Appropriations for FY2004: Foreign Operations, Export Financing, and Related Programs
Released: 2004-03-23T00:00:00

Most Recent Developments

On January 22, 2004, the Senate passed (65-28) the conference report on H.R. 2673 , the Consolidated Appropriations Act, 2004. Division D ofthe legislation includes a reconciled version of Foreign Operations funding forFY2004 as approved earlier by the House and Senate as H.R. 2800 . TheHouse approved (242-176) the conference agreement on December 8. PresidentBush signed the measure on January 23 ( P.L. 108-199 ).

The conference agreement on H.R. 2673 provides $17.48 billion for Foreign Operations, a figure that includes a 0.59% across-the-board rescissionand additional amounts for the Millennium Challenge Account specified in DivisionH of the bill. This represents a $1.4 billion, or a 7.4% reduction from the President'srequest, but $1.3 billion, or 7.9% higher than approved in regular Foreign Operationsspending for FY2003. The actual reduction to the executive's budget FY2004proposal, however, is unlikely to be as significant as this comparison suggests. Byutilizing funds provided in the Iraq reconstruction supplemental ( P.L. 108-106 ) andauthority included in H.R. 2673 to transfer Iraq reconstruction moneyfor requested regular Foreign Operations programs, the President could makeavailable as much as $575 million to fund his original FY2004 proposal withoutdrawing on the $17.48 billion provided in H.R. 2673 . If theAdministration chooses to utilize these resources from the Iraq reconstructionsupplemental, the difference between the FY2004 request and the conferenceagreement would be about $850 million, or a 4.5% cut.

Despite the overall reduction, the conference agreement increases spending for international HIV/AIDS, malaria, and tuberculosis programs to $1.646 billion. Whenthis amount is combined with appropriations in the pending Labor/HHS/Educationappropriation (Division E of H.R. 2673 ), the total for global HIV/AIDSand other infectious diseases is $2.4 billion, or roughly $400 million above thePresident's request. Conferees further agreed to a $400 million contribution to theGlobal Fund for AIDS, Malaria, and Tuberculosis that together with an additional$150 million for the Fund in Division E, would bring the total level to $550 million,rather than the Administration's $200 million proposal.

The conference agreement further authorizes and appropriates funds for the Millennium Challenge Account (MCA), one of the top Presidential aid initiatives. Division D of H.R. 2673 provides $650 million for the MCA, whileDivision H includes an additional $350 million, for a total MCA appropriation of $1billion. On another major policy matter, the conferees dropped Senate language thatwould have effectively reversed the President's "Mexico City" abortion-relatedrestrictions placed on international family planning programs during the BushAdministration. The conference agreement further appropriates $34 million for theU.N. Population Fund (UNFPA), but under the same conditions ("Kemp-Kasten"amendment) that has led to the withholding of U.S. contributions to the UNFPA thepast two years because of the organization's program in China.

Introduction

The annual Foreign Operations appropriations bill is the primary legislativevehicle through which Congress reviews and votes on the U.S. foreign assistancebudget and influences major aspects of executive branch foreign policy makinggenerally. (1) It contains the largest share -- abouttwo-thirds -- of total internationalaffairs spending by the United States (see Figure 1 ).

The legislation funds all U.S. bilateral development assistance programs, managed mostly by the U.S. Agency for International Development (USAID),together with several smaller independent foreign aid agencies, such as the PeaceCorps and the Inter-American and African Development Foundations. Mosthumanitarian aid activities are funded within Foreign Operations, including USAID'sdisaster program and the State Department's refugee relief support. ForeignOperations includes separate accounts for aid programs in the former Soviet Union(also referred to as the Independent States account) and Central/Eastern Europe,activities that are jointly managed by USAID and the State Department.

Security assistance (economic and military aid) for Israel and Egypt is also part of the Foreign Operations spending measure, as are other security aid programsadministered largely by the State Department, in conjunction with USAID and thePentagon. U.S. contributions to the World Bank and other regional multilateraldevelopment banks, managed by the Treasury Department, and voluntary paymentsto international organizations, handled by the State Department, are also funded inthe Foreign Operations bill. Finally, the legislation includes appropriations for threeexport promotion agencies: the Overseas Private Investment Corporation (OPIC),the Export-Import Bank, and the Trade and Development Agency.

For nearly two decades, the Foreign Operations appropriations bill has been theprincipal legislative vehicle for congressional oversight of foreign affairs and forcongressional involvement in foreign policy making. Congress has not enacted acomprehensive foreign aid authorization bill since 1985, leaving most foreignassistance programs without regular authorizations originating from the legislativeoversight committees. As a result, Foreign Operations spending measures developedby the appropriations committees increasingly have expanded their scope beyondspending issues and played a major role in shaping, authorizing, and guiding bothexecutive and congressional foreign aid and broader foreign policy initiatives. It hasbeen largely through Foreign Operations appropriations that the United States hasmodified aid policy and resource allocation priorities since the end of the Cold War. The legislation has also been the channel through which the President has utilizedforeign aid as a tool in the global war on terrorism since the attacks of September 11,2001. The appropriations measure has also been a key instrument used by Congressto apply restrictions and conditions on Administration management of foreignassistance, actions that have frequently resulted in executive-legislative clashes overpresidential prerogatives in foreign policy making.

Status

Table 1. Status of Foreign OperationsAppropriations, FY2004

* The House Foreign Operations bill was H.R. 2800 , while the Senate was S. 1426 . Foreign Operations was merged into the conference agreement on H.R. 2673 , the Consolidated Appropriations Act, 2004.

President Bush submitted his FY2004 federal budget request to Congress on February 3, 2003, including funding proposals for Foreign Operations Appropriationsprograms. Subsequently, on March 25, the White House requested FY2003emergency supplemental funds for costs of military operations in Iraq, relief andreconstruction of Iraq, ongoing U.S. costs in Afghanistan, additional aid to coalitionpartners and nations cooperating in the global war on terrorism, and homelandsecurity. House and Senate Appropriations Committees held several hearings onboth the FY2004 and FY2003 supplemental requests, and approved the supplemental( P.L. 108-11 ) on April 12. Subsequently, the Administration requested on September17 another Iraq military operations and reconstruction supplemental for FY2004( H.R. 3289 ) which Congress cleared on November 3 ( P.L. 108-106 ).

For the regular FY2004 Foreign Operations bill, the House Foreign Operations Subcommittee marked up draft legislation on July 11, while the full House panelapproved the legislation on July 16 and reported the measure on July 21. The Housepassed H.R. 2800 on July 23 (370-50). The Senate Committee reportedits companion bill, S. 1426 , on July 17, and passed the measure as H.R. 2800 on October 30. On November 17, a Foreign Operationsconference committee met and reached agreement on most, but not all issues indisagreement. Conferees adjourned pending the resolution of the outstandingmatters, most of which related to international family planning funding and policyissues.

After resolving these remaining issues, however, instead of filing a separate conference report on H.R. 2800 , the House and Senate AppropriationCommittees decided to incorporate the Foreign Operations bill into H.R. 2673 , the Consolidated Appropriations Act, FY2004. H.R. 2673 included seven appropriation bills that had not received final action as separatemeasures. The House approved the conference report on the ConsolidatedAppropriations bill on December 8, followed by the Senate on January 22, 2004. ThePresident signed the bill on January 23.

Foreign Operations Funding Trends

As shown in Figure 2 below, Foreign Operations funding levels, expressed inreal terms taking into account the effects of inflation, have fluctuated widely over thepast 27 years. (2)

After peaking at over $33 billion in FY1985 (constant FY2004dollars), Foreign Operations appropriations began a period of decline to $13.9 billionin FY1997, with only a brief period of higher amounts in the early 1990s due tospecial supplementals for Panama and Nicaragua (1990), countries affected by theGulf War (1991), and the former Soviet states (1993).

Arguing that declining international affairs resources seriously undermined U.S.foreign policy interests and limited the ability of American officials to influenceoverseas events, Clinton Administration officials and other outside groups vigorouslycampaigned to reverse the decade-long decline in the foreign policy budget. Foreignaid spending increased slightly in FY1998, but beginning the following year andcontinuing to the present, Foreign Operations appropriations have trended upwarddue in large part to the approval of resources for special, and in some casesunanticipated foreign policy contingencies and new initiatives. Although funding forregular, continuing foreign aid programs also rose modestly during this period,supplemental spending for special activities, such as Central American hurricanerelief (FY1999), Kosovo emergency assistance (FY1999), Wye River/Middle Eastpeace accord support (FY2000), a counternarcotics initiative in Colombia and theAndean region (FY2000 and FY2002), aid to the front line states in the war onterrorism and Iraq-war related assistance (FY2003), was chiefly responsible for thegrowth in foreign aid appropriations. The average annual funding level during theFY1999-FY2002 period of $17.29 billion represents a level 24% higher than the lowpoint in Foreign Operations appropriation in FY1997.

Although Foreign Operations appropriations had been rising for five consecutive years, amounts approved in FY2003 and FY2004 have reached unprecedented levelsover the past 40 years. Regular appropriations approved in these two years haveroughly been on par with amounts of the previous few years. But substantialsupplementals of $7.5 billion and $21.2 billion, respectively, for assistance to thefront line states in the war on terrorism and Afghanistan and Iraq reconstruction, havepushed spending upward. The regular Foreign Operations bill, signed by thePresident on January 23, 2004, combined with an earlier Iraq supplemental approvedin November 2003 ( P.L. 108-106 ), bring current year appropriations to $38.7 billion,the highest level, in real terms, since the early 1960s.

Supplemental resources for Foreign Operations programs, which in FY2004 exceed the regular funding amount, have become a significant channel of funding forU.S. international activities. Due to the nature of rapidly changing overseas eventsand the emergence of unanticipated contingencies to which it is in the U.S. nationalinterest to respond, it is not surprising that foreign aid and defense resources fromtime to time are the major reason for considering and approving supplementalspending outside the regular appropriation cycle. Supplementals have providedresources for such major foreign policy events as the Camp David accords (FY1979),Central America conflicts (FY1983), Africa famine and a Middle East economicdownturn (FY1985), Panama and Nicaragua government transitions (FY1990), theGulf War (FY1991), and Bosnia relief and reconstruction (FY1996).

Table 2. Foreign Operations Appropriations, FY1995 to FY2004 (discretionary budget authority in billionsof current and constant dollars)

Notes: FY1999 excludes $17.861 billion for the IMF; FY2004 includes $19.42 billion for Iraq reconstruction. Without Iraq funds, FY2004 totals $19.27 billion.

But after a period of only one significant foreign aid supplemental in eight years,beginning in FY1999 Congress has approved Foreign Operations supplementalappropriations exceeding $1 billion in each of the past six years. Relief for CentralAmerican victims of Hurricane Mitch, Kosovo refugees, and victims of the embassybombings in Kenya and Tanzania in FY1999 totaled $1.6 billion, and was followedin FY2000 by a $1.1 billion supplemental, largely to fund the President's newcounternarcotics initiative in Colombia. As part of a $40 billion emergencysupplemental to fight terrorism enacted in September 2001, President Bush andCongress allocated $1.4 billion for foreign aid activities in FY2001 and FY2002. Another $1.15 billion supplemental cleared Congress in FY2002 to augment Afghanreconstruction efforts and assist other "front-line" states in the war on terrorism.

Until FY2003, these additional resources have accounted for between 7% and 11% of total Foreign Operations spending. The $7.5 billion Iraq War supplementalfor FY2003, however, went well beyond these standards, representing nearlyone-third of the FY2003 Foreign Operations budget, and surpassed, as noted above,only by FY2004 supplemental appropriations.

As a share of the entire $2.24 trillion U.S. budget for FY2003, Foreign Operations represented a 1.06% share, significantly higher than the traditional levelof around 0.75%. This was due largely to enactment of the $7.5 billionsupplemental for Iraq reconstruction, aid to coalition partners, and assistance to otherfront-line states in the war on terrorism. The total FY2004 Foreign Operationsappropriation level, including the Iraq and Afghanistan reconstruction supplemental,is projected to further increase foreign aid as a percent of U.S. federal spending to1.66%. As a portion of discretionary budget authority -- that part of the budgetprovided in annual appropriation acts (other than appropriated entitlements) -- Foreign Operations consumed 2.8% in FY2003, a level that will rise significantly toabout 4.45% in FY2004. By comparison, at the previous high point of ForeignOperations spending in FY1985, foreign aid funds represented 2% of the total U.S.budget and 4.6% of discretionary budget authority.

Foreign Operations, the FY2004 Budget Resolution, and Sec. 302(b) Allocations

Usually, Appropriations Committees begin markups of their spending bills only after Congress has adopted a budget resolution and funds have been distributed to theAppropriations panels under what is referred to as the Section 302(a) allocationprocess, a reference to the pertinent authority in the Congressional Budget Act. Following this, House and Senate Appropriations Committees separately decide howto allot the total amount available among their 13 subcommittees, staying within thefunctional guidelines set in the budget resolution. This second step is referred to asthe Section 302(b) allocation. Foreign Operations funds fall within the InternationalAffairs budget function (Function 150), representing in most years about 65% of thefunction total. Smaller amounts of Function 150 are included in four otherappropriation bills.

How much International Affairs money to allocate to each of the five subcommittees, and how to distribute the funds among the numerous programs aredecisions exclusively reserved for the Appropriations Committees. Nevertheless,overall ceilings set in the budget resolution can have significant implications for thebudget limitations within which the House and Senate Foreign Operationssubcommittees will operate when they meet to mark up their annual appropriationbills.

On April 11, 2003, the House and Senate agreed to a budget framework for FY2004 ( H.Con.Res. 95 ) that included $784.7 billion in discretionarybudget authority. The discretionary budget authority target for the InternationalAffairs function was $28.65 billion, the same as the President's request (asre-estimated by CBO). This means that the House and Senate AppropriationsCommittees received sufficient resources to fully fund the Administration's foreignpolicy budget proposal, including the Foreign Operations request.

The Committees, however, could choose to allocate the $28.65 billion among the five subcommittees with jurisdiction over the International Affairs programsdifferently than what the President proposed or to alter the overall amount for foreignpolicy activities. Depending on other competing priorities, the final allocations canbe quite different from those assumed in the budget resolution.

For a number of weeks following passage of H.Con.Res. 95 , Appropriation Committee leaders debated how to distribute the discretionary fundsunder their jurisdiction, and especially how to absorb what they identified as aroughly $5 to $7 billion gap in spending requirements and amounts available. Departing from traditional practices where House and Senate Committees workseparately on subcommittee allocations, Committee leaders negotiated across bothhouses with their leadership and with the White House to establish a commonframework within which to base their initial allocations.

On June 11, House and Senate Appropriations Committee Chairmen announced an agreed package which would free-up sufficient resources to address the fundinggap and remain within the overall FY2004 discretionary budget cap of $784.7 billion. As approved by all parties, including the President, the Appropriations Committeesreduced Defense spending by $3 billion and moved $2.2 billion in FY2004 advanceappropriations to FY2003.

The House Appropriations Committee, which also released its allocation for all 13 subcommittees on June 11, made further alternations beyond the basic framework. The Committee's distribution added funding beyond the President's request forseveral subcommittees, including Homeland Security (up $1 billion), VA/HUD (up$600 million), and Commerce, Justice, and State (up $229 million). In addition tothe $3 billion reduction for Defense, the House Committee further cut ForeignOperations by $1.769 billion to $17.12 billion. This 9.4% cut from the President'srequest was the largest percentage reduction for any of the 13 subcommittees.

The Senate Appropriations Committee on June 19 agreed to its allocations, differing from House levels in several areas, including Foreign Operations. TheSenate panel provided $18.09 billion for foreign assistance, an amount that wassubsequently raised to $18.446 billion on October 29 in order to accommodate additional funds for international HIV/AIDS. The Senate amount was about $450million, or 2.3%, below the President's request, but $1.3 billion more than the House.

Although Senate levels were easier to accommodate, conferees meeting to resolve funding and other differences between the two bills received a relatively lowrevised allocation of $17.2 billion. The actual reduction to the executive's budgetproposal, however, is unlikely to be as significant as a comparison between therequest -- $18.9 billion -- and the final allocation. Congress included in the Iraqreconstruction supplemental ( P.L. 108-106 ) roughly $700 million in additional fundsfor Pakistan, Jordan, and Afghanistan that will allow the President to fully fund the FY2004 proposals for these countries using resources from both the supplementaland the regular Foreign Operations measure. As such, less money will need to bedrawn for these country aid programs from the Foreign Operations bill than originallyanticipated. Moreover, during final negotiations over the conference agreement of H.R. 2673 , the Consolidated Appropriations Act, 2004, to whichForeign Operations became attached, conferees added $350 million for theMillennium Challenge Account, an amount that is in addition to the $17.2 billionallocation. Consequently, taking into account funding in the supplemental plus theadd-on for the MCA, the cut to the President's overall request may be closer to $1billion, or 5%.

Nevertheless, a cut of this size for Foreign Operations required substantial trade-offs among Administration priorities as well as foreign aid programs of highinterest to Congress. With most of the Foreign Operations increases slated for newinitiatives, including the Millennium Challenge Account and the Global AIDSprogram, cuts were necessary for some of these new proposals and for continuingactivities. During several months of debate, the White House repeatedly emphasizedthat the budget package should not reduce funding for his top spending priorities. The White House had been most critical of proposed reductions for the MillenniumChallenge Account and successfully convinced House-Senate conferees to restoresome of the 50% cut initially recommended by the conference agreement on H.R. 2800 .

Foreign Operations Appropriations Request for FY2004 and Congressional Consideration

Request Overview

On February 3, 2003, President Bush asked Congress to appropriate $18.89 billion for FY2004 Foreign Operations. The budget proposal was $2.7 billion, or16.7% higher than regular Foreign Operations appropriations for FY2003, as enactedin P.L. 108-7 . If enacted, the President's recommendation would have resulted inone of the largest increases of regular (non-supplemental) Foreign Operationsfunding in several decades. Congress subsequently approved in mid-April anadditional $7.5 billion FY2003 supplemental foreign aid spending in P.L. 108-11 , forIraq reconstruction, assistance to coalition partners, and other activities supportingthe global war on terrorism. Including the supplemental brought Foreign Operationsappropriations in FY2003 to $23.67 billion.

The FY2004 budget blueprint continued to highlight foreign aid in support of the war on terrorism as the highest priority. But a notable characteristic of thesubmission was the request for funding four new foreign aid initiatives whichtogether accounted for most of the $2.7 billion increase over regular FY2003 levels. Combined, the Millennium Challenge Account (a new structure for delivering foreignaid), the State Department's Global AIDS Initiative, and two new contingency funds(Famine and Complex Crises), totaled $2.05 billion. Other Foreign Operationsprograms were left with a more modest 4% increase.

Table 3. Foreign Operations New Initiatives FY2004

* Enacted regular appropriations. Excludes $7.5 billion appropriated for Foreign Operations and food aid in the Iraq War supplemental ( P.L. 108-11 ).

Fighting the War on Terrorism. Since the terrorist attacks in September 2001, American foreign aid programs haveshifted focus toward more direct support for key coalition countries and globalcounter-terrorism efforts. In total, Congress appropriated approximately $17.9billion in FY2002 and FY2003 Foreign Operations funding to assist the 26"front-line" states in the war on terrorism, implement anti-terrorism trainingprograms, and address the needs of post-conflict Iraq and other surroundingcountries. Nearly half of all Foreign Operations appropriations the past two years hasgone for terrorism or Iraq war-related purposes.

The FY2004 budget continued the priority of fighting terrorism with $4.7 billion, or 25% of Foreign Operations resources assisting the front-line states. Unlikea year ago when the President's FY2003 budget was viewed by many as aninadequate request, especially for Afghanistan, the FY2004 proposal includedsubstantial aid packages for a number of the front-line states. Although the levels formost countries would not increase much beyond what was provided from regular FY2003 foreign aid funding, the request largely sustained amounts that had grownsubstantially during the past two years. Anti-terrorism training and technicalassistance programs also would rise by 45% above FY2003 levels.

The FY2004 submission did not, however, include follow-on funding for Iraq relief and reconstruction. Congress approved $2.5 billion in FY2003 supplementalresources, an amount many viewed as a down payment of long-term needs in Iraq. With great uncertainty surrounding the costs of Iraq reconstruction, how much of thefinancial burden the United States will shoulder, and the process by thereconstruction operations will be managed, the Administration did not amend itspending FY2004 request to include additional amounts. Instead, the White Houseproposed in September 2003 a $21.5 billion supplemental spending package for Iraqreconstruction and additional aid for Afghanistan. (See discussion below regardingIraq and Afghanistan reconstruction funding issues.)

New Initiative: The Millennium Challenge Account. The largest of the new initiatives was the MillenniumChallenge Account (MCA), a program designed to radically transform the way theUnited States provides economic assistance to a small number of "best performing"developing nations. The request for FY2004 was $1.3 billion with a promise that theMCA will grow to $5 billion by FY2006 and remain at least at that level in thefuture. Some MCA supporters argued that the FY2004 level was too low, saying thatthe President pledged to implement the initiative in equal installments over threeyears and that an appropriation of $1.67 billion was what they had anticipated. TheAdministration said that the added MCA funding would be in addition to and not asubstitute for existing U.S. economic aid, but development advocates were concernedthat given the tight budget environment, trade-offs between regular economicprograms and the MCA might be required. (See separate page under Funding andPolicy Issues for more discussion of the MCA.)

New Initiative: The Global AIDS Initiative. In his January 2003 State of the Union address, PresidentBush pledged to substantially increase U.S. financial assistance for preventing andtreating HIV/AIDS, especially in the most heavily inflicted countries in Africa andthe Caribbean. The President promised $15 billion over five years, $10 billion ofwhich would be money above and beyond current funding. The Global AIDSInitiative, which will be housed in the State Department, represented a portion of thatpledge -- $450 million in FY2004 -- that when combined with other resourcesmanaged by USAID and the Department of Health and Human Services (HHS),would raise total international HIV/AIDS resources in FY2004 to about $1.9 billion. Some observers noted, however, that this fell well short of the anticipated $3 billionper year implied in the President's speech and would represent only $500 million innew money to fight AIDS above the FY2003 level. Some further questioned whetherthe State Department should be coordinator of international HIV/AIDS programs, asenvisioned in the Initiative, rather than USAID or HHS. (See separate page underFunding and Policy Issues for more discussion of the Global AIDS Initiative.)

New Initiative: The Famine Fund. This new contingency fund, with $200 million requested for FY2004, would allowthe Administration to provide, under more flexible authorities, emergency food andother disaster relief support as needs arise. Executive officials argued that greaterflexibility would permit them to respond rapidly to the human consequences ofnatural disasters and conflict without having to divert resources from other economicaid accounts. Critics noted, however, that the existing international disasterassistance account and P.L. 480 food aid program, plus legislative authorities thatallow for temporary borrowing of funds from other aid accounts, perform the samefunctions as the proposed Famine Fund and questioned whether it is necessary.

New Initiative: The U.S. Emergency Fund for Complex Crises. The Administration proposed to establish withinthe Executive Office of the President a $100 million contingency fund allowing theUnited States to respond quickly to unforseen complex foreign crises. The resourceswould not be used to address victims of natural disasters, but rather would supportpeace and humanitarian intervention in conflict situations, including acts of ethniccleansing, mass killing, or genocide. In the past, Congress has been reluctant toapprove this type of contingency fund over which it can apply little oversight. TheAdministration had asked lawmakers to launch the Complex Crisis Fund with $150million as part of the FY2003 Iraq War supplemental. Congress, however, chose todefer consideration of establishing such a Fund until the FY2004 appropriation cycle,and instead allocated the requested resources among various accounts for Iraqreconstruction and aid to regional states affected by the war.

Other Key Elements of the FY2003 Request. Beyond these specific and prominent issues, the ForeignOperations proposal for FY2004 sought to substantially increase aid activities in afew areas while cutting resources for several programs. Significant appropriationincreases when compared with regular FY2003 appropriations (excluding the IraqWar supplemental) included:

Security assistance -- Economic Support Fund and Foreign Military Financing. These two core security aid accounts that aim to supportcountries strategically important to the U.S., would have grown by a combined $648million, or 10% above regular FY2003 levels. Much of the add-on was targeted fora $250 million security aid package for Turkey and a $145 million new Middle EastPartnership Initiative.

Peace Corps funding would have risen by $64 million, or 22% in an effort to place 10,000 volunteers by the end of FY2004 and to keep on track thePresident's longer term plan of having 14,000 Americans serving in the Peace Corpsby FY2007.

Contributions to the World Bank and other international financial institutions would have grown by $259 million, or 17%, covering allscheduled U.S. payments to the multilateral development banks, plus clearing $196million of U.S. arrears owed to these institutions. The request further included an18% increase for the World Bank's International Development Association and theAfrican Development Fund as a "results-based Incentive Contribution" that had beenpromised last year if the banks implemented certain reforms.

Debt reduction , which received no funding in FY2003 except by a transfer of $40 million from another aid account, would have grown to $395million under the Administration's budget submission. There were three componentsto the request: $300 million to cancel bilateral debt owed by the Democratic Republicof the Congo under the Heavily Indebted Poor Country (HIPC) initiative; $75 millionas a contribution to the HIPC Trust Fund to make up for unanticipated shortfalls inimplementing the program; and $20 million for the Tropical Forestry Conservationdebt relief activity.

International narcotics control would have grown by $89 million, or 45%, largely to expand significantly programs in Pakistan and Mexico. The Administration further sought $731 million for the Andean CounterdrugInitiative (ACI), an increase from the $700 million regular appropriation for FY2003. The ACI proposal would have generally restored amounts that were cut from theFY2003 request for Colombia, Ecuador, Brazil, Venezuela, and Panama.

The largest reduction proposed in the President's Foreign Operations budget targeted assistance to Former Soviet states and Eastern Europe . Collectively, aidto these countries would have declined by $179 million, or 24% from FY2003 levels. The request reflected a reorientation in the former Soviet aid account to focus moreon Central Asian states, linked to the war on terrorism, and to begin the process ofgraduation for Russia and Ukraine. Aid to these two nations would have fallen by40% from FY2003 allocations. The request further would have cut Armenia's aidby nearly half, from $89 million to $49 million. For Eastern Europe, aid levelswould have fallen for nearly every recipient, with some of the largest reductionsscheduled for Serbia, Montenegro, and Macedonia.

Funding for the Export-Import Bank would also have declined under the President's budget -- from $565 million to $43 million in FY2004 (as re-estimatedby CBO). But because of substantial "carry-forward" resources that were not spentin prior years, Eximbank officials said that Bank lending could total $14.6 billion inFY2004, which was at least $2 billion higher than the anticipated level for FY2003.

Assessing the Administration's request for bilateral development and health assistance was more complicated and led to varying interpretations. Withimplementation of the President's new Global AIDS Initiative in FY2004,development and health resources, including funds from USAID's "core" accountsfor development assistance and child survival/health, and the State Department'sGlobal AIDS Initiative, would have increased by $205 million, or 6.4% over regularFY2003 levels. Depending on the purposes for which Millennium ChallengeAccount funds are spent, further additions to development and health programs would also be expected from MCA allocations.

But excluding the new Global AIDS Initiative and MCA from the equation, overall funding for USAID's two "core" accounts would have declined in FY2004by a combined $245 million, or 7.6%. The implication of this reduction was thatwith the exception of HIV/AIDS, nearly all other development programs, includingthose for agriculture, basic education, family planning, malaria and tuberculosis, anddemocracy programs would have been at or slightly below amounts allocated forFY2003. Some critics charged that this violated the executive's pledge that MCAfunding would be in addition to and not in place of continuing economic aidprograms. Others expressed concern that the growth in HIV/AIDS resources cameat the expense of other key health activities for which resources would decline.

Table 4. Summary of Foreign OperationsAppropriations (Discretionary funds -- in millions of dollars)

Source: House Appropriations Committee and CRS calculations.

* FY2002 levels include $15.346 billion in regular Foreign Operations appropriations enacted in P.L. 107-115 plus $1.1 billion (net $50 million inrescissions), provided in P.L. 107-206 , the FY2002 emergency supplementalappropriation. FY2003 regular includes amounts provided in P.L. 108-7 and areadjusted for a 0.65% across-the-board rescission required by the Act. FY2003supplemental includes amounts provided in P.L. 108-11 .

Leading Foreign Aid Recipients Proposed for FY2004

Israel and Egypt remain the largest U.S. aid recipients, as they have been for many years. However, in the aftermath of the September 11 terrorist attacks, foreignaid allocations have changed in several significant ways. The request, andsubsequently the allocations for FY2004 largely continued the patterns of aiddistribution of the past two years.

Since September 11, the Administration has used economic and military assistance increasingly as a tool in efforts to maintain a cohesive internationalcoalition to conduct the war on terrorism and to assist nations which have bothsupported U.S. forces and face serious terrorism threats themselves. Pakistan, forexample, a key coalition partner on the border with Afghanistan, had been ineligiblefor U.S. aid, other than humanitarian assistance, due to sanctions imposed after Indiaand Pakistan conducted nuclear tests in May 1998 and Pakistan experienced amilitary coup in 1999. Since lifting aid sanctions in October 2001, the United Stateshas transferred over $1.9 billion to Pakistan. Jordan, Turkey, Indonesia, thePhilippines, and India also are among the top aid recipients as part of the network of"front-line" states in the war on terrorism.

The other major cluster of top recipients are those in the Andean region where the Administration maintains a large counternarcotics initiative that combinesassistance to interdict and disrupt drug production, together with alternativedevelopment programs for areas that rely economically on the narcotics trade. Several countries in the Balkans and the former Soviet Union -- Serbia andMontenegro, Kosovo, Russia, Ukraine, Armenia, and Georgia -- would continue tobe among the top recipients, although at somewhat lower funding levels.

Table 5. Leading Recipients of U.S. Foreign Aid

Source: U.S. Department of State.

Note : FY2002 includes funds allocated from the regular Foreign Operations appropriation, plusfunds drawn from the Emergency Response Fund appropriated in P.L. 107-38 and allocatedfrom the FY2002 Supplemental Appropriation ( P.L. 107-206 ). FY2003 regular appropriationincludes amounts allocated from the Foreign Operations Appropriation, FY2003 ( P.L. 108-7 ). FY2003 supplemental includes funds allocated from the Iraq War Supplemental ( P.L. 108-11 ). FY2004 regular appropriation includes amounts allocated from the ConsolidatedAppropriations, FY2004 ( P.L. 108-199 ). FY2004 supplemental includes funds allocated fromthe P.L. 108-106 .

House Consideration

On July 23, the House passed (370-50) a $17.12 billion spending bill -- H.R. 2800 -- for FY2004 foreign aid programs. The amount was $1.8billion, or 9.4% below the President's request, but $900 million, or 5.6% higher thanregular (excluding supplemental) Foreign Operations spending approved for FY2003. As one of its top priority, the House Committee approved $1.27 billion forinternational HIV/AIDS, $30 million above the President's request and $390 millionhigher than FY2003 levels. The HIV/AIDS total included $400 million for theGlobal Fund, compared with the President's request of $100 million. Combined withparallel funding approved in the House Labor-HHS spending measure, the House billprovided in both bills $1.9 billion for HIV/AIDS, $20 million less than theAdministration's proposal. Out of this, $500 million would be available as a U.S.contribution to the Global Fund for which the President proposes $200 million. Thebill also restored cuts to bilateral tuberculosis and malaria proposed by the President,increasing spending for non-HIV/AIDS infectious diseases from $104 million to$156 million.

For overall "core" bilateral development programs, including HIV/AIDS and other non-health activities, the House measure was about $140 million higher thanthe President's request and $350 million above regular FY2003 amounts. The House bill, however, reduced non-health programs by nearly $30 million from theAdministration's request and $63 million from FY2003 amounts. This would haveresulted in small cuts for activities such as agriculture, economic growth,environment, and democracy promotion. The House measure, however, placed highpriority on trade capacity building activities, increasing funding to $195 million, $35million higher than in FY2003. Spending on basic education would have also risenunder the House measure, with $259 million specified out of the bilateraldevelopment aid funds. In FY2003, USAID allocated $217 million for basiceducation and requested $212 million for FY2004. Across all Foreign Operationsaccounts, the House bill directed a total of $350 million for basic education.

On other major issues, the House measure:

reduced the President's $1.3 billion request for the new Millennium Challenge Account to $800 million.

set family planning resources at $425 million asrequested

provided $25 million for the U.N. Population Fund (UNFPA) ,but with conditions that could reduce or eliminate thecontribution.

fully funded at the requested levels amounts for Israel, Egypt,and Jordan .

provided $731 million for the Andean CounterdrugInitiative , as proposed, but reduced by $43 million funding for regularcounternarcotics programs.

set Peace Corps funding at $314 million, $19 million higherthan FY2003 levels but $45 million under the Administration's budget.

provided $576 million for the former Soviet Union , asrequested, but $179 million less than FY2003.

increased the President's request for East European assistanceby $17 million, with the additional funds set for Bosnia, Serbia, andMontenegro.

included current contributions for several multilateraldevelopment banks, including the World Bank's International DevelopmentAssociation (IDA) and the Global Environment Fund , but excluded arrearagepayments and "incentive" contributions for IDA and the African Development Banksought by the Administration.

excluded funds for two new Presidential contingency fundsfor Famine and emergency complex crises . The House bill, however, increasedinternational disaster assistance to $315.5 million, directing that $80 million be usedfor famine relief, prevention, and mitigation.

deleted $300 million sought for extending debt relief to theDemocratic Republic of Congo. The legislation, however, fully funds the requestsfor HIPC debt relief and for tropical forest conservation.

During House floor debate on July 16, lawmakers adopted several amendments to H.R. 2800 , including:

a proposal by Congressman Kolbe to clarify the role of the new State Department HIV/AIDS Coordinator, with the intent to grant the Coordinatoradequate authority to "coordinate" U.S. government efforts to combat AIDS globallywhile allowing the traditional agencies that have managed such programs for manyyears -- USAID and the Centers for Disease Control and Prevention -- to continuetheir work without excessive micromanagement by theCoordinator.

an amendment by Congressman Hefley that reduced funding for the International Military Education and Training (IMET) program by $600,000. The intent of the proposal was to cut IMET assistance to Indonesia because of lackof progress in the investigation of an August 2002 ambush that left two Americansand an Indonesian from an international school dead. Some believe the Indonesianmilitary may have been involved. While cutting the IMET account by the amountrequested for Indonesia, the amendment itself did not limit the State Department'sability to fund an IMET program for Indonesia in FY2004.

a proposal by Congresswoman Bigger to authorize U.S. participation in the 13th replenishment of the International Development Association(IDA), the World Bank's concessional lending facility. Congress approved fundingfor IDA-13, including $850 million in H.R. 2800 , but the money couldnot be transferred without a congressional authorization.

an amendment by Congressman Alcee Hastings stating a sense of Congress that the President should use all diplomatic tools available to ensure thatNorth Korea does not engage in the proliferation of nuclearweapons.

A central theme of House debate -- both on the floor and in Committee -- were efforts to increase assistance proposed in the bill for Africa, especially to increasefunding for HIV/AIDS, malaria, and tuberculosis from the roughly $2 billion levelcontained in Foreign Operations and Labor, HHS, and Education appropriation billsto something closer to the $3 billion amount Congress previously authorized in P.L.108-25 . Although numerous amendments were offered and debated, none wereadopted. Among specific proposals considered to increase aid to Africa andprograms combating HIV/AIDS were:

a Congresswomen Lowey amendment at full Committee markup to add $1 billion in "emergency" funds (an amount that would not countagainst the bill's spending cap) for additional HIV/AIDS programs, much of whichwould be delivered in Africa, failed 28-33;

a Committee amendment proposed by Congresswomen Kilpatrick to transfer $500 million from the Millennium Challenge Account toHIV/AIDS lost 27-28. Amendment supporters argued that the MCA could not utilizeall funds appropriated in H.R. 2800 in the first year, and that Africawould benefit more from HIV/AIDS programs than from MCA resources for whicha few African countries might qualify. A similar amendment to transfer $300 millionfrom the MCA to HIV/AIDS lost during House floor debate(192-228).

an amendment by Congressman Jackson in Committee markup to shift $200 million from the MCA to HIV/AIDS and provide $588 million in"emergency" funding for more African economic assistance, Congo debt relief, anda higher amount for the African Development Fund failed on a voice vote. A similarproposal by Congressman Jackson was ruled out of order during Housedebate.

a House floor amendment by Congressman McGovern to shift $75 million from the Andean Regional Initiative to HIV/AIDS programs lost on avote of 195-226.

Senate Consideration

On October 30, the Senate approved an $18.38 billion spending bill for FY2004 foreign aid programs. (The Senate Appropriations Committee had approved anoriginal bill, S. 1426 , on July 17 but passed the House bill, H.R. 2800 , with numerous amendments.) The amount was $500million, or 2.7%, below the President's request, but $2.2 billion higher than regular(excluding supplemental) Foreign Operations spending approved for FY2003. Because of a higher "302(b) allocation," S. 1426 was nearly $1.3 billionmore than the House bill.

As one of its top priorities, the Senate provided $1.47 billion for international HIV/AIDS, about $230 million above the President's request and $590 million higherthan FY2003 levels. The HIV/AIDS total included as much as $250 million for theGlobal Fund, compared with the President's request of $100 million. (The Presidentalso requested $100 million for the Global Fund in the Labor/HHS appropriationmeasure.) Unlike the House bill, the Senate included HIV/AIDS funds in both theChild Survival/Health (CS/H) and Global AIDS Initiative accounts. The GlobalAIDS Initiative account was a new request for FY2004, funding programs managedby a new State Department Coordinator. The House bill kept nearly all HIV/AIDSfunds in the CS/H account, consistent with past practice. The Senate-passed bill alsorestored cuts to bilateral tuberculosis and malaria proposed by the President,increasing spending for non-HIV/AIDS infectious diseases from $104 million to$185 million.

The issue of funding for HIV/AIDS became one of the primary issues of debate during Senate floor consideration. The Senate approved an amendment by SenatorDewine, increasing total resources by $287 million. The Senate, however, rejected proposals by Senator Durbin to add $200 million more for HIV/AIDS, and bySenator Bingaman to boost spending by $200 million, with a corresponding reductionof $200 million for the Millennium Challenge Account.

For overall "core" bilateral development programs, including HIV/AIDS, other non-health activities, and UNICEF contributions, the Senate measure was about $550million higher than the President's request and $415 million above the House bill.Besides increasing health programs, the Senate bill also added to the request for otherdevelopment activities, providing about $80 million more than requested and over$100 million more than the House. Basic education programs received $220 millionunder H.R. 2800 , as approved in the Senate, while environmentalactivities ($485 million) and microenterprise ($180 million) were other areasemphasized in the Senate bill that are above the President's request.

On other major issues, the Senate bill:

reduced the President's $1.3 billion request for the new Millennium Challenge Account to $1 billion. The Senate further attachedlegislation authorizing the MCA, drawing text from S. 925 , which hadbeen debated, amended, but not passed by the Senate inmid-July.

set family planning resources at $445 million, $20 millionhigher than the request.

included text that would effectively overturn the President's "Mexico City" abortion-related restrictions .

provided $35 million for the U.N. Population Fund (UNFPA) ,but with conditions that could reduce or eliminate thecontribution.

fully funded at the requested levels amounts for Israel, Egypt,and Jordan .

reduced to $660 million funding for the Andean CounterdrugInitiative , but provided full funding for regular counternarcoticsprograms.

set Peace Corps funding at $310 million, $15 million higherthan FY2003 levels but $49 million under the Administration'sbudget.

provided $596 million for the former Soviet Union , $20million above the request and roughly the same as for FY2003. The additional fundswould off-set proposed reductions for Russia and Armenia.

increased the President's request for East European assistanceby $10 million.

provided the total request, including arrears payments and an"incentive" contribution for the World Bank's International DevelopmentAssociation (IDA). Most other multilateral development bank contributions wereset at or near the President's request.

appropriated $100 million for one of the two new Presidentialcontingency accounts -- the Famine Fund -- but deletes funding for theemergency complex crises fund .

provided $100 million of $300 million sought for extending debt relief to the Democratic Republic of Congo. S. 1426 allocatedfunds sought for Congo debt relief for other pressing needs in Africa. Thelegislation, however, fully funded the requests for HIPC debt relief and for tropicalforest conservation.

Conference Agreement

On November 17, a conference committee on the Foreign Operations bill met and reached agreement on most, but not all issues in disputes. Conferees adjournedpending the resolution of the outstanding matters, most of which related tointernational family planning funding and policy issues. Subsequently,Appropriation Committee leaders merged the Foreign Operations measure into theconference agreement on H.R. 2673 , the Consolidated AppropriationsAct, 2004. The text of the Foreign Operations bill can be found in Division D of H.R. 2673 , while an additional appropriation for one Foreign Operationsaccount -- the Millennium Challenge Corporation -- can be found as Section 134of Division H. On December 8, the House passed H.R. 2673 , with theSenate following on January 22, 2004. The President signed the consolidatedappropriation on January 23 ( P.L. 108-199 ).

The conference agreement on H.R. 2673 provides $17.48 billion for Foreign Operations, a figure that includes a 0.59% across-the-board rescissionand additional amounts for the Millennium Challenge Account specified in DivisionH of the bill. This represents a $1.4 billion, or an 7.5% reduction from thePresident's request, but $1.3 billion, or 7.9% higher than approved in regular ForeignOperations spending for FY2003.

The actual reduction to the executive's budget FY2004 proposal, however, is unlikely to be as significant as this comparison suggests. Congress included in theIraq reconstruction supplemental ( P.L. 108-106 ) $300 million for Pakistan andJordan, amounts that were not requested, plus higher funding than proposed forAfghanistan. Further, the conference agreement on H.R. 2673 includesauthority for the President to transfer $130 million from Iraq reconstruction funds in P.L. 108-106 for economic aid for Turkey ($100 million) and the Middle EastPartnership Initiative ($30 million). Consequently, by utilizing these additional fundsand transfer authorities for requested regular Foreign Operations programs, thePresident could use about $550 million to fund his original FY2004 proposal withoutdrawing on the $17.48 billion provided in H.R. 2673 . If theAdministration chooses to utilize these resources, the difference between the FY2004request and the conference agreement would be about $850 million, or a 4.5% cut. (Note that figures mentioned below for specific programs are the actual amountappropriated in H.R. 2673 , and do not reflect the 0.59% rescission thatwill be applied to each item.)

Despite the overall reduction, the conference agreement increases spending for international HIV/AIDS, malaria, and tuberculosis programs to $1.646 billion. Whenthis amount is combined with appropriations in the pending Labor/HHS/Educationappropriation (Division E of H.R. 2673 ), the total for global HIV/AIDS,malaria, and tuberculosis is $2.4 billion, or roughly $400 million above thePresident's request. Conferees further agreed to a $400 million contribution to theGlobal Fund for AIDS, Malaria, and Tuberculosis that together with $150 million inDivision E would bring the total level to $550 million, rather than theAdministration's $200 million proposal.

The conference agreement further authorizes and appropriate funds for the Millennium Challenge Account (MCA), one of the top Presidential aid initiatives. Division D of H.R. 2673 provides $650 million for the MCA, whileDivision H includes an additional $350 million, for a total MCA appropriation of $1billion. The President had proposed $1.3 billion for the MCA, a program that isplanned to grow to $5 billion by FY2006.

On another major policy matter, the conferees dropped Senate language that would have effectively reversed the President's "Mexico City" abortion-relatedrestrictions placed on international family planning programs during the BushAdministration. The conference agreement further appropriates $34 million for theU.N. Population Fund (UNFPA), but under the same conditions ("Kemp-Kasten"amendment) that has led to the withholding of U.S. contributions to the UNFPA thepast two years because of the organization's program in China. The Senate bill hadrecommended changes in the Kemp-Kasten conditions. The White House had saidthe President would veto the bill if either of the Senate provisions on internationalfamily planning had remained in the final bill. The conference agreement alsoprovides for $432 million for bilateral family planning assistance, a compromisebetween the $425 million proposed by the President and passed by the House, and$445 million recommended by the Senate.

In other decisions made by conferees, the final Foreign Operations bill includes:

$3.2 billion for USAID's "core" aid accounts of ChildSurvival/Health and Development Assistance, $380 million higher than therequest.

$255 million for international disaster and famine aid, rejecting the proposal to establish a separate Famine Fund account.

$326.5 million across all accounts for basic education programs, an increase over the President's approximate request of $303.5million.

$731 million for the Andean Counter Drug Initiative, as requested.

full funding for the President's requests for aid to Israel, Egypt, and Jordan.

$405 million for Afghanistan, an amount that could be lowered from the $600 million earmarked in both House and Senate bills because of additionsmade in the Iraq/Afghanistan reconstruction supplemental.

$325 million for the Peace Corps, including a $15 million transfer from the HIV/AIDS account.

$95 million for debt reduction, including full funding for "topping up" the HIPC initiative and for the Tropical Forest debt program, but nofunds for bilateral debt forgiveness for the Democratic Republic ofCongo.

$913 million for the World Bank's International Development Association (IDA), an amount that will fully fund the first U.S. contribution to thenew IDA replenishment but which will provide no funds to cover past paymentarrears ($27 million) and only partially fund with $63 million the President's $100million "incentive" contribution for IDA managementreforms.

Iraq War Supplemental for FY2003 and Foreign Operations Funding

On March 25, 2003, the President requested a nearly $75 billion FY2003supplemental that included $7.6 billion for near-term Iraq reconstruction and relief,additional aid to coalition partners and other states cooperating in the global war onterrorism, and related USAID administrative expenses. By comparison, thesupplemental request totaled a little less than half of the $16.2 billion appropriatedpreviously by Congress for FY2003 Foreign Operations activities. The proposal, asdetailed below in Table 6, was roughly divided into two components: Iraq relief andreconstruction (about $2.85 billion) and aid to coalition partners and other nationsengaged in the war on terrorism (about $4.7 billion). (3)

Reconstruction Efforts

Normally, it would be presumed that transfers for reconstruction and post-conflict aid would be made to USAID, the State Department, and othertraditional foreign assistance management agencies. But with plans for the DefenseDepartment to oversee the governing of Iraq immediately after the end of hostilities,the proposal stimulated immediate controversy. A number of critics, includingMembers of Congress, argued that aid programs should remain under the policydirection of the State Department and under the authorities of a broad andlongstanding body of foreign aid laws. They pointed out that during other recentreconstruction initiatives in Bosnia and Kosovo, resources and policy decisionsflowed through the Secretary of State. Others argued that groups which would playa significant role in post-war rehabilitation efforts -- non-governmentalorganizations (NGOs), foreign donors, and international organizations -- would bereluctant to take direction and funding from the U.S. military. This, they contended,would hamper relief activities.

Furthermore, the placement of reconstruction funding in a Presidential account appeared to grant the White House significant discretion in responding to changingand unanticipated demands, unencumbered by specific programmatic allocations. The Administration said only that $543 million would cover humanitarian expenses,$1.7 billion would be set aside for reconstruction needs, and up to $200 millionwould be available to reimburse foreign aid accounts from which funds were drawnprior to the conflict.

As with other parts of the supplemental dealing with defense and homeland security resources, the White House wanted to maintain maximum flexibility overthe distribution of the appropriations so that it could respond to changingcircumstances and unanticipated contingencies. Executive officials, whoacknowledged that some or all of the funding would be transferred to DOD, arguedthat the military would be best situated following the conflict to immediately launchthe reconstruction efforts. Moreover, the Administration noted that the Defenseoffice in charge of reconstruction operations would most likely re-direct most of theresources to the State Department and USAID who would then be responsible formanaging rehabilitation projects. Officials further argued that it was too early toidentify specific reconstruction activities and that it was possible to only provide themost general outlines of how the money would be spent until assessment teams couldreport on the extent of needs throughout the country.

Congressional Action on Iraq Reconstruction. As cleared by Congress, H.R. 1559 appropriated $2.475 billion for the Relief and Reconstruction Fund, slightly higherthan requested. The President was able to apportion Fund resources directly to fivefederal agencies: the Departments of Defense, State, Health and Human Services,Treasury, and USAID. Subsequently the funds were allocated to the CoalitionProvisional Authority, headed by Ambassador Paul Bremer, who reports to theSecretary of Defense. In previous congressional debate, the House and Senate hadeach expressed their expectations that these funds would be channeled to theSecretary of State, and in most instances, further directed to USAID. The reportaccompanying S. 762 specifically noted that the funds were not expectedto be transferred to the Secretary of Defense. Nevertheless, the White Housecontinued to argue for greater flexibility and authority to place reconstructionresources under DOD auspices, and ultimately conference committee membersagreed.

Table 6. Iraq Reconstruction, International Aid, and Related Activities (in millions of dollars)

NS = Not specified.

a. The House Appropriations Committee stated that up to $495 million in reimbursements was includedin H.R. 1559 .

b. No appropriation required.

c. DOD funds ($1.3 billion) were requested and enacted for Jordan, Pakistan, and other "key cooperatingstates" providing logistical and military supportto U.S. military operations in Iraq and in the global war on terrorism.

d. Request "supported" in Senate bill.

e. Although the enacted supplemental does not set a specific level for this country, the Administration hasallocated the full amount requested.

f. DOD funds ($34 million) were also requested and enacted for drug interdiction and counter-drugactivities in Colombia.

g. Due to Congressional reductions in overall ESF funding and increases for Afghanistan and the Philippines,the Administrations allocated $100 millionfor MEPI.

h. House bill funded an Islamic Partnership and Outreach Program.

i. The Administration requested funds for 10 Central European nations but has altered the list of recipientsand the allocation of military grants followingenactment of the supplemental, as follows: Poland ($15 million requested and allocated); Hungary ($15 millionrequested; $8 million allocated);Czech Republic ($15 million requested and allocated); Estonia ($2.5 million requested, $2.75 million allocated);Latvia ($2.5 requested, $2.75 millionallocated); Slovakia ($6 million requested, $6.5 million allocated); Romania ($15 million requested and allocated);Slovenia ($5 million requested,$0 allocated ); Lithuania ($3.5 million requested, $4 million allocated); Bulgaria ($5 million requested, $10 millionallocated); Albania $0 requested,$3 million allocated); Macedonia ($0 requested, $1 allocated); and Ukraine ($0 requested, $1.5 million allocated).

The enacted bill further directed higher and more specific amounts that should be used to replenish several foreign aid accounts that had been drawn upon in orderto preposition food and medicine stocks in the region and for other pre-conflicthumanitarian purposes. The conference agreement directed "full and prompt"reimbursement of USAID and State Department accounts from the Iraq Fund. Thesupplemental provided $143.8 million for international disaster assistance, $112.5million of which would restore funds diverted previously for Iraq. The remainingbalance augmented USAID disaster relief resources to respond to foreigncontingencies that may arise through the end of FY2003. Similarly, Congressincreased the State Department's refugee reserve account from the $50 millionrequested to $80 million in order to address needs in the Persian Gulf region as wellas other global requirements.

International Assistance

The Administration's supplemental appropriation proposal, which was only slightly modified by Congress, provided about $4.7 billion in additional aid to 23countries and regional programs that are contributing to the war in Iraq andcooperating in the global fight against terrorism. See the table below for a completelist of proposed recipients. Among the largest and most complex aid packages were:

Jordan -- $700 million in economic grants and $406 million in military transfers. This was on top of Jordan's regular $452 aid package from theU.S.

Israel -- $1 billion in supplemental military aid (on top of the $2.7 billion regular FY2003 assistance) and $9 billion in economic loans guaranteedby the U.S. government over the next three years. Israel would pay all costs -- feesthat may total several hundred millions of dollars -- associated with these economicstabilization loans. Conditions on how the funds would be spent, similar to thosethat were applied in the early 1990s when Israel drew on a $10 billion U.S.-backedloan package, would be employed.

Turkey -- $1 billion for economic grants which could be applied to fees associated with $8.5 billion in direct loans or loanguarantees.

Afghanistan -- $325 million in economic grants, anti-terrorism, demining, and military transfers. This would be in addition to roughly $350 millionalready scheduled for Afghanistan this year.

Egypt -- $300 million for economic grants, a portion of which could be used to gain access to up to $2 billion in loan guarantees. Depending on theterms of the loan, if Egypt chose to receive the full $2 billion, about $120 million ormore of the $300 million would be applied to the costs faced by the United States ofguaranteeing the loans. The Administration further proposed to reprogram $379.6million in previously appropriated commodity import program aid to Egypt as a cashtransfer. The supplemental would come on top of $1.9 billion in regular U.S. aid toEgypt.

Pakistan -- $200 million in military grants and law enforcement assistance. Pakistan currently receives $305 million inFY2003.

The Administration further requested $150 million to initiate a U.S. Emergency Fund for Complex Emergencies, a contingency account that would allow the President toaddress quickly unforseen needs of coalition partners. The Fund, which would bemanaged by the White House, had originally been proposed for an FY2004 startupof $100 million.

Congressional Action on International Assistance. H.R. 1559 , as approved, included $4.52billion in additional aid to countries and regional programs, about $180 million lessthan requested. Nearly all of this reduction, however, came from Congress' decisionnot to fund the President's $150 million emergency account for complex crises. Inmost other cases, the Administration was able to allocate these foreign aid resourcesas it had intended. Congress earmarked funding at the requested levels for Israel,Egypt, Jordan, and Pakistan, while adding resources for Afghanistan and thePhilippines. Turkey may receive "not to exceed" $1 billion in aid that is conditionedon a requirement for the Secretary of State to certify that Turkey is cooperating withthe United States in Operation Iraqi Freedom (including facilitating the movementof humanitarian aid into Iraq), and has not unilaterally deployed forces in northernIraq. The restriction on Turkey's aid package, the size of which could grow to $8.5billion if the loan option is implemented, combined text in House and Senate-passedbills. Earlier, the House had defeated two amendments that would have eliminatedaid to Turkey or reduced it by $207 million.

For Israeli loan guarantees, the enacted supplemental included the full $9 billion proposal, but added conditions not included in the Administration's proposal. Loansmay be issued in $3 billion allotments in each of FY2003 to FY2005, a provision thatwould allow the President to reduce disbursements in the second and third years ifIsrael violated any of the loan conditions. One such condition added by Congressprohibited loan resources from supporting any activity in geographic areas that werenot administered by Israel prior to June 5, 1967. This is similar to a conditionattached to the 1992 $10 billion loan guaranty package for Israel, some of which wasnot disbursed because of continued Israeli settlement activity in the West Bank area.

Table 7. Proposed Recipients of SupplementalForeign Aid ($s millions)

* Up to this amount. Loans would not require additional appropriations since economic grants would be used to pay for loan fees.

a. Amount was earmarked or recommended in the enacted supplemental appropriation.

b. The enacted supplemental appropriation provided $167 million.

c. The enacted supplement appropriation included $30 million for economic aid forthe Philippines.

d. Following enactment of the supplemental, the Administration has modified itsplans to allocate funds for these recipients. See footnote "i" in Table 6, above,for the allocated amounts.

While most of the President's request for international assistance was supported in the enacted emergency supplemental, the Administration had to reduce economicassistance in one instance. Congress cut Economic Support Fund appropriations by$20 million, but because of earmarks and additions for Afghanistan and thePhilippines, and $10 million to investigate possible Iraqi leadership war crimes,executive officials had $100 million less than requested in economic assistance forcountries not protected by legislative directives. Non-earmarked programs included$50 million for the Palestinians, $25 million for Djibouti, and $200 million for theMiddle East Partnership Initiative. The Administration chose to fully allocateamounts for the Palestinians and Djibouti, but cut resources for the Middle EastPartnership Initiative (including Muslim Outreach) to $100 million, half of the levelrequested.

The State Department also chose to modify its distribution of military aid grants to several Central Europe states. Most significantly, the executive branch decidedto add funds (not requested) for Albania, Macedonia, and Ukraine, and increaseamounts above the requested levels for Estonia, Latvia, Lithuania, and Bulgaria. Asoff-sets, the State Department cut funds for Hungary and eliminated the $5 millionrequest for Slovenia. These alterations appear to reflect Administration views on theextent to which selected countries supported or did not support U.S. operations inIraq. See footnote "i" in Table 6 above for specific amounts allocated to eachrecipient.

DOD Authorities to Provide Military Aid

Under sections relating to Defense Department funds and authorities, the supplemental proposed two items that drew particular congressional attention. Thekey issue was whether they infringed on congressional oversight and the StateDepartment's traditional role in directing foreign aid policy and resource allocations. They were both similar to proposals made last year in the FY2002 supplemental thatfocused on the war on terrorism and were closely scrutinized by Congress.

The first would provide $1.4 billion for the Defense Department, "notwithstanding any provision of law," to pay Jordan, Pakistan, and other nationsthat have provided logistical and military-related support to U.S. military operationsin Iraq or in the global war on terrorism. In the past, Defense officials argue,competing demands on regular military aid resources have delayed reimbursementto key friends that provide services to American forces. Congress approved fundingin the FY2002 supplemental for this purpose, but included a 15-day prior notificationrequirement that is not part of the FY2003 supplemental draft legislation.

The more controversial authority concerned DOD's request for $150 million to support "indigenous forces" assisting U.S. military operations, including those aimedat the global war on terrorism. Decisions to draw on these funds would be made bythe Secretary of Defense, with the concurrence of the Secretary of State. TheDefense Department defines indigenous forces as "irregular forces and resistancemovements" and notes that such forces "generally conduct military and para-militaryoperations in enemy-held or hostile territory and conduct direct offensivelow-intensity, cover, or clandestine operations." (4) Although it was unclear from thebudget justification and bill text exactly what groups and under what scenarios theAdministration would utilize these resources, a senior Administration officialsuggested that the intent was to have resources available for groups in Iraq. DeputySecretary of State Richard Armitage testified on March 27 that because of theuncertainty of the war's duration, it might be necessary to transfer additional armsand equipment to Kurdish and other forces, and that the $150 million would providea "hedge" in case of a more prolonged conflict. In last year's supplementalappropriation debate, DOD asked for $30 million to support indigenous forces, fundsthat would be exclusively under the control of the Secretary of Defense. Congressrejected the proposal, however. At that time, the House Appropriations Committeeobserved in deleting the request that the Secretary of State's primary responsibilityover U.S. military assistance programs is well established and that the Administrationhad the necessary authorities under existing foreign aid laws to undertake therequested activities. (5)

Congressional Action on DOD Authorities. H.R. 1559 , as enacted, provided the $1.4billion for nations supporting U.S. military operations in the global war on terrorism,but did not authorize the $150 million for aid to indigenous forces.

Selected Major Issues in the FY2004 Foreign Operations Debate

While the Foreign Operations appropriations bill can include virtually anyforeign policy issue of interest to Congress, the annual debate usually focuses onseveral major policy and spending issues. For FY2004, substantial debate hasfocused on the following.

Foreign Aid to Combat Terrorism

Since the September 11, 2001 terrorist attacks and the initiation of military operations in Afghanistan, combating global terrorism has become one of the toppriorities of American foreign assistance. Indeed, Secretary of State Powell has saidat several 2003 congressional hearings that fighting terrorism is the most importantobjective of the FY2004 Foreign Operations request.

While there is disagreement regarding the extent to which foreign aid can directly contribute to reducing the threat of terrorism, most agree that economic andsecurity assistance aimed at reducing poverty, promoting jobs and educationalopportunities, and helping stabilize conflict-prone nations can indirectly addresssome of the factors that terrorists use in recruiting disenfranchised individuals fortheir cause. As illustrated in the table below, the United States has provided morethan $5.9 billion to 26 so-called "front-line" states in the global war on terrorism inimmediate post-September 11 and FY2002 appropriations, while FY2003 regular andsupplemental spending bills have provided $7.4 billion. The Administrationproposed $4.7 billion for the "front-line" states in FY2004, plus $1.2 billion inadditional reconstruction funds for Afghanistan enacted in P.L. 108-106 , for a totalof $5.9 billion. (None of these figures include post-conflict reconstruction assistancefor Iraq which totals about $21 billion enacted in FY2003 and FY2004supplementals.)

While increased levels of foreign aid are only one sign of the importance the United States assigns to the support provided by these front-line states, the amountsallocated since September 11 are in sharp contrast to the $3.4 billion provided tothese 26 countries prior to the attacks in regular FY2001 appropriations. Additionaleconomic and military assistance has been particularly evident in a few countries,including Jordan, Pakistan, Afghanistan, Turkey, the Philippines, Kyrgyzstan,Tajikistan, Uzbekistan, Oman, Yemen, and Djibouti.

Foreign aid can be programmed in a number of ways that contribute to the war on terrorism. Assistance can be transferred, as has occurred in Pakistan andAfghanistan, to bolster efforts of a coalition-partner government, to counter domesticdissent and armed attacks by extremist groups, and to promote better health care,education, and employment opportunities to its people. Security assistance canfinance the provision of military equipment and training to nations facing threatsfrom their own internally-based terrorist movements.

While there has been congressional support for additional foreign aid resources aimed at countering terrorism, some warn that the United States needs to be cautiousabout the risks of creating a close aid relationship with governments that may havequestionable human rights records, are not accountable to their people, and arepossibly corrupt. Some Members have been especially critical of Administrationefforts to include in aid proposals for "front-line" states legislative language thatwould waive all existing restrictions and prohibitions on the transfers. Instead, thesecritics argue, the Administration should specifically identify any obstacles toproceeding with a country aid program and seek a congressional waiver for thoseparticular problems. For example, in late 2001 when the Administration wanted toprovide Pakistan with $600 million in fast-disbursing economic aid, instead ofproviding a blanket waiver of legislative obstacles, Congress approved in P.L. 107-57 specific waivers of aid prohibitions that applied to countries that engaged in missileproliferation, whose leaders came to power through a military coup, and which werebehind in debt payments to the United States.

Table 8. U.S. Assistance to Front-Line States in War on Terrorism ($s in millions)

Source: U.S. Department of State and CRS calculations. Countries are listed in order of the size of aid provided and requested since September 11, 2001. Amountsinclude funds appropriated for programs under jurisdiction of the Foreign Operationsspending measure, plus food assistance provided in the Agriculture appropriation bill.

a. FY2001 pre-September 11 are amounts allocated from regular FY2001 appropriations. FY2001 post-September 11 are amounts distributed from theEmergency Response Fund, funding for which was provided in P.L. 107-38 ,enacted in September 2001.

Beyond substantial amounts of bilateral aid for "front-line" states, the Foreign Operations appropriation bill funds several global programs specifically aimed atanti-terrorism efforts overseas and the provision of security for USAID employeesliving abroad.

Anti-Terrorism Assistance (ATA). Since FY1984, the State Department has maintained the ATA program designed tomaximize international cooperation in the battle against global terrorism. Throughtraining, equipment transfers, and advice, the ATA program is intended to strengthenanti-terrorism capabilities of foreign law enforcement and security officials. Sinceits initiation in 1984, over 23,000 officials from 112 countries have participated inATA projects. ATA funding is included within the Foreign Operations account ofNon-proliferation, Anti-terrorism, Demining, and Related Programs (NADR).

Resources for the $38 million annual ATA program (FY2001) rose sharply following September 11, with an additional $45.5 million allocated out of theTerrorism Emergency Response Fund. Congress approved $38 million for FY2002and $64.2 million for FY2003. Increased funding for FY2003 is intended to financethree ATA program strategies:

expanding existing U.S.-based training activities;

initiating new in-country programs in participant nations;and

adding program flexibility to respond rapidly to changingglobal circumstances.

For FY2004, the State Department sought $106.4 million for ATA programs, up nearly two-thirds from existing levels. Most FY2004 training would continue fortraining of officials from the "front-line" states, with a focus on in-country trainingin Afghanistan, Pakistan, and Indonesia. The ATA program further planned tolaunch a Mobile Emergency Training Teams (METT) initiative ($10 million) whichwould deliver in-country instruction for VIP protection, bomb squads, and crisisresponse operations. The State Department had planned to begin METT in FY2002but reprogrammed a $20 million appropriation in order to provide protective servicefor Afghan President Karzai.

Terrorist Interdiction Program (TIP). As one response to the 1998 bombings of Americanembassies in East Africa, the State Department launched the TIP, an activity intendedto restrict the ability of terrorists to cross international borders, launch attacks, andescape. TIP strengthens border security systems in particularly vulnerable countriesby installing border monitoring technology, training border security and immigrationofficials in its use, and expanding access to international criminal information toparticipating nations. Like ATA, funds for TIP are part of the NADR account in theForeign Operations spending bill.

Since September 11, the State Department has expanded from 34 to 60 the number of countries where it believes TIP would immediately contribute to theglobal counterterrorism campaign. The $4 million TIP budget doubled for FY2001following September 11, and grew to $14 million in FY2002. After falling back to$5 million for FY2003, the request for FY2004 was $11 million. The Administrationplanned to expand operations in up to ten new countries with the additionalresources.

Counterterrorism Engagement with Allies. Following the September 11 attacks, the United States beganto conduct Senior Official Policy Workshops and multilateral conferences in orderto better respond to terrorist incidents involving weapons of mass destructionoverseas. With $3 million from emergency FY2002 supplemental spending, the StateDepartment conducted workshops in 18 countries as well as several regionalconferences. The $2.5 million budget request for FY2004 would finance tenscheduled workshops, including three in Greece in advance of the 2004 Olympicgames.

Terrorist Financing. In December 2001, an interagency review group identified 19 countries where a significantterrorist financing threat existed, and with $3 million allocated from the EmergencyResponse Fund, launched a training and technical assistance program. The StateDepartment allocated $10 million out of the FY2002 supplemental appropriation toexpand the program, while the Treasury Department is utilizing approximately halfof its $10 million FY2003 "Technical Assistance" program for these purposes. InFY2004, Treasury proposed $5 million for combating terrorist financing activities.

USAID Physical Security. USAID maintains about 97 overseas facilities where much of its workforce --including both Americans and foreign nationals -- is located. Many missions arebased in places where there is a high threat of terrorist activity, and especially sincethe 1998 embassy bombings in Kenya and Tanzania, agency officials have beenconcerned about insuring adequate security. In countries where USAID is or isscheduled to be co-located with the U.S. embassy, the State Department's ForeignBuildings Operations office had been responsible for financing USAID securefacilities. These funds are appropriated in the Departments of Commerce, Justice,and State appropriations. Nevertheless, there have been serious construction delaysfor USAID co-located facilities -- especially in Uganda -- due to competing StateDepartment building priorities and conflicting congressional directives.

In an effort to overcome these problems, USAID requested for FY2003 a new Foreign Operations account -- the Capital Investment Fund -- that would supportenhanced information technology ($13 million) and facility construction ($82million) specifically at co-located sites where security enhancements are needed. USAID planned to use the money in FY2003 for construction projects in Kenya,Guinea, Cambodia, and Georgia. Congress, however, reduced funding for thisaccount to $43 million, with $30 million assumed for Kenya and $10 million for anew facility in Afghanistan.

With reductions made to the FY2003 request, USAID proposed a $146.3 million Capital Investment Fund request for FY2004. Of the total, $20 million wouldsupport information technology needs, while the balance would finance constructionof seven co-located facilities where the State Department is already building newembassies. In addition to Guinea, Cambodia, and Georgia, which went unfunded inFY2003, USAID requested resources for co-located missions in Zimbabwe, Armenia,Mali, and Uganda. For construction of co-located missions at embassies wherebuilding will begin in FY2004 or later, resources for USAID facilities would bedrawn from State Department appropriations under the Capital Surcharge Proposal.

Security upgrades for the 64 overseas missions situated some distance from American embassies have been provided out of USAID operating expenses, aForeign Operations account that has been under funding stress in recent years due toagency relocation costs in Washington, D.C., replacement of failed financialmanagement systems, and dwindling non-appropriated trust funds used to financesome in-country costs. As a result, security upgrades for some USAID missions havebeen deferred due to funding shortfalls. For FY2003, USAID estimated that it willspend $7.1 million for security needs out of its operations account, compared to $6.75 million in FY2002. USAID requested the same amount -- $7.1 million -- forFY2004 as it had available for FY2003.

Aid Restrictions for Terrorist States. Annual Foreign Operations spending bills routinely includegeneral provisions prohibiting U.S. assistance to countries engaged in terroristactivities or providing certain types of support to terrorist groups. Included in theFY2003 funding measure were two:

Sec. 527 prohibited bilateral U.S. assistance to any country that the President determined grants sanctuary from prosecution to any individual orgroup which has committed an act of international terrorism, or otherwise supportsinternational terrorism. The President could waive the restrictions for nationalsecurity or humanitarian reasons.

Sec. 543 prohibited U.S. aid to a government which provides lethal military equipment to a country that the Secretary of State determined isheaded by a terrorist supporting government. The President could waive therequirement if it is important to U.S. national interests.

Despite these restrictions, however, certain types of humanitarian foreign assistance could be provided "notwithstanding" other provisions of law, which would overridethe terrorism restrictions. Disaster and refugee relief, child survival and HIV/AIDSprograms, emergency food and medicine, and demining operations are among thecategories of U.S. assistance that could potentially be provided to a country thatwould otherwise be ineligible.

Congressional Action. For specific counter-terrorism programs, the Foreign Operations conference agreementprovides amounts as shown in Table 9.

Table 9. Selected Counter-Terrorism ProgramFunding ($s -- millions)

For USAID construction, the Foreign Operations conference agreement includes full funding for new USAID buildings in Cambodia, Uganda, Guinea, and Mali, asrequested, but resources for other facilities in Armenia, Georgia, and Zimbabweappear to be less certain.

More generally, the conference agreement, similar to earlier actions by the House and Senate, largely but not totally supports bilateral security and military aidrequests for the "front-line" states. Congress makes small reductions in the twoForeign Operations accounts from which most assistance for the 26 "front-line" statesis drawn: the Foreign Military Financing (FMF) and the Economic Support Fund(ESF) accounts. As shown in Table 8 (above), country allocations based on theenacted FY2004 appropriation largely follow amounts requested by theAdministration. The major exception is Turkey, where the proposed $256 millionaid package is reduced to $145 million. P.L. 108-119 gives the President authorityto transfer an additional $100 million in economic aid for Turkey, but the moneymust be drawn from the Iraq reconstruction program. Many believe it is unlikely theAdministration will implement such a transfer.

Previous House action on the FY2004 Foreign Operations bill ( H.R. 2800 ) would have posed more difficult decisions for theAdministration in funding some of the "front-line" states. The House reduced theESF recommendation by $275 million (10.8%), but the impact on certain countries,including some "front-line" states, would have been more significant. About 70%of the ESF appropriation was earmarked at or above levels requested for countriesof special congressional interest, including the "front-line" nations of Afghanistan,Egypt, and Jordan. On the other side of the equation, the legislation reduced by $100million amounts available for Middle East Partnership Initiative (MEPI). Of theremaining ESF funds, at the House-passed level the Administration would haveneeded to cut non-earmarked countries collectively by about 21%. Among thesenon-earmarked ESF recipients were the "front-line" states of Pakistan ($200 millionrequested), Turkey ($200 million), Indonesia ($60 million), the Philippines ($20million), and India ($20 million), which would most likely have had to absorb someof the ESF reductions.

A similar situation existed in the Senate bill, although with an ESF cut of only $120 million (5%) the impact on "front-line" states would have been less significant. Still, aid to non-earmarked recipients would have fallen collectively by about 18%below requested amounts and include the same "front-line" nations cited above. TheSenate measure had also acknowledged the contributions made by several countriesin the war in Iraq -- including Albania, El Salvador, Macedonia, Mongolia, EastTimor, and Uganda -- and encouraged the Administration to increase militaryassistance to these nations.

Millennium Challenge Account

In a speech on March 14, 2002, at the Inter-American Development Bank, President Bush outlined a proposal for the United States to increase foreign economicassistance beginning in FY2004 so that by FY2006 American aid would be $5 billionhigher than three years earlier. The funds would be placed in a new MillenniumChallenge Account (MCA) and be available to developing nations that are pursingpolitical and economic reforms in three areas:

Ruling justly -- promoting good governance, fighting corruption, respecting human rights, and adhering to the rule oflaw.

Investing in people -- providing adequate health care,education, and other opportunities promoting an educated and healthypopulation.

Fostering enterprise and entrepreneurship -- promoting openmarkets and sustainable budgets.

If fully implemented, the initiative would represent one of the largest increases in foreign aid spending in half a century, outpaced only by the Marshall Plan followingWorld War II and the Latin America-focused Alliance for Progress in the early1960s.

The concept is based on the premise that economic development succeeds best where it is linked to free market economic and democratic principles and policies. Conditioning assistance on policy performance and accountability by recipientnations is not new to U.S. aid programs. Since the late 1980s at least, portions ofAmerican development assistance have been allocated to some degree on aperformance-based system. What is different about the MCA is the size of thecommitment; the competitive process that will reward countries for what they havealready achieved not just what is promised for the future; the pledge to segregate thefunds from U.S. strategic foreign policy objectives that often strongly influencewhere U.S. aid is spent; and to the decision to solicit program proposals developedsolely by qualifying countries.

If Congress fully funds the President's MCA request and assuming that FY2003 will be the baseline from which to compare growth in foreign aid spending duringimplementation of the MCA, a $5 billion increase by FY2006, combined with otherannounced foreign aid initiatives, would result in a $19.3 billion foreign aid budget. In real terms (constant FY2003 dollars), taking into the account the estimated effectsof inflation, U.S. economic assistance in FY2006 would be $18.2 billion, the highestamount since FY1979 and the signing of the Camp David Middle East peace accords,and FY1985, an unusual year in which the United States responded to special MiddleEast economic stabilization and African famine requirements. The nominal increasebetween FY2003 and FY2006 would be about 47%, while in real terms, FY2006funding would be nearly 38% more. These figures are less than Administrationclaims of a 50% increase in funding due to the MCA, a figure that is apparentlycalculated using the $10 billion aid level in FY2000 as the base year. Because of thesize of the U.S. economy and continued growth projected over the next several years,the MCA increases will have minimal impact on the amount of U.S. aid as a percentof GDP. According to current projections, assistance would rise from the 2002 levelof 0.12% of GDP to 0.15%.

During the first year of the MCA, participation will be limited to the 74 poorest nations that are eligible to borrow from the World Bank's International DevelopmentAssociation and have per capita incomes below $1,435. The list will expand toinclude all lower-middle income countries by FY2006 with per capita incomes below$2,975. Participants will be selected largely based on 16 performance indicatorsrelated to the three categories of good governance, economic freedom, and investingin people. Countries that score above the median on half of the indicators in each ofthe three areas will qualify. Emphasizing the importance of fighting corruption,however, should a country fall below the median on the corruption indicator (basedon the World Bank Institute's Control of Corruption measure), it will beautomatically disqualified from consideration.

To manage the MCA, the Administration has proposed the creation of a Millennium Challenge Corporation (MCC), a new independent government entityseparate from the Departments of State and the Treasury and from the U.S. Agencyfor International Development (USAID). The White House envisions a staff of about100, drawn from various government agencies and non-governmental organizations,led by a CEO confirmed by the Senate. A review board, chaired by the Secretary ofState and composed of the Secretary of the Treasury and the Director of OMB, wouldoversee operations of the MCC.

The decision to house the MCA in a new organization was one of the most debated issues during early congressional deliberations of the President's foreign aidinitiative. The Administration argued that because the MCA represents a newconcept in aid delivery, it should have a "fresh" organizational structure,unencumbered by bureaucratic authorities and regulations that would interfere ineffective management. Critics, however, contended that if the MCA is placedoutside the formal U.S. government foreign aid structure, it would lead to furtherfragmentation of policy development and consistency. Some believed that USAID,the principal U.S. aid agency, should manage the MCA, while others say that theMCA should reside in the State Department where more U.S. foreign policy entitieshave been integrated in recent years. At least, some argued, the USAIDAdministrator should be a member of the MCC Board, possibly in place of the OMBDirector.

For FY2004, the Administration sought $1.3 billion for the MCA's first year and remained committed to a $5 billion budget by FY2006. Some believed,however, that the FY2004 request was less than promised in 2002. At the time,Administration officials implied that funding might be phased in over three years inequal increments, resulting in a $1.67 billion program in FY2004, a $3.34 billionlevel in FY2005, and $5 billion in FY2006. In the President's budget submission thisyear, however, budget officials said the pace at which resources would rise was neverspecifically set, and that only the $5 billion target for FY2006 is a firm commitment.

Congressional Action (Appropriations). H.R. 2800 , as passed by the House,provided $800 million for the Millennium Challenge Account in FY2004, while theSenate, included $1 billion. Both were below the $1.3 billion request. The Senatefurther incorporated into H.R. 2800 authorizing legislation that had beendebated, amended, but not passed by the Senate on July 9 and 10. (See below fordetails on the authorizing text, as originally included in S. 925 ).

Needing to find additional resources for international HIV/AIDS funding and for other priorities, House-Senate conferees tentatively agreed on November 17 toprovide $650 million for the MCA in FY2004, half the level requested. Appropriation Committee leaders said that because the program was new and wouldrequire some months to begin operations, larger amounts were not necessary in thefirst year of the MCA. The White House, however, strongly objected to the reducedappropriation and convinced lawmakers to add back $350 million as part of apackage of additional spending needs that were offset by a rescission of prior yeardefense appropriations and an across-the-board cut for non-defense FY2004programs. The conference agreement on H.R. 2673 , the ConsolidatedAppropriations Act, 2004, into which Foreign Operations has been incorporated, includes a total of $1 billion for the MCA, $650 million of which is made availablein Division D of the bill (Foreign Operations) and $350 million in Division H(Miscellaneous Appropriations and Offsets). The House passed H.R. 2673 on December 8, but the Senate most likely will not consider the conferenceagreement until Congress returns on January 20, 2004 for the second session.

Congressional Action (Authorization). In legislation related to the Foreign Operationsappropriations bill, the Senate and House debated separate bills to authorize theMillennium Challenge Account. When these efforts stalled, however, the authorizingtext was added to the Senate-passed Foreign Operations measure, and ultimatelyincorporated into the conference agreement on H.R. 2673 .

Earlier, on May 29, 2003, the Senate Foreign Relations Committee reported S. 1160 , legislation providing $1 billion for the MCA in FY2004, $2.3billion in FY2005, and $5 billion in FY2006. On a vote of 11-8, the Committeefurther approved an amendment by Senators Biden and Hagel that would establishthe MCA inside the State Department under the direction of the Secretary of State. The legislation abandoned the separate corporation proposal put forward by theAdministration. Secretary of State Powell wrote the Committee saying he wouldadvise the President to veto the legislation if this provision to locate the MCA in theState Department remained in the bill.

Senator Lugar, who opposed the Biden-Hagel amendment, proposed an alternative structure in new legislation. S. 1240 , as introduced on June11, would create a Millennium Challenge Corporation, headed by a CEO who wouldreport to the Secretary of State. Senator Lugar intended that such an arrangementwould provide the Corporation with the same degree of independence and status asUSAID, but establish a chain of command that would permit the Secretary of Stateto exercise broad authority over the MCA. S. 1240 created a Board ofDirectors, made up of the Secretary of State (Chairman), the Secretary of theTreasury, the USAID Administrator, the U.S. Trade Representative, and the MCCCEO. The full Senate adopted the general approach proposed by Senator Lugar whenit voted on July 9 to incorporate a modified text of MCA authorizing legislation into S. 925 , the Foreign Affairs Authorization, Fiscal Year 2004. Therevised composition of the Board of the Directors proposed in S. 1240 was included. The approved text further strengthened the explicit relationshipbetween the Corporation and the Secretary of State by adding that the CEO shall"report to and be under the direct authority and foreign policy guidance of theSecretary." The Administration did not express objection to the revised legislation.

S. 925 , as amended, also would have permitted low-middle income nations to participate in the MCA program only if appropriations in FY2006 andbeyond exceeded $5 billion annually. In such years, these relatively wealthiercountries could compete for only 20% of the total appropriation. In many otherareas, however, the legislation adopted the broad concepts recommended by theexecutive.

On June 12, the House International Relations Committee reported an MCA authorizing measure -- H.R. 2441 -- containing at the time significantdifferences with the Senate and the Administration. The legislation authorized $1.3billion for FY2004, as requested, $3 billion for FY2005, and $5 billion for FY2006. Unlike the original Senate measure, H.R. 2441 created a newMillennium Challenge Corporation sought by the President, but altered thecomposition of the Board of Directors and the authority of the MCC's ChiefExecutive Officer. The Board, as designed under H.R. 2441 , includedthe Secretary of State as Chairman and the Secretary of the Treasury, as proposed, butdeleted the Director of OMB and added the USAID Administrator, the U.S. TradeRepresentative, and the CEO of the MCC. The bill also included four additionalmembers, to be appointed by the President from a list submitted by the majority andminority leaders of the House and Senate. The Board would have further includedas non-voting ex-officio members the CEO of OPIC, and the Directors of the Tradeand Development Agency, Peace Corps, and OMB.

Additionally, H.R. 2441 designated the CEO of the Corporation as the individual responsible for determining eligible countries rather than the Board ofDirectors, as recommended by the Administration. The House bill allowedlow-middle income countries to participate in the MCA beginning in FY2006regardless of the amount of money appropriated, but limited the allocation to theserelatively wealthier countries to 20% of MCA assistance. Similar to the Senate, theHouse incorporated a slightly modified version of H.R. 2441 as DivisionA in H.R. 1950 , an omnibus foreign policy authorization bill. TheHouse passed H.R. 1950 -- now called the "Millennium ChallengeAccount, Peace Corps Expansion, and Foreign Relations Authorization Act of 2003"-- on July 16.

As noted above, the Senate added its MCA authorizing legislation, as amended in S. 925 , to the Foreign Operations Appropriations measure( H.R. 2800 ) during debate in late October. Subsequently, H.R. 2800 was incorporated into H.R. 2673 , theConsolidated Appropriations Act, 2004, in which conferees resolved House andSenate differences in the earlier versions of MCA authorizing legislation. On keyissues, conferees agreed to:

create a Millennium Challenge Corporation, headed by a CEO who would report to the Board of Directions, rather than the Secretary of State(Senate) or the President (House).

include on the Board the Secretary of State (chairman), the Secretary of the Treasury, the U.S. Trade Representative, the USAID Administrator,the MCC CEO, and four others from lists submitted by congressional leaders andnominated by the President.

allow low-middle income countries to participate in MCA programs beginning in FY2006, as proposed, but caps the total amount funds that canbe allocated to these countries at 25% of the MCA appropriation. The House hadproposed a 20% cap, while the Senate had recommended a 20% ceiling but onlywhen MCA appropriations exceeded $5 billion.

authorize "such sums as may be necessary" for FY2004 and FY2005, with no mention of FY2006. House and Senate bills had included specificamounts for the first two years and an FY2006 authorization of $5billion.

Table 10, below, summarizes these and other key MCA issues under debate in authorizing legislation.

Because the MCA authorization was not enacted until January 23, 2004 ( P.L. 108-199 ), and the bills' requirement for consultation with Congress and publicdisclosure of eligibility criteria and methodology, it appears that MCA operationswill begin much later than originally anticipated. The conference agreement requiresa period of at least 90 days between naming "candidate countries" -- those that meetbasic income and other criteria -- and "eligible countries," those that are judged tobe the best performers and selected to receive MCA assistance. During this period,the eligibility criteria, performance indicators, and overall methodology of theselection process must be notified to Congress and published in the Federal Register. Public hearings may be held and public comments will be received. As a result, itappears likely that MCA eligible countries will not be named before May 1, 2004, atthe earliest. The selection of program proposals and initial implementation ofprojects would be expected several months beyond that date.

Table 10. Comparison of MCA Authorization Legislation

a. The status of the Senate bill is based on S. 925 , the Foreign Affairs Act, Fiscal Year 2004, as amended during debate on July 9 and 10. S. 925 remains pending in the Senate. Previously, the Senate Foreign Relations Committee had approvedlegislation authorizing theMillennium Challenge Account in S. 1160 . A modified text of S. 1160 was subsequently incorporatedinto S. 925 as Division C on July 9. The House bill, H.R. 1950 , is also a combined foreign policy authorizationmeasure to which earlier MCAauthorizing text was added. The House International Relations Committee had reported H.R. 2441 , whichwas incorporated, withmodifications, to H.R. 1950 , and passed by the House on July 16.

Development Assistance, Global Health Priorities, and HIV/AIDS

A continuing source of disagreement between the executive branch and Congress is how to allocate the roughly $3-$3.8 billion "core" budget for USAIDdevelopment assistance and global health programs. Among the top congressionaldevelopment aid funding priorities in recent years have been programs supportingchild survival, basic education, and efforts to combat HIV/AIDS and other infectiousdiseases. The Administration has also backed these programs, but officials object tocongressional efforts to increase funding for children and health activities when itcomes at the expense of other development sectors. Most recently during theFY2003 and FY2004 budget cycles, some Members of Congress have argued that ithas been the executive branch that has added funds for Administration priorities bycutting resources for other development activities.

In years when Congress has increased appropriations for its priorities, but not included a corresponding boost in the overall development aid budget, resources forother aid sectors, such as economic growth and the environment, have beensubstantially reduced. This was more problematic during the mid-to-late 1990s whenworld-wide development aid funding fell significantly. In more recent years, andespecially for FY2003 and FY2004, Congress increased overall developmentassistance so that both congressional and executive program priorities could befunded without significant reductions for non-earmarked activities. Nevertheless,Administration officials continue to argue that such practices undermine theirflexibility to adjust resource allocations to changing global circumstances.

In 2001, the Bush Administration set out revised USAID core goals for sustainable development programs focused around three "spheres of emphasis" or"strategic pillars" that include Global Health, Economic Growth and Agriculture, andConflict Prevention and Developmental Relief. The Administration furtherintroduced a new initiative -- the Global Development Alliance (GDA) -- in aneffort to expand public/private partnerships in development program implementation. Under the initiative, USAID identifies good development opportunities beingconducted by private foundations, non-governmental organizations, universities, andfor-profit organizations, and provides parallel financing to leverage resources alreadycommitted to these activities. USAID officials envisioned that the agency wouldbecome much more of a coordinating and integrating institution to expand andenhance development efforts of these non-governmental development partners.Although it started out as a much more ambitious project -- USAID requested $160million for FY2002 -- the GDA has received relatively modest funding allocations:$20 million in FY2002 and $14.9 million in FY2003. The FY2004 request sought$15 million.

Underscoring the importance of the debate over funding allocations of development aid resources has been an elevation by the Administration of the valueof foreign economic assistance as an instrument of U.S. foreign policy since theterrorist attacks of September 11, 2001. President Bush announced plans to launchtwo major foreign aid initiatives -- the Millennium Challenge Account and theGlobal AIDS Initiative -- that if approved by Congress, would significantly boostfunding for development assistance programs. Moreover, the President's September2002 National Security Strategy established global development, for the first time,as the third "pillar" of U.S. national security, along with defense and diplomacy.

For FY2004, the President sought a substantial increase in overall development assistance, although the programs are configured differently than they have been inthe past, raising questions in some observers' minds about the Administration'scommitment to broad-based, worldwide development. For "core" developmentassistance -- programs that match the current structure of USAID's "strategicpillars" and Foreign Operations appropriation accounts for Development Assistanceand Child Survival and Health Program Fund -- the Administration proposed $2.84billion, as shown in Table 11. This represented a $245 million, or 8% reduction from amounts for FY2003. With the exception of HIV/AIDS, democracy programs, andto a far less extent agriculture and economic growth activities, all other developmentsectors would have received less funding in FY2004 than appropriated for FY2003.

Table 11. Development Assistance Funding ($s millions)

Source : USAID.

a. USAID's "strategic pillars" for Economic Growth and Democracy correspond to the Development Assistance account in title II of annual Foreign Operationsappropriations bills.

b. USAID's "strategic pillar" for Global Health corresponds to the Child Survivaland Health Program Fund account in title II of annual Foreign Operationsappropriations bills.

Two new initiatives proposed for FY2004 that would be managed outside of USAID "core development" programs, however, pushed overall U.S. developmentassistance well above FY2003 levels. With the additions of the Global AIDSInitiative and the Millennium Challenge Account, for which $450 million and $1.3billion, respectively, were requested, total development aid in FY2004 would growto $4.6 billion, or 49% higher than FY2003 amounts.

While development assistance supporters applauded the increases sought for the new initiatives, they remained concerned over the reductions proposed for USAID's"core" development accounts. The latter are worldwide activities that serve multipledevelopment needs in over 55 countries that range from nations with a soundcommitment to economic and democratic reforms, to countries emerging fromconflict, to failed states that confront humanitarian crises. The HIV/AIDS and MCAproposals, on the other hand, are more narrowly focused. The Global AIDSInitiative, implementing prevention, treatment, and care projects, are to focus largelyon 14 priority countries in Africa and the Caribbean. The Millennium ChallengeAccount will likely support programs in the first year in perhaps as few as 8-10"best-performing"countries that have demonstrated progress in the areas ofgovernance, economic freedom, and social investments in people. TheAdministration further had said that MCA funding would be in addition, not asubstitute for continuing "core" development activities. Critics charged that theFY2004 budget request violated that pledge by cutting amounts for "core" programs.

What some observers found most problematic about the FY2004 development assistance request was that increases for selected areas, especially those forHIV/AIDS, to some extent resulted from reductions in other development programs. (See Table 12.) Among health programs, each sub-sector was cut, except forHIV/AIDS. Funding for other infectious diseases, including tuberculosis andmalaria, would have fallen by one-third under the President's budget request, childsurvival activities would be cut by 11%, reproductive health would drop by 5%, andvulnerable child programs would be reduced from $27 million to $10 million. TheAdministration recommended similar reductions in its FY2003 budget request lastyear, but Congress restored most of the funds that would have been lost under thePresident's recommendation. For example, USAID had sought $110 million fornon-HIV/AIDS infectious diseases out of the Child Survival and Health ProgramFund account for FY2003, an amount that rose to $154.5 million due to subsequentcongressional additions in the Foreign Operations appropriation.

Aside from global health programs, USAID proposed a mix of budget increases and cuts for other "core" development sectors. Those scheduled for higher spendingincluded:

Agriculture programs would increase by 4% to $268 million.

Economic growth activities, including trade and investmentprograms, would rise less than 1%.

Democracy and local governance would grow by 20%, althoughlarge increases for Afghanistan and Pakistan would leave similar programs in Africaand Latin America below FY2003 levels.

Funding for other "core" development areas would decline:

Environmental activities would drop by 6% to $286 million.

Basic education, a high congressional priority for a number ofyears, would fall by 2% to $212 million, and resources for higher education wouldbe cut by 17%.

Human rights and conflict prevention programs would bereduced collectively by over one-third.

Resources for some or all of these sectors, however, could rise, and in some cases significantly, when MCA programs are selected. The $1.3 billion sought by thePresident in FY2004 will be allocated among a selected few "best performing," lowincome countries, supporting the highest development priority identified by theparticipant nation.

Table 12. USAID "Core" Development Assistance Funding ($s millions)

Source: USAID.

Note: Amounts in this table reflect levels allocated from USAID's "core" development aid accounts: Development Assistance and the Child Survival andHealth Program Fund. In addition to figures shown here, funds are drawn from othereconomic aid programs -- Economic Support Fund, aid to Eastern Europe, andformer-Soviet assistance -- that are co-managed by USAID and the StateDepartment. For activities such as basic education and global health, most fundingcomes from these "core" development accounts. In other areas, however, especiallyeconomic growth , agriculture, and democracy, a sizable amount of resources aredrawn from these non-"core" accounts. Complete data for all years across allaccounts are not currently available. Consequently, it is only possible to drawcomparisons for "core" development aid resources.

International HIV/AIDS. By far, the largest growth area for development assistance was for HIV/AIDS prevention,treatment, and care programs (Table 13). Resources requested under the ForeignOperations bill for HIV/AIDS in FY2004 totaled $1.24 billion, a 41% increase over$877 million appropriated for FY2003. Moreover, the Administration sought another$680 million for international HIV/AIDS from non-Foreign Operations accounts,most importantly for the Centers for Disease Control and Prevention funded underthe Labor/HHS/Education appropriation bill. The total request across allappropriation measures for FY2004 was $1.92 billion. (The Administrationfrequently used a total of $2 billion in its estimates of FY2004 funds requested forinternational HIV/AIDS programs. These executive estimates included USAIDresources for tuberculosis and malaria that are not calculated in the $1.92 billion levelshown in Table 13.)

A controversial issue was the President's proposal for a $200 million contribution to the Global Fund to Fight AIDS, Tuberculosis, and Malaria -- $100million each from Foreign Operations and Labor/HHS/Education appropriationmeasures. For FY2003, Congress increased the U.S. contribution to $350 millionand subsequently authorized "up to" $1 billion for FY2004 in P.L. 108-25 , the UnitedStates Leadership Against HIV/AIDS, Tuberculosis, and Malaria Act of 2003.

Congressional Action.

House Debate. On July 23, the House approved $3.43 billion for "core" bilateral development programs, an amount about$140 million higher than the President's request and $350 million above regularFY2003 amounts. The bill ( H.R. 2800 ), while adding over $320 millionto FY2003 totals for the Child Survival and Health account, reduced non-healthprograms by nearly $30 million from the Administration's request and $63 millionfrom FY2003 amounts. At these levels, this have would resulted in small cuts foractivities such as agriculture, economic growth, environment, and democracypromotion.

For one of the highest Administration and congressional foreign aid priorities, the House provided $1.27 billion for international HIV/AIDS, $30 million above thePresident's request and $395 million higher than FY2003. Combined with parallelfunding approved in the House Labor-HHS spending measure, the House providedin both bills $1.9 billion for HIV/AIDS, $20 million less than the Administration'sproposal. Out of this, $500 million would be available as a U.S. contribution to theGlobal Fund ($400 million would come from the Foreign Operations bill). ThePresident proposed $200 million for the Global Fund, $100 million from each bill. The House measure also restored funding for bilateral tuberculosis and malariaprograms -- amounts that are not included in those for AIDS spending above -- thatthe President's budget had scheduled for cuts. The House bill increased amounts fornon-HIV/AIDS infectious diseases from $104 million to $156 million.

H.R. 2800 , within the Development Assistance account, placedhigh priority on trade capacity building activities, increasing funding to $194 million,$35 million higher than in FY2003. Spending on basic education would also riseunder the House measure, with $259 million specified out of the bilateraldevelopment aid funds. In FY2003, USAID allocated $217 million for basiceducation and requested $212 million for FY2004. Across all Foreign Operationsaccounts, the House bill directed a total of $350 million for basic education.

Table 13. U.S. International HIV/AIDS Programs ($s millions)

Sources : House and Senate Appropriations Committees, Departments of State and HHS, USAID,and CDC.

a. The Division H of the Consolidated Appropriation Act, 2004 ( P.L. 108-199 ; H.R. 2673 ) requires an across-the-board rescission of 0.59%for each account, amounts that are calculated for lines in this column.

b. Includes the AIDS-related portion of $53.5 million earmarked for AIDS, tuberculosis, and malaria inEastern Europe and the Baltics, as well asunearmarked assistance through other programs.

c. The House bill ( H.R. 2800 ) did not fund this new account for the Global AIDS Initiative, butinstead provided additional amounts in theChild Survival/Health account, above.

d. This amount is not specified in the legislation, but overall program funding appears sufficient to meet thistarget.

Senate Debate. In H.R. 2800 (originally reported as S. 1426 ), the Senate provided about $3.85billion in overall "core" bilateral development programs. The Senate measure wasabout $560 million higher than the President's request and $420 million above theHouse bill.

As one of its top priorities, the Senate provided $1.54 billion for international HIV/AIDS, $300 million above the President's request and $665 million higher thanFY2003 levels. The HIV/AIDS total included as much as $250 million for theGlobal Fund, compared with the President's request of $100 million. (The Presidentalso requested $100 million for the Global Fund in the Labor/HHS appropriationmeasure.) Unlike the House bill, the Senate included HIV/AIDS funds in both theChild Survival/Health (CS/H) and Global AIDS Initiative accounts. The GlobalAIDS Initiative account is a new request for FY2004, funding programs managed bya new State Department Coordinator. The House bill kept nearly all HIV/AIDSfunds in the CS/H account, consistent with past practice. The Senate bill alsorestored cuts to bilateral tuberculosis and malaria proposed by the President,increasing spending for non-HIV/AIDS infectious diseases from $104 million to$185 million. Of that total, tuberculosis was to receive $80 million, while malariafunding was set at $85 million.

Besides increasing health programs, the Senate bill also added to the request for other development activities, providing about $80 million more than requested andover $100 million more than the House. Basic education programs received $220million under bilateral development assistance, while environmental activities ($485million) and microenterprise ($180 million) were other areas emphasized in theSenate bill that were set above the President's request.

Table 14. "Core" Development Aid Accounts -- Congressional Action ($s millions)

Source: House and Senate Appropriation Committees.

* Figures in this column have been adjusted to reflect a 0.59% across-the-board rescission required in Division H of H.R. 2673 , the ConsolidatedAppropriations Act, 2004 ( P.L. 108-199 ).

a. UNICEF contributions of $120 million have been deducted from these figures in order to be consistent with the FY2004 request, Senate, and Conference accounttotals.

b. The House bill included funding for the Global AIDS Initiative in the ChildSurvival/Health account.

Conference Agreement. In conference consideration -- added as Division D of H.R. 2673 , the ConsolidatedAppropriations Act, 2004 -- lawmakers set total funding for development aid "coreaccounts" at $3.7 billion, about $400 million or 12% higher than the President'srequest. While much of the increase is directed for HIV/AIDS and other infectiousdisease programs, funding for other development priorities also rose, most notablyfor basic education, family planning, and biodiversity programs. Table 15 lists 29programs for which Congress set specific funding targets in the final legislation.

The top development aid funding priority for House-Senate conferees was the $1.46 billion agreed to for international HIV/AIDS (See Table 13, above). With theaddition of resources for malaria and tuberculosis, the total for these infectiousdiseases comes to $1.64 billion in the Foreign Operations measure. When combinedwith appropriations in the Labor/HHS/Education bill (also included in theConsolidated Appropriations Act, 2004, H.R. 2673 , as Division E),Congress will have recommended a total of $2.4 billion for global HIV/AIDS,malaria, and tuberculosis. (The final amount is slightly less than this due to a 0.59%across-the-board rescission required in Division H of the Consolidated Appropriationconference agreement.) The Foreign Operations portion is about $300 million abovethe President's request. Conferees further agreed to a $400 million contribution tothe Global Fund for AIDS, Malaria, and Tuberculosis that together with $150 millionin Division E of H.R. 2673 , would bring the total level to $550 million,rather than the Administration's $200 million proposal.

Table 15. Selected Development Aid Funding Targets -- Congressional Action ($s millions)

Source: House and Senate Appropriation Committees; USAID.

Note: Amounts in this table reflect program funding targets specified in House and Senate Foreign Operations bills and Committee reports. Targets are not set for allprograms in each bill, but are selectively identified, often to establish minimumamounts for development aid activities of special congressional importance. Amounts shown in the columns are allocated from USAID/State Department "core"development aid accounts: Development Assistance, the Child Survival and HealthProgram Fund, and the Global AIDS Initiative. In addition to figures shown here,funds are drawn from other economic aid programs -- Economic Support Fund, aidto Eastern Europe, and former-Soviet assistance. See footnotes below for additionalinformation regarding funding targets across all Foreign Operations accounts for eachprogram.

a. Amounts in this column are not adjusted to reflect the 0.59% across-the-board rescission that the conference agreement of H.R. 2673 requires.

b. Across all Foreign Operations accounts for Trade Capacity Building, the FY2003estimate was $449.1 million; the House bill provided $517 million; theconference agreement provides $503 million.

c. The FY2003 estimate across all Foreign Operations accounts for Microenterpriseprograms was $160 million; the House Appropriations Committee report"expects " USAID to fund Microenterprise programs at the authorized level forFY2004 ($200 million); the conference agreement "supports" the SenateAppropriations Committee report regarding Microenterprise policy and funding.

d. Across all Foreign Operations accounts for Plant Biotechnology, the conferenceagreement provides $25 million.

e. Across all Foreign Operations accounts for Diary Development, the FY2003estimate was $24.8 million; the Senate Appropriations Committee said thatFY2004 funding for dairy development should increase over FY2003 levels.

f. No estimate available.

g. Across all Foreign Operations accounts for Basic Education, the House billprovided $350 million; the conference agreement provides $326.5 million.

h. Across all Foreign Operations accounts for Environment activities, the Senate billprovided $485 million.

i. Across all Foreign Operations accounts for Drinking Water activities, the FY2003estimate was $99.4 million; the Senate bill provided $100; the conferenceagreement provides $100 million.

j. Across all Foreign Operations accounts for Energy Conservation/Climate Change,the FY2003 estimate was $173.9 million; the Senate bill provided $185 million;the conference agreement provides $180 million.

k. Across all Foreign Operations accounts for Iodine Deficiency Disorder, the Houseand Senate bills provided $3.5 million.

l. Across all Foreign Operations accounts for bilateral HIV/AIDS programs, theFY2003 estimate was $628.1 million; the House bill provided $870.8 million;the Senate bill provided $1.291 billion; the conference agreement provides$1.035 billion.

m. The Senate bill provided two separate targets: $29 million for Injection SafetyPrograms and $46 million for Blood Safety Programs.

n. Across all Foreign Operations accounts for bilateral tuberculosis programs, theHouse bill provided $85.1 million ; the Senate bill provided $80 million; theconference agreement provides $101 million.

o. For bilateral Malaria programs, the House bill provided not less than the FY2003funding level. Across all Foreign Operations accounts for bilateral Malariaprograms, the conference agreement provides $101 million.

p. Across all Foreign Operations accounts for Family Planning/Reproductive Health,the FY2003 estimate was $446.5 million; the House bill provided $425 million;the Senate bill provided $445 million; the conference agreement provides $432million.

International Family Planning and UNFPA Funding

U.S. population assistance and family planning programs overseas have sparked continuous controversy during Foreign Operations debates for nearly two decades. For FY2004, the Administration requested $425 million for bilateral populationassistance, the same as proposed last year, but below the $446.5 million appropriatedby Congress for FY2003. Although funding considerations have at times beenheatedly debated by Congress, the most contentious family planning issues addressedin nearly every annual congressional consideration of Foreign Operations bills havefocused on two matters: whether the United States should contribute to the U.N.Population Fund (UNFPA) if the organization maintains a program in China whereallegations of coercive family planning have been widespread for many years, andwhether abortion-related restrictions should be applied to bilateral USAID populationaid grants (commonly known as the "Mexico City" policy).

UNFPA Funding. The most contentious issue usually concerns the abortion restriction question, but most recentattention has focused on UNFPA and a White House decision in July 2002 to blockthe $34 million U.S. contribution to the organization. During the Reagan and BushAdministrations, the United States did not contribute to UNFPA because of concernsover practices of forced abortion and involuntary sterilization in China whereUNFPA maintains programs. In 1985, Congress passed the so-called Kemp-Kastenamendment which has been made part of every Foreign Operations appropriationsince, barring U.S. funds to any organization that supports or participates "in themanagement" of a program of coercive abortion or involuntary sterilization. In 1993,President Clinton determined that UNFPA, despite its presence in China, was notinvolved in the management of a coercive program. In most years since 1993,Congress has appropriated about $25 million for UNFPA, but added a directive thatrequired that the amount be reduced by however much UNFPA spent in China. Consequently, the U.S. contribution has fluctuated between $21.5 million and $25million.

For FY2002, President Bush requested $25 million for UNFPA. As part of a larger package concerning various international family planning issues, Congressprovided in the FY2002 Foreign Operations bill "not more than" $34 million forUNFPA. While members of the Appropriations Committees say it was their intentto provide the full $34 million, the language allowed the President to allocatehowever much he chose, up to a $34 million ceiling. According to February 27,2002, testimony by Arthur Dewey, Assistant Secretary of State for Population,Refugees, and Migration before the Senate Foreign Relations Committee, the WhiteHouse placed a hold on UNFPA funds in January 2002 because new evidencesuggested that coercive practices were continuing in Chinese counties where UNFPAconcentrates its programs. A September 2001 investigation team, sponsored by thePopulation Research Institute, concluded that a consistent pattern of coercioncontinued in "model" UNFPA counties, including forced abortions and involuntarysterilizations. Refuting these findings, a UNFPA-commissioned review team foundin October 2001 "absolutely no evidence that the UN Population Fund supportscoercive family planning practices in China or violates the human rights of Chinesepeople in any way." (See House International Relations Committee hearing, Coercive Population Control in China: New Evidence of Forced Abortion andForced Sterilization , October 17, 2001. See also testimony of Josephine Guy andNicholaas Biegman before the Senate Foreign Relations Committee, February 27,2002.)

Although most observers agree that coercive family planning practices continue in China, differences remain over the extent to which, if any, UNFPA supportsinvoluntary activities and whether UNFPA should operate at all in a country wheresuch conditions exist. Given the conflicting reports, the State Department sent itsown investigative team to China for a two-week review of UNFPA programs on May13, 2002. The team, which was led by former Ambassador William Brown andincluded Bonnie Glick, a former State Department official, and Dr. Theodore Tong,a public health professor at the University of Arizona, made three findings andrecommendations in its report dated May 31:

Findings:

There is no evidence that UNFPA "knowingly supported orparticipated in the management of a program of coercive abortion or involuntarysterilization" in China;

China maintains coercive elements in its population programs;and

Chinese leaders view "population control as a high priority"and remain concerned over implications of loosening controls for socioeconomicchange.

Recommendations:

The United States should release not more than $34 million ofpreviously appropriated funds to UNFPA;

Until China ends all forms of coercion in law and practice, noU.S. government funds should be allocated to population programs in China;and

Appropriate resources, possibly from the United States, shouldbe allocated to monitor and evaluate Chinese population controlprograms.

Despite the team's recommendation to release the $34 million, Secretary of State Powell decided on July 22, 2002, to withhold funds to UNFPA and torecommend that they be re-directed to other international family planning andreproductive health activities. (The authority to make this decision had beendelegated previously by the President to the Secretary of State.) The StateDepartment's analysis of the Secretary's determination found that even thoughUNFPA did not "knowingly" support or participate in a coercive practice, that alonewould not preclude the application of Kemp-Kasten. Instead, a finding that therecipient of U.S. funds -- in this case UNFPA -- simply supports or participates insuch a program, whether knowingly or unknowingly, would trigger the restriction.

The team found that the Chinese government imposes fines and penalties on families that have children exceeding the number approved by the government, apractice that in some cases coerces women to have abortions they would nototherwise undergo. The State Department analysis concluded that UNFPA'sinvolvement in China's family planning program "allows the Chinese governmentto implement more effectively its program of coercive abortion." (The full text of theState Department's analysis is online at the State Department's website at http://www.state.gov/g/prm/rls/other/12128.htm . The State Department'sassessment team report is also online, at http://www.state.gov/g/prm/rls/rpt/2002/12122.htm .)

Critics of the Administration's decision opposed it not only because of the negative impact it may have on access to voluntary family planning programs bypersons in around 140 countries where UNFPA operates, but also because of thepossible application of the determination for other international organizations thatoperate in China and to which the U.S. contributes.

For FY2003, the President proposed no funding for UNFPA, although $25 million was requested in "reserve" for the account from which UNFPA receives itsfunding. Presumably, this could have been made available to UNFPA if it was foundnot to be in violation of Kemp-Kasten. Following several legislative attempts toreverse the Administration's denial of UNFPA -- in both FY2002 supplementalappropriations and regular FY2003 Foreign Operations measures -- Congressapproved in P.L. 108-7 , the Consolidated Appropriations Act for FY2003, aprovision allocating $34 million to UNFPA, the same as in FY2002, so long asseveral conditions were met. The most significant requirement was that the Presidentmust certify that UNFPA is no longer involved in the management of a coercivefamily planning program.

Since the July 2002 determination, the Administration has transferred to USAID $34 million from FY2002 appropriations and $25 million from FY2003 that wouldhave otherwise been provided to UNFPA in order to fund USAID bilateral familyplanning programs for which UNFPA has no involvement. The State Department'sjustification of its September 25, 2003 letter to Congress regarding the FY2003resources noted that the "factual circumstances" do not support making adetermination that UNFPA no longer supports or participates in the management ofa program of coercive abortion or involuntary sterilization. Section 572 of theFY2003 Foreign Operations Appropriations required the President to issue such astatement before restoring U.S. funding to UNFPA.

Like for FY2003, the FY2004 Foreign Operations request did not propose funding for UNFPA, but placed $25 million in "reserve" for unidentified voluntarycontributions to international organizations.

"Mexico City" Policy. The debate over international family planning policy and abortion began nearly three decadesago, in 1973, when Congress added a provision to the Foreign Assistance Act of1961 prohibiting the use of U.S. appropriated funds for abortion-related activitiesand coercive family planning programs. During the mid-1980s, in what has becomeknown as the "Mexico City" policy (because it was first announced at the 1984Mexico City Population Conference), the Reagan Administration, and later theGeorge H. W. Bush Administration restricted funds for foreign non-governmentalorganizations (NGOs) that were involved in performing or promoting abortions incountries where they worked, even if such activities were undertaken with non-U.S.funds . Several groups, including International Planned ParenthoodFederation-London (IPPF-London), became ineligible for U.S. financial support. Insome subsequent years, Congress narrowly approved measures to overturn thisprohibition, but White House vetoes kept the policy in place. President Clinton in1993 reversed the position of his two predecessors, allowing the United States toresume funding for all family planning organizations so long as no U.S. money wasused by those involved in abortion-related work.

Between 1996 and 2000, the House and Senate took opposing positions on the Mexico City issue, actions that repeatedly held up enactment of the final ForeignOperations spending measures. The House position, articulated by RepresentativeChris Smith (N.J.) and others, supported reinstatement of the Mexico City policyrestricting U.S. aid funds to foreign organizations involved in performing abortionsor in lobbying to change abortion laws or policies in foreign countries. The Senate,on the other hand, rejected in most cases House provisions dealing with Mexico Citypolicy, favoring a position that left these decisions in the hands of theAdministration. Unable to reach an agreement satisfactory to both sides, Congressadopted interim arrangements during this period that did not resolve the broadpopulation program controversy, but permitted the stalled Foreign Operationsmeasure to move forward. The annual "compromise" removed House-added MexicoCity restrictions, but reduced population assistance to $385 million, and in severalyears, "metered" the availability of the funds at a rate of one-twelfth of the $385million per month.

In FY2000, when the issue became linked with the separate foreign policy matter of paying U.S. arrears owed to the United Nations, a reluctant PresidentClinton agreed to a modified version of abortion restrictions, marking the first timethat Mexico City conditions had been included in legislation signed by the President (enacted in the Foreign Operations Act for FY2000, H.R. 3422 ,incorporated into H.R. 3194 , the Consolidated Appropriations Act forFY2000, P.L. 106-113 ). Because the President could waive the restrictions for $15million in grants to organizations that refused to certify, there was no major impacton USAID family planning programs in FY2000, other than the reduction of $12.5million in population assistance that the legislation required if the White Houseexercised the waiver authority.

When Congress again came to an impasse in FY2001, lawmakers agreed to allow the new President to set policy. Under the FY2001 Foreign Operationsmeasure, none of the $425 million appropriation could be obligated until afterFebruary 15, 2001.

Subsequently, on January 22, 2001, two days after taking office, President Bush issued a Memorandum to the USAID Administrator rescinding the 1993memorandum from President Clinton and directing the Administrator to "reinstatein full all of the requirements of the Mexico City Policy in effect on January 19,1993." The President further said that it was his "conviction that taxpayer fundsshould not be used to pay for abortions or to advocate or actively promote abortion,either here or abroad." A separate statement from the President's press secretarystated that President Bush was "committed to maintaining the $425 million fundinglevel" for population assistance "because he knows that one of the best ways toprevent abortion is by providing quality voluntary family planning services." Thepress secretary further emphasized that it was the intent that any restrictions "do notlimit organizations from treating injuries or illnesses caused by legal or illegalabortions, for example, post abortion care." On February 15, 2001, the day on whichFY2001 population aid funds became available for obligation, USAID issued specificpolicy language and contract clauses to implement the President's directive. Theguidelines are nearly identical to those used in the 1980s and early 1990s when theMexico City policy applied.

Critics of the certification requirement oppose it on several grounds. They believe that family planning organizations may cut back on services because they areunsure of the full implications of the restrictions and do not want to risk losingeligibility for USAID funding. This, they contend, will lead to higher numbers ofunwanted pregnancies and possibly more abortions. Opponents also believe the newconditions undermine relations between the U.S. Government and foreign NGOs andmultilateral groups, creating a situation in which the United States challenges theirdecisions on how to spend their own money. They further argue that U.S. policyimposes a so-called "gag" order on the ability of foreign NGOs and multilateralgroups to promote changes to abortion laws and regulations in developing nations. This would be unconstitutional if applied to American groups working in the UnitedStates, critics note.

Supporters of the certification requirement argue that even though permanent law bans USAID funds from being used to perform or promote abortions, money isfungible; organizations receiving American-taxpayer funding can simply use USAIDresources for permitted activities while diverting money raised from other sources toperform abortions or lobby to change abortion laws and regulations. The certificationprocess, they contend, closes the fungibility "loophole."

Since reinstatement of the Mexico City policy in early 2001, several bills have been introduced to reverse the policy, but except for language included in the SenateFY2004 Foreign Operations appropriations bill (see below), none has passed eitherthe House or Senate, and no measure has been enacted into law.

Congressional Action. On July 23, the House approved in H.R. 2800 $425 million for bilateral familyplanning programs, as requested. For UNFPA contributions, the House bill provided$25 million, available only under certain conditions:

none of the funds can be used in China;

funds must be maintained by UNFPA in a separate account andmay not commingle amounts;

UNFPA does not perform abortions;

UNFPA does not provide any resources for the Chinese StatePlanned-Birth Commission or its regional affiliates; and

U.S. contributions will be reduced by whatever amount, if any,UNFPA spends in China.

In addition, the terms of the Kemp-Kasten amendment continued to apply, the terms of which resulted in a cut-off of U.S. contributions in FY2002.

On July 17, the Senate Appropriations Committee approved its FY2004 Foreign Operations ( S. 1426 ), including several significant changes regardinginternational family planning funding and policy that were opposed by theAdministration. (The Senate, on October 30, subsequently passed the legislation,approving the House bill, H.R. 2800 , without making changes to theCommittee-reported text concerning international family planning issues.)

For bilateral family planning activities, the Senate bill provided $445 million, $20 million above the President's request. In Section 691, the bill effectivelyreversed the Administration's Mexico City policy. Specifically, the provision statedthat foreign NGOs shall not be declared ineligible for U.S. funds solely on the basisof health or medical services they provide (including counseling and referral services)with non-U.S. government funds. This exemption would apply so long as theservices do not violate the law of the country in which they are performed and thatthey would not violate U.S. laws if provided in the United States. Section 691 furtherprovided that non-U.S. government funds used by foreign NGOs for advocacy andlobbying activities would be subject to conditions that also apply to U.S. NGOs. Since it is largely held that American NGOs would not be subject to these restrictionsunder the Constitutional protection of free speech, it was possible that this latterexemption would have lifted current prohibitions that apply to overseas NGOs. Inthe White House "Statement of Administration Policy" for S. 1426 , theexecutive said that the President would veto the bill if it included this provision.

For UNFPA, the Senate bill provided $35 million in FY2004, but made these funds, together with those appropriated for FY2002 and FY2003, subject toKemp-Kasten limitations and current restrictions that apply in FY2003.

The conference agreement on H.R. 2673 , the Consolidated Appropriations Act, 2004 ( P.L. 108-199 ), within which Foreign Operations isincluded as Division D, earmarks $432 million for bilateral family planningassistance, $7 million higher than the request, deletes the Senate provision reversingthe Mexico City policy, and modifies House and Senate-passed text regardingUNFPA.

For UNFPA, the legislation earmarks $34 million, subject, however, to the Kemp-Kasten conditions that resulted in the withholding of funds the past two years. More specifically, the bill specifies that:

none of the funds can be used in China;

funds must be maintained by UNFPA in a separate account andmay not be commingled with other sums; and

UNFPA does not perform abortions;

The conference agreement further directs how the previously withheld money will be disbursed, thereby resolving a long-standing dispute over whether to commit theseresources to other development programs or place them in a reserve account in caseUNFPA again becomes eligible for U.S. support. H.R. 2673 specifiesthat the $34 million withheld in FY2002 shall be used for family planning programsin twelve countries, including Congo, Ethiopia, Uganda, Haiti, and Russia. The $25million in FY2003 funds that was earmarked but not transferred to UNFPA will nowbe made available for a new initiative within the Child Survival and Health accountassisting young women, mothers, and children who are victims of trafficking inpersons.

In authorizing legislation related to portions of the Foreign Operations appropriation bill, the House voted on July 15 (216-211) to delete acommittee-approved amendment added to H.R. 1950 that sought torestore U.S. funding to UNFPA. On May 8, the International Relations Committeehad approved a provision offered by Congressman Crowley that authorized $50million for a U.S. contribution to UNFPA for each of FY2004 and FY2005. TheCrowley amendment further would have altered existing law for determining UNFPAeligibility by requiring that the President find that UNFPA does not "directly"support or participate in coercive or involuntary activities. This would appear tomake it more difficult for the President to block funding for UNFPA than underconditions that apply for this year. Not only would the Crowley amendment haveadded the word "directly," but also defined the circumstances under which UNFPAwould be found ineligible as "knowingly and intentionally working with a purposeto continue, advance or expand the practice of coercive abortion or involuntarysterilization, or playing a primary and essential role in a coercive or involuntaryaspect of a country's family planning program."

In another authorizing bill -- S. 925 , the Foreign Relations Authorization for FY2004 -- the Senate added on July 9 an amendment by SenatorBoxer that, like S. 1426 , would effectively reject the President's MexicoCity policy. Senate opponents had tried to table the Boxer amendment, an effort thatfailed on a vote of 43-53. The Administration strongly opposes the Boxeramendment and says the President would veto the bill if it remains in the legislation. The Senate has not resumed consideration of S. 925 .

Afghanistan Reconstruction (6)

Congress considered simultaneous requests in 2003 for additional reconstruction aid for Afghanistan. In the regular FY2004 Foreign Operations budget proposal,submitted in February 2003, the Administration asked for $550 million for economicand military support for Kabul. More recently, as part of the President's $87 billionFY2004 supplemental request, most of which would support U.S. military operationsin Iraq and Afghanistan, and Iraq reconstruction, the White House proposed $799million additional aid for Afghanistan. (The Administration further planned tore-program $390 million prior year DOD, State Department, and USAIDappropriations for Afghan reconstruction.) The Emergency SupplementalAppropriations Act for Defense and Reconstruction of Iraq and Afghanistan ( P.L.108-106 ) appropriated $1.164 billion to Afghanistan. The ConsolidatedAppropriations Act, 2004 ( H.R. 2673 ; P.L. 108-199 ), within whichFY2004 Foreign Operations regular spending was incorporated, provides $405million for humanitarian and reconstruction assistance to Afghanistan. This bringsthe total FY2004 aid package for Afghanistan to nearly $1.6 billion.

The conditions in Afghanistan represent a challenging mix of ongoing security concerns, infrastructure destruction, and humanitarian needs likely requiring a robustand sustained intervention. While the hunt for Al Qaeda forces within Afghanistancontinues, transitional and reconstruction assistance are well underway. Anexamination of the progress of reconstruction efforts and aid priorities sinceDecember 2001 reveals the complexity of the tasks at hand and the important rolesto be played by the United States and the international community. The case ofAfghanistan may present a special category of international crisis response, in whichthe United States and others pursue the war on terrorism in a country whilesimultaneously providing humanitarian and reconstruction assistance.

So far, the international community has continued to provide large amounts of aid and resources for the reconstruction effort. A long-term commitment will likelybe necessary to ensure that a stable, democratic Afghanistan emerges and will not fallprey to the twin evils of drugs and terrorism. The outcomes of the internationaldonors conference in January 2002 and other donor conferences since then indicatea strong willingness on the part of the international community to assist in therestoration of Afghanistan. However, reconstruction costs are estimated by some tobe more than $15-$30 billion over the next decade.

Current Operating Environment. Key developments since September 11, 2001 and the collapse of the Taliban focuson three main pillars: First, the development of plans for security including thepresence of an International Security Assistance Force (ISAF), the establishment andtraining of an Afghan National Army and police force, the demobilization of privatemilitias, and the formation of provincial reconstruction teams; second, establishingthe political framework through the Bonn Conference and Afghanistan InterimAdministration (AIA), the loya jirga and Islamic Transitional Government ofAfghanistan (ITGA), and renewed diplomatic ties with the international community;and third, the creation of a strategy for reconstruction beginning with the TokyoReconstruction Conference in January 2002. The current operating environmentcontinues to highlight the importance of these three themes and the work that remainsto be done to assure Afghanistan's recovery.

The most serious challenge facing Afghanistan today is the lack of security. Former commanders maintain control over their own areas and continue fighting withtheir rivals, making difficult the extension of control by the national government, theprovision of humanitarian assistance, and progress on reconstruction. The ISAF,created by the Bonn agreement, has reached its agreed strength of about 5,500. NATO assumed command of the 30-nation force in August 2003. Because ofongoing threats to Afghanistan's internal security, there have been calls for ISAFexpansion and deployment to other cities. In October 2003, the U.N. SecurityCouncil formally backed an expansion of ISAF outside of Kabul by adoptingResolution 1510.

U.S. forces, with participation from French and British forces, are continuing to train a new Afghan National Army that it is hoped will ultimately allow the Kabulgovernment to maintain security on its own, and enable foreign forces to departAfghanistan. The targeted size of the army is 70,000, but it is expected to takeseveral years to achieve full strength. With the continued fighting and insecurity, theJapan and UN-led process of demobilization and integration of combatants has alsobeen slow.

Ensuring a secure environment for reconstruction gained greater attention with an initiative by the Pentagon to expand the role of the U.S. military in Afghanistan.In December 2002, DOD announced that it would be setting up "provincialreconstruction teams" (PRTs), composed of U.S. combat and civil affairs officers,to provide security for reconstruction workers and to extend the influence of theKabul government. Plans call for eight to ten PRTs. Six of these PRTs are alreadyin operation (including one run by Britain, one by New Zealand, and one byGermany) and observers say NGOs are gravitating to areas where they are presentdue to improved security. This marks a departure from the previous policy of relyingsolely on security through the development of an Afghan national army or expansionof the ISAF, and engages U.S. forces beyond military action to oust the Taliban andAl Qaeda.

Still, factional fighting and increased criminal activity have undermined relief and reconstruction operations. In some cases, where operations were directlytargeted, this has led to the temporary suspension of U.N. missions or withdrawal ofaid agencies from certain areas. The United Nations has begun a database to recordnational security incidents and to provide more effective, timely information andsituation assessments to the aid community.

The strength and influence of the central government is viewed as a key factor that will determine the success of the intervention and assistance on the part of theinternational community. Humanitarian and reconstruction programs face thechallenge of maintaining their foothold despite the complex humanitarianrequirements (such as population returns and resettlement, food security, shelter, andwinter assistance) and reconstruction problems (such as rebuilding the infrastructure,economy and agricultural base; addressing landmines and environmental damage;and reestablishing health, education, and community centers.) Afghanistan isbeginning to prepare for presidential elections to take place in 2004, followed byparliamentary elections one year later. A loya jirga began in mid December 2003 toconsider a draft permanent constitution that was publicly unveiled on November 3. After a constitution is adopted, U.S., Afghan, and international attention will turn tothe holding of elections.

Apart from the security problems, the current operating environment presents a number of other urgent challenges. The collapsed infrastructure, rugged terrain, andextreme weather are significant factors with regard to access, food aid, logistics, reconstruction and must be understood in the context of the continuing vast numbersof refugees and IDPs, the differences among the regions in which they are located,and the political and security situation throughout the country. There is a need forstronger links between humanitarian and reconstruction projects so that Afghans canbegin to move beyond initial reintegration to more permanent resettlement. UNHCRcontinues to assist refugees and IDPs, although some have raised concerns that theinfrastructure may not yet be able to support this many returnees.

The United States has international help in carrying out the reconstruction of Afghanistan. The United States is training the new army and about 9,000 U.S. troopscontinue to combat Taliban/Al Qaeda remnants. The U.S. Treasury Department isadvising the government on its budget and other financial affairs. Amongcontributions by other countries, Italy is providing advice on judicial reform andGermany is helping establish a national police force. The United States, Japan andSaudi Arabia are financing the rebuilding of the Kabul-Qandahar-Herat majorroadway.

There have been some reports that Afghanistan officials have complained about the slow pace at which pledged funds were being paid. In a similar vein, in the pastthe United States has been critical of other donors for not meeting their "fair share"of the cost of recovery and for not doing enough on a multilateral level. On the onehand, determining the "fair share" of the costs of reconstruction for any one countryor group of countries varies from conflict to conflict and depends in part on theresources being spent on conflicts elsewhere. On the other hand, the way in whichfunds are distributed -- be it multilaterally through U.N. agencies or bilaterally withfunds supporting international organizations and NGOs directly -- has a directimpact on implementation. Others are concerned that international donors mightshift their focus to Iraq reconstruction, and lose interest or run too low on resourcesto continue to participate in Afghan reconstruction.

If progress on security, road construction, and reconstruction efforts are made in advance of the planned 2004 elections, it could increase the chances of the successof moderates in those elections. Additional funding could also have an impact ondecisions by the international community possibly resulting in larger contributions. It could also help efforts of the Afghan government to expand ISAF, which is nowlimited only to Kabul.

Increased funding could also have negative implications. There are concerns that it could add to the already high levels of corruption. Some experts are concernedabout absorption capacity and whether additional funds can be allocated quickly andeffectively. If progress is not achieved, the increase could be seen as largelysymbolic and ineffective. Others have raised the possibility that the United Stateswill be seen giving too much support to the Karzai government in advance of the2004 elections.

Tokyo Pledging Conference. The International Conference on Reconstruction Assistance to Afghanistan held in Tokyoin January 2002 gave the Afghan Interim Authority (AIA) a chance to demonstrateits commitment to the next phase of Afghanistan's recovery and provided theinternational donor community an opportunity to come together and formallydemonstrate support for this initiative. The sixty-one countries and twenty-oneinternational organizations represented pledged $1.8 billion for 2002. The U.S.government pledged $297 million, drawn from existing sources -- either from the$40 billion Emergency Terrorism Response supplemental ( P.L. 107-38 ) that waspassed shortly after the September 11, 2001 attacks or from regular FY2002appropriations. The total pledged at Tokyo was $4.5 billion, with some statesmaking pledges over multiple years and commitments to be carried out in differenttime frames. Some countries offered support in kind but placed no monetary valueon that.

Subsequent U.S. Aid Transfers, FY2002 and FY2003. Since the Tokyo pledging conference, throughsupplemental and regular appropriation bills, Congress has approved an additional$970 million in U.S. assistance to Afghanistan, making Kabul one of the largestrecipients of American aid. An emergency FY2002 supplemental measure ( P.L.107-206 ) added $258 million for Afghanistan to amounts previously allocated,bringing the total amount of U.S. assistance in FY2002 to $686 million, well inexcess of funding pledged at the Tokyo conference. In FY2003, Congress passedin regular ( P.L. 108-7 ) and supplemental ( P.L. 108-11 ) appropriation acts over $700million, of which $647 million came under Foreign Operations programs. In eachof these actions, Congress increased levels beyond those requested by theAdministration. The $40 million add-on in P.L. 108-11 allowed USAID to acceleratethe Kabul-Qandahar-Herat road construction project that is jointly financed withJapan and Saudi Arabia.

In related legislation, the Afghanistan Freedom Support Act of 2002 ( P.L. 107-327 , S. 2712 ), passed by Congress on November 15, 2002, andsigned by the President on December 4, 2002, authorizes an additional $3.3 billionfor Afghanistan over four years. Included is $2 billion for humanitarian,reconstruction, and enterprise fund assistance through FY2006 and $300 million indrawdown from U.S. military stocks of defense articles and equipment forAfghanistan and other countries and organizations participating in restoring Afghansecurity. The legislation also includes a Sense of Congress that calls for an expandedInternational Security Assistance Force with an authorization of an additional $1billion over two years.

FY2004 Regular Afghanistan Aid Request. For FY2004 Regular Appropriations, the Administrationrequested $550 million for Afghanistan. Although the FY2004 proposal was lessthan for FY2002 and FY2003, when funding for humanitarian programs in FY2004(food, refugees, disaster relief) are added, the total sum is nearer the aid amounts ofprevious years. (Humanitarian funds are usually not allocated on a country basisuntil the fiscal year begins.)

FY2004 Supplemental Request. Subsequently, as part of an $87 billion FY2004 supplemental proposal, mainly tofund continuing military operations and reconstruction programs in Iraq, theAdministration's requested in September 2003 $1.2 billion in additional Afghanistanassistance. Of the total, $799 million would be for new appropriations and $390million would come from previously appropriated DOD, State Department, andUSAID funds. The new funding more than doubled U.S. assistance to Afghanistanin FY2003. The proposal came at a time of growing criticism over delays in aiddelivery, deteriorating security conditions, and concern that U.S. and internationalattention was shifted to Iraq. Key features of the $799 million in new appropriationincluded targeting projects that would have the most immediate impact on the livesof the Afghan population, such as:

$402 million for security, with funding included to train and support police, border patrol, the military and counter-narcotics forces, disarmamentand de-mobilization programs, and courthouse construction inKabul;

$129 million to reinforce the authority of the Government ofAfghanistan with budget support for high priority projects, technical experts placedin Afghan ministries, and voter registration and electionsupport;

$105 million for completion of the Kabul-Kandahar-Heratmajor highway, a program jointly financed by the United States, Japan, and SaudiArabia; and

$163 million for social programs and critical infrastructure,including education, health, and local projects.

An additional $390 million was planned to come from reallocated, prior-year funds, but the Administration did not specified how they would be used. The White Housealso asked that the $300 million limit on military drawdowns from DOD stocksenacted in the Afghanistan Freedom Support Act of 2002 ( P.L. 107-327 ) be increasedto $600 million.

Congressional Action

FY2004 Regular Afghanistan Appropriation. In mid-July 2003, the House approved not less than$600 million for Afghan reconstruction in FY2004 in the Foreign Operations fundingmeasure ( H.R. 2800 ). This level was $50 million higher than theAdministration's request, although the President's proposal did not reflect fundsdrawn from the refugee and disaster relief Foreign Operations accounts which couldcount towards the $600 million House target. The House Appropriations Committeefurther urged the State Department Coordinator of Assistance to Afghanistan andUSAID to allocate at least $10 million ($5 million from funds in H.R. 2800 ) to support Afghan women, to include the construction of 17 Women's Centersthat provide legal and protective services, computer and literacy classes, andvocational courses.

The Senate measure -- S. 1426 , as amended and passed as H.R. 2800 -- also provided $600 million. The Senate AppropriationsCommittee highlighted several aspects of U.S. reconstruction efforts for continuedsupport: training for the Afghan National Army and national police, combatingnarcotics production, bolstering democratic institutions, protecting and strengtheningopportunities for Afghan women in the economy and politics of the country,including support for women-led Afghan NGOs, supporting the Afghan HumanRights Commission and the Judicial Reform Commission, targeting aid on Afghancommunities and families who were victims of military operations, and removing mines, ordnance, and munitions in Afghanistan.

Subsequently, Foreign Operations spending was incorporated as Division D into the Consolidated Appropriations Act, 2004, ( H.R. 2673 ) legislation thatincludes 7 appropriation measures for FY2004. The enacted text of H.R. 2673 provides $405 million be made available for humanitarianand reconstruction assistance for Afghanistan. Because of the nearly $400 millionin additional funds over the President's request for Afghanistan provided in theFY2004 Iraq/Afghanistan reconstruction supplemental (see below), conferees couldreduce amounts in the regular Foreign Operations measure for Afghanistan below the$600 million recommended in House and Senate-passed bills and still meet or exceedthe Administration's aid recommendation. (See Table 16.)

Table 16. U.S. Assistance to Afghanistan, FY2002-FY2004 ($s millions)

*Amounts reflect levels provided in the Consolidated Appropriations Act, 2004 ( H.R. 2673 ; P.L. 108-199 ).

a. The FY2004 supplemental provides $50 million for peacekeeping activities in both Iraq andAfghanistan.

b. The Consolidated Appropriations Act, 2004, earmarks $405 million for Afghanistan. Thespecific account allocations listed in the conference report's Statement of Managers, however,totals $403 million.

In addition to specifying how the $405 million should be allocated across various Foreign Operations bill accounts, conferees earmarked amounts for severalpriority activities within these accounts:

$2 million for reforestation activities;

$2 million for the Afghan Judicial ReformCommission;

$5 million to support the needs of Afghan women;and

$2 million to assist Afghan communities and families sufferinglosses as a result of military operations

Because Congress appropriated higher-than-requested amounts for counter narcotics, law enforcement, and peacekeeping programs in the FY2004 reconstructionsupplemental appropriation ( P.L. 108-106 ), conferees did not provide funding forthese activities in H.R. 2673 .

FY2004 Supplemental. S. 1689 , as passed the Senate on October 17, approved the President's$799 million Afghan reconstruction proposal largely along the lines proposed (SeeTable 17). The House measure ( H.R. 3289 ), which also cleared onOctober 17, increased spending in Afghanistan to $1.174 billion. The add-ons forKabul come from transfers in what House lawmakers deemed to be low priority itemsrequested for Iraq. House and Senate conferees agreed on October 29 to fund Afghanreconstruction at roughly the higher House-approved levels.

Table 17. Afghanistan FY2004 Supplemental: Sector Allocation ($ in millions)

a. The House bill and conference agreement included funding for Experts and Policy within the category of Elections and Improved Governance.

b. Total does not include $61 million provided by the Senate for a USAID interim facility in Kabul, $44 million provided in the House bill for an annex to the U.S.embassy in Kabul, or $56.6 million provided in the conference agreement forUSAID operating expenses in Afghanistan, a USAID interim facility in Kabul,and the USAID Inspector General.

As shown in Table 17, the enacted legislation increased the overall reconstruction funding from new appropriations by $365 million with significantchanges over the Administration's request in allocations for infrastructure(particularly power generation and road construction), governance, and socialservices. Of note, the legislation included a $60 million ESF earmark for women'sprograms, including technical and vocational education, programs for women andgirls against sexual abuse and trafficking, shelters for women and girls, humanitarianassistance for widows, support of women-led NGOs, and programs for and trainingon women's rights. (For more details on the Afghan supplemental issue, see CRS Report RL32090 , FY2004 Supplemental Appropriations for Iraq, Afghanistan, andthe Global War on Terrorism: Military Operations and Reconstruction Assistance .)

Iraq Reconstruction (7)

Responding to mounting concerns regarding delays, impact, and expansion of Iraq reconstruction activities, President Bush submitted to Congress on September17, 2003, a $20.3 billion request in additional Iraq reconstruction and securityfunding. The resources were part of an $87 billion package covering U.S. militarycosts and smaller amounts for accelerating rehabilitation efforts in Afghanistan. Thisnew supplemental followed earlier approval in April of roughly $3 billion for thepurposes of relief and reconstruction in Iraq in the Emergency Wartime SupplementalAppropriations Act, 2003 ( P.L. 108-11 ; H.R. 1559 ). Of the totalprovided in P.L. 108-11 , $2.48 billion was placed in a special Iraq Relief andReconstruction Fund supporting efforts in a wide range of sectors, including waterand sanitation, food, electricity, education, and rule of law. The FY2003supplemental also provided $489.3 million through the Department of Defensebudget for repair of oil facilities.

FY2004 Supplemental Proposal

The FY2004 supplemental was intended to fund the most pressing, immediate needs in Iraq, with the aim of having a noticeable impact on the two greatestreconstruction concerns that have been raised since the occupation of Iraq began -- security and infrastructure. More than $5 billion would be targeted at improving thesecurity capabilities of the Iraqi people and government -- including training andequipment for border, customs, police, and fire personnel, and to develop a new Iraqiarmy and a Civil Defense Corps. Enhanced efforts to reform the judicial systemwould also be made.

Most of the remaining supplemental reconstruction request would go toward rapid improvements in infrastructure, including electricity, oil infrastructure, waterand sewerage, transportation, telecommunications, housing, roads, bridges, andhospitals and health clinics. These, according to Administration officials,represented the most urgent needs over the next 12 months, but by no meansaddressed total reconstruction requirements in 2004. Other concerns in such areasof government reform, agriculture, economic development, education, and civilsociety were not included in the Administration request. A relatively small amountof funds -- $300 million -- were requested for programs designed to encourage thegrowth of the private sector and jobs training.

Table 18. Iraq Supplemental: Sector Allocation (billions of dollars)

Source: Office of the Coalition Provisional Authority Representative, September 8, 2003, OMB, FY2004 Supplemental Appropriation request, September 17, 2003, andHouse and Senate Appropriation Committees.

a. The conference agreement excluded $50 million for Iraq traffic police, reduced by $300 million funding for two prisons, and reduced several other items.

b. Excluded $25 million for consultants to plan for continued development andbuilding rehabilitation and reduced amounts for electric generation.

c. Reduced funds for emergency supplies of refined oil petroleum products by $210million.

d. House and Senate bills combined the categories of Water and sewerage servicesand Water resources. The House amount excluded $153 million for solid wastemanagement, including 40 trash trucks and $100 million for environmentalrestoration (marsh) projects.

e. The conference agreement excluded $153 million for solid waste management,including 40 trash trucks and $100 million for environmental restoration(marsh) projects.

f. Excluded $4 million for a nationwide telephone numbering system, $9 million forpostal information architecture and zip codes, and $10 million for television andradio industry modernization.

g. Excluded $100 million for seven housing communities.

h. Excluded $150 million for a children's hospital in Basra and $7 million forAmerican and Iraqi health care organization partnerships, but included anadditional $100 million for clinics and hospital modernization.

i. Excluded $200 million for an American-Iraqi Enterprise Fund, but added $45million for micro-small-medium enterprises.

j. Excluded $90 million for Public Information Centers in Iraq municipalities, butadded $90 million for education.

Reconstruction Overview

Among the key policy objectives laid out by the Bush Administration in conjunction with the war in Iraq were the restoration of basic human services and theeconomic and political reconstruction of the country. While immediate overallresponsibility for the war and management of U.S. military activity in post-war Iraqbelongs to the Commander of U.S. Central Command, the Coalition ProvisionalAuthority (CPA) is responsible for the administration of Iraq and implementingassistance efforts there. The Authority is headed by L. Paul Bremer, appointed bythe President on May 6. He reports to Defense Secretary Rumsfeld. The CPA isstaffed by officials from agencies throughout the U.S. government as well aspersonnel from other coalition member nations. A Coalition Coordinating Councilprovides liaison with NGOs, donor countries, and UN agencies and directshumanitarian affairs.

The CPA has initiated a process intended to lead to Iraqi self-rule. It has appointed a 25-member Iraqi Governing Council and provided it with specificpowers and duties, including the choosing of a cabinet to serve as ministers under thesupervision of CPA advisors and the responsibility to set in motion formulation ofa national constitution. It has encouraged establishment of councils in villages andcities throughout the country to run local affairs and identify community needs. WithCPA funding and encouragement, institutions of civil and economic society havebeen reconstituted. Schools, including universities, hospitals and health clinics, arefunctioning. The oil-for-food program continues to provide basic foodstuffs. Newpolice and security forces are being trained. Programs to renovate and repair electricpower, water, oil production, roads and bridges, airports, and the seaport werelaunched. Jobs programs have been instituted to help stimulate the economy andlessen unemployment.

Although much has been accomplished since the U.S. occupation began in April, the occupation authority in the view of many has failed to successfullyreestablish order and security, restore infrastructure, and introduce political andeconomic reform, including Iraqi self-governance, in a timely manner. Theseproblems are interlinked; the successful conduct of much reconstruction work iscontingent on an environment of order and stability, and the lack of visible progressin restoring basic infrastructure and institutions of security opens the door to politicaldiscontent and opposition. The $20.3 billion supplemental request sought to addressthose infrastructure and security concerns that have made insufficient progress andon which other U.S. objectives in Iraq hinge.

Until mid-2003, the Administration had suggested that the cost of reconstruction up to the end of 2003 could largely be met by Iraqi and already previouslyappropriated U.S. resources. A national budget for Iraq covering the rest of the year,announced by the CPA on July 7, estimated expenditures of $6.1 billion and thecreation of a Central bank currency reserve of $2.1 billion, for a total budget of $8.2billion. New oil revenue, taxes, and profits from state owned enterprises would makeup $3.9 billion of these costs, according to the CPA's analysis. The remaining deficitof $4.3 billion would be covered by recently frozen and seized assets ($2.5 billion),the Development Fund for Iraq ($1.2 billion), and $3 billion in already appropriatedU.S. assistance. Iraq was projected to have $1.1 billion remaining for reconstructionby end of December 2003.

The Administration request suggested that a reassessment of Iraq's immediate reconstruction needs demanded greater outlays of revenue than projected in July. Italso suggested that presumed sources of additional revenue in 2004 -- chiefly, oilexport production and international donor contributions -- might not be as large asoriginally anticipated. In any case, the result was a supplemental reconstructionrequest nearly 20% larger than the size of the entire national budget for Iraq projectedon an annualized basis in early July.

Reconstruction Concerns and Critical Assessment.

Total Reconstruction Costs. As noted above, the supplemental request was intended to meet only the most important,immediate needs in Iraq in the 2004 fiscal year. Until October 2003, the cost of Iraqreconstruction was based on speculation and educated guesswork. However, as partof the lead-in to an international donors conference held in Madrid on October 24,the World Bank and the U.N. Development Program released a needs assessmentthey conducted of 14 Iraqi economic and social sectors. (8) The Bank/UNDPassessments put the cost of reconstruction for the 14 sectors at $36 billion over fouryears, a figure that does not include $19.4 billion estimated by the CPA for security,oil, and other critical sectors not covered by the Bank assessments. (9) Total Bank/CPAprojected reconstruction costs through 2007 amount to $55 billion, $17.5 billion in2004 alone. If Iraqi oil revenues are not sufficient to meet the projected needs --which appears likely in the near term by most accounts -- and other internationaldonors do not pledge significant contributions, the United States may face increasedfinancial demands, if it seeks to meet projected Iraqi needs.

Iraqi Oil Revenues and Financing Reconstruction. Until mid-2003, the Administration hadexpected most costs of reconstruction to be borne by Iraq through receipts from itsoil exports. While the decrepit state of oil production infrastructure and recurrentsabotage to pipelines and facilities have forced experts to downgrade expectationsof potential exports and receipts, any sustained increase in production will assist thereconstruction effort. Current rates of production are nearing 2 million barrels/day,but Iraqis do not expect to reach 2.5 million barrels until spring and 3 million untilthe end of 2004. Administration estimates of the prewar level range between 2.5 and3 million barrels. Ambassador Bremer indicated at a Senate hearing on September22 that he expected Iraq to produce sufficient oil in 2005 to take care of its basicneeds and provide additional funds for capital investment. (10) Undersecretary of StateLarson projected $12 billion in revenue in 2004 and $19 billion in 2005. (11) Anassociation of leading banks and financiers, the Institute of International Finance,predicted that oil revenue will be insufficient to cover the Iraqi operational budget in2004, leaving nothing for reconstruction. (12)

Roughly $503 million had been allocated by September 2003 from the FY2003 Emergency Wartime Supplemental for repair of oil facilities and restoration ofproduction and distribution systems. The Administration request for these purposesunder the FY2004 supplemental was $2.1 billion. Additional sums for Iraqi securityforces were in part intended to create an Iraqi force that would prevent pipeline andother oil facility sabotage.

Loans vs. Grants for Reconstruction. Closely related to the issue of Iraqi oil revenues as a means of financingreconstruction projects was the question of whether assistance could be extended ona loan rather than grant basis. Some argued that, given the substantial amount of oilrevenues that Iraq will generate at some point in the future, Baghdad would have themeans to service debt incurred for the purpose of rebuilding its infrastructure. Loans,either extended bilaterally or through some sort of trust fund, possibly managed bythe World Bank, would be repaid at some point, thereby reducing reconstructioncosts to the United States, they said.

The Administration, which proposed that the entire $20.3 billion supplemental be offered as grants, argued repeatedly during congressional hearings against addingto Iraq's already substantial debt obligations. Witnesses asserted that Iraq owedroughly $200 billion in pre-war debts, reparations, and other claims. G7 leadersagreed informally at the June 2003 summit to suspend through 2004 the requirementfor Iraq to service any existing debt, giving time to construct some sort of multilateraldebt restructuring arrangement. (13) Further, U.N.Security Council Resolution 1483stated that Iraqi oil exports or proceeds could not be attached by creditors through2007 unless authorized by the Council.

Beyond the matter of whether Iraq should incur more debt obligations in the near term was the question over who could legally assume responsibility for newsovereign debt. Although it would be possible that the World Bank could managean Iraq reconstruction trust fund that would receive contributions from internationaldonors, if the Bank were to use these resources for project lending, it would almostcertainly require, as it has in the past, that some sort of sovereign Iraq authorityassume the debt obligation. Until such time that legal authority is transferred to Iraqihands, the Coalition Provisional Authority is the temporary government of Iraq andwould be the one signing for the loans. Most legal scholars take the position that anoccupying power has no authority to incur new debts on behalf of the displacedsovereign. (14) Some contend, however, that thereis an exception in which a newgovernment would be responsible for the debt if it can be shown that the loans wererequired for the welfare of the occupied territory and the terms were fair andreasonable. (15)

This issue was closely examined by lawmakers. The Senate adopted (51-47) an amendment by Senators Bayh and Nelson on October 16 converting $10 billion ofreconstruction grants to loans, which could be later restored as grants if foreigncreditors cancel 90% of Iraq's debt. Earlier, Senator Dorgan had offered amendments in committee markup and on the Senate floor (tabled in both venues)that would have created an authority to use Iraqi oil to secure reconstructionfinancing and convert U.S. grants to loans. Senator Hutchison and others submittedan amendment that did not come up for floor debate directing $10 billion of the totalreconstruction supplemental to a Trust Fund, to be established within the WorldBank, out of which loans and loan guarantees would be made.

On the House side, Representative Wamp proposed but later withdrew an amendment during Committee markup that would have withheld one-half of Iraqfunds until after the election of a new Iraqi leader, at which time the remainingmoney would be available in the form of a loan. Representative Obey offered anamendment (defeated 25-36) that, among other things, would have transferred about$7 billion of reconstruction funds to a World Bank-administered loan facility. Afurther amendment by Representative Obey regarding a shift of grants to loans wasdefeated in the House 200-226.

House and Senate conferees agreed to provide all Iraq reconstruction aid as grants rather than loans.

Contracting Concerns. An Administration decision applied to the early reconstruction contracts to waive thenormal competitive bidding requirements and request bids from specific companieswhich were seen to have preexisting qualifications received considerable attentionby the business community. The closed bidding and lack of transparency disturbeda number of legislators, and some Members of Congress asked the GAO to determinewhether contracting agencies are following appropriate procedures.

Some observers noted that, in addition to many American firms, a number of international organizations and non-U.S. companies were excluded from theselections made by USAID and other agencies, and even British companies were notconsidered despite that country's role in the war. U.S. officials pointed out that onlya few select firms possessed the particular skills that would qualify them for the jobspecifications for Iraq reconstruction, and that time and security clearances were alsocritical factors. Foreign entities, potentially excluded by "buy America" provisionsof law, and other U.S. firms could participate as sub-contractors to the selectedAmerican firms. Sub-contractors are likely to compose half or more of the total costof each contract.

The Supplemental's Impact on Other Donors. At the time, it appeared possible that congressionalaction on the supplemental could influence the contributions of international donorsat the October donors' conference, and Administration officials encouraged Congressto complete debate on the spending bill prior that date. Some argued that a largepledge of U.S. aid prior to the conference might stimulate other donors to contributemore; diminution of the Administration plan, they argued, could have the oppositeeffect. Opponents of making U.S. aid for reconstruction in the form of loans alsocontended that other donors might follow the American lead and offer loans ratherthan grants, adding further to Iraq's debt problems. In addition, the supplementaltargeted sectors -- infrastructure and security -- that other donors were less likelyto support themselves. In similar "nation-building" exercises elsewhere, donors havetended to funnel contributions to the social sectors, such as education and health, andgrassroots democratization and economic development, all areas relatively untouchedby the supplemental.

Perhaps a more important factor in other donor calculations was the extent to which they would have a say in the use of funds. Donors had been reluctant toprovide assistance because they were wary of being perceived as supporting aunilateral U.S. policy. In response to this concern, donors discussed at a September6 meeting in Brussels, the concept of creating Iraq reconstruction trust funds,managed by the U.N. or World Bank, which would accept and distributecontributions. Control over how the money was spent, according to Undersecretaryof State Alan Larson who represented the U.S. at the September 6 meetings, wouldbe handled by some sort of a multilateral management board that might includeofficials from international organizations, major donors, and Iraqis representinginterim ministries. (16)

Management of Iraq Reconstruction Funds by U.S. Agencies. Administrative control over Iraq reconstructionfunds became a significant issue during congressional debate on the $2.475 billionappropriation in P.L. 108-11 . At that time, most had expected that transfers forreconstruction and post-conflict aid would be made to USAID, the State Department,and other traditional foreign assistance management agencies. But with plans for theDefense Department to oversee the governing of Iraq immediately after the end ofhostilities, the White House wanted to maintain maximum flexibility over thedistribution of resources so the President could transfer some or all of the funding toDOD. The proposal stimulated immediate controversy with a number of critics,including Members of Congress, arguing that aid programs should remain under thepolicy direction of the State Department and under the authorities of a broad andlongstanding body of foreign aid laws. Although initial House and Senate decisionswould have blocked Administration efforts to place control of reconstruction fundswith the Pentagon, ultimately Congress agreed to allow the White House to allocatethe resources among five agencies, including DOD. Funds for the Iraq Relief andReconstruction Fund appropriated in P.L. 108-11 have been managed by L. PaulBremer, head of the Coalition Provisional Authority (CPA), and the U.S. civilianadministrator in Iraq, who reports to the Secretary of Defense.

The Administration proposed that the entire $20.3 billion be placed in the Iraq Relief and Reconstruction Fund, as was the case with the previous supplemental, andto continue Ambassador Bremer and the CPA's role as administrators of the Fundunder DOD guidance. After submitting the supplemental, however, the White Houseannounced the establishment of a new "Iraq Stabilization Group,"headed by NationalSecurity Advisor Condoleezza Rice. The Group was intended to help speed upreconstruction efforts by identifying and resolving problems that had in some casesbeen the source of decision-making disputes in Washington. Some analysts believedthat the move was also intended to allow the State Department a greater voice inreconstruction policy. At the same time, the State Department staff serving under theCPA in Iraq was expected to grow from 55 to about 110. Nevertheless, AmbassadorBremer would continue to report to the Secretary of Defense. (17)

During congressional debate, the Senate tabled (56-42) an amendment by Senators Leahy and Daschle that would have placed the CPA under the directauthority and foreign policy guidance of the Secretary of State. The House bill,however, added a provision barring the coordination of defense or reconstructionactivities in Iraq or Afghanistan by a U.S. government officer who was not subjectto confirmation by the Senate. The House Committee wanted to ensure that whoeverwas in charge of coordination be available to testify at congressional oversighthearings. Senator Leahy proposed a similar amendment for Senate consideration. These proposals appeared to block the initiative of placing National Security CouncilAdvisor Rice, who is not subject to confirmation and who does not testify beforeCongress, in charge of coordinating reconstruction. The White House, however,contended that the new Iraq Stabilization Group did not affect control of reconstruction efforts and that the job remains under control of the DefenseDepartment. (18) In any case, the House provisionrequiring that the coordination ofreconstruction activities be headed by a confirmed U.S. official was deleted inconference negotiations.

Reconstruction Priorities and Costs. The Administration said that the request included only the most pressing, immediateneeds for Iraq in FY2004. However, the relative importance of certain items detailedin the request -- 're-engineering of postal service business practices' andconstruction of seven residential communities, for example -- was challenged byCongress. Further, the costs associated with reconstruction requests were subject toskepticism, with some congressional staff reportedly suggesting that the price tag wasintentionally inflated so that the Administration would not have to return to Congressto ask for more funds in 2004. (19) Several Senateamendments were offered but notadopted that would have reduced funding for what the sponsors regarded aslow-priority needs and redirected the resources for domestic or other militaryprograms in Iraq. The House bill proposed a $1.655 billion cut in Iraq reconstructionfunding, reducing or eliminating resources for a wide range of activities that theHouse found to be un-executable, low priority, or likely to receive funding from otherinternational donors. A number of these House recommendations for cuts wereadopted in the conference agreement. See Table 17 above for details of sector andproject reductions recommended by Congress.

Congressional Action.

FY2004 Regular Foreign Operations Appropriations. The President did not request, nor did eitherHouse or Senate bills provide, additional funding for Iraq reconstruction in theregular FY2004 Foreign Operations Appropriations measures. Although the Housedid not address Iraq reconstruction funding matters in H.R. 2800 , Sec.572 of the legislation required that Iraq reconstruction contracts awarded withappropriated funds be subject to full and open competition. Conferees meeting on H.R. 2673 -- the Consolidated Appropriations Act 2004 within whichForeign Operations has been incorporated as Division D -- decided, however, todrop the House contract provision in Sec. 572, believing the issue had beenadequately addressed in the FY2004 supplemental measure (see below).

FY2004 Iraq Reconstruction Supplemental. As illustrated in Table 17 above, theSenate-passed measure ( S. 1689 ) followed the general funding requestsproposed by the President, while the House bill ( H.R. 3289 ) reduced the$20.3 billion recommendation by $1.65 billion. Both bills further added sectionsrequiring more detailed reporting to Congress on reconstruction activities and placedlimits on, but not prohibiting non-competitive contracting procedures. The Housemeasure also prohibited reconstruction efforts to be coordinated by anyone notconfirmed by the Senate, apparently in reaction to the White House announcementestablishing the Iraq Stabilization Group, headed by national Security Advisor Rice.

House and Senate negotiators agreed to total Iraq reconstruction at levels similar to House-passed amounts, reducing funds for a number of activities deemed tooexpensive or of low priority. The conference agreement was approved in the Houseon October 29.

Perhaps the most challenging issue for conference committee consideration was whether to provide the entire reconstruction package as a grant, as proposed by thePresident and H.R. 3289 , or extend $10 billion in the form as a loan, asthe Senate bill recommends. The $10 billion loan in S. 1689 could laterbe converted to a grant if international creditors agree to cancel 90% of Iraq's debt. Under a threat of a Presidential veto, House and Senate conferees agreed to providethe entire package of aid as grants. (For more on Congressional action regarding theFY2004 supplemental, see CRS Report RL32090 , FY2004 SupplementalAppropriations for Iraq, Afghanistan, and the Global War on Terrorism: MilitaryOperations and Reconstruction Assistance .)

For Additional Reading

Overview

CRS Report 98-916 . Foreign Aid: An Introductory Overview of U.S. Programs and Policy, by [author name scrubbed] and [author name scrubbed].

CRS Report RL31959 . Foreign Assistance Authorization Act, FY2005, by [author name scrubbed].

CRS Report RL32090 , FY2004 Supplemental Appropriations for Iraq, Afghanistan, and the Global War on Terrorism: Military Operations & ReconstructionAssistance , by [author name scrubbed], [author name scrubbed], [author name scrubbed], and RhodaMargesson.

CRS Report RL31687 . The Millennium Challenge Account: Congressional Consideration of a New Foreign Aid Initiative, by [author name scrubbed].

CRS Report RL31829 , Supplemental Appropriations FY2003: Iraq Conflict, Afghanistan, Global War on Terrorism, and Homeland Security , by AmyBelasco and [author name scrubbed].

Foreign Operations Programs

CRS Report RS20329(pdf) . African Development Bank and Fund, by Raymond Copson.

CRS Issue Brief IB10050. AIDS in Africa, by Raymond Copson.

CRS Report RL32252 . AIDS Orphans and Vulnerable Children (OVC): Problems, Responses, and Issues for Congress, by Tiaji Salaam.

CRS Report RS21437 . The Asian Development Bank, [author name scrubbed].

CRS Issue Brief IB88093. Drug Control: International Policy and Approaches , by Raphael Perl.

CRS Report 98-568 , Export-Import Bank: Background and Legislative Issues, by James Jackson.

CRS Report RL31712 . The Global Fund to Fight to Fight AIDS, Tuberculosis, and Malaria: Background and Current Issues, by Raymond Copson and TiajiSalaam.

CRS Report RS21181. HIV/AIDS International Programs: Appropriations, FY2002-FY2005, by Raymond Copson.

CRS Report RS20622. International Disasters: How the United States Responds, by Lois McHugh

CRS Report RL30830 . International Family Planning: The "Mexico City" Policy, by [author name scrubbed].

CRS Report RS21330. The International Monetary Fund: Current Reforms, by [author name scrubbed].

CRS Report RL30932(pdf) , Microenterprise and U.S. Foreign Assistance, by [author name scrubbed].

CRS Issue Brief IB96008. Multilateral Development Banks: Issues for the 108th Congress , by Jonathan Sanford.

CRS Report 98-567 . The Overseas Private Investment Corporation: Background and Legislative Issues , by James Jackson.

CRS Report RS21168 . The Peace Corps: USA Freedom Corps Initiative, by [author name scrubbed].

CRS Report RL30545. Trafficking in Women and Children: The U.S. and International Response , by Francis Miko.

CRS Issue Brief IB96026. U.S. International Population Assistance: Issues for Congress , by [author name scrubbed].

CRS Report RL31689 . U.S. International Refugee Assistance: Issues for Congress , by [author name scrubbed].

CRS Report RL31433 . U.S. Global Health Priorities: USAID's Global FY2003 Budget, by Tiaji Salaam.

Country and Regional Issues

CRS Report RL31355 . Afghanistan's Path to Reconstruction: Obstacles, Challenges, and Issues for Congress, by [author name scrubbed].

CRS Report RL30883(pdf) . Africa: Scaling up the Response to the HIV/AIDS Pandemic, by Raymond Copson.

CRS Issue Brief IB95052. Africa: U.S. Foreign Assistance Issues, by Raymond Copson.

CRS Report RL32021 . Andean Regional Initiative (ARI): FY2003 Supplemental and FY2004 Assistance for Colombia and Neighbors, by [author name scrubbed] and ConnieVeillette.

CRS Report RS21213 . Colombia: Summary and Tables on U.S. Assistance, by Nina Serafino.

CRS Issue Brief IB93087. Egypt-United States Relations, by Clyde Mark.

CRS Issue Brief IB96019, Haiti: Issues for Congress, by [author name scrubbed].

CRS Report RS21751 . Humanitarian Crisis in Haiti: 2004, by [author name scrubbed].

CRS Report RL31833 . Iraq: Recent Developments in Humanitarian and Reconstruction Assistance, by [author name scrubbed] and [author name scrubbed].

CRS Issue Brief IB85066. Israel: U.S. Foreign Assistance, by Clyde Mark.

CRS Issue Brief IB93085. Jordan: U.S. Relations and Bilateral Issues , by Alfred Prados.

CRS Report RL31412. Mexico's Counter-Narcotics Efforts Under Fox, December 2000 to April 2002, by [author name scrubbed].

CRS Report RS21457 . The Middle East Partnership Initiative: An Overview, by [author name scrubbed].

CRS Report RS21353 . New Partnership for Africa's Development (NEPAD), by Nicholas Cook.

CRS Report RS20895. Palestinians: U.S. Assistance, by Clyde Mark.

CRS Report RL31759 . Reconstruction Assistance in Afghanistan: Goals, Priorities, and Issues for Congress , by [author name scrubbed].

CRS Issue Brief IB98043. Sudan: Humanitarian Crisis, Peace Talks, Terrorism and U.S. Policy , by [author name scrubbed].

CRS Report RL31785 . U.S. Assistance to North Korea , by Mark Manyin and Ryun Jun.

CRS Report RL31362(pdf) . U.S. Foreign Aid to East and South Asia: Selected Recipients , by [author name scrubbed].

CRS Report RL32260 . U.S. Foreign Assistance to the Middle East: Historical Background, Recent Trends, and the FY2005 Request, by [author name scrubbed].

CRS Report RL32239. World Bank Activities in the Middle East and North Africa (MENA), [author name scrubbed].

Selected World Wide Websites

African Development Bank http://www.afdb.org/home.htm

African Development Foundation http://www.adf.gov/

Asian Development Bank http://www.adb.org/

CRS Current Legislative Issues: Foreign Affairs http://www.crs.gov/products/browse/is-foreignaffairs.shtml

Export-Import Bank http://www.exim.gov/

Global Fund to Fight AIDS, Tuberculosis, and Malaria http://www.theglobalfund.org/en/

Inter-American Development Bank http://www.iadb.org/

Inter-American Foundation http://www.iaf.gov/index/index_en.asp

International Fund for Agricultural Development http://www.ifad.org

International Monetary Fund http://www.imf.org/

Overseas Private Investment Corporation http://www.opic.gov/

Peace Corps http://www.peacecorps.gov/

Trade and Development Agency http://www.tda.gov/

United Nations Children's Fund (UNICEF) http://www.unicef.org/

United Nations Development Program (UNDP) http://www.undp.org/

United Nations Population Fund (UNFPA) http://www.unfpa.org/

United Nations Program on HIV/AIDS (UNAIDS) http://www.unaids.org/

U.S. Agency for International Development -- Home Page http://www.usaid.gov/

U.S. Agency for International Development -- Congressional Budget Justification http://www.usaid.gov/policy/budget/

U.S. Agency for International Development -- Emergency Situation Reports http://www.usaid.gov/our_work/humanitarian_assistance/disaster_assistance/countries/fy2003_index.html

U.S. Agency for International Development -- Foreign Aid Data ("Greenbook") http://qesdb.cdie.org/gbk/index.html

U.S. Department of State -- Home Page http://www.state.gov/

U.S. Department of State -- Foreign Operations Budget Justification, FY2004 http://www.state.gov/m/rm/rls/cbj/2004/

U.S. Department of State -- International Affairs Budget Request, FY2004 http://www.state.gov/m/rm/rls/iab/2004/

U.S. Department of State -- International Topics and Issues http://www.state.gov/interntl/

U.S. Department of the Treasury -- Office of International Affairs http://www.ustreas.gov/offices/international-affairs/index.html

World Bank http://www.worldbank.org/

World Bank HIPC website http://www.worldbank.org/hipc/

Table 19. Foreign Operations: Discretionary Budget Authority (millions of dollars)

Sources: House and Senate Appropriations Committee and CRS adjustments.

a. Pursuant to Sec. 601 of P.L. 108-7 , the Consolidated Appropriations Act, 2003, an act within which regular Foreign Operations funds were enacted,most accounts were reduced by 0.65%. Figures for each account in this column for regular FY2003 ForeignOperations include the 0.65%across-the-board rescission. FY2003 supplemental includes funds appropriated in P.L. 108-11 , the Iraq WarSupplemental.

b. Amounts shown in the column for FY2004 enacted are "regular" Foreign Operations funds included in H.R. 2673 ( P.L. 108-199 ), theConsolidated Appropriations Act, 2004. Pursuant to Sec.168 of Division H of H.R. 2673 , most accounts arereduced by 0.59%. Figuresfor each account in this column for regular FY2004 Foreign Operations include the 0.59% across-the-boardrescission. The 0.59% rescissionrepresents a $103.6 million reduction for regular FY2004 Foreign Operations from the $17.564 billion approvedin P.L. 108-199 .

c. The FY2004 supplemental are amounts provided in P.L. 108-106 , funding for military operations and reconstruction in Iraq and Afghanistan. TheFY2004 Total column represents the sum of the FY2004 conference and the FY2004 supplemental.

d. For the purposes of consistency and making accurate comparisons, amounts for the Child Survival and Health (CSH) exclude in each column a $120million contribution to UNICEF. The FY2003 enacted level and the House-passed FY2004 bill included UNICEFin the CSH account, while theAdministration's FY2004 request and the Senate-passed measure placed UNICEF funding in title IV of the billwithin the International Organizationsand Programs (IO&P) account. Because the FY2004 enacted bill places UNICEF funding within theIO&P account, the FY2003 enacted andHouse-passed amounts have been adjusted by removing $120 million for UNICEF and adding that amount to thelevels in the IO&P account line.

e. Funding for the Global AIDS Initiative in the House-passed bill was included in the Child Survival and Health Account. The Senate-passed amountincluded $289 million for HIV/AIDS that was added in section 699K.

f. The House-passed bill included $80 million for famine prevention and relief in the International Disaster Aid account. The FY2004 enacted amountincludes $20 million for famine prevention and relief in the International Disaster Aid account.

g. The Administration request included the Ireland Fund as part of the Economic Support Fund.

h. The enacted bill includes $650 million for the Millennium Challenge Account in Division D of P.L. 108-199 , plus $350 million more in Division H,for a total MCA appropriation of $1 billion. The 0.59% across-the-board rescission reduces th total to $994.1million.

Footnotes

1. (back) Although the Foreign Operationsappropriations bill is often characterized as the "foreign aid" spending measure, it does not includefunding for all foreign aid programs. Food aid, an international humanitarian aid program administered under theP.L. 480 program, isappropriated in the Agriculture appropriations bill. Foreign Operations also include funds for the Export-ImportBank, an activity that isregarded as a trade promotion program, rather than "foreign aid." In recent years, funding for food aid and theEximbank have been aboutthe same, so that Foreign Operations and the official "foreign aid" budget are nearly identical. Throughout thisreport, the terms ForeignOperations and foreign aid are used interchangeably.

2. (back) Some of these swings, however, are notthe result of policy decisions, but due to technical budget accounting changes involving howCongress "scores" various programs. For example, the large increase in FY1981 did not represent higher fundinglevels, but rather the factthat export credit programs began to be counted as appropriations rather than as "off-budget" items. Part of thesubstantial rise in spendingin FY1985 came as a result of the requirement to appropriate the full amount of military aid loans rather than onlythe partial appropriationrequired in the past. Beginning in FY1992, Congress changed how all Federal credit programs are "scored" inappropriation bills whichfurther altered the scoring of foreign aid loans funded in Foreign Operations. All of these factors make it verydifficult to present a preciseand consistent data trend line in Foreign Operations funding levels. Nevertheless, the data shown in Figure 2 canbe regarded as illustrativeof general trends in Congressional decisions regarding Foreign Operations appropriations over the past 25 years.

3. (back) OMB documents estimated the totalamount for Iraq reconstruction was $3.5 billion, a figure that included nearly $500 million from DODfunding for the repair of oil facilities.

4. (back) U.S. Office of Management and Budget, FY2003 Request for Supplemental Appropriations , March 25, 2003.

5. (back) H.Rept. 107-480 , May 22, 2002.

6. (back) This section was prepared by RhodaMargesson.

7. (back) This section was prepared by [author name scrubbed]and [author name scrubbed].

8. (back) For the full text of the report online, seethe World Bank website at http://lnweb18.worldbank.org/mna/mena.nsf/Attachments/Iraq+Joint+Needs+Assessment/$File/Joint+Needs+Assessment.pdf .

9. (back) "UN/World Bank Present IraqReconstruction Needs to Core Group." World Bank/United Nations press release no. 2004/100/S, October2, 2003.

10. (back) Testimony to Senate AppropriationsCommittee. September 22, 2003.

11. (back) "Donors Weigh Political Cost ofPaying for Iraq's Economic Revival," Financial Times , October 3, 2003. "The Struggle for Iraq," New York Times , October 5, 2003. "Iraq Donors' Meeting to be Multilateral, State's Larson Says,"Foreign Press Center Briefing, October22, 2003.

12. (back) "Donors Heed EU Plea to Pay ThroughTrust Fund," Financial Times , October 3, 2003.

13. (back) See, for example, testimony ofSecretary of Defense Rumsfeld before the Senate Appropriations Committee on September 22 and L.Paul Bremer before the House Foreign Operations Appropriations Subcommittee on September 24.

14. (back) See, for example, Pieter H.F. Bekker,"The Legal Status of Foreign Economic Interests in Occupied Iraq." ASIL Insights . AmericanSociety of International Law. July 2002. Available at the ASIL website at http://www.asil.org/insights/insigh114.htm . See also Gerhardvon Glahn. The Occupation of Enemy Territory...A Commentary on the Law and Practice of BelligerentOccupation. Minneapolis:University of Minnesota Press, 1957, p. 159, citing various sources.

15. (back) von Glahn, citing (with comments)U.S. Army Judge Advocate General's School. Law of Belligerent Occupation. (JAGS Text No.11) Ann Arbor: JAGS 1944, pp. ix, 277.

16. (back) Iraq Reconstruction anInternational Responsibility, Larson Says. Press briefing by Under Secretary of State for Economic, Business,and Agricultural Affairs Alan Larson, September 4, 2003 http://usinfo.state.gov/topical/pol/terror/texts/03090434.htm .

17. (back) "White House to Overhaul Iraq andAfghan Missions," New York Times , October 6, 2003; "Rice to Lead Effort to Speed Iraqi Aid," Washington Post , October 7, 2003.

18. (back) "Pentagon Still in Charge in Iraq, RiceTells Reporters," American Forces Information Service, October 15, 2003.

19. (back) "In GOP, Concern Over Iraq Price Tag;Some Doubt Need for $20.3 Billion for Rebuilding," Washington Post , September 26, 2003.

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