USAID and USDA are not required to  achieve a specific level of cost recovery for their monetization  transactions. Instead, they are only required to achieve reasonable market  price, which has not been clearly defined. Therefore, a combined total of $219 million of  appropriated funds was ultimately not available for development projects. The cargo preference mandate requires that 75  percent of U.S. food aid be shipped on U.S.-flag vessels. While implementing partners  report cost recovery data to USAID and USDA, the agencies do not use the  data to monitor sales prices over time. As a result, its cost recovery was lower than estimated. However,  we found that USAID’s assessments were conducted for a limited number  of countries and have not yet been updated to reflect changing market  conditions. We also found that USDA’s UMRs contained weaknesses, such  as a lack of methodology and errors in formulas. These adverse impacts may include discouraging food  production by local farmers, which in turn could undermine the food  security goals of the development projects funded by monetization. USAID and USDA Are Required to Ensure that Monetization Does Not Cause Adverse Market Impacts, but the Volume Programmed for Monetization in More than a Quarter of Cases May Have Increased the Risk of Displacing Commercial Trade

			USAID and USDA Are Required by Law to Ensure that Monetization Does Not Cause Adverse Market Impacts that May Run Counter to Development Goals

By law, USAID and USDA are required to ensure that monetization  transactions do not lead to adverse market impacts, such as causing  disincentives to, or interference with, domestic production or marketing of  the same or similar commodities. Furthermore, without conducting post-monetization transaction  impact evaluations, the agencies cannot determine the actual impacts of  monetization, even when the volume of the commodity monetized is more  than 25 percent of the commodity’s commercial import volume. Finally,  transportation costs constitute about a third of the overall costs of  monetization over the 3-year period we examined, and the 3-year  reflagging rule—which only applies to food aid and not to the defense  agencies and the U.S. Export-Import Bank—can limit competition among  ships eligible to transport U.S. food aid, further increasing cost. Matter for Congressional Consideration

Consistent with rules that apply to the Maritime Security Fleet and vessels  transporting other U.S. government cargo, Congress should consider  amending the Cargo Preference Act of 1954 to eliminate the 3-year waiting  period imposed on foreign vessels that acquire U.S.-flag registry before  they are eligible for carriage of preference food aid cargos. Recommendations for Executive Action

To improve the extent to which monetization proceeds cover commodity  and other associated costs and the agencies’ ability to meet requirements  to ensure that monetization does not cause adverse market impacts, we  recommend that the Administrator of USAID and the Secretary of  Agriculture take the following four actions:  1. jointly develop an agreed-upon benchmark or indicator to determine  “reasonable market price” for sales of U.S. food aid for monetization; 2.  monitor food aid sales transactions to ensure that the benchmark set  to achieve “reasonable market price” in the country where the  commodities are being sold is achieved, as required by law; 3. improve market assessments and coordinate to develop them in  countries where both USAID and USDA may monetize; and 4.  conduct market impact evaluations after monetization transactions  have taken place to determine whether they caused adverse market  impacts. DOT disagreed with our Matter for Congressional Consideration on the  basis of its concern regarding the potentially detrimental impact the  statutory change may have on the U.S. maritime industry. Metric tons of commodity  12. Figure 10 shows the total volume of commodities  programmed for monetization in each country by the U.S. Agency for  International Development (USAID) and U.S. Department of Agriculture  (USDA) between fiscal years 2008 and 2010. In a 2009 report to Congress, U.S. Agency for  International Development (USAID) and U.S. Department of  Agriculture (USDA) jointly stated that, due to the declining size of the  U.S.-flag commercial fleet, USAID and USDA are forced to compete  with the Department of Defense and other exporters for space aboard  the few remaining U.S.-flag vessels, thereby limiting competition in  transportation contracting and leading to higher freight rates.
Why GAO Did This Study

Since the Food Security Act of 1985, Congress has authorized monetization--the sale of U.S. food aid commodities in developing countries to fund development. In fiscal year 2010, more than $300 million was used to procure and ship 540,000 metric tons of commodities to be monetized by the U.S. Agency for International Development and the U.S. Department of Agriculture. Through analysis of agency data, interviews with agency officials, and fieldwork in three countries, this report (1) assesses the extent to which monetization proceeds cover commodity and other associated costs and (2) examines the extent to which U.S. agencies meet requirements to ensure that monetization does not cause adverse market impacts.

What GAO Found

GAO found that the inefficiency of the monetization process reduced funding available to the U.S. government for development projects by $219 million over a 3-year period. The process of using cash to procure, ship, and sell commodities resulted in $503 million available for development projects out of the $722 million expended. The U.S. Agency for International Development (USAID) and the U.S. Department of Agriculture (USDA) are not required to achieve a specific level of cost recovery for monetization transactions. Instead, they are only required to achieve reasonable market price, which has not been clearly defined. USAID's average cost recovery was 76 percent, while USDA's was 58 percent. Further, the agencies conduct limited monitoring of sale prices, which may hinder their efforts to maximize cost recovery. Ocean transportation represents about a third of the cost to procure and ship commodities for monetization, and legal requirements to ship 75 percent of the commodities on U.S.-flag vessels further increase costs. Moreover, the number of participating U.S.-flag vessels has declined by 50 percent since 2002, and according to USAID and USDA, this decline has greatly decreased competition. Participation may be limited by rules unique to food aid programs which require formerly foreign-flag vessels to wait 3 years before they are treated as U.S.-flag vessels. USAID and USDA cannot ensure that monetization does not cause adverse market impacts because they monetize at high volumes, conduct weak market assessments, and do not conduct post-monetization evaluations. Adverse market impacts may include discouraging food production by local farmers, which could undermine development goals. To help avoid adverse market impacts, the agencies conduct market assessments that recommend limits on programmable volume of commodities to be monetized. However, USAID's assessments were conducted for just a subset of countries and have not yet been updated to reflect changing market conditions, and USDA's assessments contained weaknesses such as errors in formulas. Both agencies have at times programmed for monetization at volumes in excess of limits recommended by their market assessments. Further, the agencies monetized more than 25 percent of the recipient countries' commercial import volume in more than a quarter of cases, increasing the risk of displacing commercial trade. Finally, the agencies do not conduct post-monetization impact evaluations, so they cannot determine whether monetization caused any adverse market impacts.

What GAO Recommends

GAO recommends that Congress consider eliminating the 3-year waiting period for foreign vessels that acquire U.S.-flag registry to be eligible to transport U.S. food aid. Further, the USAID Administrator and the Secretary of Agriculture should develop a benchmark for "reasonable market price" for food aid sales; monitor these sales; improve market assessments and coordinate efforts; and conduct postmarket impact evaluations. USAID and USDA generally agreed with our recommendations. DOT disagreed with our Matter for Congressional Consideration due to its concern that the proposed statutory change might be detrimental to the U.S. maritime industry.