Security Assistance: State and DOD Need to Assess How the Foreign Military Financing Program for Egypt Achieves U.S. Foreign Policy and Security Goals
Published: 2006-04-11T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Since 1979, Egypt has received about $60 billion in military and economic assistance with about $34 billion in the form of foreign military financing (FMF) grants that enable Egypt to purchase U.S.-manufactured military goods and services. In this report, GAO (1) describes the types and amounts of FMF assistance provided to Egypt; (2) assesses the financing arrangements used to provide FMF assistance to Egypt; and (3) evaluates how the U.S. assesses the program's contribution to U.S. foreign policy and security goals.
section_title: What GAO Found
paragraphs: Egypt is currently among the largest recipients of U.S. foreign assistance, along with Israel, Afghanistan, and Iraq. Egypt has received about $1.3 billion annually in U.S. foreign military financing (FMF) assistance and has purchased a variety of U.S.-manufactured military goods and services such as Apache helicopters, F-16 aircraft, and M1A1 tanks, as well as the training and maintenance to support these systems. The United States has provided Egypt with FMF assistance through a statutory cash flow financing arrangement that permits flexibility in how Egypt acquires defense goods and services from the United States. In the past, the Defense Security Cooperation Agency (DSCA) accumulated large undisbursed balances in this program. Because the flexibilities of cash flow financing permit Egypt to pay for its purchases over time, Egypt currently has agreements for U.S. defense articles and services worth over $2 billion--some of which are not due for full payment until 2011. The Departments of State (State) and Defense (DOD) have not conducted an assessment to identify the risks and impacts of a potential shift in FMF funding. Officials and many experts assert that the FMF program to Egypt supports U.S. foreign policy and security goals; however, State and DOD do not assess how the program specifically contributes to these goals. U.S. and Egyptian officials cited examples of Egypt's support for U.S. interests, such as maintaining Egyptian-Israeli peace and providing access to the Suez Canal and Egyptian airspace. DOD has not determined how it will measure progress in achieving key goals such as interoperability and modernizing Egypt's military. For example, the U.S. Central Command, the responsible military authority, defines modernization as the ratio of U.S.-to-Soviet equipment in Egypt's inventory and does not include other potentially relevant factors, such as readiness or military capabilities. Achieving interoperability in Egypt is complicated by the lack of a common definition of interoperability and limitations on some types of sensitive equipment transfers. Given the longevity and magnitude of FMF assistance to Egypt, evaluating the degree to which the program meets its goals would be important information for congressional oversight, particularly as Congress assesses the balance between economic and military assistance to Egypt as well as the impact on U.S. foreign policy interests.

section_title: Letter
paragraphs: After signing the Camp David Peace Accords, Egypt emerged as the second  largest recipient of U.S. military aid in the world. Since 1979, Egypt has  received about $60 billion in military and economic assistance overall with  about $34 billion in the form of foreign military financing (FMF) grants and  loans that enable Egypt to purchase U.S.-manufactured military goods and  services. To fund this program, approximately $1.3 billion has been  appropriated annually and disbursed through a cash flow financing  arrangement that allows Egypt to spread the payments over several years.  Specifically, the United States uses FMF funds set aside for Egypt to  purchase military equipment, services, and training from U.S. contractors  on Egypt’s behalf. These defense articles and services are to modernize  Egypt’s armed forces and enhance Egypt’s military interoperability with the  United States. According to Department of State (State) and Department of  Defense (DOD) officials, FMF funds also contribute to the U.S. goal of  maintaining regional stability and supporting Egypt as a partner in the  Middle East. Recently, congressional committees have sought to alter the  balance of economic and military assistance provided to Egypt and to  review the results of the assistance.
At your request, we reviewed selected aspects of the FMF program for  Egypt including the composition and funding of the program and the U.S.  government’s assessment of its contributions. Specifically, we (1) describe  the types and amounts of FMF assistance provided to Egypt, (2) assess the  financing arrangements used to provide FMF assistance to Egypt, and (3)  evaluate how the United States assesses FMF assistance to Egypt and its  contribution to the advancement of U.S. foreign policy and security goals.
To meet these objectives, we reviewed documentation and interviewed  officials from State, DOD, and the Defense Security Cooperation Agency  (DSCA.) We traveled to Cairo, Egypt, to meet with Egyptian officials at the  Ministry of Defense and U.S. officials at the U.S. Embassy and at the Office  of Military Cooperation (OMC). We also interviewed officials at U.S.  Central Command (CENTCOM) in Tampa, Florida, to discuss their roles  and responsibilities in the FMF program for Egypt. In addition, we  interviewed senior Egyptian officials in Washington, D.C., and several  political and military experts from academic and policy institutions in  Washington, D.C. We examined DOD data collected from 1999 to 2005 to  determine the composition of foreign military financing assistance  provided to Egypt. This report examines FMF for Egypt and does not  assess economic assistance to Egypt. We performed our work from June  2005 through March 2006 in accordance with generally accepted  government auditing standards. A detailed description of our scope and  methodology is included in appendix I of this report.
subsections: section_title: Background
paragraphs: Egypt is currently among the largest recipients of U.S. foreign assistance,  along with Israel, Afghanistan, and Iraq. Since 1979, Egypt has received an  annual average of more than $2 billion in economic and military aid. Egypt  has generally received about $1.3 billion each year in foreign military  financing assistance in the form of grants and loans. From 1982 to 1988, the  United States forgave Egypt’s FMF debt to the United States and began  providing military assistance in 1989 solely in the form of grants with no  repayment requirement.
State and DOD planning documents describe FMF as one of several U.S.  security assistance programs which are a subset of U.S. security  cooperation efforts designed to build relationships that support specified  U.S. government interests. These interests include building friendly  nations’ capabilities for self-defense and coalition operations,  strengthening military support for containing transnational threats,  protecting democratically elected governments, and fostering closer  military ties between U.S. and recipient nations.According to State, the  objectives of the FMF program worldwide include:  assisting friendly foreign militaries in procuring U.S. defense articles  and services for their countries’ self defense and other security needs;  promoting coalition efforts in regional conflicts and the global war on   improving capabilities of friendly foreign militaries to assist in  international crisis response operations;   contributing to the professionalism of military forces;  enhancing rationalization, standardization, and interoperability of  friendly foreign military forces;  maintaining support for democratically elected governments; and  supporting the U.S. industrial base by promoting the export of U.S.  defense-related goods and services.
Generally, FMF provides financial assistance in the form of credits or  guarantees to U.S. allies to purchase military equipment, services, and  training from the United States. Recipient countries can use the assistance  to purchase items from the U.S. military departments through the Foreign  Military Sales (FMS) process or directly from private U.S. companies  through direct commercial sales. State is responsible for the continuous  supervision and general direction of security assistance programs,  including FMF, in coordination with DOD. DSCA leads the day-to-day  program implementation for each FMF recipient country in coordination  with other DOD entities at the unified combatant commands and in the  recipient countries. CENTCOM’s responsibilities include developing and  implementing security cooperation plans for Egypt and other countries in  the Middle East, as well as coordinating with other government entities on  major Egyptian equipment requests. (See appendix II for a description of  the FMS process for purchasing FMF-funded cases and appendix III for a  description of the roles and responsibilities of the entities involved in the  program.)
Members of Congress have periodically sought to alter the balance of  economic and military assistance to Egypt. In 1998, the United States and  Egypt agreed to a 10-year assistance phase-down in conjunction with a  similar package for Israel. The package for Egypt reduced economic  assistance by $40 million each year but did not increase FMF assistance to  Egypt. U.S. economic assistance to Israel was reduced by $120 million each  year, and the amount of U.S. military assistance was increased by $60  million per year. In 2004 and 2005, amendments to the Consolidated  Appropriations bill for fiscal year 2005 and the Foreign Relations  Authorization billfor fiscal years 2006 and 2007 proposed converting  some military assistance to economic assistance to Egypt. The 2004  amendment was not adopted and did not become law. Furthermore, as of  March 2006, the 2005 amendment has not been enacted. Additionally, a  conference report attached to the fiscal year 2006 Foreign Operations  Appropriations bill requires State to report to Congress on the balance  between economic and military assistance provided to Egypt, including  whether maintaining the current level of military assistance in relation to  economic assistance is appropriate in light of the political and economic  conditions in Egypt and in the region. Although this requirement was not  stipulated in law, it conveys congressional intent to have this information  provided to the Congress.
Over the past decade, Congress and the executive branch laid out a  statutory and managerial framework that provides the foundation for  strengthening government performance and accountability, with GPRA as  its centerpiece. GPRA is designed to inform congressional and executive  decision making by providing objective information on the relative  effectiveness and efficiency of federal programs and spending. A key  purpose of the act is to create closer and clearer links between the process  of allocating resources and the results expected to be achieved with those  resources. Program evaluations are objective studies that answer questions  about program performance and results, and explore ways to improve  them. In 2002, OMB implemented the Performance Assessment Rating Tool  (PART) method of assessing federal programs. PART assesses federal  programs in four areas: purpose and design, strategic planning,  management, and results and accountability. Another assessment tool,  which we have discussed in previous reports, is a logic model. This tool  can be used to describe a program’s components and desired results, while  explaining the strategy by which the program is expected to achieve its  goals. A logic model is a representation of the relationship between the  various components of a program, typically including at a minimum, inputs,  activities, outputs and outcomes. By specifying the program’s theory of  what is expected at each step, a logic model can help evaluators define  measures of the program’s progress toward its ultimate goals. (See  appendix IV for details on the logic model.)
section_title: The United States Has Provided $1.3 Billion in Military Assistance to Egypt Annually to Purchase Defense Articles and Services
paragraphs: Since 1979, Egypt has received about $34 billion in FMF assistance which  the United States has generally appropriated in annual amounts of  approximately $1.3 billion. In fiscal year 2005, Egypt received nearly $1.3  billion in FMF grants, more than 25 percent of the total amount of FMF  assistance provided worldwide. FMF assistance to Egypt accounts for 80  percent of Egypt’s military procurement budget and has served to replace  some of Egypt’s Soviet-supplied equipment with modern U.S. equipment.  Egyptian officials stated that 52 percent of their military inventory is U.S.  equipment as of August 2005.
Over the life of the FMF program, Egypt has purchased 36 Apache  helicopters, 220 F-16 aircraft, 880 M1A1 tanks, and the accompanying  training and maintenance to support these systems, among other items (see  fig. 1). According to U.S. and Egyptian officials, the Egyptian military is  better equipped to defend its territory and participate in operations in the  region. For example, the Egyptian military has participated in  peacekeeping missions in East Timor, Bosnia, and Somalia. In addition, the  Egyptian military participates with the United States in Operation Bright  Star, a biannual military exercise involving forces from other coalition  countries, including Germany, Jordan, Kuwait, and the United Kingdom.  The purpose of the exercise is to conduct field training to enhance military  cooperation among U.S. and coalition partners and strengthen  relationships between the United States and Egypt, as well as other  participating partners.
From 1999 to 2005, the United States provided a total of about $7.8 billion  to Egypt in FMF funds. Egypt spent almost half of its FMF funds from 1999  to 2005 (about $3.8 billion) on major equipment such as aircraft, missiles,  ships, and vehicles (see fig. 2). For example, Egypt spent 8 percent of its  FMF funds on missiles, including 822 ground-launched Stinger missiles, 459  air-launched Hellfire missiles, and 33 sea-launched Harpoon missiles. Egypt  also spent 14 percent on aircraft, including 3 cargo airplanes; 10 percent on  communications and support equipment, including 42 radar systems and 8  switchboards; and 9 percent on supplies and supply operations, including  1,452 masks to protect against chemical and biological agents.
Egypt spent the remaining amount of its FMF funds—about $2.5 billion— on maintenance, weapons and ammunition, and other requirements. DSCA  adheres to a total package approach when working with Egypt to procure  items through the FMF program, which ensures that the costs of support  articles and services for new equipment are included in the total price of  the item. In addition to the equipment, support items include training,  technical assistance, initial support, and follow-on support. Egyptian  officials stated that approximately one-third of their FMF funds are  dedicated to follow-on support; one-third to upgrade U.S.-supplied  equipment; and nearly one-third to new procurements.
section_title: Cash Flow Financing Flexibility Allows Egypt to Pay for Defense Goods over Multiple Years
paragraphs: The United States permits Egypt to finance its military purchases using a  statutory cash flow financing arrangement that allows Egypt to make  purchases in one year and pay for them over succeeding years using grants  made from future FMF appropriations. The arrangement allows the United  States to enter into contracts in advance of—and in excess of—current  FMF appropriations for Egypt. Specifically, Egypt is not required to pay the  full amount of the LOA up front. Cash flow financing allows Egypt to pay  only the amount that signed LOAs require in a given year for specified  defense articles and services. The cash flow financing arrangement  benefits Egypt in that it can receive more defense goods and services than  it can under other financing arrangements. However, the program  accumulated undisbursed funds because the agency refrained from making  as many new commitments for goods and services as the annual  appropriation would have allowed, according to DSCA officials. The cash  flow financing arrangement allows for significant commitments to be made  based on anticipated appropriations.
subsections: section_title: Cash Flow Financing Allows for Flexibility
paragraphs: Unlike other countries that receive FMF assistance, Egypt and Israel are  currently the only countries that may receive defense goods worth more  than the annual FMF appropriation and pay for them over multiple years.  Cash flow financing enables Egypt to purchase more defense goods and  services than under other financing arrangements and to better plan its  military purchases over a number of years. For example, Egypt may begin  the process of purchasing an F-16 in one year and make installment  payments for the item over the life of the contract. Traditional financing  options for FMF programs permit countries to make purchases equal to the  amount of the particular appropriation in any given year or save  appropriations over multiple years. For example, a country using  traditional financing would have to plan its purchases by saving its FMF  funds over a period of years to accumulate sufficient funds to make the full  payment for the item. All other countries that receive FMF assistance,  except Israel and Egypt, are required to make their FMF purchases in this  manner.
section_title: In the Past, DSCA Limited the Number of New Commitments to Less than the Appropriated Amounts, Allowing Funds to Accumulate
paragraphs: By 1998, more than $2 billion in undisbursed funds accumulated in Egypt’s  FMF account because DSCA did not have a high enough level of  commitments to require disbursements in an amount equal to Egypt’s  entire annual FMF appropriation. DSCA officials stated that previous FMF  program managers did not have adequate tools to track Egypt’s FMF  current commitments against future FMF disbursement requirements. In  August 1998, DSCA established a system to project estimated commitments  and payments by fiscal year to obtain better control over the cash flow  financing process.
DSCA developed and is now implementing a plan to disburse the  accumulated funds by fiscal year 2007. According to DSCA, OMB officials,  and congressional staff, in 1998, members of Congress and OMB became  concerned about the large balance in Egypt’s FMF account and consulted  with DSCA to eliminate it. As a result, DSCA coordinated with OMB and  subsequently developed and implemented a plan in 2002, to disburse $300  million of the undisbursed balances every year, in addition to the amounts  appropriated annually for Egypt’s FMF program, until the undisbursed  balances are eliminated in 2007 (see fig. 3).
According to DSCA, an estimated $130 million of the undisbursed balances will be held in  reserve to cover unexpected costs.
section_title: Cash Flow Financing Allows for Significant Commitments that Anticipate Future Appropriations
paragraphs: Cash flow financing also permits Egypt to order defense articles and  services that may be paid for with future appropriations or country funds.  As of March 22, 2006, the value of LOAs anticipating future funding totaled  approximately $2 billion, some of which are not due for full payment until  2011. Due to the nature of cash flow financing, this number can vary daily  because contracts are signed, completed, or modified daily. For example,  from 1997 to 2005, the dollar value of these commitments at the end of each  fiscal year has varied from $1.3 billion to $3.6 billion, whereas the average  amount was $2.6 billion (see fig. 4). These commitments are expected to be  paid for with future appropriations. If future appropriations are not  available, Egypt will be responsible under the LOA to pay these  commitments with other sources.
DSCA officials stated that, if there were a change in the anticipated  appropriations, the United States would seek funding from Egypt to satisfy  the LOAs. If Egypt is unable to pay for the LOAs with its own funds, the  U.S. government would be liable for the payments due on the underlying  contracts executed on Egypt’s behalf. To manage payment if expected  funding is reduced, DSCA officials stated that DOD would consider a range  of steps including reducing the scope of the existing contracts, and  stopping new orders, among other things. Additionally, defense articles and  services that have not been delivered would not be provided to Egypt, if  payment had not been received. As a result, DOD also may use FMF funds  held in reserve to pay companies’ costs associated with closing down their  production lines and terminating the contracts. However, DSCA officials  stated that contract termination would be considered as a last resort.
Absent the availability of U.S. funds to pay the entire balance of existing  contracts, important implications for the achievement of the program goals  and U.S. relations with Egypt may arise. For example, if the United States  had to terminate multiple contracts on Egypt’s behalf because of a  reduction in FMF program funding and Egypt’s inability to provide funding,  the U.S. ability to achieve FMF goals such as military modernization would  be affected. In addition, U.S. and Egyptian officials stated that a shift in  funding may affect some elements of the U.S.-Egyptian relationship.
State and DOD have not conducted an assessment to identify the impacts  of a potential reduction in FMF funding below the levels that are planned to  be requested. According to applicable internal control standards for the  federal government, an organization should identify risks—such as a  reduction in funding—and decide upon the internal control activities  required to mitigate those risks and achieve efficient and effective  operations, reliable financial reporting, and compliance with laws and  regulations.Management should then plan a course of action for  mitigating risks, developing mechanisms to anticipate, identify, and react to  change.
section_title: Officials Assert that FMF Assistance to Egypt Supports U.S. Goals, but State and DOD Do Not Evaluate the Program’s Contributions to Key Goals
paragraphs: U.S. officials and several experts we consulted assert that FMF assistance  to Egypt has supported U.S. strategic goals such as regional stability, the  war on terrorism, and Egyptian-Israeli peace. Furthermore, U.S. and  Egyptian officials state that FMF has promoted a modern Egyptian military  by replacing 52 percent of its aging Soviet-era military equipment with U.S.  equipment, and improved U.S.-Egyptian interoperability through joint  military exercises. U.S. officials also stated that the U.S.-Egyptian  relationship resulted in expedited access through the Suez Canal and the  right to fly over Egyptian territory. Although DOD and State can describe  the qualitative benefits the United States receives from Egypt, the  departments have conducted no systematic, outcome-based assessment of  how the FMF program furthers U.S. goals. GPRA and PART establish the  expectation that federal programs determine whether they are meeting  agency and program goals—annual and long-term—and how performance  can be improved to achieve better results.
subsections: section_title: Officials and Experts Cite Examples of Egypt’s Support for U.S. Goals
paragraphs: Officials and several experts assert that Egypt supports the U.S. goals of  the FMF program, which are found in State’s annual Mission Performance  Plan for Egypt and its Congressional Budget Justification. Specific goals  include (1) modernizing and training Egypt’s military; (2) facilitating  Egypt’s participation as a coalition partner; (3) providing force protection  to the U.S. military in the region; and (4) helping guarantee U.S. access to  the Suez Canal and overflight routes. Another key goal of the program is to  enhance Egypt’s interoperability with U.S. forces. DOD officials stated that  broader security cooperation and assistance goals found in DOD’s regional  Theater Security Cooperation Plan also apply to Egypt’s FMF program,  which we found to be consistent with State’s goals for the program.
Egyptian and U.S. officials cited several examples of Egypt’s support for  U.S. goals. For example, Egypt:  deployed about 800 military personnel to the Darfur region of the Sudan   trained 250 Iraqi police and 25 Iraqi diplomats in 2004;  deployed a military hospital and medical staff to Bagram Air Base in  Afghanistan from 2003 to 2005, where nearly 100,000 patients received  treatment;   provided over-flight permission to 36,553 U.S. military aircraft through  Egyptian airspace from 2001 to 2005; and  granted expedited transit of 861 U.S. naval ships through the Suez Canal  during the same period and provided all security support for those ship  transits.
section_title: State and DOD Do Not Evaluate How FMF Assistance to Egypt Achieves U.S. Goals
paragraphs: State and DOD have not systematically evaluated how the FMF program  specifically contributes to achieving U.S. goals, particularly modernization  and interoperability. DOD currently conducts assessments of security  assistance activities in the region and regularly reviews selected FMF- funded purchases at the country level. However, these assessments do not  provide information on specific FMF goals for Egypt or progress made in  achieving them.
DOD rates the collective effectiveness of a mix of programs on a regional  basis, including FMF, International Military Education and Training,  military-to-military contacts, and others. At the country level, DOD and  Egyptian officials regularly review the status of selected FMF-funded  purchases through financial management, program management, and in- progress reviews. In addition, a Military Coordination Committee,  comprised of senior DOD and Egyptian military officials, meets annually to  discuss specific FMF purchases and types of equipment that have been or  may be procured. These efforts reflect DOD’s attention to assessing broad  activities and certain financial and management aspects of FMF to Egypt,  but they do not provide a comprehensive assessment of how FMF  contributes to achieving U.S. goals.
We have reported that, although it can be difficult to isolate one program’s  effect from another’s or to assess a program’s impact or benefit, such  assessments can help decision makers make more informed choices when  faced with limited resources and competing priorities. While some U.S.  foreign policy and security goals, such as regional stability or maintaining a  strong U.S.-Egyptian relationship, may be difficult to measure  quantitatively, key FMF program goals—such as interoperability and  modernization—better lend themselves to measurement.
DOD has not defined the degree of interoperability that it seeks to  achieve with the Egyptian military, nor has it determined how to  measure progress towards this goal. According to DOD doctrine,  interoperability is the ability of communications and other systems,  units, or forces to provide services to each other so that forces can  operate effectively together and information can be exchanged directly  and satisfactorily. The doctrine also states that the degree of  interoperability should be defined in specific cases.
Achieving interoperability in Egypt is complicated by both the lack of a  common definition of interoperability and limitations on some types of  sensitive equipment transfers. CENTCOM officials also stated that they  would prefer to operate with Egyptian forces according to the  interoperability standard used by the United States. They noted,  however, that the Egyptian military’s definition of interoperability is  limited to participation in joint exercises, such as Operation Bright Star.  Additionally, Egypt and the U.S. use interim short-term solutions to  minimize limitations with respect to interoperability. For example, U.S.  officials stated they have established temporary communications  installations on certain equipment and have flown alongside Egyptian   C-130s to facilitate Egypt’s participation in a joint exercise. Egypt lacks  specific equipment that limits its interoperability with U.S. forces, but  DOD has not formally assessed this limitation and its implications on  interoperability.
According to DOD policy, the desired level of interoperability cannot  be ascertained within a general statement of policy but is dependent on  factors unique to certain areas—such as compatible doctrine, tactics,  techniques, and procedures. U.S. CENTCOM officials acknowledged  that measuring interoperability in Egypt would vary greatly depending  on the operation conducted, the type and size of systems used, and the  timing of events. State officials acknowledged that it is possible to  measure levels of interoperability through specific capabilities  demonstrated by Egyptian forces participating in specific operations.  For example, it would be possible to measure the capabilities of  Egyptian forces participating in peacekeeping operations.
DOD has similarly not defined how it will determine the extent to which  FMF assistance contributes to the modernization of Egypt’s armed  forces. Currently, the Egyptian benchmark is based on a percentage of  U.S.-versus-Soviet equipment in Egypt’s inventory, as reported by the  Egyptian military. According to Egyptian military officials, 52 percent of  its current military inventory is U.S. equipment. By 2020, Egypt’s goal is  to increase this amount to 66 percent. DOD officials stated that they  believe Egypt’s ratio of U.S.-to-Soviet equipment is accurate but  acknowledged that they do not maintain their own data to support the  statistics.
Nonetheless, other factors may be useful indicators to measure  progress toward modernization, such as the technical sophistication of  Egypt’s units, weapons systems, and equipment to provide  humanitarian assistance; the readiness of Egyptian troops to deploy to a  peacekeeping mission; or the degree to which Egypt’s troops are  capable of maintaining a desired level of operational activity during  Operation Bright Star. Developing these and other indicators would  help DOD measure the degree of modernization and, in turn, be better  positioned to determine whether Egypt’s goals are reasonable.
While measuring goals in these areas presents some difficulties, legislation  and administration initiatives have recognized the need to do so. GPRA  emphasized the importance of evaluating federal programs. Program  evaluations help policy makers address whether program activities  contributed to their stated goals and can help improve programs and target  resources more effectively.
In addition, OMB recently implemented PART to assess and improve  program performance so that federal agencies can achieve better results. A  PART review is intended to assess aspects of the program in order to form  conclusions about program benefits by looking at the program’s purpose  and design, strategic planning, management, and results—that is, whether  the program is meeting its annual and long-term goals. To date, OMB has  not conducted a review of the FMF program in the Middle East region.
section_title: Conclusion
paragraphs: For the past 27 years, the United States has provided Egypt with more than  $34 billion in FMF assistance to support U.S. strategic goals in the Middle  East. Most of the FMF assistance has been in the form of cash grants that  Egypt has used to purchase U.S. military goods and services. Like Israel,  and unlike all other recipients of U.S. FMF assistance, Egypt can use the  prospects of future congressional appropriations to contract for defense  goods and services that it wants to procure in a given year through the FMF  program. Until 1998, DSCA limited the number of new commitments to less  than the annual appropriation thereby allowing more than $2 billion in  undisbursed funds to accumulate. If the plan to eliminate the undisbursed  funds for the Egypt FMF program is realized, these funds will be depleted  by the end of fiscal year 2007. As Congress debates the appropriate mix  between military and economic assistance to Egypt, the inherent risks of  such flexible financing warrant careful attention and assessment by State  and DOD.
Similarly, both State and DOD could do a better job assessing and  documenting the achievement of goals as a result of the $34 billion in past  U.S. FMF assistance and the $1.3 billion in annual appropriations planned  to be requested. Periodic program assessments that are documented and  based on established benchmarks and targets for goals would help  Congress and key decision makers make informed decisions. We agree that  expedited transit in the Suez Canal; support for humanitarian efforts in  Darfur, Sudan, and elsewhere; and continuing offers to train Iraqi security  forces are important benefits that the United States derives from its  strategic relationship with Egypt. However, without a common definition of  interoperability for systems, units, or forces, it is difficult to measure the  extent of current and desired levels of interoperability, nor is it clear how  the Egyptian military has been or could be transformed into the modern,  interoperable force articulated in the U.S. goals for the Egypt FMF  program.
section_title: Recommendations for Executive Action
paragraphs: Given the longevity of the FMF program, its relatively high appropriation  levels, the strategic importance of Egypt in the Middle East, and  congressional interest in assessing the balance between economic and  military assistance provided to Egypt, we recommend that the Secretaries  of State and Defense take the following two actions:  conduct an assessment of the impact of potential shifts in future  appropriations on the Egypt FMF program. This would include  identifying risks, planning a course of action for mitigating those risks,  and developing mechanisms to anticipate, identify, and react to change;  and  conduct periodic program-level evaluations of the FMF program to  Egypt. The United States should define specific objectives for the goals,  and identify appropriate indicators that would demonstrate progress  toward achieving those objectives. Specifically, we recommend that the  agencies define the current and desired levels of modernization and  interoperability the United States would like to achieve. This should  include establishing benchmarks and targets for these and other goals.
section_title: Agency Comments and our Evaluation
paragraphs: We provided a draft of this report to the Secretaries of Defense and State  for their review and comment.  DOD and State provided written responses  that are reprinted in appendixes V and VI. Both departments also provided  us with technical comments which we incorporated in the report as  appropriate.
In commenting on our draft report, DOD concurred with our  recommendations but stated that we should direct the recommendations  primarily to the Secretary of State.  DOD and State are joint partners in the  FMF program for Egypt—State sets the broad goals for the program while  DOD works closely with Egypt’s military to implement the program.   Therefore, the recommendations are appropriately addressed to both  departments.
State did not indicate whether it concurred with our recommendations.   With regard to our first recommendation, State emphasized that steps to  mitigate risks are already in place, such as maintaining reserves to pay  costs associated with terminating FMF contracts.  However, contract  termination reserves are last-resort measures that do not represent a  comprehensive assessment for reducing risk associated with possible  fluctuations in the resources of the FMF program for Egypt.  As we specify  in the report, a risk assessment should include other measures such as  reducing the scope of existing contracts, stopping new orders, or selling  undelivered defense goods.  An assessment that identifies the risks,  including a plan to mitigate and anticipate these risks, would be  appropriate and consistent with federal government internal control  standards.
On our second recommendation, State noted that it will work with DOD to  better define measures for assessing Egypt’s modernization goals but  stated that defining a level of interoperability would be speculative.  Improving Egypt’s ability to operate with the U.S. and coalition partners  has been a critical, yet unmeasured goal of the program. At a minimum,  DOD and State can begin to measure Egyptian forces’ capabilities to  operate with allied countries in military exercises or peacekeeping  operations. Evaluating the degree to which the program meets its goals  would be important information for congressional oversight, particularly as  Congress assesses the balance between economic and military assistance  to Egypt, as well as the impact on U.S. foreign policy interests.
State commented that our report found that cash flow financing caused the  accumulation of undisbursed balances in the FMF program for Egypt. DOD  made the same comment in their technical comments. We modified the  language in our report to clarify that the flexibilities of cash flow financing  as managed by DSCA in the past allowed for the accumulation of large  undisbursed balances.
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section_title: Objectives, Scope, and Methodology
paragraphs: To describe the types and amounts of Foreign Military Financing (FMF)  assistance to Egypt, we examined government and private sector  documents, databases, and reports; we also interviewed U.S. government  officials. Specifically, we interviewed U.S. Department of Defense (DOD),  and Defense Security Cooperation Agency (DSCA) officials. We examined  DSCA data from the Defense Security Assistance Management System  (DSAMS) database for the period 1999 to 2005. We sorted and categorized  this data by type of procurement, year, military service, and cost to  determine the composition of purchases made by funds provided under the  Egypt FMF program. The broad categories of equipment and services were  then examined for specific content and type of equipment, training,  support, or service. In addition, we conducted multiple interviews with  database administrators and information technology specialists to assess  the reliability of the data in this system. We determined that the DSAMS  database is reliable for the purposes of this report. We also interviewed  officials and reviewed documentation from the U.S. Office of Military  Cooperation in Cairo (OMC), along with U.S. Embassy officials, to better  understand the nature of the program and the types of equipment and  services procured through this program. In addition, we interviewed  Egyptian military officials in Cairo and Ministry of Foreign Affairs officials  at the Egyptian embassy in Washington, D.C.
To assess the financing arrangements used to provide FMF assistance to  Egypt, and determine how undisbursed balances accumulated in the Egypt  FMF program accounts, we examined data from DSCA’s Credit System  Database and interviewed officials from the DSCA Middle East and South  Asia Division and Comptroller’s Office, as well as the Defense Finance and  Accounting Service. To identify the amounts of accumulated undisbursed  balances, we examined fiscal data by annual appropriation, total amount of  accumulated undisbursed balances, and amount of funds that had been  disbursed by fiscal year. We analyzed this data by fiscal year and  interviewed the database administrator and information technology  specialists responsible for this database. We determined that the Credit  System Database is reliable for the purposes of this report. To assess the  manner in which the undisbursed balances were being eliminated, we also  examined three DSCA databases used to manage the financing  arrangement for the Egypt FMF program: (1) a cash-flow tracking database  that monitors letters of offer and acceptance (LOA) and the amount of  funds needed in each fiscal year, (2) a fiscal year data base that monitors  the time needed to execute a procurement request, and (3) Egypt’s Five  Year Defense Plan. We interviewed the custodians of these databases in  DSCA’s Middle East and South Asia Division to develop an understanding of  how they are used to manage the cash flow financing arrangement and the  program more generally. We also met with the Office of Management and  Budget (OMB) to gain an understanding of the plan to eliminate the  accumulated undisbursed balances. We did not examine or assess U.S.  economic assistance to Egypt.
To evaluate how the United States assesses FMF assistance to Egypt and its  contribution to the advancement of U.S. foreign policy and security goals,  we examined multiple U.S. and Egyptian government documents, and  interviewed U.S. and Egyptian government officials and foreign policy  specialists. Specifically, we obtained and analyzed the State Department’s  mission and bureau performance plans to understand U.S. foreign policy  and security goals and priorities, and how the executive branch evaluates  those goals. Similarly, we obtained DOD theater and country security  cooperation plans and compared their goals and priorities to understand  how DOD would measure results against them. We then examined U.S.  Central Command’s (CENTCOM) evaluation tools to understand what  metrics it used to evaluate program results. In addition to U.S. and  Egyptian government officials, we spoke with foreign policy experts from  the Center for Strategic and International Studies, Georgetown University,  the Council on Foreign Relations, the Heritage Foundation, the U.S.  Institute for Peace, the Middle East Institute, the National Defense  University, the Carnegie Endowment for International Peace and the  Brookings Institute. To assess DOD’s evaluations of security assistance  goals, we reviewed various assessments and identified key components  that are inherent in all of these assessments. We also researched other  potential models that may assist in program evaluation. We interviewed  officials from State and DOD in Washington, D.C., who are responsible for  administering and implementing the FMF program to Egypt. We also met  with Egyptian government officials in Washington, D.C. We traveled to  Cairo and met with State and DOD officials at the U.S. Embassy and the  OMC. In addition, we interviewed CENTCOM officials responsible for the  FMF program to Egypt as well as Egyptian Ministry of Defense officials in  Cairo.
We performed our work from May 2005 through March 2006 in accordance  with generally accepted government auditing standards.
section_title: Letter of Request and Letter of Offer and Acceptance Process
paragraphs: The review and approval process for FMF-funded purchases begins with  the Egyptian military requesting the purchase of certain defense articles or  services, and ends with a signed letter of offer and acceptance for those  goods or services. Figure 5 depicts the review and approval process below.
The relevant Egyptian military department sends a letter of request (LOR)  to the Egyptian Armament Authority, which then forwards it to the U.S.  OMC in Cairo to be processed. If approved, the LOR is sent back to the  Egyptian Armament Authority and then to the Egyptian Procurement  Office, which forwards it to the DSCA and the appropriate U.S. military  department.
The relevant U.S. military department and agencies—including the Army,  Navy, Air Force, the National Security Agency, and the Defense Logistics  Agency—generate a Letter of Offer and Acceptance (LOA) and send it to  DSCA to coordinate with the State Department and notify Congress, if  required. Once endorsed by DSCA or the relevant military department or  agency, the LOA is sent to Egypt for acceptance and signature. After  acceptance, LOAs are sent to DSCA, DFAS, and the relevant military  department or agency. The country program director for Egypt registers the  LOA into various databases that track the program.
section_title: Agency and Organizational Roles and Responsibilities
paragraphs: The principal U.S. entities responsible for administering and implementing  the FMF program are State and DOD.  The table below further describes  their roles and responsibilities.
section_title: Example of an Evaluation Framework
paragraphs: The logic model we provide below is a foundation and first step for  organizing the elements of a program. It is a tool that may help program  managers identify the necessary elements for an evaluation—but it is not a  complete evaluation itself.  This model can also be used to communicate  how program funds are used to achieve program goals. Figure 5 depicts  how FMF dollars (inputs), training and procurement (activities), and the  resulting equipped and trained military (outputs) can be linked to enhanced  modernization and interoperability (outcomes). We are not prescribing this  or any other specific model, and the figure below provides a high-level  example in aggregate that is meant to be illustrative and does not define all  of the exact inputs, activities, and outputs of the FMF program for Egypt.  A  program evaluation would typically include a breakdown of these  aggregated elements in further detail and would include definitions of  standards, benchmarks, and targets for each program goal.
section_title: Comments from the Department of State
section_title: Comments from the Department of Defense
section_title: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: Ms. Muriel Forster, Assistant Director. In addition, Nanette J. Barton,  Stephanie Robinson, Ann M. Ulrich, Lynn Cothern, Martin De Alteriis,  Grace Lui, and Christine Bonham made significant contributions to this  report.