Foreign Aid:

Issues Concerning AID's Private-Sector Revolving Fund

NSIAD-88-185: Published: Jul 18, 1988. Publicly Released: Jul 18, 1988.

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Harold J. Johnson, Jr
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In response to a congressional request, GAO reviewed the operations of the Agency for International Development's (AID) Private-Sector Revolving Fund, specifically, its: (1) financial management; (2) funding levels; and (3) management and monitoring of field projects.

GAO found that the fund had several financial management weaknesses, including: (1) a database that was inadequate for accurately projecting cash flow and additional appropriations requirements; (2) a lack of complete and audited financial statements to ensure the integrity of its annual reports; (3) no loss reserve account; and (4) inadequate procedures for converting loan reflows of principal, interest, and fees into U.S. securities. GAO also found that: (1) the $8.5 million AID requested for its fiscal year (FY) 1989 appropriation would exceed its requirements; (2) staff limitations affected the quality of field mission project management and monitoring; (3) AID could not effectively operate a larger program; and (4) AID did not have an overall risk policy for the fund that defined the balance between projects' credit worthiness and AID developmental goals. In addition, GAO found that AID took several actions to address the fund's financial difficulties, including: (1) revising cash flow projections; (2) preparing financial statements; (3) establishing a loss reserve account; (4) strengthening reflow investment procedures; and (5) hiring a financial consultant.

Recommendations for Executive Action

  1. Status: Closed - Not Implemented

    Comments: AID has added staff and increased mission involvement in project management. AID officials, however, do not intend to audit annual financial statements. They consider the following adequate to ensure accuracy: (1) joint preparation of statements by two independent offices; and (2) annual reconciliation of statements to official reports submitted to the Treasury.

    Recommendation: The Administrator, AID, should provide sufficient resources for strengthening the management and monitoring of revolving fund projects by adding fund staff and increasing the direct involvement of its field missions in project management. The Administrator should also provide for annual audited revolving fund financial statements.

    Agency Affected: United States Agency for International Development

  2. Status: Closed - Implemented

    Comments: AID established a fund risk policy on January 24, 1990. As an alternative to heavily collateralized loans, the Fund's current guarantee program strategy is designed to encourage banks to offer term and cash-flow lending.

    Recommendation: The Administrator, AID, should establish a fund policy on maximum collateral requirements for local banks. The policy should: (1) establish a ceiling on banks' collateral requirements as a condition for fund loans and guarantees; (2) identify options for encouraging bank lending based on project performance and cash flow, instead of collateral-based lending; and (3) define, as part of an overall policy of what constitutes acceptable risk, the loss rates necessary and acceptable for balancing developmental goals and the objective of ensuring that revenue exceeds losses to retain revolving fund capital.

    Agency Affected: United States Agency for International Development


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