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Report to the Chairman, Committee on International Relations, U.S. 
House of Representatives:

July 2005:

Foreign Assistance:

USAID's Cash Transfer Program in Egypt Supports Economic Reform 
Activities, but Various Factors Have Limited Its Influence:

GAO-05-731:

GAO Highlights:

Highlights of GAO-05-731, a report to the Chairman, Committee on 
International Relations, U.S. House of Representatives.

Why GAO Did This Study:

Since 1992, the U.S. Agency for International Development (USAID) has 
focused the Cash Transfer Program in Egypt on supporting economic 
reform activities to move Egypt toward a more liberal and market-
oriented economy. USAID has provided funds to Egyptís government as it 
completed agreed-on economic reform activities. In fiscal year 2002, 
the Department of State and USAID conducted a review of U.S. economic 
assistance in Egypt that led USAID to renegotiate the programís terms. 
USAID and Egypt signed a new agreement in March 2005. 

GAOís review of the Cash Transfer Program focused on the programís 
disbursement of funds and Egyptís completion of agreed-on activities, 
factors affecting the programís influence on Egyptís economic reform, 
USAIDís efforts to evaluate the programís impact, and USAIDís changes 
to the program in response to the 2002 review by the Department of 
State and USAID. 

GAO received comments on a draft of this report from USAID. USAID 
stated that the draft was fair and clear but that Egyptís completion of 
about 70 percent of the activities resulted from the programís 
structure rather than shortcomings in Egyptís policy reforms. USAID 
also stated that extending the target dates for completing reforms 
increased U.S. influence in accomplishing reforms.

What GAO Found:

Since fiscal year 1992, USAIDís Cash Transfer Program has provided 
about $1.8 billion in economic assistance to the Egyptian government 
for completing reform-related activities, such as privatizing state-
owned companies. USAID and Egypt have identified 196 reform-related 
activities, and Egypt has completed 136 of them (about 70 percent), 
primarily in the areas of finance and trade. 

Cash Transfer Program Disbursements by Reform Area:

[See PDF For Image]

[End of Figure]

Although the Cash Transfer Program supported Egyptís completion of 
reform activities, several factors have limited its ability to 
influence the Egyptian government to undertake certain reforms. First, 
the financial costs of certain reforms affected the Egyptian 
governmentís willingness to undertake them despite their potential 
benefits; although the Cash Transfer Program offsets some of those 
costs, its contribution to Egyptís overall budget is small. In 
addition, Egypt is cautious about undertaking reforms that may lead to 
domestic instability. Finally, USAID granted numerous extensions that 
allowed Egypt additional time to complete agreed-on activities, thus 
weakening the conditions tied to funding disbursement.

Despite the difficulty of determining the impact of policy reform, 
USAID conducted two evaluations of Cash Transfer activities as well as 
a series of opinion surveys on the impact of certain activities 
supported by the program. Although these studies reported some positive 
results, GAO found limitations with some of the measures used to 
evaluate the activitiesí impact on Egyptís economy. 

In response to recommendations in the 2002 Department of State and 
USAID review, USAID (1) narrowed the Cash Transfer Programís focus to 
reforms in the financial sector, (2) will obligate funds when it is 
certain that the Egyptian government will complete activities rather 
than when the government agrees to undertake them, and (3) is improving 
its monitoring and evaluation system.

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-05-731]

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact David Gootnick at (202) 
512-3149 or gootnickd@gao.gov.

[End of Section]

Contents:

Letter:

Results in Brief:

Background:

USAID Provided Financial and Technical Assistance to Support Egypt's 
Completion of Reform Activities:

Various Factors Have Limited the Program's Ability to Influence Egypt's 
Reforms:

USAID Made Efforts to Evaluate Cash Transfer Program's Impact on 
Egypt's Reforms, but The Assessments Had Limitations:

USAID Is Taking Steps to Respond to Recommendations by State and USAID:

Conclusions:

Agency Comments and Our Evaluation:

Appendixes:

Appendix I: Objectives, Scope, and Methodology:

Appendix II: Comments from the U.S. Agency for International 
Development:

Appendix III: GAO Contact and Staff Acknowledgments:

Table:

Table 1: Examples of Targeted Reform Activities That Egypt Did Not 
Complete, or Receive Funds for under the Terms of the Program:

Figures:

Figure 1: Cash Transfer Funding Flow:

Figure 2: Cash Transfer Program Disbursements by Reform Area:

Figure 3: Number of Privatizations Supported by the Cash Transfer 
Program, Fiscal Years 1993-2002:

Abbreviations:

DSP: Development Support Program:

IPR: intellectual property rights:

IMF: International Monetary Fund:

MOU: memorandum of understanding:

PMP: Performance Management Plan:

SPR: Sector Policy Reform:

SDDS: special data dissemination standards:

State: Department of State:

USAID: United States Agency for International Development:

WB: World Bank:

WTO: World Trade Organization:

Letter:
July 11, 2005:

The Honorable Henry Hyde:
Chairman:
Committee on International Relations:
House of Representatives:

Dear Mr. Chairman:

Since 1992, the U.S. Agency for International Development (USAID) has 
focused the Cash Transfer Program in Egypt on supporting economic 
reform activities intended to move Egypt toward a more liberal and 
market-oriented economy. Under the terms of the program, USAID provides 
funds to the Egyptian government as it completes specific activities 
related to reforms in a range of areas, including finance, trade, and 
industry. USAID and Egypt agree on these reform areas and activities in 
memorandums of understanding (MOU). In addition, USAID provides 
technical assistance to facilitate Egypt's completion of the reform- 
related activities. In 2002, the Department of State (State) and USAID 
conducted a joint review of USAID's activities in Egypt. Based on the 
review's recommendations, USAID began renegotiating the terms of the 
program, to which Egypt assented when it signed a new MOU in March 
2005. The review by State and USAID recommended, among other things, 
that USAID narrow the Cash Transfer Program's focus, strengthen the 
agency's ability to enforce activity deadlines, and improve performance 
monitoring.

GAO's review of USAID's Cash Transfer Program in Egypt focused on (1) 
the program's disbursement of funds and Egypt's completion of agreed-on 
activities, (2) factors affecting the program's influence on Egypt's 
economic reform activities, (3) USAID's efforts to evaluate the 
program's impact on Egypt's economic reform, and (4) USAID's changes to 
the program in response to recommendations in the 2002 joint review by 
State and USAID.

To achieve these objectives, we analyzed USAID's criteria for making 
disbursements, as well as the total disbursements made under the Cash 
Transfer Program since fiscal year 1992. We also reviewed legislation, 
USAID regulations, and other relevant program documentation. We 
developed a database of all activities USAID targeted under the program 
and, to better understand the range of activities targeted and 
completed, we further analyzed three subsets of the reform areas 
covering a range of activities that had a mix of results-- 
privatization, banking, and intellectual property rights. To determine 
the monetary significance of the Cash Transfer Program, we calculated 
the program's annual share of Egypt's foreign exchange earnings and 
government revenue using relevant data provided by the Egyptian 
government to the International Monetary Fund (IMF). Although we were 
unable to assess fully the reliability of the Egyptian government data, 
we noted that Egypt recently subscribed to the IMF's special data 
dissemination standards (SDDS), which were created for nations that 
already meet high data quality standards. While these data probably 
have some limitations, we determined that it is unlikely that potential 
errors would materially impact our use of this information in our 
report. To understand USAID's efforts to evaluate the program, we 
reviewed USAID studies and opinion surveys that attempted to assess the 
impact of reform activities on the Egyptian economy and USAID's 
performance monitoring plan. We examined State's and USAID's joint 2002 
review of U.S. economic assistance to Egypt and other relevant 
documents related to USAID's response to the review. We interviewed 
officials from USAID, the Department of State, the Department of the 
Treasury, the IMF, the World Bank, and the government of Egypt, as well 
as representatives of the European Union, economists, and academics. We 
performed our work between August 2004 and May 2005 in accordance with 
generally accepted government auditing standards. Appendix I provides a 
more detailed description of our objectives, scope, and methodology.

Results in Brief:

Since fiscal year 1992, USAID's Cash Transfer Program has provided 
about $1.8 billion in financial assistance to Egypt. Additionally, 
USAID had provided about $70 million in technical assistance to the 
Egyptian government to support Cash Transfer Program related reform 
activities. USAID and Egypt jointly identified and agreed on 196 
economic reform-related activities, of which Egypt has completed 136-- 
for example, privatizing state-owned companies and drafting and passing 
intellectual property rights laws.[Footnote 1] Egypt did not complete 
or receive program funds for 60 of the 196 activities because (1) a 
change in the program in 1999 allowed Egypt to select from a menu of 
reform activities, and (2) the United States withdrew from a 2001 MOU 
after the joint State and USAID review recommended renegotiating the 
program's terms.[Footnote 2] The program's disbursement values have 
ranged from $0.1 million to $150 million, with a median disbursement of 
$10 million per reform activity. However, Egypt had received about $730 
million, or 40 percent of the total funds disbursed, for completing 20 
activities, including $100 million for developing a macroeconomic 
reform plan approved by the Egyptian government.

The Cash Transfer Program has supported Egyptian economic reforms, and 
USAID has provided technical assistance that aided Egypt's completion 
of reform-related activities; however, various factors have limited the 
program's ability to influence Egypt to undertake certain reforms. 
First, the financial costs of undertaking certain reforms have limited 
the Egyptian government's willingness to implement reforms despite 
their potential benefits. Second, although Cash Transfer Program 
payments help offset some costs related to reform activities, its 
contribution relative to Egypt's overall foreign exchange earnings and 
government revenue is small. Third, the Egyptian government is cautious 
about undertaking reforms that may negatively affect certain groups and 
lead to domestic instability. Fourth, USAID has granted numerous 
deadline extensions that allowed Egypt additional time to complete 
agreed-on activities, weakening the conditions tied to funding 
disbursements.

USAID has attempted to assess the impact of program-supported 
activities on the Egyptian economy, despite challenges involved in 
evaluating the impact of policy reform; however, its measures of the 
program's impact had limitations. USAID officials pointed out the 
difficulty of isolating the Cash Transfer Program's influence from 
other factors affecting Egypt's trade and investment environment. 
Nevertheless, to evaluate the impact of the program's activities, the 
agency has conducted agency-funded studies and opinion surveys of 
Egyptian business leaders and academics, and has linked some activities 
to its performance management plan. While each of these efforts 
highlighted the activities' positive impacts, they had limitations. For 
example, a study on the impact of privatization activities pointed out 
that the reforms helped reduce Egypt's fiscal deficit and improved some 
companies' financial performance. However, the study acknowledged the 
difficulty of drawing definitive conclusions regarding the activities' 
impact.

USAID has taken steps to respond to several recommendations regarding 
the Cash Transfer Program made in the joint State and USAID review. To 
narrow the program's focus, USAID's March 2005 MOU with the Egyptian 
government targets only financial sector reform activities.[Footnote 3] 
To strengthen its ability to ensure that the Egyptian government meets 
reform requirements, USAID will now obligate funds when it is clear 
that Egypt will complete the activities. To improve its measurement of 
program performance, USAID signed a contract in January 2005 with 
Management Systems International to revise the agency performance 
management plan, which assists USAID in monitoring and evaluating how 
well it is meeting its strategic objectives in Egypt. The details of 
the changes to the performance management plan were not available 
during the time of our review.

The Acting Assistant Administrator of USAID, Bureau of Management, 
provided written comments on a draft of this report which are 
reproduced in appendix II. He stated that the draft was fair and clear, 
but that the Egyptian government's completion of 70 percent of the 196 
agreed-on activities related substantially to the Cash Transfer 
Program's structure rather than to shortcomings in Egypt's policy 
reforms. Additionally, USAID stated that granting deadline extensions 
to permit Egypt to complete activities increased the U.S. government's 
influence in accomplishing reforms. USAID also provided technical 
comments as did the Department of State, which we incorporated where 
appropriate.

Background:

Since 1975, the United States government has provided more than $25 
billion in economic assistance to Egypt. The U.S. continues to support 
Egypt, in part because of its political leadership in making peace with 
Israel and fostering a broader peace between Israel, the Palestinians, 
and other Arab states, including its efforts in the war on terrorism. 
U.S assistance to Egypt has three components. (1) The Cash Transfer 
Program provides assistance conditioned on the Egyptian government's 
achievement of specific reform-related activities. (2) Traditional 
project assistance focuses on, among other things, economic reform, 
health and education, and the environment. (3) The Commodity Import 
Program supplies financing to Egyptian private sector importers of U.S. 
goods and provides funding that is not specifically conditioned on any 
reforms.[Footnote 4] In 1998, the United States and the Egyptian 
government agreed to reduce annual U.S. economic support by $40 million 
per year, resulting in a reduction of total funds from $815 million to 
$407 million by fiscal year 2009. Annual Cash Transfer Program 
appropriations are projected to remain constant at about $200 million 
annually until fiscal year 2007 and decline to $150 million by fiscal 
year 2009.

In the early 1990s, USAID focused on fostering economic reforms aimed 
at achieving a stable macroeconomic environment in Egypt, then shifted 
its focus to encouraging economic growth and development in the mid- 
1990s. The goal of USAID's program activities in Egypt is to create "a 
globally competitive economy benefiting Egyptians equitably."[Footnote 
5] Although Egypt has made progress at the macroeconomic level, 
including reducing inflation and unifying the exchange rate, USAID has 
stated Egypt's continued state ownership of companies and banks and its 
existing laws and regulations continue to hinder its transition to a 
market economy.

The Cash Transfer Program began as the Sector Policy Reform (SPR) 
program and complemented Egypt's economic reform and structural 
adjustment program, which began in 1991.[Footnote 6] In 1999, the 
program was renamed the Development Support Program (DSP) and focused 
on improving the trade and investment environment and increasing 
private sector employment.[Footnote 7] The Cash Transfer Program 
targeted eight general reform areas until the State and USAID review in 
2002 recommended that it be narrowed to a single sector. These areas 
include the following:

* Financial sector--reforming the banking and insurance industries;

* Trade sector--reducing trade barriers;

* Industrial sector--privatizing state-owned companies;[Footnote 8]

* Business law and regulation--modernizing laws that affect business 
and trade such as intellectual property rights laws;

* Fiscal sector--establishing tax policy and improving public access to 
fiscal data;

* Monetary policy--reforming foreign exchange rate and domestic credit 
policy;

* Data dissemination--improving standardization of data and statistical 
transparency; and:

* Environmental protection--improving environmental regulations and 
conservation.

Funding for the Cash Transfer Program is provided in annual 
appropriations to the Economic Support Fund.[Footnote 9] The annual 
appropriation makes this funding available for the program with the 
understanding that Egypt will undertake economic reforms in addition to 
those it has undertaken in previous years.[Footnote 10] Grant 
agreements and MOUs between the U.S. and Egyptian governments outline 
the ways that Egypt may use program funds and the types of reform- 
related activities that it must undertake to receive them.[Footnote 11] 
According to the grant agreements, the Egyptian government is 
authorized to use 75 percent or more of the funds to purchase U.S. 
commodities, such as wheat or equipment, and up to 25 percent to repay 
its debt to the United States. After purchasing commodities in U.S. 
dollars that the program provides, the Egyptian government must deposit 
the equivalent amount of Egyptian local currency into a special 
account. A separate MOU between USAID and the Egyptian government 
stipulates that the government of Egypt may use funds from this account 
for its general budget, sector support, or USAID activities. In 
addition to providing a source of budgetary funds for the Egyptian 
government, the Cash Transfer Program serves as an additional source of 
foreign exchange for Egypt. Figure 1 depicts the flow and use of Cash 
Transfer Program funds.

Figure 1: Cash Transfer Funding Flow:

[See PDF for image]

[End of figure]

According to USAID officials, if the Egyptian government does not meet 
the agreed-on criteria for a specific activity, USAID may withhold 
funding and redirect it to support other Cash Transfer Program 
activities. To determine the funding that Egypt should receive for 
completing each reform activity, USAID considers the activity's 
significance, the cost to the Egyptian government associated with 
completing it, the Egyptian government's willingness to implement it, 
the U.S. government's interest in seeing it implemented, and the 
contribution of the completed activity to Egypt's economic growth.

USAID Provided Financial and Technical Assistance to Support Egypt's 
Completion of Reform Activities:

Since fiscal year 1992, USAID's Cash Transfer Program has provided 
about $1.8 billion in financial assistance to the Egyptian government. 
USAID has also provided about $70 million in technical assistance to 
the Egyptian government to support Cash Transfer-related reform 
activities. The Egyptian government has completed 136 of the 196 
activities targeted for reform, including financial and industrial 
sector reforms. The Egyptian government did not complete 60 of the 
targeted activities and consequently received no money for them, in 
part because of a change in the program in 1999 that allowed Egypt to 
choose from a menu of reform activities. Although Egypt completed many 
activities, the results of some of the targeted reform areas were 
mixed. USAID's disbursements per activity ranged from $0.1 million to 
$150 million, with a median disbursement of $10 million. However, Egypt 
received about $730 million, or 40 percent of total funding, for 20 of 
the completed activities.

USAID Provided Almost $2 Billion in Cash Transfer Program Funding and 
Technical Assistance:

USAID disbursed about $1.8 billion in Cash Transfer Program funds to 
the government of Egypt as it completed agreed-on economic reform 
activities, primarily in the areas of finance and trade. Figure 2 shows 
the distribution of program funding among the reform areas since 1992.

Figure 2: Cash Transfer Program Disbursements by Reform Area:

[See PDF for image]

[A] The Macroeconomic Reform Plan was a crosscutting activity not 
included under any specific reform area.

[End of figure]

In general, the targeted activities represented the steps associated 
with a major reform in agreed-on areas. For example, privatizing state- 
owned companies, an aspect of industrial sector reform, required:

* initial steps such as conducting a study of the social and economic 
costs and the benefits of opening an industry to private investment,

* intermediate steps such as developing a national privatization plan, 
and:

* final steps such as privatizing a number of companies.

In addition, USAID provided approximately $70 million in technical 
assistance, in part to support the Egyptian government's completion of 
agreed-on activities. For example, USAID's technical assistance funding 
supported the government of Egypt in formulating and implementing 
policies, training government personnel, and purchasing office 
equipment. USAID also used technical assistance funds to hire 
contractors to monitor and verify the government of Egypt's completion 
of agreed-on activities. According to Egyptian officials, USAID's 
technical assistance helped the Egyptian government complete 
intellectual property rights (IPR) reform activities targeted under the 
Cash Transfer Program, such as drafting an IPR code, and provided 
technical information on the World Trade Organization's (WTO) Trade- 
Related Aspects of Intellectual Property Rights requirements. Technical 
assistance funds were also used to promote public awareness of the 
importance of IPR and modernize the patent and copyright offices.

Egyptian Government Completed the Majority of Agreed-on Activities, but 
Results of Some Targeted Activities Were Mixed:

Beginning in 1992, USAID and the Egyptian government identified 196 
activities for reform. Egypt completed and received program funds for 
136 of those activities (about 70 percent) and did not complete or 
receive money for 60 of them. Egypt had the option of not completing 
some of them, because under a new program approach initiated in 1999, 
USAID and the Egyptian government agreed to a broad range of activities 
that allowed Egypt to select those that best fit its reform agenda. The 
60 uncompleted activities included 3 of 25 activities targeted for 
reform in a 2001 MOU. Egypt did not complete these 3 activities because 
the U.S. government unilaterally withdrew from the program following 
the 2002 review by State and USAID.[Footnote 12]

Table 1 shows some of the 60 activities that the government of Egypt 
did not complete or receive program funds for under the terms of the 
program. We found that roughly 10 percent of the completed activities 
involved conducting studies and reviews, 10 percent involved drafting 
laws and issuing decrees, and about 20 percent involved adopting plans 
or implementing procedures. The remaining 60 percent involved various 
sector specific activities, such as reducing the number of tariffs and 
removing price controls from hotels, restaurants, and other businesses 
associated with tourism.

Table 1: Examples of Targeted Reform Activities That Egypt Did Not 
Complete, or Receive Funds for under the Terms of the Program:

Reform area: Fiscal policy;
Uncompleted activities: 
* Establishing a system to generate and publish 
revenue and expenditure data on a quarterly basis with a lag of no more 
than 2 months;
* Implementing key components of corporate tax reforms;
* Creating regulations to establish and regulate margin trading;
* Revising a draft competition law submitted to People's Assembly.

Reform area: Trade sector;
Uncompleted activities: 
* Reducing the cost of Egyptian air freight;
* Reducing import tariffs;
* Creating new regulations to improve customs valuation;
* Providing data for marketing approval of pharmaceutical products.

Reform area: Financial sector;
Uncompleted activities: 
* Reducing state ownership in at least five 
joint venture banks[A];
* Reducing Egyptian government share in at least one state insurance 
company to achieve private sector majority ownership;
* Passing legislation to facilitate a public debt law;
* Amending a capital market law.

Source: USAID data.

Note: These examples include activities in all program years, although 
the Egyptian government may have subsequently completed some of them 
without receiving a payment from USAID.

[A] Joint venture banks are private banks that have partial Egyptian 
government ownership.

[End of table]

To understand the range of activities USAID targeted and the extent to 
which Egypt completed them, we analyzed reform activities in three 
subsets of the program's general reform areas--privatization 
(industrial sector), banking (financial sector), and IPR (business law 
and regulation)--and found that the results of these targeted 
activities were mixed. For example, although Egypt privatized some of 
its state-owned companies and its joint venture banks, less than half 
of its state-owned companies and none of its public sector banks had 
been privatized as of May 2005. Likewise, according to USAID, although 
Egypt has improved its IPR legal framework, the country still does not 
fully comply with international standards for pharmaceutical protection.

Industrial Sector: Privatization:

USAID disbursed $169 million for the completion of 12 privatization 
activities in fiscal years 1992-2004. Six of the activities supported 
privatization of companies--for example, developing a national 
privatization plan, reducing indebtedness of public companies, and 
improving the process for valuing of them. The other six activities 
consisted of actually privatizing public and joint venture 
companies.[Footnote 13] In 1991, the Egyptian government identified 314 
companies to be privatized. During fiscal years 1993-2002, it 
privatized 118 of these companies, 3 of which were joint ventures, 
according to Cash Transfer Program disbursement justifications (see 
fig. 3).[Footnote 14] Privatizations slowly increased through fiscal 
year 1996, peaked in fiscal year 1998, and then declined through fiscal 
year 2002. Of the 196 remaining public companies, some are profitable 
but others are unprofitable, including indebted textile companies.

Figure 3: Number of Privatizations Supported by the Cash Transfer 
Program, Fiscal Years 1993-2002:

[See PDF for image]

[End of figure]

According to Egyptian government and USAID officials, as well as 
documents we reviewed, three reasons contributed to the decline in 
privatizations after 1998. (1) The companies remaining on the list were 
difficult to sell because of unprofitability or were difficult to 
liquidate because of concerns about mass layoffs.[Footnote 15] (2) The 
Egyptian government did not fully support privatization, as 
demonstrated by its unwillingness to realistically value companies. (3) 
The global economic environment became less conducive to privatization, 
particularly in the Middle East after September 11, 2001. According to 
a USAID contractor responsible for tracking privatization progress, the 
best companies were sold initially and many of the remaining companies 
required large investments to stay operational.

Financial Sector: Banking:

In fiscal years 1992-2004, USAID disbursed $260 million for the 
completion of 11 activities associated with banking reforms in Egypt. 
According to USAID documents, banking activities focused on improving 
regulations and strengthening banks' capital structure, including the 
following:

* allowing foreign banks to establish branches or gain full ownership 
of local banks and deal in local currency;

* removing controls on banking service fees;

* establishing new accounting and auditing procedures for all sectors, 
including insurance, based on the International Accounting Standards;

* revitalizing capital markets and improve the transparency of 
financial flows;

* ratifying an anti-money-laundering law, satisfying the Organization 
for Economic Cooperation and Development's Financial Action Task Force 
on Money Laundering, and:

* reducing Egyptian government shares in 22 of 25 joint venture banks 
in Egypt.[Footnote 16]

Additionally, the Egyptian government agreed to transfer majority 
ownership of at least one of its state-owned banks under the Cash 
Transfer Program in 1995 and sell its shares in the four public sector 
banks in 2000. Although the Egyptian government identified the first 
bank for privatization in 1997, none of the four state-owned banks had 
been privatized as of May 2005. In March 2005, the Egyptian government 
signed a new MOU with USAID that once again made the privatization of a 
state bank a priority. According to U.S. and Egyptian officials, a 
public sector bank is expected to be privatized by the end of 2005, 
owing in part to increased political will in Egypt's cabinet and more 
experienced management in the Central Bank of Egypt.However, a Central 
Bank senior official stated that the sale of the public sector bank 
depends on its handling of nonperforming loans and finding an investor, 
which could prove difficult.

Business Law/Regulation: Intellectual Property Rights:

USAID disbursed about $75 million for the completion of six IPR-related 
reform activities undertaken to support Egypt's commitments under the 
WTO's agreement on Trade-Related Aspects of Intellectual Property 
Rights. According to a USAID contractor, although the reforms that 
Egypt completed moved it closer to international IPR standards, more 
reforms are needed for Egypt to achieve compliance with international 
standards related to data dissemination and data exclusivity for 
pharmaceuticals. The activities that USAID supported included the 
following:

* conducting a study of the benefits of consolidating the patent, 
trademark, and international design offices;

* joining the Patent Cooperation Treaty in June 2003;[Footnote 17] and:

* enacting a new IPR law in May 2002 that incorporated both the patent 
and industrial design laws.

Small Number of Activities Accounted for Large Share of Program Funds:

Since 1992, USAID has disbursed between $0.1 million and $150 million 
to Egypt for completed activities, with a median disbursement of $10 
million per activity;[Footnote 18] however, the Egyptian government 
received large disbursements, totaling about $730 million (40 percent) 
of total program funds, for 20 of the 136 activities that it completed. 
Our analysis showed that the largest disbursements included $150 
million for passing an anti-money-laundering law and $100 million for 
developing a macroeconomic reform plan approved by the government.

* Antimoney-laundering law. In 2002, Egypt received a disbursement of 
$150 million for passing a law against money laundering. According to 
USAID, as Egypt's economy and financial systems have opened they have 
become more susceptible to use as conduits for laundering proceeds from 
criminal activities such as drug trafficking and terrorism. USAID first 
targeted anti-money-laundering reform in a 2001 MOU and formally 
specified the requirements for passage of a law in June 2002, the same 
month Egypt received a disbursement for completing the activity. 
According to USAID documentation, Egypt received a large disbursement 
because the law addressed the concern of the Organization for Economic 
Cooperation and Development's Financial Action Task Force that Egypt 
was noncooperative in addressing money-laundering problems.

* Macroeconomic reform plan. In 2001, Egypt received a disbursement of 
$100 million for developing and approving a macroeconomic reform plan. 
According to USAID, this activity supported major Egyptian reforms in 
the face of the economic crisis after September 11, 2001, that included 
Egypt's slowed growth and loss of revenues. Among the areas the plan 
addressed were Egypt's exchange rate, monetary and fiscal policy, and 
legislation for issues such as IPR, labor and mortgage laws, and 
banking reform. According to USAID documents, the plan was added to the 
program in December 2001 and was approved by the U.S. Ambassador to 
Egypt, the Egyptian Prime Minister, and several of Egypt's economic 
ministers before the disbursement in January 2002.

Our review of program activities showed that USAID generally paid the 
Egyptian government once for each activity. However, we identified one 
instance in which USAID made disbursements twice to Egypt for the 
privatization of three companies. In 1998, USAID disbursed to the 
Egyptian government $20 million dollars for meeting criteria to 
privatize 25 companies. Egypt's privatization of three of these 
companies--United Poultry Production, Ramsis Agriculture, and the 
Egyptian Company for Meat and Dairy Production--were listed in 
subsequent documents as justification for additional disbursements of 
$2.4 million in 2000 and $1.2 million in 2001.[Footnote 19] In 
commenting on a draft of this report, USAID officials agreed that these 
disbursements had occurred.

Various Factors Have Limited the Program's Ability to Influence Egypt's 
Reforms:

Although the Cash Transfer Program provided financial and technical 
assistance to support Egypt's completion of reform-related activities, 
several factors have limited the program's ability to influence Egypt 
to undertake certain reforms. These factors include the following:

* Financial costs versus benefits of reform-related activities. 
Although the reforms are expected to generate financial benefits by 
correcting inefficiencies in the economy, financial costs are also 
associated with the reforms. For example, the authors of a USAID- 
sponsored study estimated the financial benefit to the Egyptian 
government of privatizing the remaining state-owned companies and banks 
would be over $17 billion.[Footnote 20] However, the financial benefits 
are not guaranteed; privatized companies may not operate more 
efficiently or produce additional tax revenues. For example, according 
to USAID's privatization study, some privatized Egyptian companies 
failed to undertake significant restructuring and therefore did not 
produce many of the expected benefits they were supposed to bring, 
including improved financial performance.

* Size of program funding relative to Egypt's overall foreign exchange 
earnings and revenue. Although the Cash Transfer payment provides U.S. 
dollars for the purchase of U.S. commodities and repayment of debt to 
the United States, the payment represents a small portion of Egypt's 
foreign exchange earnings. For example, in fiscal year 2003, the 
program's funds accounted for about 1 percent of Egypt's overall 
foreign exchange earnings and less than 2 percent of its foreign 
reserves. Additionally, the Egyptian pounds generated by the program 
and used by the Egyptian government for budget support are a small 
portion of its revenue; in fiscal year 2003, the program funds 
accounted for about 1 percent of the government of Egypt's annual 
revenues and grants. According to a State Department official, the $200 
million that the program provides annually is not sufficient by itself 
to persuade the Egyptian government to undertake an unpopular reform 
such as privatization.

* Reforms' potential effects on domestic stability. Since IMF sponsored 
economic reforms triggered protests and domestic unrest among Egypt's 
populace in the 1970s, the government of Egypt has been cautious about 
reforms such as liberalizing prices and lifting subsidies because of 
the potential negative impact on certain groups. For example, in 
January 2003, the Egyptian government introduced a more flexible and 
market-oriented exchange rate regime as outlined in its macroeconomic 
reform plan. However, as a result, the value of the Egyptian pound fell 
by about 30 percent in its initial months, raising the prices that 
Egyptians paid for imported goods, including food. According to the 
IMF, the Ministry of Finance partially negated this change when in 
September 2003, concerned about rising food prices, it introduced a 
special exchange rate for imported items such as grains.[Footnote 21]

* Cash Transfer Program deadlines. The Cash Transfer Program was 
designed to provide funding to Egypt based on its compliance with 
agreed on conditions, including meeting deadlines. Since fiscal year 
1992, the government of Egypt requested, and USAID granted, 19 
extensions to the deadlines originally agreed to in MOUs. The 
extensions were generally for an additional 3 to 6 months; however, 
certain performance periods had multiple extensions that allowed the 
government of Egypt 2 or more years from the original deadline to 
complete the activities.[Footnote 22] Although USAID documents 
justified the extensions, the number and length of extensions may have 
weakened the conditions tied to the funding disbursement by assuring 
that Egypt continued to receive funds, in some cases well beyond the 
established deadlines. For example, in March 1997, USAID extended the 
Egyptian government's deadline to complete agreed-on activities for an 
additional 6 months and then granted five other extensions, resulting 
in a final deadline of September 1999. According to USAID documents we 
reviewed, the 1997 extensions were granted to give the government of 
Egypt time to negotiate a new IMF agreement, prepare for the Cairo 
economic summit, and redefine reform priorities after a shift in 
Cabinet members--factors that contributed to a delay in Egypt's 
completion of Cash Transfer Program reform activities. USAID approved 
additional deadline extensions for a separate set of activities in 
September 1997, subsequently extending it four more times to June 2000. 
The need to tighten conditions tied to the program's funding 
disbursements was highlighted in the 2002 review by State and USAID.

USAID Made Efforts to Evaluate Cash Transfer Program's Impact on 
Egypt's Reforms, but The Assessments Had Limitations:

Demonstrating the impact of policy reforms is challenging, according to 
USAID officials and academics studying such reforms; however, USAID 
conducted two evaluations related to the Cash Transfer Program 
activities, as well as a series of opinion surveys that attempted to 
assess the impact of economic reform activities supported by the 
program. These evaluations and opinion surveys reported that the 
program's activities had some positive results, but we found 
limitations with the two studies. We also reviewed USAID's performance 
management plan (PMP) and found that some of its measures had 
limitations.

Measuring Policy Reform's Impact Is Challenging:

USAID officials and academics studying policy reform pointed out the 
difficulties of demonstrating the impact of policy reforms. USAID 
officials stated that it is nearly impossible to isolate the impact of 
the Cash Transfer program from other factors that have influenced 
Egypt's trade and investment environment. In addition, collecting 
reliable data is problematic in Egypt. For example, according to a 
USAID contractor responsible for tracking Egypt's privatization 
efforts, basic data, such as the number of privatizations completed, 
were not readily available from the Egyptian government. Furthermore, 
the nature of policy reform often results in delayed impacts, thus 
evaluations cannot take place until sufficient time passes. For 
example, according to USAID's privatization evaluation, it was 
difficult to draw definitive conclusions regarding financial 
performance for some of the companies because of inadequate time 
between the privatizations and evaluation. Although measuring the 
impact of reforms is difficult, USAID continues to fund various 
assessments.

USAID Efforts to Evaluate Program's Impact Showed Positive Results but 
Had Limitations:

To evaluate the impact of Cash Transfer Program activities in Egypt, 
USAID conducted two agency-funded studies, twelve opinion surveys of 
private sector business leaders, and linked some activities to its PMP. 
However, we found that some measures that USAID used in their 
performance management system had limitations.

* USAID-funded reform area studies:

A study of USAID-supported privatization activities published in 2002 
pointed out some positive impacts, such as helping to reduce Egypt's 
fiscal deficit, facilitating the entrance of new companies into Egypt's 
market, expanding product varieties and availability, and improving 
some firms' financial performance.[Footnote 23] However, the study also 
found that privatization did not increase Egypt's foreign direct 
investment relative to other developing countries although this reform 
was related to USAID's strategic objective of enhancing Egyptian 
business opportunities by attracting private sector investment. In 
addition, the study acknowledged some challenges in evaluating 
privatization's impact because access to some of the Egyptian 
government's data was limited and sufficient time had not passed to 
assess the financial performance of some privatized companies.

A study of USAID technical assistance for Egypt's IPR reforms published 
in 2004 found that this assistance, among other factors,[Footnote 24] 
motivated the Egyptian government to implement reforms. The study found 
that these reforms led to: a legal framework that was more compliant 
with WTO IPR requirements; a modernized IPR-related facilities; a 
reduction in the time required to obtain a patent from 6 years in 1996 
to less than 3 years in 2003; and, increased public awareness of the 
benefits of intellectual property rights.[Footnote 25] However, the 
study focused on the outcomes of USAID's technical assistance to 
support the completion of IPR-related activities rather than on the 
impact of these activities on the Egyptian economy, such as increasing 
confidence among foreign investors, with regard to doing business in 
Egypt.

* Opinion surveys:

USAID conducted a series of periodic questionnaires and roundtables 
with Egyptian private sector leaders and academics to gauge the 
progress and impact of the Egyptian government's economic reforms and 
structural adjustment program.[Footnote 26] Every 6 months for a 6-year 
period, respondents were asked to score and give opinions on 24 policy 
areas in three main categories: stabilization policies, structural 
adjustment policies, and social policies. The surveys found that, in 
general, business leaders agreed that the Egyptian government had taken 
modest steps forward in stabilization policies. However, the survey 
also found that business leaders were concerned about slow progress in 
many reform areas, such as banking and privatization, exchange rates, 
and the growth of small and midsize businesses. USAID recognized that 
the survey scores and opinions are subjective. However, USAID pointed 
out that respondents' perceptions of the behavior of the domestic and 
international marketplace served as a proxy for the larger business 
community's opinion of Egypt's progress with economic reform. As a 
result, USAID said the survey could be a useful tool for evaluating 
policy initiatives.

* USAID's performance management plan:

USAID uses its PMP to measure progress toward strategic goals and 
objectives. Although the PMP does not directly evaluate the impact of 
the Cash Transfer Program, USAID pointed us to it as a measure of the 
program's progress and impact on the Egyptian economy during our 
fieldwork. However, we found limitations in some of the indicators used 
in the PMP in that they primarily assess outputs and do not link the 
outputs to the activities' impact on Egyptian economic reform. For 
example, two privatization indicators--the value of sale proceeds from 
privatized state-owned and joint venture companies and the cumulative 
number of qualified joint venture companies and banks divested-- 
measured the quantitative results of privatization rather than the 
activities' effects on the companies' efficiency. Other PMP indicators 
were influenced by factors outside the program. For example, USAID used 
the indicator trade weighted average tariffs to show progress in 
reducing trade barriers; however, other factors, such as a shift to 
imports with lower tariffs, could have contributed to a reduction in 
trade barriers, and thus the change could not be attributed only to the 
reform's impact.

USAID Is Taking Steps to Respond to Recommendations by State and USAID:

USAID has taken several steps to address the 2002 State and USAID 
review's recommendations that the agency narrow the focus of the Cash 
Transfer Program, reprogram funds if deadlines for reform-related 
activities are not met, and improve the USAID mission in Egypt 
performance monitoring system.

1. To narrow the program's focus, USAID signed an MOU on March 20, 
2005, focused on reforming the financial sector.[Footnote 27] The new 
MOU aims to support financial sector modernization by:

* strengthening the management of the Central Bank of Egypt;

* creating a government securities market consistent with international 
standards;

* increasing the private sector's share of the banking system;

* strengthening the legal and regulatory framework of the overall 
financial system; and:

* implementing a code of corporate governance.

USAID and the Egyptian government agreed to 19 reform-related 
activities that support these goals, including privatizing one of four 
state-owned banks before the end of December 2005. According to USAID 
officials, if the Egyptian government completes all 19 reform-related 
activities by the agreed-on time frames, it will receive disbursements 
of $800 million, or 67 percent of the $1.2 billion that USAID expects 
to obligate for the Cash Transfer Program through fiscal year 
2009.[Footnote 28] USAID has not yet determined the conditions for 
disbursement of the remaining funds, but a State official stated that 
the agency will likely target trade reform.

2. To respond to the review's recommendation to reprogram funds if 
reform-related activity deadlines are not met, USAID changed its 
process for obligating Cash Transfer funds. Beginning in 2005, USAID 
will obligate Cash Transfer funds only after it is certain that the 
Egyptian government will complete agreed-on activities. This change is 
intended to ensure that obligated funds do not accumulate and to 
strengthen USAID's ability to encourage the Egyptian government to 
satisfy activity requirements.

3. To improve its measurement of the mission's programs' contribution 
to meeting USAID strategic objectives, the agency contracted to revise 
its performance monitoring system by updating its PMP.[Footnote 29] The 
review by State and USAID indicated that the previous system did not 
allow USAID to reprogram resources from programs that were not 
producing desired results. According to a USAID official, the system's 
measures also did not provide timely information for management 
purposes. However, at the time of our review, details of PMP revisions 
were not available; therefore, we were unable to determine how USAID 
will address the issues raised by the review and whether the new system 
will improve evaluation of Cash Transfer Program activities.

Conclusions:

Although the Cash Transfer Program has supported reform-related 
activities since 1992, several factors have constrained its influence 
and potential to be a more effective force for change in Egypt. 
However, the recently signed MOU, which makes deadlines explicit for 
the first time, and Egypt's renewed political support to undertake 
certain reforms, such as bank privatization, offers a new opportunity 
to better leverage this program. For example, by not making funds 
available until it is clear that Egypt will complete program 
activities, USAID is strengthening conditionality. Given the recent 
program changes and Egypt's regional importance, it is critical that 
policymakers continue to monitor Egypt's progress in achieving economic 
reform and the Cash Transfer Program's contribution to those reforms, 
especially in light of the broader political environment in which the 
program operates.

Agency Comments and Our Evaluation:

The Acting Assistant Administrator for USAID, Bureau of Management, 
provided written comments on a draft of this report, which are 
reproduced in appendix II. He stated that the draft was fair and clear, 
but that the Egyptian government's completion of 70 percent of the 196 
agreed-on activities related substantially to the Cash Transfer 
Program's structure rather than to shortcomings in Egypt's policy 
reforms. Additionally, USAID stated that granting deadline extensions 
to permit Egypt to complete activities increased the U.S. government's 
influence in accomplishing reforms. USAID also provided technical 
comments as did the Department of State, which we incorporated where 
appropriate.

As arranged with your office, we plan no further distribution of this 
report for 30 days from the date of the report unless you publicly 
announce its contents earlier. At that time, we will send copies to 
interested congressional committees and to the Administrator, USAID and 
the Secretary of State. We will make copies available to others upon 
request. In addition, this report will be available at no extra charge 
on the GAO Web site at [Hyperlink, http://www.gao.gov.]

If you or your staff have any questions regarding this report, please 
contact me at 202-512-3149 or [Hyperlink, gootnickd@gao.gov] 
[Hyperlink, gootnickd@gao.gov]. Contact points for our Offices 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 III.

Sincerely yours,

Signed by:
David Gootnick:
Director, International Affairs and Trade:

[End of section]

Appendixes:

Appendix I: Objectives, Scope, and Methodology:

This review for the Chairman of the House Committee on International 
Relations, focused on (1) the Cash Transfer Program's disbursement of 
funds and Egypt's completion of agreed-on activities since in fiscal 
year 1992, (2) factors affecting the program's influence on Egypt's 
economic reform activities, (3) U.S. Agency for International 
Development's (USAID) efforts to evaluate the program's impact on 
Egypt's economic reform, and (4) USAID's changes to the program in 
response to the 2002 Department of State and USAID review.

To identify the requirements of the Cash Transfer Program and total 
funding disbursed since fiscal year 1992, we reviewed legislation and 
USAID's regulations, grant agreements, and memorandum of understanding. 
We reviewed USAID's program documents and interviewed USAID and State 
officials to learn how USAID identified reform areas and assigned 
values for reform-related activities and to determine the number and 
types of activities that the government of Egypt completed. We also 
developed a database of all the activities targeted by USAID to 
identify: the number of completed and uncompleted activities, the 
various types of activities, any duplication in the activities or 
payments, and any changes to the originally targeted and agreed-on 
activities. We developed the database using attachments to the 
program's memorandum of understanding (MOU), which included activities 
that USAID and the Egyptian government agreed to undertake in support 
of economic reforms. To determine the number of completed activities, 
we used USAID disbursement memorandums. We also included activities for 
which USAID disbursed program funds although the entire activity was 
not completed (in 20 instances, USAID disbursed partial payments based 
on the percentage of the activity that it determined Egypt had 
completed). We did not include activities that Egypt completed outside 
the terms of the program because there were no disbursement memorandums 
for these activities. We corroborated testimonial evidence from USAID, 
State, and Egyptian officials with our analysis of program activities 
by reviewing and comparing information in USAID's program documents. We 
reviewed internal controls, including reports by USAID's Office of 
Inspector General, as well as potential for fraud and abuse and 
compliance with laws and regulations and found no significant issues. 
We did not independently evaluate Egyptian laws and regulations, and 
our discussion of them is based on secondary sources.

To better understand the range of activities targeted and completed 
under the program, we selected three subsets of the reform areas. The 
three subsets for which we conducted a more in-depth analysis were 
privatization, banking, and intellectual property rights (IPR) and 
these subsets covered 29 out of 196 targeted activities (15 percent). 
They did not constitute a representative sample of all the activities; 
however, we consulted USAID and identified areas with varying results. 
For example, USAID characterized IPR reforms as successful, whereas 
banking and privatization had varied levels of success.

To determine factors affecting the program's influence on economic 
reform in Egypt, we reviewed documents and interviewed U.S. and 
Egyptian officials with knowledge of the Cash Transfer Program. We also 
met with International Monetary Fund (IMF), World Bank, and European 
Union officials, as well as an expert at the Egyptian Center for 
Economic Studies. We reviewed studies on the benefits and the costs of 
reforms that were published in refereed journals or completed by USAID 
contractors; we also interviewed the authors of one of these 
studies[Footnote 30] and discussed their methodology. To determine the 
monetary significance of the Cash Transfer Program, we calculated the 
program's annual share of Egypt's foreign exchange earnings and 
government revenue using relevant data provided by the Egyptian 
government to the IMF. Although we were unable to fully assess the 
reliability of the Egyptian government data, we noted that Egypt 
recently subscribed to the IMF's special data dissemination standards, 
which were created for nations that already meet high data-quality 
standards. Although these data probably have some limitations, we 
determined that it is unlikely that potential errors would materially 
impact our use of this information in our report. To identify other 
factors affecting the program's influence, we analyzed program 
documents to calculate the number of times that the Egyptian government 
requested, and USAID granted, deadline extensions to complete program 
activities.

To assess USAID's evaluation of the program's impact on economic 
reform, we reviewed studies that addressed the methodological 
challenges of conducting impact evaluations. We also met with, and 
reviewed studies by, contractors hired by USAID to assess the impact of 
two program areas, IPR and privatization. In addition, we reviewed 
USAID's opinion surveys reports and performance management plan.

To determine the steps that USAID has taken in response to the 2002 
review by State and USAID, we interviewed USAID and State officials who 
participated in or had knowledge of the review, focusing only on those 
recommendations that referred to the Cash Transfer Program. We 
interviewed USAID, State, Treasury, and Egyptian officials who were 
involved in negotiating the new financial sector MOU, and we reviewed 
funding data to determine the amount and proportion of program funds 
allocated to financial sector reform. To corroborate testimonial 
evidence provided by USAID, State, and Treasury officials, we also 
reviewed the USAID mission in Egypt's updated strategic plan, revised 
in March 2004. Further, we consulted USAID officials regarding any 
legal issues to reprogramming Cash Transfer Program funds, and we 
reviewed documents showing USAID's funding process. To understand how 
the USAID mission in Egypt plans to improve its performance monitoring 
system, we interviewed USAID officials and contractors who are 
responsible for developing it.

We performed our work between August 2004 and May 2005 in accordance 
with generally accepted government auditing standards.

[End of section]

Appendix II: Comments from the U.S. Agency for International 
Development:

USAID:
From The American People:

June 15, 2005:

Mr. David Gootnick:
Director:
International Affairs and Trade:
U.S. Government Accountability Office:
441 G Street, N.W.
Washington, D.C. 20548:

Dear Mr. Gootnick:

I am pleased to provide the U.S. Agency for International Development's 
(USAID) formal response on the draft GAO report entitled "USAID's Cash 
Transfer Program in Egypt Supports Economic Reform Activities, but 
Various Factors Have Limited Its Influence " (GAO-05-731) (July 2005).

We have reviewed the draft report and appreciate the time and effort of 
your team. While we appreciate the fairness and clarity of the draft 
GAO report, there are several points raised in the report on which we 
have provided comments in the enclosed document.

Thank you for the opportunity to respond to the GAO draft report and 
for the courtesies extended by your staff in the conduct of this review.

Signed by:
Steven G. Wisecarver:
Acting Assistant Administrator Bureau for Management:

Enclosure: a/s:

DRAFT COMMENTS:

USAID appreciates the GAO's very close and. professional collaboration 
with USAID staff in studying the U.S. cash transfer program to Egypt. 
USAID also appreciates having had the opportunity to provide detailed 
comments on a draft of the report.

The GAO's draft included valuable descriptions of progress that Egypt 
has made in several areas where USAID provided support through cash 
transfers. Based on the Congressional request, the GAO's draft report 
also focused on four specific issues, stated in the draft's Appendix 1. 
With respect to these issues, USAID would like to draw attention to two 
principal points.

1. Completion of Agreed Reforms:

Because of the extraordinary breadth of the USG's policy dialogue with 
the Government of Egypt (GOE), USAID and the GOE have agreed on reforms 
worth significantly more than the available cash transfer funds. To 
expedite implementation of the overall reform program, some cash 
transfer agreements were structured to trigger disbursements on a first-
come, first-served basis. As this implies, the GOE subsequently 
implemented some reforms without receiving cash transfer disbursements. 
Examples of agreed, implemented, but unremunerated reforms include 
creation of regulations to establish and regulate margin trading, 
drafting and enactment of a competition law, new regulations to improve 
customs procedures, and reduction of state ownership in joint venture 
banks.

Thus, the GAO draft's finding that "the Egyptian government completed 
about 70 percent of the 196 activities it agreed to" related in 
substantial part to the structure of the cash transfer program, and not 
entirely to shortcomings in policy reforms. Furthermore, please note 
that the GAO's draft did not suggest that only 70 percent of cash 
transfer disbursements were justified. On the contrary, disbursements 
of more than 100 percent of the cash transfers would have been 
justified by the GAO's implementation of agreed reforms, had additional 
funding been available.

2. Deadlines:

The draft mentioned that USAID and the GOE had revised the initial 
target dates for some of the agreed reforms, and that these reforms 
were subsequently implemented and cash transfer disbursements approved. 
Given that the initial target dates were estimates and were not 
material to the desired impact of the reforms, the GAO draft's factual 
findings tended to show that the revisions of target dates increased 
the USG's influence in accomplishing reforms. With the two points above 
taken into consideration, USAID believes that the GAO's draft provided 
a clear and fair response to the Chairman's inquiry.

Finally, USAID notes that the scope of the Congressional request did 
not appear to allow the GAO to address broader questions concerning the 
Government of Egypt's overall progress in modernizing its economic 
policies and USAID's overall approach to assisting this progress. 
USAID's approach includes a substantial program of technical 
assistance, NGO grants, and multilateral cooperation, in addition to 
the cash transfers. This program addresses some priorities, such as 
trade capacity building, that extend beyond the cash transfer program's 
present focus.

USAID is committed to a continuous effort to adapt its policy-reform 
program in Egypt to the evolving state of knowledge about policy-reform 
assistance and to the opportunities afforded by events on the ground. 
We welcome the GAO's valuable contribution to this effort.

[End of Section]

The following are GAO's comments on the U.S. Agency for International 
Development letter dated June 15, 2005.

GAO Comments:

1. In our report we acknowledge the collaborative process between USAID 
and the government of Egypt to identify and agree on reforms (see pages 
1, 2, 11). However, in reviewing program agreements and discussing the 
program with USAID officials, we found only one agreement that used the 
"menu approach"--that is, targeting activities that were worth more 
than the available cash transfer funds during the 12-year period of our 
review (1992-2004). We explain that the scope of activities we reviewed 
was limited to those targeted under the USAID program (see pages 2 and 
26) and that Egypt completed some reform activities for which they did 
not receive program funds (see pages 3, 11).

2. USAID states that our finding that the Cash Transfer Program 
completed 70 percent of the targeted activities "is related in 
substantial part to the structure of the Cash Transfer Program, and not 
entirely to shortcomings in policy reforms." As we note in comment 1 
and on pages 3, 9, and 11 of the report, the structure that USAID 
refers to was in effect only from 1999 to 2003. Regarding USAID's 
concern that presenting the percentage of agreed-on activities 
completed by Egypt suggests a shortcoming in Egypt's progress in policy 
reform, our findings reflect the fact that USAID and the Egyptian 
government agreed on 196 reform activities during the period covered by 
our review and the Egyptian government completed 136 of those 
activities.

3. USAID states that our findings show that the revisions of target 
dates increased the U.S. government's influence in accomplishing 
reforms. Although USAID's provision of extensions may have allowed the 
Egyptian government to complete the reforms, we disagree that our 
findings show that revising the target dates increased the U.S. 
government's influence, as USAID asserts. Rather, we believe that the 
practice weakened one of USAID's tools of conditionality--deadlines. 
Additionally, the 2002 review by State and USAID pointed out the need 
to focus more tightly the conditionality of the Cash Transfer Program 
and indicated that "in the event that outcomes, benchmarks and 
timelines agreed with the Egyptian government are not met within a 
reasonable time of the originally agreed target dates the team agreed 
that DSP II funds will be reprogrammed to fund other USAID projects in 
Egypt."

[End of section]

Appendix III: GAO Contact and Staff Acknowledgments:

GAO Contact:

David Gootnick (202) 512-3149:

Acknowledgments:

In addition to the individuals named above, Phillip Herr, Julie 
Hirshen, Adrienne Spahr, Ming Chen, Joel Green, Eve Weisberg, Grace 
Lui, Reid Lowe, and Martin de Alteriis made key contributions to this 
report:

(320309):

FOOTNOTES

[1] We reviewed activities that were identified for reform in 
agreements between USAID and the Egyptian government, and we calculated 
the number of completed activities based on those for which USAID 
disbursed program funds. We included activities that USAID deemed 
partially complete and for which it consequently disbursed a percentage 
of program funds based on activity completion criteria. 

[2] In 1999, USAID provided the government of Egypt with a "menu" of 
reform-related activities from which to choose, rather than a narrowly 
defined set of activities to undertake. Because the value of the total 
activities targeted under the menu approach was greater than funds 
available through the program, Egypt was not expected to complete all 
of the activities. 

[3] The new MOU negotiated by USAID and the Egyptian government was 
developed by the Department of State, the Department of the Treasury, 
and USAID. 

[4] GAO, Foreign Assistance: Observations on USAID's Commodity Import 
Program, GAO-04-846T (Washington, D.C.: June 17, 2004).

[5] U.S. Agency for International Development, USAID/Egypt Strategic 
Plan Update: FY 2000-2009, Advancing the Partnership (Cairo: 2000).

[6] The IMF and World Bank (WB) supported an economic reform and 
structural adjustment program in Egypt that focused on (1) restoring 
macroeconomic balance and reducing inflation, (2) adjusting economic 
policies to stimulate medium-and long-term economic growth, and (3) 
revising social policy to minimize the negative effects of economic 
reforms on the poor. The IMF loaned Egypt approximately $221 million 
and WB loaned Egypt $300 million for these efforts. The IMF continues 
to provide Egypt technical assistance. In addition, under its 
Industrial Modernization Program, the European Union granted Egypt $124 
million dollars to support policy reforms between 1998 and 2004.

[7] For the purposes of this report, we refer to the program as the 
"Cash Transfer Program" since different names were used during our 
review period. 

[8] USAID's definition of privatization evolved from "reducing a 
company's public ownership to less than 50 percent", to "reducing a 
company's public ownership to less than 20 percent."

[9] 22 U.S.C. ß 2346 (2004). 

[10] Consolidated Appropriations Act of 2005, Pub. L. No. 108-447, div. 
D, title II, 118 Stat. 2809, 2976 (2004).

[11] In this report, "reform-related activities" are activities that 
USAID identified for reform and the Egyptian government agreed to 
through MOUs. USAID uses various terms for these activities, such as 
"policy measures," "indicators," and "benchmarks."

[12] In responding to a draft of this report,USAID officials commented 
that the Egyptian government subsequently completed some of the 
activities--such as new regulations for customs procedures and reducing 
its shares in joint venture banks--but USAID did not disburse any funds 
for these activities because it was still negotiating the terms of the 
new MOU. 

[13] Joint venture companies are private companies with partial 
Egyptian government ownership.

[14] Joint ventures were not included in the original list of 314 
companies identified by the Egyptian government for privatization. Over 
time, some of the companies became joint ventures and remained on the 
list of companies to be privatized because the Egyptian government 
retained controlling ownership.

[15] USAID counted liquidation as a form of privatization. Liquidation 
involves selling off the assets of a company to the extent that the 
company ceases to exist. 

[16] Until 1998, the government of Egypt's state banks partially owned 
most of the joint venture commercial banks, which had a negative impact 
on the joint venture banks' profitability and competitive position in 
the banking sector. This activity reduced the Egyptian government's 
share of joint venture banks to less than 20 percent in each bank. 

[17] Although Egypt joined the Patent Cooperation Treaty, USAID did not 
disburse funds for this activity because the government of Egypt missed 
the activity's deadline. 

[18] The average disbursement was about $25 million; the average was 
higher than the median because of several large payments USAID made for 
activities completed between 2002 and 2004.

[19] The privatization of Ramsis Agriculture and the Egyptian Company 
for Meat and Dairy Products were used to justify a payment of $2.4 
million in 2000 and the privatization of United Poultry Production was 
used to justify a payment of $1.2 million in 2001.

[20] David T. King, Bruce MacQueen, and Mack Ott, The Cost of Not 
Privatizing: An Assessment for Egypt. Survey and Empirical Analysis. 
Submitted to USAID/Egypt (Bethesda, Md: IBM Business Consulting 
Services, 2004).

[21] International Monetary Fund, Arab Republic of Egypt--Staff Report 
for the 2004 Article IV Consultation (Washington, D.C.: 2004).

[22] A performance period is the period of time between the date that 
the government of Egypt agreed to undertake an activity and the 
deadline for completing it. 

[23] Carana Corporation, The Results and Impacts of Egypt's 
Privatization Program (Cairo, Egypt: USAID Coordinating and Monitoring 
Services Project, 2002).

[24] Other factors included (1) USAID's Cash Transfer Program, (2) 
Egypt's IPR-related obligations under the WTO's membership, and (3) 
Egypt's placement on the U.S. Trade Representative's Priority Watch 
list.

[25] Development Associates, Inc., Assessing the Effectiveness of 
Technical Assistance for Policy Reform: The Case of Intellectual 
Property Rights Reform in Egypt (Cairo: USAID, 2004).

[26] The results of the survey cannot be viewed as representative of 
all academics and or business leaders in Egypt because its population 
was small and not selected randomly and had a response rate of about 50 
percent.

[27] The review recommended that the Cash Transfer Program focus on "no 
more than two broad sets of economic reform goals at any one time," 
whereas previous MOUs targeted several reform areas.

[28] In addition to the $800 million that the Egyptian government may 
receive for completing financial sector reform activities by the end of 
fiscal year 2009, it received $100 million for signing the financial 
sector MOU and developing a related matrix of time-bound reform-related 
activities. For the first time, deadlines for completing the activities 
were specified in the new MOU, whereas previously deadlines were 
determined after an MOU was signed. 

[29] The Cash Transfer Program falls under USAID's strategic objective 
of strengthening the environment for trade and investment. 

[30] King, MacQueen, and Ott, The Cost of Not Privatizing.

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