Foreign Assistance: USAID's Operating Expense Account Does Not Fully Reflect the Cost of Delivering Foreign Assistance

GAO-03-1152R Published: Sep 30, 2003. Publicly Released: Sep 30, 2003.
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Humanitarian and economic development assistance has long been an important component of U.S. global security strategy. Since 1962, the U.S. Agency for International Development (USAID) has managed more than $273 billion in such assistance. In fiscal year 2003, USAID estimates that it will obligate about $13 billion for assistance programs in almost 160 countries. In recent years, demands on USAID's budget and workforce have increased as the agency strives to meet emerging requirements, such as reconstruction efforts in Afghanistan and Iraq and increased funding for health programs. However, USAID officials have expressed concern that funds provided for its administrative or operating expenses have not kept pace with the agency's requirements. Since 1976, Congress has included a separate appropriation to consolidate USAID's operating expenses into a single budget item. Congress intended that USAID pay for the administrative costs of delivering foreign assistance (its "cost of doing business") from an operating expense account separate from its humanitarian and development assistance program funds. These operating expenses are costs incurred primarily for the benefit of the United States rather than the foreign assistance recipient. In accordance with congressional guidance, USAID reports all expenses related to the U.S. direct-hire staff as operating expenses and, based on its guidance on what constitutes the cost of doing business, other operating expenses--from rent to office utilities and supplies. In fiscal year 2003, USAID estimates that it will obligate $668 million for its operating expenses. We examined (1) trends in USAID's operating expenses since 1995 and (2) whether the charges to USAID's operating expenses account reflect the agency's actual cost of doing business.

According to date USAID reported, over fiscal years 1995 to 2003, USAID's total obligated operating expenses have ranged from a low $595.7 million in 1998 to a high of $654.8 million in 1995, and USAID estimates total obligations in 20003 will be about $668 million (in constant 2003 dollars). The largest administrative category in USAID's operating expense account is salaries and related support for U.S. direct-hire staff. Obligations for these expenses account for 43 percent ($277.7 million) of USAID's estimated operating expenses for fiscal year 2003. However, funds obligated for direct-hire personnel declined during fiscal years 1995 through 2001--from $302 million to $249.2 million--primarily due to declining levels of direct-hire staff during this period. But, in fiscal years 2002 and 2003, U.S. direct-hire personnel costs have increased over 11 percent. USAID expects these costs to continue rising as it continues its recent hiring efforts. Three other administrative categories--other staff costs, information technology, and rent--account for about 33 percent ($216 million) of USAID's estimated operating expenses for fiscal year 2003. Although these expenses varied from year to year, the net change in total from fiscal year 1995 was a decline of less than 1 percent. Between fiscal years 1995 to 2002, operating expense obligations as a percentage of program obligations remained fairly level--averaging about 8.5 percent. However, in fiscal year 2003, the operating expenses to program ration dropped to 5 percent due to large amounts of supplemental funding. USAID's operating expense account does not fully reflect the agency's cost of doing business primarily because the agency pays for some administrative activities done by contractors and other nondirect-hire staff with program funds.

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Recommendations for Executive Action

Agency Affected Recommendation Status
Agency for International Development To help provide increased visibility over USAID's operating expenses, better reflect what USAID, spends on program administration, and provide a more realistic accounting of the agency's cost of doing business, the USAID Administrator should identify all administrative costs that primarily benefit the United States--whether paid for with operating expense funds or program funds--and report this information to the Congress in its annual budget requests for operating expense account appropriations. Such an accounting should form the basis of USAID's annual budget request for operating expense funds.
Closed – Not Implemented
No action reported by the agency.

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