a

GAO

United States General Accounting Office

Report to the Chairman, Subcommittee 

on International Monetary Policy and 

Trade, Committee on Financial Services 

House of Representatives

June 2002 EXPORT 

PROMOTION

Export-Import Bank 

and Treasury Differ in 

Their Approaches to 

Using Tied Aid

GAO-02-741
Page i GAO-02-741 Differing Agency Approaches to Tied Aid

Letter 1

Results in Brief 2

Background 4

Treasury Had Authority to Direct and Control Use of Tied Aid

Credit Funds 5

Ex-Im Bank and Treasury Agreed on Broad Principles for Tied Aid

Financing 7

Ex-Im Bank and Treasury Place Different Emphases on Tied Aid

Principles 10

Agency Comments and Our Evaluation 17

Appendix I Activity under the Tied Aid Program 20

Tied Aid Application Process 20

Tied Aid Program Activity 22

Appendix II Application of Criteria for Matching Foreign

Tied Aid Offers 25

Appendix III Objectives, Scope, and Methodology 28

Appendix IV Comments from the Export-Import Bank 30

Appendix V Comments from the Department of the Treasury 32

Appendix VI GAO Contacts and Staff Acknowledgments 37

GAO Contacts 37

Acknowledgments 37

Tables

Table 1: Decisions Made in Selected Tied Aid Cases 15

Table 2: Tied Aid Activity, January 1, 1991–February 22, 2002 23

Contents
Page ii GAO-02-741 Differing Agency Approaches to Tied Aid

Figures

Figure 1: The Evolution of Tied Aid Policy, 1983-2001 4

Figure 2: Distribution of Approved and Authorized Tied Aid Cases

by Recipient Countries, January 1, 1991–February 22, 2002 24

Abbreviations

Ex-Im Bank Export-Import Bank

OECD Organization for Economic Cooperation and Development
Page 1 GAO-02-741 Differing Agency Approaches to Tied Aid

June 28, 2002

The Honorable Doug Bereuter

Chairman, Subcommittee on

International Monetary Policy and Trade

Committee on Financial Services

House of Representatives

Dear Mr. Chairman:

The Export-Import Bank (Ex-Im Bank) provides assistance to U.S.

exporters facing foreign competitors supported by tied aid. Tied aid is

government-to-government concessional financing of public sector capital

projects in developing countries that is linked to the procurement of goods

and services from the donor country. Tied aid can distort trade when it is

used to influence competitions for foreign government procurement rather

than allowing those procurements to be decided on the basis of quality,

price, or service. The provision of tied aid is subject to a nonbinding

Organization for Economic Cooperation and Development (OECD)

arrangement, to which the United States is a party, that sets rules

restricting the instances in which such offers can be made.

Through the Tied Aid Capital Projects Fund,1

 known as the War Chest, ExIm Bank may provide tied aid financing to support the negotiations and

policing of OECD tied aid rules and to match foreign tied aid offers to level

the playing field for U.S. exporters. In consultation with the Department of

the Treasury (Treasury), Ex-Im Bank assesses applications from U.S.

exporters for tied aid financing to counter foreign offers. In March 2001,

the interagency decision-making process for determining the eligibility of

applications for tied aid financing broke down when Ex-Im Bank and

Treasury disagreed on two applications and Treasury “vetoed” them.2

While Ex-Im Bank and Treasury at the time agreed that Treasury had the

authority to veto these applications, Ex-Im Bank changed its position in

June 2001 and challenged Treasury’s veto authority. The dispute over the

handling of the two cases and the extent of Treasury’s authority over the

 1

The Tied Aid Capital Projects Fund had an available budget of $288 million, as of February

2002.

2

Treasury provided its recommendation against the two cases in advance of the Ex-Im

Bank Board meeting.

United States General Accounting Office

Washington, DC 20548
Page 2 GAO-02-741 Differing Agency Approaches to Tied Aid

tied aid program was highlighted in congressional hearings on

reauthorization of Ex-Im Bank during May and June 2001.3

 While the two

agencies instituted formal consultation procedures in July 2001 to prevent

future breakdowns in the interagency decision-making process, these new

procedures did not address the issue of whether Treasury had statutory

veto authority over the use of tied aid.

You expressed concern about the nature of Treasury’s authority over the

use of tied aid and the underlying reasons for Ex-Im Bank and Treasury’s

differences. As requested, we assessed (1) whether Treasury had a

statutory veto over the use of Ex-Im Bank’s Tied Aid Capital Projects

Fund, (2) what the principles were for using tied aid, and (3) how Ex-Im

Bank and Treasury applied these principles.

To determine whether Treasury had a statutory veto over the use of the

tied aid funds, we examined the program legislation in effect at the time of

the disagreement, legislative history, and relevant Ex-Im Bank and

Treasury memorandums. To identify the principles governing the use of

tied aid, we examined agency records related to the tied aid policy and

decision-making principles, and we interviewed agency officials. To assess

how the principles for tied aid financing were applied, we examined eight

tied aid applications, including the two applications that led to the March

2001 disagreement. Of the eight selected cases, half were approved and

half denied. Appendix III provides further information on our scope and

methodology.

Under the tied aid program legislation,4

 Treasury had the authority to

direct and control the use of Ex-Im Bank’s Tied Aid Capital Projects Fund,

 3

The House Financial Services Subcommittee on International Monetary Policy and Trade

held hearings on May 2 and 8, 2001. The Senate Banking Subcommittee on International

Trade and Finance held hearings on May 17, and June 19, 2001.

4

This legislation, codified at 12 U.S.C. 635i-3, was amended by the Export-Import Bank

Reauthorization Act of 2002, enacted June 14, 2002. The reauthorization act deletes from 12

U.S.C. 635i-3 the language requiring Ex-Im Bank to administer the tied aid program in

accordance with the Treasury Secretary’s recommendations. Also, it requires that Ex-Im

Bank and Treasury develop the process, principles, and standards for governing use of War

Chest funds; that Ex-Im Bank make final case-by-case decisions on use of the funds; and

that Ex-Im Bank’s approval of use of funds in any case be subject to a presidential

determination based on consultation with Ex-Im Bank and Treasury. Throughout this

report, we refer to the tied aid program legislation in 12 U.S.C. 635i-3 before its amendment

by the 2002 reauthorization act.

Results in Brief
Page 3 GAO-02-741 Differing Agency Approaches to Tied Aid

in effect allowing Treasury to veto individual tied aid proposals. This

legislation required Ex-Im Bank to administer the program in consultation

with the Secretary of the Treasury and in accordance with the Secretary’s

recommendations on the most effective use of the fund in carrying out the

program’s purposes of achieving certain U.S. trade policy objectives, a

responsibility assigned to the Secretary. The provision’s legislative history

makes clear that, to assist the Secretary in carrying out this responsibility,

Congress gave the Secretary control of the fund as a negotiation and

enforcement tool and intended that the Secretary’s authority to direct use

of the fund extend beyond the policy level to a case-by-case basis.

Therefore, the legislation required Ex-Im Bank to comply with a Treasury

recommendation that the fund not be used to support an export financing

package for a particular project.

Ex-Im Bank and Treasury have agreed on a set of broadly stated principles

for making decisions on using the Tied Aid Capital Projects Fund. Tied aid

can be used to support the negotiation and policing of the OECD tied aid

rules. It can also be used to match otherwise allowable foreign tied aid

offers that would disadvantage a U.S. exporter’s competitive position for

future commercial-term sales. In the latter case, two primary criteria must

be met: tied aid recipient countries must have sufficient economic growth

to support future commercial-term sales (the dynamic markets criteria),

and the U.S. exporter requesting tied aid must demonstrate the potential

for additional future sales on commercial terms (the follow-on sales

criteria).

While Ex-Im Bank and Treasury both seek to help U.S. exporters, they

place different emphases on the principles used for matching tied aid

financing, based on their different missions and perspectives. Treasury,

which takes the lead in negotiating and policing the OECD tied aid rules,

takes a strategic approach to financing tied aid. It focuses more on the use

of tied aid financing to advance U.S. interests at OECD negotiations, police

foreign competitors’ compliance with the rules, and deter other

governments from offering tied aid. Ex-Im Bank, which works directly

with exporters, takes a transactional approach to financing tied aid,

placing emphasis on helping U.S. exporters by matching foreign tied aid

offers that would disadvantage their competitive position for future

commercial-term sales. Treasury and Ex-Im Bank sometimes differ in their

assessment of whether the requirements for follow-on sales have been

met, particularly regarding whether there will be sufficient additional U.S.

economic benefits.
Page 4 GAO-02-741 Differing Agency Approaches to Tied Aid

Congress first established the tied aid credit program in 1983 to counter

foreign tied aid offers and to encourage OECD members to negotiate a

reduction in the use of tied aid credits, as shown in figure 1. In the ExportImport Bank Act Amendments of 1986, Congress established the Tied Aid

Credit Fund, also known as the War Chest. This fund was intended to (1)

make other countries aware of the United States’ willingness to challenge

foreign tied aid offers when U.S. exporters were in a disadvantageous

competitive position and (2) create bargaining leverage in U.S.

negotiations with the other OECD members to discipline or set rules for

tied aid.

Figure 1: The Evolution of Tied Aid Policy, 1983-2001

Source: Ex-Im Bank.

OECD negotiators concluded a landmark tied aid agreement in 1992,

known as the Helsinki Package. It established a comprehensive framework

for the use of tied aid based on two major principles: (1) tied aid should

Background
Page 5 GAO-02-741 Differing Agency Approaches to Tied Aid

not be used for commercially viable projects and (2) higher-income

developing countries should be graduated from eligibility for tied aid

credits.

In 1994, Ex-Im Bank established the Tied Aid Capital Projects Fund, which

incorporated the Tied Aid Credit Fund. The $150 million fund was

established to provide the United States with the means to support its

efforts to discipline tied aid in OECD and to match trade-distorting foreign

tied aid offers that were undermining U.S. exporters’ competitiveness.

Appendix I provides more information on activity under the U.S. tied aid

program.

Ex-Im Bank became concerned that the Fund’s restrictive criteria might

have discouraged U.S. exporters from bidding on projects in which tied aid

was offered by foreign competitors. In 1998, Ex-Im Bank initiated an

internal policy review, followed by an interagency review with Treasury in

1999. These reviews resulted in modifications of the criteria for matching

foreign tied aid offers, making them somewhat less restrictive. The review

also resulted in a set of separate criteria that were designed to facilitate

the matching of foreign tied aid credits in Africa.

Although the policy review was intended to ease the criteria and facilitate

additional opportunities for tied aid matching, the lasting effects of

international events, such as the Asian financial crisis of 1997 and the

enhancement of the Highly Indebted Poor Countries Initiative in 1999, as

well as reductions in the level of foreign tied aid offers, had a significant

impact on its implementation. The devastating effects of the Asian

financial crisis of 1997 on Indonesia, the second largest recipient of U.S.

tied aid matching funds (see app. I), made meeting the U.S. tied aid

criteria, especially for follow-on sales on commercial terms, more difficult

to satisfy. The 1999 debt relief initiative, which accelerated and deepened

debt relief treatments, specifically prohibited participating countries from

receiving financial capital on commercial terms. The result was that fewer

countries were eligible for tied aid under the U.S. program rules.

During Ex-Im Bank’s reauthorization hearings in May 2001 before the

Subcommittee on International Monetary Policy and Trade, House

Committee on Financial Services, the Bank’s then Deputy General

Counsel, representing the position of the Bank’s then General Counsel,

testified that Ex-Im Bank’s ability to use the Fund must be done in

consultation and in accordance with the Treasury Secretary’s

recommendations, and that the legislative history “makes it fairly clear”

Treasury Had

Authority to Direct

and Control Use of

Tied Aid Credit Funds
Page 6 GAO-02-741 Differing Agency Approaches to Tied Aid

that the Secretary “has the final word in how and when the [Fund] is

used.”

5

 At the time, Ex-Im Bank and Treasury officials were in agreement

regarding this view of Treasury’s authority. Subsequently, Ex-Im Bank’s

new General Counsel issued a memorandum dated June 19, 2001, that

concluded that Treasury does not have a statutory veto or other unilateral

decisional authority over Ex-Im Bank’s use of tied aid funds on a case-bycase basis. This latter memorandum reflects Ex-Im Bank’s current official

position on the issue of Treasury’s veto authority under the program

legislation prior to enactment of the 2002 reauthorization legislation.

We reviewed the General Counsel’s memorandum and the legislation

establishing the Fund and its legislative history. Our review of that

legislation and its history indicates that Congress intended to place control

of the Fund under the Secretary of the Treasury as a negotiation and

enforcement tool of U.S. trade policy and that the Secretary be able to

direct the use of the fund at a policy level and on a case-by-case basis.

Therefore, under the legislation, Ex-Im Bank was required to comply with

a Treasury recommendation that the fund not be used to support an

export financing package for a particular project.

Subsection 10 (b)(2)(A) of Ex-Im Bank’s charter, at 12 U.S.C. 635i3(b)(2)(A), required the Bank to administer the tied aid program “in

consultation with the [Treasury] Secretary and in accordance with the

Secretary’s recommendations on how such credits could be used most

effectively to carry out the [program’s] purposes.” Subsection 10 (a)(5) of

the charter, at 12 U.S.C. 635i-(a)(5), defined the program’s purposes as

enforcing compliance with the existing international agreement restricting

use of tied aid credits for commercial purposes and facilitating efforts to

negotiate, establish, and enforce new international agreements.

The conference report on the Export-Import Bank Act Amendments of

1986 (Public Law 99-472), the legislation originally establishing the Fund,

states that

[t]he structure and purpose of the War Chest have been carefully designed.... Its overriding

purpose is to strengthen the hand of the Secretary of the Treasury in negotiating a

comprehensive agreement to limit the use of mixed credits. To serve that purpose, it is

 5

Reauthorization of the Export-Import Bank, Hearing Before the Subcommittee on

International Monetary Policy and Trade of the Committee on Financial Services, House of

Representatives, 107th Cong., 1st Sess. 28 (May 28, 2001).
Page 7 GAO-02-741 Differing Agency Approaches to Tied Aid

essential that the Secretary, who is in charge of these negotiations for the United States,

play a role in the use of the funds from the War Chest. Thus, though the War Chest is

lodged administratively in the Bank, the Secretary’s role is assured by the statutory

language in this section that requires the Bank to administer this tied aid credit program ‘in

consultation with the Secretary of the Treasury and in accordance with the Secretary’s

recommendations.’

6

In addition, statements during debates on the House floor regarding the

authority intended to be given to the Treasury Secretary over the use of

War Chest funds reflected, as the Congressional Record makes clear, the

views of the Banking Committees of the House and Senate conferees.

These statements specifically indicate that the language requiring Ex-Im

Bank to administer the program in accordance with the Treasury

Secretary’s recommendations was intended to give the Secretary “practical

control over the use of the funds” and the ability “to direct the use of the

funds.” The original legislation establishing the program was amended in

1989 and 1992, and we found nothing in the provisions or legislative

histories of either amendment indicating that Congress intended any

change regarding Treasury’s control over, and use of, the Fund as a

negotiation and enforcement tool of U.S. trade policy.

Under the broad principles established for the tied aid program, the United

States will provide tied aid financing under three basic circumstances: (1)

to support OECD negotiations aimed at reducing trade-distorting aid, (2)

to police compliance with the OECD tied aid rules, and (3) to protect U.S.

exporters when foreign tied aid that meets OECD rules threatens to

undermine the exporters’ competitive position for winning future

commercial sales. When U.S. exporters request tied aid financing from ExIm Bank under the third circumstance, their application generally needs to

meet two primary criteria: the country receiving the financing should be

considered a “dynamic market,” and there must be the potential for followon export sales on commercial terms.

In setting up the Tied Aid Capital Projects Fund, Ex-Im Bank and Treasury

agreed on a set of broadly stated principles that would guide its use.

Overall, the agencies agreed that the United States will not initiate tied aid

but only respond to and match foreign governments’ tied aid offers. They

 6

House Conference Report No. 99-956, 99th Cong., 2nd Sess. 7 (1986).

Ex-Im Bank and

Treasury Agreed on

Broad Principles for

Tied Aid Financing

Principles for Using Tied

Aid
Page 8 GAO-02-741 Differing Agency Approaches to Tied Aid

agreed that the United States will provide tied aid offers to support the

U.S. negotiating position at the OECD to continue to reduce tradedistorting aid, enforce other governments’ compliance with the OECD tied

aid rules, and protect U.S. exporters when foreign tied aid allowed under

the OECD rules disadvantages their competitive position for future

commercial sales. In addition, in using the fund, the United States is to

preemptively counter potential foreign tied aid offers without triggering

foreign tied aid use7 and to defend potential U.S. sales to projects that are

developmentally and environmentally sound.

Because the fund is not nearly large enough to match all instances of

foreign tied aid offers,8

 Ex-Im Bank and Treasury developed criteria

designed to maximize the benefits to the U.S. economy when tied aid is

used. Also, Congress required that when the United States matched foreign

tied aid offers that complied with the OECD Arrangement, Ex-Im Bank

was to determine that such cases were in the national trade or economic

interest.9

 To maximize the benefits of each use of the fund, the agencies

agreed to examine two other aspects of each tied aid application—

whether the country receiving the financing could be considered a

dynamic market and whether there would likely be follow-on U.S. exports

financed on commercial terms. Because the circumstances of each tied aid

case are so different, the criteria cannot be automatically applied and a

certain amount of flexibility is inherent in how they are applied in each

case, according to Ex-Im Bank and Treasury officials.

To be considered a dynamic market, the country receiving the tied aid

financing needs to show reasonable signs of future economic growth to

ensure prospects for additional U.S. sales of similar equipment. The Tied

Aid Capital Projects Fund is thus to be used to match foreign offers in

markets where there is greater chance that future tied aid offers (i.e.,

concessional lending) would not be necessary for U.S. exporters to

compete for sales.

 7

This principle is meant to encourage the withdrawal of existing tied aid offers.

8

In 2001, notifications to OECD of tied aid offers amounted to about $3.4 billion. However,

not all offers become actual deals.

9

12 U.S.C. 635i-3(b)(1)(A)(ii).

Dynamic Markets Criteria
Page 9 GAO-02-741 Differing Agency Approaches to Tied Aid

Specifically, the recipient country must have an annual gross national

product greater than $5 billion. It must also meet a majority of the

following factors:

• Average gross national product per capita growth of greater than 1.5

percent.

• Investment as a percentage of gross domestic product greater than 1

percent.

• Foreign direct investment as a percentage of gross national product less

than 2 percent.

• Net aid flows as a percentage of gross national product less than 2 percent.

• Private investment as a percentage of gross domestic fixed investment

greater than 60 percent.

In addition, since 1999, there have been separate, special dynamic market

criteria for Africa, designed to facilitate tied aid matching. These criteria

are as follows:

• Ex-Im Bank is open for cover in the country’s public sector.

• OECD does not require 50 percent concessionality (required for least

developed countries).

• Average gross national product per capital growth exceeds 1.5 percent.

To determine whether a U.S. exporter’s tied aid credit application has

follow-on sales potential, Ex-Im Bank and Treasury examine whether

there is potential for additional business in the same or a neighboring

country. Such potential follow-on sales could be by the applicant or by

other U.S. exporters of the same or similar technology as long as (1)

potential sales can be attributed to the applicant’s tied aid sale and (2)

future sales can be financed without Ex-Im Bank tied aid support. The

intent behind the follow-on sales criteria is to counter foreign donor

governments’ efforts to use aid to “lock in” long-run commercial

advantages for their exporters. The criteria are also intended to exploit an

initial market penetration opportunity, to enable a U.S. exporter to gain a

competitive position for winning future sales on nonconcessional terms.

The existence of any of the following factors may also meet the follow-on

sales requirement:

• International financial institutions, such as the World Bank, are active in

financing the technology, and follow-on sales in the same industry could

Follow-on Sales Criteria
Page 10 GAO-02-741 Differing Agency Approaches to Tied Aid

reasonably be expected to take place in the future under international

competitive bidding rules.

• The project would be considered commercially viable if it were located in

a different place (e.g., in an urban area).

• The sector is undergoing a credible privatization process,10 and so part of

future expansion of the sector could be financed without concessional

financing and such expansion is reasonably expected in the near future.

• The project can be expected to involve significant amounts of operating

expenses in spare parts.

In addition, small businesses (as defined by the Small Business

Administration) are not held to the same standards as larger U.S.

exporters, and favorable consideration is given to the sale of

environmentally beneficial goods and services.

Appendix II provides additional information on how the tied aid matching

criteria are applied.

While Ex-Im Bank and Treasury both seek to help U.S. exporters, they

place different emphases on the principles used for matching foreign tied

aid financing, based on their differing missions and perspectives. Treasury,

which takes the lead in negotiating and policing the OECD tied aid rules,

takes a strategic approach to financing tied aid. Ex-Im Bank, which works

directly with exporters, takes a transactional approach to financing tied

aid, placing emphasis on helping U.S. exporters match foreign tied aid

offers that would disadvantage their competitive position for future

commercial sales.

Our analysis of eight tied aid cases indicated that the agencies sometimes

differed in how they assessed whether the requirements for follow-on

sales had been met. In particular, they differed in how they assessed

whether there would be sufficient additional U.S. economic benefits

attributable to the tied aid financing.

 10The term “credible privatization process” refers to the privatization of government-owned

plants or private investment taking place in new enterprises in the sector.

Ex-Im Bank and

Treasury Place

Different Emphases

on Tied Aid Principles
Page 11 GAO-02-741 Differing Agency Approaches to Tied Aid

Treasury takes a strategic approach to tied aid financing. It is the lead U.S.

agency at OECD in negotiating and policing the tied aid rules agreed to

under the Helsinki Package in 1992. Treasury focuses on using tied aid

financing to advance U.S. interests at OECD negotiations to expand the

coverage of the Helsinki Package and to bring “untied” aid11 under the

OECD disciplines. Treasury also seeks to police foreign competitors’

compliance with the Helsinki tied aid rules. These policing efforts have

included using the fund to combat other countries’ use of untied aid that is

de facto tied. Treasury’s primary aim is to deter other governments from

offering tied aid that does not meet the Helsinki rules in both letter and

spirit. It also seeks to remove tied aid as an export promotion tool,

allowing U.S. exporters to compete on a level playing field without

needing export subsidies. It also seeks to ensure that matching foreign tied

aid offers helps U.S. exporters compete without having these individual

transactions undermine the cooperation of other governments in achieving

this broader goal of a level playing field, according to a Treasury official.

Treasury does not want tied aid to be used routinely to match allowable

cases, because it fears that this would cause foreign competitors to once

again increase their use of tied aid and because it would be expensive for

the U.S. government to engage in this kind of subsidy competition.

Because the rules established under the OECD Arrangement and the

Helsinki Package are voluntary rather than legally binding agreements,

Treasury is concerned about losing the gains achieved over years of

negotiations at the OECD to reduce use of tied aid. It emphasizes that far

more benefit has accrued to U.S. exporters by the removal of tied aid from

major segments of the market than could possibly have been provided by

even vastly increased levels of tied aid financing.

Treasury’s other concern is that the tied aid allowed under the Helsinki

rules is for projects that are not commercially viable and would therefore

not allow for regular commercial financing. Such tied aid is generally part

of the foreign assistance programs of the other OECD members, who do

not define foreign assistance as generally precluding capital projects the

 11“Untied” trade-related aid is financing that is not contractually linked to procurement

from suppliers in the donor government’s country and that ought to present opportunities

for multicountry procurement.

Treasury’s Strategic

Approach to Tied Aid

Financing
Page 12 GAO-02-741 Differing Agency Approaches to Tied Aid

way the United States does.12 According to Treasury officials, if a foreign

tied aid offer is designed to lock in market share, the offer would meet

follow-on sales criteria. Otherwise, it is generally a legitimate aid project

that Treasury does not think U.S. tied aid offers should challenge. Such

matches would have to be made over and over again, with no possibility of

follow-on sales made on commercial terms. According to Treasury

officials, this would make the U.S. appear to be preying on bona fide

foreign aid programs.

According to a Treasury official, the department has been successful in

achieving its objective of reducing trade-distorting tied aid. While tied aid

offers accounted for about $9.3 billion in 1991 before the new rules under

the Helsinki Package were put in place, that amount had been reduced to

around $3.5 billion by 1998. By 2001, tied aid financing from all donors

other than Japan was down to about $1.5 billion. Owing to a shift in

Japanese aid programs from untied to tied aid after 1998, Japanese tied aid

rose to about $1.9 billion, so that the total amount of tied aid offers in 2001

was about $3.4 billion. According to Treasury officials, despite these

reductions, Treasury is aware that tied aid can still affect future

commercial competitions in some cases, and it supports use of tied aid

matching under such circumstances.

Ex-Im Bank takes a transactional approach to tied aid financing. Its overall

mission is to finance and promote exports of U.S. goods and services. In

the tied aid arena, it helps U.S. exporters counter foreign competitors that

can use their government’s offer of concessionary or subsidized financing

terms to skew competition for foreign government capital projects. Ex-Im

Bank focuses on establishing that such foreign tied aid offers have actually

been made and on determining whether the exporter has a reasonable

prospect of follow-on sales on commercial terms from that tied aid deal. If

 12According to a Treasury official, understanding the historical context of the tied aid

debate is important. Tied aid became a problem when the United States unilaterally cut aid

(foreign assistance) for capital projects and refocused it on human development needs.

Having done so, it found that U.S. exporters were disadvantaged because they could not

compete for capital projects against foreign competitors with subsidized loans from their

national aid programs. As a result, the United States negotiated the Helsinki Package,

which was a compromise with those who see capital projects as legitimate aid. The

Helsinki compromise was that if a project is commercially viable, its financing should come

from market term financial resources, while if it is not commercially viable, but has a high

social value, then it is normally considered an aid project, and subsidized tied aid financing

is acceptable.

Ex-Im Bank’s

Transactional Approach to

Tied Aid Financing
Page 13 GAO-02-741 Differing Agency Approaches to Tied Aid

so, and if Ex-Im Bank finds the borrower government and the exporter to

be creditworthy, it is ready to move the transaction through its decision

process to final approval by its Board of Directors.

Ex-Im Bank works directly with U.S. exporters who are competing with

foreign tied aid offers. Although Ex-Im Bank officials do not specifically

advocate the routine use of tied aid to match allowable cases, they cite the

very low level of exporter applications for tied aid and the even lower level

of approved cases that get funded (see table 2, in app. I). They also state

that more should be done to assist U.S. exporters facing tied aid in

overseas markets. The belief that U.S. tied aid rules were too restrictive

led to Ex-Im Bank’s internal policy review in 1998 and an interagency

review in 1999, resulting in modifications to the tied aid criteria that were

designed to expand the potential for tied aid matching. In fact, however,

the level of U.S. matching has steadily decreased, because the lasting

effects of international events—such as the 1997 Asian financial crisis and

the 1999 restrictions on concessional borrowing by African participants in

international debt relief programs—have made meeting U.S. tied aid rules

for commercial-term follow-on sales more difficult. Another reason is

related to the reduction in the level of foreign tied aid offers. According to

an Ex-Im Bank official, the tied aid criteria were developed in order to

ration limited War Chest funds at a time when a high level of foreign tied

aid offers was expected, so that the justification for the strict adherence to

these eligibility criteria has since been eroded.

According to an Ex-Im Bank official, the Bank does not share Treasury’s

concern about harming foreign governments’ “legitimate aid” programs.

Ex-Im Bank’s view is that when the foreign aid offer is used to tilt the

playing field against the U.S. exporter of a better product, Ex-Im Bank

offers the recipient government an alternative and the chance to get the

best value for its money. Ex-Im Bank officials also did not share Treasury’s

concern that increasing the amount of U.S. tied aid provided to exporters

would jeopardize the gains made at OECD on restricting tied aid use.

According to an Ex-Im Bank official, the Bank is also concerned about the

sometimes predatory character of foreign tied aid offers and the potential

impact on the U.S. exporters competing for the bid. The predatory effect

of foreign tied aid offers is seen, for instance, when a U.S. exporter is

successfully competing with a foreign company for a commercial bid, and

the foreign competitor suddenly makes a concessionary tied aid offer. ExIm Bank is also concerned about the potential impact of losing the sale on

the U.S. exporter, which may have invested extensive time and money to

develop the deal.
Page 14 GAO-02-741 Differing Agency Approaches to Tied Aid

One result of Ex-Im Bank and Treasury’s differing approaches to tied aid

has been that they sometimes have differed in assessing the requirements

for follow-on sales. Our analysis of selected tied aid cases indicated that

when the two agencies disagreed on the eligibility of a tied aid case, their

disagreement was based on differences in how they assessed the potential

for follow-on sales to provide sufficient additional U.S. economic benefits

attributable to the tied aid financing.

Ex-Im Bank has tried to keep the assessment of follow-on sales

straightforward by determining whether there is a potential for follow-on

sales to occur in the recipient or neighboring country that can be linked to

the tied aid sale without more Ex-Im Bank tied aid financing. Ex-Im Bank

prefers that follow-on sales be on commercial terms. However, under the

revised criteria, it is prepared to accept future sales on concessional terms

as long as another institution, such as the World Bank, provides the

concessional financing. According to an Ex-Im Bank official, if the

application fits the criteria, then Ex-Im Bank is ready to consider financing

the tied aid transaction. In this view, a finding of potential follow-on sales

in itself meets the need to demonstrate economic benefits from the tied

aid financing.

In applying follow-on sales criteria, however, Treasury assesses whether

the tied aid will provide substantial additional U.S. economic benefits. In

Treasury’s view, a finding of potential follow-on sales is necessary but not

sufficient; there must also be a concomitant finding that there would be

substantial additional economic benefits for the United States that are

attributable to the original tied aid financing.

In the eight selected tied aid cases that we reviewed, half were approved

and half were denied, and all had been decided since the 1999 revision of

tied aid criteria (see table 1). The decision-making process was fairly

straightforward when, as in case B, the decision to approve a case was

strategic, either to support negotiations or police compliance with the

Helsinki rules. Again, in cases in which the foreign tied aid offer was

allowed under the Helsinki rules and the U.S. eligibility criteria were

clearly met or not met, the decision-making process was generally

concluded without major disagreement (cases C, F, G, and H). Thus, in

three of the denied cases, there was no real disagreement between the two

agencies. However, in cases in which the eligibility criteria were not

clearly met (cases A, D, and E)—generally involving the follow-on sales

criteria—then the two agencies’ differing approaches to tied aid

heightened the potential for disagreement. On the basis of the cases we

reviewed and interviews with agency officials, we observed that

Differing Assessments of

Follow-on Sales Criteria
Page 15 GAO-02-741 Differing Agency Approaches to Tied Aid

differences arise when follow-on sales potential is marginal or its

attribution to the tied aid sale is questioned.

Table 1: Decisions Made in Selected Tied Aid Cases

Approved cases Denied cases

Case

elements Case A Case B Case C Case D Case E Case F Case G Case H

Recipient

country

Ghana Indonesia China Ghana China Ghana Uzbekistan Senegal

Goods

and/or

services

exported

Equipment

for solar

street lighting

Simulators

and trainers

for seafarer

training

facility

Wind

turbines

Medical

equipment

(MRI, CT &

X-ray)

Irrigation

machinery

and

equipment

Electrical

distribution

equipment

Medical

equipment

Mapping

survey

information

services for

water

sources

Country

offering tied

aid

Spain Japan and

Germany

The

Netherlands

Spain and

Austria

Austria Spain and

Sweden

Finland,

Germany,

Japan, and

Spain

France and

Spain

Key tied aid

criteria

Follow-on

sales

Policing

compliance

of Helsinki

Package

Follow-on

sales

Follow-on

sales

Follow-on

sales

Follow-on

sales

Dynamic

market

Dynamic

market

Source: Ex-Im Bank case files.

In the three cases we reviewed that raised significant disagreement

between Ex-Im Bank and Treasury, the disagreement arose over the

agencies’ differing assessments of whether the application met the followon sales criteria. Ex-Im Bank determined that the criteria had been met in

all three cases. Treasury determined, in the first of these three cases (case

E), that follow-on sales would not be attributable to the tied aid sale; in the

second case (case A), that linkage to follow-on sales in the private sector

in a neighboring country needed to be better established; and in the third

case (case D), that stronger assurance was needed that product sales

would supplant the foreign tied aid offer instead of being used to

supplement the offer. These three cases are discussed in detail in the

following paragraphs.

In case E, Treasury and Ex-Im Bank disagreed over whether the follow-on

sales would be attributable to the tied aid sale. Ex-Im Bank thought that

the exporter, a manufacturer of irrigation machinery, had made a strong

case for follow-on sales. The company had made prior sales on

commercial terms in China. The Xinjiang provincial government had plans

to irrigate vast tracts of agricultural land, and Ex-Im Bank believed that

follow-on sales potential existed. Ex-Im Bank also believed that Austria’s
Page 16 GAO-02-741 Differing Agency Approaches to Tied Aid

numerous tied aid offers showed its intent to lock in market advantage.

However, Treasury did not accept that the follow-on sales criteria had

been met because it believed (1) that the U.S. exporter had superior

technology and an already well-established market position in China and

(2) that the technology involved was not unique and the foreign

competitor could not use it to lock in market share. Thus, Treasury’s view

was that the U.S. exporter did not need tied aid to get follow-on sales,

because its position was so strong that it would get follow-on sales in any

case. Treasury also believed that demand for financing such equipment in

the future would far exceed expected aid financing, therefore ensuring

commercial competition. The follow-on sales thus would not be

attributable to the tied aid. Treasury also explicitly warned the Austrian

export credit agency against any future tied aid offers, stating that

Treasury would support tied aid matching if the Austrian agency

continued to offer tied aid in this sector when in competition with U.S.

firms.

In case A, Treasury and Ex-Im Bank disagreed over whether the linkage

from the tied aid sale to follow-on sales in the neighboring country’s

private sector had been adequately established. This case involved a U.S.

exporter of solar lighting equipment, which faced a tied aid financing offer

from a Spanish competitor for a project in Ghana. Follow-on sales on

commercial terms were problematic in that the government of Ghana

could enter only into concessional borrowing arrangements, owing to the

provisions of an International Monetary Fund program to which it was a

party. However, the U.S. exporter claimed that because of the

demonstration effect of the tied aid deal in Ghana, it would be able to

make follow-on sales on commercial terms to the private sector in Nigeria.

Ex-Im Bank concluded that the exporter had made a credible case for

follow-on sales in Nigeria, that this transaction offered the kind of initial

market penetration opportunity intended by the follow-on sales provision,

and that many potential projects in the region could follow. Treasury,

however, did not believe that the follow-on sales criteria had been met,

saying that the exporter needed to establish a clearer connection between

the Ghana project and the follow-on sales in Nigeria. It required the

exporter to provide additional information establishing the potential

private sector buyer’s actual intent to purchase similar equipment and

their ability to obtain such financing. Once the exporter provided this

information, Treasury removed its objection to the transaction. By that

time, however, Ghana had defaulted on other Ex-Im Bank debts and the

transaction, although officially approved, was not made operative.
Page 17 GAO-02-741 Differing Agency Approaches to Tied Aid

In case D, Treasury and Ex-Im Bank initially disagreed over whether there

was adequate assurance that a U.S. tied aid offer involving product sales

would supplant the foreign tied aid offer instead of being used to

supplement the offer. This case involved a U.S. exporter of medical

equipment that was faced with tied aid competition from Spanish and

Austrian exporters for a project in Ghana. Ex-Im Bank again concluded

that a credible case had been made for follow-on sales. The Bank had

obtained information from the U.S. embassy in Ghana that a potential

market for new or used medical equipment in the private sector existed; it

had also obtained information from the U.S. embassy in Nigeria that both

the Nigerian government and the private sector were potential customers

of U.S. medical equipment. Treasury thought that the case for follow-on

sales was not strong, but it was most concerned by the fact that the export

involved product sales, which are inherently fungible or interchangeable.

A central element of the U.S. tied aid matching policy is that each use of

tied aid should supplant a foreign tied aid offer, not be used to supplement

the offer and actually increase the amount of tied aid in that market. For

instance, a recipient government could manipulate a bid for X-ray

equipment and find a way to accept both the foreign and the U.S. tied aid

offer, perhaps by using the U.S. tied aid to fulfill the original bid and

switching the foreign offer to another set of hospitals in another city. The

result would be that the United States would be supplementing rather than

supplanting the foreign tied aid offer. In the end, Treasury decided to

support the use of tied aid in this case, although it had serious misgivings.13

We received written comments on a draft of this report from Ex-Im Bank

and Treasury. Ex-Im Bank declined to provide substantive comments.

Treasury generally agreed with the report and its summary of the history

of the Tied Aid War Chest, the legal authority for its use, and the past

criteria to determine its use. It also stated that the scope of the report

should have been broader. The comments we received and our evaluation

of them are contained in appendixes IV and V. In addition, Treasury

provided technical comments, which we incorporated in the report as

appropriate.

Ex-Im Bank said that, while it does not agree with the report’s

characterization of the Bank’s position or approach on some issues

 13Although use of tied aid was approved, this case was never finalized, and Ex-Im Bank

cancelled its offer in 2001.

Agency Comments

and Our Evaluation
Page 18 GAO-02-741 Differing Agency Approaches to Tied Aid

identified in the report, it would not provide specific comments on the

draft report. It stated that (1) its July 2001 agreement with Treasury on a

new set of principles and procedures for administration of the Tied Aid

Credit Program and (2) the signing into law of its reauthorization

legislation, which modified its relationship with Treasury, had made the

findings of this report not relevant to its future administration of the

program. We believe it is important to provide transparency regarding the

criteria used in decision making, as well as to explain how and why Ex-Im

Bank and Treasury’s differing approaches to using tied aid sometimes

resulted in disagreement. Neither the July 2001 agreement between Ex-Im

Bank and Treasury nor the recently enacted Ex-Im Bank reauthorization

act changed this dynamic.

In addition, we were asked to clarify whether Treasury had veto authority

in March 2001 when the decision-making process broke down. Between

March and June 2001, Ex-Im Bank had changed its position regarding

Treasury’s veto authority, resulting in conflicting legal opinions between

those agencies, which needed to be addressed.

Treasury, while generally agreeing with the report, stated that the scope of

the report was too narrow. It said that the broader objectives of tied aid

policy should have been analyzed. Our report was not intended to provide

a comprehensive evaluation of the tied aid program, but rather to address

the specific questions raised relating to Treasury’s legal authority over the

program and the problems with program administration.

Treasury raised three specific issues regarding the report. First, it said that

we should not have included Ex-Im Bank’s view that increased U.S. tied

aid levels would not jeopardize the gains made at OECD on restricting tied

aid use, without requiring Ex-Im Bank to justify this belief. We are

reporting Ex-Im Bank’s view, as clearly attributed in the report. Second, it

objected to the statement on page 1 of the report that Treasury had vetoed

two tied aid cases in March 2001. It said that this statement was misleading

because it implied that Treasury had used its statutory authority to

overturn two Ex-Im Bank Board decisions, while it had actually indicated

its objections in advance of the Board vote. We do not believe our

statement is misleading since we make clear in the report that, under the

program legislation, Ex-Im Bank was required to comply with a Treasury

recommendation not to fund a particular project, which in effect allowed

Treasury a veto of tied aid proposals. In addition, we do not discuss the

Board vote, its circumstances, or its timing, but merely describe the Ex-Im

Bank and Treasury disagreement on the two applications and Treasury’s

objection to them. We do not intend any implication that Treasury’s veto
Page 19 GAO-02-741 Differing Agency Approaches to Tied Aid

occurred after the Ex-Im Bank Board vote, and we added a footnote to

provide this clarification. Third, Treasury said it was misleading to state

that half of the eight tied aid cases we examined were denied tied aid,

because it might give the impression that Treasury alone denied tied aid in

all four cases. Our statement that we selected eight cases to review, of

which half were approved and half denied, is a simple statement of

methodology. In order to prevent any misunderstanding that Treasury was

solely responsible for denying these four cases, we added a statement to

the detailed discussion of our findings related to these cases that, in three

of the denied cases, there was no disagreement between the two agencies.

We are sending copies of this report to the Chairman of the Export-Import

Bank, the Secretary of the Treasury, and other appropriate congressional

committees. We will also make copies available to others upon request. In

addition, the report will be available at no charge on the GAO Web site at

http://www.gao.gov.

If you or your staff have any questions about this report, please contact me

on (202) 512-4128. Additional contacts and staff acknowledgments are

listed in appendix VI.

Sincerely yours,

Loren Yager

Director, International Affairs and Trade
Appendix I: Activity under the Tied Aid

Program

Page 20 GAO-02-741 Differing Agency Approaches to Tied Aid

Tied aid is government-to-government concessional financing of publicsector capital projects in developing countries that is linked to the

procurement of goods and services from the donor country. Tied aid can

distort trade when it is used to influence competitions for foreign

government procurements rather than allowing those procurements to be

decided on the basis of quality, price, or service. When a U.S. exporter is

faced with tied aid use by a foreign competitor, the exporter can request

assistance from the Export-Import Bank (Ex-Im Bank) by applying for tied

aid financing to match the foreign offer.

In the tied aid application process, Ex-Im Bank tries first to deter tied aid

offers by foreign competitors. If the foreign tied aid offer is not deterred,

depending on the stage of the offer, Ex-Im Bank can provide a number of

different instruments with which to counter the foreign offer. These

instruments consist of a letter of interest with willingness-to-match

indication, a tied aid letter of interest, or a preliminary commitment.

Approved tied aid cases have been accepted for tied aid matching;

however, they do not become authorized cases until the U.S. exporter

wins the bid. Ex-Im Bank financing packages for authorized cases

generally include three options: a soft loan, a mixed credit, or a direct loan

with 0 percent interest rate.

Once the U.S. exporter notifies Ex-Im Bank of the foreign tied aid offer

and requests matching tied aid financing, the application process starts

with a determination by Ex-Im Bank of whether the Organization for

Economic Cooperation and Development (OECD) has been notified of the

foreign tied aid offer. If it has not, Ex-Im Bank can propose a “no aid

common line” at the OECD, requesting that other members agree not to

offer tied aid for that particular project. If the proposal is rejected, Ex-Im

Bank will start its internal process for reviewing the tied aid application.

The Ex-Im Bank Board of Directors must approve all applications for tied

aid, in consultation with the Department of the Treasury (Treasury), and in

accordance with Treasury’s recommendations. Both agencies determine

whether the application has met the requirements of the tied aid program

and review the application to ensure that the principles established by the

Tied Aid Capital Projects Fund for using tied aid are met. If so, Ex-Im

Bank can issue a letter of interest with willingness-to-match indication, a

tied aid letter of interest, or a preliminary commitment, depending upon

the evidence available (e.g., foreign government notification of tied aid

offers to the OECD) to prove that a foreign government has made a tied

aid offer.

Appendix I: Activity under the Tied Aid

Program

Tied Aid Application

Process
Appendix I: Activity under the Tied Aid

Program

Page 21 GAO-02-741 Differing Agency Approaches to Tied Aid

Ex-Im Bank will approve a letter of interest with willingness-to-match

indication when an OECD no aid common line has been rejected by other

governments. The letter’s purpose is to deter the foreign tied aid offer by

showing the United States’s intention to challenge the foreign competitor’s

source of advantage, the concessional financing, in the hope that tied aid

will be withdrawn and the bidding continued on a commercial basis. It is

not a tied aid offer but an indication of intent to match such an offer if

necessary. Ex-Im Bank will consider approving a tied aid letter of interest

if there is documentary evidence of a foreign tied aid offer—for instance, a

bilateral tied aid protocol between the donor and recipient governments

that identifies the project—but the OECD has not yet been notified of the

offer. This letter offers to match a foreign offer with respect to the specific

project, credit size, and equivalent financing terms. If a foreign tied aid

credit offer of which OECD has been notified has cleared the OECD

challenge and consultation process, Ex-Im Bank will consider approving a

preliminary commitment—a formal offer that specifies the terms for

financing. If the U.S. exporter wins the bid, and once the contract is signed

with the recipient government and all financing requirements are met, a

preliminary commitment can be converted directly to a final commitment

to provide a tied aid credit.

It is important to note that in the tied aid lexicon, an approved tied aid

case is one that has been found to meet the tied aid criteria and for which

tied aid matching has been approved. A case can start at any one of the

stages discussed above, depending on the circumstances of the foreign

offer. Each time the case moves up a stage—for example, from letter of

interest to preliminary commitment—the Ex-Im Bank Board of Directors,

in consultation with Treasury and in accordance with Treasury’s

recommendations, must determine whether to approve the tied aid

matching. However, the tied aid credit offer is not completed until the U.S.

exporter wins the bid and signs the contract with the foreign recipient

government. At that time, it is converted to a final commitment and is

considered to be authorized. Thus, approved cases have been approved for

tied aid matching but are still awaiting a decision by the purchasing

government, whereas authorized cases have been finalized and funding

has been provided for them.

Ex-Im Bank typically includes three options in its tied aid financing

packages: a soft loan with a grace period, a mixed credit with a grant and a

standard export credit component, and a direct loan with a 0 percent

interest rate. For example, a soft loan with a grace period might mean a 25-

year loan with a 5-year grace period and an interest rate of 3.66 percent. A

mixed credit might comprise a grant for 35.23 percent of the contract price
Appendix I: Activity under the Tied Aid

Program

Page 22 GAO-02-741 Differing Agency Approaches to Tied Aid

and a 10-year direct loan for 64.77 percent of the contract price, with no

grace period and 6.13 percent interest. The direct loan with a 0 percent

interest rate might be structured with a 12.5-year loan with no grace period

and 0 percent interest. All three options would have an overall

concessionality level of roughly 35 percent, as required by the OECD.

According to our review of program data,14 there have been 73 tied aid

cases approved since 1991, as shown in table 2.15 These cases may

comprise letters of interest with willingness-to-match indication, tied aid

letters of interest, preliminary commitments, and final commitments,

approved at each stage by the Ex-Im Bank Board of Directors in

consultation with Treasury. Individual cases may have stopped at any of

these stages of application; the highest level reached is shown for each

case. Of the 73 approved cases that Ex-Im Bank and Treasury agreed to

(totaling $2.7 billion), Ex-Im Bank offered final commitments or

authorizations in 26 cases.16 The most active period of tied aid matching

approval was from 1995 to 1997, with a total of 38 cases, representing 52

percent of all activity. After 1999, the number of cases dropped

significantly. From January 1, 2000, through February 22, 2002, there were

a total of 5 cases, or 7 percent of the total. In terms of tied aid results, U.S.

exporters lost contracts in 51 percent of cases while winning contracts in

37 percent of cases. The outcome in the remaining 12 percent of cases was

deferred or pending. The largest number of authorized cases was in 1996,

with 9 authorizations for a total of $135.6 million. From January 1, 2000,

through February 22, 2002, there were 2 authorized cases.

 14We did not verify the accuracy of Ex-Im Bank’s tied aid data, which was the best available

information.

15In addition, there were 4 cases that went to the Ex-Im Bank Board of Directors and were

denied approval.

16Of the 26 final commitments that were issued, 1 (Turkey, in 1998) was deferred.

Tied Aid Program

Activity
Appendix I: Activity under the Tied Aid

Program

Page 23 GAO-02-741 Differing Agency Approaches to Tied Aid

Table 2: Tied Aid Activity, January 1, 1991–February 22, 2002

Cases approved for tied aid matching Tied aid competition results Ex-Im Bank authorizations

Year

Number

of cases

Letter of

interest with

willingness to

match

indication or

tied aid letter

of interest

Preliminary

commitment

Final

commitment

Cases

won by

exporters

Cases

lost by

exporters

Cases

deferred

and

pending

Number of

authorizations

Amount

authorized

(millions)

2002 0 0 0 0 0 0 0 N/A N/A

2001 2 0 0 2 2 0 0 2 59.23

2000 3 2 1 0 0 1 2a,b 0 0

1999 11 8 1 2 3 2 6b2 34.52

1998 6 3 1 2 1 4 1b2 36.78

1997 7 2 3 2 2 5 0 2 75.46

1996 18 2 7 9 9 9 0 9 135.59

1995 13 3 9 1 1 12 0 1 21.99

1994 2 1 1 0 0 2 0 0 0

1993 2 1 0 1 2 0 0 1 60.58

1992 2 0 1 1 1 1 0 1 12.98

1991 7 0 1 6 6 1 0 6 501.89

Total 73 22 25 26 27 37 9 26 $939.02

Legend: N/A = not available.

Note: There were also 4 cases for which tied aid matching was denied, which are not shown in this

table.

a

Pending.

b

Deferred.

Source: Ex-Im Bank.

Figure 2 shows the distribution of countries for which tied aid matching

was approved (the top part of the figure), as well as those for which it was

authorized. China and Indonesia are the countries in which U.S. exporters

encountered the most foreign tied aid use. Together, China and Indonesia

accounted for 43 of the 73 approved cases, representing 59 percent of the

total, and received 15 of the 26 authorizations, or 58 percent. However,

after 1997, the year of the Asian financial crisis, there were only 2 cases of

U.S. exporters attempting to counter foreign tied aid offers in Indonesia,

and both were authorized. Also, starting in 1999, Ghana had the highest

number of cases in which U.S. exporters were trying to compete against

foreign tied aid credits (8 cases); of these, 3 cases were authorized. Ghana,

as well as many other sub-Saharan countries, was going through economic

reforms that prohibited it from receiving international financing on
Appendix I: Activity under the Tied Aid

Program

Page 24 GAO-02-741 Differing Agency Approaches to Tied Aid

nonconcessional terms, making the tied aid criteria requiring follow-on

sales on commercial terms difficult to meet.

Figure 2: Distribution of Approved and Authorized Tied Aid Cases by Recipient Countries, January 1, 1991–February 22, 2002

Source: Ex-Im Bank.
Appendix II: Application of Criteria for

Matching Foreign Tied Aid Offers

Page 25 GAO-02-741 Differing Agency Approaches to Tied Aid

After an extensive review of the principles established for using tied aid,

including a review of eight selected case files and interviews with Ex-Im

Bank and Treasury officials, we developed an outline of the tied aid

decision-making process. The following conceptual framework shows how

the established criteria for matching foreign tied aid offers were applied

during the May 1999 to July 2001 period. This period followed the 1999 tied

aid policy review’s expansion of the criteria for matching, and it preceded

the two agencies’ establishment of formal consultation procedures and a

new, more concise statement of tied aid principles in the aftermath of the

March 2001 dispute.

U.S. tied aid policy allows foreign tied aid offers to be matched under

three basic circumstances:

1. To support international negotiations aimed at reducing trade

distorting aid (tied aid can also be initiated under these

circumstances).

2. To police compliance with the OECD tied aid rules.

3. To protect U.S. exporters when foreign aid that meets OECD rules

would nevertheless undermine the exporters’ competitive position for

winning future commercial sales.

The following outline presents specific criteria that have been developed

for matching foreign tied aid offers under the third circumstance.

I. U.S. response to foreign tied aid when U.S. exporter is not

involved

A. Confirm tied aid eligibility of project under OECD rules

• Apply 35 percent minimum concessionality rule (50 percent for least

developed countries)

• Apply country eligibility rules (no “wealthy” countries or certain Central

and Eastern European/Newly Independent State countries)

• Determine project eligibility (no “commercially viable” projects)

• Refer to OECD’s Ex-Ante Guidance and recent tied aid consultations

decisions; evaluate project on its merits

• Make exception for de minimus projects (less than about $2.6 million)

• Make overall exception for projects with concessionality level of 80

percent or higher

Appendix II: Application of Criteria for

Matching Foreign Tied Aid Offers
Appendix II: Application of Criteria for

Matching Foreign Tied Aid Offers

Page 26 GAO-02-741 Differing Agency Approaches to Tied Aid

B. If project appears ineligible, “challenge” project within OECD, perform

detailed technical analysis to refute foreign analysis, debate foreign

technical expert in presence of other OECD members

• If OECD declares project ineligible, project cannot receive tied aid (except

via rarely used procedure requiring involvement of Ministry-level official)

• If OECD declares project eligible, project proceeds with tied aid

II. U.S. response to foreign tied aid when U.S. exporter is involved

A. Confirm whether foreign government has notified OECD of tied aid, as

required

• Search OECD tied aid notifications

• Query foreign governments, as necessary

• If foreign government has not yet notified OECD of tied aid

• Query foreign government, as appropriate, on U.S. exporter’s allegation

of tied aid

• Request, as appropriate, “No Aid Common Line” to ensure that OECD

members refrain from offering tied aid for that particular project

B. If OECD tied aid notification is located, or “No Aid Common Line”

rejected, consider whether to issue Ex-Im Bank Willingness-to-Match

Tied Aid Indication based on criteria below

III. U.S. determination whether to match eligible foreign tied aid

offer

A. Screen tied aid matching request for national trade and economic

interest (required by Congress)

B. Recipient country must qualify as a “dynamic market”

• Annual gross national product (GNP) greater than $5 billion and a

majority of the following tests must be met:

• Average GNP per capita growth of greater than 1.5 percent

• Investment as a percentage of gross domestic product greater than 1

percent

• Foreign direct investment as a percentage of GNP less than 2 percent

• Net aid flows as a percentage of GNP less than 2 percent

• Private investment as a percentage of gross domestic fixed investment

greater than 60 percent
Appendix II: Application of Criteria for

Matching Foreign Tied Aid Offers

Page 27 GAO-02-741 Differing Agency Approaches to Tied Aid

• Special “dynamic market” criteria for Africa

• Ex-Im Bank open for cover in the public sector

• Country is not a least developed country (requiring at least 50 percent

concessionality)

• Average GNP per capita growth of greater than 1.5 percent

C. “Follow-on sales” requirement

• Tied aid sale should generate substantial follow-on sales in the recipient or

neighboring country that are expected to be financed on commercial

terms. Follow-on sales of identical or reasonably similar equipment should

be attributable to the tied aid sale (e.g., through brand and performance

preference, technical standards compatibility, etc.)

• Follow-on sales may also be considered to exist when any of the follow

conditions are met:

• International financial institutions are active in financing the sector

• Project would be considered commercially viable were it located

elsewhere (e.g., rural vs. urban setting)

• Sector is undergoing a credible privatization process

• Project will require fairly significant expenditure on imported spare

parts that would be financed out of current revenues or on commercial

terms

• Follow-on sales requirement will be applied less stringently to U.S. small

business exporters

D. Budget cost should normally not exceed 50 percent

E. Project must be environmentally sound

F. Willingness of U.S. exporter to cover exposure fee will be a positive

factor
Appendix III: Objectives, Scope, and

Methodology

Page 28 GAO-02-741 Differing Agency Approaches to Tied Aid

The Chairman of the Subcommittee on International Monetary Policy and

Trade asked us to examine the nature of the Department of the Treasury’s

(Treasury) authority over the use of tied aid and the underlying reasons

for the breakdown in the decision-making process between the ExportImport Bank (Ex-Im Bank) and Treasury in March 2001. To address these

concerns, we assessed (1) whether Treasury had a statutory veto over the

use of Ex-Im Bank’s Tied Aid Capital Projects Fund, (2) what the

principles were for using tied aid, and (3) how Ex-Im Bank and Treasury

applied these principles.

To determine whether Treasury had a statutory veto over Ex-Im Bank’s

use of the Tied Aid Capital Projects Fund, we examined the legislation

establishing the fund and its legislative history, as well as relevant Ex-Im

Bank and Treasury documents.

To identify the principles for tied aid financing that were in effect in March

2001, when Ex-Im Bank and Treasury disagreed on the two tied aid

applications, we interviewed Ex-Im Bank and Treasury officials and

reviewed tied aid policy and procedures documents from the Ex-Im Bank

Policy and Planning Division. We also conducted a historical review of the

tied aid policy to develop a better understanding of the policy in effect in

March 2001. In addition, we reviewed the tied aid rules set by the

Organization for Economic Cooperation and Development (OECD) to

understand the international context in which the U.S. tied aid policy

principles were developed.

To understand the application of the tied aid principles, we reviewed eight

tied aid cases. We interviewed Ex-Im Bank and Treasury officials to gain

their perspective on how the tied aid principles were applied and how the

interagency decision-making process functioned. In addition to reviewing

the two cases cited in the request, we selected six other cases to establish

a broader basis for analysis. This provided us with the needed additional

perspective, when examining the way that the criteria were applied and

the consultation procedures were followed, as to whether and how the

actions in the two cases cited in the request might differ from those cited

in other cases. We selected cases that were reviewed under the criteria

established by the interagency tied aid policy review of 1999, so that they

would all be subject to the same decision-making criteria. Of the eight

cases, four were approved and four were denied. We included five cases

involving China and Ghana, the recipient countries in the two cases cited

in the request, so that we could review cases that had been both approved

and denied for each country. The remaining three cases involved three

other countries: Indonesia, Uzbekistan, and Senegal. We also interviewed

Appendix III: Objectives, Scope, and

Methodology
Appendix III: Objectives, Scope, and

Methodology

Page 29 GAO-02-741 Differing Agency Approaches to Tied Aid

representatives from the companies involved in the eight cases to obtain

their perspectives on the application of U.S. tied aid policy.

We performed our work from September 2001 through May 2002 in

accordance with generally accepted government auditing standards. We

spent 21⁄2 months negotiating access to tied aid files at Ex-Im Bank from

October to mid-December 2001.
Appendix IV: Comments from the ExportImport Bank

Page 30 GAO-02-741 Differing Agency Approaches to Tied Aid

Appendix IV: Comments from the ExportImport Bank
Appendix IV: Comments from the ExportImport Bank

Page 31 GAO-02-741 Differing Agency Approaches to Tied Aid
Appendix V: Comments from the Department of the Treasury

Page 32 GAO-02-741 Differing Agency Approaches to Tied Aid

Appendix V: Comments from the Department

of the Treasury
Appendix V: Comments from the Department of the Treasury

Page 33 GAO-02-741 Differing Agency Approaches to Tied Aid
Appendix V: Comments from the Department of the Treasury

Page 34 GAO-02-741 Differing Agency Approaches to Tied Aid
Appendix V: Comments from the Department of the Treasury

Page 35 GAO-02-741 Differing Agency Approaches to Tied Aid
Appendix V: Comments from the Department of the Treasury

Page 36 GAO-02-741 Differing Agency Approaches to Tied Aid
Appendix VI: GAO Contacts and Staff Acknowledgments

Page 37 GAO-02-741 Differing Agency Approaches to Tied Aid

Virginia Hughes, (202) 512-5481

Leyla Kazaz, (202) 512-9638

In addition to those listed above, Jose Martinez-Fabre, Ernie Jackson,

Martin De Alteriis, Lynn Cothern, and Reid Lowe made key contributions

to this report.

Appendix VI: GAO Contacts and Staff

Acknowledgments

GAO Contacts

Acknowledgments

(320077)
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