Foreign Assistance: USAID's Cash Transfer Program in Egypt Supports Economic Reform Activities, but Various Factors Have Limited Its Influence
Published: 2005-07-11T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Since 1992, the U.S. Agency for International Development (USAID) has focused the Cash Transfer Program in Egypt on supporting economic reform activities to move Egypt toward a more liberal and market-oriented economy. USAID has provided funds to Egypt's government as it completed agreed-on economic reform activities. In fiscal year 2002, the Department of State and USAID conducted a review of U.S. economic assistance in Egypt that led USAID to renegotiate the program's terms. USAID and Egypt signed a new agreement in March 2005. GAO's review of the Cash Transfer Program focused on the program's disbursement of funds and Egypt's completion of agreed-on activities, factors affecting the program's influence on Egypt's economic reform, USAID's efforts to evaluate the program's impact, and USAID's changes to the program in response to the 2002 review by the Department of State and USAID. GAO received comments on a draft of this report from USAID. USAID stated that the draft was fair and clear but that Egypt's completion of about 70 percent of the activities resulted from the program's structure rather than shortcomings in Egypt's policy reforms. USAID also stated that extending the target dates for completing reforms increased U.S. influence in accomplishing reforms.
section_title: What GAO Found
paragraphs: Since fiscal year 1992, USAID's Cash Transfer Program has provided about $1.8 billion in economic assistance to the Egyptian government for completing reform-related activities, such as privatizing state-owned companies. USAID and Egypt have identified 196 reform-related activities, and Egypt has completed 136 of them (about 70 percent), primarily in the areas of finance and trade. Although the Cash Transfer Program supported Egypt's completion of reform activities, several factors have limited its ability to influence the Egyptian government to undertake certain reforms. First, the financial costs of certain reforms affected the Egyptian government's willingness to undertake them despite their potential benefits; although the Cash Transfer Program offsets some of those costs, its contribution to Egypt's overall budget is small. In addition, Egypt is cautious about undertaking reforms that may lead to domestic instability. Finally, USAID granted numerous extensions that allowed Egypt additional time to complete agreed-on activities, thus weakening the conditions tied to funding disbursement. Despite the difficulty of determining the impact of policy reform, USAID conducted two evaluations of Cash Transfer activities as well as a series of opinion surveys on the impact of certain activities supported by the program. Although these studies reported some positive results, GAO found limitations with some of the measures used to evaluate the activities' impact on Egypt's economy. In response to recommendations in the 2002 Department of State and USAID review, USAID (1) narrowed the Cash Transfer Program's focus to reforms in the financial sector, (2) will obligate funds when it is certain that the Egyptian government will complete activities rather than when the government agrees to undertake them, and (3) is improving its monitoring and evaluation system.

section_title: Letter
paragraphs: Since 1992, the U.S. Agency for International Development (USAID) has  focused the Cash Transfer Program in Egypt on supporting economic  reform activities intended to move Egypt toward a more liberal and market- oriented economy. Under the terms of the program, USAID provides funds  to the Egyptian government as it completes specific activities related to  reforms in a range of areas, including finance, trade, and industry. USAID  and Egypt agree on these reform areas and activities in memorandums of  understanding (MOU). In addition, USAID provides technical assistance to  facilitate Egypt’s completion of the reform-related activities. In 2002, the  Department of State (State) and USAID conducted a joint review of  USAID’s activities in Egypt. Based on the review’s recommendations,  USAID began renegotiating the terms of the program, to which Egypt  assented when it signed a new MOU in March 2005. The review by State  and USAID recommended, among other things, that USAID narrow the  Cash Transfer Program’s focus, strengthen the agency’s ability to enforce  activity deadlines, and improve performance monitoring.
GAO’s review of USAID’s Cash Transfer Program in Egypt focused on (1)  the program’s disbursement of funds and Egypt’s completion of agreed-on  activities, (2) factors affecting the program’s influence on Egypt’s economic  reform activities, (3) USAID’s efforts to evaluate the program’s impact on  Egypt’s economic reform, and (4) USAID’s changes to the program in  response to recommendations in the 2002 joint review by State and USAID.
To achieve these objectives, we analyzed USAID’s criteria for making  disbursements, as well as the total disbursements made under the Cash  Transfer Program since fiscal year 1992. We also reviewed legislation,  USAID regulations, and other relevant program documentation. We  developed a database of all activities USAID targeted under the program  and, to better understand the range of activities targeted and completed,  we further analyzed three subsets of the reform areas covering a range of  activities that had a mix of results—privatization, banking, and intellectual  property rights. To determine the monetary significance of the Cash  Transfer Program, we calculated the program’s annual share of Egypt’s  foreign exchange earnings and government revenue using relevant data  provided by the Egyptian government to the International Monetary Fund  (IMF). Although we were unable to assess fully the reliability of the  Egyptian government data, we noted that Egypt recently subscribed to the  IMF's special data dissemination standards (SDDS), which were created  for nations that already meet high data quality standards. While these data  probably have some limitations, we determined that it is unlikely that  potential errors would materially impact our use of this information in our  report. To understand USAID’s efforts to evaluate the program, we  reviewed USAID studies and opinion surveys that attempted to assess the  impact of reform activities on the Egyptian economy and USAID’s  performance monitoring plan. We examined State’s and USAID’s joint 2002  review of U.S. economic assistance to Egypt and other relevant documents  related to USAID’s response to the review. We interviewed officials from  USAID, the Department of State, the Department of the Treasury, the IMF,  the World Bank, and the government of Egypt, as well as representatives of  the European Union, economists, and academics. We performed our work  between August 2004 and May 2005 in accordance with generally accepted  government auditing standards. Appendix I provides a more detailed  description of our objectives, scope, and methodology.
subsections: section_title: Background
paragraphs: Since 1975, the United States government has provided more than $25  billion in economic assistance to Egypt. The U.S. continues to support  Egypt, in part because of its political leadership in making peace with Israel  and fostering a broader peace between Israel, the Palestinians, and other  Arab states, including its efforts in the war on terrorism. U.S assistance to  Egypt has three components. (1) The Cash Transfer Program provides  assistance conditioned on the Egyptian government’s achievement of  specific reform-related activities. (2) Traditional project assistance focuses  on, among other things, economic reform, health and education, and the  environment. (3) The Commodity Import Program supplies financing to  Egyptian private sector importers of U.S. goods and provides funding that  is not specifically conditioned on any reforms. In 1998, the United States  and the Egyptian government agreed to reduce annual U.S. economic  support by $40 million per year, resulting in a reduction of total funds from  $815 million to $407 million by fiscal year 2009. Annual Cash Transfer  Program appropriations are projected to remain constant at about $200  million annually until fiscal year 2007 and decline to $150 million by fiscal  year 2009.
In the early 1990s, USAID focused on fostering economic reforms aimed at  achieving a stable macroeconomic environment in Egypt, then shifted its  focus to encouraging economic growth and development in the mid-1990s.  The goal of USAID’s program activities in Egypt is to create “a globally  competitive economy benefiting Egyptians equitably.” Although Egypt has  made progress at the macroeconomic level, including reducing inflation  and unifying the exchange rate, USAID has stated Egypt’s continued state  ownership of companies and banks and its existing laws and regulations  continue to hinder its transition to a market economy.
The Cash Transfer Program began as the Sector Policy Reform (SPR)  program and complemented Egypt’s economic reform and structural  adjustment program, which began in 1991. In 1999, the program was  renamed the Development Support Program (DSP) and focused on  improving the trade and investment environment and increasing private  sector employment. The Cash Transfer Program targeted eight general  reform areas until the State and USAID review in 2002 recommended that it  be narrowed to a single sector. These areas include the following:   Financial sector—reforming the banking and insurance industries;  Trade sector—reducing trade barriers;  Industrial sector—privatizing state-owned companies; Business law and regulation—modernizing laws that affect business  and trade such as intellectual property rights laws;  Fiscal sector—establishing tax policy and improving public access to   Monetary policy—reforming foreign exchange rate and domestic credit   Data dissemination—improving standardization of data and statistical   Environmental protection—improving environmental regulations and  conservation.
Funding for the Cash Transfer Program is provided in annual  appropriations to the Economic Support Fund. The annual appropriation  makes this funding available for the program with the understanding that  Egypt will undertake economic reforms in addition to those it has  undertaken in previous years. Grant agreements and MOUs between the  U.S. and Egyptian governments outline the ways that Egypt may use  program funds and the types of reform-related activities that it must  undertake to receive them. According to the grant agreements, the  Egyptian government is authorized to use 75 percent or more of the funds  to purchase U.S. commodities, such as wheat or equipment, and up to 25  percent to repay its debt to the United States. After purchasing  commodities in U.S. dollars that the program provides, the Egyptian  government must deposit the equivalent amount of Egyptian local currency  into a special account. A separate MOU between USAID and the Egyptian  government stipulates that the government of Egypt may use funds from  this account for its general budget, sector support, or USAID activities. In  addition to providing a source of budgetary funds for the Egyptian  government, the Cash Transfer Program serves as an additional source of  foreign exchange for Egypt. Figure 1 depicts the flow and use of Cash  Transfer Program funds.
According to USAID officials, if the Egyptian government does not meet  the agreed-on criteria for a specific activity, USAID may withhold funding  and redirect it to support other Cash Transfer Program activities. To  determine the funding that Egypt should receive for completing each  reform activity, USAID considers the activity’s significance, the cost to the  Egyptian government associated with completing it, the Egyptian  government’s willingness to implement it, the U.S. government’s interest in  seeing it implemented, and the contribution of the completed activity to  Egypt’s economic growth.
section_title: USAID Provided Financial and Technical Assistance to Support Egypt’s Completion of Reform Activities
paragraphs: Since fiscal year 1992, USAID’s Cash Transfer Program has provided about  $1.8 billion in financial assistance to the Egyptian government. USAID has  also provided about $70 million in technical assistance to the Egyptian  government to support Cash Transfer-related reform activities. The  Egyptian government has completed 136 of the 196 activities targeted for  reform, including financial and industrial sector reforms. The Egyptian  government did not complete 60 of the targeted activities and consequently  received no money for them, in part because of a change in the program in  1999 that allowed Egypt to choose from a menu of reform activities.  Although Egypt completed many activities, the results of some of the  targeted reform areas were mixed. USAID’s disbursements per activity  ranged from $0.1 million to $150 million, with a median disbursement of  $10 million. However, Egypt received about $730 million, or 40 percent of  total funding, for 20 of the completed activities.
subsections: section_title: USAID Provided Almost $2 Billion in Cash Transfer Program Funding and Technical Assistance
paragraphs: USAID disbursed about $1.8 billion in Cash Transfer Program funds to the  government of Egypt as it completed agreed-on economic reform activities,  primarily in the areas of finance and trade. Figure 2 shows the distribution  of program funding among the reform areas since 1992.
In general, the targeted activities represented the steps associated with a  major reform in agreed-on areas. For example, privatizing state-owned  companies, an aspect of industrial sector reform, required   initial steps such as conducting a study of the social and economic costs  and the benefits of opening an industry to private investment,   intermediate steps such as developing a national privatization plan, and   final steps such as privatizing a number of companies.
In addition, USAID provided approximately $70 million in technical  assistance, in part to support the Egyptian government’s completion of  agreed-on activities. For example, USAID’s technical assistance funding  supported the government of Egypt in formulating and implementing  policies, training government personnel, and purchasing office equipment.  USAID also used technical assistance funds to hire contractors to monitor  and verify the government of Egypt’s completion of agreed-on activities.  According to Egyptian officials, USAID’s technical assistance helped the  Egyptian government complete intellectual property rights (IPR) reform  activities targeted under the Cash Transfer Program, such as drafting an  IPR code, and provided technical information on the World Trade  Organization’s (WTO) Trade-Related Aspects of Intellectual Property  Rights requirements. Technical assistance funds were also used to promote  public awareness of the importance of IPR and modernize the patent and  copyright offices.
section_title: Egyptian Government Completed the Majority of Agreed-on Activities, but Results of Some Targeted Activities Were Mixed
paragraphs: Beginning in 1992, USAID and the Egyptian government identified 196  activities for reform. Egypt completed and received program funds for 136  of those activities (about 70 percent) and did not complete or receive  money for 60 of them. Egypt had the option of not completing some of  them, because under a new program approach initiated in 1999, USAID and  the Egyptian government agreed to a broad range of activities that allowed  Egypt to select those that best fit its reform agenda. The 60 uncompleted  activities included 3 of 25 activities targeted for reform in a 2001 MOU.  Egypt did not complete these 3 activities because the U.S. government  unilaterally withdrew from the program following the 2002 review by State  and USAID.
Table 1 shows some of the 60 activities that the government of Egypt did  not complete or receive program funds for under the terms of the program.  We found that roughly 10 percent of the completed activities involved  conducting studies and reviews, 10 percent involved drafting laws and  issuing decrees, and about 20 percent involved adopting plans or  implementing procedures. The remaining 60 percent involved various  sector specific activities, such as reducing the number of tariffs and  removing price controls from hotels, restaurants, and other businesses  associated with tourism.
To understand the range of activities USAID targeted and the extent to  which Egypt completed them, we analyzed reform activities in three  subsets of the program’s general reform areas—privatization (industrial  sector), banking (financial sector), and IPR (business law and  regulation)—and found that the results of these targeted activities were  mixed. For example, although Egypt privatized some of its state-owned  companies and its joint venture banks, less than half of its state-owned  companies and none of its public sector banks had been privatized as of  May 2005. Likewise, according to USAID, although Egypt has improved its  IPR legal framework, the country still does not fully comply with  international standards for pharmaceutical protection.
USAID disbursed $169 million for the completion of 12 privatization  activities in fiscal years 1992-2004. Six of the activities supported  privatization of companies—for example, developing a national  privatization plan, reducing indebtedness of public companies, and  improving the process for valuing of them. The other six activities  consisted of actually privatizing public and joint venture companies. In  1991, the Egyptian government identified 314 companies to be privatized.  During fiscal years 1993-2002, it privatized 118 of these companies, 3 of  which were joint ventures, according to Cash Transfer Program  disbursement justifications (see fig. 3). Privatizations slowly increased  through fiscal year 1996, peaked in fiscal year 1998, and then declined  through fiscal year 2002. Of the 196 remaining public companies, some are  profitable but others are unprofitable, including indebted textile  companies.
According to Egyptian government and USAID officials, as well as  documents we reviewed, three reasons contributed to the decline in  privatizations after 1998. (1) The companies remaining on the list were  difficult to sell because of unprofitability or were difficult to liquidate  because of concerns about mass layoffs. (2) The Egyptian government did  not fully support privatization, as demonstrated by its unwillingness to  realistically value companies. (3) The global economic environment  became less conducive to privatization, particularly in the Middle East after  September 11, 2001. According to a USAID contractor responsible for  tracking privatization progress, the best companies were sold initially and  many of the remaining companies required large investments to stay  operational.
In fiscal years 1992-2004, USAID disbursed $260 million for the completion  of 11 activities associated with banking reforms in Egypt. According to  USAID documents, banking activities focused on improving regulations  and strengthening banks’ capital structure, including the following:  allowing foreign banks to establish branches or gain full ownership of  local banks and deal in local currency;  removing controls on banking service fees;   establishing new accounting and auditing procedures for all sectors,  including insurance, based on the International Accounting Standards;   revitalizing capital markets and improve the transparency of financial   ratifying an anti-money-laundering law, satisfying the Organization for  Economic Cooperation and Development’s Financial Action Task Force  on Money Laundering, and  reducing Egyptian government shares in 22 of 25 joint venture banks in  Egypt.
Additionally, the Egyptian government agreed to transfer majority  ownership of at least one of its state-owned banks under the Cash Transfer  Program in 1995 and sell its shares in the four public sector banks in 2000.  Although the Egyptian government identified the first bank for  privatization in 1997, none of the four state-owned banks had been  privatized as of May 2005. In March 2005, the Egyptian government signed a  new MOU with USAID that once again made the privatization of a state  bank a priority. According to U.S. and Egyptian officials, a public sector  bank is expected to be privatized by the end of 2005, owing in part to  increased political will in Egypt’s cabinet and more experienced  management in the Central Bank of Egypt. However, a Central Bank senior  official stated that the sale of the public sector bank depends on its  handling of nonperforming loans and finding an investor, which could  prove difficult.
Business Law/Regulation: Intellectual Property Rights  USAID disbursed about $75 million for the completion of six IPR-related  reform activities undertaken to support Egypt’s commitments under the  WTO’s agreement on Trade-Related Aspects of Intellectual Property Rights.  According to a USAID contractor, although the reforms that Egypt  completed moved it closer to international IPR standards, more reforms  are needed for Egypt to achieve compliance with international standards  related to data dissemination and data exclusivity for pharmaceuticals. The  activities that USAID supported included the following:   conducting a study of the benefits of consolidating the patent,  trademark, and international design offices;  joining the Patent Cooperation Treaty in June 2003; and  enacting a new IPR law in May 2002 that incorporated both the patent  and industrial design laws.
section_title: Small Number of Activities Accounted for Large Share of Program Funds
paragraphs: Since 1992, USAID has disbursed between $0.1 million and $150 million to  Egypt for completed activities, with a median disbursement of $10 million  per activity; however, the Egyptian government received large  disbursements, totaling about $730 million (40 percent) of total program  funds, for 20 of the 136 activities that it completed. Our analysis showed  that the largest disbursements included $150 million for passing an anti- money-laundering law and $100 million for developing a macroeconomic  reform plan approved by the government.
Antimoney-laundering law. In 2002, Egypt received a disbursement of  $150 million for passing a law against money laundering. According to  USAID, as Egypt’s economy and financial systems have opened they  have become more susceptible to use as conduits for laundering  proceeds from criminal activities such as drug trafficking and terrorism.  USAID first targeted anti-money-laundering reform in a 2001 MOU and  formally specified the requirements for passage of a law in June 2002,  the same month Egypt received a disbursement for completing the  activity. According to USAID documentation, Egypt received a large  disbursement because the law addressed the concern of the  Organization for Economic Cooperation and Development’s Financial  Action Task Force that Egypt was noncooperative in addressing money- laundering problems.
Macroeconomic reform plan. In 2001, Egypt received a disbursement of  $100 million for developing and approving a macroeconomic reform  plan. According to USAID, this activity supported major Egyptian  reforms in the face of the economic crisis after September 11, 2001, that  included Egypt’s slowed growth and loss of revenues. Among the areas  the plan addressed were Egypt’s exchange rate, monetary and fiscal  policy, and legislation for issues such as IPR, labor and mortgage laws,  and banking reform. According to USAID documents, the plan was  added to the program in December 2001 and was approved by the U.S.  Ambassador to Egypt, the Egyptian Prime Minister, and several of  Egypt’s economic ministers before the disbursement in January 2002.
Our review of program activities showed that USAID generally paid the  Egyptian government once for each activity. However, we identified one  instance in which USAID made disbursements twice to Egypt for the  privatization of three companies. In 1998, USAID disbursed to the Egyptian  government $20 million dollars for meeting criteria to privatize 25  companies. Egypt’s privatization of three of these companies—United  Poultry Production, Ramsis Agriculture, and the Egyptian Company for  Meat and Dairy Production—were listed in subsequent documents as  justification for additional disbursements of $2.4 million in 2000 and $1.2  million in 2001. In commenting on a draft of this report, USAID officials  agreed that these disbursements had occurred.
section_title: Various Factors Have Limited the Program’s Ability to Influence Egypt’s Reforms
paragraphs: Although the Cash Transfer Program provided financial and technical  assistance to support Egypt’s completion of reform-related activities,  several factors have limited the program’s ability to influence Egypt to  undertake certain reforms. These factors include the following:  Financial costs versus benefits of reform-related activities. Although  the reforms are expected to generate financial benefits by correcting  inefficiencies in the economy, financial costs are also associated with  the reforms. For example, the authors of a USAID-sponsored study  estimated the financial benefit to the Egyptian government of privatizing  the remaining state-owned companies and banks would be over $17  billion. However, the financial benefits are not guaranteed; privatized  companies may not operate more efficiently or produce additional tax  revenues. For example, according to USAID’s privatization study, some  privatized Egyptian companies failed to undertake significant  restructuring and therefore did not produce many of the expected  benefits they were supposed to bring, including improved financial  performance.
Size of program funding relative to Egypt’s overall foreign exchange  earnings and revenue. Although the Cash Transfer payment provides  U.S. dollars for the purchase of U.S. commodities and repayment of debt  to the United States, the payment represents a small portion of Egypt’s  foreign exchange earnings. For example, in fiscal year 2003, the  program’s funds accounted for about 1 percent of Egypt’s overall foreign  exchange earnings and less than 2 percent of its foreign reserves.  Additionally, the Egyptian pounds generated by the program and used  by the Egyptian government for budget support are a small portion of its  revenue; in fiscal year 2003, the program funds accounted for about 1  percent of the government of Egypt’s annual revenues and grants.  According to a State Department official, the $200 million that the  program provides annually is not sufficient by itself to persuade the  Egyptian government to undertake an unpopular reform such as  privatization.
Reforms’ potential effects on domestic stability. Since IMF sponsored  economic reforms triggered protests and domestic unrest among  Egypt’s populace in the 1970s, the government of Egypt has been  cautious about reforms such as liberalizing prices and lifting subsidies  because of the potential negative impact on certain groups. For  example, in January 2003, the Egyptian government introduced a more  flexible and market-oriented exchange rate regime as outlined in its  macroeconomic reform plan. However, as a result, the value of the  Egyptian pound fell by about 30 percent in its initial months, raising the  prices that Egyptians paid for imported goods, including food.  According to the IMF, the Ministry of Finance partially negated this  change when in September 2003, concerned about rising food prices, it  introduced a special exchange rate for imported items such as grains.
Cash Transfer Program deadlines. The Cash Transfer Program was  designed to provide funding to Egypt based on its compliance with  agreed on conditions, including meeting deadlines. Since fiscal year  1992, the government of Egypt requested, and USAID granted, 19  extensions to the deadlines originally agreed to in MOUs. The  extensions were generally for an additional 3 to 6 months; however,  certain performance periods had multiple extensions that allowed the  government of Egypt 2 or more years from the original deadline to  complete the activities. Although USAID documents justified the  extensions, the number and length of extensions may have weakened  the conditions tied to the funding disbursement by assuring that Egypt  continued to receive funds, in some cases well beyond the established  deadlines. For example, in March 1997, USAID extended the Egyptian  government’s deadline to complete agreed-on activities for an additional  6 months and then granted five other extensions, resulting in a final  deadline of September 1999. According to USAID documents we  reviewed, the 1997 extensions were granted to give the government of  Egypt time to negotiate a new IMF agreement, prepare for the Cairo  economic summit, and redefine reform priorities after a shift in Cabinet  members—factors that contributed to a delay in Egypt’s completion of  Cash Transfer Program reform activities. USAID approved additional  deadline extensions for a separate set of activities in September 1997,  subsequently extending it four more times to June 2000. The need to  tighten conditions tied to the program’s funding disbursements was  highlighted in the 2002 review by State and USAID.
section_title: USAID Made Efforts to Evaluate Cash Transfer Program’s Impact on Egypt’s Reforms, but The Assessments Had Limitations
paragraphs: Demonstrating the impact of policy reforms is challenging, according to  USAID officials and academics studying such reforms; however, USAID  conducted two evaluations related to the Cash Transfer Program activities,  as well as a series of opinion surveys that attempted to assess the impact of  economic reform activities supported by the program. These evaluations  and opinion surveys reported that the program’s activities had some  positive results, but we found limitations with the two studies. We also  reviewed USAID’s performance management plan (PMP) and found that  some of its measures had limitations.
subsections: section_title: Measuring Policy Reform’s Impact Is Challenging
paragraphs: USAID officials and academics studying policy reform pointed out the  difficulties of demonstrating the impact of policy reforms. USAID officials  stated that it is nearly impossible to isolate the impact of the Cash Transfer  program from other factors that have influenced Egypt’s trade and  investment environment. In addition, collecting reliable data is problematic  in Egypt. For example, according to a USAID contractor responsible for  tracking Egypt’s privatization efforts, basic data, such as the number of  privatizations completed, were not readily available from the Egyptian  government. Furthermore, the nature of policy reform often results in  delayed impacts, thus evaluations cannot take place until sufficient time  passes. For example, according to USAID’s privatization evaluation, it was  difficult to draw definitive conclusions regarding financial performance for  some of the companies because of inadequate time between the  privatizations and evaluation. Although measuring the impact of reforms is  difficult, USAID continues to fund various assessments.
section_title: USAID Efforts to Evaluate Program’s Impact Showed Positive Results but Had Limitations
paragraphs: To evaluate the impact of Cash Transfer Program activities in Egypt, USAID  conducted two agency-funded studies, twelve opinion surveys of private  sector business leaders, and linked some activities to its PMP. However, we  found that some measures that USAID used in their performance  management system had limitations.
A study of USAID-supported privatization activities published in 2002  pointed out some positive impacts, such as helping to reduce Egypt’s  fiscal deficit, facilitating the entrance of new companies into Egypt’s  market, expanding product varieties and availability, and improving  some firms’ financial performance. However, the study also found that  privatization did not increase Egypt’s foreign direct investment relative  to other developing countries although this reform was related to  USAID’s strategic objective of enhancing Egyptian business  opportunities by attracting private sector investment. In addition, the  study acknowledged some challenges in evaluating privatization’s  impact because access to some of the Egyptian government’s data was  limited and sufficient time had not passed to assess the financial  performance of some privatized companies.
A study of USAID technical assistance for Egypt’s IPR reforms  published in 2004 found that this assistance, among other factors,  motivated the Egyptian government to implement reforms. The study  found that these reforms led to: a legal framework that was more  compliant with WTO IPR requirements; a modernized IPR-related  facilities; a reduction in the time required to obtain a patent from 6  years in 1996 to less than 3 years in 2003; and, increased public  awareness of the benefits of intellectual property rights. However, the  study focused on the outcomes of USAID’s technical assistance to  support the completion of IPR-related activities rather than on the  impact of these activities on the Egyptian economy, such as increasing  confidence among foreign investors, with regard to doing business in  Egypt.
Opinion surveys  USAID conducted a series of periodic questionnaires and roundtables  with Egyptian private sector leaders and academics to gauge the  progress and impact of the Egyptian government’s economic reforms  and structural adjustment program. Every 6 months for a 6-year  period, respondents were asked to score and give opinions on 24 policy  areas in three main categories: stabilization policies, structural  adjustment policies, and social policies. The surveys found that, in  general, business leaders agreed that the Egyptian government had  taken modest steps forward in stabilization policies. However, the  survey also found that business leaders were concerned about slow  progress in many reform areas, such as banking and privatization,  exchange rates, and the growth of small and midsize businesses. USAID  recognized that the survey scores and opinions are subjective.  However, USAID pointed out that respondents’ perceptions of the  behavior of the domestic and international marketplace served as a  proxy for the larger business community’s opinion of Egypt’s progress  with economic reform. As a result, USAID said the survey could be a  useful tool for evaluating policy initiatives.
USAID’s performance management plan USAID uses its PMP to measure progress toward strategic goals and  objectives. Although the PMP does not directly evaluate the impact of  the Cash Transfer Program, USAID pointed us to it as a measure of the  program’s progress and impact on the Egyptian economy during our  fieldwork. However, we found limitations in some of the indicators  used in the PMP in that they primarily assess outputs and do not link  the outputs to the activities’ impact on Egyptian economic reform. For  example, two privatization indicators—the value of sale proceeds from  privatized state-owned and joint venture companies and the  cumulative number of qualified joint venture companies and banks  divested—measured the quantitative results of privatization rather than  the activities’ effects on the companies’ efficiency. Other PMP  indicators were influenced by factors outside the program. For  example, USAID used the indicator trade weighted average tariffs to  show progress in reducing trade barriers; however, other factors, such  as a shift to imports with lower tariffs, could have contributed to a  reduction in trade barriers, and thus the change could not be attributed  only to the reform’s impact.
section_title: USAID Is Taking Steps to Respond to Recommendations by State and USAID
paragraphs: USAID has taken several steps to address the 2002 State and USAID  review’s recommendations that the agency narrow the focus of the Cash  Transfer Program, reprogram funds if deadlines for reform-related  activities are not met, and improve the USAID mission in Egypt  performance monitoring system.  1. To narrow the program’s focus, USAID signed an MOU on March 20,  2005, focused on reforming the financial sector. The new MOU aims to  support financial sector modernization by:  strengthening the management of the Central Bank of Egypt;  creating a government securities market consistent with international   increasing the private sector’s share of the banking system;   strengthening the legal and regulatory framework of the overall   implementing a code of corporate governance.
USAID and the Egyptian government agreed to 19 reform-related  activities that support these goals, including privatizing one of four  state-owned banks before the end of December 2005. According to  USAID officials, if the Egyptian government completes all 19 reform- related activities by the agreed-on time frames, it will receive  disbursements of $800 million, or 67 percent of the $1.2 billion that  USAID expects to obligate for the Cash Transfer Program through fiscal year 2009. USAID has not yet determined the conditions for  disbursement of the remaining funds, but a State official stated that the  agency will likely target trade reform.  2. To respond to the review’s recommendation to reprogram funds if  reform-related activity deadlines are not met, USAID changed its  process for obligating Cash Transfer funds. Beginning in 2005, USAID  will obligate Cash Transfer funds only after it is certain that the  Egyptian government will complete agreed-on activities. This change is  intended to ensure that obligated funds do not accumulate and to  strengthen USAID’s ability to encourage the Egyptian government to  satisfy activity requirements.  3. To improve its measurement of the mission’s programs’ contribution to  meeting USAID strategic objectives, the agency contracted to revise its  performance monitoring system by updating its PMP. The review by  State and USAID indicated that the previous system did not allow  USAID to reprogram resources from programs that were not producing  desired results. According to a USAID official, the system’s measures  also did not provide timely information for management purposes.  However, at the time of our review, details of PMP revisions were not  available; therefore, we were unable to determine how USAID will  address the issues raised by the review and whether the new system  will improve evaluation of Cash Transfer Program activities.
section_title: Conclusions
paragraphs: Although the Cash Transfer Program has supported reform-related  activities since 1992, several factors have constrained its influence and  potential to be a more effective force for change in Egypt. However, the  recently signed MOU, which makes deadlines explicit for the first time, and  Egypt’s renewed political support to undertake certain reforms, such as  bank privatization, offers a new opportunity to better leverage this  program. For example, by not making funds available until it is clear that  Egypt will complete program activities, USAID is strengthening  conditionality. Given the recent program changes and Egypt’s regional  importance, it is critical that policymakers continue to monitor Egypt’s  progress in achieving economic reform and the Cash Transfer Program’s  contribution to those reforms, especially in light of the broader political  environment in which the program operates.
section_title: Agency Comments and Our Evaluation
paragraphs: The Acting Assistant Administrator for USAID, Bureau of Management,  provided written comments on a draft of this report, which are reproduced  in appendix II. He stated that the draft was fair and clear, but that the  Egyptian government’s completion of 70 percent of the 196 agreed-on  activities related substantially to the Cash Transfer Program’s structure  rather than to shortcomings in Egypt’s policy reforms. Additionally, USAID  stated that granting deadline extensions to permit Egypt to complete  activities increased the U.S. government’s influence in accomplishing  reforms. USAID also provided technical comments as did the Department  of State, which we incorporated where appropriate.
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section_title: Objectives, Scope, and Methodology
paragraphs: This review for the Chairman of the House Committee on International  Relations, focused on (1) the Cash Transfer Program’s disbursement of  funds and Egypt’s completion of agreed-on activities since in fiscal year  1992, (2) factors affecting the program’s influence on Egypt’s economic  reform activities, (3) U.S. Agency for International Development’s (USAID)  efforts to evaluate the program’s impact on Egypt’s economic reform, and  (4) USAID’s changes to the program in response to the 2002 Department of  State and USAID review.
To identify the requirements of the Cash Transfer Program and total  funding disbursed since fiscal year 1992, we reviewed legislation and  USAID’s regulations, grant agreements, and memorandum of  understanding. We reviewed USAID’s program documents and interviewed  USAID and State officials to learn how USAID identified reform areas and  assigned values for reform-related activities and to determine the number  and types of activities that the government of Egypt completed. We also  developed a database of all the activities targeted by USAID to identify: the  number of completed and uncompleted activities, the various types of  activities, any duplication in the activities or payments, and any changes to  the originally targeted and agreed-on activities. We developed the database  using attachments to the program’s memorandum of understanding (MOU),  which included activities that USAID and the Egyptian government agreed  to undertake in support of economic reforms. To determine the number of  completed activities, we used USAID disbursement memorandums. We  also included activities for which USAID disbursed program funds although  the entire activity was not completed (in 20 instances, USAID disbursed  partial payments based on the percentage of the activity that it determined  Egypt had completed). We did not include activities that Egypt completed  outside the terms of the program because there were no disbursement  memorandums for these activities. We corroborated testimonial evidence  from USAID, State, and Egyptian officials with our analysis of program  activities by reviewing and comparing information in USAID’s program  documents. We reviewed internal controls, including reports by USAID’s  Office of Inspector General, as well as potential for fraud and abuse and  compliance with laws and regulations and found no significant issues. We  did not independently evaluate Egyptian laws and regulations, and our  discussion of them is based on secondary sources.
To better understand the range of activities targeted and completed under  the program, we selected three subsets of the reform areas. The three  subsets for which we conducted a more in-depth analysis were  privatization, banking, and intellectual property rights (IPR) and these  subsets covered 29 out of 196 targeted activities (15 percent). They did not  constitute a representative sample of all the activities; however, we  consulted USAID and identified areas with varying results. For example,  USAID characterized IPR reforms as successful, whereas banking and  privatization had varied levels of success.
To determine factors affecting the program’s influence on economic reform  in Egypt, we reviewed documents and interviewed U.S. and Egyptian  officials with knowledge of the Cash Transfer Program. We also met with  International Monetary Fund (IMF), World Bank, and European Union  officials, as well as an expert at the Egyptian Center for Economic Studies.  We reviewed studies on the benefits and the costs of reforms that were  published in refereed journals or completed by USAID contractors; we also  interviewed the authors of one of these studies and discussed their  methodology. To determine the monetary significance of the Cash Transfer  Program, we calculated the program’s annual share of Egypt’s foreign  exchange earnings and government revenue using relevant data provided  by the Egyptian government to the IMF. Although we were unable to fully  assess the reliability of the Egyptian government data, we noted that Egypt  recently subscribed to the IMF's special data dissemination standards,  which were created for nations that already meet high data-quality  standards. Although these data probably have some limitations, we  determined that it is unlikely that potential errors would materially impact  our use of this information in our report. To identify other factors affecting  the program’s influence, we analyzed program documents to calculate the  number of times that the Egyptian government requested, and USAID  granted, deadline extensions to complete program activities.
To assess USAID’s evaluation of the program’s impact on economic reform,  we reviewed studies that addressed the methodological challenges of  conducting impact evaluations. We also met with, and reviewed studies by,  contractors hired by USAID to assess the impact of two program areas, IPR  and privatization. In addition, we reviewed USAID’s opinion surveys  reports and performance management plan.
To determine the steps that USAID has taken in response to the 2002  review by State and USAID, we interviewed USAID and State officials who  participated in or had knowledge of the review, focusing only on those  recommendations that referred to the Cash Transfer Program. We  interviewed USAID, State, Treasury, and Egyptian officials who were  involved in negotiating the new financial sector MOU, and we reviewed  funding data to determine the amount and proportion of program funds  allocated to financial sector reform. To corroborate testimonial evidence  provided by USAID, State, and Treasury officials, we also reviewed the  USAID mission in Egypt’s updated strategic plan, revised in March 2004.  Further, we consulted USAID officials regarding any legal issues to  reprogramming Cash Transfer Program funds, and we reviewed documents  showing USAID’s funding process. To understand how the USAID mission  in Egypt plans to improve its performance monitoring system, we  interviewed USAID officials and contractors who are responsible for  developing it.
We performed our work between August 2004 and May 2005 in accordance  with generally accepted government auditing standards.
section_title: Comments from the U.S. Agency for International Development
paragraphs: The following are GAO’s comments on the U.S. Agency for International  Development letter dated June 15, 2005.
subsections: section_title: GAO Comments
paragraphs: 1.
In our report we acknowledge the collaborative process between  USAID and the government of Egypt to identify and agree on reforms  (see pages 1, 2, 11). However, in reviewing program agreements and  discussing the program with USAID officials, we found only one  agreement that used the “menu approach”—that is, targeting activities  that were worth more than the available cash transfer funds during the  12-year period of our review (1992-2004). We explain that the scope of  activities we reviewed was limited to those targeted under the USAID  program (see pages 2 and 26) and that Egypt completed some reform  activities for which they did not receive program funds (see pages 3,  11). 2. USAID states that our finding that the Cash Transfer Program  completed 70 percent of the targeted activities “is related in substantial  part to the structure of the Cash Transfer Program, and not entirely to  shortcomings in policy reforms.” As we note in comment 1 and on  pages 3, 9, and 11 of the report, the structure that USAID refers to was  in effect only from 1999 to 2003. Regarding USAID’s concern that  presenting the percentage of agreed-on activities completed by Egypt  suggests a shortcoming in Egypt’s progress in policy reform, our  findings reflect the fact that USAID and the Egyptian government  agreed on 196 reform activities during the period covered by our review  and the Egyptian government completed 136 of those activities.  3. USAID states that our findings show that the revisions of target dates  increased the U.S. government’s influence in accomplishing reforms.  Although USAID’s provision of extensions may have allowed the  Egyptian government to complete the reforms, we disagree that our  findings show that revising the target dates increased the U.S.  government’s influence, as USAID asserts. Rather, we believe that the  practice weakened one of USAID’s tools of conditionality—deadlines.  Additionally, the 2002 review by State and USAID pointed out the need  to focus more tightly the conditionality of the Cash Transfer Program  and indicated that “in the event that outcomes, benchmarks and  timelines agreed with the Egyptian government are not met within a  reasonable time of the originally agreed target dates the team agreed  that DSP II funds will be reprogrammed to fund other USAID projects  in Egypt.”
section_title: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Acknowledgments