United States General Accounting Office

GAO Report to Congressional Requesters

December 1998 DEFENSE TRADE

Status of the Defense

Export Loan Guarantee

Program

GAO/NSIAD-99-30

GAO United States

General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-280232 

December 21, 1998

The Honorable Dale Bumpers

The Honorable Paul Sarbanes

United States Senate

The National Defense Authorization Act for Fiscal Year 1996 directed the

Secretary of Defense to establish a loan guarantee program for the sale or

long-term lease of defense articles and services to eligible foreign

governments.1

 The legislation required the Secretary of Defense to charge

fees to cover administrative costs and potential U.S. liability in the event of

default on loan payments. Consistent with congressional intent, the

Department of Defense (DOD) established the Defense Export Loan

Guarantee (DELG) Program in November 1996 and designed it to operate at

no cost to the government. The authorizing legislation also required the

President to submit a report to Congress by February 1998 that included

an analysis of the costs and benefits of the DELG Program and any

recommendations for modification of the program that the President

considers appropriate.

In response to your request, we determined the status of the program.

Specifically, we reviewed the level of program activity to date, the

program’s financial status, and other sources of financing available to

borrowing countries. As agreed with your offices, we also compared DELG

Program characteristics with other U.S. government export financing

programs and examined issues related to the planned fiscal year 1999

transfer of DELG Program responsibilities within DOD.

Results in Brief Since its implementation in 1996, the DELG Program has guaranteed one

loan and has not generated enough revenue in fees to cover its operations.

The program’s ability to attract future activity to generate sufficient

revenue for continued operations is uncertain, since countries have other

sources that offer financing at a lower cost. Further, the availability of loan

guarantees is one of numerous factors that affect a country’s decision to

purchase U.S. defense exports. Unlike the DELG Program, other U.S.

government-administered programs that offer direct loans or guarantees

for defense-related items are designed to operate with U.S. government

subsidies, which reduce financing costs to the purchasing countries.

1

10 U.S.C. 2540(a).

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Decisions on the scope and nature of continued DELG operations pose a

challenge to DOD. A report on program operations and any recommended

changes has not been submitted to Congress, as required by law. In

addition, the DELG Program has not been transferred within DOD as

originally planned under the Defense Reform Initiative. Uncertainty about

future program responsibility may also be hampering day-to-day

operations.

Background In the 1970s and 1980s, DOD guaranteed loans issued for weapons exports

and incurred significant costs when developing countries were unable to

repay. Between 1974 and 1984, almost all foreign military financing took

the form of guaranteed loans provided through the U.S. government’s

Federal Financing Bank. In the global recession of the 1980s, repayment of

these loans was difficult for developing countries. Congress authorized

debt refinancing and debt reduction plans to mitigate these problems. By

1990, DOD changed its financing focus from guarantees to predominantly

grants. DOD’s foreign military financing currently consists of grants and

also loans subject to the Federal Credit Reform Act of 1990.2

As worldwide military sales have declined in recent years, competition in

arms sales has intensified among major weapon suppliers. U.S. defense

companies have been concerned that they have been at a competitive

disadvantage because other exporting nations provided

government-backed financing, while the United States did not. Although

only one of many variables in a buyer’s decision, official export financing

support can be of particular importance in an individual sale, such as

when private institutions are unwilling to offer long-term financing

without a guarantee.

The Secretary of Defense assigned responsibility for the new loan

guarantee program to the Under Secretary of Defense (Acquisition and

Technology), who placed the program in the office of the Deputy Under

Secretary of Defense for International and Commercial Programs.

However, as part of the Secretary of Defense’s 1997 Defense Reform

Initiative to restructure parts of DOD, responsibility for the program was

2

The purpose of the Federal Credit Reform Act of 1990 was to ensure that the budget reflects a more

accurate measurement of the government’s subsidy costs for federal direct loans and loan guarantees

and to permit better cost comparisons among credit programs and between credit and noncredit

programs.

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B-280232 

planned to transfer to the Defense Security Cooperation Agency (DSCA) in

fiscal year 1999.3

Under the DELG Program, the Secretary of Defense may issue guarantees

against possible losses of principal and interest for loans provided by

private sector institutions to certain eligible sovereign nations. DOD

guarantees defense export loans for up to the lesser of 85 percent of the

contract value or 100 percent of U.S. content provided that the

U.S. portion of the production cost of exported items is greater than

50 percent. The program covers eligible transactions under both the

Foreign Military Sales Program, administered by DOD, and U.S. defense

companies’ direct sales that are licensed by the U.S. Department of State.

Eligibility is limited to countries meeting criteria defined by the program’s

authorizing legislation.4

 As of January 1997, 39 countries were eligible for

the DELG Program.

DELG Program financing terms include disbursement periods, during which

only interest is charged, that extend as long as 5 years and repayment

periods up to 12 years. Interest, based on a lender’s cost of funds plus an

agreed percentage, will accrue on the outstanding balance of the loan

during the disbursement period and will be paid at a minimum of every

6 months. Repayment of principal must begin within 6 months of the end

of the disbursement period. DOD determines the repayment period based

on the contract value, the useful life of the item, and the purchasing

country. The borrowing nation must accept the loan as sovereign debt and

pay at least 15 percent of the contract price to the supplier in cash, prior to

disbursement of the guaranteed loan amount or in incremental

installments.

DOD may respond to an application for a DELG loan guarantee in two phases

as requested by the applicant (see fig.1). In the first phase, DOD issues a

letter of interest providing nonbinding notification that it is willing to

guarantee a loan and estimates the costs to the borrower. This notification

does not obligate DOD to provide a guarantee. In the second phase, DOD

issues a binding commitment to guarantee the eligible loan. However,

3

DSCA (formerly the Defense Security Assistance Agency) is the principal organization within DOD

responsible for security assistance program management and associated operational functions,

including financing.

4

By law, 10 U.S.C. 2540(b), a country must be (1) a member of the North Atlantic Treaty Organization

(NATO); (2) a designated major non-NATO ally as of March 31, 1995; (3) a Central European country

that the Secretary of State has determined either has changed its form of national government from a

nondemocratic to a democratic form since October 1, 1989, or is in the process of changing its form; or

(4) a non-Communist country that was a member of the Asia Pacific Economic Cooperation as of

October 31, 1993.

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B-280232 

applicants may request final commitment from DOD without first obtaining

a letter of interest.

Figure 1: DELG Application Process

U.S. Department of

State issues

export license

Lender or country

 applies for

final commitment

(DOD's binding 

commitment to guarantee

the eligible loan)

DOD issues 

final commitment and

approves terms of

transaction

DOD makes guarantee;

lender disburses loan

DOD issues letter of

interest which contains

estimated financing

costs to the borrower

Lender, country, or

exporter applies for

letter of interest

(DOD's nonbinding

indication that a loan is

eligible for a guarantee)

Preliminary

Qualification

Final

Commitment

Source: DELG Program guidance.

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B-280232 

DELG Program Has

Seen Little Demand

Consistent with congressional intent, DOD designed the DELG Program to

operate through various user fees to cover its operating costs and the risk

of potential default on loan payments by the borrowing nation. However,

the program has collected little money in fees because most eligible

countries have not participated. In the authorizing legislation, Congress

limited the number of eligible countries to countries that are major allies

or emerging democracies. Industry and banking officials we spoke with

said that most of the eligible countries can obtain financing at a lower cost

or, alternatively, they find the program unaffordable. Therefore, countries

make little use of the DELG Program. In addition, it is unclear what impact

export financing arrangements have on export sales, because other factors

may also affect a purchasing country’s decision on from whom to buy.

DELG Program Was

Designed to Be

Self-sustaining

The DELG Program was intended to be self-sustaining and therefore user

fees to borrowing nations were set at levels expected to cover estimated

program costs. The borrower pays fees to cover administrative costs and

an exposure fee that reflects the risk of default. DOD calculates the

exposure fee based on the loan’s repayment term, its disbursement

schedule, the country’s risk rating, and the guaranteed loan’s interest rate.

By law, the exposure fee must be paid proportionately as the guaranteed

loan is disbursed and may not be included in the guaranteed loan amount.

To initiate the program, DOD was authorized to provide $500,000 from its

operating funds for reimbursable start-up costs. The authorizing legislation

provided that user fees for the DELG Program would be used to reimburse

the start-up costs. As shown in figure 2, borrowers pay administrative fees

to a program account that is recorded on budget and an exposure fee to a

financing account that is nonbudgetary and is used to record the cash

flows associated with the loan guarantee over its life.5

 In the case of

defaults, the reserves held in the financing account are used to make claim

payments to the lending institution. If exposure fee estimates are accurate,

the financing account will have exactly the reserves needed to cover any

defaults that occur. If exposure fees are not estimated correctly and losses

occur, additional funds from the general fund may be necessary to cover

losses.6

5

Nonbudgetary accounts may appear in the budget for informational purposes, but the transactions are

outside the budget because they do not represent net budget authority but rather the means of

financing.

6

The Federal Credit Reform Act of 1990 provides credit programs with permanent indefinite budget

authority to pay for subsidy reestimates that may occur.

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Figure 2: DELG Program Cash Flow Under Credit Reform Act

Congress

Program

Account

Treasury Financing

Account U.S. Exporter

Lender

Special Receipt

Account

(which temporarily holds fees

until transferred to program account)

Borrower

Interest paid 

on

 exposure fee

Borrower pays

up front

exposure fee

Borrower pays

exporter

Borrower pays

administrative fees

Borrower repays principal

and interest to lender during

repayment period

Lender disburses loan

In event of default,

financing account pays lender Budget Account

Nonbudget Account

Start-up costs appropriated

DELG Program

Guaranteed One Loan and

Issued Nine Nonbinding

Notifications for Other

Loan Guarantees

Since its inception, the DELG Program has issued one loan guarantee

valued at about $16.7 million to support a U.S. company’s licensed direct

commercial sale of unmanned air vehicle and moving target simulator

systems to Romania.7

 In early 1997, AAI Corporation, a U.S. company,

conducted negotiations with the Romanian government for the contract.

According to company officials, financing was not a factor in winning the

contract award. The Romanian government had originally planned to pay

for the purchase from its budget but requested financing during contract

7

Defense appropriations acts have provided authority to DOD to carry outstanding guarantees up to a

total value of $15 billion.

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negotiations. As a result, AAI Corporation sought a loan that would be

guaranteed by the DELG Program. When the loan guarantee was approved,

the exposure risk fee was calculated at 21.23 percent of the guaranteed

principal amount of about $16.7 million, a fee of about $3.5 million.

Disbursement of the loan began in July 1998, and it is planned to conclude

in March 1999 according to DOD officials. The Romanian government will

have 5 years to repay the loan.

Besides guaranteeing one loan, the DELG Program has issued preliminary

notifications that it is willing to guarantee loans for nine other

transactions.8

 These are valid for 6 months and then may be renewed.

According to a DELG program official, some of the nine letters of interest

are no longer valid. DOD officials said that they do not monitor the status of

contract awards and, therefore, do not know whether any of the nine

transactions will result in an eventual loan guarantee. However, if any of

the letters of interest resulted in a guarantee, then the DELG Program would

receive additional fees. Based on the letters already issued, the DELG

Program has indicated its willingness to guarantee loans to Greece, New

Zealand, South Korea, Spain, Thailand, and Turkey. The aggregate DELG

guarantee amount for the nine transactions is about $4.5 billion. Examples

of equipment covered by the potential loan guarantees are radar systems

and major platforms such as military aircraft. Some DOD and industry

officials stated that the letters of interest are used as a marketing tool so

that the potential purchaser can compare the DELG terms and conditions

with other available financing options.

DELG Has Limited

Funding to Cover Future

Program Costs

As authorized, the Secretary of Defense made available $500,000 for

expenses directly related to the administration of the DELG Program. This

money, which came from DOD appropriated funds, was used for a contract

with a consulting firm to implement the program. The start-up costs are to

be reimbursed to DOD’s operations and maintenance fund if and when the

program has collected sufficient fees. To date, the start-up costs have not

been reimbursed, and the contract with the consulting firm terminated at

the end of fiscal year 1998. DOD officials who provided policy oversight for

the program indicated that they did not charge time specifically to a DELG

account and that most of the daily operations, such as responding to

program inquiries and drafting letters of interest, were covered by the

outside consulting firm.

8

Two letters of interest remained pending but not issued.

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About $125,000 in fees were collected as of October 1998. The funds are

being held in a special receipt account until they are expended. Table 1

shows the types of fees charged to administer the program and the amount

collected.

Table 1: DELG Fees to Cover the Administration of the Program (from February 1997 to October 1998)

Fee Definition of fee Policy

Amount

collected

Administrative Covers administration of the DELG guarantee

during the loan disbursement and loan

repayment period

3/8 of 1 percent of total amount guaranteed and

is paid at loan guarantee closing

$62,475

Commitment Indicates that DELG has committed a portion of

its authorized contingent liability to a specific

transaction

1/8 of 1 percent a year is to be paid on the

undisbursed balance of a guaranteed loan

14,997

Processing Covers the cost of processing applications For letter of interest (14 applications): $1,250;

for renewal or update of letter (1 letter

amendment): $500;

for final commitment (1 final commitment

application fee): $25,000;

for Master Guarantee Agreementsa with lending

institutions (2 agreements): $2,500

48,000

Total $125,472

aThe Master Guarantee Agreement is an agreement between DOD and a lender. It provides the

general terms and conditions applicable to DELG guarantees.

DELG Program Not

Cost-Effective for Most

Eligible Countries

Long-term viability of the program, as currently structured, depends on a

level of business that generates sufficient funds to cover daily program

operations and the likelihood of potential defaults. However, the

program’s ability to attract additional business is unclear because,

according to banking and industry officials with whom we spoke, the

program is not cost-effective for most of the 39 eligible countries. The

majority of these countries could either pay for defense equipment from

their own budgets or obtain favorable financing from the private sector

lending community. The countries with the highest risk of default on loans

are the most likely to be interested in the program because they can obtain

longer terms and lower interest rates than in the commercial market.

Banking and industry officials also said that many banks do not finance

defense exports as a matter of policy, and those that do are not likely to

provide long financing terms for high risk countries.

The risk rating of an eligible country is an important factor in determining

the exposure fee DOD will charge for guaranteeing a specific transaction.

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The program follows country risk ratings resulting from the schedules and

agreements set by the Interagency Country Risk Assessment System

(ICRAS).9

 For example, the program used the country risk rating for

Romania as one of the factors to calculate the exposure fee for the loan

guarantee.

Based on our analysis, about one-third of the eligible countries may

consider DELG as a financing option because their high risk credit ratings

would likely foreclose other alternatives. (See table 2 for a list of eligible

countries and those with high risk ratings.) Most of the high risk countries

eligible for DELG loan guarantees are in Central Europe and represent

newly independent nations that do not have an established credit rating on

the commercial market, according to industry officials.

Table 2: Countries Eligible for the DELG Program

Eligibility criteria Eligible countries

Number of

countries Countries with high risk ratingsa

NATO member Belgium, Canada, Denmark, France, Germany,

Greece, Iceland, Italy, Luxembourg, the

Netherlands, Norway, Portugal, Spain, Turkey,

and the United Kingdom

15 Greece, Turkey

Major non-NATO member Australia, Egypt, Israel, Japan, and South Korea 5 Egypt, South Korea

Central European countries Bulgaria, Croatia, Czech Republic, Estonia,

Hungary, Latvia, Lithuania, Poland, Romania,

Slovakia, and Slovenia

11 Bulgaria, Croatia, Hungary,

Latvia, Lithuania, Poland,

Romania, and Slovakia

Non-Communist Asia Pacific

Economic Cooperation

members

Brunei, Indonesia, Malaysia, New Zealand,

Philippines, Singapore, Taiwan, and Thailand

8 Indonesia, Philippines

Total 39 14

aBased on fiscal year 1998 country risk ratings.

Company and banking officials cite the exposure fee structure as a

deterrent to program use. By law, the exposure fee cannot be financed as

part of the guaranteed loan. The borrowing country must either pay for the

fee out of its budget or seek other options to finance the fee.

9

Federal budgeting procedures require all U.S. government agencies and programs that provide

cross-border loans, guarantees, or insurance to have common standards for country risk assessment.

ICRAS was developed for this purpose.

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Availability of

Cost-Effective Financing

May Not Be the Deciding

Factor in Making a

Defense Sale

Even if the DELG Program provided more cost-effective financing, other

factors, including price, technical sophistication of equipment, and offset

arrangements,10 influence a purchasing country’s decision when awarding

a contract. For example, offsets are often an essential part of defense

export sales, and demand for such arrangements has increased in certain

countries.11 U.S. defense companies are unable to quantify the impact of

export financing on sales but recognize that it is one of many factors

considered during source selection. According to some U.S. defense

companies, more purchasing countries are officially requesting exporters

to include financing arrangements in proposals for contracts. Financing

provides purchasing countries with an option for optimizing the use of

available funds by stretching out payments over time. However, no U.S.

defense company official we spoke with could offer an example of a

purchasing country awarding a defense contract based solely on financing

considerations such as securing a government guaranteed loan.

Economic and political conditions also can affect a purchasing country’s

decision on buying defense equipment. For example, the current Asian

financial crisis has resulted in canceled or deferred purchases. Thailand

could not uphold its contractual obligations for its

government-to-government purchase of an F/A-18 fighter package because

of economic hardship, and the Malaysian government announced that

defense spending would be deferred except for certain items until the

economy improves. The availability of a DELG Program guarantee would

not likely alter these decisions.

The DELG Program

Differs From Other

U.S. Government

Defense Export

Financing

In addition to the DELG Program, the U.S. government supports

defense-related export financing through the U.S. Export-Import Bank

(Eximbank) for dual-use and drug interdiction equipment and through the

Foreign Military Financing Program, administered by DOD, for direct

commercial or government-to-government sales of defense articles,

services, and training. Congress authorized loans to Central European

countries in fiscal years 1997 and 1998 as a new initiative in the Foreign

Military Financing Program. As shown in table 3, financing programs vary

by legislative basis, eligible products, levels of subsidization, types of

financing offered, authorized commitment or funding levels, program

usage, and country participation. None of these programs reached their

10Offsets are the industrial and commercial compensation benefits provided by sellers to foreign

governments and firms as inducements or conditions for the purchase of military goods and services.

11For additional information on offsets, see Military Exports: Offset Demands Continue to Grow

(GAO/NSIAD-96-65, Apr. 12, 1996).

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authorized levels, and few countries are undertaking new commitments

assisted by these programs.

Table 3: Program Characteristics of the DELG Program, Eximbank Dual-Use Financing, and Foreign Military Financing

Program

characteristicsa DELG Program Eximbank Dual-Use Financingb Foreign Military Financing

Legislative basis Fiscal Year 1996 National Defense

Authorization Act, sec. 1321

Fiscal Year 1999 Defense

Appropriations Act, sec. 8075

Public Law 103-428, Oct. 31, 1994

Public Law 105-121, Nov. 26, 1997

Foreign Assistance Act of 1961, as

amended,

Arms Export Control Act, as

amended

NATO Enlargement Facilitation Act of

1996

Purpose “Level the international playing field”

for U.S. defense companies

competing for exports

Supplement and facilitate private

sector financing

Support national security objectives

of the United States and its allies by

providing security assistance

Eligible products Defense articles, services, or design

and construction services

Nonlethal dual-use exports that have

military applications but primarily

civilian use

Defense articles, services, and

training

Subsidization and

types of financing

Zero subsidy for U.S.-backed loan

guarantees for private sector loans

Partially subsidized loan guarantees

for private sector loans and partially

subsidized Eximbank loans

Grants and partially subsidized

loans, with DOD as the lender

Authorized

commitment or

funding

Up to $15 billion of U.S. backing

(contingent liability) for outstanding

guarantees

Up to 10 percent of the Eximbank’s

total annual export financing authority

Varies annually: fiscal year 1997

authority totaled $3.3 billion

Program usage At close of fiscal year 1998: 1 loan

guarantee valued at $16.7 million

Since 1995, 12 transactions, both

loan guarantees and loans, with

dual-use export value of about $264

million

Fiscal year 1997 loan subsidy

authority: $58.2 million (included in

the $3.3 billion total)

Country

participation

Limited by law to designated

countries. As of fiscal year 1998,

Romania was the only borrowing

country.

Open to countries subject to

Eximbank limitations. As of fiscal

year 1998, Brazil, Indonesia,

Romania, and Venezuela

participated.

In fiscal year 1997, five countries

considered for loans. Turkey and

Greece received direct loans in

fiscal year 1997.

aData as of fiscal year 1998 unless otherwise noted.

bDrug interdiction defense equipment is not in this category.

The Eximbank is generally prohibited by law from financing exports of

defense articles except for nonlethal articles, categorized as dual-use,

intended primarily for civilian purposes.12 The Eximbank may also finance

12For additional information on the Eximbank, see U.S. Export-Import Bank: Process in Place to

Ensure Compliance with Dual-Use Export Requirements (GAO/NSIAD-97-211, July 17, 1997) and

correspondence reporting on end uses of items financed and additional financing commitments

(GAO/NSIAD-98-244R, Sept. 1, 1998).

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equipment and services on the U.S. munitions list13 for drug interdiction

purposes if the President determines that the sale is in the U.S. national

interest. The Foreign Military Financing Program provides loans for

eligible products similar to the DELG Program but restricts direct

commercial sales to nonstandard defense articles and services.14 The

Foreign Military Sales Program is the avenue through which most Foreign

Military Financing Program dollars are spent.15

The DELG Program is not as advantageous to eligible borrowers as the

other U.S. programs because the DELG Program requires a country to fully

cover its assessed risk of default as well as administrative fees. In contrast,

the Eximbank offers the borrower an option to finance the exposure fee

that covers part of its assessed risk and add the fee into the guaranteed

loan amount. The Eximbank subsidizes the remaining amount needed to

cover the risk of default. According to Eximbank officials, borrowers

almost always choose to finance the fee. In the hypothetical example

shown in table 4, the Eximbank issued a loan guarantee for 85 percent of

the contract price of $100 million and charged the borrower an exposure

fee of 14 percent of the 85-percent loan guarantee. The fee is rolled into

the loan guarantee amount.

Table 4: Example of Hypothetical

Eximbank Loan Guarantee (dollars in

millions)

Transaction feature Amount

Contract price $100.0

Loan guarantee amount for contract 85.0

Borrower’s exposure fee 11.9

Total loan guarantee amount $96.9

The examples in table 5 contrast exposure fees for a given country risk

assessment category in the DELG Program and in Eximbank for the same

risk category and loan repayment term. As the country’s risk rating and

repayment period increase, the borrowing country has to pay a higher

exposure fee under both programs. However, the fees are higher under the

DELG Program as compared to Eximbank’s subsidized program.

13The U.S. munitions list is published in the Department of State’s International Traffic in Arms

Regulations.

14Nonstandard items are those DOD items that do not have national stock numbers. However, a

purchasing country may request in writing exceptions from DSCA for the commercial procurement of

standard DOD items that have national stock numbers.

15The Foreign Military Sales Program allows foreign government purchasers to acquire U.S. defense

articles and services from DOD, which manages the acquisitions using its established contracting

procedures.

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Table 5: DELG and Eximbank

Exposure Fees Exposure fee (percent of loan

guarantee) Borrowing country’s risk

rating (1=low; 8=high)

Repayment

period (years) DELGa Eximbank

4 5 5.38 2.75

6 5 13.63 4.14

6 12 22.55 11.41

7 12 33.50 17.11

aDELG examples are based on a 1-year disbursement period, the lowest end of the DELG fee

range.

Source: DELG Program guidance applicable for fiscal year 1998.

Commitment levels in both the DELG Program and the Eximbank’s dual-use

financing have been below authorized caps. As of the close of fiscal

year 1998, the total value of dual-use exports receiving Eximbank

financing since 1995 was about $264 million. Also, the Eximbank has

financed four drug interdiction projects involving defense articles since

1990. Eximbank financing may be available, subject to limitations, to

almost 200 countries.16 However, four countries—Brazil, Indonesia,

Romania, and Venezuela—received loans or loan guarantees for dual-use

exports between 1995 and 1998.

The Foreign Military Financing Program’s authority to issue new loans

also has not been fully used and few countries are undertaking new

commitments. In fiscal year 1997, five countries—Greece, Turkey, the

Czech Republic, Poland, and Hungary—were considered for Foreign

Military Financing Program subsidized loans. The Central European

countries did not participate because of (1) the perceived high interest

rate, (2) restrictions on countries’ use of the loan, (3) internal budgetary

constraints, or (4) internal political conditions such as the timing of

legislative sessions. In fiscal year 1998, the appropriations act did not limit

loan eligibility to specific countries; however, DOD continued its initiative

with the three Central European countries and in 1998, one country,

Poland, indicated interest in accepting a loan because of a more favorable

interest rate. DOD officials said they were planning to convert unused fiscal

year 1998 Foreign Military Financing loan subsidies to grants.

16The Eximbank makes available on its Web site a Country Limitation Schedule. The listing effective

October 15, 1998, contains 199 countries and their limitations for financing.

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Resolving Uncertainty

Concerning DELG

Program

Responsibility Poses a

Challenge to DOD

DOD has not submitted a required report to Congress nor resolved issues

concerning programmatic responsibilities and resource management of

the program. Under a DOD reorganization initiative, the DELG Program was

to transfer to DSCA in fiscal year 1999. However, such a transfer has not

occurred and the conditions under which a transfer would take place are

not clear.

The National Defense Authorization Act for Fiscal Year 1996 required that

the President submit to Congress a report on the loan guarantee program,

including an analysis of the costs and benefits of the program and any

recommendations for modification of the program that may be

appropriate, such as adding to the list of eligible countries, and any

proposed legislation necessary to authorize a recommended modification.

The report assessing the program was required to be sent to Congress by

February 1998. DELG Program officials said that they have drafted a report

for Congress and are coordinating it through DOD. The officials indicated

that they had not prepared a cost-benefit analysis of the program as part of

the report. According to program officials, the report had not been

submitted, in part, because the law required the President to sign the

report, a time-consuming process. They stated that they were taking the

steps necessary for the report to be signed by the Secretary of Defense,

which would require less review and coordination than a report signed by

the President.

Under the Defense Reform Initiative, the transfer of the DELG Program to

DSCA was intended to consolidate programmatic responsibility for financial

matters associated with international weapon sales. However, officials are

uncertain as to whether a transfer will actually take place. Senior DSCA

officials said they view the program as “broken” and have refused to

accept it in its current condition. Furthermore, they said the Under

Secretary of Defense for Policy has prepared a memorandum citing that

problems with the program needed to be resolved. DOD officials said that

they may use the existing user fees to award a contract to a consulting

firm to operate the program on an interim basis.

Without any demand for the program, continued operations may not be

necessary. However, without future activity and revenue, the $500,000

start-up costs from DOD’s operating funds cannot be repaid. In the

meantime, DOD program officials view their role as one limited to policy

oversight. It is unclear, therefore, how day-to-day operations are being

handled.

Page 14 GAO/NSIAD-99-30 Defense Trade
B-280232 

Conclusions Although designed to be self-sufficient, the DELG Program appears unlikely

to reach this goal in the near future without additional loan guarantees.

Industry and banking officials indicated that the program was too

expensive to attract potential borrowing countries in comparison to

financing terms available from private sector sources or their own

budgets. However, it is not clear what program modifications would

generate more activity, because financing is only one of several factors a

country considers when awarding a contract. Any examination of the steps

needed to modify program operations should be based on an assessment

of the costs to the government in taking those steps and the benefits

associated with a more active program. DOD has an opportunity to

reexamine the future of the DELG Program in the required report to

Congress. The ongoing dispute regarding program management

responsibility may be hampering day-to-day program operations.

Recommendations We recommend that the Secretary of Defense ensure that the required

report to Congress provides a cost-benefit analysis of the DELG Program. In

addition, we recommend that the Secretary of Defense clarify

responsibility for staffing, managing, and providing resources for the

program.

Agency Comments In commenting on a draft of this report, DOD stated that it plans to submit a

legislative proposal to terminate the program and believes, therefore, that

our recommendations are moot. The existing law requires that the

President submit a report to Congress by February 1998 on the DELG

Program, containing an analysis of the program’s costs and benefits. This

has not occurred. Although in its comments, DOD limited its discussion to

the impact of program terms and conditions of the program’s operations,

an analysis addressing issues that we raise in our report, such as the use of

export financing by purchasing countries and by exporters, would also

contribute to the debate about the future of the program. We have deleted

part of our original recommendation that called for DOD to develop a

recommendation on the future of the program. However, our remaining

recommendations are still valid because DOD’s proposal does not relieve it

from complying with the current legislation or continuing sound

management of current operations. For example, DOD has ongoing

business such as the loan guarantee to Romania that requires continued

management until its conclusion. DOD’s response, without attachment, is

reprinted in appendix I.

Page 15 GAO/NSIAD-99-30 Defense Trade
B-280232 

Scope and

Methodology

To determine the DELG Program’s activity and financial status, we

examined DELG legislation, policy, loan guarantee, and budget documents.

We interviewed past and present officials working on the DELG Program,

collected and analyzed budget documents, and discussed the DELG

budgetary accounts with officials from the DOD Comptroller’s Office, the

Office of Management and Budget, and the Congressional Budget Office.

We discussed with several banking and industry officials the level of

interest in the DELG Program as well as alternative financing sources

available to borrowing countries. We examined the country risk rating

schedule for the 39 DELG-eligible countries and the impact the country

rating had on the cost of the DELG loan guarantee to borrowing countries.

To provide a broader context of information on U.S. government

defense-related export financing, we compared the DELG Program with

DOD’s Foreign Military Financing Program and the Eximbank’s financing

for dual-use items. We obtained information and program documents from

DOD and Eximbank officials on their financing programs. We reviewed and

assessed various characteristics of all three financing programs, including

the governing legislation, program purpose, type of financing provided,

spending authority, eligible articles to be financed, and country

participation. We also compared the impact of subsidies on DELG and

Eximbank loan guarantee exposure fees. Finally, we identified unresolved

management issues regarding the DELG Program and discussed them with

DOD officials.

We performed our work between March and October 1998 in accordance

with generally accepted government auditing standards.

We plan no further distribution of this report until 30 days from its issue

date unless you publicly announce its contents earlier. At that time, we

will send copies of this report to the Chairmen and Ranking Minority

Members of the Senate Committee on Armed Services; Subcommittee on

Defense, the Senate Committee on Appropriations; Subcommittee on

Foreign Operations, Export Financing, and Related Programs, the Senate

Committee on Appropriations; Subcommittee on International Economic

Policy, Export, and Trade Promotion, the Senate Committee on Foreign

Relations; the House Committee on National Security; Subcommittee on

Foreign Operations, Export Financing and Related Agencies, the House

Committee on Appropriations; Subcommittee on National Security, House

Committee on Appropriations; Subcommittee on International Economic

Policy and Trade, House Committee on International Relations; and

Page 16 GAO/NSIAD-99-30 Defense Trade
B-280232 

Subcommittee on International Operations and Human Rights, House

Committee on International Relations; the Secretary of Defense; the

Director, Defense Security Cooperation Agency; and the Director, Office of

Management and Budget. We will make copies available to others upon

request.

Please contact me on (202) 512-4841 if you or your staff have any

questions concerning this report. Major contributors to this report were

Karen Zuckerstein, Anne-Marie Lasowski, and Anne Howe.

Katherine V. Schinasi

Associate Director

Defense Acquisitions Issues

Page 17 GAO/NSIAD-99-30 Defense Trade
Appendix I 

Comments From the Department of Defense

(707335) Page 18 GAO/NSIAD-99-30 Defense Trade
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