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

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