt's policy
reforms. Additionally, USAID stated that granting deadline extensions
to permit Egypt to complete activities increased the U.S. government's
influence in accomplishing reforms. USAID also provided technical
comments as did the Department of State, which we incorporated where
appropriate.
As arranged with your office, we plan no further distribution of this
report for 30 days from the date of the report unless you publicly
announce its contents earlier. At that time, we will send copies to
interested congressional committees and to the Administrator, USAID and
the Secretary of State. We will make copies available to others upon
request. In addition, this report will be available at no extra charge
on the GAO Web site at [Hyperlink, http://www.gao.gov.]
If you or your staff have any questions regarding this report, please
contact me at 202-512-3149 or [Hyperlink, gootnickd@gao.gov]
[Hyperlink, gootnickd@gao.gov]. Contact points for our Offices of
Congressional Relations and Public Affairs may be found on the last
page of this report. GAO staff who made major contributions to this
report are listed in appendix III.
Sincerely yours,
Signed by:
David Gootnick:
Director, International Affairs and Trade:
[End of section]
Appendixes:
Appendix I: Objectives, Scope, and Methodology:
This review for the Chairman of the House Committee on International
Relations, focused on (1) the Cash Transfer Program's disbursement of
funds and Egypt's completion of agreed-on activities since in fiscal
year 1992, (2) factors affecting the program's influence on Egypt's
economic reform activities, (3) U.S. Agency for International
Development's (USAID) efforts to evaluate the program's impact on
Egypt's economic reform, and (4) USAID's changes to the program in
response to the 2002 Department of State and USAID review.
To identify the requirements of the Cash Transfer Program and total
funding disbursed since fiscal year 1992, we reviewed legislation and
USAID's regulations, grant agreements, and memorandum of understanding.
We reviewed USAID's program documents and interviewed USAID and State
officials to learn how USAID identified reform areas and assigned
values for reform-related activities and to determine the number and
types of activities that the government of Egypt completed. We also
developed a database of all the activities targeted by USAID to
identify: the number of completed and uncompleted activities, the
various types of activities, any duplication in the activities or
payments, and any changes to the originally targeted and agreed-on
activities. We developed the database using attachments to the
program's memorandum of understanding (MOU), which included activities
that USAID and the Egyptian government agreed to undertake in support
of economic reforms. To determine the number of completed activities,
we used USAID disbursement memorandums. We also included activities for
which USAID disbursed program funds although the entire activity was
not completed (in 20 instances, USAID disbursed partial payments based
on the percentage of the activity that it determined Egypt had
completed). We did not include activities that Egypt completed outside
the terms of the program because there were no disbursement memorandums
for these activities. We corroborated testimonial evidence from USAID,
State, and Egyptian officials with our analysis of program activities
by reviewing and comparing information in USAID's program documents. We
reviewed internal controls, including reports by USAID's Office of
Inspector General, as well as potential for fraud and abuse and
compliance with laws and regulations and found no significant issues.
We did not independently evaluate Egyptian laws and regulations, and
our discussion of them is based on secondary sources.
To better understand the range of activities targeted and completed
under the program, we selected three subsets of the reform areas. The
three subsets for which we conducted a more in-depth analysis were
privatization, banking, and intellectual property rights (IPR) and
these subsets covered 29 out of 196 targeted activities (15 percent).
They did not constitute a representative sample of all the activities;
however, we consulted USAID and identified areas with varying results.
For example, USAID characterized IPR reforms as successful, whereas
banking and privatization had varied levels of success.
To determine factors affecting the program's influence on economic
reform in Egypt, we reviewed documents and interviewed U.S. and
Egyptian officials with knowledge of the Cash Transfer Program. We also
met with International Monetary Fund (IMF), World Bank, and European
Union officials, as well as an expert at the Egyptian Center for
Economic Studies. We reviewed studies on the benefits and the costs of
reforms that were published in refereed journals or completed by USAID
contractors; we also interviewed the authors of one of these
studies[Footnote 30] and discussed their methodology. To determine the
monetary significance of the Cash Transfer Program, we calculated the
program's annual share of Egypt's foreign exchange earnings and
government revenue using relevant data provided by the Egyptian
government to the IMF. Although we were unable to fully assess the
reliability of the Egyptian government data, we noted that Egypt
recently subscribed to the IMF's special data dissemination standards,
which were created for nations that already meet high data-quality
standards. Although these data probably have some limitations, we
determined that it is unlikely that potential errors would materially
impact our use of this information in our report. To identify other
factors affecting the program's influence, we analyzed program
documents to calculate the number of times that the Egyptian government
requested, and USAID granted, deadline extensions to complete program
activities.
To assess USAID's evaluation of the program's impact on economic
reform, we reviewed studies that addressed the methodological
challenges of conducting impact evaluations. We also met with, and
reviewed studies by, contractors hired by USAID to assess the impact of
two program areas, IPR and privatization. In addition, we reviewed
USAID's opinion surveys reports and performance management plan.
To determine the steps that USAID has taken in response to the 2002
review by State and USAID, we interviewed USAID and State officials who
participated in or had knowledge of the review, focusing only on those
recommendations that referred to the Cash Transfer Program. We
interviewed USAID, State, Treasury, and Egyptian officials who were
involved in negotiating the new financial sector MOU, and we reviewed
funding data to determine the amount and proportion of program funds
allocated to financial sector reform. To corroborate testimonial
evidence provided by USAID, State, and Treasury officials, we also
reviewed the USAID mission in Egypt's updated strategic plan, revised
in March 2004. Further, we consulted USAID officials regarding any
legal issues to reprogramming Cash Transfer Program funds, and we
reviewed documents showing USAID's funding process. To understand how
the USAID mission in Egypt plans to improve its performance monitoring
system, we interviewed USAID officials and contractors who are
responsible for developing it.
We performed our work between August 2004 and May 2005 in accordance
with generally accepted government auditing standards.
[End of section]
Appendix II: Comments from the U.S. Agency for International
Development:
USAID:
From The American People:
June 15, 2005:
Mr. David Gootnick:
Director:
International Affairs and Trade:
U.S. Government Accountability Office:
441 G Street, N.W.
Washington, D.C. 20548:
Dear Mr. Gootnick:
I am pleased to provide the U.S. Agency for International Development's
(USAID) formal response on the draft GAO report entitled "USAID's Cash
Transfer Program in Egypt Supports Economic Reform Activities, but
Various Factors Have Limited Its Influence " (GAO-05-731) (July 2005).
We have reviewed the draft report and appreciate the time and effort of
your team. While we appreciate the fairness and clarity of the draft
GAO report, there are several points raised in the report on which we
have provided comments in the enclosed document.
Thank you for the opportunity to respond to the GAO draft report and
for the courtesies extended by your staff in the conduct of this review.
Signed by:
Steven G. Wisecarver:
Acting Assistant Administrator Bureau for Management:
Enclosure: a/s:
DRAFT COMMENTS:
USAID appreciates the GAO's very close and. professional collaboration
with USAID staff in studying the U.S. cash transfer program to Egypt.
USAID also appreciates having had the opportunity to provide detailed
comments on a draft of the report.
The GAO's draft included valuable descriptions of progress that Egypt
has made in several areas where USAID provided support through cash
transfers. Based on the Congressional request, the GAO's draft report
also focused on four specific issues, stated in the draft's Appendix 1.
With respect to these issues, USAID would like to draw attention to two
principal points.
1. Completion of Agreed Reforms:
Because of the extraordinary breadth of the USG's policy dialogue with
the Government of Egypt (GOE), USAID and the GOE have agreed on reforms
worth significantly more than the available cash transfer funds. To
expedite implementation of the overall reform program, some cash
transfer agreements were structured to trigger disbursements on a first-
come, first-served basis. As this implies, the GOE subsequently
implemented some reforms without receiving cash transfer disbursements.
Examples of agreed, implemented, but unremunerated reforms include
creation of regulations to establish and regulate margin trading,
drafting and enactment of a competition law, new regulations to improve
customs procedures, and reduction of state ownership in joint venture
banks.
Thus, the GAO draft's finding that "the Egyptian government completed
about 70 percent of the 196 activities it agreed to" related in
substantial part to the structure of the cash transfer program, and not
entirely to shortcomings in policy reforms. Furthermore, please note
that the GAO's draft did not suggest that only 70 percent of cash
transfer disbursements were justified. On the contrary, disbursements
of more than 100 percent of the cash transfers would have been
justified by the GAO's implementation of agreed reforms, had additional
funding been available.
2. Deadlines:
The draft mentioned that USAID and the GOE had revised the initial
target dates for some of the agreed reforms, and that these reforms
were subsequently implemented and cash transfer disbursements approved.
Given that the initial target dates were estimates and were not
material to the desired impact of the reforms, the GAO draft's factual
findings tended to show that the revisions of target dates increased
the USG's influence in accomplishing reforms. With the two points above
taken into consideration, USAID believes that the GAO's draft provided
a clear and fair response to the Chairman's inquiry.
Finally, USAID notes that the scope of the Congressional request did
not appear to allow the GAO to address broader questions concerning the
Government of Egypt's overall progress in modernizing its economic
policies and USAID's overall approach to assisting this progress.
USAID's approach includes a substantial program of technical
assistance, NGO grants, and multilateral cooperation, in addition to
the cash transfers. This program addresses some priorities, such as
trade capacity building, that extend beyond the cash transfer program's
present focus.
USAID is committed to a continuous effort to adapt its policy-reform
program in Egypt to the evolving state of knowledge about policy-reform
assistance and to the opportunities afforded by events on the ground.
We welcome the GAO's valuable contribution to this effort.
[End of Section]
The following are GAO's comments on the U.S. Agency for International
Development letter dated June 15, 2005.
GAO Comments:
1. In our report we acknowledge the collaborative process between USAID
and the government of Egypt to identify and agree on reforms (see pages
1, 2, 11). However, in reviewing program agreements and discussing the
program with USAID officials, we found only one agreement that used the
"menu approach"--that is, targeting activities that were worth more
than the available cash transfer funds during the 12-year period of our
review (1992-2004). We explain that the scope of activities we reviewed
was limited to those targeted under the USAID program (see pages 2 and
26) and that Egypt completed some reform activities for which they did
not receive program funds (see pages 3, 11).
2. USAID states that our finding that the Cash Transfer Program
completed 70 percent of the targeted activities "is related in
substantial part to the structure of the Cash Transfer Program, and not
entirely to shortcomings in policy reforms." As we note in comment 1
and on pages 3, 9, and 11 of the report, the structure that USAID
refers to was in effect only from 1999 to 2003. Regarding USAID's
concern that presenting the percentage of agreed-on activities
completed by Egypt suggests a shortcoming in Egypt's progress in policy
reform, our findings reflect the fact that USAID and the Egyptian
government agreed on 196 reform activities during the period covered by
our review and the Egyptian government completed 136 of those
activities.
3. USAID states that our findings show that the revisions of target
dates increased the U.S. government's influence in accomplishing
reforms. Although USAID's provision of extensions may have allowed the
Egyptian government to complete the reforms, we disagree that our
findings show that revising the target dates increased the U.S.
government's influence, as USAID asserts. Rather, we believe that the
practice weakened one of USAID's tools of conditionality--deadlines.
Additionally, the 2002 review by State and USAID pointed out the need
to focus more tightly the conditionality of the Cash Transfer Program
and indicated that "in the event that outcomes, benchmarks and
timelines agreed with the Egyptian government are not met within a
reasonable time of the originally agreed target dates the team agreed
that DSP II funds will be reprogrammed to fund other USAID projects in
Egypt."
[End of section]
Appendix III: GAO Contact and Staff Acknowledgments:
GAO Contact:
David Gootnick (202) 512-3149:
Acknowledgments:
In addition to the individuals named above, Phillip Herr, Julie
Hirshen, Adrienne Spahr, Ming Chen, Joel Green, Eve Weisberg, Grace
Lui, Reid Lowe, and Martin de Alteriis made key contributions to this
report:
(320309):
FOOTNOTES
[1] We reviewed activities that were identified for reform in
agreements between USAID and the Egyptian government, and we calculated
the number of completed activities based on those for which USAID
disbursed program funds. We included activities that USAID deemed
partially complete and for which it consequently disbursed a percentage
of program funds based on activity completion criteria.
[2] In 1999, USAID provided the government of Egypt with a "menu" of
reform-related activities from which to choose, rather than a narrowly
defined set of activities to undertake. Because the value of the total
activities targeted under the menu approach was greater than funds
available through the program, Egypt was not expected to complete all
of the activities.
[3] The new MOU negotiated by USAID and the Egyptian government was
developed by the Department of State, the Department of the Treasury,
and USAID.
[4] GAO, Foreign Assistance: Observations on USAID's Commodity Import
Program, GAO-04-846T (Washington, D.C.: June 17, 2004).
[5] U.S. Agency for International Development, USAID/Egypt Strategic
Plan Update: FY 2000-2009, Advancing the Partnership (Cairo: 2000).
[6] The IMF and World Bank (WB) supported an economic reform and
structural adjustment program in Egypt that focused on (1) restoring
macroeconomic balance and reducing inflation, (2) adjusting economic
policies to stimulate medium-and long-term economic growth, and (3)
revising social policy to minimize the negative effects of economic
reforms on the poor. The IMF loaned Egypt approximately $221 million
and WB loaned Egypt $300 million for these efforts. The IMF continues
to provide Egypt technical assistance. In addition, under its
Industrial Modernization Program, the European Union granted Egypt $124
million dollars to support policy reforms between 1998 and 2004.
[7] For the purposes of this report, we refer to the program as the
"Cash Transfer Program" since different names were used during our
review period.
[8] USAID's definition of privatization evolved from "reducing a
company's public ownership to less than 50 percent", to "reducing a
company's public ownership to less than 20 percent."
[9] 22 U.S.C. § 2346 (2004).
[10] Consolidated Appropriations Act of 2005, Pub. L. No. 108-447, div.
D, title II, 118 Stat. 2809, 2976 (2004).
[11] In this report, "reform-related activities" are activities that
USAID identified for reform and the Egyptian government agreed to
through MOUs. USAID uses various terms for these activities, such as
"policy measures," "indicators," and "benchmarks."
[12] In responding to a draft of this report,USAID officials commented
that the Egyptian government subsequently completed some of the
activities--such as new regulations for customs procedures and reducing
its shares in joint venture banks--but USAID did not disburse any funds
for these activities because it was still negotiating the terms of the
new MOU.
[13] Joint venture companies are private companies with partial
Egyptian government ownership.
[14] Joint ventures were not included in the original list of 314
companies identified by the Egyptian government for privatization. Over
time, some of the companies became joint ventures and remained on the
list of companies to be privatized because the Egyptian government
retained controlling ownership.
[15] USAID counted liquidation as a form of privatization. Liquidation
involves selling off the assets of a company to the extent that the
company ceases to exist.
[16] Until 1998, the government of Egypt's state banks partially owned
most of the joint venture commercial banks, which had a negative impact
on the joint venture banks' profitability and competitive position in
the banking sector. This activity reduced the Egyptian government's
share of joint venture banks to less than 20 percent in each bank.
[17] Although Egypt joined the Patent Cooperation Treaty, USAID did not
disburse funds for this activity because the government of Egypt missed
the activity's deadline.
[18] The average disbursement was about $25 million; the average was
higher than the median because of several large payments USAID made for
activities completed between 2002 and 2004.
[19] The privatization of Ramsis Agriculture and the Egyptian Company
for Meat and Dairy Products were used to justify a payment of $2.4
million in 2000 and the privatization of United Poultry Production was
used to justify a payment of $1.2 million in 2001.
[20] David T. King, Bruce MacQueen, and Mack Ott, The Cost of Not
Privatizing: An Assessment for Egypt. Survey and Empirical Analysis.
Submitted to USAID/Egypt (Bethesda, Md: IBM Business Consulting
Services, 2004).
[21] International Monetary Fund, Arab Republic of Egypt--Staff Report
for the 2004 Article IV Consultation (Washington, D.C.: 2004).
[22] A performance period is the period of time between the date that
the government of Egypt agreed to undertake an activity and the
deadline for completing it.
[23] Carana Corporation, The Results and Impacts of Egypt's
Privatization Program (Cairo, Egypt: USAID Coordinating and Monitoring
Services Project, 2002).
[24] Other factors included (1) USAID's Cash Transfer Program, (2)
Egypt's IPR-related obligations under the WTO's membership, and (3)
Egypt's placement on the U.S. Trade Representative's Priority Watch
list.
[25] Development Associates, Inc., Assessing the Effectiveness of
Technical Assistance for Policy Reform: The Case of Intellectual
Property Rights Reform in Egypt (Cairo: USAID, 2004).
[26] The results of the survey cannot be viewed as representative of
all academics and or business leaders in Egypt because its population
was small and not selected randomly and had a response rate of about 50
percent.
[27] The review recommended that the Cash Transfer Program focus on "no
more than two broad sets of economic reform goals at any one time,"
whereas previous MOUs targeted several reform areas.
[28] In addition to the $800 million that the Egyptian government may
receive for completing financial sector reform activities by the end of
fiscal year 2009, it received $100 million for signing the financial
sector MOU and developing a related matrix of time-bound reform-related
activities. For the first time, deadlines for completing the activities
were specified in the new MOU, whereas previously deadlines were
determined after an MOU was signed.
[29] The Cash Transfer Program falls under USAID's strategic objective
of strengthening the environment for trade and investment.
[30] King, MacQueen, and Ott, The Cost of Not Privatizing.
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