```
Mozambique: Insufficient Effort Made to Attract U.S. Suppliers Under AID
Commodity Program (Letter Report, 02/28/94, GAO/NSIAD-94-73).

This report reviews the Agency for International Development's (AID)
procurement procedures and practices under a commodity import program
established in 1984 to revitalize Mozambique's agricultural sector.
Concerns had been raised about the amount of program funds spent on
goods procured outside of the United States. For example, only 18
percent of total commodities and less than one percent of vehicles
supplied to Mozambique during fiscal years 1985-93 were from the United
States. GAO discusses (1) why this program has primarily benefitted U.S.
trade competitors; (2) whether changes in law or regulation are needed
to prevent this procurement imbalance; and (3) whether AID financing of
commodity purchases from South Africa violated the sanctions imposed
against that country.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  NSIAD-94-73
     TITLE:  Mozambique: Insufficient Effort Made to Attract U.S. 
             Suppliers Under AID Commodity Program
      DATE:  02/28/94
   SUBJECT:  Foreign aid programs
             Foreign economic assistance
             Developing countries
             Buy American
             Exporting
             Commodity sales
             Procurement regulation
             International economic relations
             Investments abroad
IDENTIFIER:  Mozambique
             AID Commodity Import Program
             South Africa
             Soviet Union
             AID Private Sector Rehabilitation Program
             AID Private Sector Support Program
             Japan
             Brazil
             Germany
             United Kingdom
             
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Cover
================================================================ COVER

Report to the Honorable
David L.  Boren, U.S.  Senate

February 1994

MOZAMBIQUE - INSUFFICIENT EFFORT
MADE TO ATTRACT U.S.  SUPPLIERS
UNDER AID COMMODITY PROGRAM

GAO/NSIAD-94-73

Mozambique

Abbreviations
=============================================================== ABBREV

  AID - Agency for International Development
  CIP - commodity import program
  DFA - Development Fund for Africa
  GAO - General Accounting Office

Letter
=============================================================== LETTER

B-255675

February 24, 1993

The Honorable David L.  Boren
United States Senate

Dear Senator Boren: 

At your request, we reviewed the Agency for International
Development's (AID) procurement procedures and practices under a
commodity import program (CIP) that was established in 1984 to
revitalize Mozambique's private agricultural sector.  You were
concerned about the amount of CIP funds spent in Mozambique to
purchase goods procured outside of the United States.  For example,
18 percent of total commodities and less than 1 percent of vehicles
supplied to Mozambique from fiscal years 1985 to 1993 under CIP were
from the United States.  You asked us to determine (1) why this
program has primarily benefited U.S.  trade competitors, (2) whether
changes in law or regulation are needed to prevent this procurement
imbalance, and (3) whether AID financing of commodity purchases from
South Africa was in violation of sanctions imposed against this
country. 

   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

AID's development focus and program design were mainly responsible
for a comparatively low rate of U.S.  supplier participation in
program financing.  The program was geared toward small-scale farmers
and employed a procurement strategy that gave importers flexibility
to buy commodities from approved offshore sources.  The lack of U.S. 
supplier participation was further accentuated by an environment of
political instability in which U.S.  firms had not established strong
commercial ties.  Despite these conditions, some market entry
opportunities to sell U.S.  trucks were missed because AID officials
did not (1) actively solicit or notify U.S.  suppliers of planned
vehicle requirements or (2) adequately explore the suppliers'
capability to build 8-ton or larger right-hand drive vehicles and
their willingness to establish service facilities and supply spare
parts to support them.  To increase export opportunities for U.S. 
firms, AID has restricted program financing for vehicles to U.S. 
sources, expanded the list of eligible commodities, and issued new
guidance aimed at improving procurement planning. 

No changes are needed in law or regulation to prevent this
procurement imbalance.  Under AID's "Buy America" policy, missions
were told that commodities should be procured from U.S.  sources to
the maximum extent practicable.  When AID adopted simplified
procurement procedures in 1988 pursuant to legislation establishing
the Development Fund for Africa, it also issued instructions to the
missions that made it clear that the new procedures did not lessen
the requirement for commodity procurements to be made from U.S. 
sources whenever possible.  However, for certain commodities (e.g.,
trucks), AID officials who were responsible for justifying and
approving requests for waivers that commodities be of U.S.  source or
origin did not adequately determine whether the commodities could
have been provided by U.S.  suppliers. 

AID's financing of commodity procurements from South Africa was not
in violation of sanctions implemented under the Comprehensive
Anti-Apartheid Act of 1986.  The commodities procured during the time
that sanctions were in effect were from South African private sector
organizations allowed by the act. 

   BACKGROUND
------------------------------------------------------------ Letter :2

After Mozambique gained independence from Portuguese colonial
authorities in 1975, the country's ruling party inherited an economy
ravaged by civil war that left millions facing food shortages and
forced others to leave their homes.  The new government, heavily
influenced by the Soviet Union and other communist countries,
initially pursued a centrally planned development
strategy--nationalizing productive sectors of the economy.  The
effect of nationalization was economic collapse; the agricultural
sector, which was the mainstay of the economy with about 80 percent
of the labor force, was particularly hard hit. 

Since its economic strategy was not succeeding, the government
adopted a fundamentally new approach in 1983--increased
privatization--and launched a program of reforms aimed at boosting
food production and strengthening the private agricultural sector. 
The reform package attracted wide support from Western aid donors,
including the United States.  In 1984, to respond to the Mozambique
government's private sector initiatives and improve relations between
Mozambique and the United States, AID approved a CIP specifically
directed at revitalizing Mozambique's private agricultural sector. 
The aid was designed to encourage the government's economic reforms,
reduce the Soviet Union's influence, and alleviate the suffering of
Mozambique's people. 

Since that time, AID has provided Mozambique with $113 million in CIP
financing under two programs consisting of commodity imports and
technical assistance and training projects.  From 1984 to 1988, AID
funded $51.6 million in assistance through the Private Sector
Rehabilitation Program.  This program focused on a limited range of
agricultural products and covered only 2 of Mozambique's 10
provinces.  Since 1989, AID has provided $61.4 million in assistance
through the Private Sector Support Program.  Under this program, AID
seeks to improve incentives for production and income.  AID increased
CIP coverage to all 10 of Mozambique's provinces and expanded the
list of eligible commodities to include all those related to
agricultural production, processing, and marketing. 

The extent of reflow of U.S.  foreign economic assistance dollars
back to the United States as a result of programs that finance
commodity procurement is difficult to determine, and AID data on this
subject is unreliable.\1 However, CIPs usually provide a higher rate
of U.S.  dollar reflow than other AID programs.  AID uses CIPs to
provide generalized financial support in implementing agreed-upon
government reforms, and local currency is generated by importers in
exchange for AID's issuance of letters of credit to import specific
commodities and services.  Although in contrast with the Mozambique
program, CIP procurements are frequently made by public sector
organizations and restricted to U.S.  sources. 

Commodity purchases under the Mozambique CIP were initially provided
through economic support and development assistance funds but were
restricted by Buy America provisions that required all procurements
to be of U.S.  source and origin.  Waiver of the Buy America
requirements required extensive written justifications and multiple
clearances, causing undue delays and unnecessary paperwork that
hampered AID's project implementation in Africa.  Because of the
onerous requirements placed on African missions to process the
waivers and a severe decline in the conditions of sub-Saharan Africa
in the 1980s, Congress created the Development Fund for Africa (DFA)
in December 1987 to provide more stability in U.S.  development
assistance funding and give AID greater flexibility in carrying out
its work in Africa.  Congress included a blanket waiver provision in
the legislation that exempted DFA funding from the Buy America
requirement.  AID has financed all procurements since December 1987
under the Mozambique CIP with DFA funding. 

--------------------
\1 Foreign Assistance:  Accuracy of AID Statistics on Dollars Flowing
Back to the U.S.  Economy Is Doubtful (GAO/NSIAD-93-196, Aug.  3,
1993). 

   DEVELOPMENT FOCUS AND PROGRAM
   DESIGN LIMITED OPPORTUNITIES
   FOR U.S.  SUPPLIERS
------------------------------------------------------------ Letter :3

The Mozambique program was primarily development oriented and
designed to place procurement decisions in the hands of local
importers.  Development focus was on the small private farmers and
the program design reduced the marketing opportunities normally
available for U.S.  suppliers.  The relatively simple nature of
Mozambique farming (the average farm size participating in the
program is 50 to 100 acres) and the limited resources of these
farmers made it inappropriate in many instances to import the
typically larger and more sophisticated equipment available from U.S. 
sources.  Mission officials told us that unsuitability for local
conditions and high unit cost were also factors in the importers'
decisions to procure certain commodities from non-U.S.  sources. 

In addition, the program was designed to give local importers and end
users much latitude in procuring commodities from whatever source or
country of origin they chose as long as the commodities being
procured met the designated program criteria.  Mission officials said
that local importers were encouraged to buy from U.S.  suppliers, but
when no U.S.  suppliers were represented through local dealers or met
program criteria, the officials deferred to the importers'
preference.  The officials further told us that giving the importers
the prerogative to select items to be procured (from an approved
commodity list) was the most efficient means to allocate resources
and that this method had been used throughout the program.  As a
result, the source that local importers used to procure commodities
was significantly influenced by the commercial links that were
already established with Mozambique's traditional European and South
African trading partners and with Japanese companies that
aggressively marketed their products in the 1980s. 

      LOW U.S.  SHARE OF
      PROCUREMENTS WAS AFFECTED BY
      LACK OF U.S.  INVESTMENT
---------------------------------------------------------- Letter :3.1

At the time of our review, the total value of procurements made under
the Mozambique CIP was about $84 million.  The value of procurements
from the United States exceeded that from any other single country,
but the share secured by U.S.  suppliers was relatively small (18
percent).  Procurements from six other countries accounted for nearly
all of the other program imports, as shown in figure 1.  Details of
procurement activity by commodity category and country under the
Mozambique program are presented in appendix I. 

   Figure 1:  Share of Total CIP
   Procurements, Fiscal Years
   1985-93

   (See figure in printed
   edition.)

Source:  AID. 

The value of procurements from the United States declined both in
real terms and in relation to the share attained by other countries
between fiscal years 1988 and 1992.  No procurements were made from
U.S.  suppliers in fiscal years 1991 and 1992, but procurements
resumed modestly in fiscal year 1993 (see fig.  2).  Mission
officials attributed the decline between fiscal years 1988 and 1992
to tight credit conditions that existed in Mozambique and a lack of
competitiveness of U.S.  products.  In addition to the procurements
already made, about $29 million remained unspent or uncommitted under
the Private Sector Support Program at the time of our review. 

   Figure 2:  Total Value of
   Procurement Commitments Signed,
   Fiscal Years 1985-93

   (See figure in printed
   edition.)

Source:  GAO's analysis of AID data. 

Trucks and related spare parts represented the largest share of
procurements, accounting for $24 million (29 percent) of the total. 
Another $14 million (16 percent) was spent to procure tractors and
related spare parts.  The United States provided only three trucks
(less than 1 percent) under the program during fiscal years 1985
through 1993.  Four countries--Japan, Brazil, Germany, and the United
Kingdom--supplied nearly all of the vehicles and spare parts (see
fig.  3). 

   Figure 3:  Truck and Tractor
   Procurements, Fiscal Years
   1985-93

   (See figure in printed
   edition.)

Note:  Percentages include procurements of related spare parts. 

Source:  AID. 

The low level of U.S.  goods imported under the program appears to be
at least partly the result of lack of interest and/or business
investment by U.S.  firms in the Mozambican market.  Mission and
embassy officials reported few American commercial contacts.  U.S. 
foreign investment in Mozambique, discouraged by socialist economic
policies, political instability, and a spillover effect from the
sanctions against South Africa, was minimal during the course of the
program; for example, in 1991, U.S.  private sector investment was
only about $70,000.  Local importers had little contact with U.S. 
suppliers, and without established U.S.  business links in country,
the mission had no ready access to distribution points for American
products.  U.S.  exports were chiefly bulk commodities that did not
require an ongoing business presence.  Mission officials and local
importers said that if the importers were told that they had to buy
equipment items from U.S.  suppliers that did not have existing
maintenance facilities or adequate supplies of spare parts, the AID
program would not have generated any interest. 

Despite encouraging developments in Mozambique's political situation,
U.S.  firms are taking a "wait and see" approach toward investment in
the country.  One way to gauge how U.S.  firms view the investment
climate in Mozambique is through their participation in the annual
Maputo trade fair.  Five U.S.  firms planned to attend the 1993 trade
fair versus 10 that attended in 1992, none of which were truck or
tractor suppliers despite a recent U.S.  monopoly on vehicle
procurements under program financing (see below).  During 1992, the
mission sent letters to vehicle manufacturers in the U.S.--General
Motors, Ford, Chrysler, Mack, Volvo/White, Navistar, and Paccar--of
vehicle procurement opportunities and urged local importers to
contact U.S.  suppliers directly to establish representational
agreements.  The importers told us they did contact U.S.  suppliers,
but received little response. 

      U.S.  EXPORTS WERE NOT
      SUFFICIENTLY PROMOTED UNDER
      MOZAMBIQUE PROGRAM
---------------------------------------------------------- Letter :3.2

Until recently, AID management did not appear to give adequate
consideration to the trade impact of private sector CIPs in deciding
whether and how to finance Mozambique's development needs.  The
program assistance and approval documents, prepared throughout the
program by mission staff and reviewed and approved at various levels
within the agency, sufficiently disclosed the mission's intent for a
large majority of the commodities financed under the program to be
procured from non-U.S.  sources.  However, as far as we were able to
determine, the mission's offshore procurement practices were never
formally challenged by agency management until mid-1992 when private
sector and congressional concerns were raised about them.  These
concerns prompted AID to cancel orders of over $6.1 million in
non-U.S.  origin vehicles and suspend all vehicle procurements under
CIP from non-U.S.  sources.  AID's Africa Bureau and mission
officials told us that the suspension of vehicle purchases from
non-U.S.  sources was not an admission of faulty procurement practice
but a response to congressional concerns. 

At the time of our review, AID was continuing to take steps to
increase export opportunities for U.S.  firms.  Even though the
suspension of vehicle procurements from non-U.S.  sources was still
in effect, AID had expanded the list of eligible commodities under
the program to include the financing of lower cost late-model used
trucks (under a parts and service warranty) that appeared to be in
good demand.\2 Mission officials told us that they were also
considering having U.S.  consumables imported (i.e., rice, sugar, and
wheat), even though they thought that importation of such commodities
instead of investment items was counterproductive for development. 
In addition, to increase U.S.  supplier participation, AID's Africa
Bureau issued new guidance to the missions.  The new guidance was
aimed at improving procurement planning, including the adoption of
monitoring procedures to ensure that large numbers of non-U.S.  motor
vehicles do not wind up being financed by AID. 

AID officials consider the Mozambique CIP a success.  Mozambique
mission officials said that the program helped to revive the
agricultural sector, which is critical to the country's overall
economy.  The mission unit was cited for superior performance by
AID's Special Awards Committee in 1993.  In addition, formal AID
evaluations concluded that the program was well conceived and made a
positive contribution to Mozambique's development needs.  However,
one contractor evaluation completed in March 1992 raised questions on
whether the mission financed the best product mix to encourage
agricultural production and did enough to promote procurement of U.S. 
goods by informing potential suppliers of the planned program and
encouraging them to establish local dealerships and support
facilities.  The evaluation noted that if U.S.  firms had learned
earlier of the multiyear program, and if the program offered the
prospects for commodity purchases in sufficient volume to make
investments in Mozambique service and maintenance facilities
worthwhile, more U.S.  goods might have been imported under the
program. 

In fact, some market entry opportunities to sell U.S.  trucks were
missed because (1) mission officials were not fully aware of U.S. 
vehicle manufacturers' supply capability, (2) the officials did not
explore the manufacturers' willingness to establish needed service
facilities and supplies of spare parts in Mozambique, and (3) AID
management did not adequately review and monitor the mission's
offshore vehicle procurements.  Between January 1986 and January
1992, the Mozambique mission issued letters of credit for CIP
financing of offshore purchases of 322 8-ton or larger capacity
trucks estimated to cost more than $11.6 million.  Truck procurements
were not advertised in the usual trade media because mission
officials determined that there would be no purpose in doing so,
since no U.S.  vehicle supplier was established in Mozambique that
could provide the required after-sales service and spare parts
support.  Mission officials also initially justified the offshore
vehicle procurements because they believed that no U.S.  truck
manufacturer built right-hand drive vehicles for 8-ton trucks. 
However, we found that over one-fourth (94) of the trucks actually
procured offshore during this period were left-hand drive vehicles. 

AID regulations require that motor vehicles must be made in the
United States to be eligible for program financing, unless special
circumstances exist.  Special circumstances that may justify waiving
this requirement include a present or projected lack of adequate
service facilities and supply of spare parts for U.S.-made vehicles. 
There is some disagreement within AID regarding the requirement.  An
AID headquarters procurement official responsible for motor vehicle
policy told us that U.S.  suppliers should have had the opportunity
to bid on vehicle requirements even if they did not have facilities
in place to support the vehicles but were willing to commit to make
the necessary investment to support them.  However, in its comments
on a draft of this report, AID said that commodity management and
Africa Bureau personnel had insisted that relying on a promise by a
U.S.  supplier to establish vehicle maintenance facilities did not
work.  AID further commented that it had also had negative
experiences in Africa when it relied on such a promise. 

Regardless, mission officials responsible for determining potential
procurement sources did not determine whether any U.S.  manufacturer
of the needed-size trucks was willing to make such an investment
(estimated at 2 years of supply support) in service facilities and
spare parts.  A U.S.  supplier's representative of such trucks also
told us that the supplier probably would have been agreeable to make
such an investment for any significant volume.  (The quantity would
have depended on circumstances, but it would have been below the
level of procurement that actually occurred.)

Managers at AID headquarters and regional overseas offices did not
challenge the mission's proposed offshore procurement plans.  In
approving the initial program financing in September 1984, before
DFA's enactment, the Africa Bureau and a Washington-based commodity
manager gave clearances to buy 8-ton trucks and spares offshore
because of a request for waiver, stating that no U.S.  truck
manufacturer produced right-hand drive vehicles in this required
size.  In addition, regional directors appeared to have relied on AID
headquarters' prior approval of the waiver determination when they
approved further mission offshore truck procurements in 1985 through
1987.  However, a U.S.  truck manufacturer told us that it did
produce 8-ton right-hand drive vehicles at the time of the initial
and subsequent offshore procurements.  An AID commodity official
acknowledged that such vehicles were available in the United States
at the time and conceded that clearances to buy the vehicles offshore
should not have been given without first determining whether U.S. 
suppliers could have responded to the mission's requirements. 

AID managers also did not notify U.S.  suppliers of the continuing
commodity requirements under the Mozambique program.  According to
AID procurement instructions for private sector and other types of
financing programs in which commodities are procured on a negotiated
basis, AID will distribute to the U.S.  business community and
periodically update (at least every 2 years) for each cooperating
country a list of commodities that are expected to be imported and
the names and addresses of importers that have traditionally
purchased those commodities.  According to an AID official
responsible for such lists, the only listing prepared for the
Mozambique program was in November 1984, announcing an initial $6
million procurement of various agricultural commodities, including
8-ton trucks.  The listing did not specify the quantities of items
being procured.  Another AID official believed that publication of
such notices was only required at the commencement of a new program. 

Aside from trucks, it appeared that mission officials sought to have
commodities procured from the United States whenever they thought it
was possible.  However, the officials regarded certain commodities to
be better suited to U.S.-origin procurement than others.  Although
AID policy does not require individual private sector procurements to
be advertised, mission officials advertised those commodities they
judged to be more accessible in the United States in the Department
of Commerce's Procurement Information Bulletin.  During our review,
we obtained copies of advertisements dating back to 1985 for such
items as raw materials, seeds, gasoline, hardware, and miscellaneous
agriculture equipment and supplies.  However, mission officials did
not advertise for the under 75-horsepower tractors needed by small
farmers because they determined (and we verified) that tractors of
this size were not made in the United States at the time. 

--------------------
\2 As of October 1993, a U.S.  truck supplier told us it had agreed
to supply 37 large late-model used trucks valued at $1.1 million
under CIP and 46 older trucks through non-program financing. 

   BUY AMERICA GUIDANCE WAS CLEAR
   BUT NOT EFFECTIVELY IMPLEMENTED
------------------------------------------------------------ Letter :4

The Mozambique mission's financing of commodity procurements in
certain instances from offshore rather than U.S.  sources resulted
from ineffective implementation of AID's Buy America guidance. 
Although AID is exempt from certain federal procurement laws and
regulations, its policy is to promote procurement of U.S.  goods and
services, to the maximum extent practicable, in accordance with the
government's Buy America requirement.\3 However, no specific
requirement explicitly instructs mission directors on when to
restrict procurements to a U.S.  source or perform the required
procedures to procure offshore.  Rather, the AID Administrator
instructed mission directors to use common sense to determine what
procurement source would be most understandable to the American
taxpayer.  Except for DFA-funded and certain other programs, AID
procurements not supported by individual waivers on a
transaction-by-transaction basis are generally restricted to U.S. 
source or origin. 

AID's policy that goods and services should be procured from the
United States to the maximum practicable extent did not change when
DFA was established, even though DFA-funded procurements are also
exempted from the Buy American Act requirements.\4 Instead, DFA
expedited the procurement process to make it more responsive to the
recipient country's needs.  In addition, AID headquarters undertook
sufficient efforts to make clear to overseas missions the agency's
view on Buy America under DFA-funded programs. 

In April 1988, AID's Africa Bureau issued a special set of policy
rules governing the missions' implementation of DFA.  The rules
transferred virtually all DFA implementing authority to the missions,
giving them much flexibility in exercising the blanket waiver
exemption allowed under legislation.  The rules also permitted
missions to execute procurements offshore without processing a waiver
for AID headquarters' approval (in most cases without special
documentation), thus achieving the statutory purpose of eliminating
the onerous waiver procedures that were affecting program
development.  The guidance informed mission staff that the DFA
exemption authority should be used sparingly and that significant
decreases in overall U.S.  source commodity purchases as a result of
the exemption were not intended or expected.  The missions were
instructed to develop their DFA procurement plans to ensure a high
level of U.S.  source procurement to the maximum extent practicable;
specifically, they were instructed to procure U.S.-manufactured
vehicles whenever they could be made available. 

No ambiguity existed at the Mozambique mission about the agency's
view on Buy America under DFA-funded programs.  Past and present
mission officials told us that they were well aware of and clearly
understood the agency's view on Buy America both before and after DFA
was passed.  Furthermore, they told us the mission was aware of the
low level of U.S.  source procurements under the program and tried to
address this concern by expanding the list of eligible commodities to
increase the participation of U.S.  suppliers.  Nevertheless, in
exercising the DFA authority, the Mozambique mission financed
vehicles and possibly other commodities offshore without fully
exploring the capability and willingness of U.S.  suppliers to meet
program requirements. 

We stated in an April 1991 report that AID's DFA procurement guidance
did not permit the missions to take full advantage of the flexibility
offered by Congress.\5 In response to our report, AID agreed to
re-examine the guidance; as a result, it determined that the guidance
would be more effective if it were simplified and liberalized.  AID's
Africa Bureau reissued the guidance in February 1993.  The new
guidance satisfactorily addressed the failure to adequately pursue
U.S.  procurement in some assistance programs and specified a broader
range of actions necessary to maximize U.S.  procurement at the
mission level and for non-project assistance programs.\6 Some of the
actions included (1) mandatory mission procurement plans to be
submitted to the African Bureau for screening, (2) an explanation why
each case of non-U.S.  source procurement is not practicable, (3)
mission suggestions on ways to involve U.S.  suppliers, and (4)
proactive monitoring by management staff of mission procurement plans
that appear to contain significant opportunities for U.S.  suppliers. 

--------------------
\3 AID's Buy America requirement refers to a provision of the Foreign
Assistance Act of 1961, as amended, which allows AID to use funds
from the act for procurement outside the United States only if the
President determines that such procurement would not adversely affect
the United States.  In 1961, President Kennedy made such a
determination, authorizing AID to procure from developing countries
for AID-financed procurement but not from industrialized countries
without a special case-by-case waiver.  Recent legislation (P.L. 
102-391, Oct.  6, 1992) modified the provision by restricting the
procurement eligibility of "advanced developing countries."

\4 22 U.S.C.  2293(n)(4). 

\5 Foreign Assistance:  Progress in Implementing the Development Fund
for Africa (GAO/NSIAD-91-127, Apr.  16, 1991). 

\6 Commodity import programs are categorized as non-project
assistance programs. 

   PROCUREMENTS FROM SOUTH AFRICA
   DID NOT VIOLATE U.S.  SANCTIONS
------------------------------------------------------------ Letter :5

On October 2, 1986, Congress enacted sanctions against South Africa
under the Comprehensive Anti-Apartheid Act as a means of pressuring
the South African government to change its apartheid system. 
Specifically, section 314 of the act prohibited U.S.  government
organizations from entering into procurement contracts for goods or
services from South African government parastatals\7

except for items necessary for diplomatic and consular purposes; it
did not cover U.S.  government-financed procurements by private
entities.  The sanctions restricted procurements from South African
government entities but allowed them from the country's private
sector.  On July 10, 1991, after determining that the South African
government was irreversibly committed to repealing apartheid and to
negotiating with leaders of the black majority, President Bush signed
an executive order lifting specific sanctions, including section 314. 

AID's financing of commodity procurements from South Africa did not
violate the act's sanctions because (1) the procurements were not
made by AID but by private importers in Mozambique and (2) none of
the items imported from South Africa were purchased from South
African government entities.  The private importers procured
commodities with AID financing provided to the government of
Mozambique (conditioned on economic policy reforms and restricted for
private sector use) and selected these commodities from AID-approved
eligibility lists. 

Pursuant to the act, an executive order required the Secretary of
State to determine which South African corporations, partnerships, or
entities were parastatals within the meaning of the act.  The
Department of State issued a list of South African parastatals in
November 1986 and updated the list in March 1987.  We used this list
to examine commodity procurements from South African suppliers and
found that no procurement financed under the Mozambique CIP was from
any of the parastatals identified by the Department. 

Mozambican importers utilized the services of private South African
cargo companies and, in a few instances, South African Railways--a
government parastatal--to transport commodities during the period
when the sanctions were in effect.  Section 314 of the act did not
address how commodities procured in South Africa were to be
transported if private cargo services were not available.  However,
AID's policy was to permit the private importers to use South African
government railway and port services if no other practical
alternatives existed.  We believe that AID's policy was reasonable
under the circumstances and confirmed that the private importers used
the government railway services only when no other practical
transportation services were available. 

Under the Mozambique CIP, AID has financed nearly $11.9 million in
agricultural and agricultural-related commodities from South Africa. 
During the period the sanctions were in effect, AID financed $6.6
million in commodities from this country.  The majority of the
procurements from South Africa were for petroleum products, seeds,
and agricultural equipment.  AID mission officials cited the
following reasons why these procurements took place: 

  South Africa's geographic proximity to Mozambique made its
     petroleum products the most cost-competitive.  The United States
     is an importer of petroleum; thus, a U.S.  supplier was not a
     viable option. 

  Certain varieties of required seeds for commercial and family farms
     were not available from the United States due to different
     climatic and soil conditions and the non-adaptability of some
     varieties to the Mozambique environment.  The mission financed
     over $4 million (59 percent) of its total seeds from South
     Africa and over $0.9 million (14 percent) from the United
     States. 

  South African firms provided after-sales service for their
     agricultural equipment, consisting mostly of irrigation
     equipment.  No other suppliers had this capability in
     Mozambique. 

--------------------
\7 These are entities that are owned, controlled, or subsidized by
the South African government. 

   RECOMMENDATION
------------------------------------------------------------ Letter :6

To ensure that U.S.  suppliers are notified as soon as possible of
any planned commodity procurements under private sector CIPs or other
AID-financed programs, we recommend that the AID Administrator (1)
compile and circulate importer lists to interested U.S.  suppliers
and determine whether new or additional methods are needed to
appropriately publicize purchases and (2) cooperate with other
federal agencies to assist U.S.  suppliers in making early contact
with local distributors in new or developing markets where export
opportunities may exist. 

   AGENCY COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :7

In its comments on a draft of this report, AID generally did not take
issue with the report's findings.  It suggested some clarifications
to the text and we incorporated changes where appropriate.  AID's
comments appear in appendix II. 

AID acknowledged that improved methods might be needed to publicize
or provide adequate advance notice of private sector CIPs to U.S. 
suppliers and to inform local importers in recipient countries of the
availability of U.S.  goods and services.  However, on the basis of
recent disappointing experience, AID doubted that earlier active
solicitation of U.S.  suppliers--accompanied by a ban on non-U.S. 
vehicle imports--would have significantly increased the number of
U.S.  trucks and tractors purchased by the targeted Mozambican small
farmers and entrepreneurs.  In fact, AID said its recent experience
suggested that even if it had actively solicited U.S.  suppliers
earlier, the program probably would have failed to achieve its
development objectives.  AID emphasized that the development
program's success depended on its ability to provide financing for
trucks and tractors that had existing adequate service facilities and
spare parts support, a requirement that it said effectively excluded
U.S.  manufacturers. 

AID's suggestion that it probably would have failed to achieve its
program development objectives had it actively solicited U.S. 
vehicle suppliers earlier is speculative and misses the point.  AID
is required by law to make information concerning program purchases
available to U.S.  suppliers as far in advance as possible and to
inform prospective foreign purchasers of the availability of U.S. 
goods and services.\8 Early notification of AID programs helps U.S. 
suppliers decide whether to invest in needed service and maintenance
facilities abroad.  By providing the affected U.S.  suppliers and
local importers with the essential program information and
requirements and acting in a facilitative role if needed, AID can
then properly leave the primary investment and procurement decisions
in the suppliers' hands. 

AID said it fully agreed that appropriate publicity or advance notice
was necessary for private sector CIPs, but it questioned how much
notice was necessary when dealing with the private sector in a
developing country, such as Mozambique.  It suggested that we revise
the first part of our recommendation to require the Mozambique
mission to compile an importer list to be circulated to interested
U.S.  suppliers by the Washington commodity procurement office and
for the agency to review new or additional methods of appropriately
publicizing private sector CIP purchases to increase competition and
provide opportunities for U.S.  suppliers under such programs.  To
meet these statutory mandates, AID said it planned to conduct a
review of publicity and notification requirements for private sector
CIPs during the next 6 months and would provide us with the results
of the review. 

We modified part one of the recommendation to include AID's suggested
revision but broadened its applicability to all AID-financed private
sector or commodity programs.  We will monitor AID's review of
publicity and notification requirements for these programs. 

--------------------
\8 Section 602 of the Foreign Assistance Act of 1961, as amended. 

   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :8

We conducted our work at AID headquarters in Washington, D.C.  We
also visited the AID mission and the U.S.  embassy in Maputo,
Mozambique, and private sector importers and consumers of
AID-financed agricultural commodities.  Our review focused mainly on
AID's procurement of high-cost items--for example, large trucks,
tractors, and spare parts from U.S.  foreign competitors.  We did not
review whether the program achieved its stated development
objectives.  To study why AID's commodity import program primarily
benefited U.S.  trade competitors, we obtained information and
interviewed officials in AID's Africa Bureau, the U.S.  embassy, and
the AID mission responsible for program administration.  We also
interviewed officials of U.S.  truck and tractor suppliers and other
affected organizations to gain their views on the Mozambique program. 

To determine whether changes in law or regulation are needed to
prevent procurement imbalances, we obtained, reviewed, and analyzed
Buy America and DFA legislation as well as AID's DFA and Buy America
procurement policy.  In addition, we interviewed officials from AID's
Office of the General Counsel responsible for issuing the procurement
guidance to the missions and former and present mission officials
responsible for implementing the guidance. 

To determine whether AID's financing of commodity procurements
violated U.S.  sanctions against South Africa, we reviewed the
Comprehensive Anti-Apartheid Act of 1986 and relevant legislative
data.  We also interviewed officials and obtained information from
the Department of State's and AID's Offices of the General Counsel,
the AID mission in Maputo, and the Congressional Research Service. 

We conducted our review between April and August 1993 in accordance
with generally accepted government auditing standards. 

---------------------------------------------------------- Letter :8.1

As agreed with your office, unless you publicly announce this
report's contents earlier, we plan no further distribution until 7
days from its issue date.  At that time, we will send copies to the
Administrator of the Agency for International Development and
interested congressional committees.  We will also provide copies to
others on request. 

Please contact me on (202) 512-4128 if you or your staff have any
questions on this report.  Major contributors to this report are
listed in appendix III. 

Sincerely yours,

Joseph E.  Kelley
Director-in-Charge
International Affairs Issues

AID'S PROCUREMENT FOR MOZAMBIQUE
COMMODITY IMPORT PROGRAM, FISCAL
YEARS 1985-93
=========================================================== Appendix I

                              (Dollars in millions)

                                                 Unite
                        South                        d    Other             U.S.
           Japa  Brazi  Afric            United  State  countri          percent
Commodity     n      l      a  Germany  Kingdom      s       es  Total  of total
---------  ----  -----  -----  -------  -------  -----  -------  -----  --------
Vehicle procurement
--------------------------------------------------------------------------------
Trucks     $10.  $3.97  $0.75    $8.15    $0.14  $0.13    $0.14  $24.0      0.54
 and         72                                                      0
 spare
 parts
Tractors      0   5.24      0        0     7.33   0.01     1.06  13.64      0.07
 and
 spare
 parts
================================================================================
Subtotal   10.7   9.21   0.75     8.15     7.47   0.14     1.20  37.64      0.37
              2

Non-vehicle procurement
--------------------------------------------------------------------------------
Agricultu  0.22   3.38   1.82        0     0.23   0.40     1.28   7.33       5.5
 ral
 equipmen
 t
Fertilize     0      0      0        0        0   6.85     0.95  77.80      87.8
 rs
Raw           0   0.36   0.05     0.01        0   6.74     1.13   8.29      81.3
 materials
Seeds         0      0   4.02        0        0   0.93     1.89   6.84      13.6
Petroleum     0      0   5.24        0     0.05      0  10.58\a  15.88         0
Computers     0      0      0        0        0   0.17        0   0.17       100
================================================================================
Subtotal   0.22   3.74  11.13     0.01     0.28  15.10    15.47  46.32      32.6
================================================================================
Total      $10.  $12.9  $11.8    $8.16    $7.75  $15.2   $16.69  $83.9      18.2
             95      5      8                        4               6
--------------------------------------------------------------------------------
Note:  Figures may not total due to rounding. 

\a Singapore provided 87 percent and Nigeria and Zimbabwe provided 13
percent of petroleum products. 

Source:  AID. 

(See figure in printed edition.)Appendix II
COMMENTS FROM THE AGENCY FOR
INTERNATIONAL DEVELOPMENT
=========================================================== Appendix I

(See figure in printed edition.)

(See figure in printed edition.)

(See figure in printed edition.)

(See figure in printed edition.)

(See figure in printed edition.)

Now on p.  10. 

(See figure in printed edition.)

(See figure in printed edition.)

(See figure in printed edition.)

(See figure in printed edition.)

The following are GAO's comments on the Agency for International
Development's letter dated December 29, 1993. 

   GAO COMMENTS
--------------------------------------------------------- Appendix I:1

1.  We agree that AID cited unavailability of service or parts as the
primary justification for financing only non-U.S.  trucks.  However,
this situation did not excuse AID from fulfilling its notification
requirements.  Further, as noted on page 10, a U.S.  supplier
probably would have made the necessary investment to support the
vehicles if it had known about the proposed procurement. 

2.  The requirements of section 602 of the Foreign Assistance Act to
notify U.S.  suppliers of program purchases as far in advance as
possible and to inform local importers in the recipient countries of
the availability of U.S.  goods and services have existed since the
Mozambique program began. 

3.  The report has been modified to reflect this information. 

4.  The report does not discuss AID's procurement decision-making. 

5.  We do not agree that the contractor evaluation statements were
taken out of context.  The evaluators were discussing program
shortcomings that could have been avoided.  Even though it is true
that the program design limited the mission's influence over the
importers' choice of commodities, it did not prevent the mission from
informing U.S.  suppliers of the multiyear program or encouraging
them to establish local maintenance facilities. 

6.  The figure of 94 left-hand drive trucks was derived from letter
of commitment data provided to us by the Mozambique mission. 

MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix III

NATIONAL SECURITY AND
INTERNATIONAL AFFAIRS DIVISION,
WASHINGTON, D.C. 

Ronald A.  Kushner, Assistant Director
Rolf A.  Nilsson, Evaluator-in-Charge
John D.  Sawyer, Evaluator

EUROPEAN OFFICE

Patrick A.  Dickriede, Senior Evaluator
Peter J.  Bylsma, Evaluator

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