International Food Assistance: Funding Development Projects through the Purchase, Shipment, and Sale of U.S. Commodities Is Inefficient and Can Cause Adverse Market Impacts
Published: 2011-06-23T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Since the Food Security Act of 1985, Congress has authorized monetization--the sale of U.S. food aid commodities in developing countries to fund development. In fiscal year 2010, more than $300 million was used to procure and ship 540,000 metric tons of commodities to be monetized by the U.S. Agency for International Development and the U.S. Department of Agriculture. Through analysis of agency data, interviews with agency officials, and fieldwork in three countries, this report (1) assesses the extent to which monetization proceeds cover commodity and other associated costs and (2) examines the extent to which U.S. agencies meet requirements to ensure that monetization does not cause adverse market impacts.
section_title: What GAO Found
paragraphs: GAO found that the inefficiency of the monetization process reduced funding available to the U.S. government for development projects by $219 million over a 3-year period. The process of using cash to procure, ship, and sell commodities resulted in $503 million available for development projects out of the $722 million expended. The U.S. Agency for International Development (USAID) and the U.S. Department of Agriculture (USDA) are not required to achieve a specific level of cost recovery for monetization transactions. Instead, they are only required to achieve reasonable market price, which has not been clearly defined. USAID's average cost recovery was 76 percent, while USDA's was 58 percent. Further, the agencies conduct limited monitoring of sale prices, which may hinder their efforts to maximize cost recovery. Ocean transportation represents about a third of the cost to procure and ship commodities for monetization, and legal requirements to ship 75 percent of the commodities on U.S.-flag vessels further increase costs. Moreover, the number of participating U.S.-flag vessels has declined by 50 percent since 2002, and according to USAID and USDA, this decline has greatly decreased competition. Participation may be limited by rules unique to food aid programs which require formerly foreign-flag vessels to wait 3 years before they are treated as U.S.-flag vessels. USAID and USDA cannot ensure that monetization does not cause adverse market impacts because they monetize at high volumes, conduct weak market assessments, and do not conduct post-monetization evaluations. Adverse market impacts may include discouraging food production by local farmers, which could undermine development goals. To help avoid adverse market impacts, the agencies conduct market assessments that recommend limits on programmable volume of commodities to be monetized. However, USAID's assessments were conducted for just a subset of countries and have not yet been updated to reflect changing market conditions, and USDA's assessments contained weaknesses such as errors in formulas. Both agencies have at times programmed for monetization at volumes in excess of limits recommended by their market assessments. Further, the agencies monetized more than 25 percent of the recipient countries' commercial import volume in more than a quarter of cases, increasing the risk of displacing commercial trade. Finally, the agencies do not conduct post-monetization impact evaluations, so they cannot determine whether monetization caused any adverse market impacts.
section_title: What GAO Recommends
paragraphs: GAO recommends that Congress consider eliminating the 3-year waiting period for foreign vessels that acquire U.S.-flag registry to be eligible to transport U.S. food aid. Further, the USAID Administrator and the Secretary of Agriculture should develop a benchmark for "reasonable market price" for food aid sales; monitor these sales; improve market assessments and coordinate efforts; and conduct postmarket impact evaluations. USAID and USDA generally agreed with our recommendations. DOT disagreed with our Matter for Congressional Consideration due to its concern that the proposed statutory change might be detrimental to the U.S. maritime industry.

section_title: Letter
paragraphs: The United States provided nearly $2.3 billion to alleviate world hunger  and support development in 2010. This amount accounted for more than  half of all global food aid supplies, making the United States the single  largest donor of food aid. For almost 30 years, since the enactment of the  Food Security Act of 1985, Congress has authorized the sale of U.S. food  aid commodities in local and regional markets in developing countries  with the proceeds used to fund development activities that address causes  and symptoms of food insecurity—a practice known as monetization. In  2010, more than $300 million was used to procure and ship 540,000 metric  tons of food assistance to be monetized. To adhere to cargo preference  requirements, 75 percent of all U.S. food aid commodities must be  shipped on U.S.-flag vessels. According to U.S. agencies, nonemergency  food aid resources, including proceeds from monetization, supported  development and direct assistance projects that benefited more than 7  million people in 35 developing countries. These development projects  include assistance to improve agricultural production, provide health and  nutrition activities, and support education and humanitarian needs.
However, the practice of monetizing food aid has long been controversial.  Advocates view monetization as a tool to meet the development needs of  chronically food-insecure people in many developing countries. Critics  view the practice of converting cash to commodities and then back to cash  as an inefficient use of resources that may also have adverse market  impacts in recipient countries. These market impacts may include  displacing commercial trade and discouraging local food production. By  law, the two principal agencies that manage U.S. food assistance—the  U.S. Agency for International Development’s (USAID) Office of Food for  Peace and the U.S. Department of Agriculture’s (USDA) Foreign  Agricultural Service—must ensure that monetization transactions do not  entail substantial disincentive to, or interfere with, domestic production or  marketing in that country.
While we recognize the benefits of the development activities that  monetization funds, in 2007, we reported that monetization was an  inherently inefficient use of food aid. The inefficiencies stem from the  process of using U.S. government funds to procure food aid commodities  in the United States which are then shipped to the recipient country and  sold, with the proceeds used to fund development projects. In that report,  we identified various costs associated with the transporting, handling, and  selling of commodities that contributed to these inefficiencies. Because  U.S. agencies did not collect monetization proceeds data electronically at  the time of our review, we found it difficult to assess the extent to which  monetization revenues covered the commodity and other costs associated  with the practice. We recommended that USAID and USDA develop an  information collection system to track monetization transactions, which  the agencies have begun to implement.
In this report, we examine issues related to cost recovery and market  impact assessment for monetization. At your request, as part of our work  on international food assistance, we (1) assessed the extent to which  monetization proceeds cover commodity and other associated costs and  (2) examined the extent to which U.S. agencies meet requirements to  ensure that monetization does not cause adverse market impacts.
To address these objectives, we analyzed food aid program data provided  by USAID, USDA, and USDA’s Kansas City Commodity Office (KCCO).  USAID has not been collecting monetization cost recovery information  systematically and thus could not provide us with comprehensive and  reliable data for transactions prior to 2008. Therefore, for the purposes of  this report, the agencies generated cost recovery data manually, covering  fiscal years 2008 through 2010 for USAID, and fiscal years 2007 through  2009 for USDA. We worked with the agencies to correct errors in the data  and determined that the data used in our analysis were sufficiently reliable  for our purposes. Further, we examined the differences between U.S.-and  foreign-flag ocean freight rates using KCCO data. We also reviewed and  analyzed data from the agencies, such as their market assessments,  volumes programmed for monetization, import data, consumption data,  and the limits set by the agencies for monetization in recipient countries  for fiscal years 2008 through 2010. We also interviewed officials from  USAID; USDA; the Departments of State and Transportation; and the  Office of Management and Budget in Washington, D.C., as well as subject- matter experts in the field of international food aid. In addition, we  conducted a survey of the 29 implementing partners who conducted  monetization between fiscal years 2008 and 2010 and received a 100  percent response rate. We also conducted field work in countries that  programmed some of the highest volumes of monetized nonemergency  U.S. food aid from fiscal years 2008 through 2010—Bangladesh,  Mozambique, and Uganda—and met with officials from U.S. missions,  representatives from nongovernmental organizations (NGO) and other  implementing partners that directly handle sales and implement  development activities, and officials from relevant host government  agencies. (Appendix I provides a detailed discussion of our objectives,  scope, and methodology. In addition, appendix II provides technical notes  on our analysis of ocean freight rates.)
We conducted this performance audit from July 2010 to June 2011 in  accordance with generally accepted government auditing standards. Those  standards require that we plan and perform the audit to obtain sufficient,  appropriate evidence to provide a reasonable basis for our findings and  conclusions based on our audit objectives. We believe the evidence  obtained provides a reasonable basis for our findings and conclusions  based on our audit objectives.
Based on our findings in this report, we are proposing that, consistent with  rules that apply to the Maritime Security Fleet and vessels transporting  other U.S. government cargo, Congress should consider amending the  Cargo Preference Act of 1954 to eliminate the 3-year waiting period  imposed on foreign vessels that acquire U.S.-flag registry before they are  eligible for carriage of preference food aid cargos. This could potentially  increase the number of U.S.-flag vessels eligible for carriage of preference  food aid cargo, thereby increasing competition and possibly reducing  costs. The Department of Transportation (DOT) disagreed with our Matter  for Congressional Consideration due to its concern regarding the  potentially detrimental impact the statutory change may have on the U.S.  maritime industry. However, we maintain that the elimination of the 3-year  waiting period can ease entry of new vessels into U.S. food aid programs.   We are suggesting this proposed amendment on the basis of factors  including the following: First, as USAID and USDA jointly reported in  2009, the number of vessels participating in U.S. food aid programs has  declined, thereby limiting competition in transportation contracting and  leading to higher freight rates. Second, our analysis shows that food aid  shipments on foreign-flag carriers cost the U.S. government, on average,  $25 per ton less than U.S.-flag carriers.
Further, we are recommending that the Administrator of USAID and the  Secretary of Agriculture (1) jointly develop an agreed-upon benchmark or  indicator to determine “reasonable market price” for sales of U.S. food aid  for monetization; (2) monitor food aid sales transactions to ensure that the  benchmark set to achieve “reasonable market price” in the country where  the commodities are being sold is achieved, as required by law; (3)  improve market assessments and coordinate to develop them in countries  where both USAID and USDA may monetize; and (4) conduct market  impact evaluations after monetization transactions have taken place to  determine whether they caused adverse market impacts. Both USAID and  USDA generally concurred with our recommendations and noted ongoing  efforts and plans to address them.
subsections: section_title: Background
subsections: section_title: The Practice of Monetization Has Evolved over Time, and Agencies Are Currently Required to Achieve Reasonable Market Price in Monetization Transactions
paragraphs: The authority to monetize food aid was established by the Food Security  Act of 1985. The act allowed implementing partners that received  nonemergency food aid under USAID’s Food for Peace program and  USDA’s Food for Progress program to monetize some of the food in  recipient countries and use the proceeds to cover associated shipping  costs. In 1988, the authorized use of monetization funds was expanded to  incorporate funding of food-security-related development projects, and in  1995, a minimum monetization level for nonemergency food assistance  was set at 10 percent, which was then increased to 15 percent in 1996. The  2002 Farm Bill authorized the McGovern–Dole International Food for  Education and Child Nutrition Program and allowed it to raise cash  through monetization. (For a description of these program authorities, see  appendix III).
The practice of selling commodities for cash to fund development  programs originated in part from U.S. government farm subsidies that  contributed to a surplus of agricultural commodities owned by the U.S.  government. However, the U.S. government no longer has surplus  agricultural commodities. Current monetization requires the U.S.  government to purchase the commodities from the commercial market  and ship them abroad for implementing partners to sell them in another  market to generate cash.
Neither USAID nor USDA has been required to achieve a set level of cost  recovery following an amendment by the 2002 Farm Bill to the Food for  Peace Act. Rather, the agencies are required, by statute, to achieve  “reasonable market price” for sales of food aid in recipient countries. Prior  to 2002, USAID sought to achieve an average cost recovery that was  calculated based on the following formula: either (1) 80 percent of  commodity value plus freight value, including associated transport and  marketing costs, or (2) 100 percent of free alongside ship price on its  monetization transactions. USDA’s requirement was to adhere to  reasonable market price as its benchmark. According to the conference  report for the 2002 Farm Bill, the change from the cost recovery formula  to reasonable market price for USAID was made to address two primary  concerns. The first concern was that the cost recovery formula  requirement was too inflexible, and could either unfairly punish  participants where market forces were beyond their control, or not reward  situations where the market price was above the formula value. The  second concern was that, since both USAID and USDA monetize food aid,  sometimes in potentially overlapping markets, having a cost recovery  requirement for USAID but not for USDA could cause inconsistencies in  monetization and potentially penalizes one or the other agency. The  change to a single requirement of reasonable market price for both  agencies was intended to establish similar results in determining sales  prices.
section_title: USAID and USDA Together Monetize More than Half of All Nonemergency Food Aid, Primarily in a Few Countries
paragraphs: Under  new trtegy to ddress global  hnger clled the Feed the Fre inititive,  the dminitrtion ght the eablihment  of  Commnity Development Fnd (CDF) to  decrease U.S. government relince on the  monetiztion of food id to fnd development  ctivitie. The CDF fnd was deigned to  expnd effort to nrrow the getween  hnitrind development assnce in  reas thsupport food ecrity. However, the  mechni to use the fnd to replce  monetiztion were not inclded in the lw,  nd the CDF therefore cnnot used to  decrease crrent level of monetiztion.  According to  USAID officil, the gency will  contine to work with Congress on fre  budget o thpproprite mechni to  decrease relince on monetiztion re  incorported in the lw. A $75 million reqt  to fnd the CDF was inclded in the fil  yer 2011 Foreign Opertion Bdget. While  Congressas pproprited fnd for the  CDF, the finpproprition has not een  mde public.
In fiscal year 2010, the United States spent about $2.3 billion to provide a  total of 2.5 million metric tons of food aid commodities to food-insecure  countries. Of that amount, almost $800 million was spent on providing  USAID and USDA 890,000 metric tons of nonemergency food aid   (see fig. 1). This assistance is provided through both monetization and  direct distribution, where commodities are provided directly to  beneficiaries through implementing partners. While U.S. food aid  legislation mandates that a minimum of 15 percent of USAID’s Food for  Peace nonemergency assistance be monetized, actual levels of  monetization far exceed the minimum. In fiscal year 2010, more than  313,000 metric tons of food aid were monetized under USAID’s Food for  Peace program, accounting for 63 percent of food aid tonnage under that  program. In fiscal year 2010, USDA monetized more than 229,000 metric  tons of food aid under the Food for Progress program, accounting for 95  percent of food aid tonnage under that program. Monetization has been  less prevalent under the McGovern-Dole International Food for Education  and Child Nutrition Program since the end of its pilot program in 2003, due  to an increase in the amount of cash provided along with food aid for  direct distribution. In fiscal year 2010, the McGovern-Dole International  Food for Education and Child Nutrition Program did not monetize any  food aid shipments.
According to KCCO data, between fiscal years 2008 and 2010, more than  1.3 million metric tons of food aid were programmed for monetization in  34 countries (see fig. 2). The countries in which the largest volumes of  commodities were programmed to be monetized during that time period  are Bangladesh (220,590 metric tons), Mozambique (202,200 metric tons),  Haiti (100,000 metric tons), and Uganda (88,400 metric tons). Together,  these four countries accounted for 45 percent of all food aid programmed  to be monetized. During that same time period, wheat was the commodity  most often programmed for monetization, accounting for about 77 percent  of all monetization. Other commodities programmed to be monetized  during the same period include soy bean meal, milled rice, vegetable oil,  and crude soybean oil. (For a complete list of commodities and volumes  programmed to be monetized by country, see appendix IV.)
section_title: Monetization Is a Complex Process that Involves Multiple Entities
paragraphs: Monetization is conducted by implementing partners, usually NGOs that  receive grants from USAID or USDA to monetize agreed-upon  commodities in certain countries. Monetization grants generally provide  development resources over a 3- to 5-year period. The process begins  with a call for applications from either USAID or USDA, to which  implementing partners respond by submitting grant proposals for  development programs that are to be funded in part with monetization  proceeds. USAID and USDA independently issue calls for applications and  approve applications at different times, based on different guidelines and  priorities. Grant proposals include, among other things, information on the  commodity to be monetized, commodity volumes requested, estimated  sales price, estimated cost recovery, considerations of market impact  assessments, and projects that will be funded based on the estimated sales  proceeds. Implementing partners that receive grants have the  responsibility to manage and oversee the monetization process. As part of  their responsibilities, implementing partners must secure a buyer in the  recipient country before a call forward (or purchase order) can be  approved by the relevant agency. After either USAID or USDA receives a  call forward request from the implementing partner in their Web Based  Supply Chain Management (WBSCM) system, the agency approves or  disapproves the request, which is then routed to KCCO. KCCO purchases  the requested commodities from U.S. producers in the United States and  ships them to the implementing partner in the recipient country. To adhere  to cargo trade preference requirements, DOT assists in identifying  qualified ocean carriers to ship the commodities to the recipient country.  The commodities are delivered to the implementing partner in the  recipient country, where the implementing partner executes the sales  contract with the buyer and collects payment. The implementing partner  uses the proceeds to implement the development projects. Figure 3  depicts the general steps in the monetization process, from submitting a  grant proposal to obtaining proceeds to completing development projects.  (See appendix V for more information). According to an implementing  partner we interviewed, the monetization process consists of nearly 50  substeps, including steps to complete the application, conduct market  assessments, coordinate requests and shipment, identify buyers and obtain  bids, deliver commodities, and collect payments.
subsections: section_title: Implementing Partners Can Monetize Food Aid in Various Ways
paragraphs: While implementing partners are not required to follow a particular  process to conduct food aid sales for monetization, the two most common  approaches reported by implementing partners are the following:    Several implementing partners might form a consortium in which one  of the partners serves as the selling agent. Consortiums are often formed  when several implementing partners obtain grants for the same country to  monetize the same commodity. Generally, one of the implementing  partners in the consortium takes the lead in conducting monetization  sales. The lead implementing partner is responsible for identifying the  buyers; preparing a single call forward drawing from each partner’s food  allocation; arranging for commodities to be shipped in a single shipment;  finalizing the sale in-country; and distributing proceeds among  participating consortium members, as appropriate. Typically, the lead  implementing partner charges a fee of 3 to 5 percent of total sales to  handle monetization, while in some cases, the lead is rotated among  consortium members. Fifteen of the 29 implementing partners we  interviewed reported being part of a monetization consortium.
A single implementing partner might independently sell the  commodities granted to it. When a single implementing partner monetizes  only its own commodities, it must hire or train staff to conduct the sales or  contract a selling agent to sell the food. Selling agents that we interviewed  generally charge a fee of 3 to 5 percent of monetization sales. Fourteen of  the 29 implementing partners we interviewed said that they monetize only  the food granted to their organization.
Implementing partners generally sell commodities to private buyers in the  recipient countries in the open market. Sales are generally conducted  through a public tender process organized by the implementing partner or  its selling agent, where an open bidding will take place. This is the  preferred method for both USAID and USDA, on the assumption that a  public tender process will most likely produce a competitive sales price. In  some cases, however, implementing partners sell commodities through  direct negotiation, where the implementing partners or their agents enter  into a one-on-one dialogue with individual buyers. According to USDA  officials, monetization sales through direct negotiation are only permitted  when the public tender process is not feasible or does not initially result in  a sale.
In some cases, implementing partners work with the recipient country’s  national government to conduct monetization. For example, an  implementing partner may enter into direct negotiation with the  government, as in the case of Bangladesh, where the government is the  buyer and purchases all USAID Food for Peace nonemergency food aid  that is monetized in the country. In Haiti, the government requires that  monetization transactions to private buyers be facilitated through a  government entity called the Monetization Bureau. According to an  implementing partner, the bureau must approve each transaction and  charges a monetization fee of 2 to 5 percent.
section_title: Monetization Funds Are Used for a Broad Range of Development Projects
paragraphs: Development projects funded through monetization are expected to  address food insecurity in recipient countries. According to USAID  guidance, goals of nonemergency food aid programming are to reduce  risks and vulnerabilities to food insecurity and increase food availability,  access, utilization, and consumption. Within this framework, monetization  is built around two main objectives—to enhance food security and  generate foreign currency to support development activities. Therefore,  the range of activities that USAID funds through monetization includes  projects to improve and promote sustainable agricultural production and  marketing; natural resource management; nonagricultural income  generation; health, nutrition, water and sanitation; education; emergency  preparedness and mitigation; vulnerable group feeding; and social safety  nets. According to USDA guidance, commodities for monetization are  made for use in developing countries and emerging democracies that have  made commitments to introduce or expand free enterprise elements in  their agricultural economies. Within these constraints, USDA gives priority  consideration to proposals for countries that have economic and social  indicators that demonstrate the need for assistance. These indicators  include income level, prevalence of child stunting, political freedom,  USDA overseas coverage, and other considerations such as market  conditions. Therefore, according to USDA, development projects funded  through monetization by the agency’s Food for Progress program should  focus on private sector development of agricultural sectors such as  improved agricultural techniques, marketing systems, and farmer  education. Figure 4 provides examples of USAID and USDA projects  funded through monetization in countries that we visited.
section_title: Funding Generated for Development Projects through Monetization Is Less than Originally Expended, and Various Factors Adversely Affect Cost Recovery
paragraphs: Proceeds generated through monetization to fund development projects  are less than what the U.S. government expends to procure and ship the  commodities that are monetized. USAID and USDA are not required to  achieve a specific level of cost recovery for their monetization  transactions. Instead, they are only required to achieve reasonable market  price, which has not been clearly defined. More than one-third of the  monetization transactions we examined fell short of import parity price, a  quantifiable measure of reasonable market price. Various factors can  adversely impact cost recovery. For instance, ocean transportation  constitutes a substantial cost to the U.S. government, and cargo  preference requirements raise this cost even further. Furthermore, USAID  and USDA conduct only limited monitoring of the sales prices, though  monitoring is necessary to ensure that the implementing partners generate  as much funding as possible for their development projects. The agencies’  monitoring efforts are further hindered by deficiencies in their reporting  and information management systems. Finally, implementing partners face  increased risk and uncertainty in their project budgets due to long lag  times throughout the approval and sales process.
subsections: section_title: Funding Generated for Development Projects through Monetization Was Less than Originally Expended
paragraphs: Proceeds generated to fund development projects through monetization  were less than what the U.S. government expended to procure and ship  the monetized commodities. Cost recovery, the ratio between the  proceeds the implementing partners generate through monetization and  the cost the U.S. government incurs to procure and ship the commodities  to recipient countries for monetization, is an important measure to assess  the efficiency of the monetization process in generating development  funding. Table 1 shows USAID’s and USDA’s average cost recovery, from  fiscal years 2008 through 2010 and fiscal years 2007 through 2009,  respectively, as well as their lowest and highest cost recovery  transactions. The table also shows the difference, in dollars, between the  proceeds from monetization sales to fund development projects, and the  cost to the U.S. government to procure and ship the commodities. (For a  detailed discussion of our methodology for calculating cost recovery, see  appendix I).
We found that between fiscal years 2008 and 2010, USAID achieved an  average cost recovery of 76 percent, or about $91 million less in proceeds  than what the U.S. government spent on procuring and shipping  commodities, over these 3 years. USDA achieved an average cost recovery  of 58 percent, or about $128 million less than what was expended between  fiscal years 2007 and 2009. Therefore, a combined total of $219 million of  appropriated funds was ultimately not available for development projects.  Figure 5 shows funds being used for procuring and shipping commodities,  with the commodities then being sold for cash, and the difference between  the final proceeds and the original expended amounts, for both USAID and  USDA.
USAID’s cost recovery rates ranged from 34 percent to 165 percent, while  USDA’s ranged from 25 percent to 88 percent. While USAID’s monetization  transactions most often achieved cost recovery between 60 and 100  percent, USDA’s transactions most often achieved between 40 and 80  percent cost recovery. Fifteen of USAID’s monetization transactions  achieved cost recovery greater than 100 percent, meaning that the amount  of proceeds generated exceeded the costs the government incurred, while  none of USDA’s monetization transactions did so. Figure 6 shows the  distribution of cost recovery over the 3 years we examined for these  selected monetization transactions by USAID and USDA, respectively.
USDA’s level of cost recovery is lower for government-to-government  monetization transactions, which accounted for about 18 percent of  USDA’s monetization from fiscal years 2007 through 2009. While most  grants involving monetization are provided to NGOs and educational  institutions, USDA also allows monetization by sovereign governments,  known as government-to-government monetization. These transactions  are completed by host country governments, largely through the same  process that is used by other implementing partners. Implementing  partners of government-to-government monetization between fiscal years  2007 and 2010 have included Afghanistan, the Dominican Republic, El  Salvador, Nicaragua, Niger, and Pakistan. Government-to-government  transactions achieved an average cost recovery level of 45 percent from  fiscal year 2007 through 2009.
Our cost recovery calculations included costs for commodity procurement  and ocean shipping but did not include other costs that are not solely  associated with monetization. USAID and USDA incur these additional  costs when they provide funding for direct distribution and monetization  of food aid, as follows:    USAID provides its implementing partners with cash from two sources to  cover administrative costs other than commodity procurement and ocean  shipping costs that are associated with monetization. The first source is  internal transportation, shipping, and handling (ITSH), which is cash for  shipping and handling the commodities, if necessary, once they arrive at  the destination port, to the final point of sale. The second source is  funding through Section 202(e) of the Food for Peace Act, which is  provided to implementing partners to assist in meeting administrative,  personnel, distribution, and other costs associated with Food for Peace  programs. Since most Food for Peace grants include both monetized and  direct distribution food aid, USAID does not track ITSH and 202(e)  specifically for monetization purposes. However, in 2010, ITSH and 202(e)  costs for all of USAID nonemergency assistance, including both  monetization and direct distribution, were $123.3 million, or about 30  percent of USAID’s total nonemergency costs for the year.
According to agency officials, USDA provides its implementing partners  with cash through Commodity Credit Corporation (CCC) funds, to cover  various administrative costs that are associated with food aid. While this  money primarily covers administrative costs associated with the  implementation of development projects, some of it pays for costs  associated with the monetization process. The CCC is an agency within  USDA that authorizes the sale of agricultural commodities to other  government agencies and foreign governments and authorizes the  donation of food to domestic, foreign, or international relief agencies. The  CCC also assists in the development of new domestic and foreign markets  and marketing facilities for agricultural commodities. According to a  USDA official, such costs could include hiring a monetization agent to  facilitate a monetization transaction, or the salaries and benefits of the  staff that carry out the monetization transaction. USDA provided  implementing partners $23 million in CCC funding between fiscal years  2008 and 2010. USDA stated that it provided $3.57 million in a combination  of CCC funding and monetization proceeds to cover the administrative  costs associated with monetization from fiscal years 2007 through 2009.
section_title: Agencies Do Not Have a Cost Recovery Benchmark and Are Only Required to Achieve Reasonable Market Price, which Has Not Been Clearly Defined
paragraphs: Neither USAID nor USDA currently has a required minimum cost recovery  benchmark for monetization transactions, and there is no specific target  that monetization transactions must reach or exceed. Instead, the Food for  Peace Act requires that monetization transactions through both USAID  and USDA achieve “reasonable market price” in the recipient countries  where U.S. commodities are monetized. The statute does not define  reasonable market price, and does not refer to a specific cost recovery  benchmark.
USAID recommends two sales methods in its 1998 Monetization Field  Manual—which has not been updated since its issuance—to achieve  reasonable market price, but neither of these methods provides a specific  metric. More than three-quarters of the implementing partners we  surveyed said they used the field manual as a source of guidance on  monetization. Both USAID and USDA have stated a preference for the first  method—conducting sales by public tender—to determine a reasonable  market price. According to the field manual, public tender, generally an  open auction where traders are allowed to bid on the commodities, allows  competitive price information to determine the market price for monetized  food aid. When public tender sales are not feasible, the manual  recommends direct negotiation between buyers and sellers as a second,  alternative method. Both agencies recommend taking into account prices  for the same or comparable commodities from other suppliers in the  marketplace in order to achieve reasonable market price. Specifically,  USAID states that reasonable market price is one which “compares  favorably with the lowest landed price or parity price for the same or  comparable commodity from competing suppliers.”
section_title: More than One-Third of the Monetization Transactions We Examined Fell Short of Import Price Parity, a Quantifiable Measure of Reasonable Market Price
paragraphs: We found that more than one-third of the monetization transactions we  reviewed, carried out in various years and countries, were conducted at  prices below a quantitative and objective metric for reasonable market  price that could be used across time, markets, and individual transactions.  In the absence of a quantitative benchmark of reasonable market price, we  used the prices of comparable commercial imports for a given country,  commodity, and year—the IPP referred to in USAID’s guidance. Others in  the economics field, including researchers of food aid and monetization,  use IPP as a measure of market price in a given country and time frame.  Additionally, the World Food Program, the single largest multilateral  provider of food aid in the world, uses IPP to determine whether or not to  procure its food in a given market, in order to gain an accurate picture of  the potential impact the purchase may have. Comparing monetization  sales prices to the IPP tells us the extent to which the monetization  transaction occurred at a fair and competitive market price for  commercially imported commodities. We found that more than one-third  of the 42 transactions we examined, for which we had IPP and sales price  data, had prices lower than 90 percent of the commercial import prices, an  indication that they might have been able to achieve higher prices. For  example, in 2008, USAID allowed an implementing partner in Burkina  Faso to monetize rice at a price that was 67 percent of the IPP, while at the  same time in Guatemala, USAID permitted monetization of vegetable oil at  70 percent of the IPP.
section_title: Ocean Transportation Costs Can Reduce the Amount of Funding Generated through Monetization
paragraphs: Ocean freight cost is a significant component of the monetization cost,  and due in part to cargo preference requirements, U.S.-flag carriers have  higher shipping rates on average than foreign-flag carriers, further  lowering cost recovery. The cargo preference mandate requires that 75  percent of U.S. food aid be shipped on U.S.-flag vessels. Another  mandate, known as the Great Lakes Set-Aside, requires that up to 25  percent of Title II bagged food aid tonnage be allocated to Great Lakes  ports each month. These legal requirements limit competition and  potentially reduce food aid shipping capacity, leading to higher freight  rates. Figure 7 shows the share of freight costs in food aid procurement  and the costs associated with cargo preference for monetized food aid.  (For a detailed discussion of our methodology in assessing the costs  associated with cargo preference, see appendix II.)
Between fiscal years 2008 and 2010, ocean shipping accounted for about  one-third, or $235 million, of the cost to procure and ship monetized food  aid (see fig. 7). For low-value commodities, such as bulk wheat, ocean  shipping costs take up a higher percentage of the total cost. In 15 percent  of the monetization transactions between fiscal years 2008 and 2010,  shipping costs accounted for more than 40 percent of the total cost of  procurement and shipping, amounting to more than $91 million in ocean  shipping. For several of these transactions, shipping cost was higher than  commodity procurement cost. For example, while it cost $3.9 million to  purchase the shipment of 10,000 metric tons of wheat to be sent to Malawi  in 2008 for monetization, it cost $4.5 million in ocean shipping.
The freight rate for USAID and USDA food aid shipments on foreign-flag  carriers cost on average $25 per ton less than the freight rate on U.S.-flag  carriers, controlling for shipping routes, the shipping time and term, and  the type of commodities shipped. The difference in freight rate between  U.S.- and foreign-flag carriers also depends on the type of commodities  shipped. Figure 8 shows the difference in the average freight rate per  metric ton between U.S.- and foreign-flag carriers. The freight rate for bulk  commodities averaged $8 per ton lower and the rate for non-bulk  commodities averaged $30 per ton lower for foreign-flag carriers than U.S.- flag carriers for shipments with the same shipping routes and the same  shipping times and terms. We estimate that between fiscal years 2008 and  2010, cargo preference potentially cost the food aid programs  approximately $30 million because of the higher rates U.S.-flag carriers  charged. When surveyed, 19 of the 29 implementing partners stated that  allowing more shipping on foreign-flag carriers would “greatly improve” or  “very greatly improve” cost recovery rates.
Food aid shipping competition may be further limited by the requirement  in the Cargo Preference Act that foreign-built vessels that reflag into the  U.S. registry wait 3 years before participating in the transportation of food  aid cargo. According to a DOT official, the 3-year requirement was  established in 1961 to provide employment opportunities to U.S. shipyards  by discouraging vessels from reflagging into and out of the U.S. registry.  The requirement, which does not apply to the Maritime Security Fleet or  to vessels transporting cargos financed by the U.S. Export-Import Bank,  seeks to ensure that vessels transporting 75 percent of food aid are not  only U.S.-flagged, but also constructed in U.S. shipyards. However, since  2005, U.S. shipyards have built only two new U.S-flag vessels appropriate  for transporting food aid and these vessels have not been awarded a food  aid contract. Further, DOT has no record of an ocean transportation  contract awarded to a U.S.-flag vessel that reflagged into the U.S. registry  and waited the 3 years prior to applying for food aid contracts.
Limited competition contributes to fewer ships winning the majority of the  food aid shipping contracts. Based on KCCO data, from fiscal years 2002 to  2010, the number of U.S.-flag vessels awarded food aid contracts declined  by 50 percent, from 134 to 67 vessels. In a 2009 report to Congress,  USAID and USDA stated that, due to the declining size of the U.S.-flag  commercial fleet, USAID and USDA are forced to compete with the  Department of Defense and other exporters for space aboard the few  remaining U.S.-flag vessels, thereby limiting competition in transportation  contracting and leading to higher freight rates. When surveyed about what  could be done to improve the monetization process, 13 implementing  partners with USAID and 16 with USDA stated that exploring options for  lowering transportation costs would lead to “great” or “very great”  improvement.
section_title: USAID’s and USDA’s Monitoring of the Sales Prices that Implementing Partners Achieve through Monetization Is Limited
paragraphs: USAID and USDA conduct only limited monitoring of the sales prices that  implementing partners achieve through monetization to ensure that the  transactions generate as much funding as possible for the development  projects funded by monetization proceeds. While implementing partners  report cost recovery data to USAID and USDA, the agencies do not use the  data to monitor sales prices over time. USAID requires annual reports on  multiyear assistance programs (MYAP), referred to as pipeline and  resource estimate proposals, to be submitted for the coming fiscal year.  Additionally, implementing partners report their monetization proceeds in  Annual Results Reports. These reports include fiscal year levels of metric  tonnage to be called forward, anticipated monetization proceeds, and any  202(e) or ITSH funds used for the program, which encompass both direct  distribution and monetization activities. In addition, they record the  results of any monetization transactions from the previous year. USDA  requires semiannual reports, known as Logistics and Monetization  Reports. These reports record the metric tonnage of commodity monetized  in that time period. In addition, they record the date and price at which the  commodity was sold, as well as the date received and a breakdown of the  specific use of the funds.
As part of the review and evaluation criteria of proposals, USAID’s 1998  Monetization Field Manual requires verification that the amount of  money generated in the monetization transaction(s) meets or exceeds the  cost recovery benchmark. However, USAID officials said that they no  longer hold implementing partners accountable for meeting the cost  recovery benchmark of 80 percent referenced in the field manual, because  (1) the 2002 Farm Bill changed the requirement to achieving “reasonable  market price,” and (2) USAID has not officially reissued the field manual  since 1998. Although the USAID mission in-country can recommend  against monetization transactions if it disagrees with the sales price  analysis conducted by the implementing partner in its attempts to sell the  commodity, USAID officials told us that the missions have never made  such recommendations. Furthermore, USAID stated that the agency has  not established criteria to monitor sale prices. According to USAID  officials, because food aid monetization transactions are governed by  grants, not contracts, the agency cannot be overly directive towards its  implementing partners. USAID works to have ongoing conversations with  the implementing partners in order to identify potential problems,  troubleshoot, and help with potential alternatives.
USDA does not have a process to monitor sale prices either. USDA  officials in charge of the Food for Progress program told us that they did  not know what the level of cost recovery of monetization transactions is  and did not have enough information to develop an estimate. USDA  officials said that they rely on their agricultural attachés to act as a “reality  check” in determining reasonable market price, and determine acceptable  cost recovery on a case-by-case basis, looking at the U.S. prices and the  circumstances surrounding the sale.
The agencies’ monitoring of monetization cost recovery is further hindered  by deficiencies in their reporting and information management systems.  USAID and USDA acknowledged that their current information systems  are not capable of systematically capturing cost recovery information,  which would help them monitor the sales prices implementing partners  achieve. Both agencies had to manually generate the cost recovery  information to fulfill our data request by going through the individual  reports submitted by implementing partners to collect the information  needed to calculate cost recovery for monetization transactions, inputting  them into a spreadsheet for us to conduct our analysis. Furthermore, these  spreadsheets contained numerous errors and inconsistencies. Examples  include transactions that were recorded in the incorrect year, double- counted, or not counted at all. In other instances, the calculation of cost  recovery was incorrect, due to incorrect values inputted into the cells. In  addition, multiple transactions were missing the actual sales prices. In our  2007 report, we recommended that both USAID and USDA develop an  information collection system to track monetization transactions. Despite  this recommendation, both USAID and USDA acknowledged that their  current information systems are still not capable of systematically  capturing cost recovery information. Both USAID and USDA are in the  process of implementing information systems that aim to better capture  the information generated by the implementing partners regarding  monetization transactions. USAID plans to have its new information  system fully operational by summer 2012, including monitoring and  evaluation components. USDA’s Food Aid Information System will tie into  its procurement, payment, and accounting system—Web Based Supply  Chain Management—tracking budgeting and planning, solicitations,  proposals and negotiations, payment and compliance for the Foreign  Agricultural Service. The final components of the system are due to come  online in fall 2011.
section_title: Long Lag Times Increase Market Risk for Implementing Partners and Hinder Their Ability to Accurately Budget for Project Implementation
paragraphs: Long lag times between a monetization proposal’s approval by USAID or  USDA and the time of the commodities’ final sale increases the  transaction’s exposure to market volatility. This makes it difficult to  accurately project the funding level monetization can generate, and to  design and implement the development projects accordingly. Two-thirds  of the implementing partners we surveyed said that if they received less  funding than expected, they would curtail the scope of their projects as  well as the number of beneficiaries served. One implementing partner  commented that while monetization transactions must do their best to  achieve “reasonable market price,” timing is a constraint. The process of  getting a proposal approved, finding a foreign buyer, and conducting an  actual sale can be time-consuming, and market conditions can change  significantly from when the implementing partners first submitted the  proposals. For example, when an implementing partner monetized  through USDA’s Food for Progress program in Bangladesh, it submitted its  initial proposal in August 2008, including the volume and estimated sales  prices for the proposed commodity, but the sale of the commodities was  not made until 17 months later, in December 2009. Market conditions  changed significantly during the process from the time of the initial  proposal to the final sale, and the commodity price fell by close to 40  percent, leading to a diminished return on the transaction. The  implementing partner’s actual sales price of $800 per metric ton was more  than a third less than the estimated price in the original proposal of $1,300  per metric ton. In another example, an implementing partner stated that it  wanted to monetize its commodities at a certain point when prices were  high, but missed the opportunity to do so due to delays in the approval  process. As a result, its cost recovery was lower than estimated. This  situation forced the implementing partner to reduce its number of  beneficiaries by roughly a third, and eliminate one of its targeted  geographical regions within the country. All but 2 of the 29 implementing  partners we surveyed reported that they experienced delays during  monetization transactions at least “sometimes.” In addition, 19 of the 29  implementing partners we surveyed reported that delivery delays were a  factor that hindered their ability to conduct monetization.
section_title: USAID and USDA Cannot Ensure that Monetization Does Not Cause Adverse Market Impacts because They Program Monetization at High Volumes, Conduct Weak Market Assessments, and Do Not Conduct Post- Monetization Evaluations
paragraphs: By law, USAID and USDA must ensure that monetization transactions do  not entail substantial disincentive to, or interference with, domestic  production or marketing of the same or similar commodities. In addition,  the agencies are to ensure that the transactions do not cause disruption in  normal patterns of commercial trade. However, we found that the volume  programmed for monetization was more than 25 percent of the  commercial import volume, in more than a quarter of the cases, increasing  the risk of displacing commercial trade. As part of an effort to meet its  legal requirements, in 2008, USAID hired a private contractor as an  independent third party to conduct market analyses and recommend  commodities and volumes to monetize without causing adverse market  impact. Separately, USDA conducts assessments called the Usual  Marketing Requirement (UMR) that determine the maximum volume of a  given commodity to be programmed for monetization without disrupting  commercial trade, and relies on its implementing partners to conduct  broader market analyses to address the Bellmon requirements. However,  we found that USAID’s assessments were conducted for a limited number  of countries and have not yet been updated to reflect changing market  conditions. We also found that USDA’s UMRs contained weaknesses, such  as a lack of methodology and errors in formulas. Further, we found that  USAID’s and USDA’s recommended limits for monetization differed  significantly from each other, and that the volume of commodity  programmed for monetization by the agencies has at times exceeded the  recommended limits. Finally, because both agencies do not conduct post- monetization market impact evaluations, they cannot determine the  effectiveness of steps taken to ensure that monetization transactions do  not cause adverse market impacts and what, if any, adverse impacts may  have resulted. These adverse impacts may include discouraging food  production by local farmers, which in turn could undermine the food  security goals of the development projects funded by monetization.
subsections: section_title: USAID and USDA Are Required to Ensure that Monetization Does Not Cause Adverse Market Impacts, but the Volume Programmed for Monetization in More than a Quarter of Cases May Have Increased the Risk of Displacing Commercial Trade
subsections: section_title: USAID and USDA Are Required by Law to Ensure that Monetization Does Not Cause Adverse Market Impacts that May Run Counter to Development Goals
paragraphs: By law, USAID and USDA are required to ensure that monetization  transactions do not lead to adverse market impacts, such as causing  disincentives to, or interference with, domestic production or marketing of  the same or similar commodities. Additionally, the agencies are to ensure  that the transactions avoid causing disruption in normal patterns of  commercial trade, which is also an adverse market impact. Monetization  has the potential to discourage food production by local farmers, and as a  result may undermine the broader agricultural development and food  security goals of the Food for Peace and Food for Progress programs. For  example, when large volumes of food are monetized at once, the prices of  the same or competitive commodities in the recipient country may be  depressed, creating disincentives to local producers and possibly resulting  in a decline in local production. The risk of depressing prices increases  when the commodities arrive while supply is at a peak, such as during a  harvest period for the same or competitive commodities. Monetization  also has the potential to displace commercial trade, especially if the  monetized food is sold on more favorable terms than what is available  commercially. Buyers in the recipient country, such as domestic importers  and millers, would then have an incentive to purchase monetized  commodities over commercial ones. When sold in significant volumes,  monetized food has the potential to substantially reduce demand for  exports from the United States, other developed countries, and regional  partners, thus hurting competitive commercial trade. Furthermore, if local  production decreases or if commercial trade is displaced, repeated  monetization of food aid commodities over time can increase the risk of  market dependency on this source of food.
section_title: Food Aid Programmed for Monetization Constituted More than 25 Percent of Commercial Import Volume in More than a Quarter of Cases, Increasing the Risk of Displacing Commercial Trade
paragraphs: Food aid programmed for monetization constituted more than 25 percent  of commercial import volume in more than a quarter of cases for certain  commodities between fiscal years 2008 and 2010. As mentioned earlier,  monetized food aid has the potential to displace commercial trade from  developed countries or regional partners, a cost that impacts U.S.  agribusiness and other exporters of the same commodity. Monetizing large  volumes of food aid relative to commercial import volume increases the  risk that commercial trade is displaced. Fintrac recommends that the total  volume monetized of a given commodity should not exceed 10 percent of  the commodity’s commercial import volume in a given country in a given  year. We examined the total volume programmed for monetization by  both agencies for each commodity in each country and each year between  fiscal years 2008 and 2010, for which we could obtain the commercial  import volume—a total of 87 cases. For each country and year, we  compared the total volume programmed for monetization of a given  commodity to the commodity’s reported commercial import volume. We  found that the total volume programmed for monetization as a percentage  of the reported commercial import volume ranged from less than 1 percent  to 1,190 percent during this period. In about half of the 87 cases, the total  volume programmed for monetization exceeded 10 percent of the  commercial import volume. Further, in 24 of the 87 cases, the total volume  programmed for monetization exceeded 25 percent of the reported  commercial import volume for that commodity. Moreover, in 10 of the 87  cases, the total volume programmed for monetization was more than 100  percent of the reported commercial import volume. For example, about  30,000 metric tons of wheat were programmed for monetization in Uganda  in 2008, which was more than 1.5 times the reported commercial import  volume of wheat for that year. Figure 9 shows the distribution of the total  volume programmed for monetization by both agencies as a percentage of  the reported commercial imports.
section_title: USAID and USDA Conduct Market Assessments to Meet Legal Requirements but These Market Assessments Contain Weaknesses
subsections: section_title: USAID Conducts Market Assessments to Determine Recommended Monetization Levels but These Have Been Conducted For a Limited Number of Countries and Do Not Include Projection Analyses
paragraphs: USAID uses a private contractor to conduct market assessments to help  ensure that monetization transactions do not entail substantial  disincentive to domestic production, as required by the Bellmon  Amendment, for its 20 priority countries. In August 2008, USAID hired  Fintrac to improve the market analysis required before food aid programs  are approved in recipient countries, known as the Bellmon Estimation for  Title II (BEST). Prior to 2008, USAID made determinations about market  impact based solely on the Bellmon analyses conducted by its  implementing partners, who as the recipients of monetization grants are  not independent. As of May 2011, 13 of the 20 BEST analyses had been  completed. According to USAID, the BEST analysis is to complement and  not substitute the implementing partners’ market analyses and  surveillance. Therefore, in many cases implementing partners continue to  conduct their own market analysis, which estimates the price they are  likely to receive for the commodity to be monetized. Overall, 17 of the 29  implementing partners we surveyed stated that the BEST analysis was  sufficient for determining which commodities to monetize and 13 of the 29  implementing partners stated that it was sufficient for determining how  much to monetize.
The methodology for the BEST analysis includes identifying potential  commodities to be monetized, ensuring that recipient country policies and  regulations are favorable (i.e., there are no barriers or restrictions on the  commodity to be monetized), reviewing local market structure as well as  previous and planned food aid initiatives, and examining the likelihood of  achieving fair and competitive market price. In conducting its analysis,  Fintrac also considers the latest 5-year trends in import volumes and  domestic production data to ensure that the commodity to be monetized  has been imported in significant volumes and that local production is  insufficient to meet demand. As noted above, another important step in  the analysis is to assess the likelihood that the monetized commodity will  achieve fair and competitive market price. Fintrac uses the IPP as the  most precise estimate of fair and competitive price for commercially- imported commodities. As discussed earlier, the IPP is the price a  commercial importer in the recipient country pays to import the same or  similar commodities from the most common exporting country. Based on  all of these components, Fintrac makes a recommendation on  monetization. When Fintrac recommends monetization, it does so in  volumes that generally do not exceed 10 percent of the commodity’s  commercial import volume in order to avoid substantial displacement of  trade. Fintrac’s analysis also relies on field visits to obtain additional data,  and interviews with stakeholders in the recipient country such as  implementing partners; commercial importers; and potential buyers,  including millers and processors. According to Fintrac, its methodology  allows it to replicate these market assessments from country to country  and ensures that all implementing partners are provided with the same  information for their monetization applications.
USAID’s ability to ensure that monetization does not cause adverse market  impact is limited, because the BEST analyses have only been conducted  for a limited number of countries and have not yet been updated to reflect  changes in market conditions. While Fintrac has conducted 13 BEST  analyses, these analyses were available for only 11 of 63 cases in which  USAID monetized since 2008. For the remaining cases, USAID relied on  Bellmon analyses conducted by their implementing partners, which are  not independent. In addition, while the BEST offers an independent and  consistent methodology and considers the latest 5 year trends in import  volumes and domestic production data, it is not updated to capture  changes in market conditions that may occur by the time sales  transactions take place. We found that in certain cases, in the interval  between the completion of the BEST and the sale of the monetized  commodity, there was a relatively long lag, during which market  conditions may have changed. Further, MYAPs generally last for 3 to 5  years, and monetization sales can take place in each of those years. The  BEST would likely not be useful for monetization transactions that take  place beyond the initial MYAP approval. According to USAID, while there  is market information that changes rapidly and requires continued  assessments, the BEST includes historical and cyclical information that  can be used for many years. However, we found that the BEST does not  include projection analysis that could take into account potential price  spikes and the volatile nature of the market. As a result, the findings in the  BEST have the potential to be irrelevant by the time the commodities  reach the recipient country and implementing partners may not have  adequately considered the impact of monetization on local markets and  trade when applying for grants.
section_title: USDA Conducts Market Assessments to Determine Recommended Monetization Levels but These Assessments Contain Weaknesses
paragraphs: USDA relies on its implementing partners to conduct market analyses that  are used to address the Bellmon requirements. As the recipients of both  the monetized commodities and the proceeds of their sales, implementing  partners lack independence in conducting market analyses. Further, USDA  does not provide guidance to the implementing partners on what  methodology should be used for the market assessments that are intended  to address Bellmon requirements. USDA does not conduct its own  Bellmon requirement assessments to verify whether or not the conclusions  reached by the implementing partners are reliable or reasonable. Without  doing so, USDA cannot accurately determine whether monetization will  result in substantial disincentive to, or interference with, domestic  production or marketing of the same or similar commodities. USDA  officials explained that they are currently unable to conduct independent  analyses, such as those conducted by Fintrac, due to lack of resources.  However, these officials also stated that they encouraged implementing  partners to use the BEST analysis when available.
USDA conducts its own market assessment—the UMR—to meet its  requirement to determine that monetization does not cause disruption in  normal patterns of commercial trade. The UMR for a given commodity is  an Excel spreadsheet that contains data on the recipient country’s  consumption needs or apparent consumption, imports, and production.  USDA determines the maximum allowable volume for U.S. programming,  including monetization, for a given commodity in a specific country and  year by subtracting the volume of imports and production from that of the  consumption needs or apparent consumption, as follows:  Maximum Allowable Volume for U.S. Programming = Consumption +  Exports + Stocks – (Domestic Production + Imports)
USDA officials told us that the UMRs are conducted after they receive  monetization grant applications and that they issue about 30 to 40 UMRs  per year. According to USDA officials, UMRs are not shared with the  public because the information is intended solely for the use of U.S.  government agencies, and the UMRs are considered market-sensitive  because they include forecasts about consumption needs. Further, USDA  officials told us that the UMRs are not held to the same rigorous review  and verification processes that official USDA documents intended for  external distribution must undergo.
We found weaknesses in the UMRs, such as no explanation or source for  values used to calculate the consumption needs or apparent consumption  in each UMR. In addition, some of the UMRs we reviewed included errors  in formulas and mistakes in calculations. The standard methodology for  estimating consumption would show it as the sum of production and  imports minus exports adjusted for the changes in stock. However, the  consumption needs and apparent consumption figures in the spreadsheets  are not based on any formula and appear as a data entry. For example, the  consumption need noted in one UMR was more than double the  consumption need that was calculated for that commodity using the  standard methodology mentioned above. In another UMR, the  consumption need was 80 percent greater than the calculated amount  using the standard methodology. Further, our review of the UMRs showed  that while data sources are listed at the bottom of these spreadsheets, it is  impossible to identify which information came from which of the listed  sources. In addition, we found errors in formulas and mistakes in  calculations in 8 of the 12 UMRs that we reviewed. For example, columns  in the Excel spreadsheets were not added correctly and resulted in totals  that were smaller than the components summed to create them. We also  found inconsistencies in how numbers and formulas were created. In  addition, averages that were supposed to be based on 5 years’ worth of  data were based on only 3 years’ worth of data and treated as averages of 5  years’ worth of data. In other cases, calculations included figures that  should have been excluded, such as concessionary sales. Further, we  found that some formulas included circular references, meaning that the  total of the summation was also included as part of the summation itself.  When we shared these findings with USDA, the agency corrected the eight  UMRs. Such weaknesses impact the calculation for the maximum volume  of recommended food aid programming and ultimately the decisions on  how much food aid can be monetized. USDA officials told us that they  conduct ad-hoc spot checks of the UMRs but do not have a formal quality  control process in place.
section_title: USAID and USDA Recommend Differing Limits for Monetization and In Some Cases Have Exceeded the Recommended Limits
subsections: section_title: USAID’s and USDA’s Recommended Limits for Monetization Differ Significantly from Each Other
paragraphs: The assessments that USAID and USDA use to help set recommended  limits for monetization volumes vary widely in their conclusions. In all of  the 12 cases in which we could compare USAID’s and USDA’s limits, these  limits were significantly different from each another. In some cases, the  UMR analyses recommended monetization of a commodity, while the  BEST did not. For example, the 2010 UMR for wheat in Burundi concluded  that up to 6,000 metric tons of wheat could be monetized, but the 2010  BEST analysis for Burundi concluded that the market was not suitable for  monetization of any commodity, including wheat, and recommended that  regional monetization be considered. Further, in all 12 cases, the  maximum allowable volume for U.S. programming found in the UMR was  higher than the recommended maximum volume found in the BEST (see  table 2). According to Fintrac, these volumes vary greatly because USAID  conducts its assessments based on multiple factors, including the  purchasing power of the buyers, which impacts the ability of the market to  absorb additional commodities.
The volume of commodity programmed for monetization has at times  exceeded the recommended limits set by the agencies. The purpose of  setting these limits is to help ensure that these transactions do not cause  adverse market impacts. However, the limits have been exceeded by the  very agencies that set them. We examined the total volume programmed  for monetization by each agency and the aggregate of both agencies for  each commodity in each country and each year between fiscal years 2008  and 2010 (for a complete list, see table 5 in appendix IV). We then  compared these totals to the recommended limits found in the BEST and  UMRs. We found that USAID exceeded the limits recommended by the  BEST analyses in 6 of 11 possible cases. For example, the 2010 BEST  analysis for Liberia recommended that a maximum of 3,427 metric tons of  rice could be monetized; however, USAID programmed 10,100 metric tons  of rice to be monetized in Liberia in 2010. In addition, USDA exceeded the  recommended limit found in the BEST in 2 of 3 possible cases. For  example, in 2009 USDA programmed 15,000 metric tons of wheat in  Uganda to be monetized, despite a recommendation in the BEST analysis  that USDA should not monetize more than 7,500 metric tons of wheat. We  also found that USDA exceeded the limit set by its UMR in 5 of 34 possible  cases. For example, in 2008 USDA programmed 6,000 metric tons of  soybean meal to be monetized in Armenia when the maximum allowable  volume was set at 200 metric tons in the corresponding UMR. USAID  exceeded the UMR’s limit for U.S. programming in 10 of 59 possible cases.  For example, in 2009, USAID monetized 2,390 metric tons of rice in  Senegal even though the corresponding UMR did not recommend  programming any rice for monetization. See table 3 for all the cases in  which USAID and/or USDA exceeded the limit recommended by the BEST  analysis and/or set by the UMR between fiscal years 2008 and 2010.
Further, for 3 of 6 possible cases in which both agencies programmed the  same commodity for monetization in the same country and the same year,  the combined volume programmed for monetization by both agencies  exceeded the recommendation in the BEST and/or the UMR. For example,  for wheat in Malawi in 2009, the BEST recommended 8,000 metric tons  and the UMR set the limit at 29,200 metric tons; however, both agencies  programmed wheat for monetization and their combined total of 51,140  metric tons was more than six times the BEST’s recommendation and 75  percent above the UMR’s limit.
According to USAID officials, the recommended limits are at times  exceeded because these market assessments are part of a larger decision- making process, which includes informal discussions between  headquarters, the field-mission, and the implementing partners. Officials  stated that through these discussions a decision on the commodity choice  and volume to be monetized is made. However, USAID acknowledged that  these discussions and the rationale for the decisions are not systematically  documented. According to USDA officials, the agency considers other  market information after agreements are signed and the UMRs are not the  only information used to make programming decisions. Further, USDA  officials stated that in some cases, they have documented the justification  to exceed the programming limits set by the UMR. However, USDA did not  provide this documentation for the cases that are discussed in this report.
section_title: USAID and USDA Do Not Conduct Impact Evaluations after Monetization Transactions Have Taken Place to Determine Actual Market Impact
paragraphs: The actual impacts of programming monetization and monetizing above  the limits recommended by the BEST and UMR have not been determined,  since neither USAID nor USDA conduct evaluations after monetization  transactions have taken place. Both agencies require implementing  partners to report the sales price achieved for their monetization  transactions, and USAID’s Monetization Field Manual recommends that  implementing partners establish a process for regularly monitoring local  market prices. However, USAID and USDA have neither used the data on  sale prices reported by the implementing partners to assess the impact  monetization had on local production and trade nor established ways to  systematically monitor the local markets in countries where they  monetize. USAID and USDA have depended on the BEST, UMR, and  market assessments conducted by their implementing partners to help  meet their requirement to ensure that monetization does not result in  adverse market impacts in the recipient countries. However, without  conducting evaluations after monetization has occurred, they cannot  determine the impact the sale of donated food had on local production and  trade. Furthermore, they cannot assess the effectiveness of the BEST and  UMR in preventing adverse market impact. According to a 2009 study by  the Partnership to Cut Hunger and Poverty in Africa, for the United  States to demonstrate commitment to minimizing market risks in recipient  countries, more systematic evaluation of the monetization process is  needed.
section_title: Conclusions
paragraphs: Providing developing countries with assistance to improve food security is  a vital humanitarian and foreign policy objective. However, monetization  of U.S. food aid—the U.S. government’s primary approach to meeting this  objective—is an inherently inefficient way to fund development projects  and can cause adverse market impacts in recipient countries. The  monetization process results in the expenditure of a significant amount of  appropriated funds in unrelated areas such as transportation and logistics,  rather than development projects. Moreover, the potential for adverse  market impacts, such as artificially suppressing the price of a commodity  due to excessive monetization, could work against the agricultural  development goals for which the funding was originally provided. The  inefficiencies of monetization stem directly from the multiple transactions  required by the process and, except in rare cases, prevent full cost  recovery on monetization transactions. Therefore, as a source of funding  for development assistance, monetization cannot be as efficient as a  standard development program which provides cash grants directly to  implementing partners.
While monetization continues, however, it is important that the agencies  strive to maximize the resources available for implementing development  projects funded through monetization. The absence of a clearly defined  benchmark or indicator for reasonable market price hinders their efforts  to forestall transactions that provide a very low rate of return. In addition,  since the agencies conduct only limited monitoring of the sales prices that  implementing partners achieve through monetization, they cannot ensure  that the transactions obtain the highest price and thereby generate as  much funding as possible for development projects. The agencies are  required by law to ensure that monetization does not cause adverse  market impacts, but their market assessments contain weaknesses that  diminish their usefulness for informing decisions on what, where,  whether, and how much to monetize. Moreover, whatever limits these  assessments attempt to establish are often exceeded and could contribute  to disincentives to local food production and displacement of commercial  trade. Furthermore, without conducting post-monetization transaction  impact evaluations, the agencies cannot determine the actual impacts of  monetization, even when the volume of the commodity monetized is more  than 25 percent of the commodity’s commercial import volume. Finally,  transportation costs constitute about a third of the overall costs of  monetization over the 3-year period we examined, and the 3-year  reflagging rule—which only applies to food aid and not to the defense  agencies and the U.S. Export-Import Bank—can limit competition among  ships eligible to transport U.S. food aid, further increasing cost.
section_title: Matter for Congressional Consideration
paragraphs: Consistent with rules that apply to the Maritime Security Fleet and vessels  transporting other U.S. government cargo, Congress should consider  amending the Cargo Preference Act of 1954 to eliminate the 3-year waiting  period imposed on foreign vessels that acquire U.S.-flag registry before  they are eligible for carriage of preference food aid cargos. This could  potentially increase the number of U.S.-flag vessels eligible for carriage of  preference food aid cargo, thereby increasing competition and possibly  reducing costs.
section_title: Recommendations for Executive Action
paragraphs: To improve the extent to which monetization proceeds cover commodity  and other associated costs and the agencies’ ability to meet requirements  to ensure that monetization does not cause adverse market impacts, we  recommend that the Administrator of USAID and the Secretary of  Agriculture take the following four actions:  1. jointly develop an agreed-upon benchmark or indicator to determine  “reasonable market price” for sales of U.S. food aid for monetization; 2.  monitor food aid sales transactions to ensure that the benchmark set  to achieve “reasonable market price” in the country where the  commodities are being sold is achieved, as required by law; 3. improve market assessments and coordinate to develop them in  countries where both USAID and USDA may monetize; and 4.  conduct market impact evaluations after monetization transactions  have taken place to determine whether they caused adverse market  impacts.
section_title: Agency Comments and Our Evaluation
paragraphs: USAID and USDA, the two principal agencies that manage U.S. food aid  monetization programs, and DOT, the principal agency responsible for the  implementation of cargo preference rules, provided written comments on  a draft of this report. We have reprinted their comments in appendixes VII,  VIII, and IX, respectively. These agencies also provided technical  comments and updated information, which we have incorporated  throughout this report, as appropriate. The Department of State and the  Office of Management and Budget did not provide written comments.
DOT disagreed with our Matter for Congressional Consideration on the  basis of its concern regarding the potentially detrimental impact the  statutory change may have on the U.S. maritime industry. However, we  maintain that Congress should consider amending the Cargo Preference  Act of 1954 to eliminate the 3-year waiting period imposed on foreign  vessels that acquire U.S.-flag registry before they are eligible for carriage  of preference food aid cargos. We are suggesting this proposed  amendment on the basis of the following four factors: First, the number of  vessels participating in U.S. food aid programs has declined. In a 2009  report to Congress, USAID and USDA jointly stated that, due to the  declining size of the U.S.-flag commercial fleet, USAID and USDA are  forced to compete with the Department of Defense and other exporters for  space aboard the few remaining U.S.-flag vessels, thereby limiting  competition in transportation contracting and leading to higher freight  rates. Second, our analysis of ocean transportation costs showed that food  aid shipments on foreign-flag carriers cost the U.S. government, on  average, $25 per ton less than U.S.-flag carriers. Third, although the 3-year  requirement was established to provide employment opportunities to U.S.  shipyards, since 2005, U.S. shipyards have built only two new U.S.-flag  vessels appropriate for transporting food and the vessels have not been  awarded a food aid contract. Fourth, the 3-year rule applies only to food  aid and not to defense agencies and the U.S. Export-Import Bank. The  elimination of the 3-year waiting period can ease entry of new vessels into  the U.S. food aid program, with the potential to increase competition  among eligible U.S.-flag ships and reduce the cost of transportation. DOT  also said that we overstated the overall cost of transportation. Our  calculation of transportation cost was based on an analysis of all actual  monetization transactions over a 3-year period and is thus a precise  calculation of the actual cost to the U.S. government. In addition, DOT said  that the number of vessels participating in the program has declined by  less than what we found. However, our analysis was based on the number  of actual vessels booked for all food aid contracts awarded from fiscal  years 2002 to 2010.
USAID generally concurred with our recommendations, noting ongoing  and planned actions to address them. Specifically, USAID stated that it will  work with USDA to explore options of setting a benchmark or indicator  for the sale of U.S. food aid through monetization. USAID noted that it has  regional and country-based food aid monitoring and evaluation specialists  who review U.S. food aid programs, including monetization sales, and that  the agency’s BEST project is well-accepted by its implementing partners.  Additionally, USAID is updating its Monetization Field Manual, which  includes market assessment guidance. Finally, USAID stated that it will  explore possible cost-effective ways to conduct post-sale market impact  evaluations with its partners.
USDA also generally concurred with our recommendations, stating that  they will be useful in ongoing efforts to generate cash development  resources and improve overall program management. USDA noted that an  advantage of monetization is that it can encourage commercial markets for  agricultural products and contribute to other market-building activities.  However, we found that the agencies cannot ensure that monetization  does not cause adverse market impacts, including discouraging food  production by local farmers. USDA also noted actions it is exploring to  reduce the cost of food aid shipments, such as the recipient host  government paying for the cost of ocean transportation and combining  shipments to obtain volume discounts. Further, USDA stated that it will  work with USAID to develop improved benchmarks for reasonable local  market prices. Finally, USDA stated that it will coordinate with USAID to  improve market assessments and it will consider revising its regulations to  require market impact evaluations.
We are sending copies of this report to interested members of Congress,  the Administrator of USAID, the Secretary of Agriculture, and relevant  agency heads. The report is also available at no charge on the GAO Web  site at http://www.gao.gov.
If you or your staffs have any questions about this report, please contact  me at (202) 512-9601 or melitot@gao.gov. Contact points for our Office of  Congressional Relations and Public Affairs may be found on the last page  of this report. GAO staff who made major contributions to this report are  listed in appendix X.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: Our objectives were to (1) assess the extent to which monetization  proceeds cover commodity and other associated costs and (2) examine the  extent to which U.S. agencies meet requirements to ensure that  monetization does not cause adverse market impacts.
To address these objectives, we analyzed emergency and nonemergency  food aid program data provided by the U.S. Agency for International  Development (USAID), the U.S. Department of Agriculture (USDA), and  USDA’s Kansas City Commodity Office (KCCO). Our analysis focused on  nonemergency food aid that was monetized. The agencies relied on  various reports their implementing partners submitted to manually  generate the cost recovery data for fiscal years 2008 through 2010 for our  review. We worked with the agencies to correct errors in the data and  determined that the data used in our analysis were sufficiently reliable for  our purposes.
We surveyed all the nongovernmental organizations (NGO) that served as  implementing partners under USAID and USDA and conducted  monetization between fiscal years 2008 through 2010. To determine the  universe of NGOs that served as implementing partners during this time  period, we obtained a list of all implementing partners with call forwards  for monetized food aid from KCCO between fiscal years 2008 and 2010,  which consisted of a total of 33 implementing partners. Three of these  implementing partners were foreign governments and we excluded these  from our sample. A fourth implementing partner was excluded because it  had not conducted monetization before the end of fiscal year 2010. As a  result, we determined that the universe of implementing partners that had  monetized between fiscal years 2008 and 2010 was 29. We developed a  structured instrument for our survey in October of 2010, and pre-tested it  on two implementing partners. The instrument contained both closed and  open ended questions in four general areas: (1) the monetization process,  (2) the U.S. government role, (3) market analysis, and (4) cost recovery.  We sent the instrument to all 29 implementing partners via e-mail in  November 2010 and received completed instruments from all 29 of them.  As part of our process for this survey, we conducted phone interviews  with each implementing partner after we received its completed  instrument to ensure the accuracy of their responses.
In Washington, D.C., we interviewed officials from USAID, USDA, the  Departments of State and Transportation, and the Office of Management  and Budget. We also met with a number of subject matter experts, as well  as officials representing NGOs that serve as implementing partners to  USAID and USDA in carrying out U.S. food aid monetization programs  overseas. In addition, we conducted field work in three of the four  countries that programmed some of the highest volumes of nonemergency  monetized U.S. food aid between fiscal years 2008 and 2010—Bangladesh,  Mozambique, and Uganda—and met with officials from U.S. missions,  representatives from NGOs and other implementing partners that directly  handle sales and implement development activities, and in Uganda and  Mozambique, officials from relevant host government agencies.
To determine the level of cost recovery, we obtained data from USAID and  USDA on commodity costs, which include the procurement and ocean  freight cost, and sales price for each monetization transaction. For the  purposes of this report, we defined cost recovery as the ratio between  sales proceeds from monetization and the cost to the U.S. government to  procure and ship the commodities. We did not include transactions for  which the agencies did not have actual sales prices. We analyzed cost  recovery by agency, year, commodity, and recipient country to study the  variations in the level of cost recovery. In order to analyze cost recovery,  we took the following steps:    Cleaned the data. We found many errors and discrepancies in the data we  obtained from USAID and USDA, and sent questions asking them to  explain the discrepancies we found and make corrections.
Calculated cost recovery. Using the cleaned data, we calculated the cost  recovery for each transaction and for the USAID and USDA programs in  total. The program average we reported is a weighted average, the ratio  between the sum of sales proceeds and the sum of commodity and freight  costs.
Estimated the difference between the proceeds generated through  monetization and the cost the U.S. government incurred to procure and  ship the commodities. To do so, subtracted the total cost the U.S.  government incurred on procurement and shipping monetized food aid  commodities from the total proceeds generated.
We also estimated the extent to which freight costs account for the cost to  the U.S. government for U.S. food aid procurement and shipping. In  addition, we looked at how cargo preference affects cost recovery by  examining the freight rate differentials between U.S.- and foreign-flag  carriers, in shipping U.S. food aid. (For a detailed description of our  methodology for this analysis, see appendix II.)
To examine the extent to which USAID and USDA meet requirements to  ensure that monetization does not cause adverse market impacts, we  conducted a literature search to identify relevant studies and papers on  the effect of monetization on recipient countries and trade. In addition, we  conducted interviews with officials from USAID and USDA;  representatives from NGOs engaged in monetization; and experts from  academia with extensive research, published work, and experience in the  field. We reviewed the federal requirements and agency documents such  as policies and guidelines, the Bellmon Estimate for Title II (BEST)  analyses, and the Usual Marketing Requirement (UMR). We also analyzed  data from KCCO, USAID, and USDA on commodities that were  programmed for monetization between fiscal years 2008 and 2010,  including volumes programmed for monetization, import data, and  consumption data in recipient countries. Specifically, we    Examined the total volume programmed for monetization by both  agencies for each commodity in each country and each year between fiscal  years 2008 and 2010, for which we could obtain the commercial import  volume using the UMR. We compared the total volume monetized of a  given commodity to the commodity’s commercial import volume. To  assess the data, we interviewed cognizant agency officials at USDA and  reviewed documentation; however, we did not independently verify the  underlying source data. We determined that the data we used were  sufficiently reliable for our purposes.
Reviewed the 7 BESTs and 87 UMRs that were available for all of the  monetization cases that occurred between fiscal years 2008 and 2010. For  the purposes of this report, we define the term “case” as the total volume  of a given commodity programmed for monetization by either USAID  and/or USDA in a given country in a given year.
Examined the limits set by the BEST and the UMR and compared them to  each other.
Examined the monetization cases that occurred between fiscal years 2008  and 2010 and compared them to limits set by the BEST and/or the UMR. As  we created a data set from the agencies’ documents and calculations to  assess the extent to which USDA and USAID had exceeded the limits they  set for monetization, we determined that it was beyond the scope of this  engagement to assess the agencies’ underlying data. We did, however,  check the internal logic of the agencies’ documents and their calculations.  We consulted with the agencies if we found discrepancies and either had  the agencies make the necessary corrections or did not use the data in our  analysis.
We also assessed both agencies’ efforts to monitor and evaluate the impact  of monetization transactions.
We conducted this performance audit from July 2010 to June 2011 in  accordance with generally accepted government auditing standards. Those  standards require that we plan and perform the audit to obtain sufficient,  appropriate evidence to provide a reasonable basis for our findings and  conclusions based on our audit objectives. We believe the evidence  obtained provides a reasonable basis for our findings and conclusions  based on our audit objectives.
section_title: Appendix II: Technical Notes on Analysis of Differences in Ocean Freight Rates between U.S.- and Foreign-Flag Carriers
paragraphs: To determine whether, and the extent to which, ocean freight rates differ  between U.S.-and foreign-flag carriers in shipping U.S. food aid, we  obtained data from the Kansas City Commodity Office (KCCO) and  developed two regression models to estimate the differences in freight  rates between U.S.-and foreign-flag carriers while controlling for various  factors that affect the freight rate.
subsections: section_title: Data
paragraphs: We obtained data from KCCO, a division of the Department of Agriculture  (USDA) responsible for procuring U.S. food aid commodities. The data  contain more than 5,000 food aid purchase transactions between 2007 and  2010. For each transaction, we had the following information:  1.  Name of program: Food for Peace, Food for Progress, or McGovern- Dole International Food for Education and Child Nutrition Program 3.  Name of the recipient country  4.  Name of the implementing partner  5.  Name of the commodity  6.  Type of food aid: monetization or direct delivery  7.  Fiscal year the program is approved  8.  Name of the port where commodity is loaded in the U.S  9.  Date when commodity arrives at load port  10. Name of the port where commodity is discharged  11. Metric tons of commodity  12. Total commodity cost  13. Total freight cost  Table 4 presents the summary statistics of the data.
We generated a new variable called pertonfreight, measured in dollars per  metric ton, by dividing total freight cost by metric tons. Table 5 compares  the difference in freight rate between foreign and U.S.-flag carriers by  commodity type (bulk vs. non-bulk) and by year without controlling for  shipping routes or shipping terms. The results show that in general U.S.  flag carriers charge higher freight rates than foreign flag carriers.  However, part of the difference could be explained by shipping routes or  shipping terms, which we incorporated in the regression analysis.
section_title: Regression Model Specification and Results
subsections: section_title: Regression Model 1 and Results
paragraphs: In order to analyze the difference in ocean freight rate between U.S.-and  foreign-flag carriers while controlling for various factors which affect  freight rates, we performed a multivariate regression analysis. We  attempted to explain the differences in freight rates using the shipping  routes, shipping time, shipping terms, commodities shipped, and the  ownership of the carriers.
Freight rate = a0 + (a1 * load port dummy) + (a2 * discharge port  dummy) + (a3 * year dummy) + (a4 * bulk dummy) + (a5 * shipping  term dummy) + (a6 *flag dummy)  load port dummy is a set of variables indicating where commodities were  loaded.   discharge port dummy is a set of variables indicating where commodities  were unloaded.   year dummy is a set of variables indicating the year the commodities were  shipped.   bulk dummy is a variable indicating if the commodities shipped were bulk  (bulk dummy=1) or non-bulk (bulk dummy=0); term dummy is a set of variables indicating which of the four different  shipping terms we used. flag dummy is a variable indicating if the ocean carriers were foreign-flag  carriers (flag dummy=1) or U.S.-flag carriers (flag dummy=0).
A negative and significant coefficient a6 would indicate that foreign-flag  carriers charge a lower freight rate than U.S.-flag carriers after controlling  for shipping routes, shipping time, commodity type, and shipping terms.  Table 6 presents the main regression results for model 1.
In order to capture the difference in freight rate between U.S.-and foreign- flag carriers on bulk and non-bulk commodities, we ran a regression with  an interactive term flag * bulk.
Freight rate = a0 + (a1 * load port dummy) + (a2 * discharge port  dummy) + (a3 * year dummy) + (a4 * bulk dummy) + (a5 * shipping  term dummy) + (a6 *flag dummy) + (a7 * (flag * bulk)
For bulk commodities (bulk=1), and foreign-flag carriers (flag=1),  Equation 2 becomes:  Freight rate = a0+ (a1 * load port dummy) + (a2 * discharge port  dummy) + (a3 * year dummy) + (a4 * 1) + (a5 * shipping term  dummy) + (a6 *1)+  For bulk commodities (bulk=1) and U.S.-flag carriers (flag=0), Equation 2  becomes:  freight rate = a0+ (a1 * load port dummy) + (a2 * discharge port  dummy) + (a3 * year dummy) + (a4 * 1) + (a5 * shipping term  dummy) + (a6 *0)+  The difference between Equation 3 and Equation 4 yields a6+a7, which is  the difference in freight rate between U.S.-and foreign-flag carriers for  bulk commodities.
Similarly, for non-bulk commodities (bulk=0), and foreign-flag carriers  (flag=1), Equation 2 becomes:  freight rate = a0+ (a1 * load port dummy) + (a2 * discharge port  dummy) + (a3 * year dummy) + (a4 * 0) + (a5 * shipping term  dummy) + (a6 *1)+  For bulk commodities (bulk=0) and U.S.-flag carriers (flag=0), Equation 2  becomes:  freight rate = a0+ (a1 * load port dummy) + (a2 * discharge port  dummy) + (a3 * year dummy) + (a4 * 0) + (a5 * shipping term  dummy) + (a6 *0)+  The difference between Equation 5 and Equation 6 yields a6, which is the  difference in freight rate between U.S.-and foreign-flag carriers for non- bulk commodities.
Table 7 presents the main regression results for model 2.
section_title: Appendix III: Program Authorities
paragraphs: The United States has principally employed six programs to deliver food  aid: Public Law 480 Titles I, II, and III; Food for Progress; the McGovern- Dole International Food for Education and Child Nutrition; and the Local  and Regional Procurement Project. Three of these programs allow for  monetization: Title II (renamed Food for Peace), Food for Progress, and  McGovern-Dole International Food for Education and Child Nutrition.  Table 8 provides a summary of these food aid programs by program  authority.
section_title: Appendix IV: Total Volume and Commodities Programmed for Monetization by Country from Fiscal Years 2008 through 2010
paragraphs: As previously mentioned, between fiscal years 2008 and 2010, more than  1.3 million metric tons of food aid were programmed for monetization in  34 countries. Figure 10 shows the total volume of commodities  programmed for monetization in each country by the U.S. Agency for  International Development (USAID) and U.S. Department of Agriculture  (USDA) between fiscal years 2008 and 2010. Table 9 shows the volume of  each commodity programmed for monetization by country, program, and  year. Figure 11 provides a percentage breakdown of the commodities  programmed for monetization by USAID and USDA between fiscal years  2008 and 2010.
section_title: Appendix V: Steps in the Monetization Process from Grant Proposal to Development Project Completion
paragraphs: The following table further outlines the steps in the monetization process  from grant application through development project completion depicted  in figure 3.
section_title: Appendix VI: Results from Survey of Implementing Partners
paragraphs: We conducted a survey of 29 implementing partners that monetized either  through U.S. Agency for International Development (USAID) or and U.S.  Department of Agriculture (USDA) between fiscal years 2008 and 2010,  and we received a 100 percent response rate. Of the 29 implementing  partners, 6 monetized through USAID only, 13 monetized through USDA  only, and 10 monetized through both agencies. The tables that follow  summarize selected results of the implementing partners’ responses to our  survey.
section_title: Appendix VII: Comments from the U.S. Agency for International Development
section_title: Appendix VIII: Comments from the U.S. Department of Agriculture
paragraphs: The following are GAO’s comments on the U.S. Department of Agriculture  letter dated June 10, 2011.
subsections: section_title: GAO Comment
paragraphs: The U.S. Department of Agriculture noted some advantages in addition to  the economic benefits of development projects funded by monetization,  such as encouraging commercial markets for agricultural products and  other market-building benefits. However, the potential for adverse market  impacts, such as artificially suppressing the price of a commodity due to  excessive monetization, could work against the agricultural development  goals for which the funding was originally provided.
section_title: Appendix IX: Comments from the U.S. Department of Transportation
paragraphs: The following are GAO’s comments on the U.S. Department of  Transportation letter dated June 14, 2011.
subsections: section_title: GAO Comments
paragraphs: 1.  We are making this proposed amendment on the basis of the following  four factors: First, the number of vessels participating in the food aid  program has declined. In a 2009 report to Congress, U.S. Agency for  International Development (USAID) and U.S. Department of  Agriculture (USDA) jointly stated that, due to the declining size of the  U.S.-flag commercial fleet, USAID and USDA are forced to compete  with the Department of Defense and other exporters for space aboard  the few remaining U.S.-flag vessels, thereby limiting competition in  transportation contracting and leading to higher freight rates. Second,  our analysis of ocean transportation costs showed that food aid  shipments on foreign-flag carriers cost the U.S. government, on  average, $25 per ton less than U.S.-flag carriers. Third, although the 3- year requirement was established to provide employment  opportunities to U.S. shipyards, since 2005, U.S. shipyards have built  only two new U.S.-flag vessels appropriate for transporting food and  the vessels have not been awarded a food aid contract. Fourth, the 3- year requirement applies only to food aid and not to defense agencies  and the U.S. Export-Import Bank. The elimination of the 3-year waiting  period can ease entry of new vessels into U.S. food aid programs, with  the potential to increase competition among eligible U.S.-flag ships and  reduce the cost of transportation. 2.  We added clarifying language to describe the U.S. Department of  Transportation’s reimbursement to USAID and USDA for the ocean  freight differential (OFD). However, the OFD represents a cost to the  U.S. government. In addition, according to USAID and USDA, the OFD  reimbursements for monetization are transferred to the general food  aid accounts of both agencies, can be used to fund either emergency or  nonemergency programs, and are likely not fully available to fund  development assistance.  3.  Our analysis of transportation cost was based on Kansas City  Commodity Office (KCCO) data covering all monetization transactions  for both agencies for fiscal years 2008 through 2010 and is thus a  precise calculation of the actual cost to the U.S. government. 4.  In a 2009 report to Congress, USAID and USDA jointly stated that, due  to the declining size of the U.S.-flag commercial fleet, USAID and  USDA are forced to compete with the Department of Defense and  other exporters for space aboard the few remaining U.S.-flag vessels,  thereby limiting competition in transportation contracting and leading  to higher freight rates. 5.  While we did not analyze cargo freight bids, our analysis of KCCO data  included more than 5,000 food aid purchase transactions for fiscal  years 2007 to 2010. We included in this data the number of vessels  awarded all food aid contracts, not just Title II, by fiscal year and  determined that both the number of vessels and the tonnage shipped  per year had declined. We also determined the actual difference in cost  to the U.S. government between U.S.- and foreign-flag vessels.  6.  According to KCCO data, the number of U.S.-flag vessels awarded food  aid contracts in fiscal year 2002 was 134.
section_title: Appendix X: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, Joy Labez (Assistant Director),  Carol Bray, Ming Chen, Debbie Chung, Kathryn Crosby, Martin De Alteriis,  Mark Dowling, Francisco Enriquez, Etana Finkler, Sarah M. McGrath, Julia  Ann Roberts, Jerry Sandau, Jena Sinkfield, Sushmita Srikanth, Phillip J.  Thomas, Seyda Wentworth, and Judith Williams made key contributions to  this report.
section_title: Related GAO Products
paragraphs: International School Feeding: USDA’s Oversight of the McGovern-Dole  Food for Education Program Needs Improvement. GAO-11-544.  Washington, D.C.: May 19, 2011.
International Food Assistance: Better Nutrition and Quality Control  Can Further Improve U.S. Food Aid. GAO-11-491. Washington, D.C.: May  12, 2011.
Global Food Security: U.S. Agencies Progressing on Governmentwide  Strategy, but Approach Faces Several Vulnerabilities. GAO-10-352.  Washington, D.C.: March 11, 2010.
International Food Assistance: A U.S. Governmentwide Strategy Could  Accelerate Progress toward Global Food Security. GAO-10-212T.  Washington, D.C.: October 29, 2009.
International Food Assistance: Key Issues for Congressional Oversight.  GAO-09-977SP. Washington, D.C.: September 30, 2009.
International Food Assistance: USAID Is Taking Actions to Improve  Monitoring and Evaluation of Nonemergency Food Aid, but Weaknesses  in Planning Could Impede Efforts. GAO-09-980. Washington, D.C.:  September 28, 2009.
International Food Assistance: Local and Regional Procurement  Provides Opportunities to Enhance U.S. Food Aid, but Challenges May  Constrain Its Implementation. GAO-09-757T. Washington, D.C.: June 4,  2009.
International Food Assistance: Local and Regional Procurement Can  Enhance the Efficiency of U.S. Food Aid, but Challenges May Constrain  Its Implementation. GAO-09-570. Washington, D.C.: May 29, 2009.
Foreign Aid Reform: Comprehensive Strategy, Interagency  Coordination, and Operational Improvements Would Bolster Current  Efforts. GAO-09-192. Washington, D.C.: April 17, 2009.
Foreign Assistance: State Department Foreign Aid Information Systems  Have Improved Change Management Practices but Do Not Follow Risk  Management Best Practices. GAO-09-52R. Washington, D.C.: November  21, 2008.
International Food Security: Insufficient Efforts by Host Governments  and Donors Threaten Progress to Halve Hunger in Sub-Saharan Africa  by 2015. GAO-08-680. Washington, D.C.: May 29, 2008.
Foreign Assistance: Various Challenges Limit the Efficiency and  Effectiveness of U.S. Food Aid. GAO-07-905T. Washington, D.C.: May 24,  2007.
Foreign Assistance: Various Challenges Impede the Efficiency and  Effectiveness of U.S. Food Aid. GAO-07-560. Washington, D.C.: April 13,  2007.
Foreign Assistance: U.S. Agencies Face Challenges to Improving the  Efficiency and Effectiveness of Food Aid. GAO-07-616T. Washington,  D.C.: March 21, 2007.
Maritime Security Fleet: Many Factors Determine Impact of Potential  Limits on Food Aid Shipments. GAO-04-1065. Washington, D.C.:  September 13, 2004.