B-133002, MAR. 10, 1966, 45 COMP. GEN. 565

B-133002, MAR. 10, 1966, 45 COMP. GEN. 565

FOREIGN AID PROGRAMS - LOAN PROGRAMS - SUSPENSION OR TERMINATION - PROPRIETY THE RESERVATION IN PROGRAM AND PROJECT LOAN AGREEMENTS FOR THE SUSPENSION OR TERMINATION OF ASSISTANCE TO A FOREIGN COUNTRY AND FOR THE DIVERSION OF THE TITLE TO GOODS IN TRANSIT FROM THE BORROWING COUNTRY TO THE AGENCY FOR INTERNATIONAL DEVELOPMENT, THE AGENCY TO ASSUME THE COST OF DIVERSION AND TO INDEMNIFY SUPPLIERS OR CARRIERS, IS WITHIN THE CONTEMPLATION OF THE FOREIGN ASSISTANCE ACT OF 1961, AND IS AN APPROPRIATE MEANS FOR ASSURING COMPLIANCE WITH THE PURPOSES OF THE ACT, AND THE EXPENSES OF ANY DIVERSION THAT ARE OF A GENERAL ADMINISTRATIVE NATURE SHOULD BE CHARGED TO ADMINISTRATIVE EXPENSE LIMITATIONS, LEAVING FOR CHARGE TO LOAN ACCOUNTS THE EXPENSES THAT HAVE A DIRECT CONNECTION WITH THE EXECUTION OF THE DIVERSION, AND WHEN THE MAXIMUM CONTINGENT LIABILITY INCIDENT TO INDEMNIFICATION AGREEMENTS AND CHARGEABLE TO LOAN ACCOUNTS IS SUBJECT TO REASONABLE DETERMINATION THE PROHIBITION AGAINST ESTABLISHING INDETERMINATE AMOUNTS IS OVERCOME, AND ANY RESERVE OR OBLIGATION ESTABLISHED TO ASSURE THE AVAILABILITY OF FUNDS FOR INDEMNIFICATION LIABILITY SHOULD BE SUFFICIENT TO AVOID VIOLATION OF THE ANTIDEFICIENCY ACT.

TO THE ADMINISTRATOR, AGENCY FOR INTERNATIONAL DEVELOPMENT, MARCH 10, 1966:

BY LETTER OF FEBRUARY 28, 1966, YOU REQUESTED OUR CONCURRENCE IN CONCLUSIONS WHICH HAVE BEEN REACHED WITHIN YOUR AGENCY CONCERNING AUTHORITIES PROVIDED BY THE FOREIGN ASSISTANCE ACT OF 1961, AS AMENDED, 22 U.S.C. 2151 NOTE, RELATIVE TO SITUATIONS WHERE SUDDEN SUSPENSIONS OF ASSISTANCE THEREUNDER MIGHT BE NECESSARY WITH RESPECT TO ANY PARTICULAR COUNTRY.

CONSIDERATION OF THE MATTER ARISES OUT OF CHANGES IN ECONOMIC OR POLITICAL CONDITIONS WHICH DESTROY OR IMPAIR THE ASSUMPTIONS UPON WHICH ECONOMIC ASSISTANCE TO DEVELOPING COUNTRIES IS BASED. IN SUCH SITUATIONS DETERMINATIONS MUST BE MADE AS TO WHETHER ASSISTANCE SHOULD BE SUSPENDED AND WHETHER TITLE TO GOODS IN TRANSIT FINANCED BY THE AGENCY FOR INTERNATIONAL DEVELOPMENT UNDER THE TERMS OF LOAN AGREEMENTS WITH THE COUNTRIES INVOLVED SHOULD BE TRANSFERRED TO THE AGENCY. IN CONNECTION WITH SUCH DECISIONS TO DIVERT TITLE, YOU HAVE CONCLUDED THAT AUTHORITY EXISTS TO FIND:

1. ANY INCIDENTAL COSTS AND LOSSES CONNECTED WITH OR ARISING FROM THE ACQUISITION AND SUBSEQUENT DISPOSAL OF THE GOODS, AND

2. ANY COSTS ARISING FROM HOLD HARMLESS OR INDEMNIFICATION AGREEMENTS MADE WITH SUPPLIERS OR CARRIERS IN CONNECTION WITH DIVERSION OF AID- FINANCED GOODS.

ALSO, WITH RESPECT TO INDEMNIFICATION AGREEMENTS, YOU HAVE CONCLUDED THAT PROVISION WOULD HAVE TO BE MADE UNDER THE ANTIDEFICIENCY ACT, R.S. 3679, AS AMENDED, 31 U.S.C. 665, TO COVER THE CONTINGENT LIABILITIES OF THE UNITED STATES ONLY WHERE THERE IS SOME REASONABLE LIKELIHOOD THAT PAYMENT UNDER SUCH AGREEMENT WILL BE REQUIRED.

THE FOLLOWING EXCERPT FROM YOUR LETTER SETS FORTH THE FACTUAL CIRCUMSTANCES INVOLVED:

A SUBSTANTIAL PORTION OF UNITED STATES ASSISTANCE IS PROVIDED THROUGH LOANS, EITHER "PROGRAM" LOANS FOR FINANCING THE IMPORTATION OF COMMODITIES OR "PROJECT" LOANS FOR FINANCING THE FOREIGN EXCHANGE COSTS OF A PARTICULAR CAPITAL PROJECT. ALL PROCUREMENT MUST BE CARRIED OUT IN ACCORDANCE WITH A.I.D. DIRECTIONS EXPRESSED IN THE LOAN AGREEMENTS AND ANCILLARY DOCUMENTS. THE MOST IMPORTANT OF THESE REQUIREMENTS ARE APPLICABLE TO BOTH CATEGORIES OF LOANS AND INCLUDE STIPULATIONS THAT ALL GOODS BE PROCURED FROM UNITED STATES SUPPLIERS AND 50 PERCENT OF GROSS TONNAGE SHIPPED BE CARRIED ON U.S.-FLAG VESSELS.

FINANCING IS EITHER BY DIRECT REIMBURSEMENT OF THE BORROWING COUNTRY FOR THE COMMODITY COSTS IT HAS INCURRED OR THROUGH THE OPENING OF LETTERS OF COMMITMENT BY A.I.D. WITH U.S. BANKS. UNDER THE LETTER OF COMMITMENT PROCEDURE, THE PURCHASERS ABROAD NORMALLY REQUEST THAT IRREVOCABLE LETTERS OF CREDIT BE ESTABLISHED BY OR THROUGH THE U.S. BANK HOLDING THE A.I.D. LETTER OF COMMITMENT IN FAVOR OF U.S. SUPPLIERS. THESE SUPPLIERS HAVE CONTRACTED WITH THE PURCHASERS FOR DELIVERY OF GOODS IN NORMAL COMMERCIAL CHANNELS, THE PURCHASERS HAVING SECURED NECESSARY IMPORT LICENSES AND IN THE CASES OF PROGRAM LOANS, ARRANGED FOR PAYMENT TO THE BORROWING GOVERNMENT IN LOCAL CURRENCY OF THE COST OF THE GOODS TO BE IMPORTED. UPON PRESENTATION OF PROPER DOCUMENTS, NORMALLY AFTER GOODS HAVE BEEN DELIVERED TO CARRIERS, THE SUPPLIER IS PAID IN U.S. DOLLARS BY THE BANK. THE BANK IN TURN IS REIMBURSED BY A.I.D.

A.I.D. HAS RESERVED RIGHTS IN ITS LOAN AGREEMENTS WHICH PERMIT IT TO INTERRUPT THE FINANCING PROCESS IF IN ITS JUDGMENT EVENTS HAVE OCCURRED WHICH RENDER IT PROBABLE THAT THE PURPOSES OF THE LOAN OR THE FAA WILL NOT BE ATTAINED. IF THE ADMINISTRATOR MAKES THE REQUISITE FINDING, A.I.D. MAY WITHHOLD ISSUANCE OF LETTERS OF COMMITMENT, REVOKE LETTERS OF COMMITMENT TO THE EXTENT IRREVOCABLE LETTERS OF CREDIT HAVE NOT BEEN ISSUED OR OTHER BANK PAYMENTS MADE, AND CEASE MAKING DIRECT REIMBURSEMENTS. MOST IMPORTANTLY FOR OUR PURPOSES, A.I.D. MAY NOT IN MOST CASES DIRECT THAT TITLE TO A.I.D.-FINANCED GOODS IN TRANSIT TO THE BORROWING COUNTRY BE TRANSFERRED TO A.I.D., PROVIDED THE GOODS ARE IN A DELIVERABLE STATE AND NOT OFF-LOADED IN PORTS OF THE BORROWING COUNTRY.

IF A.I.D. DIRECTS THAT TITLE BE TRANSFERRED, A.I.D. WILL PURCHASE THE GOODS FROM THE SUPPLIERS AND PAY ALL OTHER COSTS INCIDENT TO DIVERSION, INCLUDING STORAGE COSTS. IT WILL, TO THE EXTENT NECESSARY REDUCE THE LOAN REPAYMENT OBLIGATION OF THE COUNTRY THE ASSISTANCE TO WHICH IS BEING SUSPENDED. IT IS ANTICIPATED THAT MANY OF THE DIVERTED GOODS CAN BE RESOLD OR TRANSFERRED TO OTHER COUNTRIES AS PART OF A.I.D.'S ASSISTANCE PROGRAMS, BUT IT IS REASONABLY CLEAR THAT LOSSES WILL BE INCURRED BY A.I.D., EITHER BECAUSE SOME ITEMS, PARTICULARLY CUSTOM-MADE ITEMS, CANNOT BE SOLD OR BECAUSE AMOUNTS RECEIVED ON RESALE OR CHARGEABLE TO ANOTHER A.I.D. PROGRAM WILL NOT COVER THE COSTS TO A.I.D. OF ACQUIRING, STORING, AND THEN DISPOSING OF THE GOODS. MOREOVER, BECAUSE IN MANY CASES SERIOUS QUESTIONS MAY ARISE AS TO WHETHER A.I.D.'S DIVERSION ORDER RELIEVES THE U.S. SUPPLIER OR THE CARRIER OF LEGAL OBLIGATIONS TO THE PURCHASER, IT IS ANTICIPATED THAT EFFECTUATION OF A.I.D.'S DIVERSION RIGHT MIGHT WELL DEPEND UPON A.I.D. AGREEING TO HOLD SUPPLIERS OR CARRIERS HARMLESS FROM ANY LOSSES WHICH MIGHT BE CAUSED BY THEIR COMPLIANCE WITH A.I.D. DIVERSION ORDERS.

UNDERLYING PURPOSES OF ASSISTANCE UNDER THE FOREIGN ASSISTANCE ACT ARE TO PROMOTE PEACE AND TO MAINTAIN SECURITY AND PROMOTE THE FOREIGN POLICY OF THE UNITED STATES THROUGH MILITARY, ECONOMIC, AND TECHNICAL ASSISTANCE TO FRIENDLY COUNTRIES IN ORDER TO STRENGTHEN MUTUAL SECURITY AND THE INDIVIDUAL AND COLLECTIVE DEFENSES OF THE FREE WORLD. IN CARRYING OUT THESE PURPOSES, THE ACT PROVIDES IN THE 12TH PARAGRAPH OF SECTION 102, AS AMENDED, 22 U.S.C. 2151, QUOTING FROM THE CODE, THAT IN CONNECTION WITH ECONOMIC ASSISTANCE:

IT IS THE SENSE OF THE CONGRESS THAT, IN THE ADMINISTRATION OF PROGRAMS OF ASSISTANCE UNDER SECTIONS 2161-2213 OF THIS TITLE, EVERY POSSIBLE PRECAUTION SHOULD BE TAKEN TO ASSURE THAT SUCH ASSISTANCE IS NOT DIVERTED TO SHORT-TERM EMERGENCY PURPOSES (SUCH AS BUDGETARY PURPOSES, BALANCE-OF- PAYMENTS PURPOSES, OR MILITARY PURPOSES) OR ANY OTHER PURPOSE NOT ESSENTIAL TO THE LONG-RANGE ECONOMIC DEVELOPMENT OF RECIPIENT COUNTRIES.

AND WITH RESPECT TO BOTH ECONOMIC AND MILITARY ASSISTANCE, THE ACT PROVIDES IN SECTION 605, 22 U.S.C. 2355, THAT:

(A)ANY COMMODITIES AND DEFENSE ARTICLES PROCURED TO CARRY OUT THIS CHAPTER SHALL BE RETAINED BY, OR UPON REIMBURSEMENT, TRANSFERRED TO, AND FOR THE USE OF, SUCH AGENCY OF THE UNITED STATES GOVERNMENT AS THE PRESIDENT MAY DETERMINE IN LIEU OF BEING DISPOSED OF TO A FOREIGN COUNTRY OR INTERNATIONAL ORGANIZATION, WHENEVER IN THE JUDGMENT OF THE PRESIDENT THE BEST INTERESTS OF THE UNITED STATES WILL BE SERVED THEREBY, OR WHENEVER SUCH RETENTION IS CALLED FOR BY CONCURRENT RESOLUTION. ANY COMMODITIES OR DEFENSE ARTICLES SO RETAINED MAY BE DISPOSED OF WITHOUT REGARD TO PROVISIONS OF LAW RELATING TO THE DISPOSAL OF PROPERTY OWNED BY THE UNITED STATES GOVERNMENT, WHEN NECESSARY TO PREVENT SPOILAGE OR WASTAGE OF SUCH COMMODITIES OR DEFENSE ARTICLES OR TO CONSERVE THE USEFULNESS THEREOF. FUNDS REALIZED FROM ANY DISPOSAL OR TRANSFER SHALL REVERT TO THE RESPECTIVE APPROPRIATION, FUND, OR ACCOUNT USED TO PROCURE SUCH COMMODITIES OR DEFENSE ARTICLES OR TO THE APPROPRIATION, FUND, OR ACCOUNT CURRENTLY AVAILABLE FOR THE SAME GENERAL PURPOSE.

IN CONNECTION WITH PROMOTING THE ECONOMIC DEVELOPMENT OF LESS DEVELOPED FRIENDLY COUNTRIES, SECTION 201 (B), 22 U.S.C. 2161 (B), OF THE FOREIGN ASSISTANCE ACT AUTHORIZES THE PRESIDENT TO ,MAKE LOANS PAYABLE AS TO PRINCIPAL AND INTEREST IN UNITED STATES DOLLARS ON SUCH TERMS AND CONDITIONS AS HE MAY DETERMINE.' IN MAKING SUCH LOANS, THE PRESIDENT IS DIRECTED TO TAKE INTO ACCOUNT, AMONG OTHER THINGS, "THE EXTENT TO WHICH THE RECIPIENT COUNTRY IS SHOWING A RESPONSIVENESS TO THE VITAL ECONOMIC, POLITICAL, AND SOCIAL CONCERNS OF ITS PEOPLE, AND DEMONSTRATING A CLEAR DETERMINATION TO TAKE EFFECTIVE SELF-HELP MEASURES.'

WE AGREE, IN LIGHT OF THE PURPOSES OF THE ACT AND OF THE AUTHORITIES PROVIDED THEREUNDER THAT IT IS APPROPRIATE FOR THE PRESIDENT TO INCLUDE IN ANY LOAN AGREEMENTS PROVISIONS TO SUSPEND OR TERMINATE ASSISTANCE IN THE EVENT IT IS DETERMINED THAT FURTHER ASSISTANCE WOULD NOT SUBSERVE OR WOULD BE INIMICAL TO THE PURPOSES OF THE ACT. ANY OTHER CONCLUSION WOULD BE TO REQUIRE THAT ONCE A LOAN AGREEMENT HAS BEEN REACHED, THE ASSISTANCE TO BE FURNISHED UNDER IT MUST BE PROVIDED EVEN WHERE IT LATER DEVELOPS THAT TO DO SO WOULD OPERATE AGAINST THE BEST INTERESTS OF THE UNITED STATES AND NOTWITHSTANDING THAT SUCH RESULT IS AN AVOIDABLE ONE. WE SEE NO REASON FOR QUESTIONING THE USE OF A DIVERSION CLAUSE OF THE NATURE EXPLAINED IN YOUR LETTER, AS AN APPROPRIATE MEANS FOR ASSURING COMPLIANCE WITH LEGISLATIVE PURPOSES IN THIS REGARD.

HAVING CONCLUDED THAT A DIVERSION RIGHT IS A PROPER LOAN CONDITION, IT WOULD FOLLOW THAT ANY LOSSES INCURRED IN EXECUTING SUCH RIGHT WOULD BE CHARGEABLE TO THE LOAN ACCOUNT. HOWEVER, IN CALCULATING THE AMOUNT OF LOSS, THERE MAY ARISE QUESTIONS CONCERNING WHETHER CERTAIN EXPENSES INVOLVED IN EFFECTING A DIVERSION SHOULD BE CHARGED AS PART OF THE LOSS OR AS ADMINISTRATIVE EXPENSES AGAINST APPROPRIATIONS TO THE AGENCY FOR ADMINISTRATION. IN VIEW OF THE GENERAL NATURE OF THE QUESTIONS WE HAVE BEEN ASKED TO CONSIDER AND SINCE WE ARE NOT AWARE OF THE EXACT KINDS OF EXPENSES WHICH ARE CONTEMPLATED FOR CHARGE TO LOAN ACCOUNTS UNDER ANY DIVERSIONS WHICH MIGHT BE EFFECTED, WE WOULD STATE ONLY THAT ANY SUCH EXPENSES WHICH ARE OF A GENERAL ADMINISTRATIVE NATURE SHOULD BE CHARGED TO ADMINISTRATIVE EXPENSE LIMITATIONS LEAVING FOR CHARGE TO THE LOAN ACCOUNTS ONLY THOSE EXPENSES WHICH HAVE A DIRECT CONNECTION WITH EXECUTION OF THE DIVERSIONS.

WE ALSO AGREE THAT ANY COSTS ARISING FROM HOLD HARMLESS OR INDEMNIFICATION AGREEMENTS MADE WITH SUPPLIERS OR CARRIERS IN CONNECTION WITH DIVERSION OF AID-FINANCED GOODS WOULD BE CHARGEABLE TO THE LOAN ACCOUNTS, WHERE SUCH AGREEMENTS ARE ENTERED INTO PURSUANT TO CONDITIONS IMPOSED BY THE SUPPLIERS AND CARRIERS. SINCE, AS YOU STATE HOLD HARMLESS AND INDEMNIFICATION AGREEMENTS ARE TO BE OFFERED ON A CASE BY CASE BASIS IN RELATION TO SPECIFIC CARGOES, IT WOULD APPEAR THAT THE MAXIMUM CONTINGENT LIABILITY THEREUNDER WOULD BE SUBJECT TO REASONABLE DETERMINATION THEREBY OVERCOMING THE PROHIBITION AGAINST THE USE OF SUCH CONTRACTING PROCEDURE BECAUSE OF THE ESTABLISHMENT OF LIABILITIES OF INDETERMINATE AMOUNT. SEE 42 COMP. GEN. 708.

AND, FINALLY, WE AGREE WITH THE CONCLUSION EXPRESSED IN YOUR LETTER THAT THE BARE POSSIBILITY OF PAYMENT BEING REQUIRED UNDER A HOLD HARMLESS OR INDEMNIFICATION AGREEMENT IS NOT NECESSARILY SUFFICIENT TO REQUIRE RECOGNITION BY WAY OF ESTABLISHING A RESERVE THEREFOR. WHERE CIRCUMSTANCES ARE SUCH AS TO INDICATE SOME LIKELIHOOD OF PAYMENT BEING REQUIRED, AN APPROPRIATE RESERVE OR OBLIGATION WOULD, OF COURSE, HAVE TO BE ESTABLISHED TO ASSURE THE AVAILABILITY OF FUNDS. BUT WHILE WE HAVE NO OBJECTION TO SUCH AN APPROACH, WE WOULD EMPHASIZE THAT THE PRACTICE MIGHT WELL RESULT IN A VIOLATION OF THE ANTIDEFICIENCY ACT IF INSUFFICIENT FUNDS ARE RESERVED AND THAT DETERMINATION OF THE ADEQUACY OF RESERVES IS A RESPONSIBILITY WHICH RESTS WITHIN YOUR AGENCY. 34 COMP. GEN. 418, 419.