[House Hearing, 105 Congress] [From the U.S. Government Publishing Office]FOREIGN OPERATIONS, EXPORT FINANCING, AND RELATED PROGRAMS APPROPRIATIONS FOR 1998 _______________________________________________________________________ HEARINGS BEFORE A SUBCOMMITTEE OF THE COMMITTEE ON APPROPRIATIONS HOUSE OF REPRESENTATIVES ONE HUNDRED FIFTH CONGRESS FIRST SESSION ________ SUBCOMMITTEE ON FOREIGN OPERATIONS, EXPORT FINANCING, AND RELATED PROGRAMS SONNY CALLAHAN, Alabama, Chairman JOHN EDWARD PORTER, Illinois NANCY PELOSI, California FRANK R. WOLF, Virginia SIDNEY R. YATES, Illinois RON PACKARD, California NITA M. LOWEY, New York JOE KNOLLENBERG, Michigan THOMAS M. FOGLIETTA, Pennsylvania MICHAEL P. FORBES, New York ESTEBAN EDWARD TORRES, California JACK KINGSTON, Georgia RODNEY P. FRELINGHUYSEN, New Jersey NOTE: Under Committee Rules, Mr. Livingston, as Chairman of the Full Committee, and Mr. Obey, as Ranking Minority Member of the Full Committee, are authorized to sit as Members of all Subcommittees. Charles Flickner, William B. Inglee, and John Shank, Staff Assistants, Lori Maes, Administrative Aide ________ PART 3 Page Agency for International Development............................. 1 NIS and Central Europe........................................... 263 Export and Investment Assistance................................. 423 ________ Printed for the use of the Committee on Appropriations ________ U.S. GOVERNMENT PRINTING OFFICE 41-782 O WASHINGTON : 1997 ------------------------------------------------------------------------ For sale by the U.S. Government Printing Office Superintendent of Documents, Congressional Sales Office, Washington, DC 20402 COMMITTEE ON APPROPRIATIONS BOB LIVINGSTON, Louisiana, Chairman JOSEPH M. McDADE, Pennsylvania DAVID R. OBEY, Wisconsin C. W. BILL YOUNG, Florida SIDNEY R. YATES, Illinois RALPH REGULA, Ohio LOUIS STOKES, Ohio JERRY LEWIS, California JOHN P. MURTHA, Pennsylvania JOHN EDWARD PORTER, Illinois NORMAN D. DICKS, Washington HAROLD ROGERS, Kentucky MARTIN OLAV SABO, Minnesota JOE SKEEN, New Mexico JULIAN C. DIXON, California FRANK R. WOLF, Virginia VIC FAZIO, California TOM DeLAY, Texas W. G. (BILL) HEFNER, North Carolina JIM KOLBE, Arizona STENY H. HOYER, Maryland RON PACKARD, California ALAN B. MOLLOHAN, West Virginia SONNY CALLAHAN, Alabama MARCY KAPTUR, Ohio JAMES T. WALSH, New York DAVID E. SKAGGS, Colorado CHARLES H. TAYLOR, North Carolina NANCY PELOSI, California DAVID L. HOBSON, Ohio PETER J. VISCLOSKY, Indiana ERNEST J. ISTOOK, Jr., Oklahoma THOMAS M. FOGLIETTA, Pennsylvania HENRY BONILLA, Texas ESTEBAN EDWARD TORRES, California JOE KNOLLENBERG, Michigan NITA M. LOWEY, New York DAN MILLER, Florida JOSE E. SERRANO, New York JAY DICKEY, Arkansas ROSA L. DeLAURO, Connecticut JACK KINGSTON, Georgia JAMES P. MORAN, Virginia MIKE PARKER, Mississippi JOHN W. OLVER, Massachusetts RODNEY P. FRELINGHUYSEN, New Jersey ED PASTOR, Arizona ROGER F. WICKER, Mississippi CARRIE P. MEEK, Florida MICHAEL P. FORBES, New York DAVID E. PRICE, North Carolina GEORGE R. NETHERCUTT, Jr., Washington CHET EDWARDS, Texas MARK W. NEUMANN, Wisconsin RANDY ``DUKE'' CUNNINGHAM, California TODD TIAHRT, Kansas ZACH WAMP, Tennessee TOM LATHAM, Iowa ANNE M. NORTHUP, Kentucky ROBERT B. ADERHOLT, Alabama James W. Dyer, Clerk and Staff Director FOREIGN OPERATIONS, EXPORT FINANCING, AND RELATED PROGRAMS APPROPRIATIONS FOR 1998 ---------- Wednesday, March 19, 1997. U.S. AGENCY FOR INTERNATIONAL DEVELOPMENT WITNESS J. BRIAN ATWOOD Chairman Callahan's Opening Statement Mr. Callahan. Good morning, Brian, welcome to our subcommittee. It is good to see you once again. I am not going to force you to sit through my reading an opening statement. I am just going to touch on the highlights of what I am going to give to you in printed form, and I think I do that out of deference and respect for you. I hope you have the same deference and respect for me. Mr. Atwood. I will. Mr. Callahan. I have read your statement, and I would appreciate you keeping it as brief as possible. We get into these meetings and with so many members on the subcommittee, we want to make certain that everyone has the opportunity to question you about any area of your responsibility. You and I have already talked. Basically, I was very disappointed the administration did not follow through on the direction that this committee has given the administration for the past couple of years with respect to child survival. I don't think you really believe this committee is not going to reinsert the child survival account in our legislation. And incidentally, child survival has great bipartisan support. It is just not Sonny Callahan or the Republicans. It has broad support in this subcommittee and the full committee, as well as the Congress. I know we have discussed that. You can rest assured that--good morning, Nancy--the child survival account will be reinstated. Second, you are asking for an increase of $65 million for development activities, and you even indicate that the monies you would spend on child survival, even though you didn't request a line item, would be cut by $44 million, or 10 percent or thereabouts, and that, too, is unacceptable, at least to me. Third, your AID budget would increase overall, and yet there is no increase that I can detect in development assistance activities for Latin America. Other regions would receive increases, but not our own hemisphere, and that, too, would not be my wish. I certainly will be guided by the subcommittee members, but I think it is extremely important that we look at our own hemisphere, that we recognize we have needs in this hemisphere, incidentally, in areas other than Haiti, and I don't think it would be appropriate for us to consider reducing our levelized funding for this hemisphere, while at the same time increasing funding for other areas of the world. Your new management system is far behind schedule and I understand is over budget. I understand you spent $100 million on a new computer system and it, too, is several years behind schedule. We are going to have to talk about that this morning. I also understand that the perennial problem of the move to the Federal Triangle Building is now going to be even more expensive than we were originally told, and we need to talk about that. Furniture costs, for example, are up about $3 million. I don't think the cost of furniture has increased to that degree, and I don't imagine you are considering buying more desks than you currently have. So therefore we are interested in knowing why the furniture costs are now estimated to go up to, I think, $14 million versus $11 million. The $11 million is too high. The$14 million is completely out of reach. Finally, I know that a working group from the National Security Council and the Vice President's office and OMB are currently reviewing options for the future of AID. Since I assumed Chairmanship of this committee, there has been talk within the administration of abolishing your independence, of merging with it other operations, and in addition to that, you have had some Members of the other body who have expressed an interest in doing the same thing. We in the House have sort of stayed out of that fracas. We want the Federal Government and the administrative branch of government to be able to effectively, from a cost viewpoint and an operational viewpoint and a jurisdictional viewpoint, run the USAID program as best they see fit. So we have stayed out of that fracas, but we keep hearing these rumblings and we don't want to get into a conference report, which inevitably happens. For some reason, the Senate chooses to disagree with us on some of the things we do, and we can't understand that, but I suppose every committee has that same problem with the Senate. But we want to get into a conference report and have the administration come out and say we think USAID's structure should be changed, nor do we want to face a conference report where we are trying to satisfy the wishes of some Member of the Senate about language in the bill that would force that change. I know that you might not be a part of that endeavor by the administration, but in any event, we would like to know your views on this issue. Before hearing from you, Brian, at this time I would like to yield to the gentlelady from California, the Ranking Democrat on our panel, Mrs. Pelosi, for as much time as she may consume. How is that? Ms. Pelosi's Opening Statement Ms. Pelosi. As usual, you are very gracious. Thank you, Mr. Chairman, very much. I appreciate hearing the comments that you made and at some point in my remarks I will associate myself with some parts of them, and that would begin by welcoming Administrator Atwood to our hearing today. We are looking forward to your testimony. Thank you for being here and for your exceptional leadership in the challenge that you have. As you are here today to discuss the administration's fiscal year 1998 request for various programs administered by AID, I, again, want to commend you and the people of AID for continuing to administer a wide ranging and complex set of programs throughout the world. AID is a unique organization for which there is no equal. AID's personnel serve U.S. national security interests by developing and implementing sustainable development programs in areas ranging from AIDS prevention to democracy building, all the way up to Z. But in the interest of time, I won't go all the way to Z. AID is accomplishing this mission, I would add, despite the reduction in its administrative funds. I think it would be most unfortunate if the future capability of AID were compromised by some reorganization scheme that did not preserve these capabilities. Mr. Chairman, I have been interested in this area for a very long time. It is my experience that USAID provides us with the independent voice that we need, making funding decisions here in terms of supporting initiatives throughout the world. I don't think it would be appropriate for it to be brought under the umbrella of the State Department where decisions would be based on things other than the objective judgment that USAID can provide. I was very pleased to hear your remarks that we would not be dictating to the administration how it organizes this part of the executive branch. The fiscal year 1998 request contains an increase, I see, for $476 million for programs administered by the USAID, most of which, $292 million, is for Eastern Europe and the New Independent States. Other areas are $135 million for the Economic Support Fund and $65 million for development assistance. The increase requested for development assistance is modest, indeed, if we look at the needs around the world and as most of it is targeted for promoting food security in Africa, I would recommend the Committee's attention to it. I always want to associate myself with the Chairman's very forceful remarks that reflect his strong commitment to our own hemisphere and hope that we would have a strong emphasis on Latin America, as well. I look forward to our seeing some of the good work that AID has accomplished in Central America on our visit--two weeks from now. The crisis situations that have occurred within the last few years should be a warning enough for us that development programs aimed at crisis prevention are a good investment for American security and economic interests around the world, and of course, democracy building is too. There are many other issues I will address this morning in my questions includes AIDS prevention and control, population planning, women's programs, environmental concerns and regional issues in Latin America, Asia and Africa. I do want to note, while I am mentioning Africa, that I am so pleased that the First Lady and Chelsea have embarked on a goodwill trip to Africa. I want to commend her effort to bring the world's attention to the particular challenges that we have there. There is no better example of AID's unique role in the world than the response they, along with the UNHCR, were able to bring about during the crisis in Rwanda and more recently Zaire. The ability to respond quickly and effectively to humanitarian crises around the world depends heavily on our AID personnel on the ground and their practical solutions and know- how. In thanking you, Mr. Administrator, I want to thank them for their courage and their dedication and their effectiveness. I look forward to your testimony and thank you, Mr. Chairman. Mr. Callahan. Mr. Atwood, before you get started, we have some guests here today from Alabama. We have close-up students from Mobile, Alabama, and also Monroeville, Alabama. Would you all please stand? And you are learning about government, and as you and I have discussed, and I discussed it briefly coming over here with a couple of them, they can't understand why we are giving all of this money to foreign countries. They want to be able to go back to their respective homes and talk to their parents and their classmates about why this country should be giving money to foreign countries when we have needs in the State of Alabama. Secretary Albright has agreed to come to Mobile in June and our conversation with Mrs. Albright was that the people of south Alabama cannot understand or comprehend an increase. And she said she would be glad to come down there and convince them to the contrary. So if Mrs. Albright is able to convince my constituency of the need for this huge increase in foreign aid, then you might be in a better position to get what you are requesting. As persuasive and gracious as the Secretary is, she has a tremendous mission in front of her. But in any event, welcome, constituents of mine from south Alabama, and welcome, Brian, to the committee. Mr. Atwood's Opening Statement Mr. Atwood. Thank you, very much, Mr. Chairman, I will be brief and ask my written statement be made a part of the record. You asked a series of questions. I hope that we will get more time to get into the detail of those through the question-and-answer period. When I looked out my window this morning and saw snow on the forsythia blossoms I realized we might have a tough day today at this hearing, but this is the third time I have had an opportunity to testify before you since you became Chairman of this committee, and I want to thank you for being fair, or being very straight with us, for being a very tough negotiator on occasion. I am pleased that you have some constituents here from Alabama, and also delighted that you are going to keep an open mind about the President's request. Mr. Callahan. I might inject, here, Brian, there is a good possibility we can give you these increases, but you are not going to have to wait until it freezes in Washington. It is going to have to freeze someplace else. Mr. Atwood. Well, so much for open minds. I simply want to make a point about the President's request for an increase in the overall 150 account and certainly that portion which relates to this subcommittee's responsibilities. We see this really as an effort by our country to dig ourselves out of a hole. We feel that we have been shortchanging our own interests in our international affairs budgets, and we feel it is essential for us to try, once again, to become leaders with all of our bills being paid in the various institutions. I recognize the controversy about those matters, but I want to state before I get into the USAID's budget that I very strongly support all aspects of the President's request and hope that we can pay our bills at the United Nations and theWorld Bank, as well as trying to fund our bilateral program wherein we do pursue American interests. I think that there are more people aware today around the country, whether they are in Mobile or Massachusetts, that we are making investments that will mean jobs for tomorrow; that we are making investments in our safety against diseases; and that we are making investments in protection against environmental damage that we are already suffering as a result of climate change and the like. We have asked for an additional amount of money for USAID- managed programs. Mrs. Pelosi detailed some of that. We have asked for additional resources for the former Soviet Union and Eastern Europe. Part of this is, again, designed to dig us out of a hole. We, again, went from a Russia program that had something like $2 billion in it a few years ago down to $98 million. What we are attempting to do is work with the Russians to create the institutions and environment that will allow trade and investment to flow, so we can, indeed, exit that country and will no longer have to have a development transformation program there. Of the resources that we have requested for ESF, which we would fund and do development work with, most is for the Middle East and Latin America. And while it is true that we only asked for the same amount as was appropriated last year for Latin America, approximately $273 million, the fact of the matter is that that was $23 million more than the previous year, and we are asking for an increase of $14 million in our ESF account for Latin America. Latin America benefits more from ESF than does, for example, Africa. We have asked for, as was indicated, $65.5 million more for development assistance. Much of this is for our food security initiative. This is truly an investment in the future. Africa is suffering from gross food security problems that we would like to address over a 10-year period. We have asked for $30 million in this particular budget for that purpose, but we have also asked for resources under the P.L. 480, Title III program that does not fall under the jurisdiction of this committee. We believe that over time we can do something about agricultural production in Africa and if we are able to do that, we will be able to cut down on the amount of food aid we have to provide to that continent. So I think it is a good investment in the future. I asked this morning for figures on how much we are expending for food aid, disaster relief and refugees in Africa. The number I have for last year, 1996, it was $642 million. That does not count the peacekeeping aid we provided, the peacekeeping forces we had to provide in cases of Rwanda and Somalia and the like. That would push it way over $1 billion, perhaps towards $2 billion. If we could make this investment and couple that with other initiatives such as the Greater Horn of Africa Initiative, we could see the situation improving in Africa over time. So I will just address some of your other questions about why we didn't ask for a child survival account and why we asked for what we have asked for. We are looking for balance, functional balance and geographical balance. We assess in each of the regions what the need is, what is the state of development, what are the private capital flows to a region. And as you know, the private capital flows to Latin America are very significant today. That doesn't mean they don't have serious problems. We need to continue to invest in Latin America, in particular, in transition situations and try to stabilize economies and political systems, but the per capita income in Latin America is very high. It is over $2,000 on average, I think it is over 3,000, actually, and it is very low in Africa. So we look at need, we look at our foreign policy interests. Obviously, Latin America scores very high on that scale. It is in our hemisphere. We look at the quality of our partnerships with the different governments to see whether or not they are, indeed, cooperating with us on development nowadays, whether they believe in economic and political reform, and we look at the performance of our programs. So all of those come into play when we make decisions inside the executive branch. It isn't as if we are ignoring what you are saying to us, but I have many masters and we have got the Senate as well. So, clearly, we understand your commitment and I have made it clear in my written statement that I do very much appreciate your dedication and that of others. There is a bipartisan commitment to child survival and we understand that. But given all these pressures, what we are looking for is some functional balance. We have had to ask for more money for food security. We believe that directly affects children and so do many other aspects of our budget. So that is my explanation. I do feel with respect to the changes that we have made at the USAID that we have made significant progress. Yes, depending on which timetable that you want to look at, you may say that our NMS is slightly behind schedule. The fact of the matter is that when you actually begin to deploy a system like this is when you hear more about the problems of deployment themselves. We have run into data migration problems. The old systems were very bad and no one is trying to hide that. This system works. The software is solid, the system itself has been deployed worldwide. We are actually conducting business over this system. It works. The problem is that it does not accept inconsistent data, so we have to make sure that we are working our way through this. We feel that by August we will have all the data from the various 11 different accounting systems put into the system in a consistent way so that we won't run into blockages every time we attempt to do it. We have made major improvements in the communication speed in the NMS system through a series of actions we have taken. I believe we are way ahead of anyone else in government in deploying this system. It is complicated. We are not using conventional systems. Our IG has a job to do in looking over our shoulder to make sure that we are doing things according to the book. The fact of the matter is the book wasn't written for an integrated electronic computer system of this type. Even the GSA testing bed that is used for normal systems doesn't work and we are working with the GSA to see that they can test it as they are supposed to under our government procedures. The building, in fact, will cost us, the move itself will cost us less even though the furniture price has gone up. The move itself, because of savings in other areas, will cost us $2.1 million less, even with the add-on for furniture. So I think in the long run, since we are moving into a government building, that we are going to be able to stabilize our rental payments over time, and that this is a good thing for USAID, despite the fact that the building is described as a Taj Mahal, the fact of the matter is our people are going to have a lot less space, and if you could hear the complaints coming from our people about having to move into this building, you would know immediately that it was not a fancy place. I think I can actually see daylight from my office, but I need a periscope for that purpose. In any case, these are complicated issues. We have overhauled this agency from top to bottom. We are pleased that your staff has spent an awful lot of time overseeing what we are trying to do. We were down just the other day for a briefing on the Government Performance and Results Act. I think we are way ahead of, again, other agencies in proceeding to create a strategic plan and certainly we want your input into that plan. I feel good about where we are today. We ask you for $15 million less for operating expenses this year than we did last; that is a result of a lot of these changes which I can just summarize very quickly: We have reduced staff by over 2,700 people; we have cut senior management by 38 percent; we have reduced project design time by 75 percent; we have reduced our regulations by 55 percent; we have closed 26 overseas missions. I could go on and on. I think that is why we are able to come back to you and say while we want $476 million more for programs, we need less actually for operating expenses to run those programs. Thank you, Mr. Chairman, I will end there. [The statement of Mr. Atwood follows:] [Pages 8 - 38--The official Committee record contains additional material here.] Mr. Callahan. Thank you. I am just going to be very brief with my questions in order to give the other members here an opportunity to ask some questions. As a matter of fact, I think I will just hold off on mine, Nancy, if you don't mind. Let's let the other Members make some statements and then we will go from there. Mr. Packard. Mr. Packard. Thank you, Mr. Chairman, and welcome, Mr. Atwood, to the committee again. Mr. Atwood. Thank you. child survival Mr. Packard. You have addressed the child survival account and I think you know how important that is, not only to the Chairman, but to most of the members of this subcommittee. I guess my question is, and you may have partly answered it in your statement, but how can you justify an increase in the overall funding in this account and yet not request funding for the child survival account. My understanding was that if you did include it, it would have been less than last year's funding even at that, so would you review again for us why you felt you could reduce that account and still increase other areas where I am not sure, at least to this committee, those areas are as important as the child survival account. Mr. Atwood. Yes, Mr. Packard. Again, the first point I would make is that we are all operating under some very serious constraints, attempting to balance the budget. The President did ask for more in the 150 account, but a lot of that was to pay arrearages and the like, so there is still compression in the development accounts. I think we felt fortunate that OMB, the President and others within the executive branch allowed us a small increase in our development account, but there are judgments that come into play here. We obviously understand how successful the child survival programs have been. We understand the very strong support that those programs have. What we would simply say is that initiatives, new initiatives such as requesting resources for food security in Africa relate directly to children, and whether or not they are going to be properly fed. We have asked for more money for our population accounts. This administration strongly believes in family planning. We believe that family planning itself helps children in spacing those children so they have more food on the table and better access to health care and the like. So there are a lot of aspects of the programs that relate to children that don't fall exactly within the definition of the child survival account. We, of course, generally don't like earmarks, and that is another sort of principle that was behind our request this year. Mr. Packard. You have asked for additional amounts, $30 million, which is an increase of $3 million for Albania. We are not sure this is a success story in Albania that justifies that, and that of course takes money away from child survival; a $100 million increase to Russia, huge increase for Russia, and we are not sure that the track record there is positive for us, and all of those, of course, at the expense of the child development account. We are not sure the priorities are correct. partnership for freedom Another question, can you tell me a little bit more about the Partnership for Freedom, PFF initiative? Why is the bulk of it going to increases for Russia, and particularly when Russia is resisting our efforts to expand NATO? Is it more important to fund Russia than it is to save the children in child survival. Mr. Atwood. A lot of the resources that go to that region of the world, I think, also directly benefit children, so I don't think it is an either/or proposition. But we have very important foreign policy requirements and interests in seeing Russia convert to a democratic, free-market society. That, I think, is obvious, and we feel that the cuts in the Russia program last year were severe. But what this Partnership for Freedom is trying to convey is the notion that we need to leave Russia in the next 5 to 10 years, I would hope less than 10 years, and that we need to see a new partnership developing between the private sector of our country and the private sector of Russia, between NGOs in our country and NGOs there. So the Partnership for Freedom is designed to underscore, if you will, that exit strategy. It is designed to underscore the fact that private linkages are more important now that we have gotten through the first phase of our technical assistance programs, although we still continue to work on aspects of creating enabling environments so that trade and investment will be made in Russia. That is basically the purpose. It is to facilitate trade, it is to facilitate private contacts between the United States and Russia that will stabilize our relationship in years to come. nato The question of NATO enlargement is being discussed and will be discussed in Helsinki. There are different perceptions on both sides for what this means for Russia. We will just have to see how that evolves. I think politically, in Russia, NATO has always been seen as an adversarial alliance. That, I believe, is changing rapidly as we give the Partnership for Peace a different meaning. So these discussions have to go on with Russia, and my belief is that they will produce a positive result. This is more likely, however, if we are able to see Russia become more democratic and more market-oriented. middle east development bank Mr. Packard. Lastly, I am interested in your reaction to including additional funds for the Middle East Development Bank in economic support funds. I think it is clear that the Chairman and the committee has not been anxious to increase the portion of the pie that goes to the Middle East, and yet this obviously is increasing that component of the total budget for the committee. I was wondering why you are increasing that pie, or that piece of the pie? In reality, are you seeking to increase the amount that goes to the Middle East overall? Mr. Atwood. Mr. Packard, we are certainly not seeking to cover the serious problems we have had in actually getting this Middle East Development Bank off the ground, and I know the Chairman, when he traveled in the Middle East, talked to a lot of people about it. But it was an initiative that resulted from a joint proposal from Israel, Egypt, Jordan and the Palestinians. It is designed to reinforce our foreign policy objections which enhance the peace process and give some feeling that if, indeed, people are amenable to the peace process and moved forward, there is at the end of that road a joint effort to try to bring about consolidation of the process through development, and this is one idea. It has, has had its difficulties, but we continue to think it is important to suggest to the Congress simply because it relates so closely to the peace process itself. Mr. Packard. Thank you, Mr. Chairman. Mr. Callahan. Well, we are very pleased that our patient is out of the hospital and convalescing, and at this time, Mr. Obey, if you have any questions or if you want to defer, whatever you want to do. Mr. Obey. I don't know what stage you are at, Mr. Chairman. Mr. Callahan. Well, any time you get ready, you jump in. Mr. Obey. Okay. Let me get my act together first. Mr. Callahan. Mrs. Lowey, last week we introduced a new policy that we are going to recognize people in the order they arrive, because last week Mr. Torres sat there for 2 hours and every time it came to him, somebody else came in. Mrs. Lowey. Thank you very much, Mr. Chairman. Mr. Callahan. We ask that you not abuse this and try to keep it to five minutes. latin america Mr. Torres. Administrator Atwood, thank you for coming today. Both Chairman Callahan and our Ranking Member, Representative Pelosi, have addressed the issue of your agency's diminishing aid to Latin America, so much so that they will travel to Latin America in the near future to look at these issues. We here in the subcommittee have been noticing that there has been a steep decline in funding for Latin America, and last year I recall our subcommittee expressed concern over this decline and we asked exactly how the administration was going to pay more attention to this part of the world, our closest neighbor to the South. Trade programs to the region are helpful, but obviously not sufficient. Development aid that helps to alleviate poverty and tackle the problem of persistent inequality in the region must be part of the solution. Mr. Atwood, what are AID's priorities and objectives for the region and how do you propose to ensure adequate funding for programs that help Latin America? And, if I may add a second question to that, part of your testimony indicates that by the end of fiscal year 1998, your agency will close more than six country missions. Are any of those in Latin America? Mr. Atwood. We have closed some, Mr. Torres, in Latin America in the first year; Chile and Argentina, for example. And we are planning to phase down our operations in Brazil, because what we are doing should be taken over by Brazilian NGOs and the government. I would have to check that list of six the Chairman referred to in the testimony to give you more detail than that. I certainly agree with you, we should be spending more in Latin America. We should be spending more elsewhere, as well, if we really want to achieve results, but there is a compression in the 150 account that causes us to reduce these amounts. Our priorities in Latin America today are in consolidating the democratic gains that have been made that are still not as solid as we would like. They are still fragile in many of these countries. There is a tremendous amount of private capital going to Latin America, which is a mitigating factor. But we look at transitional situations like Guatemala. We have provided assistance to Guatemala in this transition and made certain commitments, and I am pleased to say that in the case of Guatemala, the Secretary of State yesterday just approved an additional $8 million to bring the overall amount of ESF available for Guatemala up to the $25 million that we had indicated to Congress that we wanted to provide. The amount we have asked for for Latin America is $273 million in development assistance. It is the same level as last year, and last year was an increase. We have asked for $14 million more for ESF in Latin America. I think we understand the priorities. I wish there were more money available overall. There isn't. And we have to make these judgments, and we do understand how important we all consider Latin America to be. Because last year alone we had almost $100 billion worth of exports to Latin America. So we want to make sure that those gains in market development and democracy are maintained. basic education Mr. Torres. Thank you. Mr. Atwood, as you, yourself, have stated, access to basic education is essential for improving economic development, political stability and social welfare. Investment in girls' education, in particular, has some of the biggest benefits of any development strategy that we've been able to support. Educating girls, as we know, results in improved child health, lower fertility rates and higher earnings and productivity. I recognize the difficult funding situation that you face, but I am very concerned about basic education. Funding for these basic education programs has dropped by nearly 30 percent in the last couple of years, a decline greater than averge cuts in development assistance. Do you believe that basic education should remain an important focus of our foreign assistance portfolio? If so, I would ask if AID intends in its fiscal year 1998 budget, to reinstate its support for basic education and how can we restore our U.S. leadership in this very important issue of education? Mr. Atwood. We have announced a major initiative on girls' education. We are attempting to reorient a lot of the money we spend on basic education toward that initiative. Only about a third of the girls in the developing world are given equal access to education along with boys in many of those countries, so we consider it to be extremely important. I agree we have seen, even as a percentage of our reduced budget, basic education and education generally going down. It is because partially there has been a good deal more emphasis on population, environment, and, of course, higher child survival and the like. The economic growth budget, where our education funding falls (because it is considered to be human productive capacity that relates to economic growth), has been really squeezed. Economic growth funding about 4 years ago was almost 50 percent of our development budget assistance. It is now less than 20 percent of our budget. So education has suffered. A group came to see me a few weeks ago suggesting that we make education a major strategic goal of the USAID. We are looking at that question carefully. Our assumption had been that education ran through all of the four sustainable development goals, that you need insome fashion or another to emphasize education if you are going to obtain results in any of those other areas. But one of the effects of budget cutting and emphasizing certain things over other things is that we have lost balance, in my opinion. There is an effort, albeit not perfect, to achieve more of that balance in the budget request we have before you now. microenterprise Mr. Torres. I note that AID has taken a leadership role among bilateral donors on microenterprise and I want to thank you for your personal support of micro credit. I want to thank you and particularly encourage AID to increase its support for credit programs reaching the poorest in the world, but I have one specific question. While AID has actively supported microenterprise in Asia and Latin America, it has been slow to support it in Africa and Eastern Europe and the former Soviet Union. Do you have any plans to increase support for microenterprise in these regions? Mr. Atwood. We would like very much to do it. Part of the problem we have is we need to work with institutions that are able to carry forward these projects. We have found institutions in Latin America like BancoSol in Bolivia that are absolutely fantastic. They have managed to create a huge portfolio for use in poverty lending programs. One of the problems in Africa is that institutions are very weak, banking institutions are very weak. The NGOs in Africa need to be helped in terms of capacity building. We have attempted to push microenterprise programs and will continue to do so, only held back by the fact that institutions are not yet at that stage where it is easy to work with them. former soviet union Mr. Torres. What about the Soviet Union? Mr. Atwood. The former Soviet Union has a per capita income somewhat different than in the developing world and has a great deal of human resource capacity, because of the good education system, although they were educated in the wrong way. It is a place where we want to do more for microenterprise lending. I think we can do better programs there because of the lack of extreme poverty levels. We are also doing a lot of small business lending there. In other words, the average amounts we are lending in that part of the world are higher than what we would classify as poverty lending, which is $300 or less. Mr. Torres. I am sorry, Mr. Administrator, I erred in saying the Soviet Union. I meant the former Soviet Union. Mr. Atwood. Right. Mr. Torres. Thank you. Mr. Callahan. I might point out both Mrs. Pelosi and Mr. Torres have mentioned Latin America and their concern for Latin America. So it is not just Sonny Callahan, not just the friendly opposition here of the Republican Members. It is, I think, totally universal on this committee that we do not feel we are paying a sufficient amount of attention to Latin America. Mr. Frelinghuysen. Mr. Frelinghuysen. Thank you, Mr. Chairman. Administrator Atwood, thank you very much for stopping by my office yesterday. You highlight in your written statement on page 10 in italics, our modest and well-targeted domestic assistance programs directly advance America's interests, your constituents' interest, and then you go on. public perception of foreign aid I know you said in your oral testimony, and I quote, ``more people are aware of what we do, that we are making these types of investments.'' I don't get the feeling in connecting with my constituents that many people are aware of the good work of your agency, AID, and I would like to know what specific steps--I know you obviously have some major responsibilities around the world--what you are doing on the home front to better educate our fellow Americans as to what these investments mean to them. And I would like to know what specific steps, and I have actually somewhat asked Secretary Albright this, as well as Secretary Rubin, what specific steps you have contemplated here at home to educate the public. Mr. Atwood. I have travelled around the country probably more than any USAID administrator and attempted to talk to all sorts of groups, not just world affairs council people. That is like preaching to the converted. We have managed, I think, to make a case, and I don't know to what extent people up here read editorials from their hometown newspapers. I think quite a bit, but we can show you about 300 editorials supporting what we do. We have tried to get around this phrase ``foreign aid.'' It is a dirty word in politics, as you know very well. Our foreign aid program is less today a foreign aid program than an American aid program. We create jobs. I remember mentioning just a minute ago the $100 billion in trade to Latin America, in the early 1980s that was down to $25 million, and the progress we have made in trade in Latin America is a large part of why jobs are being created in the United States of America. The same is true in Asia. We made investments over 30 years that have helped to create those markets. We are also trying to deal with a world that is very unstable, especially the developing part of the world. Four out of five people by the year 2000 are going to live in the developing world. Either we make investments in sustainable development now or they will become wards of the international community and we will be truly undertaking an international welfare program, because our people don't like to see people starving. We spent $642 million last year in Africa just for what I would call international welfare, emergency food to help starving people, disaster relief and refugee assistance. And there are 50 million people walking around that are not living at home, they are either displaced or refugees. So there are great opportunities to create new markets, and there are the problems that will accrue if we do not get involved to try to prevent crises. I think the case is a strong one. The United States has been able to lead the rest of the industrial world to do more. In 1960, the rest of the industrial world was providing only 40 percent of all the development aid; the United States was providing 60. Today the United States is providing only 17 percent and the rest of the developed world is providing the remainder. So burden sharing is no longer an issue. We have managed through our leadership to influence what the other donors do, and that helps Americans. Mr. Frelinghuysen. I think it is absolutely imperative to influence potential donors and some of our allies are indeed big donors. I am more interested in concentrating some of our effort in educating Americans as to why these investments in a variety of ways on different continents are absolute imperative, and I would like to make a specific suggestion. Most every State has a Department of Commerce or economic development agency. I don't know whether there is a possibility of setting up regional meetings with some of the men and women who run those agencies so they would have a better grasp of what you are doing. Because you say on page 16 here, and I quote, ``the bottom line is that by the year 2000, three short years from now, four out of five consumers will live in the developing world.'' I don't know if that is accurate or not, but I have never seen a statement so blunt or so compelling. On what basis do you make such a statement? Mr. Atwood. Simply the demographics. That is where the people are going to be living. The birth rates are so high in the developing world that the facts are that four out of five people are going to be living there. We are going to see 2 billion more people coming onto the face of the earth in the next 20 years, and most of them, 80 percent, are going to be coming into the developing world. The only qualifier I would give you is there is a serious question as to whether they are going to be consumers or whether they are going to be wards of the international community. We do work with state development offices. We have our Center for Trade and Investment Services that works with state offices. We have actual agreements with some states. We also have a program that I neglected to mention earlier called ``Lessons Without Borders'' where our development experts use their experience and go to different cities and rural areas around the country. This program is not at taxpayers' expense. We have managed to raise foundation money, for example, to help the City of Baltimore increase immunization rates, or introduce microenterprise lending ideas in some of these other cities, or to talk about community-based environmental programming in places like Seattle, Washington, and the like. That has done a lot to, I think, educate people as to what we do overseas, and how their people are connected to the global economy and to others overseas. Mr. Frelinghuysen. I saw you on C-SPAN several weeks ago before one of the other committees and you were talking about Africa and South America, parts of Asia, and you were explaining to some of the committee members, some of you are successes as well as some of your failures. For instance, this whole issue of the appallingly low per capita income in some of these countries. Some of the questions that the Chair and others have raised is that we have been making these substantial investments, yet in many cases the per capita income is either going down or remains the same. And many people are wondering how much that investment is paying off for those people. Would you comment generally about that issue, whether our investments, in fact, are raising the per capita income in some of these countries? africa Mr. Atwood. Yes. I think the critics are partially correct, except they go a bit too far. For example, in many parts of Africa, we have not been working with governments that really have dedicated themselves to economic reform. There are still statist regimes in many places. We don't work with them anymore. We had to work with them in some cases during the Cold War, but the quality of the relationship we have with other countries is important to us now. Zaire as you know, is falling apart today. We started working there when the per capita income was close to $2,000; we spent 2\1/2\ billion dollars, and the per capita income is now under $200 per year. The investment didn't work. But others will argue that, well, the investment did work because at least Mobutu supported us in the general assembly at the United Nations and didn't allow the Soviets, the Communists, to take over his country. But there is a different standard today. We expect that we are going to be able to achieve results. We can't do that unless we are working with people like Museveni in Uganda or Meles Zenawi or Mandela, people dedicated to bringing about economic freedom, which I know Mr. Livingston was very concerned about, when Secretary Albright was here. We believe in achieving economic freedom. The government has to take the step of dedicating itself to that proposition, but then they need help in building the institutions and putting the right policies in place. We would like to do more of that in Africa. The GNP per capita in Africa is only $460 dollars. By the way, in Latin America, it is $3,340, on average. Life expectancy in Africa is 52, and in Latin America, it is 65. Infant mortality is 92 per thousand deaths in Africa. In Latin America it is 51 per thousand deaths. Adult illiteracy is 57 percent in Africa and 60 percent in Latin America. So there is a whole series of indicators to use in order to know what parts of the world need more help than other parts of the world. I was recently quoted in the New York Times Magazine as saying USAID hasn't worked in Africa. I wish that the entire quote was put in, because Africa would be a lot worse off today if we hadn't worked to improve the agricultural production, infant mortality rates and the like, and literacy rates. But the fact is that aid at the economic level hasn't worked because we were working with governments that did not commit themselves to free market economies. Mr. Frelinghuysen. Thank you for your response, and thank you. Mrs. Lowey. I want to join my colleagues in thanking you for your leadership at AID. Thank you. I would like to associate myself with my colleague, Mr. Torres, on several points that he made. international education and training First of all, we all know, and you have agreed, that an educated and well-trained population is a precursor to long- term economic growth. In fact, the highest poverty rates are found in nations with the lowest education levels. Despite progress over the last 30 years, about 1.4 billion adults in the developing world are illiterate, only half of the children attend primary school, and there is a great disproportion of boys and girls attending school. We recently returned from Egypt, and that was clearly the case, as well as in Jordan. Given the realities, it seems to me that education and training should certainly be a priority of U.S. foreign assistance, and I am very pleased that you said you were looking into designating international education and training as a separate strategic goal of United States development assistance. I look forward to pursuing this discussion, and I hope that we can see that decision concluded shortly. But I know that there will be ongoing discussion, and I thank you. microenterprise programs As well as Mr. Torres, I too am a strong supporter, as many of us are, of microcredit lending; and I think we all agree that providing small, low-interest loans to the millions of small entrepreneurs around the world would be a major step towards the eradication of poverty. This is especially true among women who are often the heads of households and benefit tremendously under microcredit programs. I know Jim Wolfensohn of the World Bank is making tremendous advancements in that area; however, it is still a very small portion of the total aid programs. Perhaps you could share with us, AID's microcredit initiative; how it is being expanded to help people around the world pull themselves out of poverty; and at a time when there is so much skepticism--we have seen it in the press, we have seen it even in this committee--of the impact of aid around the world, I think microcredit is an extraordinary example of success. Could you share some views with us? Mr. Atwood. Well, it is, I think, an extraordinary example of success and it certainly has very strong bipartisan support here in the Congress. Many people who think about it look back on the development of our own country and people's access to credit to try to build this country; and therefore it is, ironically, very American to support microenterprise programs. The irony is that the idea really came from Mohammed Yunis of Bangladesh who created the Grameen Bank. So we do learn things from other people. It was just the form that it came in, the poverty lending aspect of it. They, of course, people who are poor, have to borrow money, and in the past, before institutions like Grameen Bank existed they borrowed money from money lenders who charged exorbitant rates of interest so the poor suffered even more. They didn't have any formal standing in most economies, so they couldn't go to a normal bank and gain credit, and yet in the way that Mohammed Yunis created it, they were able to create networks. Many groups that have come to the United States when they were new ethnic groups also created those same type of networks. I remember Sam Gejdenson saying when his family first came here they wouldn't have been able to survive without that connection they had with their own ethnic group and own religion. That is the notion that is behind this, what makes it work. What has happened over time is that, through institutions like BancoSol and FINCA and others, the interest has been compounded and not only do banks lend, but they also now are opening savings windows so that poor people are now actually saving money in addition to building businesses. It is a wonderful idea. There was a microcredit summit here in Washington just a few months ago, and I want to say this, as it relates to enthusiasm up here for doing even more. One of the concerns expressed at that microcredit summit by people like Mohammed Yunis is they don't want to push this too fast, because if some of these institutions begin to fail or you don't have the correct institutional framework to carry this out, the failure will hurt people badly. So I have talked to my own people. I think USAID is really the number one institution in the world right now for pushing microenterprise lending, but they are concerned that we are getting at that end where we are working with NGOs who are not as strong as some of the NGOs we were working with before, so they are a bit concerned that we are going to push too fast and create problems for this wonderful revolution that is going on around the world. Mrs. Lowey. Are you working with the Treasury Department and the multilateral development banks in coordinating a strategy? Mr. Atwood. Yes, Bob Rubin has a major initiative in this country to carry this forward; and he and I and the First Lady had a press conference to talk about our activities, while the President later gave awards to people who have broken new ground in this country for microenterprise lending. In addition, we have a person helping Jim Wolfensohn over at the World Bank setting up his microenterprise lending. Mrs. Lowey. Thank you. jordan One troubling aspect of the budget is the low level of economic assistance proposed for Jordan. I understand the difficulties you face as a result of the shrinking budget over the last few years, and despite the modest increase requested for your budget, there are still far more worthy projects to be funded than there are dollars to fund them. We recently returned, as a committee, from Jordan, and it is a nation that, as you know, is in great need of economic assistance. The congressional presentation for your agency's budget says the development of Jordan's fledgling democracy, its ability to wage peace and continuing efforts to promote regional peace can only be achieved through sustained international assistance. I think most of us agree who recently traveled to Jordan. Can you discuss with us what you think we can do to meet Jordan's critical needs? Mr. Atwood. Yes, Mrs. Lowey. The requests we have made through all accounts for Jordan for fiscal year 1998 is $86.2 million. I think that reflects the extent to which we believe Jordan is a key player in the peace process, as well as a country that needs some assistance in the development area. The request is for $25 million in ESF, 2.5 million in DA, and there are a series of other accounts including military assistance as well. The total is $86.2 million. I know that this has been discussed, obviously, extensively, with King Hussein and the Jordanian Government. I think, by the way, that the action that was taken by the king the other day was one of those extraordinary steps that more international leaders could take. I am referring, of course, to his visit to the victims' families of the shooting on the West Bank a while back. I think that our effort is to try to continue to see peace consolidated and Jordan is a major part of that effort, and I think this request, at least, reflects how important we consider that to be. family planning programs Mrs. Lowey. I thank you, and I probably have time for one more question, but I want to thank you. I was very pleased that we were able to get the population funds out on March 1st, since they were already five months late; and so I do want to thank you for your commitment. And I think it would be helpful for us if you could give us your views about how United States International Family Planning Assistance improves the health and well-being of women. Some of us also visited those clinics in Egypt, and it is clear in a country where there is only 30 percent literacy among women, that these clinics provide a very important service. Could you share your opinions on that? Mr. Atwood. Well, it is a program that is fully voluntary, I want to add, and therefore no one is forced against their will to participate in the program. The program is also multidimensional in the sense that it offers, in some cases, training in the use of modern contraceptives, but it also has programs in natural birth control that are sensitive, I think, to the religious and cultural context. In fact, as has been demonstrated in a lot of statistical analyses, it does reduce abortions, maternal deaths and the deaths of children because people are a lot more sensible. They are not having unwanted pregnancies; they are able to space their children properly so that those children will have access to education and health care and food on the table. It is a children's program in that sense. We have been providing about 45 percent of all of the family planning services in the world, and one of the consequences of our leadership here is there are 5 million fewer people since the program started than there would have been. That means higher per capita income, it means governments are spending less on the social sector, health and education, for example. I mean, they are spending more per capita, but less than they would have otherwise if more people had been born in those countries. The country of Egypt, for example, would have 50 million more people if it weren't for the family planning programs we have in place there and life in Egypt would look pretty miserable today if all of those people lived next to that river in those very few parts of the country that are fertile. So I think it has had a major positive impact on the world. I wish we could get away from--I know the Chairman agrees with me--these debates. Our family planning program has nothing to do with abortion and I wish we could get away from these debates, but I suppose if there were goodwill on all sides, we could probably find a way out of this mess. Mrs. Lowey. I look forward to that day, and I will submit the balance of my questions for the record. And I thank you, Mr. Chairman. Mr. Callahan. My comment is, there is goodwill on our side. Mr. Atwood. I try to figure out which side. Mrs. Lowey. Our side, our committee. microcredit lending programs Mr. Knollenberg. Mr. Atwood, welcome, and I thank the Chairman for yielding. I join Mr. Torres and Mrs. Lowey, in their appreciation and support of the microcredit programs as an aid to helping the very, very poor. I want to go a little bit more deeply into AIDS support for those programs. As you know, in the 1994 microcredit initiative, a Commitment was made, that by the end of 1996, half of the money provided for microcredit would be used for supporting poverty lending programs which reached the very poor, with loans under $300. Also I am sure you are aware in the report that accompanied the 1997 foreign aid appropriations bill, there was language that reiterated that same position, that half of microcredit funding must be used for those programs providing loans of under $300. Now, as far as I know, we have received no reply to that report. Perhaps you could shed some light on that and why we have not. Mr. Atwood. Yes. Well, we are in the midst of doing a survey. We did one in 1994. What we found in 1994 was that 80 percent of all loans given by AID-supported programs were below $300. This lending amounted to one-third of the total loan portfolios of the institutions involved; and that is, of course, the issue. The loans themselves, yes, no problem, but the overall portfolio of the institutions was only one-third. We did the same analysis in 1995 and found we had pushed it up to 42 percent. We have been doing another analysis and have been pushing to get that number up to 50 percent as is required. I apologize that we don't have that complete yet, but we are going to have that done in the next few months to see if we have reached the target of getting 50 percent of portfolios to the under $300 range. Mr. Knollenberg. I know when we talked about this previously, they said it was difficult to get a handle on the NGOs and the PVOs. If you can do this survey you are currently doing, why is it you can't get a handle specifically on the money trail that goes to the NGOs and PVOs; because only then, I think, would we really know if half of this funding is supporting programs for the poorest, and I think it is pretty clear it does not. Mr. Atwood. Yes. We deal with something like 542 institutions around the world right now. All of them are set up somewhat differently. For example, the bank in Indonesia has a microcredit window, not the entire bank as is the case with BancoSol, and there are NGOs that are much smaller that do sort of neighborhood lending programs. The problem is we can certainly track the AID resources, but our idea is to make these institutions sustainable by encouraging them to collect interest. They then build a portfolio that really is outside our purview in the sense that they have built that portfolio with interest they have raised on their own. We then have to go in, and in all cases, there is not a question of a lack of cooperation, but we are asking them for information that doesn't relate directly to the USAID loan of the moment. Mr. Knollenberg. Is the lack of cooperation you are saying not on their side? Mr. Atwood. No, it is just that it is a lot of work to do one of these surveys because you have got to go in and look at the books of BancoSol and hundreds of organizations like it to find out what they have done with the money they have earned on interest. That becomes the target you are interested in. We can tell you that USAID-funded loans are 80 percent under $300, but we can't tell you what they have done with the interest they have earned. Mr. Knollenberg. That is the loans, not the volume? Mr. Atwood. That is right, because they are doing some loans over $300, there is no question, with the rest of the portfolio. Mr. Knollenberg. I would just urge that you come as close as possible to meeting the commitment made in that initiative, because I do think that greater oversight is needed. If it does involve a little more work, I think that should happen, I really do, and I believe that we should move in that direction. So I would just urge you to do that and see if we want to bring that number up to one-half as this subcommittee recommended last year. Maybe we will change it to 60 percent; then we will get a little closer. But I urge you to move in that direction. Thank you. Mr. Atwood. We certainly are; and I would say, one of the things that happened last year was with the Development Assistance Committee of the OECD, of the industrial countries. One of their goals in the next 25 years is to reduce extreme poverty by one-half; 1.3 billion people make less than $365 a year. That is extreme poverty. The idea is to cut that in half. Clearly, microenterprise lending programs are crucial in doing that, and when you talk about $300 to one who is only making $365 a year, that is a big loan. So we don't have a problem in emphasizing the need to loan under $300. There is no problem, there is no philosophical difference here. It is simply a question of trying to acquire the information we need to comply with your oversight needs. Mr. Knollenberg. When do you think that report might be available? Mr. Atwood. I could try to get back to you on that and give you the information directly. [The information follows:] Report on Survey of Poverty Lending Programs The information will be available when the survey now in process is complete and the data has been recorded and analyzed. We expect it to be available to report to the Congress in September. While we can certainly track USAID resources, we are seeking information beyond the direct boundaries of the USAID funds. Our idea is to make these institutions sustainable by encouraging them to connect to the financial system. They then build a portfolio that really is outside USAID's purview in the sense that they have built that portfolio with funds they have raised on their own. We then look not at the USAID loan of the moment, but at how our support contributes to their overall growth of institutional capacity. Mr. Knollenberg. Thank you. Mr. Atwood. I am not sure. It is being done now. Mr. Knollenberg. Thank you. Mr. Callahan. With respect to the microenterprise programs, do you think that $300--we recommended in our report language that half of the money be provided to $300 and poverty-level programs. Some of the NGOs have told us now that they are so successful that some of the $300 recipients are coming back and saying, let us expand, we have paid off the loan, we have done exactly what the program intended, and they want to borrow $500 or $1,000. Is the $300 report language suggestion too high, or is the 50 percent too high a percentage; or does that--I know you are not bound by law, but does that restrict you too severely? Mr. Atwood. I don't believe so, Mr. Chairman, but we are trying to push it to that level. We accept the need to keep the pressure on poverty lending. But we also believe that if we are going to have sustained economic growth in these countries, that we need to create a situation wherein those microbusinesses can grow into small businesses, and they ought to have access to credit to do that. So I think we can work with the 50 percent number, but we want to make sure too that that the regulatory environment in the country lets businesses grow and the entire economy grow. Mr. Callahan. It is not the intent of the committee, even though it is not the tooth of law--it is not our intention to micromanage the micro program. Mr. Atwood. Right. Mr. Callahan. We are encouraging that you start at the lowest level in the poverty areas, but we don't want to say, do not make them even more successful. Mr. Atwood. That is right. Mr. Callahan. David, do you have any questions? Mr. Obey. Thank you, Mr. Chairman. aid bureaucracy Mr. Atwood, let me just ask a few questions about that bloated bureaucracy that I often hear that you have. What is the largest number of people that AID employed in its history? Mr. Atwood. I believe it was close to 20,000 during the height of the Vietnam war, Mr. Obey. Mr. Obey. And you are now down to about 8,000? Mr. Atwood. That is right. I started with 11,500, as best we could ascertain, because it was difficult to get that kind of information when I first arrived. Mr. Obey. So on your watch, you have cut it from what to what? Mr. Atwood. From about 11,500 to 8,000. Mr. Obey. That compares to, what did the supersleuths in the Senate tell us the other day, Senator Shelby, that compares to about 80,000 people at the vaunted CIA? Mr. Atwood. Is that what he said? That is probably a classified number. Mr. Obey. That is what he said. I was interested in the fact that it was said, but that is what he said. In your budget, you spend about 7 billion, roughly. Mr. Atwood. Approximately, yes. Mr. Obey. As opposed to about $30 billion for the CIA, according to Senator Shelby. Mr. Atwood. Is that what he said? Mr. Obey. That is what he said. Let me ask you this. You have 7 billion bucks, they have 30; you have got 8,000 people, they have got 80. Why couldn't they find the refugees that were supposedly going from Rwanda to Zaire, and how could you find them? Mr. Atwood. Well, I can't answer for them. I understand cloud cover was a problem, but we do have people in eastern Zaire now. We have a DART team there that is trying to discuss how we can help the displaced and the refugees---- Mr. Obey. Do you think in your spare time you might offer to help the CIA so that--I understand with that big bloated budget they don't have the ability to cut through it all and understand the information. Do you think you could arrange to help them out a little bit? Don't even answer the question. Mr. Atwood. I think it is important for our government to have the capacity to do both. Mr. Obey. I don't want you to comment on this. I think I have made my point about the tightness of your budget versus other so-called lean and mean agencies in the Federal Government, but I do want to make a point. How many people are here in the room from the State Department? Is there anybody here from the State Department? Well, I hope that you will carry a message back for me to the Secretary of State and the State Department in general, and Mr. Atwood, if you get the chance, I would like to have that same message carried back by you, and I don't know how to put this delicately, so I won't. I have served on this committee since 1973, this subcommittee, and one of the reasons that I continue to devote a lot of interest to it is that I believe that if we are going to have those 2 billion additional people in the developing world, that our aid package has to be something more than simply walking-around money for ambassadors around the world. I think the State Department is understandably always going to be focused--it has for as long as I have been here, the State Department has been focused primarily on short-term political relationships with whoever is in power, and I understand that; but I honestly think that foreign aid will be the raffle that so many people think it is if that is all our aid program is. And that is why I have always valued the fact that AID is supposed to have a different focus. Its focus is supposed to be long-term development rather than short-term cuddling up to whichever government is running the show in whatever area we are interested in. I don't like to say this, but as a Member of Congress, on many occasions I have been lied to by various officials in the executive branch of government. When I have been in the field, I have certainly been lied to by ambassadors. I have seen ambassadors send false cables back to the State Department misdescribing what Congressman Solarz and myself and several others said, or even asked about in some countries, whether the issue was Vietnam--I mean, the Vietnam war, or whether the issue is the contra war or whether the issue was what was really happening in the Middle East or anything else. I have always been able to get information from independent AID workers that I simply could not get out of the embassy teams. I do not say that to condemn embassy teams; I think the State Department does a very good job in most parts of the world. But I think the Congress needs to have all the independent sources of information that they can get, because I do not trust any institution of the government and I certainly, based on my past experiences, do not generically trust the State Department. I think it is very important that AID not be submerged into a larger bureaucracy at State. I think that we have got to keep a focus on long-term development if we are going to move these countries off the dole, so to speak; and I certainly think that the Congress needs all the independent sources of information it can get. So I know you don't make the decision, and I don't even ask you to comment, but people who know me know I feel quite strongly on this and I want to, on every occasion I can, send that message to whomever or through whichever channels are available, because I, for one, am not interested in supporting any AID budget request if that degenerates simply into a process by which the State Department has money to pass around to different governments around the world for short-term fixes of political problems. Those are important to do, but our responsibility to taxpayers is to make certain that we also keep our eye on the ball, which is to assist those societies to develop in such a way that they eventually cease to be long- term drains on the Treasury of the United States. So I, for one, would be very disturbed if we wound up seeing an institutional arrangement--we weaken the ability of our government to do that, and I think any submerging of AID into the State Department certainly would weaken our efforts to do that. And I certainly believe, over time, it would cut off independent sources of information, which this committee and the Congress as an institution needs to do its job. Thank you very much, Mr. Chairman. subcommittee jurisdiction Mr. Callahan. Mr. Obey, I might editorialize or comment on your statements there. True, AID needs reform; true, State Department needs reform, but so does the Congress. And I know that sounds strange coming from the Majority, but I think one of the big problems we have is our particular committee, the Appropriations Committee. I think that the State Department jurisdiction should be in this subcommittee, whereby you could have joint oversight. I think that the military financing support program should be in the defense subcommittee rather than in the foreign aid subcommittee; and I think that we need to, as an institution, correct a gross problem that we have. We looked at it at the beginning of the year, the possibility of taking the State Department away from Commerce and Justice. The Senate wanted to do it; I wanted to do it. The Chairmen of Commerce and Justice didn't want to do it, but I think that would be a step in the right direction, because when we can get us out of the military aspect and put State Department over here where we would answer, in a sense, to one master. Mr. Obey. Mr. Chairman, I would respectfully dissent from that for good historical reasons. I have been around long enough to know one of the reasons this subcommittee was kept separate from Commerce and Justice is because the persons who were in charge of the Appropriations Committee at that time did not want Otto Passman to have control on a day-to-day basis over the operational budget of the State Department. They did not want this subcommittee, every time we disagreed with a policy statement of the State Department, to retaliate by gutting State Department management budgets; and I think that was a proper precaution for the Congress to respect by keeping the two subcommittees separate. If I were the State Department I would be very chary of having the State Department and AID merged because then it would logically lead to a consolidation of the way the State Department is handled in the Congress as an institution, and you would establish a process by which it would be very easy for the subcommittee to pull the Secretary by jerking around their administrative accounts every time we have a policy difference with the State Department. So I think that there are good, sound reasons to prevent that from happening also, which is why I think the present arrangement safeguards both the interests of the Congress in getting independent information and it safeguards the interests of the State Department in remaining independent in its policy judgments--at least more independent than they would be if every time they made a decision with which we disagreed we could retaliate by whacking their administrative budget 20 percent. That might be awful fun, but it would happen if the kind of merger being contemplated takes place, and they will have brought it on themselves. Mr. Callahan. I don't think under the current Rules of the House we can limit chairmanship of a subcommittee to anything except six years. We are going to have to worry about that anyway, but I still feel as though I am correct, and I know with your history and your involvement in this arena for these past 20 or so years, certainly I would view your opinions with great respect. Ott Passman is no longer here. Sonny Callahan is here, and I know that many would question whether or not I have the same abilities as Otto Passman. But he has an interesting history. Mr. Obey. Mr. Chairman, I have much greater confidence in your ability to recognize the public interests than I had in a number of past persons who have occupied this and other subcommittee chairs. Mr. Callahan. Well, thank you, and I hold no one in higher respect as a chairman of this committee than you, and I happened to have the pleasure to serve under you for 2 years, and you were extremely fair to me. Until Ms. Pelosi gets back--and I certainly want to give her time; she is in a committee hearing next door--let me start on some of the questions I have. Child survival, you mentioned the word ``earmark.'' We did not earmark child survival monies? Mr. Atwood. Right. Mr. Callahan. We think it is important that it be an independent account. It is an account, not an earmark. We don't tell you how to spend the money or where to spend it, and I can't understand an administration--as unpopular and as misunderstood as foreign aid is, it would appear to me that they ought to be looking for some rationale to explain to the American people what the positive aspects of foreign aid are; and certainly when you have an account labelled ``child survival,'' no American disagrees with that aspect of foreign aid, and I think it is very important that the administration recognize this. med bank On the MED Bank that someone talked to you about, number one, is this a USAID project? Mr. Atwood. No. Well, I mean, it has been funded out of the ESF account. Mr. Callahan. Why is it not funded through Treasury? Why are you lobbying for banking measures? Mr. Atwood. I think that the point I made earlier is the one I would make now, which is that this is so closely tied to the peace process. I believe that is why it evolved in this way as a proposition that was put forward under our ESF account. Mr. Callahan. Well, and you mentioned that a lot of people talked with me when we were in the Middle East with respect to the MED Bank. Not one soul mentioned it to me. We met with the leaders of each country that we visited. The only person that mentioned it to me was an individual, and I forget his name, who was at a reception prior to a banquet one night in Jerusalem, who walked up and said, I hear you are against the MED Bank; and I said, how can you say that when it was in my bill to authorize the MED Bank? And he indicated that he was a preadvanced, or some type of advanced employee, of what they hoped would be the MED Bank. So he had sort of a personal interest because he wasn't going to have a full-time job unless the bank was created; but the President, the prime ministers, the kings that we met with never mentioned it. Since that time, Mr. Mubarak has visited this country and he, in passing, mentioned his support. Mr. Netanyahu was here and mentioned, in passing, we need your support. And we are not opposed to the MED Bank, if that is what you want to do. We are opposed to increasing the size of the pie that we have available for the Middle East. We are not going to increase the size of that pie, number one; the pie is not going to be increased and neither is the size. If you all want to take $100 million out of economic support monies or any other areas that currently is channelled to the Middle East, I have no objection to that. israel's expedited transmission In speaking of that, I have always wondered, what is the position of the administration on the expediting of the payment to Israel? Is this a request for economic support? Is this a request of the administration? Or would you rather it not be put into law by Congress requiring the expedited payment of economic support to Israel? Mr. Atwood. Mr. Chairman, I believe that under the authorization that has been passed for that aspect of this appropriation, that the Israeli Government is allowed to accrue interest, which is not what is normally done in terms of these kinds of transfers. That is why I believe that there is also a desire for the expedited transmission of that resource. Mr. Callahan. For the purpose of economic support, aid is to encourage friendship, to encourage them to take certain steps, or anybody else to take certain steps; and if you have to give them that money the first week of October, how did you utilize that as a wedge? Does the administration understand it is not supporting the housing settlement that the Prime Minister has indicated he wants to start? And if you have no wedge, if Israel doesn't have to respond to us because they are going to get all of their money up front, isn't that an impediment to the administration? Mr. Atwood. Mr. Chairman, I take it that we don't ask for legal authority to do that, it is simply an informal matter; and, of course, if the appropriation is delayed, the process is delayed, then there is a good deal of consternation because of the point I made earlier. But we are not obliged to do that. It is simply a matter, I think, of judgment as to whether or not we consider it important to maintain the confidence of the Israeli Government as we proceed to deal with them on a whole series of issues. Mr. Callahan. I think you are obliged to do it. I think actually it is put in bill language in our bill, requiring you to make the expedited payment; and my question is---- Mr. Atwood. Sorry, Mr. Chairman. My understanding is that we have not asked for it. Mr. Callahan. I understand that, but are you asking for it? Is the administration requesting this, or do you--in the absence of a request, feel like this is an impediment to our ability to facilitate the peace process? Mr. Atwood. Just as a general proposition, Mr. Chairman, we would prefer not to have a lot of provisos or whatever put into the law. We have not asked for this, it has been traditionally---- Mr. Callahan. So you would rather the Congress not hold you to expedited payments of economic support monies to Israel? Mr. Atwood. I will simply rest on what I have said: We have not requested it in this budget, Mr. Chairman. Mr. Callahan. We ought not do things like that to you. Sometimes we just can't help it. Mr. Atwood. You know, I was a foreign service officer; I was trained in the way they speak. med bank Mr. Callahan. Yes, they did a good job of training you. Back to the MED Bank though. I don't know what you are doing involved in the MED Bank, frankly. I think you have other areas of priority you ought to be concentrating on, and I don't see the MED Bank as a facilitating vehicle for peace, when it is not even enough for the leaders of the country to mention it to the Appropriations Subcommittee that, in a sense, gives them $6 billion--I am talking about the Middle East--plus, when they don't even bother to mention it to us. I don't know why it is a priority with Israel, with Jordan, with Egypt, with Morocco, or any other area of the Middle East. But if the administration feels they want to create that bank or participate in the creation of that bank, create the thing, you have the authority. But you are not going to be able to take it away from Latin America, you are not going to be able to take it away from other areas of the world. You can divide the pot any way you want, and if it is that crucial, do it. I think we are going to be a little bit more glaring in our definition of what size the pie is going to be available to the Middle East as a whole. You know, may be it is time to look at the redistribution formula of the report. Is it right, Brian, for us to make a contribution to a country based on a percentage of what another country gets? Is this sound logic, in your opinion? Mr. Atwood. Mr. Chairman, I believe that that formula was the result of the Camp David Accords, and of course, any diplomatic solution to a problem--and I think that solution has been maintained over the years because of the contributions we have been making---- Mr. Callahan. Let me just respond to that. I was of the same perception; I thought the same thing. It was not. It was not a Camp David discussion even. It was just created, not long after Camp David, but it was not a part of the Camp David Accords. It was a part that was established long after the Camp David Accords was reached. So we are not bound by the Camp David Accords, we are bound only by historical precedents. Mr. Atwood. I do recall there was a discussion by President Carter and Anwar Sadat about the revenues that Egypt would lose if he signed that agreement, so I think it was in their minds that they needed to compensate him for that so he would sign those accords. But I think the point I would make is the same as I would make about the Mideast Development Bank. If it facilitates the peace process, if it would be important in consolidating the peace process after the fact, then I think we need to continue to pursue it with other countries. I mean, the idea here is that we would not be the only county; the Gulf states and the Europeans and others would contribute to this, and we could help consolidate the peace process after a comprehensive peace is reached. One person said to me the other day, the next war in the Middle East will start over water. We need to work on development of the region. This is one way of doing it. It is a way that was suggested by those who are actually negotiating in the peace process now, so we take it seriously and that is why we have put it in this request. Mr. Callahan. Well, do you mean to say that the Camp David Accord, if it was discussed there and not really drafted into the accord, that this is in perpetuity? What if Israel's economic situation took a downturn and their needs were ten times greater than Egypt's, and they took an upturn? Do you think we should still give to a country that needs no economic support? Are we buying peace in the Middle East? And what if Assad comes in and says he wants to contribute to the Middle East process and he wants 70 percent? Do we agree to that because we think that will enhance the peace directions of the Middle East? What if King Hussein suddenly said, ``Look, I am tired of being a world leader, I am tired of being a peacekeeper; I want 50 percent?'' Are we selling our souls for peace? How long are we going to continue this ratio funding for Egypt and Israel? Mr. Atwood. Mr. Chairman, both Israel and Egypt know, and we have said it very publicly, that this is not in perpetuity. In fact, the major component of the Gore-Mubarak decisions, the commission that we have set up which involves the private sector, as well, is how can we achieve economic reform so they will not be as dependent on our aid in the future. So I think there is an understanding in both countries that this is not going to last forever. We are in the midst of delicate negotiations now and there certainly is not a desire to rock the boat. And we feel that these resources have bought us peace for the last 20 years that certainly--in the case of Egypt, the country would look they different if not for the investment we have been making here. Mr. Callahan. One more thing. You indicate in your opening statement and in the written statement how the President has requested additional funding, and you itemize the prioritization and the rationale behind that, which makes good sense. If we are going to be a world player, we have to. But then in the fifth year, he drastically reduces it in order to submit a balanced budget. Do you think that our foreign involvement is just limited to President Clinton's term, that if he wants to increase it every year? I know Mr. Gore wants to be President. If I were Al Gore, I would be turning back flips over this budget, because what he is saying is, Let me spend all of this money for the next 4 years, or 3 years; and then, Al, when you get to be President, we are going to cut it in half in order that we can balance the budget. Is that realistic, or is the President's budget--I don't want to say a ``charade'' with respect to being balanced, and I know you are a good soldier and I don't want to put you on the spot, but don't you think it strains that the President says let's spend, spend, spend and move up, up, up and be a world leader in foreign affairs, but then 4 years from now, let's cut it in half so we can tell the American people that in 5 years we balanced the budget? Is that strange or do you think there will be no more need, 37 percent of those funds are going to be gone the first year of Al Gore's presidency? Mr. Atwood. Mr. Chairman, knowing that there are intense discussions going on on the Hill between Frank Raines and the Chairs of the Budget Committees, this is the last area I want to get into. I can only assume that we have anticipated that our programs are going to work so well in the first 4 years that we won't need as much in the fifth. Mr. Callahan. Nancy. institute of peace Ms. Pelosi. Thank you very much, Mr. Chairman, and I again apologize for having to leave the room to go to my other committee. I went over there because the item on the agenda was the Institute of Peace, which is asking for $11 million-plus for the Institute of Peace for this year. And it was interesting to me because our Chairman, Mr. Porter--and I know he wouldn't mind my sharing this with you since he said it publicly and very energetically--was critical of the administration for not putting more money in the budget for foreign policy and indeed keeping the Institute of Peace at the same. And he said, I told the President if he wants to put $4 billion more in the foreign policy budget, I will support that. So I thought I would bring that back to you, Mr. Chairman. He had only the nicest things to say about you. The thrust was to the President--I guess you could say, against the President--and I think it is important to note, as I did then, that I think if we are going to get the kind of money we need for foreign policy, as Mr. Frelinghuysen said correctly, we have to educate the people and the President has to use the bully pulpit to do that, because that is who the American people listen to, especially on the matters of foreign policy. I have always been mystified that of the little bit of money that is in this committee, we have $11 million in our Labor, Health and Human Services, Education budget for the Institute of Peace. And in our committee over there, if you think this is tight, I call that lamb eat lamb. Now where are we taking it from--children's education, Head Start, job training, the National Institutes of Health? So that $11 million is a lot of money coming out of there. But again I hope that the President--I appreciate what he said in his State of the Union speech, what he said about conflict avoidance and how important that is and what a savings it in every possible personal and fiscal way. But I hope--I have confidence that your message is getting through, those editorials speak to that, that our Secretary of State is certainly another excellent messenger, but I think it also has to come from the White House. The questions that I had, I know that Congresswoman Lowey addressed some of my concerns, as did Mr. Torres about microlending. I just want to mention that I share their interests in that, as you know, and any other nuances on questions in that regard and on international family planning I will submit for the record. women in development Ms. Pelosi. Women in development, in 1991, the UN reported that despite increased international awareness that women play key roles in development, the situation of the world's women has not improved, in some cases deteriorated. In 1993, the GAO looked at this problem and reported back to Congress that the U.S. has made slow progress in involving women in development. I heard what you said earlier about educating young girls, and I think that is very important. Can you provide the subcommittee with a progress report on USAID's gender plan of action, the plan you launched last year to ensure that women are not overlooked as AID determines how to spend scarce foreign aid dollars? Are women gaining better access to USAID's credit, health and education programs. And I know my Chairman would want you to answer briefly. Mr. Atwood. Yes, I will. I think we are making a great deal of progress in our program, and what we have been trying to do is to integrate it into all of our activities at USAID. We have a wonderful Office of Women in Development, obviously, but what we are attempting to do through procedures is to assure that we sensitize others to look for opportunities in this area. And I know that we have used our discussions with the advisory committee for PVOs; they have pushed us in that direction. We have set up a committee to do this, and they feel very pleased that this program has indeed been adopted and the procedures are being followed now. environmental programs Ms. Pelosi. As far as environmental programs are concerned, the fiscal year 1998 request contains a total of $290 million for environmental programs. This is one of the largest areas of increase. What are the priority areas for the proposed funding increase? Do you plan to use these funds to support ongoing programs or develop new ones? Will any deferred environmental priorities, for example, in El Salvador, Jamaica, or Peru be addressed in this funding and how will the programs in Africa-- well, I will save that question as a separate one, because that is about food and the environment. Mr. Atwood. The increase, I think, reflects our growing concern about the climate change problem and our need, I think, to create even a major initiative in this area, to try to deal with climate change; and that is done in a variety of ways. We are concerned about urbanization and the brown pollution problems that exist. There are going to be more emissions coming from the developing world by the year 2015 than we are producing ourselves, and we are the number one cause of the CO- 2 problems. But the loss of rain forests contributes to this, and we are putting a major effort into trying to solve these problems. We are also concerned obviously and another strategic concern is the loss of biodiversity. As we are losing rain forests, we are losing opportunities. We are losing species by the thousands. We don't know what we are losing. We are losing opportunity for new pharmaceuticals to deal with diseases and the like. So those are two major strategic objectives under the environment budget. Ms. Pelosi. Thank you. global aids Global AIDS, I commend you, Mr. Administrator, for your continued support in funding global AIDS pandemic, and thank you for your efforts to address some of the concerns we had about the program, including staffing levels. I understand there is a new director that has been named, and I look forward to further discussion on effective ways to address the crisis. It is my understanding that a GAO study has been requested of the AIDS program, and I would hope you would address some of the issues to be reviewed, particularly the coordination between USAID and the United Nations and USAID and other bilateral donors. Mr. Atwood. Yes, I think that our agency is doing more internationally than any other development agency in the world, and I feel very pleased; and, of course, you should feel proud about your association with this. Ms. Pelosi. And the generosity of our Chairman. That is just what you were thinking; I can read your mind. That was off the record. Mr. Atwood. I am not sure. I have just learned yesterday that GAO is going to be looking into this program. I, of course, also welcome audits of our programs to see that they are effective, whether it is GAO or our own IG or whatever; so I look forward to seeing what they say about it. I hope they find it an effective program. If they find weaknesses, I want to know about it. Because despite the problem where we lost a lot of staff all at once, we have now hired people including, as you said, the new head of office. This office does contribute to the international effort to try to stop this terrible disease. We also are contributing $15 billion to UNAIDS and some degree of recognition for the role we play is the fact that our Assistant Administrator for Global Bureau, Sally Shelton Colby, is the Chair of the UNAIDS committee. Ms. Pelosi. I wanted to just follow up on that with a question about women. Ninety percent of all women infected by HIV live in the developing world, nearly 50 percent of the new infections in the developing world are among women who usually become infected during their childbearing years and therefore can run the risk of transmitting the disease. Given this reality, the advances made in the last 2 decades in the area of child survival may be negated by increase ininfant mortality due to HIV/AIDS. Ensuring women's participation in economic and social development programs, as we discussed earlier, in women and development can reduce women's vulnerability to HIV infection by improving their socioeconomic political legal status and their own sense of self. To what extent do USAID's HIV/AIDS programs address enhancing women's status as a means of prevention? Mr. Administrator, if I may, I think you answered that question earlier in your previous answer, unless you would like to elaborate. Mr. Atwood. Only to say that, as you have suggested by your question, these programs are interrelating. If we are emphasizing women and development and girls education and microenterprise programs that principally focus on women, what we are doing is improving their own understanding of their status in the community, we are improving their status by giving them an understanding of what their legal rights ought to be. Part of the AIDS problem that relates to women is that in male-dominated societies, they are often forced into sexual relationships that they simply don't want, and that is part of the problem. And to the extent that they can increase their own standing and their dignity in a society, then they are going to be able to ward off that kind of problem. Ms. Pelosi. You are correct, they are interrelated and, I think, interrelated with international family planning as well, so that husbands and wives can determine the size and timing of their families, improve the health of the family, education level of the family, literacy and economic options for the women. So I thank you for all of your initiatives in that area. I--calling back the Chairman's remarks about child survival, indicating that he will recommend a level of $500 million for AID's child survival programs--600, I can't keep up. I hope that the recommendation, Mr. Chairman, will also include full funding for the administration's request for development assistance. food security program In that context, Mr. Atwood, would you please elaborate on the pilot initiative in Africa aimed at improving food security? It was a question under development and a question under environment. Mr. Atwood. We are focusing on some of the countries in which we work where we have a serious food security program. There are about a half dozen countries. It is an effort to try to create the right kind of policy environment, which means issues such as land tenure and creation of extension operations, the privatization of those agricultural inputs, to the efforts that need to be made to give people incentive. So it is an overall effort to try to increase agricultural production over a 10-year period. Again, the 30 million will be focused on six countries and they are countries that have serious food security problems. We believe we can save the amount of money that we are putting into this in terms of the food aid that we provide if these food programs work. cambodia Ms. Pelosi. Thank you. I have a number of other questions which I will submit for the record, but I wonder, getting back to the food and environment, what is AID doing to assist Cambodia, particularly the area of timber harvesting? It is such a devastation. Mr. Atwood. It is, indeed. We are concerned about it. I have been given a paper here that relates to the rule of law in Cambodia, but we also have a program to use community-based methods to try to preserve the rain forests in Cambodia. It is a serious problem there as in other parts of the world. Ms. Pelosi. Thank you very much for your testimony, your leadership, and I want to tell my other Chairman that we discussed your proposal of $4 billion and I put the Chairman down as a maybe. Perhaps you can---- Mr. Porter. Boy, you are an optimist. Ms. Pelosi. In any event, thank you very much, Mr. Chairman. funding levels Mr. Callahan. Mr. Atwood, we have sort of pulled your numbers up. You are asking for a 5.2 percent increase for Africa, a 4.2 increase for Asia, a 3.5 increase for Eastern Europe, a 44 percent increase for the former Soviet Union, and a zero increase for Latin America. And then in the Middle East, you are actually asking for an increase in economic support money. So you are asking for an increase for everybody in the world but Latin America. I cannot understand the administration making such a request. Number one, we know that is not going to happen, so what you are going to ask us to do is to cut Africa, cut Asia, cut Eastern Europe, cut the former Soviet Union, cut Latin America or cut the Middle East in order that we can provide what I think is an appropriate and fair share of our allocation of monies to this hemisphere, and then when we get into this hemisphere, even with a zero increase, no doubt the administration is going to want to spend most of this money in Haiti, where I see no evidence of progress being made. The subcommittee is going to Haiti the week after next to take a firsthand look at some of the progress that some contend is being made, but based upon the staff visit to Haiti and based upon reports that we have received, we are not making any progress in Haiti. So what we are going to have to do is go back and reduce all of these areas, reduce economic support requests, and redistribute these increases to zero. There are not going to be any increases. And yet extract from existing monies, monies for Latin America. So I just want to point that out, that there are not going to be any increases, not on my markup. The subcommittee may choose to overrule me, but there is not going to be an overall increase, there is not going to be a reduction or levelized spending for Latin America, unless it is worldwide. There is not going to be money for a Middle East bank unless you want to take it out of the economic support fund, and unless it is within the boundaries of the amounts of money that will have been spent in 1997 in the Middle East. So those are realities. So we may as well plan in that direction, and if you want to change that, I suggest you begin lobbying the Senate, because I don't think we are going to change it in the House. On one hand, your request for a $15 million decrease in operational expenses is going to make the package easier to sell. You know the difficulties we have on the Floor with some Members of the Congress upset about the operations of USAID, and I compliment you on trying to manipulate this situation you are in of, in a sense, being forced to move to the new Federal Building, the cost of that, and at the same time giving us the ability to go to the Floor and argue for your overall programs without having to argue with those are concerned more about your operations than they are the operations of USAID. So I do compliment you on that. Mr. Porter, we are glad to have you here. Mr. Porter. Thank you, Mr. Chairman, and I apologize both to you and to Mr. Atwood, because I was next door in my own subcommittee and I was unfortunately not able to get here any earlier. Mr. Chairman, I respect very greatly your strong feelings about funding for the subcommittee and funding for the programs. I know you have had an opportunity recently and will have further opportunities to see on the ground how some of the money is spent, and I think that is a very, very important part of your role as Chairman and our roles as members of the subcommittee. I believe that the United States has never in its history had a greater opportunity to change the world in the direction of the values and principles which this country stands for as it does today: to change societies that have never known democracy, to begin the process of building democracy; and to change governments that had never had an independent judiciary or operated according to the rule of law, or observed basic human rights. Most particularly, we have the opportunity to change the world toward free enterprise economics that we know make for a better life for everyone, and there is so much positive happening in the world. While the news always tells all the negative things that are happening, there is so much good that is happening, that I believe we need to catch the wave and to lead it. And I believe that that takes resources. You can't do it without resources. I think the opportunity is huge and I guess, I happened to mention some of these thoughts in the hearing next door with the Peace Institute, which deals with conflict resolution and saving lives that would otherwise be lost in violence or war. I did tell President Clinton that I think we need substantially more resources in the area of foreign assistance and our diplomatic corps. I find appalling the lack of the resources we have given them. As I told the Chairman, I just led a group of Members to Beijing and I had been there in 1981. The facilities we have in Beijing for our personnel and our embassy there are Third World. They are in incredibly bad shape. This is not your area, but it seems to me that if we are the leader of the free world, and we are, that we ought to have an embassy in Beijing, the largest country on the earth, that is at least as good as Canada's embassy there, which it is not. It is not that foreign assistance should not contribute to deficit reduction, it should contribute perhaps more than other areas, and it has done that. We have cut this function of government more than any other function of government. I believe we are through the muscle and into the bone, and I think we are missing opportunities we need to grasp strongly. We need to make certain that we are projecting American values and encouraging the kind of civil society that can really change this world from a place of violence and conflict to a place of peace, exchange and interchange. I just got back from a trip in January that also included Cambodia. Cambodia is a country where the United States has huge moral responsibility. If nothing else, we really need to help people whom we have, in a very real sense, put in the position they have found themselves. It is a society where, when you talk about violence and conflict, it has happened there like no place on earth. We went out to the killing fields. The Khmer Rouge killed 2 million people in the space of about 3\1/2\ years. What are we doing today? We are doing some wonderful things there. Ambassador Ken Quinn is providing the kind of outreach that can build a civil society in a country that hasn't had one at least in the last 20 years. And if you look at our rule of law program there, it might be able to make the difference and bridge where they are to where we hope they can go. Of course, they have had one election. It was not decisive and they have a coalition government that is very unusual with two prime ministers. The next election is either going to be followed by a civil society, or the parties won't accept it and Cambodia is going to break down into the violence that has been there in the past. It seems to me we have an obligation to do everything possible to ensure that the upcoming elections are free, fair, and democratic, and that we build the institutions of law and human rights that will lead to a civil society in that country. Here we are doing a good job, but we need more resources. If we had more resources we would do better. That is the only question I am going to ask, because I know the time is short, but can you comment on what is happening in Cambodia as an example of what can be done with resources and what you see for the future there? Mr. Atwood. I can. I want to simply emphasize that this is one election that the entire international community is concerned about, and I think, again, without American leadership, when the international community is involved in the transition, it doesn't work. We are trying very hard now to move resources around so that we can finance many activities that will be supportive of the electoral process that is coming up. The first time around the election was basically run by the international community. I do think that this time we want to try to create institutions that can be sustained after this election, so Cambodians ought to be more involved this time in the running of their own elections. We are trying to build those kinds of institutions and electoral commissions and the like. Part of the rule is we have had to shift from under our rule of law program into the electoral program because of the finite resources we have. I hate to take advantage of this opening, but because of the concerns of this committee, we have really been squeezing our Asia budget. We had to do that last year because of the language in the committee report on proportionality, which meant that our Asia budget was cut by some 21 percent, whereas the other two regions of the world were not cut as much. I know that Asia seems very far away, but we have got some major crises out there. I wouldn't argue that countries like Japan shouldn't be doing a lot more. But the irony is wherever we work in Asia, whether it is Cambodia or Indonesia or the Philippines, despite the fact that our budget is probably one- tenth in most cases of what the Japanese are putting in, we continue to have a great deal of influence in those countries because of who we are, and those countries want us there even at reduced levels. But I agree with you and I certainly agree with your very eloquent statement. We need to be making these investments. As we enter the global economy, our economy in terms of its growth is going to be so much more dependent on the creation of new markets and the exploitation of markets we have created over the past 30 years, and while I want to see a balanced budget, as you look 5, 10 years on out, you have to see growth in our economy. That is going to happen only if a much larger percentage of our economy depends on trade, and it seems to me it is an investment in the revenues of the future. The fact of the matter is that we are gaining so much from our investments in the past already, such as, we are seeing $100 billion of trade going to Latin America, every billion dollars creates 20,000 jobs in this country. So I certainly agree with the statement you made and consider Cambodia to be crucial. In every one of these transition situations, whether it is the West Bank, Gaza, South Africa, Haiti, if the international community, which is led by us, fails, then it sends a message to a lot of those who would wreak havoc over the rest of the world, the so-called rogue states who want to do everything they can to destabilize the international community. I think we have got to succeed when we make commitments of the type we have made in Cambodia. Mr. Porter. Mr. Atwood, thank you for your answer to the question, and for the excellent job you are doing at AID for our country. I appreciate it very much. Thank you. Mr. Atwood. Thank you. Mr. Callahan. Thank you. We will allow committee members to submit questions for the record and ask for your expeditious response. Secondly, I would like to submit a report issued by AID on the last 10 years of the Child Survival Program to be entered into the record, as well as a report on America's partnership with UNICEF, which was written by a former subcommittee clerk, Terry Peel. [The information follows:] [Pages 68 - 168--The official Committee record contains additional material here.] Mr. Callahan. And I guess lastly, our committee, in addition to going to Haiti the week following Easter, is also going to Guatemala. And several weeks ago, Mrs. Pelosi and I wrote to the Secretary of State to encourage her to make adequate resources available to Guatemala to help them implement the peace agreement. I think there is about $8 million originally intended to be provided through the ESF fund. What is the status of that additional $8 million? Seventeen million has already been provided, $8 million is floating. What can we say about that? Mr. Atwood. Mr. Chairman, the Secretary yesterday approved the use of this additional $8 million in Guatemala. These are carryover funds. That will bring the total ESF for Guatemala to $25 million. So we certainly have noted your concerns, the letter you sent, and share your belief that this is also another very important transition. I would like to get down to Guatemala sometime myself to see what we have done. We have helped in the demobilization of soldiers on both sides and have a real interest in following. By the way, the Guatemalan Government is putting a lot of its own resources into the peace process and the development process. So we would like this to work and think it is very important. It is sort of the last of the South American countries to go through a transition of this type. Mr. Callahan. We hope it will work, too. We are anxious to visit AID projects, as well as Secretary Rubin has requested that we visit some World Bank projects in Latin America. So we are looking forward to our visit to Guatemala, and I am happy to hear that the other $8 million was released. Mr. Frelinghuysen, you have more questions. Mr. Frelinghuysen. A few more questions for the record. Thank you, Mr. Chairman. Mr. Callahan. Thank you. And we thank you, Mr. Atwood. Mr. Atwood. Thank you, Mr. Chairman. [Questions and answers for the record follow:] Questions for the Record Submitted by Chairman Callahan usaid's fy 1998 budget to omb Question. By statute, the Congress and Congressional committees are to receive information they deem appropriate in order to assess the President's budget request. Title 31, chapter 11, United States Code, states, in part: ``(b) When requested by a committee of the Congress * * * the head of each executive agency shall (1) provide information on the location and kind of available fiscal, budget, and program information; (2) to the extent practicable, prepare summary tables of that fiscal, budget, and program information and related information the committee * * * considers necessary * * *'' In that regard, by appropriations account (both as proposed by the Administration in its account structure and for the existing account structure for fiscal year 1997), please provide the committee with the original fiscal year 1998 request of AID to the Office of Management and Budget; the initial passback by OMB; the appeals (if any) by the agency for specific increases or decreases in funding (or changes in account structure); and the final levels as reflected in the President's budget request. Answer. USAID's budget request to the Office of Management and Budget (OMB), submitted in October of 1996, consisted of the development program accounts only, as reflected in the table below. I am advised that the Office of Management and Budget does not permit release of its initial passback levels. However, as you are aware, the Administration has always been, and continues to be, very willing to join in consultations with congressional members and staff, as well as to prepare additional materials justifying the President's budget request when any congressional member expresses such a need. [Page 171--The official Committee record contains additional material here.] campfire Question. The Agency for International Development has been funding a project in Zimbabwe known as CAMPFIRE. Organizations funded through this project have allegedly lobbied the United States Congress to modify the Endangered Species Act. a. What are the laws and regulations affecting the use of USAID funds for lobbying activities either by U.S. contractors or fund recipients, or by overseas organizations that receive USAID funds. Do such laws or regulations affect lobbying by foreign organizations in foreign countries? b. Have any such restrictions been applied to recipients of CAMPFIRE funds? If not, why not? c. Even if public advocacy is not restricted, why does USAID fund such activities? A USAID review of the project states that ``effective lobbying carried out locally and internationally'' is an expected output of the funds provided to the CAMPFIRE Association, on the ``NRMP II-CCG partners.'' Please explain why this is desirable--and if it is legal under U.S. law. If not legal, what steps is USAID taking to defund such activities, both through CAMPFIRE and other programs, projects, and activities? Answer. CAMPFIRE recipients, like other recipients of USAID grant funds, are subject to the government-wide restrictions on lobbying of OMB Circular A-122. With regard to charges of improper lobbying by CAMPFIRE organizations, we referred them to the Office of the General Counsel. That office did a review of the allegations and concluded that there were no violations of the lobbying restrictions. Nonetheless, because of the high degree of concern about the program's international outreach efforts, USAID has decided to eliminate these activities from USAID funding. We have learned that a development program's success depends upon the full participation by affected African communities. Therefore, USAID will continue to support activities such as: the sharing of information on best practices and lessons learned for community-based natural resources management (CBNRM); exchanges of personnel between districts, provinces and countries to enhance knowledge of CBNRM; training for communities and personnel; participation at national, regional and international technical meetings and workshops which foster CBNRM, and site visits. Question. A document from USAID indicates that Activity 1.2 (under African Resources Trust Indicative Programme Planning for the Period 1995-1999) includes an output to recruit African Resources Trust liaison officers for the UK, Brussels, Washington, and South Africa. Why is USAID funding attempts to open offices for this organization in Western Europe and the United States? What possible development benefit could be derived from opening such offices? Answer. A substantial source of the revenue accruing to CAMPFIRE districts flows from tourist visits to Zimbabwe. These offices support donor coordination, trade development, provide public information on program success, and maintain markets. After a management review of the CAMPFIRE program, USAID has decided to discontinue funding for offices outside of Zimbabwe. campfire--overseas offices Question. Has ANY USAID funding been used to advertise for such liaison officers, train such officers, or provide funding for such officers in any way, including the funding of overseas offices? If so, please provide funding details. Answer. Yes, as indicated above, these offices have been part of our program activities. They are also funded from a variety of donor sources and include a portion of overhead expenses. As of February 28, 1997, a total of $258,570 has been provided to offices in Washington, D.C. ($81,967), Pretoria, South Africa ($78,702), Brussels, Belgium ($67,588) and London ($30,312). Expenses included office rent and supplies and staff salaries. campfire--liaison officers Question. What is the status of proposed liaison officers for these countries? Does USAID have any future plans to support, directly or indirectly, the employment of such officers in any way, including operating support for overseas offices? If so, please provide details, including funding assumptions. Answer. While legal and technically justifiable, and because of the concerns raised, USAID has decided to terminate bilateral funding of all international offices of Africa Resources Trust, a subgrantee under the CAMPFIRE program. As USAID is only a partial funder of these offices, they will continue some functions with other resources. funding for indigenous ngos--offices in other countries Question. During fiscal years 1995, 1996, and 1997 (or prospectively for fiscal year 1998) has USAID supported the establishment of offices by other indigenous nongovernmental organizations in countries other than those in which such organizations were established? If so, please provide the funding provided to each such organization, and the justification for the funding. Answer. USAID, from central, regional and bilateral resources, works worldwide with large number of indigenous nongovernmental organizations (NGOs) that operate in developing countries or which maintain offices in donor nations. They maintain the latter for purposes such as donor liaison and public information. USAID does not maintain central records that would readily identify whether or not USAID funding has been used for such activities and trying to obtain such data would require a very intensive staff effort office by office and mission by mission. While USAID does provide competitive grants to U.S. private voluntary organizations (a portion of the NGO population), for expanding their organizational structure and outreach, there is no similar central mechanism for funding indigenous NGOs. funding for usaid child survival activities, fys 1995-1998 Question. Please provide the committee with a table showing budgeted funding levels by country (by appropriation account, with subtotals by regional bureau), as well as by centrally funded programs, of USAID child survival activities for fiscal years 1995, 1996, anticipated 1997, and requested 1998. In addition, provide a similar table indicating obligations for fiscal years 1995 and 1996. Answer. The first set of tables shows child survival (CHS) funding levels by country and by appropriations account for FYs 1995-1998 based on new obligational authority (NOA) for each of those years. The second set of tables show obligations--including NOA, funds carried over from prior years, and deobligation/reobligations, less unobligated balances carried into subsequent years--for each country for FYs 1995 and 1996. Due to the changeover to the Agency's New Management System, FY 1996 obligations are still estimated at this time, but final FY 1996 obligations should be available later this year. Total obligations cannot yet be projected by country for FYs 1997 and 1998. For FY 1998 we do not at this time have data on CHS levels funded out of the Economic Support Funds account. That information should also become available in about one month, and we will be happy to provide it to the Committee when available. The last point to note about the tables is that historically USAID has funded about $30 million of child survival activities from the International Disaster Assistance (IDA) account. Due to the nature of that program, which is responsive to current disaster activity around the world, we are unable to predict in advance the exact level of CHS funding that will be available from that account. Therefore, we do project a CHS level against the IDA account in FY 1998 on the attached tables, although IDA funding for CHS activities is likely to remain in the $30 million range. [Pages 174 - 190--The official Committee record contains additional material here.] child survival programs Question. On page 9 of the GAO report ``Contributions to Child Survival are Significant, but Challenges Remain'' (GAO/NSIAD-97-9), a chart appears which summarizes child survival activities of USAID by central programs and by geographic bureau. Please provide, to the extent possible, a country or regional breakdown of those funds obligated by central programs. Answer. Although obligations of central programs are not tracked by country and region, a system set up in FY 95 does track country and regional level expenditures of these programs. We have provided below the regional breakdown of field support expenditures for central programs for health including child survival, but excluding HIV/AIDS. These data reflect expenditure of FY 95 funds. The system does not provide separate tracking of child survival from other health funding. FY 95 EXPENDITURES FOR CENTRAL PROGRAMS BY REGION FOR CHILD SURVIVAL AND OTHER HEALTH, EXCLUDING HIV/AIDS [In thousands of dollars] Africa..................................................... 32.254 Asia/Near East............................................. 18.768 Eastern Europe/Newly Independent States.................... 8.281 Latin America/Caribbean.................................... 14.461 Multiple/International..................................... 15.837 gao report and child survival attributions Question. The GAO report mentioned above includes the following statement on page 15: ``USAID is unable to determine with any degree of precision how much funding is actually being used for child survival activities because (1) of the way Congress has directed funding; (2) USAID guidance allows considerable flexibility and variation in attributing child survival funds; (3) the amounts reported are based on estimated percentages of projected budgets, which sometimes are not adjusted at the end of the year to reflect any changes that may have occurred; and (4) the amounts reported are not directly based on specific project expenditures.'' Please discuss each point, including whether you agree with the statement made in the GAO report and what steps USAID is taking to address the problem. Answer. Although the GAO report is correct in noting some flexibility in USAID's system for allocating to and tracking of funding to various activities, USAID believes that the degree of imprecision is minor for a program of this size and scope. The legislative history of child survival funding is complex. This year child survival is being tracked through a special account that includes other areas of health. In the past, child survival has been part of the overall Development Assistance (DA) funds; during the early years of the program, some child survival was funded through a special Child Survival Action Program while the remaining amounts come from other funds. These variations have made coding and tracking difficult. In FY '96, new instructions on allocation and coding were provided which, combined with the New Management System, we believe should improve consistency in allocation and tracking. USAID believes that those closest to the activity are the most qualified to characterize its nature. Within the guidelines provided to the field, it is the project manager, and eventually the Mission, that determines whether an activity or project should be coded totally or in part as ``child survival.'' In most fiscal years, the final coding (assignment of funds to activities and the attribution of portions of selected activities for child survival) is done near the end of that year. Some changes do occur between the moment of final coding and the actual end of the fiscal year, due to last minute events in a country, or shifts in obligations for program reasons. The magnitude of these shifts, however, is quite small relative to the magnitude of the entire program. Under the new management system missions and USAID Washington offices will be able to adjust coding at the end of a fiscal year to reflect any changes that may have taken place. Since the origin of the Child Survival program in FY 86, only obligations, and not expenditures, have been tracked and reported to Congress. Frequently, expenditures (the actual use of obligated funds in support of activities) occur in the year or years following the obligation. In the future, the New Management System will permit the tracking of expenditures in specific areas, albeit on a delayed basis. Regular reporting to Congress, however, will continue to be based on obligations, or appropriations, as necessary. USAID has recently issued new instructions providing cleared guidance to the field in the allocation and attribution of child survival funds. While this guidance gives the responsibility to missions for characterizing activities, it provides clearer boundaries. child survival attributions Question: The GAO report mentioned above states on page 16 ``the agency's instructions [on reporting on child survival activities] name types of activities that may be attributed to child survival and give broad discretion to USAID officials to determine the percentage of funding that can be reported as child survival. However, the instructions do not provide specific indicators for determining attribution, such as the percentage of children in the population served for water projects. Moreover, some mission officials responsible for recording project activities told us the guidance for making attributions was not clear to them.'' Please comment on this statement. Please provide for the record the instructions that are given for the attribution of activities and projects to child survival. In addition, please indicate whether and to what degree infrastructure projects are attributed to child survival activities. Answer. The GAO review as carried out in 1995 and reviewed field instructions provided in FY 94. In FY 97, based on feedback from both mission personnel and budget personnel in Washington, the instructions were refined and clarified to provide better guidance. With reference to water and sanitation, the instructions now state: ``To determine the appropriate share of child survival/diseases account funds vs. other funding, missions should consider a variety of factors, including the degree of a mortality/morbidity to children due to water and sanitation problems; expected impact on mothers and children given the affected population and degree to which the program will directly affect children and their mothers; and percent of population under five that is affected by the program.'' We note in the instructions, however, that other factors may need to be considered given the nature of the program and the country context. As missions become increasingly conversant with the coding system and its use and importance in tracking obligations for specific areas of Administration and Congressional interest, the coding becomes more consistent and reliable. A copy of the latest instructions, provided to the field in March 1997 for use in coding FY 97 obligation, is attached. Historically, and in accord with the current guidance, if funding for water and sanitation programs or activities can be clearly shown to contribute directly the improvement of the health of children in a community, with specific results measured in terms of child health indicators, the activities may be coded to the child survival and disease account. Activities would usually not include infrastructure repair. [Pages 193 - 198--The official Committee record contains additional material here.] allocation for ``other diseases'' Question: According to a chart provided to the Committee on the allocation of funds based on fiscal year 1997 appropriations levels, the allocation for ``Other diseases'' includes a notation ``30% water sanitation''. Does that mean the thirty percent of the funds provided for any and all water sanitation projects are allocated against these funds? What is the justification for this decisions, and for the thirty percent figure? Answer. The instructions provided to the field for coding of obligations against the Child Survival and Diseases account state that water and sanitation activities may be considered for funding by the account ``if and when these programs contribute directly to child and maternal health objectives,'' that is, the projects must be designed to improve the health of children in a community, and the results must be measured in terms of child health indicators. The justification is that improving community water and sanitation systems directly addresses the root causes of diarrhea and other childhood diseases by proving uncontaminated water. The World Bank cites studies showing that improvements in water supply and sanitation can reduce deaths among children under five from diarrhea by 20% and reduce incidence of roundworm infection in children by one-third. A number of other studies considered highly reliable report a 55% median reduction in child deaths from such improvements. These studies are cited in ``Health Benefits from Improvements in Water and Sanitation,'' a review of the literature over the past 40 years conducted by USAID's Water and Sanitation for Health project. The thirty percent is based on an estimate of the proportion of the population that is under five that is affected by the program. If a mission wants to attribute a larger percent, it must obtain approval from USAID's Bureau of Policy and Program Coordination and the Bureau for Global Affairs, Field Support and Research. allocation for ``other diseases'' percentage/justification Question. Are any funds provided for water sanitation projects allocated against other activities, such as child survival? If so, provide the percentage allocation and the justification for each. Answer. The thirty percent figure is the amount provided as a guideline for attribution to the Child Survival and Diseases account. The thirty percent is based on an estimate of the proportion of the population that is under five that is affected by the program. allocation for ``other diseases''--totals Question. Please provide the total for all water sanitation projects allocated, obligated, and/or expended in fiscal years 1995 and 1996, and the funds allocated against other categories such as other diseases and child survival. Answer. USAID's budget tracking system indicates the total amounts obligated from all accounts, including Development Assistance (DA), Development Fund for Africa (DFA), Economic Support (ESF), the Southern Africa Initiative, and the Newly Independent States (NIS) for water and sanitation programs that contribute to the Agency's health and child survival goals to be: ------------------------------------------------------------------------ Fiscal year Fiscal year 1995 (in 1996 (in millions) millions) ------------------------------------------------------------------------ DA/DFA........................................ $12.2 $6.6 ESF........................................... 29.8 36.3 NIS........................................... 6.7 .5 ------------------------- Total................................... 48.7 43.4 ------------------------------------------------------------------------ In FY 1995, $11.1 million or 23% was attributed to child survival; $37.7 million to Other Diseases (excluding HIV/AIDS); in FY 1996, $11.7 million or 27% is estimated to be attributed to child survival; $31.7 million to Other Diseases (excluding HIV/AIDS). Expenditures are not included in the Agency's central tracking system. international food policy research institute (ifpri) study Question. In your testimony, you state: ``A recent study by the International Food Policy Research Institute found that for every dollar invested in agricultural research for developing countries, the export market available for donor countries expands by more than four dollars, of which more than one dollar is for agricultural commodities.'' Please provide a chart indicating the total requested, appropriated, allocated, obligated and expended (within development assistance accounts) by fiscal years for agricultural research by USAID beginning in fiscal year 1978. For fiscal years 1997 and 1998, indicate the totals requested, appropriated, and allocated as appropriate. Answer. While the question posed appears straightforward, unfortunately the answer is not. The base definition of ``agriculture research'' and all of its associated elements has not remained constant over the data period you requested. What we present below is an attempt to consolidate the following elements: support for national agricultural research systems throughout the world, university development, international agricultural research centers, collaborative research support programs, and other related global agricultural programs. The figures presented are compiled from obligations as those most accurately represent final project implementation. A similar compilation of program ``expenditures'' would not have differed significantly from the obligated funds. Furthermore, funds are not appropriated for this specific activity, nor are they requested at this level of specificity. While the funding totals include Economic Support Fund financed activities, these do not represent a large amount. However, missing from the picture presented by these figures are substantial amounts of PL-480 local currency generations that have been used in many countries to provide local counterpart funding for research programs supported by USAID and other donors. With these caveats, estimated total obligations/expenditures for agricultural research for the period from 1978 to 1996 (in millions of current dollars) are as follows: 1978......................... 106.62 1988........... 197.11 1979......................... 133.67 1989........... 206.61 1980......................... 136.02 1990........... 201.41 1981......................... 144.91 1991........... 196.93 1982......................... 165.46 1992........... 169.48 1983......................... 166.43 1993........... 158.19 1984......................... 182.01 1994........... 129.38 1985......................... 215.41 1995........... 113.08 1986......................... 217.70 1996........... 80.44 1987......................... 210.74 A comparable compilation of funding data for 1997 and 1998 is not presently available. Preliminary indications are that the figures will not exceed the 1996 funding total. disease research Question. In your testimony, you state: ``Foreign assistance programs are also vital in protecting the United States against dangers that are global in scope. By treating infectious diseases like AIDS, polio, and emerging viruses like Ebola before they reach our shores, USAID lowers health costs here at home.'' Please provide a chart indicating the total requested, allocated, obligated and expended (within development assistance accounts) by fiscal year for disease research and disease activities by USAID beginning in fiscal year 1978. For fiscal years 1997 and 1998, indicate the totals requested, appropriated and allocated, as appropriate. Answer. Below we have provided obligations for disease research and disease activities (other than research) from FY 90 through FY 96. Prior to FY 90, the Agency's budget coding system covered sectors only; in this case, health. Coding for these activities has not been completed for FYs 1997 and 1998, so we are unable to provide data for these years at this time. In the table, we have reported obligations against the codes for diarrheal disease control and oral rehydration therapy, HIV/AIDS, immunization against communicable diseases, malaria, tuberculosis, and vector control-tropical diseases. These categories include reported obligations for the major work USAID has carried out in areas such as onchocerciasis, measles and polio. Activities include work in areas such as training, evaluation and monitoring, and institutionalization. USAID's financial monitoring system tracks activities by obligation, rather than by request, appropriation or allocation. -------------------------------------------------------------------------------------------------------------------------------------------------------- Fiscal year Fiscal year Fiscal year Fiscal year Fiscal year Fiscal year Fiscal year 1990 1991 1992 1993 1994 1995 1996 -------------------------------------------------------------------------------------------------------------------------------------------------------- Disease Research...................................... 68,208,000 64,590,000 74,717,000 86,600,000 \1\ 43,819,0 00 30,731,000 26,411,000 Disease Activities.................................... 151,905,000 191,128,000 205,573,000 238,315,000 194,707,000 204,479,000 228,461,000 ------------------------------------------------------------------------------------------------- Disease Funding Total................................. 220,113,000 255,718,000 280,290,000 324,915,000 238,526,000 235,210,000 254,872,000 -------------------------------------------------------------------------------------------------------------------------------------------------------- \1\ The reduction in research between FY 93 and 94 reflects: (1) A change in the World Health Organization's Global Programme on AIDS (GPA) from a research-focused program toward application of research in program implementation. A similar shift was made in USAID's HIV/AIDS program at that time. This was a technical decision based on developments in the epidemic and on USAID's comparative advantages. (2) A reduction in the malaria vaccine research program due to an overall reduction of ``other health'' funding in FY 94, and a decision to concentrate on bringing to development several of the vaccine candidates which had been developed. (3) A reduction in grants to international organizations in the wake of the overall budget reduction. Such reductions continued after FY 94 as total assistance levels were reduced. Some missions with sizable research portfolios in health (e.g., Cameroon) were phased out, and the Agency shifted its budgeting system to emphasize field implementation activities, leading to a reduction in centrally supported activities, including research. malaria Question. For the record, please provide a chart indicating the amount of funds requested, appropriated, and allocated for malaria research, prevention and treatment in fiscal years 1994, 1995, and 1997, as well as the amount requested for fiscal year 1998. Answer. The requested chart is attached, showing USAID funding for malaria control (prevention plus treatment) and research between 1994 and 1997 and our planned levels for 1998. Malaria has been funded as a part of the Child Survival program during these years. Although no separate request was made specifically for malaria, an average of almost $10 million a year has been allocated in each year for malaria research and control (including prevention and treatment). In FY 98, USAID plans to allocate $11 million for the program. The decline in research funding in 1995 reflects a $3 million reduction for the Malaria Vaccine Development Program. The increase in control funding reflects support for the Africa Integrated Malaria Initiative which provides assistance for a regional USAID initiative for the prevention and treatment of malaria. [Page 202--The official Committee record contains additional material here.] united nations and affiliated organizations Question. Please provide a list of the funds provided (or to be provided) through development assistance in fiscal years 1994, 1995, 1996, and 1997, and requested for 1998, for the United Nations and its affiliated organizations, and for other international organizations, specifying the programs for which the funds were provided. Answer. The table below reflects development assistance funding for the United Nations and affiliated organizations, and other international organizations, for the fiscal years 1994, 1995, and 1996. Funds reflect a tally of contracts or other obligating documents with these organizations. Funding for these organizations cannot, for the most part, be accurately estimated for current or future years prior to obligation since funding is done through several contracting mechanisms throughout the agency. As the footnote on the table notes, many of these entities receive funding from other USAID-managed accounts in addition to development assistance. Funding from all accounts was around $400 million annually before dropping in FY 1996, largely due to the drop in overall development assistance levels. About half of the approximately $400 million has been Commodity Credit Corporation funds transferred to USAID to pay for USAID's transporting World Food Program goods. [Page 204--The official Committee record contains additional material here.] world summit goals Question. On page 23 of the USAID report ``Saving Lives Today and Tomorrow: A Decade Report on USAID's Child Survival Program'', six key World Summit Goals for the Year 2000 are identified for child survival programs. Indicate whether and how these goals are included in the agency's planning process, and how the reduced budget request for child survival activities for fiscal year 1998 is compatible with attaining these goals. Answer. The World Summit Goals have formed the backbone of the Agency's child survival and health strategy since they were agreed on in 1990. Three of USAID's Strategic Objectives in Population and Health--to obtain sustainable reductions in unintended pregnancies, in maternal mortality, and in infant and child mortality--mirror the Summit goals. USAID plans its program and allocates its budget to regions and countries based on strategic plans developed in collaboration with host governments to achieve goals such as those noted in the Decade Report. Resource allocations largely depend on the degree to which a country is taking specified steps to carry out an agreed upon program and able to use resources effectively. As a part of its overall program restructuring, USAID has refocused its efforts in Child Survival as well as the rest of the health sector to priority programs and countries. In these countries, we are working closely with the government as well as NGOs and other donors to help the countries achieve the goals they have established as their priorities. These partnerships, which are integral to our overall strategy for sustainable development, will help alleviate the pressures that result from our reduced funding levels. Additionally, in many of these countries, USAID's efforts in other sectors, including agriculture, education and democracy, create better living conditions that contribute directly to the health and well-being of children. child survival programming through private and voluntary agencies Question. Of the funds allocated for child survival activities in each of the fiscal years 1994, 1995, and 1996, please indicate the amounts that were programmed through non-profit, American-based, private and voluntary organizations. Also, indicate how much of child survival funds were allocated through the Global Bureau in each of those fiscal years, and how much was programmed through individual missions. Answer. Funding amounts for child survival programmed through non- profit, American-based private and voluntary organizations (PVOs) are provided below for FY 95 and FY 96 (estimated). No comparable data are available for FY 94. ------------------------------------------------------------------------ FY 95 FY 96 (est.) ------------------------------------------------------------------------ Total Child Survival Activities......... $316,034,000 $314,988,000 =============================== Child Survival Funding from Global through PVOs........................... 28,180,000 17,586,000 Child Survival Funding from Other Bureaus and Missions through PVOs...... 114,345,000 112,298,000 ------------------------------- Total Child Survival Funding through PVOs................................... 142,525,000 129,884,000 ------------------------------------------------------------------------ child survival requests Question. (Sic) Of the amounts provided for child survival programs in each of the fiscal years 1994, 1995, and 1996 through the Global Bureau, how much was allocated for such programs compared to the requests and proposals from outside groups for funding for such programs received by the Bureau? USAID receives hundreds of proposals each year, both in response to requests for such proposals or applications, in the case of cooperative agreements or grants, as well as unsolicited proposals. The Agency has no data system for tracking the total number of proposals received. The technical validity and financial soundness of proposals vary widely. Each is considered on its merits, whether submitted in response to an Agency solicitation or submitted on an unsolicited basis. The Agency, however, maintains no overall record of such proposals. usaid non-project assistance Question. Of the funds obligated for non-project assistance for each country in fiscal years 1994, 1995, and 1996, and intended for fiscal year 1997, indicate: a. the total amount obligated, by bureau; b. the total amount obligated, by country; c. the total amount obligated, by strategic objective; d. by country, the purposes for which the non-project assistance was or is to be used (NOT the intended policy objective, but the actual uses of the funds); and e. the intended policy objective to be accomplished by the use of the funds. Answer. The following tables cover obligations for non-project assistance for fiscal years 1994 through 1997 (estimated), by bureau, country, activity or strategic objective, the use of the funds, and the policy objective, or the intended results, of each activity. [Pages 207 - 216--The official Committee record contains additional material here.] Question. Please provide the following information regarding grants, contracts, or cooperative agreements with Southwest Voter Research Institute (SVRI): Is SVRI currently receiving funds through USAID, or has SVRI submitted proposals for any future USAID funds? Answer. SVRI is not receiving funds from USAID/El Salvador and we have no proposals pending. Question. In 1993, SVRI received a grant for $1.3 million for voter registration in El Salvador; are any of the funds previously identified as unaccounted for ($162,000) still unaccounted for? Answer. All expenses were reviewed and certified by an independent U.S. certified public accounting firm which certified that these expenses went for the subgrants. The entirety of the $1.3 million was expended between September 1993 and April 1994. Question. If the grant to SVRI was intended to assist El Salvadoran NGOs, why was nearly 65 percent of the funding used on SVRI's administrative costs? Answer. The design of the project took into account the relative little prior experience of Salvadoran NGOs in the design of non- partisan, get-out-the-vote campaigns. The SVRI/El Salvador staff and in-country costs were largely associated with the SVRI staff providing technical advice and direction to the NGOs in the program planning, development of campaign materials and training workshops. USAID/El Salvador did not consider these to be administrative costs. Similarly, printing and public information costs were related to the printing of program materials for the participating NGOs. Question. Was the grant to SVRI audited? If so, by which organization? Is this organization the same firm used by SVRI as its own accounting firm? If so, why was SVRI allowed to use this firm? Answer. The grant to SVRI was not audited. However, a licensed certified public accounting (CPA) firm, Garza and Associates, certified to USAID/El Salvador the eligibility and allowability of costs throughout the course of the grant. Therefore, a final audit would have been redundant. Garza and Associates was chosen through a competitive bidding process. USAID/El Salvador did not and does not know whether or not SVRI was using Garza and Associates for its own audits in the United States. We expect licensed CPA firms to be honest companies who abide by generally accepted accounting and auditing principles. Question. Did USAID review and/or approve SVRI's selection of subgrantees in El Salvador and Nicaragua? Was the second allocation of subgrants in El Salvador approved by USAID? Answer. USAID/Nicaragua did not approve subgrants under the grant to SVRI. Project activities included organizing an Ad Hoc Committee to mobilize volunteers to undertake field walks in and around Managua in order to promote increased electoral participation by citizens. During the initial start-up phase, SVRI was required to meet with USAID/ Nicaragua on a biweekly basis to discuss the selection of NGOs to participate in the Ad Hoc Committee. In addition, a ``Declaration of Principles'' for the Ad Hoc Committee, which stipulated the non- partisan nature of their work was developed and approved by USAID/ Nicaragua. USAID/El Salvador reviewed and approved the first round of proposed local NGO subgrants prior to the provision of any financial support to these organizations. The second allocation of subgrants to the same NGOs did not require USAID approval. However, all expenses were reviewed and certified by a U.S. independent certified public accounting firm which certified that these expenses went for the subgrants. southwest voter research institute (svri) Question. Is AID currently funding SVRI projects in South Africa, or has it done so in the past? Answer. USAID is not funding SVRI now and a review of our records reveals no funding of any SVRI activities in South Africa in the past. collaboration with japan in children's vaccines Question. The agency has reported that its successful joint effort with Japan on children's vaccine in Central Asia became the model for worldwide cooperation on child health care. Has this model been replicated elsewhere and what has been the result? Answer. USAID's collaboration with Japan in polio and diphtheria vaccinations in Central Asia is continuing in other parts of the world. Coming out of that experience, Japan has taken a major role in polio eradication efforts in India where USAID efforts helped kick off that country's critical decision to undertake Polio Eradication. Then, in Africa, where its engagement had previously focused on infrastructure projects, Japan has joined with USAID and the World Health Organization in supporting a $45 million effort toward eradicating polio in Africa by the year 2000. USAID is also encouraging its field missions to pursue cooperation with the Government of Japan on a range of activities, including emerging and reemerging diseases prevention. poor performance Question. The objectives of USAID's results-oriented management system are to concentrate resources in fewer countries where the quality of the partnership is high and to shift resources away from programs and countries where there is poor performance. Provide the instances where USAID has eliminated programs or countries due to poor performance and/or lack of support from the host country. Answer. Based on its re-engineered operating principles, which emphasize program performance and the achievement of results, USAID is seeking to assure that its scarce resources are managed efficiently and effectively. Accordingly, operating bureaus have made difficult decisions to pare back and, in some cases, eliminate less productive programs. For example: Last September, Jordan's program, Increased Foreign Exchange from Culture and Nature Visitors, was terminated because the program was not achieving its dual objectives of increasing tourist arrivals and expenditures in-country and because difficulties were encountered in setting up the Jordan Tourism Board, an institutional development required for program success. In El Salvador, three activities were shut down because they were not having the intended direct impact on the rural poor, including a coffee development initiative (PROCAFE), a water users' association project, and a credit program. Funding also was eliminated for a $3.9 million economic policy assistance project in Nicaragua; all non-microenterprise economic growth activities in the Dominican Republic, totaling $1.3 million, were terminated; and $1.2 million in Panama to return properties to their rightful owners was eliminated. These programs were discarded because they did not address poverty alleviation as effectively as other programs in the Latin America portfolio. In other cases, the response to poor performance is to revise rather than completely scrap unproductive programs. Sound development practices, in many instances, argue for continued funding if the planned intervention is critical to the economic and social development of the recipient country. In such instances, USAID overseas Missions respond by revising program design and, sometimes, adding staff resources to the program. A case in point is Zambia. The country's Improved Agricultural Production program had been low-rated by USAID headquarters on its performance. As a result, the program has been reconfigured, making it now one of the Agency's better performing programs. Focused on increasing the productive participation of rural enterprises and communities in the Zambian national economy, the revised program helped achieve a 15 percent expansion of non- traditional agricultural exports in FY 1996 and to development of improved sorghum varieties producing yield increases of 36 percent. These and other program interventions are contributing importantly to higher incomes for Zambian smallholder households, and the USAID Mission in Zambia, now confident of the soundness of its investment, has increased funding from $1.1 million in FY 1996 to a planned level of $5 million in FY 1998. In cases of marginal, but not wholly unproductive, performance, the response is sometimes to reduce rather than eliminate funding. For instance, allocations to South Africa's Environmentally Sustainable Urbanization program, Zambia's Improved Democratic Governance program, and Madagascar's Reduced Fertility program were to come down by 60 percent, 68 percent, and 33 percent respectively in FY 1998 compared to FY 1996. In the Asia/Near East region, the Agency has reduced funding for a number of lower performing programs including a regional project on water conflict resolution (cut 60 percent), Morocco's Expanded Base of Stakeholders in the Economy program (cut 50 percent), Jordan's Increased Practice of Family Planning (cut 39 percent), and India's Reduced Fertility in North India (cut 30 percent). These examples constitute selected samples; others could be cited. The important point is that the Agency is making the requisite tough calls and choices, based to the maximum extent possible on results assessments, to the benefit of recipient countries and the U.S. taxpayer alike so that USAID's increasingly scarce resources are not wasted. usaid budget link to performance Question. How much of the FY 1998 budget request is linked to performance by programs and Missions? Answer. Program performance played a major role in FY 1998 budget allocations. A number of other factors--such as foreign policy imperatives, recipient country need, and recipient country self help efforts--continue to play an important role in program allocations. Nevertheless, as a consequence of re-engineering, program performance-- measured by the results and impact of the Strategic Objectives (SOs) in each operating unit's portfolio--is now playing an important role in budget decision-making. USAID is seeking to assure that its scarce resources are managed efficiently and effectively and, guided by performance assessments, operating bureaus have made difficult decisions to pare back, in some cases, eliminate entirely, less productive programs. For example: Last September, Jordan's program, Increased Foreign Exchange from Culture and Nature Visitors, was terminated because the program was not achieving its dual objectives of increasing tourist arrivals and expenditures in-country and because difficulties were encountered in setting up the Jordan Tourism Board, an institutional development required for program success. In El Salvador, three activities were shut down because they were not having the intended direct impact on the rural poor, including a coffee development initiative (PROCAFE), a water users' association project, and a credit program. Funding also was eliminated for a $3.9 million economic policy assistance project in Nicaragua; all non-microenterprise economic growth activities in the Dominican Republic, totaling $1.3 million, were terminated; and $1.2 million in Panama to return properties to their rightful owners was eliminated. These programs were discarded because they did not address poverty alleviation as effectively as other programs in the Latin America portfolio. In other cases, the response to poor performance has been to revise rather than completely scrap unproductive programs. Sound development practices, in many instances, argue for continued funding if the planned intervention is critical to the economic and social development of the recipient country. In such instances, USAID overseas Missions respond by revising program design and, sometimes, adding staff resources to the program. A case in point is Zambia. The country's Improved Agricultural Production program had been low-rated by USAID headquarters on its performance. As a result, the program has been reconfigured, making it now one of the Agency's better performing programs. Focused on increasing the productive participation of rural enterprises and communities in the Zambian national economy, the revised program helped achieve a 15 percent expansion of non- traditional agricultural exports in FY 1996 and to development of improved sorghum varieties producing yield increases of 36 percent. These and other program interventions are contributing importantly to higher incomes for Zambian smallholder households, and the USAID Mission in Zambia, now confident of the soundness of its investment, has increased funding from $1.1 million in FY 1996 to a planned level of $5 million in FY 1998. In instances of marginal, but not wholly unproductive, performance, the response in some cases was to reduce rather than eliminate funding. For instance, allocations to South Africa's Environmentally Sustainable Urbanization program, Zambia's Improved Democratic Governance program, and Madagascar's Reduced Fertility program were to come down by 60 percent, 68 percent, and 33 percent respectively in FY 1998 compared to FY 1996. In the Asia/Near East region, the Agency has reduced funding for a number of lower performing programs including a regional project on water conflict resolution (cut 65 percent), Morocco's Expanded Base of Stakeholders in the Economy program (cut 50 percent), Jordan's Increased Practice of Family Planning (cut 39 percent), and India's Reduced Fertility in North India (cut 30 percent). These examples constitute selected samples; others could be cited. The important point is that the Agency is making the requisite tough calls and choices, based to the maximum extent possible on results assessments, to the benefit of recipient countries and the U.S. taxpayer alike so that USAID's increasingly scarce resources are not wasted. new management system--ig findings Question. In last year's Committee report we asked the AID Inspector General to keep us informed about the progress of the New Management System at the agency. We received several reports last Fall, and a new report was issued on March 31. Reports from the Inspector General, and from individual AID employees, indicate that the financial and procurement operations of the agency have serious problems: a. while individual components of the new system are operational, at least at headquarters, the system is barely being used in the field; according to the IG, ``as of March 1997, none of the NMS subsystems was fully operational''; b. the cost of the new system is reported by the IG to be at least $96 million, rather than the $72 million originally estimated by AID; that's a 33 percent cost overrun; c. in addition, according to the Inspector General, the new accounting subsystem ``is not presently performing most agency accounting functions . . . originally scheduled to be complete by October 1995, none of the . . . components (are) fully operational or have undergone testing for conformance with federal accounting requirements''; d. also, the New Management System was deployed last October before it was complete; the Inspector General reported to us, ``premature deployment can disrupt agency business; create additional vulnerability to fraud, waste, and abuse; and create morale problems''; e. according to the IG, ``NMS is encountering these problems because USAID's acquisition and system development approach deviated from guidelines calling for (1) thorough system tests to verify that the system operates effectively, and (2) adequate implementation planning to ensure that the system meets user needs''; f. also, the IG reports that ``USAID has postponed dealing with design flaws, most of which are not tracked in its problem reporting system''; g. there are reports from the IG of ``a user entered unauthorized data . . . adequate controls over data entered into the Operations subsystem are critical . . .''; this could dramatically increase vulnerability to waste, fraud, and abuse; h. the IG also reports that ``At this time, it does not appear that NMS, as an operational system, meets OMB criteria for continued funding''. Please respond in detail to each of the points cited above. Answer. (a) Operations and Budget components are operational in the field and will remain so through the rest of the fiscal year. The Acquisitions and Assistance and AWACS components are being disconnected in the field to allow USAID/Washington staff to concentrate on work required to ensure the stability of the system. (b) The cost of the system as described by the IG includes personal computer upgrades and other hardware that had to be purchased and maintained whether or not NMS moved forward. Direct NMS project and development costs are estimated to be between $72 and $78 million through FY 1998. (c) Top priority is being given to developing total functionality of the AWACS component of the NMS. (d) & (e) The new NMS management plan addresses these two requirements. We have entered into a contract with FEDSIM to evaluate the entire system. FEDSIM is a GSA contractor and was recommended by the IG to conduct the evaluation. (f) The new implementation workplan deals with any design flaws. (g) The problems with controls over data being entered into the Operations component has been corrected. (h) Within the context of the new implementation workplan, USAID disagrees with this statement. nms--ig report Question. In his audit report of March 31, 1997, the Inspector General made five specific recommendations. Please indicate how and when AID intends to implement each recommendation. If AID refuses to comply with any recommendation, please provide the rationale. Answer. Recommendation #1: Appoint a senior official with information resources management expertise to be the Chief Information Officer. Action: Candidate selected, and announcement of selection will be made in early June. Recommendation #2: Assign a senior manager to manage the NMS project reporting to the CIO, AA/M or USAID Administrator. Direct project manager to work with the CIO to prepare an implementation plan. Action: USAID's Chief of Staff, Richard McCall, has been appointed as NMS manager. Mr. McCall and the NMS Task Force has been directed to and are developing an NMS implementation plan. Recommendation #3: Assign a senior manager to develop and manage a performance-based acquisition plan that requires the contractor to deliver a fully functioning system or a subset of the systemthat meets financial management and USAID requirements. Action: Mr. McCall, the senior manager, and the NMS Task Force are near completion of the plan for each of the components. AWACS plan is complete. Recommendation #4: Suspend AWACS operations until the implementation and acquisition issues are approved. Recommendation #5: Suspend AWACS operations until technical deficiencies are corrected, implementation issues are resolved, and testing shows the system--or a cost effective subset of the system-- operates effectively and complies with federal financial management system requirements. Action: Both of these recommendations are incorporated into the new workplan, which involves disconnecting the field from some of the NMS components and focusing resources on resolving the remaining problems in the core system in Washington. fy 1997 obligations Question. Excluding the cash grant to Israel, please indicate how much has been obligated and disbursed during the fiscal year 1997 through the New Management System through March 31, 1997, compared to funds obligated and disbursed through older, ``legacy'' systems. Answer. For USAID overseas operations, USAID management has recently curtailed overseas implementation of the NMS. As a result, any transactions previously input to the NMS will be recorded for obligations and disbursements in the ``legacy'' system (Mission Accounting and Control System--MACS). Cumulative FY 1997 overseas obligations from MACS as of March 31, 1997 equal $169,819,280.16. We are not able to report what portion of those FY 1997 obligations have been disbursed; however, cumulative overseas disbursements for all fiscal years equal $721,955,731.39 for the period October 1, 1996 through March 31, 1997. Total disbursements from Washington for all appropriations equal $2,502,932,094.95, excluding the Israel cash transfer, for the period October 1, 1996 through March 31, 1997. Of this portion, approximately $144,000,000 was recorded in the NMS. FY 1997 obligations from the NMS are recorded as $666,715,468 as of 3/31/97. comparison of operating year budget Question. Please provide a comparison of the operating year budget (OYB) funds obligated and disbursed by the Agency for International Development (Excluding the cash grant to Israel) for development assistance activities (including Economic Support Fund) through the first six months of fiscal years 1993, 1994, 1995, 1996 and 1997, both in terms of total funds and as a percentage of the OYB for each applicable fiscal year. Answer. The attached table compares the operating year budget (OYB) funds (excluding the cash grant to Israel) obligated and disbursed within the first six months of each fiscal year, 1993-1996, based on new obligational authority (NOA) of each of those years. The funding levels are net of rescissions, appropriation transfers, and FAA Sec. 632(a) allocations to other USG agencies. Information on cumulative FY 1997 obligations cannot be provided at this time. USAID management has recently curtailed overseas implementation of the accounting component of the New Management System (NMS) and is developing alternative procedures to provide a complete status of obligations from NMS and the legacy systems. The development of the USAID ``Flash'' report, expected to be available within the next few weeks, will provide this information. U.S. AGENCY FOR INTERNATIONAL DEVELOPMENT--COMPARISON OF OPERATING YEAR BUDGET, FYs 1993-1996 [Dollars in thousands] ---------------------------------------------------------------------------------------------------------------- Thru 3/31 of fiscal year As percentage of OYB Fiscal year OYB ---------------------------------------------------------- Obligations Disbursements Obligs. Disburse. ---------------------------------------------------------------------------------------------------------------- 1993................................. 3,628,983 381,553 8,727 10.5 0.2 1994................................. 3,160,789 242,971 7,271 7.7 0.2 1995................................. 3,166,670 433,518 40,680 13.7 1.3 1996................................. 2,739,488 65,754 2,771 2.4 0.1 ---------------------------------------------------------------------------------------------------------------- vitamin c Question. The Agency is conducting a pilot program on the role of Vitamin C in preventive health care. What is the current status of the pilot study? Answer. USAID has assessed the uniformity of Vitamin C in both wheat soy and corn soy blends at the point of manufacture. In progress are reviews in Haiti, Tanzania and India to assess the stability of Vitamin C under actual field conditions. Assays of Vitamin C in the blended food samples collected from the field are being conducted by a reputable laboratory in the United States. vitamin c preliminary findings Question. What are the preliminary findings? Answer. Preliminary findings showed that Vitamin C uniformity was poor in the corn soy blend at the point of manufacture. Commodity manufacturers, USAID, and UDA are trying to correct this. Some loss of Vitamin C potency during shipment and storage of the blended commodities overseas was shown. Preliminary results also indicate that Vitamin C is lost during the normal food preparation of these commodities. Perhaps only a small part of the Vitamin C added may be consumed by food aid program recipients. This still needs to be confirmed. vitamin c report status Question. When will USAID complete the study and report to the Committee. Answer. We expect a preliminary report to be ready by mid-June, and a final report by fall 1997, following an Institute of Medicine/ National Academy of Sciences review. child survival--orphans funding Question. In the USAID report ``Saving Lives Today and Tomorrow'', there is a chart (page 36) laying out the funding for categories of child survival from 1985 to 1995. Funding under the category of ``orphans'' begins only in 1990 and is at various levels ranging from $3.4 million to $19.2 million. However, funding for orphans programs has been made available since 1986, when funding was provided under disaster assistance. Also, funding since 1991 has been approximately $10 million per year. Please submit a revised table and an explanation for the inaccuracies in the report. Answer. In the early years of this program, due to variations in coding between missions, changing definitions and lag time in reporting, there were discrepancies in the Agency's overall reporting on funds that were ``attributed'' for children under the ``Displaced Children and Orphans Fund'' (DCOF). In FY 91, to improve the administration of the orphans program, the allocation and obligation of these funds was assigned to the Office of Health and Nutrition in the Agency's Bureau for Global Programs and Field Support. The breakdown provided below reflects the actual amounts provided each year since 1988. Funding for Orphans and Displaced Children: Dollars 1988.................................................... 715,000 1989.................................................... 1,965,000 1990.................................................... 301,884 1991.................................................... 4,960,000 1992.................................................... 6,121,000 1993.................................................... 10,205,000 1994.................................................... 10,016,000 1995.................................................... 10,000,000 1996.................................................... 8,500,000 1997 (Planned).......................................... 10,000,000 -------------------------------------------------------- ____________________________________________________ Total............................................. 62,783,884 polio Question. During my first year as Chairman, the Committee initiated a $25 million annual effort to eradicate polio throughout the world. Although USAID was not supportive of the project at first, we were able to persuade them to join the program that was originally launched by our friends at Rotary International. Can you summarize for us the plans for this program in the coming year? How much is being requested for 1998, and how will be the funds be used? Answer. Following the successful polio eradication efforts in Latin America and the Caribbean where USAID was the major external donor, USAID launched an agency-wide initiative in 1996 to support the global eradication of polio by the year 2000. Thanks to support from Congress and USAID's many partners in the field, funding for polio eradication in 1997 has grown as have USAID's activities. National or sub-national immunization days are planned in 35 countries in Africa, 8 in Asia and 11 in the NIS--reaching over 250,000,000 children. Since the need to find any cases of polio is critical for certifying the world is polio- free, more countries will establish and strengthen surveillance activities in FY 97. In 1997, $15.9 million will be targeted to selected countries in Africa, primarily through WHO/AFRO and UNICEF; $3.9 million will be targeted to India (where more than 50% of the reported cases occur) primarily through UNICEF; and $5.15 million of ``global'' funds will be focused on improving surveillance in South Asia and the NIS through WHO; filling severe country-level funding gaps for National Immunization Days (NIDs) and surveillance in USAID-assisted countries in South Asia (Nepal, Bangladesh and Indonesia); initiating a global communication strategy in collaboration with the Polio Partners (WHO, UNICEF, CDC, and Rotary International), Voice of America and other international broadcasters; supporting a limited amount of research; and, monitoring, evaluating, and disseminating the lessons learned from the eradication effort. USAID continues to utilize the strategy and framework developed in collaboration with the Polio Partners to guide its funding decisions. The strategy has five components as summarized below: Effective Partnerships: Support of coordination between donors, host-country governments, and the private sector to ensure effective implementation or eradication efforts, reduction of funding gaps and increased efficiency at the country, regional and international levels. Strengthened Selected Systems: Training, supervision, and practical workshops to improve the efficiency of vaccine delivery, including administration, proper handling of the polio vaccines, repair and maintenance of cold chainequipment and general program management. Ensuring Effective Supplemental Immunizations: Support of improved planning and implementation of supplemental polio immunization, national and subnational immunization days (NIDs/SNIDs), and mop-up campaigns. Improved Surveillance: Supports the needed inputs to ensure that every case of acute flaccid paralysis (AFP) (a visible sign of polio) is reported to health authorities; that stool specimens are handled properly, reach the laboratories; and are analyzed reliably; and, that the in-country response to finding a case is rapid and appropriate. Information Use for Continuous Improvement: Support of appropriate collection, use and dissemination of key data necessary for high quality program monitoring and evaluation. In FY 1998, USAID hopes to maintain FY97 levels for the Polio Eradication Initiative. These funds will continue to support international, regional and country-level activities in the five elements of the strategy. As countries improve their capacity to plan and conduct NIDs, USAID will shift its focus to increasing attention to facility-based surveillance, community-level case detection of AFP (a visible sign of paralysis), maintaining host country motivation, reaching hard-to-reach populations, and enhancing the linkages between the polio eradication and on-going immunization and disease control efforts. USAID will explore an expanded role for PVOs at the community level to help achieve these results in countries where their participation can make a difference. USAID Missions, WHO, CDC, and host countries will consult together regarding decisions to shift emphasis among technical areas, within countries or between regions. Such decisions will be based on epidemiologic need, progress towards achieving results, host-country commitment, all within the context of country and regional budget levels. The USAID Polio Eradication Initiative is an active area of collaboration under the U.S.-Japan Common Agenda, especially in India and Africa. USAID is pleased that Rotary International, using a $6 million grant from USAID, has been able to develop national polio plus programs in Nigeria and India, two countries with the largest polio burden and critical for the ultimate eradication of polio. federal triangle building Question. Last year AID expended quite a bit of political capital to ensure that it could move into the Federal Triangle Building. The move will begin soon and AID will occupy the most expensive space in Washington, D.C. In terms of cost per square foot, is this the most expensive office space in Washington, D.C.? Answer. GSA conducted a survey in October 1995, and determined that lease rates in the downtown area of Washington, D.C. ranged from $43.13 to $45.79 per rentable square foot. The charge to USAID for the Federal Triangle Building space is $43.84 per rentable square foot. Thus, compared to other buildings in downtown Washington, D.C., GSA assures us these rates are very reasonable. (Note: In various hearings and briefings on the Hill cost per square foot was stated at around $51. This figure is based on occupied space rather than rented space; there are no comparable figures for the private sector on this basis.) total cost of usaid move Question. In December we were told the total cost of the move would be $40.6 million. However, now it appears it will cost $45 million, an increase of 10 percent. Most of this is due to an increase of $3 million in furniture costs. Why didn't you lease furniture rather than purchase it to lower your costs? Answer. On December 27 of last year, Larry Byrne, USAID's Assistant Administrator for Management, sent a letter to John Shank of your staff explaining that extimated costs for USAID's move had increased from $40.6 million to $44.7 million primarily due to an expected increase in furniture costs. In a subsequent letter to Mr. Shank on February 14, 1997, Mr. Byrne explained that the systems furniture purchase was actually made at a price below our previous estimate. Our total budget estimate was then revised downward to $43.6 million. The Agency explored the costs and benefits involved in each type of systems furniture acquisition. We discovered that, given the interest accrual rates used by the industry, it would cost approximately 5% more on a five-year lease, and 3% more on a three-year lease to lease such furniture than to purchase it outright. Vendor leasing interest rates run from 9.57% to 14.49% depending upon length of lease and company. In our case, using the average rates (12.50% for three year period) we would have paid $10,904,262 for $9,440,920 worth of furniture, rather than the $9,724,147 we will pay GSA for managing the selection process and for delivery and installation of $9,440,920 worth of furniture. The best benefit for the taxpayer is provided when we purchase the furniture as we have done. security in the federal triangle building Question. The new building will not include plastic coating on the windows, known as ``mylar'', to prevent injuries from broken glass; such glass is now standard in most new government buildings. In addition, public parking will be allowed in the basement of a building that not only includes AID, but the Customs Service as well. Are you addressing these security concerns? If so, do you believe every reasonable precaution is being taken to protect the employee of AID? Answer. In a letter to David Barram, Acting Administrator for the General Services Administration, on April 3, 1997, the Administrator expressed his continuing concern about the need for mylar in the Federal Triangle Building (FTB) and offered to work with GSA concerning funding for this much needed security feature. He also noted that while the employees of USAID would be more secure in a building that housed only federal parking, we recognize that this is not feasible in a building in which 25 percent of space is leased to non-federal tenants. GSA, in the wake of the Oklahoma City bombing, has issued guidance for increased security requirements in the FTB. USAID will continue to work with GSA on these and other security related issued to assure that all reasonable precautions are taken to protect the employees of USAID. congressional presentation documents Question. Congress is often criticized for the failure to complete its work on time. However, last year the Foreign Operations Act was signed into law on September 30. USAID has had plenty of time to respond to the Act and prepare for the 1998 process. However, the agency has consistently failed to provide information on its programs to the Congress in a timely fashion. For example: a. Under section 653(a) of the Foreign Assistance Act, the Administration is required to submit its funding allocations by country to the Congress within 30 days of enactment of an appropriations act; this submission of programming by country and region did not occur for almost four months, one-third of the way through the fiscal year; b. The President submitted his budget to the Congress on February 6; however, it took USAID five weeks to submit a printed congressional presentation to the Committee; c. Each year, as part of the congressional presentation, the Committee receives a document known as the ``Statistical Annex''; this provides the Committee with detailed information on current programs, projects, and activities of USAID; while a single, unbound version of the report was provided to the Committee the Friday prior to our hearing, it has yet to be printed for all our members. This Committee has the right and the responsibility to review the programs of the Agency in a timely fashion. Why is it taking so long to provide information to the Congress that is required by law? In addition, please provide a response to each of the points raised above. Answer. The Agency's country-based programming process requires time to develop. Moreover, the level of detail required by the Congress in USAID's Congressional Presentation document is time-consuming and requires much effort. The Agency programs are developed at the country level in collaboration with the host government and our aid partners. The program, once approved by the U.S. country team, is then reviewed in Washington. When the budget level is established with the Office of Management and Budget, the country allocations are communicated to the field where the USAID mission then determines what activities can be funded within that level. All these steps of collaboration are necessary in carefully crafting a detailed budget for programs in over 100 countries around the world. Traditionally, USAID's annual CPD has been delivered approximately three to five weeks after the President's budget. This extra time is necessary to finalize the country, regional and central program details and to have the multiple volumes printed, once the President makes final decisions on the Administration's request. Pursuant to an agreement with the Appropriations Foreign Operations Subcommittee, the CPD Statistical Annex is prepared after the foreign assistance appropriations bill has been enacted for the fiscal year. Following enactment of the bill, the Agency must revisit its funding decisions, which were made at the time the budget was prepared, in order to take into consideration the funding of earmarks and directives contained in the appropriations act and the accompanying reports. This involves consultation with the congressional oversight committees prior to establishing budget requirements. Again, the funding allocations are made for each country, regional and central programs, and funding for these programs are then broken out by the field missions and Washington bureaus for each activity within each program. The decisions on the operational year budget are traditionally affected by the budget request for the upcoming year, further slowing the process. Every effort is made to expedite these decisions, but the process does take time. Finally, the 653(a) report is the product of much of the give and take between Washington and the field, as discussed above. It is also discussed with the Department of State as the Department and USAID share responsibility for reporting on the foreign assistance accounts. Every effort is made by both organizations to make these decisions in a timely manner. USAID appreciates the oversight responsibilities of the committee and we will continue to work to improve our reporting on budget and other information to help the committee in carrying out these functions. regional funding priorities Question. Last year the Congress included bill language that urged the Administration to allocate development assistance funds to Africa and Latin America in the same proportion as that requested by the President for fiscal year 1997. However, when allocations were made, Latin America was disproportionately cut by approximately $12 million. For 1998, funding for Africa would be increased from $665 million to $700 million, while Asia would increase from $253 million to $310 million. However, Latin America would remain frozen at $273 million. Indonesia, at $46.5 million, would get more development assistance in 1998 than any country in Latin America. I realize that, as a whole, Latin America is better off economically than some other regions of the world, but we share the same region with these countries. From the time of the Monroe Doctrine it has had a special place in American foreign policy. You mention in your statement that a primary reason for foreign assistance is to develop trading partners. If the President is committed to a free trade agreement throughout the Americas, why aren't we investing more in this region? Why is the budget request for Latin America frozen, while funding for Africa increases by 5 percent and funding for Asia increases by 22.5 percent? Answer. I do not believe there is any fundamental disagreement about the importance of providing adequate levels of Development Assistance to the Latin America and Caribbean (LAC) region. Indeed, while you note that in FY 1997, LAC funding was cut $12 million, I would point out that this represents an adjustment of just 4 percent from a strictly proportional level. This adjustment was due to the need to correct for a sharp cut in FY 1997 funds available for the ANE region as a result of Congressional directives but, even after that adjustment, FY 1997 funding for ANE was down 21 percent from the requested level compared to the 4 percent cut in LAC. The proportionality language is just one complicating factor. The nature of many of the directives causes us to have to increase, not the regional budgets, but the centrally funded budget where many of these programs are managed. Regarding your comparisons of the FY 1998 request with FY 1997 levels, the request attempts to restore what we believe is the appropriate regional balance to the overall Development Assistance program. While funding for ANE is up somewhat from FY 1997, this is in part to compensate for the effects of the sharp FY 1997 cut just mentioned and in part to maintain adequate support for our objectives in the region and avoid premature termination of key development programs there. Even so, the FY 1998 request for ANE is less than what the Administration requested for ANE in FY 1997. Likewise, the request for Africa is less than the FY 1997 request but seeks to restore what we believe is the proper priority to a region with some of the poorest countries with the highest birth rates and greatest development needs of any workdwide. With regard to the aid level for Indonesia, I would point out that Indonesia is a populous nation with tremendous development needs and potential for growth into a major economy and market for US exports; our request works out to a level of just $0.24 per capita whereas the per capita average assistance for USAID-assisted countries in the LAC region is more than three times that level. food security initiative and ghai Question. For the past few years the Agency for International Development has had a $15 million annual effort called the ``Greater Horn of Africa Initiative'', which is designed to enhance food security and regional stability in East Africa. We've been impressed with this program, because it stresses self-help in the region, and tries to coordinate all AID activities toward one goal. This year, the Administration is requesting $30 million for a Food Security Initiative in Africa. What are the elements of this program, and how is it different from the existing Greater Horn of Africa Initiative? Answer. The $30 million budgeted in FY 1998 for the Food Security Initiative is the first, pilot year of a ten-year activity taking an integrated approach to USAID resources in policy, research and technology, and food to stem the erosion in food security in Africa. It will provide supplemental resources to address a growing food and poverty crisis in Africa which, if unchecked, could require emergency response costs of an additional $900 million per year beginning eight years from today. By addressing food security and poverty more broadly today, and preventing growing problems in the future, hungry children will be better nourished, enhanced food security will help to avert costly crises like Rwanda and Somalia, and the U.S. economy will directly benefit. The Greater Horn of Africa Initiative is a vehicle for exploring new ways of preventing crisis. The GHAIseeks to address the twin problems of crisis prevention, mitigation and resolution and food security through a process which emphasizes: African ownership; strategic coordination; regional approaches; linking relief and development; and promoting change in unstable environments. The Food Security Initiative will be implemented in accordance with the GHAI approach. The Food Security Initiative complements GHAI efforts by targeting specific policies, technologies and infrastructure which impact food security. In the first pilot year of a ten-year program, key countries include Ethiopia and Uganda from the Greater Horn, and will extend to Mozambique, Malawi and Mali. Thus, in the Greater Horn region the initiatives will reinforce each other to help avoid an increase in the number of food insecure, malnourished and poor people in Africa. With recent research documenting that half of all childhood deaths are attributable to malnutrition, both GHAI and Food Security Initiative impact in reducing malnutrition will also reduce child mortality and promote child survival. assistance priorities Question. Administrator Atwood, in your statement you mention that AID's economic growth programs have been squeezed due to other priorities. In 1988, economic growth programs, which include agriculture, economic policy reform, privatization, microenterprise, and basic education, comprised 56 percent of the AID budget request. In 1998, it accounts for 30 percent. The 1998 budget would increase environment programs by $62.4 million, or almost 30 percent. It would increase population programs by $45 million, or almost 13 percent. We've already discussed the cut in child survival and disease programs. Why are environment and population programs more important that economic growth, child survival, and disease programs? Answer. I would not say that environment and population programs are more important than either economic growth or child survival and disease programs. What is important is balance in our bilateral assistance program. It is our firm belief that a balanced program of assistance--one which fosters broad-based economic growth, protects human health, helps stabilize the world's population, promotes responsible environmental management, and builds sustainable democracies--is essential if we are to achieve the goal of sustainable economic development. The proposed increases in environment and population programs which you cite, by comparisons to FY 1997 levels, represent efforts to restore balance to the Development Assistance program by reversing the reductions in appropriations for those programs in FY 1997 from the levels requested by the Administration. Questions for the Record Submitted by Mr. Porter criteria for mission closings Question. In your overhaul of USAID, you have reduced staff by over 2,700 and closed 26 missions overseas. (1) What was the criteria for determining what missions to close--countries that had graduated from USAID programs or countries where there was no progress? (2) How many countries have graduated from USAID programs? (3) How many missions are still operating? (4) Last year, you noted that USAID has contacts in some countries where missions have closed or there is an USAID office within U.S. embassies--how is the program working? (5) Has USAID been effective by working in this manner? Answer. In making the difficult decision concerning which country programs to reduce, close or graduate, USAID considered four criteria: Need and Level of Development--Relative need was assessed based on an index that considered standard indicators such as per capita income measured in terms of purchasing power, infant mortality, and fertility. Global Problems--the importance of a country in addressing global issues such as population growth, HIV/AIDS, climatic changes, bio- diversity and democracy was assessed and key countries were identified. Quality of Partnership, Commitment and Performance--while this is a much more subjective criterion,current programs were reviewed to assure that the countries receiving U.S. assistance are making every effort to help themselves. Foreign Policy Considerations--the assessment of U.S. national interests in a specific country or region is a factor which sometimes becomes an over-arching consideration if, for example, the country might otherwise be ranked low in need, relative to others. During the October 1, 1993, to September 30, 1996, period the Agency closed 26 missions. This counts as separate events the closing of the Thailand mission in 1995 and the subsequent closing of the Regional Support Mission in Thailand in 1996. In FY 1997 USAID has firm plans to close the Czech Republic and Slovenia missions. Recent graduates of USAID programs include Costa Rica, Botswana, Thailand, Tunisia and Estonia. Over the next five years the Agency has a schedule for graduating a number of other countries, depending on the achievement of planned results in each case. At the end of 1996, USAID had U.S. direct-hire (USDH) staff stationed in 73 countries. This excludes Donor Coordinators and Inspector General staff which may be located in countries which are not assistance recipients. In several countries where USAID missions have been closed certain program activities have continued to protect prior U.S. investments. These residual activities are necessary to complete programs that began before the close-outs were implemented. In addition, training participants who began their studies before the close-outs were announced are being allowed to complete their training. On a case-by- case basis other initiatives have been approved when they have been determined to be in U.S. national interests. In almost all the African countries, including many of the close-out countries, the State Department is responsible for implementing special self-help and democracy [Sec. 116(e)] grants. The Food Aid activities implemented by U.S. PVOs have been allowed to continue until the end of the current programs. The Agency will scrutinize new PL 480 Title II proposals and will carefully consider continuation requests in non-presence countries to ensure that these resources are integrated with our development assistance programs. Small USAID programs are implemented in certain countries where no U.S. presence is maintained, provided that sufficient oversight can be maintained. These programs are generally working well. However, the vulnerability of these programs and the need to maintain adequate internal controls are primary concerns. USAID normally has one or two U.S. direct hire (USDH) employees stationed in those locations where their presence is essential to maintaining program accountability and for program management. usaid foreign service officers Question: The main service of USAID is the expertise that its Foreign Service Officers are able to provide in developing countries. What percentage of current USAID staff are foreign service officers? (Gore stated four years ago that USAID and State would condense staff in Washington. Zero has been done on this. USAID has spent the past four years fighting the Helms bill to fold USAID into State. Couldn't there be a better use of resources?) Answer. Nearly 75 percent of USAID's total work force, including Foreign Nationals, U.S. Personal Services Contractors and others together with direct-hire Foreign Service Officers, are serving in overseas missions. The expertise provided by these missions is one of USAID's main services to developing countries. About 14 percent of USAID's overseas work force is represented by Foreign Service Officers who provide leadership, technical expertise and program management in these missions. Foreign Service Officers represent 49 percent of USAID's U.S. Direct Hire staff with 66 percent serving in overseas positions. These percentages are virtually unchanged from September 30, 1992. Of the 25 percent of the total work force serving in Washington, 21 percent are Foreign Service Officers and 64 percent Civil Service, with the balance non-USAID Direct Hire. Since September 30, 1992, the total number of USAID U.S. Direct Hire staff declined by over 25 percent. sustainable development Question: A recent CIA report on failed states confirmed the role of underdevelopment in contributing to crises in the Third World. As you know, U.S. exports to developing countries in the 1990s have expanded to 12% annually and is predicted to continue to increase dramatically. I have noted that a substantial amount of development assistance is going specifically to promote ``sustainable development''. Sustainable development is a term that we hear often but rarely learn what it means on the ground. Can you give me an example of a USAID project that is working to promote sustainable development? Also, can you offer an example of a country that has graduated from a USAID program and is now a significant importer of U.S. products. Answer. The mission of USAID is sustainable development, and most of our projects and programs aim at that. By sustainable development we mean development that can continue without depending on resources that won't be available in the future. In part this means development that doesn't depend simply on running down the stock of natural resources, e.g. oil or forests. It also means development that will be able to continue without perpetual dependence on foreign aid or other financial resources that won't be there in the future. For example, our agricultural research projects in Africa are seeking to incorporate sustainable financing mechanisms so that they will not perpetually depend on foreign aid. We are trying to strengthen the links between agricultural research and the private sector, and make the research more customer-oriented, so that research will be financed increasingly by domestic sources. This concern with financial sustainability also characterizes our projects and programs in health, education, and micro-enterprise. Where graduation is concerned, the two most illustrious USAID graduates are Korea and Taiwan. U.S. merchandise exports to these countries in 1995 came to $25 billion and $19 billion respectively. Our exports to both countries have increased by 16 per cent annually over the past decade. Chile and Thailand are more recent graduates, with 1995 merchandise exports at $3.5 billion and $6.5 billion respectively; and average annual growth rates of 18% and 24% (respectively) over the past decade. It is important to emphasize that we do not have to wait for graduation to realize gains from trade. We have seen high and/or rapidly rising levels of exports to many current aid recipients that are making progress in terms of economic performance, e.g. Philippines, Indonesia, and the countries of Central America. usaid coordination with international financial institutions Question. The international financial institutions (IFIs) provide guidance and assistance to governments in developing countries on national policies and projects. AID works at the community level and with PVOs and local NGOs. These two forms of assistance obviously complement one another. Since both multilateral and bilateral assistance are operating with reduced funds, has AID tried to work more closely with the IFIs to coordinate projects? Answer. USAID officers in missions around the world are routinely assigned the function of coordination with IFIs engaged with the host country in activities in which USAID is involved. This occurs through periodic general coordination meetings with principal representatives of donor agencies and in lower level meetings with technical officers from those agencies. These meetings almost invariably involve IFI officers or project representatives. There is a high degree of awareness among donors about the work and partners of the other donors working in a technical area or sector. The linkages between the IFIs and USAID's partners can always be strengthened, but in general the level of mutual awareness is high. At a different level, USAID has detailed employees to work in the offices of the U.S. Executive Directors at two of the multilateral development banks, the World Bank and the Inter-American Development Bank, to coordinate bank activities with USAID-financed activities in those banks' client countries. Through their reviews of bank loans and interaction with bank staff, those liaison officers are able to encourage direct and indirect Bank cooperation with bilateral USAID activities. They are also able to promote more general bank support for the work of USAID partners, including PVOs and NGOs. In part due to initiatives by U.S. Executive Directors in the IFIs, and often with the direct involvement of USAID liaison officers, IFI relationships with PVO/NGO communities has become more collaborative in recent years, both within and outside of USAID-financed activities. usaid coordination with international financial institutions Question. Specifically, you mention promoting projects that use renewable energy sources and reduce greenhouse gas emissions. Is there an effort for AID to coordinate efforts with grants from the Global Environment Facility (GEF)? Answer. As part of its renewable energy activities, USAID has funded its own ``parallel'' GEF program, after consulting with the World Bank. USAID also has collaborated directly with the Bank on the latter's GEF programs. In the first category, USAID has funded programs in India, Indonesia, the Philippines, Mexico, and Bolivia over the past three years. Two examples: (1) In India, USAID has been funding a $12 million program to spur private investment in the use of sugar mill residues as an energy for producing and then selling electricity. (2) In Indonesia, USAID has been funding a $2.8 million pilot project testing the economic and technical feasibility of using wind energy as a resource for electrifying remote villages. In the second category: (1) USAID helped the World Bank develop a financingpackage combining a loan and GEF grant for Indonesia ($48 million) that is intended to promote markets for ``solar home systems'' in rural areas. This program will be the largest of its kind in the world, benefiting 200,000 homes in the first round of loans. In addition to that assistance, USAID has funded the training of the entrepreneurs in Indonesia who will avail themselves of the loan and grant money and move the market. (2) USAID assisted the International Finance Corporation in developing the Renewable Energy and Energy Efficiency Fund (REEF), which will combine GEF grant money and private capital to offer investment capital of approximately $150 million for projects worldwide. (3) In Brazil, USAID is assisting the World Bank in preparing a rural electrification loan/GEF grant that focuses on the use of renewable energy technologies. The total package is expected to reach $100-$200 million. (4) Also in Brazil, USAID assisted the World Bank in designing a biomass gasification/gas turbine pilot project. The project subsequently received a World Bank GEF commitment of $30 million. mongolia Question. For fiscal year 1997, USAID is planning on providing $10 million in assistance for Mongolia. A large portion of this assistance is going to buy spare parts for Soviet made energy plants. Knowing Mongolia's vast territory and weather, is there a strategy to promote renewable energy in Mongolia? Answer. With FY 1997 funds USAID is providing $7 million in emergency support to Mongolia's energy sector, for spare parts and consumables for the power plants and coal mines and heavy equipment for the coal mines. Responding to an urgent request from the Government of Mongolia (GOM) regarding a lack of heat in health and education centers in remote provinces not on the electric grid, USAID has agreed to purchase and install American-made diesel generators in five of these provincial capitals over the next two years. USAID's goal has been to move as quickly as possible out of the emergency energy sector to more sustainable development of Mongolia's energy sector, such as improved energy policy, restructuring the energy sector towards privatization and conservation methods including metering. Among our planned future activities in renewable energy is a seven-month analysis of wind energy resources in Mongolia, which is scheduled to begin in a few months. This analysis will be conducted by the U.S. Department of Energy. cambodia rule of law program Question. I have recently returned from Cambodia where I had the privilege of seeing some of the best-run USAID programs in the world. These programs are private-public partnerships with NGOs and PVOs, and they are doing a tremendous job leveraging a very small amount of assistance to make a huge difference in the lives of people in Cambodia. One of the most successful and most desperately needed programs there is the Rule of Law program. During the Khmer Rouge reign of terror, all the legal professionals in Cambodia were either killed or fled for their lives. The Rule of Law program is training new legal professionals, preparing the legal framework for the upcoming elections, and helping to resurrect the Cambodian legal system. Many of the grantees have told me that they need at least another year to make their programs and the gains they have made self-sustaining. (a) Would AID consider providing extensions to these programs? (b) What is the future of the Rule of Law program in Cambodia? Answer. (a) Yes. USAID has long term agreements in place under its rule of law (ROL) program and is presently negotiating extensions to a number of them on the basis of experience gained in the past few years. Current grantees include: The Asia Foundation (provides grants to indigenous democracy and human rights NGOs, including two NGO elections coalitions); the International Foundation for Electoral Support (provides assistance to the Government in developing electoral legislation and planning for elections); the International Human Rights Law Group (provides training for public defenders and staff in the judicial system, including judges); the American Bar Association (strengthens the nascent Cambodian Bar Association and helping to modernize the country's commercial, economic, and business codes); the Asian-American Free Labor Institute (helps the Ministry of Labor to develop and implement labor laws and dispute resolution systems that meet international standards); and the University of San Francisco (provides legal education to the law community through the Community Legal Education Center and universities, as appropriate). (b) Efforts to improve the rule of law have been at the core of our program in Cambodia from the start, and we intend to continue this emphasis for the foreseeable future. More than $29 million has been allocated for these efforts to date, and another $18.8 million is planned for FYs 1997 and 1998. Our ROL programs seek to increase the participation of civil society in the democratic process; strengthen the protection of human rights; increase the independence, professionalism, and transparency of the judicial system; and help the country prepare for free and fair elections in 1998 and beyond. victims of torture: usaid response to committee concerns Question. Torture is one of the most effective weapons against democracy and human rights. Both Republican and Democratic leadership of this Committee have urged AID to integrate an effort to combat and treat torture into its human rights and development program. The Committee has identified the UN Voluntary Fund for Victims of Torture and the Centers for Victims of Torture as potential partners for this effort by AID. (a) What steps has AID taken to meet the Committee's concerns on this point? What are AID's plans to work with these organizations for fiscal year 1998? Answer. Regrettably, victims of physical and mental persecution are found in many countries. It is our experience that torture often is a symptom of authoritarianism or anarchy. USAID's democracy, governance and human rights programs are attempting to treat the causes and consequences of torture. Strengthening the rule of law and respect for human rights are our objectives. This includes protection of people against arbitrary use of authority and against lawlessness. Successful U.S. diplomatic and democracy and governance assistance efforts hopefully will quell the use of torture. But there remain the unfortunate victims of past and present abuse. USAID is supportive of the work financed by UN Voluntary Fund for Victims of Torture. The U.S. contribution this year, from the International Organizations and Programs account, will be $1.5 million. USAID has supported the Center for the Victims of Torture to carry out a program in Turkey, providing training and technical assistance to the Human Rights Foundation of Turkey and the Turkish Medical Association to build clinical capacity in treatment centers. The grant may lead to a multi-country conference and possible follow-on activities on the treatment of torture victims. USAID also is involved in other activities that relate to the needs of victims of torture. The Displaced Children and Orphans Fund supports the psychological and social reintegration of children affected by war. Major activities are currently funded under this program in Angola, Eritrea, Liberia, Rwanda, the Former Yugoslavia and Vietnam. The USAID War Victims Fund provides prosthetics and other related orthopedic assistance to civilian victims of war. The Fund currently operates in Angola, Cambodia, El Salvador, Laos, Liberia, Mozambique, Sri Lanka and Vietnam. Although there is no specific targeting of torture victims, the beneficiaries are primarily traumatized civilians who have lost limbs as a result of landmines and other weapons. Under the Trauma, Social Welfare, and Humanitarian Assistance project, USAID supports NGO programs that address issues of community health and training activities for mental health providers, teachers, volunteers and doctors working with traumatized refugees and displaced populations in the former Yugoslavia. Under this project, USAID has supported the following activities. Catholic Relief Services which is working with local psychological associations to provide training on post-traumatic stress syndrome and other psychosocial treatments. USAID provided $1.9 million in support of this effort. The International Rescue Committee which is addressing the psychosocial needs of war-traumatized women, children and other vulnerable groups by developing local organizations' capacity and to fund specific activities in both Bosnia-Herzegovina and Croatia. IRC has received a total of $8.5 million from USAID. In Croatia, the Center for Attitudinal Healing has received funding from USAID to build on its experiences working with Vietnam veterans using the group counseling approach to work with refugees and displaced persons in the camps and settlements adversely affected by the horrors of war. victims of torture: usaid response to committee concerns Question. There is still a significant number--upwards of 6,000 in Moscow alone--of Stalin era political prisoners in Russia who suffered torture during their incarceration. These people are generally 60 to 80 years old, live in extreme poverty and still suffer the aftereffects of torture. The Compassion Center in Moscow is working to assist this population, with support from the UN Voluntary Fund and other donors. Is their potential for AID to work with this organization and support the important work it is doing to help those who were instrumental in making the cracks in the Soviet empire which finally brought it down? Answer. Concerning Stalin era victims of torture and the work of the Compassion Center in Moscow, USAID does not have a program directly supporting that institution. I also have asked USAID staff to look into that possibility. asha fy 1997 funding level Question. In the FY 97 Omnibus Appropriations Bill Conference Report, this committee, along with our Senate colleagues, worked out a compromise on the funding for the American Schools and Hospitals Abroad (ASHA) program whereby USAID was directed to level fund this program for Fiscal Year 1997. It is my understanding that USAID has not yet made a request for proposals for these grants, even though the competition process should be well underway by now in order to meet the September 30, 1997 end of the fiscal year deadline for disbursing these funds. Given the complexity of the normal grantmaking process for this program, it seems unlikely that USAID will be able to administer such a process in the time available. a. What steps are you taking to meet USAID's commitment to level fund this program for fiscal year 1997? Specifically, how does USAID intend to meet the September 30th deadline? Answer. FY 1997 new obligational authority (NOA) funding for ASHA is $14.6 million. Approximately $5.750 million of FY 1996 carryover will be combined with $5.0 million of the FY 1997 NOA and used to complete funding for a competitively selected set of American School and Hospitals Abroad (ASHA) proposals that were reviewed and approved in the summer of 1996. As stated in the FY 1998 Congressional Presentation, we are combining the balance of FY 1997 NOA funding of $9.6 million with $5.0 million of FY 1998 NOA funding (total $14.6 million) to finance a new ASHA competitive grants award process in calendar year 1997. The development assistance funds used for ASHA programs are two-year funds, and thus can be carried over early FY 1998 for obligation beginning this calendar year. Question. Is it USAID's intention to regularize its procedures for ASHA, including permanently streamlining the grant process, for fiscal year 1998 and beyond, in order to avoid the concern and confusion that have occurred this fiscal year due to the delay in beginning the grant- making process. Answer. Yes, the Agency does intend to regularize the ASHA program, including incorporating the procedures we have used to streamline the competitive process. For example, the Agency has published in the Federal Register a request for proposals by June 30, 1997 and has sent letters to former ASHA grant recipients inviting them to submit proposals by that date. We expect to begin making awards before the end of this calendar year. campfire Question. The request for USAID's Communal Areas Management Programme for Indigenous Resources (CAMPFIRE) for the next five years is $28 million. This is a significant increase from the $8 million that was spent for the first five years of the program. Can you please tell me in detail how these funds are planning to be spent? What percentage of funding is used for elephant hunting? Answer. Our assistance to CAMPFIRE is currently planned at US $20.5 million in regional and bilateral funds over a five-year period from FY 1995-1999 (with obligations being incurred only through FY 1998) and supports: Wildlife conservation ($3.1 million). This includes research and field work of ecology of wildlife habitat, used to define carrying capacity, and on alternative resource options. Activities are implemented primarily by the Department of National Parks and World Wildlife Fund. Community development ($3.9 million). This includes staff training at the district level as well as technical support so that district councils can comply with the technical and financial regulations required if they are to make use of authorities provided them by the Government of Zimbabwe. The majority of funds will go via the Zimbabwe Trust, which works with district councils, wards, villages and households to strengthen their capacity to manage their natural resources. Grant funds to communities and rural district councils ($6 million). This includes building activities and support for the establishment of nature-based tourism infrastructure, such as electric game fencing, waterhole development, and trail establishment. Regional Communications and training ($1.2 million). This includes the exchange of information between nations with similar resource applications, and the sharing of lessons learned beyond Southern Africa. This component is implemented by ACTION, an environmental magazine, and the Africa Resources Trust. Planning and applied research ($2.1 million). This includes socio- economic and biophysical research, monitoring and evaluation of program impact, and program coordination with the Government of Zimbabwe and Southern African Development Conference (SADC). Under this component the University of Zimbabwe (Centre for Applied Social Sciences) collects and analyzes social and economic data from participating program areas. Technical/administrative assistance ($2.7 million). This includes grant management and assistance to CAMPFIRE Association and other members in setting up administrative, financial and technical support systems. This component is implemented primarily by U.S. consulting firms (Development Alternatives, Inc. and Price, Waterhouse and Company). USAID management/audit and evaluation ($1.5 million). This includes technical oversight by the mission, as well as audits and evaluations. Elephant hunting: USAID funds do not subsidize trophy hunting of elephants and other wildlife. CAMPFIRE does include assistance to communities to establish hunting concessions on their communal lands. This type of concession was granted decades ago to commercial farmers by the Government of Zimbabwe and, through CAMPFIRE, is being extended to the country's rural poor. The result of this activity is that communities are increasing efforts to limit poaching and are maintaining habitat suitable for elephants and other wildlife. By doing so, the land dedicated to conservation has increased to over 30 percent of Zimbabwe's total land area, and unregulated hunting and poaching has been reduced, which benefits both the animal populations and the local communities. In addition to direct cash payments to households, local communities are using CAMPFIRE revenues from the hunting concessions to improve their quality of life through investing in schools, water supplies, health clinics and other community-level improvements. Question. Twenty-eight million dollars seems to be a very large sum of money for protecting natural resources in Zimbabwe. For every dollar USAID invests in this program, how much actually makes it into the pockets of the local people--at the village level not the communal? Answer. While there are some instances by village committees of direct cash payments of CAMPFIRE revenues to male and female heads of household, the majority of CAMPFIRE allocations from the rural district councils (RDC) (of which there are 57 country-wide) go to lower governmental administrative units (wards and villages) and have been used for social services (clinics, schools), village infrastructure (wells, wildlife fences, game guards, road improvement) and revenue producing enterprises (campgrounds, restaurants, etc.). The percentage of revenue used at the RDC-level versus lower governmental units has varied by each RDC, ward and village and over time. To date, an average of 53% of total revenues ($4.088 million) has been disbursed to communities as cash dividends or as community projects (schools, grinding mills, clinics, etc.). An additional 20% ($1.575 million) has been used for wildlife management/natural resources management activities. In addition, some revenues have been used to strengthen the capabilities of the rural district councils. Question. Will USAID have to continue to support this program or will it become self-sustaining in the near future? Answer. We think that, even with Zimbabwe's weak tourism infrastructure, CAMPFIRE would probably be financially sustainable based on sport hunting. There are other wildlife-based activities, such as game ranching and eco-tourism, which have potential. Districts without substantial elephant populations are exploring ways to utilize other natural resources--such as forestry, traditional plants, etc., in order to find environmentally sound economic development activities. Question. What program operates under or in coordination with CAMPFIRE to measure the impacts of legal elephant hunting in Zimbabwe's elephant population? Answer. The cognizant agency responsible for setting quotas and monitoring wildlife populations is the Government of Zimbabwe, Ministry of the Environment and Tourism, Department of National Parks and Wildlife Management. In addition to other international donors, USAID has and is supporting them in fulfilling that mandate. USAID also supports the World Wide Fund for Nature/Zimbabwe for, among other activities, ecological monitoring support services. Question. Finally, it has been suggested that CAMPFIRE funding is being used indirectly to lobby for a lifting of the international trade ban on ivory. Considering U.S. support for this ban since its establishment in 1989, is this accusation valid? Answer. There have been allegations that CAMPFIRE member organizations have been using U.S. tax dollars to lobby the United States Congress to change the U.S. position on the ivory trade ban. Our review of these allegations has not found any use of funds for unallowable costs including unallowable lobbying. USAID's funds are earmarked for specific development activities and all grantees are notified of the restrictions placed on these monies, including U.S. regulations on lobbying (OMB Circular A-122). Had we found that funds were so used, we would have taken appropriate and timely action. Our General Counsel's office has concluded that there were no violations of U.S. lobbying restrictions by our grantees or sub- grantees. Nonetheless, because of the high degree of interest in the program's international outreach efforts, USAID has decided to eliminate these activities from the program in order to concentrate its resources on its important work in Zimbabwe. Questions for the Record Submitted by Mr. Wolf humanitarian assistance and nagorno-karabakh Question. As you know, over the past several years I have supported efforts to modify Section 907 of the FREEDOM Support act to make it easier for humanitarian aid agencies to meet the needs of the refugees and other needy people in Azerbaijan. I have also tried to encourage USAID and the State Department to provide humanitarian assistance to the people of Nagorno-Karabakh. This is not happening and I remain concerned about what I perceive to be an imbalance in U.S. policy. U.S. humanitarian assistance (within U.S. budgetary constraints) should be provided to people who need it. We should not be taking sides with humanitarian assistance. Azerbaijan receives U.S. humanitarian assistance but Nagorno-Karabakh does not. Why can't USAID and the State Department take more leadership with regard to this issue? What is wrong with providing humanitarian assistance to the people of Nagorno- Karabakh through NGO's? Would USAID support aid through NGO's? Are there any other disputed regions in the world where USAID has refused to provide humanitarian assistance through NGO's? Answer. The United States Government provides humanitarian assistance to the people of Nagorno-Karabakh through grants from the Department of State Bureau for Population, Refugees and Migration to the International Committee of the Red Cross (ICRC). As in other parts of the world, in the Caucasus the United States does its best to respond to the most critical humanitarian assistance needs wherever they may be. The United States does not take sides with humanitarian assistance. All available information, including anecdotal information from various sources, indicates that currently there are no critical, unmet humanitarian assistance needs within Nagorno-Karabakh. Humanitarian aid needs in Nagorno-Karabakh appear to be similar to those in other areas of the Caucasus region. Provision of USG humanitarian assistance is needs-driven. Because funds available for humanitarian activities are limited, only the most critical needs can be addressed. The ICRC, which takes the lead in providing a humanitarian response in conflict areas, bases its humanitarian aid solely on observed needs. Because the ICRC is neutral and remains detached from all political issues related to conflict, we are confident any critical unmet needs would be reported. The USG also takes into consideration private and non-U.S. official aid flows, which play a large role. The Hayastan Fund (a private donor with the official sanction of the Government of Armenia) reports $3.82 million spent on humanitarian assistance in Nagorno-Karabakh between 1995-96, and this is only one such private aid organization. An important part of the humanitarian and economic assistance picture for Nagorno-Karabakh is official assistance from the Republic of Armenia. The very substantial earmark of $95 million in FREEDOM Support Act funds for Armenia, by freeing up other Government of Armenia resources, provides significant opportunities for the Republic of Armenia to provide additional non-military assistance to Nagorno- Karabakh. Given the small population in Nagorno-Karabakh, it is likely any truly critical needs could be readily met by assistance from official and unofficial sources. The ICRC is the best instrument for delivery of any U.S.-funded humanitarian assistance to Nagorno-Karabakh. It is a professional organization, with ample experience in conflict zones and provides not only humanitarian aid but promotes protection of human rights, a critical task in Nagorno-Karabakh. There are other regions of the world where specific conditions have made it unsuitable to channel U.S. humanitarian assistance through NGOs, for example Chechnya, North Korea, and southern Iraq. Political considerations usually do not affect allocation of resources for humanitarian relief, but they may affect the way such aid is delivered. The U.S. continues to respond to humanitarian crises based primarily upon assessed need. pvo's and child survival Question. I share the Chairman's commitment to child survival programs and am concerned that USAID has not requested specific funding for the child survival account in the FY 1998 budget. I am also concerned about GAO's recent report on child survival that concluded that child survival monies are not necessarily targeted to countries with the highest child death rates. Last year, the House report stated that child survival funds in the account are intended to be used for traditional child survival programs--activities that are provided to save the lives of children, such as immunizations, provision of vitamins, and pneumonia treatment-- and not diverted to more indirect and less cost-effective use. Can you reassure me that these activities will continue to receive the highest priority for funding from the child survival account? Answer. USAID has clear guidance on the appropriate use of child survival funds and, in March, reissued that guidance to all of its missions. The guidance, which USAID follows, clearly reflects the legislative mandate for child survival activities. In accord with that guidance, the majority of child survival funding goes to activities that you mention (immunization, micronutrients, and pneumonia) and the systems that support those activities. Although linkages of child survival to reproductive health, AIDS, water, sanitation and other illness prevention activities in the home are clear, we shall continue to insist that the majority of funding be used to address the key childhood killers (pneumonia, diarrhea, malnutrition, and malaria) with specific indicators to assure these programs have the desired impact. These health problems are responsible for over 70% of childhood deaths in developing countries. USAID uses the magnitude, (i.e., number of child deaths) as well as the severity of infant and child mortality (as measured by infant and child mortality rates) as criteria for the use of Child Survival funds. Although within resources available, USAID cannot work in all countries in which there is a need, countries in which the Agency is supporting child survival-related programs are responsible for more than 80% of world child mortality (excluding China). pvos and child survival Question. I am also concerned by reports that the percentage of the child survival funds that go to PVO's (non-profit organizations) has declined when overall funding for the account has increased in recent years. PVO's are very successful in leveraging private funds with public funds and have over time demonstrated their ability to deliver aid at the grassroots level in a cost-effective and efficient manner. Though some organizations are better than others, for the most part, they have low overhead and administrative expenses. Moreover, PVO's have increased their ability to deliver more technical kinds of assistance. As foreign aid dollars have become more scarce, it is important to utilize PVO's to the greatest extent possible to ensure that the highest percentage of our aid gets to the people who need it. Of the $500 million appropriated for bi-lateral programs in the child survival account for FY 1997, how much went to non-profit private voluntary organizations (PVO's) such as World Vision, CARE and others? How much went to for-profit contractors or other NGO's? Answer. Although we do not yet have figures for funding by such categories for FY 97, we can provide information on FY 96 funding to Non-governmental Organizations (NGOs). Our definition of NGOs includes ``nongovernmental organizations, organized in any country (including the United States) either formally or informally, that is independent of government, excluding for-profit enterprises and religious institutions, except for religiously affiliated development organizations.'' This definition includes universities, but as noted above, does not include for-profit organizations. The Agency's tracking system shows that in FY 96, 36 per cent of $316 million in funding for child Survival, or more than $100 million, went to NGOs, including PVOs. We believe this is in fact an underestimate based on a one time survey we carried out in FY 95 as a part of the General Accounting Office audit of the Child Survival program. That survey, which asked field officers to review funding allocations to child survival implementers in more detail, found that the number was closer to 50% (this closer review by field officers focusing on child survival allowed us to capture more complete data on sub-grantees). The rest of the funding went to a combination of for-profit contractors, multilateral organizations, and host governments. One of my priorities as Administrator of USAID has been to increase USAID's collaboration with the private and voluntary community and other indigenous non-governmental organizations. To cite only one program, our current portfolio of over 70 PVO Child survival grants to 23 U.S. PVOs totals $59.5 million. This is in addition to the substantial amount of work carried out by USAID Washington and field missions with U.S. and indigenous PVOs in the health and population sector. Questions for the Record Submitted by Mr. Forbes child survival and disease account Question. I want to express my support for the child survival and diseases account created by this committee. This is one of the most important and effective USAID programs. Given the successful nature of child survival programs, why was funding for child survival and diseases programs cut in the Administration's 1998 budget request? Answer. Both the GAO and I agree with you about the effectiveness of this program for which Congress has indeed been a strong impetus. The Decade Report on USAID's Child Survival Program, which has just been released, discusses the accomplishments of the program as well as future challenges. Nonetheless, given overall cuts in development assistance since 1996, even programs such as Child Survival have had to take reductions. And, although an FY 1998 overall increase has been proposed for the international affairs budget over FY 97 levels, there is only a small increase in for Development Assistance, especially for a new Food Security Initiative. Also, in order to retain some balance to our overall program, we have made a minor decrease in child survival funding. microenterprise (funding) Question. Microenterprise is one of the most effective strategies USAID supports, providing small loans that allow poor people to start and expand individual businesses. Not only do these programs reduce poverty, they recycle foreign aid dollars as loans are repaid allowing new loans to be made. I want to express my support for programs reaching the very poor, especially women, and urge that more of USAID's microenterprise resources reach programs serving these people. In light of the success of the microenterprise program and its support in Congress why has the Administration reduced funding for the program over the last several years? Answer. USAID's recent budget situation forced us to trim the target for microenterprise in 1996 from the level of $140 million, originally announced at the start of our microenterprise initiative, to $120 million. Nevertheless, we have protected microenterprise relative to other parts of the budget. Microenterprise has risen as a percentage of the DA/DFA budget from 6.9% in FY95, to 7.3% in FY96, to 7.5% in FY97. Given that our development budget is not projected to increase significantly except for special initiatives such as Food Security, we are maintaining the $120 million target level for 1997 and 1998. Our commitment to microenterprise remains firm, as shown by our recent renewal of the microenterprise initiative for an additional two years, but our budget situation does not allow us to increase overall funding. microenterprise (partnerships) Question. Many of USAID's successes in microenterprise have come through its partnership with non-governmental organizations. As USAID builds its program, how will it strengthen its mechanisms to build these partnerships? Answer. Most of USAID's microenterprise programs are implemented by non-governmental organizations (NGOs), including U.S. private voluntary organizations (US PVOs) working abroad and indigenous organizations working in their own countries. USAID will continue to support the U.S. PVOs through centrally-funded programs such as the Matching Grant Program of the Bureau for Humanitarian Response and the Implementation Grant Program of the Global Bureau's Microenterprise Development Office. It also will continue supporting indigenous NGOs through field- based mission programs. USAID finds that these mechanisms are working well to create partnerships with NGOs of all types. microenterprise (goals) Question. While I know that you have a strong commitment to microenterprise programs reaching the poor, USAID has not yet reached the goal set in your 1994 initiative launched with Congress, to assure that by the end of 1996, half of your total microenterprise resources would be supporting poverty lending programs (loans under $300). How can we work with you to ensure that this goal will be reached in the very near future? Answer. USAID has found that an increasing proportion of its microcredit assistance is going to poverty lending programs. In 1995, 42 percent of our total microenterprise resources were devoted to poverty lending. We are in the process of surveying our 1996 program recipients to learn what proportion of their loans are below $300, and will share the information with you when it becomes available in September. We would like to work with you on our microenterprise initiative, which we have just renewed after dialogue with both Congress and practitioners. In the initiative we are pledging that two- thirds of all clients in institutions supported by USAID's microcredit programs will be receiving loans less than $300, and that half of our support to microcredit will support poverty lending. Your support for the microenterprise initiative and the continuing dialogue on this issue would be most helpful. Questions for the Record Submitted by Mr. Kingston aid to russia Question. I am very concerned about the dominance of organized crime over the economy in Russia. It is my impression that some of these groups are more efficient in collecting ``taxes'' from entrepreneurs in Russia than the government itself. Although I suppose that does not say too much at this point. In fact, I have been told that mafia groups even maintain de facto control over many major ports in Russia. These problems are bound to have an extremely negative impact on the success of economic liberalization efforts there. Can you please evaluate the nature and scope of the problem for me? Answer. Organized crime has become a significant economic force in Russia. Russian President Yeltsin told the Duma (Parliament) in March of this year that ``the problem of economic crime and corruption has grown from what was clearly a police matter, as it is in most countries, into a political issue. The criminal world has openly challenged the state and launched into open competition with it.'' Deputy Prime Minister and Minister of Internal Affairs Kulikov recently said that thirty to forty percent of the national income circulates in the shadow sphere and, over the last five years, capital flight has amounted to roughly $150 to $300 billion. While organized crime is engaged in illegal activities, particularly extortion, financial fraud and the smuggling of raw materials, it is difficult to obtain accurate statistics as the shadow economy also includes Russian citizens hoping to evade the country's high and unpredictable taxes and tariffs, its maze of regulatory rules, and perceived or actual corruption. This is also having a deterrent effect on foreign investment in Russia; US investment in Russia is already markedly less than in smaller Eastern European countries. Lastly, increased economic crime is worrisome as many ordinary Russians may equate reform with crime and corruption. organized crime Question. Does organized crime also interfere with development projects? To what extent and in what ways? Answer. It could potentially interfere, but we have built in a number of safeguards to minimize its impact on our programs. Even though we and other donors still have much to learn concerning the full nature and depth of criminal activities in Europe and the NIS, we know from our experience other regions of the world that these activities can sometimes present a significant barrier to the USG and the host country achieving our developmental goals. For example, entrenched interests benefitting from crime may become obstacles to enactment of major reforms. Because we knew so little about the governments or people that we would be working with when we began the CEE and NIS programs a few years ago, USAID's general approach in the Central Europe and the NIS has been very cautious and includes several safeguards: (i) our assistance consists of technical advice, exchanges, humanitarian components, sometimes equipment which is closely tied to a development objective, not cash; (ii) we have provided most of our assistance through U.S. contractors or grantees who are subject to routine audits and must observe normal accounting standards, instead of to governmental entities or individuals (iii) we have devoted much of our assistance to reformers we know in the non-governmental community; and (iv) we have required training participants to be cleared through our Embassies and have developed criteria for selecting participants in the numerous training programs we have funded. We believe these kinds of safeguards, coupled with USAID's rule of law program and the law enforcement efforts of various U.S. agencies, are protecting our assistance programs from the direct impacts of crime. We recognize, however, that long-term efforts are required before there will be clear commercial laws which provide fair and open rules by which business and government operate; effective regulation and enforcement; transparent and accountable corporate governance; and an effective independent media to expose crime and corruption where it exists. Much of our economic and democratic reform efforts are aimed squarely at this set of issues. aid to russia Question. How is the United States trying to prevent interference in aid implementation? Answer. The U.S. supports the continuing efforts of international financial institutions (IMF and the World Bank) to address transparency and safe and sound management of the shift to market economics. These leveraged reforms will help assure that all international assistance to Russia is protected against criminal activity. The U.S. also supports an anti-crime training and technical assistance program that funds U.S. federal and state law enforcement and regulatory agencies to work with their Russian counterparts to prevent, investigate, and prosecute criminal activity in Russia's financial sector. The FBI is also working directly with the Ministry of Interior to improve Russian officials' capacity to combat international organized crime. Question. I read a very brief editorial in the Washington Post last month that charged that U.S. proposals to fight Russian crime may even strengthen the institutions that are part of the problem. To be honest, I don't know what they meant by that. At the risk of straying to the edge of your jurisdiction over this problem, can you address that statement? Answer. No agency or institution is immune from the influence of organized crime or from corruption, whether in Russia or the United States. The USG is working with the Russians to address the influence of organized crime and corruption across the public and private sectors, including in the powerful military, law enforcement and criminal justice agencies. We are recommending the Russians adopt the procedures that the US has found foster transparency and honesty in public and private organizations. Agencies and firms need to establish transparent systems for recruiting, promoting and paying employees. Offices of Professional Responsibility and disciplinary procedures must be established and followed. Independent agencies such as the Inspectors General and the Government Accounting Office must be established to assure integrity in the public sector. The Russians are committed to reform. partnership for freedom: what is changing? Question: The Partnership for Freedom is characterized as a refocus of our aid to the New Independent States on economic and grass roots linkages. It has been my impression that this has been at least a large part of our focus for 3 or 4 years now in the NIS. Will you explain what is changing (besides the price tag)? Answer. Key elements of the USAID program in the NIS over the past few years have been the installation of an institutional and regulatory framework to support the transition from command economies to market democracies. Now we are narrowing the focus on trade and investment issues that support economic growth and are expanding grass roots linkages. The main difference between our program to date and the Partnership for Freedom (PFF) is a shift from top-down technical assistance to mutually-beneficial partnership. There are still significant areas, however, such as tax reform in Russia, in which work requiring technical cooperation must continue. The Administration's request of $900 million for the FREEDOM Support Act in FY 1998 is based on the belief that the United States must stay engaged in the changes now taking place in this strategically important region of the world until well into the next decade. The new PFF initiative would change the emphasis of our engagement, from assistance to partnership first with Russia, and subsequently with the other NIS countries. It builds on the successes of our assistance program while focusing on trade and investment, exchanges, and cooperative activities. This initiative will support U.S. commercial involvement in the NIS countries and help support partnership activities by private and public U.S. organizations. One example of a PFF activity is the Regional Investment Initiative in Russia that was signed by Vice President Gore and Prime Minister Chernomyrdin at the February 1997 meeting of the Gore-Chernomyrdin Commission. It establishes a new arrangement whereby U.S. Government assistance will be focused on several regions in Russia to stimulate real economic growth by reducing impediments to trade and investment. President Yeltsin, at the recent Helsinki summit, called for increased U.S. and other foreign trade and investment. These developments, coupled with the recent changes in the Russian cabinet, give us reason to believe that Russia is now prepared to support reforms more vigorously. It is in the interest of the United States to help them do that. economic growth Question. On page 18 of your written testimony you discuss the agency's difficulty administering economic growth programs. As a new member of the subcommittee I'm not sure what the Hill directives are you were referring to, although I do know we had a lot more earmarks in the bill last year than we should have. It seems, though, that the fact that the various challenges you referred to have a particularly negative impact on economic growth programs as a result of the agency's own prioritizing process. If it is really a primary concern, I would think the agency could have maintained greater focus in this area. Who made the ultimate decisions which squeezed out economic growth oriented projects? Answer. The squeeze on economic growth programs is due to the combined effect of cuts in appropriations and Congressional directives requiring increases in certain programs. To illustrate, in FY 1996 USAID's Development Assistance (DA) account was cut by more than 20 percent from the Administration's request level. Within this reduced level funds had to be set aside to meet an earmark for child survival and diseases programs and to meet directives to fund at or above requested levels programs totaling over $400 million. These directives ranged from victims of war, vitamin A and dairy development to energy, neo-tropical birds and agricultural research. As a result, residual funds available for remaining programs--in economic growth, environment and democracy--were effectively cut by 26 percent from the level planned. While it is true that the Administration made the choices as to the priorities for use of these residual funds, the largest portion of the funds had been planned for economic growth programs. Having to accommodate a 26 percent cut in these funds meant that, even after taking reductions in environment and democracy programs, economic growth programs had to be trimmed significantly. The funding levels for FY 1997, and the effects thereof, are similar--a 14 percent cut from the FY 1997 request, and a further 4 percent cut from the already sharply reduced FY 1996 level, in the residual funds available for economic growth, environment and democracy programs, with a repetition of the squeezing of economic growth programs. If similar cuts in DA appropriations, and similar directives levels, were to occur in FY 1998, the results likely would be the same again. aid and the public sector Question. My attention has been called to one of the theses of a new book by Michael Maren which say that foreign aid merely lets governments of poor countries avoid taking the steps necessary to make their own economies more productive and that it sometimes strengthens the public sector rather than the private sector. Will you please respond to this. Answer. We are very familiar with the issues raised by Mr. Maren and others. Foreign aid should not be provided without regard for the policies and self-help efforts of recipient countries. With the end of the Cold War, USAID is better able to prioritize among countries based on developmental criteria, including economic policies and self-help efforts. USAID takes into account economic policy performance covering fiscal, monetary and trade policy as part of our performance-based budgeting. The second issue is whether aid tends to strengthen the public sector rather than the private sector. USAID and other major bilateral and multilateral donors emphasize the role of the public sector in creating the policy and institutional enabling environment for private markets, rather than competing with or substituting for the private sector. For instance, the criteria for economic freedom have to do with how well the public sector performs essential functions that support private markets. With this focus, aid strengthens the private sector by strengthening the public sector. trade and aid Question. How do U.S. programs to develop foreign markets and promote exports compare to those of other developed nations in terms of general approach, measurable success, and ambition. Answer. USAID efforts to promote U.S. exports emphasize critical determinants of development performance such as human resource development, institutional strengthening, and policy reform. Where practicable this aid is tied to procurement in the United States. But the major and lasting impacts on U.S. exports come through the development results of these efforts. While the developing world as a whole represents a rapidly growing market, there is great variation in market growth among developing countries, with demand for imports expanding at annual rates above 20 percent per year in some countries, and stagnating or contracting in others. USAID analysis indicates that progress in establishing policies and institutions supportive of private markets is the major factor that distinguishes rapidly expanding export markets. This has generated immediate, large and growing benefits for the United States in terms of export sales, benefits that dwarf the impacts of isolated capital projects, and which accrue to many more Americans. For example, our exports to Central America have increased by nearly 13 percent annually since 1985, reaching over $7.5 billion in 1995. Our exports to Thailand have increased by over 24 percent annually since 1985, and reached $6.4 billion in 1995. For Indonesia, the corresponding figures are 16 percent and $3.3 billion. This performance has depended not just on improved policies and institutions in developing countries, but also sound policies in the United States. U.S. exports of goods and services overall during the past decade expanded almost twice as rapidly as those of Japan, Germany, or the European Union. We have achieved superior export performance by focusing on sound policies that affect the basic determinants of competitiveness, rather than on the costly and wasteful aid practices mentioned above. At the same time, the U.S. has not remained blind to the practices of other donors. We have actively led a cooperative effort among donors to curb the use of commercially motivated aid practices that distort both trade and aid. This effort culminated several years ago in the Helsinki Agreement, which restricts (but does not eliminate) the use of tied aid credits as a device for financing exports. Other donors are now exercising leadership to reach agreements to further limit the use of tied aid. These sorts of efforts increase the development effectiveness of aid (with major positive implications for growth of U.S. exports) and also promote trade that is more efficient, effective, and fair. democracy and foreign assistance Question. You state that you have adopted a policy that nations that do not embrace democracy and turn their back on their own citizens will not receive U.S. assistance. I see a number of countries listed in the summary tables that don't fit that description. Can you comment on that? Also, does this policy include humanitarian assistance such as famine relief? Answer. USAID considers human rights performance a critical factor in identifying development partners and in making budget allocation decisions. In deciding where and how USAID funds should be spent, the level of democratization and respect for human rights is a central consideration. In accordance with Section 116(a) of the FAA, USAID cannot give economic assistance ``to the government of any country which engages in a consistent pattern of gross violations of internationally recognized human rights.'' Humanitarian assistance such as famine relief is not subject to the restrictions contained in Section 116(a). Regular development programs funded by USAID benefit citizens at the grass roots: they foster the economic empowerment of women and the poor; and expand educational opportunities; reduce maternal, infant and child mortality, and the spread of HIV/AIDS. Environmental programs supported by USAID range from biodiversity conservation to improving urban environments. In countries where democracy has not yet fully taken hold, we fund NGOs and projects designed to improve political and human rights conditions. Democracy-related projects, for example, foster the growth of civil society and independent media, they develop viable political parties, and build independent, better trained judiciaries and parliaments. In crisis situations, USAID humanitarian assistance and famine relief is extended. agriculture Question. In reference to the International Food Policy Research Institution study, can you tell us in which countries we have been most successful in cultivating agriculture exports for U.S. businesses? Answer. The International Food Policy Research Institute (IFPRI) study established the relationship between agricultural research, agricultural growth, economic development, and agricultural imports in developing countries. IFPRI noted that agricultural imports had grown the most in East Asia, followed by Latin America. The study did not specifically list countries which were importing agricultural products from the U.S. According to data compiled by the Foreign Agricultural Service of USDA, agricultural exports from the United States have followed a similar pattern, growing the most sharply in East Asia and Latin America. The linkage was first shown in the frequently-cited cases of South Korea and Taiwan. But, during the 1990's, these countries have been joined by Indonesia, Malaysia, Philippines, and Thailand. Within Latin America, the most pronounced increases in imports from the U.S. were found in Colombia, Brazil, Venezuela, and Peru. As other countries experience agricultural and economic growth, we would expect them to be added to the list. agricultural assistance in russia and ukraine Question. Can you give me a few details on what types of agricultural development projects are being funded in Russia and Ukraine now? Has the focus shifted over the last five years or are we using primarily the same approach? Answer. The USAID assistance program in Ukraine includes agricultural development activities in a number of areas. Programs being implemented support: (a) agribusiness partnerships involving U.S. and Ukrainian firms; (b) the establishment of private agricultural commodity exchanges; (c) the restructuring of collective farms and land privatization; (d) agricultural policy analysis and reform; (e) farm management and marketing assistance to private farmers and farmer organizations; (f) development of regional agricultural trade in Western Ukraine; and (g) volunteer programs providing technical assistance to private farmers and agribusinesses. Assistance is also being planned in the area of farm finance and may be provided for agricultural enterprise privatization if government reform programs proceed. In Russia the program of agricultural assistance is limited to support for: (a) agribusiness development and rural social services as part of farm post-privatization in two oblasts; (b) pilot agricultural credit activities; (c) the completion of a final agribusiness partnership; and (d) volunteer activities. Assistance in agricultural policy reform and sustainable agriculture are being considered with an emphasis on regional rather than national development. In the past two years the focus on the agricultural assistance program in Ukraine has broadened to encompass additional program areas while seeking greater geographic focus. For example, agribusiness partnerships and other programs are being directed to regions where farm restructuring is taking place while the assistance in agricultural policy reform is being directed to those issues being surfaced by the expanded agribusiness partnership program. Private farmers and systems for their support are also a special target of all activities. As progress on the agricultural policy reform front has lagged in Russia, the USAID program of agricultural assistance has been sharply consolidated. During this period, the focus has shifted to a very limited number of systemic issues such as agricultural finance and away from agribusiness partnerships. The possible new initiative in regional investment promotion policy reform reflects an attempt to continue this focus on systemic issues. legal reform Question. What are the realistic prospects of enactment of new tax laws which are being written with United States assistance in Russia-- with a strong Communist presence in the Duma--and other NIS? Answer. In Russia, a new comprehensive, unified tax code has been drafted and readied for presentation to the Duma. Realistically, chances for passage in 1997 of the tax code as a whole, are not promising. However, there is a possibility that tax reform will proceed this year as in 1996, on an item-by-item basis. Some of the reforms accomplished in 1996 include the improvement of procedures for the Value Added Tax, closing of several exemption loopholes which had been responsible for lost tax revenue, and legislative approval of a market- value property tax pilot program. Priorities for 1997 include further improvements in tax administration including legal aspects, strengthening tax analysis capability of the Ministry of Finance, and passage of a law extending the property tax pilot program nationwide. At the same time we will continue support for passage of a comprehensive tax code by the Duma. Elsewhere in the NIS tax legislation has proceeded well. Kazakstan adopted a comprehensive, unified tax code in mid-1995. Kyrgyzstan did the same, effective July 1, 1996, and Uzbekistan is likely to follow suit at its legislative session in April 1997. Moldova is adopting a comprehensive tax code in stages, following a unified concept: adoption of new corporate and personal income tax law is imminent, with a new VAT law to follow shortly. Ukraine is beginning the task of adopting modern tax legislation. child survival Question. What percentage of Child Survival aid is administered via private voluntary organizations? I have been informed that there are significant benefits--especially resulting from private matching funds--from this approach. What is your assessment? Answer. USAID's tracking system shows that approximately 36 percent of funding for Child Survival from all accounts, or more than $100 million, is administered by non-governmental organizations (NGOs), including private voluntary organizations (PVOs). The private matching funds certainly are one benefit from using private voluntary organizations. In fact, to cite one program alone, the current portfolio of over 70 PVO Child Survival grants to 23 U.S. PVOs totals $59.5 million to which the PVO recipients contribute an additional $20.7 million. This contribution leverages additional resources from the American public to support these grassroots PVO programs. Perhaps of equal importance is the fact that most of these organizations work directly with community groups to determine their needs and goals, and to plan effective programs to reach those goals. In recognition of this, USAID is in the process of launching a new PVO partnership activity in the population and health area. One of my priorities as Administrator of USAID has been to increase USAID's collaboration with the private and voluntary community and other indigenous non- governmental organizations. polio Question. I received a copy of your polio eradication report yesterday. I appreciate that, and I am glad to see the program is succeeding rather quickly. I would appreciate being apprised of its progress over the next couple of years. Are all countries cooperating fully in the effort? Answer. We will provide another formal report on the progress of the Polio Eradication Initiative in the fall of 1997. In addition, we are planning to establish a web site which will provide up-to-date information on the Initiative. USAID works in partnership with the World Health Organization (WHO), UNICEF, the U.S. Centers for Disease Control and Prevention (CDC), and Rotary International to engage as many countries as possible in the Initiative. In countries in which USAID is a lead donor, we encourage full collaboration between our Missions and host country counterparts; in countries where we have less of a presence, we are working with WHO, UNICEF, CDC and Rotary to stimulate greater participation. We have worked with our counterparts to develop regional strategies to engage countries which are facing difficult situations, such as Nigeria, Rwanda, and Somalia. child survival (other preventable health problems) Question. Can you please update the subcommittee on progress against other preventable health problems as well? Dehydration due to diarrheal diseases is a major cause of death among children in many countries. Are we also succeeding against some of these other problems? Answer. In addition to the work on polio, USAID's collaboration with UNICEF, the World Health Organization (WHO), other donors and NGOS in the delivery of vaccines, has resulted in estimated global coverage of immunization against 5 other vaccine-preventable diseases (diphtheria, pertussis, measles, tetanus and TB) of 80% of children under the age of 5. This level of coverage has contributed to a 20% decline in childhood mortality. After financing the basic scientific research on oral rehydration, USAID still leads the global effort to ensure that oral rehydration therapy (ORT) is available and used correctly around the world. USAID's Child Survival program has applied its expertise in social marketing and modern communication techniques to address cultural blocks and alter behavior for preventing and treating diarrheal disease. Between 1986 and 1993, worldwide use of prepackaged salts or home solutions to treat diarrhea doubled, with usage increasing even faster in areas where USAID has concentrated attention, e.g., Indonesia, Peru, Morocco, Ghana, and Kenya. ORT is estimated to save the lives of one million children each year. Our experience with ORT has also saved lives in emergency situations, such as the refugee camps established during the Rwandan crisis of 1994. Acute respiratory infections, mostly pneumonia, which are now the leading cause of death in children, were initially considered beyond the reach of the Child Survival Program given the expense of treatment. However, USAID-funded research has identified the most appropriate antibiotics to treat common pneumonia in developing countries and proved that health workers in poor and remote settings can effectively diagnose and treat pneumonia. While we are not generally in a position to supply the antibiotics, we work closely with host country counterparts and other donors to help assure access and affordability of treatment. USAID has led the world in Vitamin A research, promoting Vitamin A linkages to immunization and other prevention programs. Effective intake of Vitamin A through capsules or fortification may decrease deaths of Vitamin A-deficient children by 20-30%, and reduce childhood blindness by 400,000 cases annually. office of emerging markets Question. Is the new Office of Emerging Markets fully established? What has it accomplished since last spring? What budget has it been allocated? What will be its primary objectives in FY 98? Answer. The Office of Emerging Markets has been established within USAID's Economic Growth Center in the Bureau for Global Programs, Field Support and Research. Since last spring, the Office--through approximately 80 separate activities--provided technical assistance, policy analysis and research in Africa, Asia, the Near East, Latin America, Central and Eastern Europe and Russia. Activities included, inter alia, stock exchanges in Prague and Dhaka, public utility deregulation/privatization in Russia, fiscal decentralization in the Philippines, computer-based interactive banker training in Russia and tax reform in Egypt. The FY 1997 budget for the Office is approximately $6.35 million, an amount sufficient for the Office to develop a small number of pilot activities and to support overseas missions requesting assistance. The primary objectives of the Office in FY 1998 will be to support overseas missions activities and to develop new partnerships that increase the amount of private participation in development activities. The partnerships will focus on policy reform and institution building, using advanced telecommunication technology to link U.S. institutions to host country partners. grant and contract oversight Question. Has AID changed or increased its method of oversight and enforcement of accountability in its grant and contract projects in the field as a result of the New Management Systems (NMS)? How many grants and contracts were revoked in FY 1996 due to grantees' or contractors' poor management, ineffectiveness, or even fraud identified by AID oversight? Answer. The NMS is not re-engineering in itself, but rather a tool to help accomplish the reengineered USAID processes. While the work performed does not necessarily change because we have an automated system, the benefits of the NMS include greater communication and transparency of information for decision making, faster processing, reduction of paper, elimination of duplicate data entry, and a reduction in errors with a resulting increase in accuracy of data. With the implementation of NMS, we are eliminating multiple stovepipe corporate systems and replacing them with one, integrated, Agency-wide database. The NMS by itself does not provide for changed/increased oversight and accountability in our grants and contracts; however, it does facilitate teamwork between the technical and procurement offices, the responsibility of the Contracting Officer's Technical Officer (COTR) in monitoring grant/contract progress and compliance, and transparency of data. USAID issued its Procurement Reform Report ``Procurement Reform Initiatives: 18 Elements in Streamlining the U.S. Agency for International Development's (USAID) Procurement Processes'' in October 1995. This report identified eighteen procurement reform items for action. An example of increased oversight and enforcement of accountability is the Agency's implementation of contractor past performance evaluations (reform initiative number 5). All contracts with a total estimated cost in excess of $500,000 are subjected to interim (annually) and final evaluations on completion. April has been designated past Performance Month and evaluations will be initiated for some 600 contracts that are due for interim and final evaluations during this fiscal year. These 600 contracts represent over $3.5 billion in development assistance. Contractor performance evaluations are effective not only in enforcing accountability but also for achieving results and obtaining best value for taxpayer dollars. Reform initiative number eight provided for the strengthening of USAID's suspension and debarment procedures. USAID's Contract Information Bulletin (CIB) 95-25, published November 20, 1995, identifies the procedures to follow, the parties that need to be involved in processing these cases, and reiterates that suspension/ debarment matters be given a high priority and processed expeditiously. It also emphasizes that bills for collection, offset, terminations for default or other administrative measures may also be appropriate actions. One of USAID's longstanding contractors has been proposed for debarment this year and the incidence of ``show cause'' and ``cure'' letters to contractors has definitely increased due to greater vigilance in the area of performance monitoring. environment Question. I'm glad to see that you demand demonstrable results of the projects undertaken at USAID. Please detail specific results achieved in one of your highlighted goals: protection against environmental threats. Has USAID fully and efficiently utilized its allocated resources to the fullest extent possible in this area? Answer. USAID understands that its limited resources must be channeled to maximize the Agency's ability to promote the sustainable development of our host countries and to address the key threats to the global environment. We therefore have adopted a performance based system to manage our environmental portfolio to ensure that our initiatives achieve their objectives efficiently and strategically. In order to utilize its limited resources to the best possible advantage, the Agency has adopted a strategic environmental framework to concentrate our resources on five environmental objectives where experience shows we can be effective and can have the greatest impact. Our experience shows that even modest investments in strategically targeted sectors can have measurable results and impacts. In FY95, this performance based approach led to demonstrable results within our five environmental objectives, as highlighted below. In biodiversity conservation, USAID works to conserve protected areas, encourage the sustainable use of biological resources, and preserve species mainly through habitat conservation. Our interventions were targeted in those shown to be critical for biodiversity conservation either because of their contribution to the global stock of biological diversity or because of their importance for achieving sustainable development in a country. In 1995, we worked in more than 100 protected areas covering more than 40 million hectares worldwide, an area nearly the size of California. In global climate change, USAID effectively decreases the rate of growth in greenhouse gas emissions by promoting cleaner power generation, the use of renewable sources of energy and more efficient energy production and use. For example, in Mexico USAID facilitated the retrofit of a 300 megawatt burner at a heavy oil fired power plant to demonstrate its environmental benefits resulting in a decrease of carbon dioxide emissions of more than 9,400 tons per year. USAID also promotes the use of agricultural waste as fuel for energy generation, and thus far, the Agency has reduced carbon dioxide emissions from energy generation by about 2.2 million metric tons per year. In promoting sustainable urbanization and pollution reduction, USAID supports programs in countries where the rapid growth of cities and pollution poses serious health hazards to people and pollution of land, air and water. We work within three approaches: increasing access to safe water and sanitation services, promoting improved urban management, and supporting pollution prevention and control. For example in the Philippines, USAID's program to promote pollution prevention has reduced the country's entire output of industrial organic pollution by nearly two percent in the demonstration phase alone. To promote environmentally sound energy services, USAID encourages market-based activities that yield benefits for the environment and economic growth. We employ three targeted approaches: increasing energy efficiency, expanding use of renewable energy sources, and introducing clean energy technologies. Activities also are designed to yield secondary benefits, such as reducing greenhouse gas emissions or local air pollutants. For example in Egypt, USAID has improved the reliability and economic efficiency of the Aswan High Dam Hydroelectric Power Station, and has averted the use of two million tons a year of oil and annual emissions of 7.7 million tons of carbon dioxide, and 118,000 tons of sulfur dioxide. To promote sustainable natural resource management, USAID targets four resources that provide the greatest range of benefits to the largest number of people: forests, coastal resources, agricultural lands, and freshwater resources. We test and disseminate locally appropriate management practices and technologies, and bring divers stakeholders together to forge effective and long lasting solutions. In water resources management, for example, USAID helps 11 countries address their most pressing problems. For example, in water-scarce Jordan, USAID helped to increase Jordan's water availability by 19 percent through application of conservation measures. usaid program effects in crisis prevention Question. I believe strongly in the value of crisis prevention. Like you, I am disturbed by the number of unsuccessful governments and the tragic consequences manifested for their citizens that we see now. I presume, though, that crisis prevention is not a new USAID mission. Judging by the current problems worldwide, is it seriously realistic to claim that USAID programs have a noticeable impact in crisis prevention in other states? Answer. In the post-cold war era, USAID has an important role to play in supporting U.S. foreign policy objectives. This requires changes in the manner and principles in which we operate as an Agency. USAID is working to: Enhance its capacity to respond to crises with humanitarian relief viewed as part of continuum that leads to recovery and to long-term development in a manner that addresses the root causes of conflict; Strengthen our capacity to work in classic-post transition situations to support the processes of peace and reconciliation; and Promote sustainable development through the creation of integrated new country and regional strategies that have analyzed and targeted interventions that link relief and development in a manner that addresses the root causes of conflict. The Office of Transition Initiatives (OTI) was created, in part, to provide USAID with an institutional rapid response capacity for potential zones of conflict and war-torn societies such as Bosnia and Rwanda. It is only one, but an important, part of USAID that responds strategically to prevent crisis, further economic and political transitions and catalyze other donors to support indigenous local capacities for crisis prevention and economic and political transitions. As you have implied, it would be unrealistic to believe that our own actions can alone prevent crisis in other states in most instances. That is why USAID tries to anticipate the likelihood of such events and work in partnership with concerned governments, civil society, and other donors to mitigate conflict, and perhaps at times prevent them from becoming violent. USAID has developed the ``New Partnership Initiative'' (NPI) to work more collaboratively with host country counterparts and this approach will be useful in working in post- conflict situations. Like natural disasters, the potential for crises and violent conflict can be identified with some degree of probability. This requires, however, long-term development strategies that are keyed to understanding the social fault liens of the societies in which we operate, much like those of known earthquake zones, and developing more effective participatory development programs as means of responding to the problems identified. It is in this way that more targeted and flexible long-term development strategic interventions have a role to play on conflict mitigation and prevention such as economic growth, health, education, family planning, environmental activities, and strengthening the institutions of civil society. USAID is adjusting its strategy and program development process in a number of transition countries in sub-Saharan Africa and elsewhere to address more concertedly the root causes of conflict. political freedom Question. Please provide the Subcommittee with the strong evidence linking increased political freedom to U.S. aid. It seems to me that the U.S. probably provides aid to almost all 78 of the countries analyzed by Freedom House, Including the 30 that grew worse. Answer. You are correct that the U.S. has provided foreign aid to most of the countries surveyed by Freedom House, including many of those where political freedom declined between 1982 and 1996. Where political freedom and other aspects of development progress are concerned, success or failure is primarily a function of domestic (recipient country) factors. Foreign aid aims to play a supportive and reinforcing role. The evidence for the effectiveness of foreign aid rests on the predominantly positive record in terms of improvements in political freedom, and the greater role of aid in countries that made large improvements, compared with those where there were large declines in political freedom. As I mentioned in my testimony, political freedom improved in 48 countries and grew worse in 30. Looking at countries with major changes in political freedom, the record is even more positive. Among the improvers, there were 29 countries with large improvements, of three points or more on a scale from 2 to 14. Only 7 countries showed large declines (three points or more) in political freedom--Dominican Republic, Kenya, Colombia, Sri Lanka, Sudan, Gambia, and Nigeria. The average change over all countries was an improvement of 1.4 points. Further, there is less of an aid presence in the countries where political freedom has declined. Of the 29 large improvers, 27 were aid recipients during the period in question, and two others (Korea and Taiwan) received large amounts of U.S. foreign aid earlier. In the 7 countries showing large declines, our programs have ceased or have been sharply limited in size and/or scope. In 23 other countries that showed moderate declines, we have had little or no role in recent years in 6 of these countries; we have restricted programs or exited from 10 others; and we are achieving important development results in the remaining 7. u.s. ships Question. What percentage of AID material that is actually shipped from the U.S. abroad is sent on U.S. ships? How would your agency respond to the idea of a legislative mandate requiring this? Answer. Legislation already exists that addresses the issue of cargo being shipped on U.S. flag vessels. The Cargo Preference Act of 1954, Section 901(b)(1) of the Merchant Marine Act of 1936 as amended, requires USAID to ship at least 50 percent, by tonnage and revenue, on U.S. flag vessels if they are available at fair and reasonable rates. In 1996, USAID financed 192,254 metric tons of cargo that was exported from the United States; 68.5 percent moved on U.S. flag vessels. Of the $32.4 million expended for ocean freight, U.S. carriers received 80.9 percent. On average, U.S. carriers' shipping rates were approximately twice that of non-U.S. carriers during the preceding year. Questions for the Record Submitted by Mr. Frelinghuysen multilateral vs. bilateral assistance Question. Mr. Atwood, in your testimony and as reflected in your budget, out bilateral assistance covers a wide range of objectives-- Promoting democracy & economic growth, stabilizing world population and protecting human health, protection of the environment and strengthening the rule of law and respect for human rights. I have to say that both Secretary Albright and Secretary Rubin stated some very similar objectives with regard to our continued participation in multilateral institutions. And, at a time when overall foreign aid spending has and is being reduced, do we have the appropriate balance--in your view--of multilateral and bilateral assistance? Answer. It is quite appropriate that Secretaries Albright and Rubin and the USAID Administrator identify the same sustainable development objectives because this Administration has a coherent, integrated and consistent approach to development which it pursues through both the bilateral and multilateral assistance programs. Bilateral and multilateral assistance programs play a complementary role in advancing U.S. foreign policy objectives and we use each to accomplish different aspects of our integrated approach. The clearest example of their complimentarity occurs around structural adjustment loans. In many such cases, our bilateral program is used to provide American technical expertise, to advise countries on the implementation of structural adjustment programs. Similarly, our bilateral programs, such as the Microenterprise program are able to take assistance more directly to the poor, who also benefit from structural adjustments at the macro-level, but over the longer term. The intergration of multilateral and bilateral assistance tales on the greatest meaning at the country level where our missions are directed to coordinate programs with other donors and to identify programs of the multilaterals which conflict with our bilateral goals so that we can object to their approval. Accordingly, we believe the balance struck in the FY98 budget request appropriately reflects U.S. interests. other donor multilateral and bilateral assistance Question. With regard to other large donor countries--Japan, France, Germany to name some of the largest--what has been your experience with regard to their involvement in foreign assistance? Is it primarily country-to-country or focused on multilateral participation? Answer. On average, the larger donor countries provide about the same percentage of their aid (20-25%) to the multilateral development banks (MDBs) and to United Nations (UN) development programs. (France, however, provides less multilaterally than other donors.) Members of the European Union (EU) also finance the EU's own development cooperation program, and these contributions are counted as multilateral aid by them. Some donors have concentrated much of their bilateral aid in specific regions, e.g., Japan in Asia and France in Africa. Others, such as Germany and the Netherlands, distribute their aid more globally. Cultural, colonial, and, sometimes, commercial ties variously influence aid patterns. All donors give major emphasis to their bilateral programs. And, as agreed in their joint statement Shaping the 21st Century: The Contribution of Development Cooperation, donors are committed to ensure that bilateral and multilateral assistance complement each other through active coordination arrangements. aid then trade vs. ``aid for trade'' Question. I have heard the use of the phrase ``aid then trade'' as a means of explaining how bilateral assistance programs help pave the way, albeit indirectly , for U.S. companies to enter new markets in the developing world. It is my impression that many other countries--in Europe and Japan--are far more aggressive in leveraging their aid dollars for explicit opportunities for their private sector. It that your experience with other donor countries, and if so, how should we respond with the use of our dollars. Answer. Most bilateral donors use some portions of their aid to promote their own exports, either by fully funding large capital projects tied to procurement in their own countries, or by using aid for subsidized financing of their own exports. While U.S. foreign aid is tried by law to U.S. procurement, our position in international fora has consistently been to urge donors to untie bilateral aid. It is our experience that tied aid can undermine its development effectiveness. Various estimates of the costs of tied aid in terms of higher prices to the recipient country range from 10 to 30 percent of the cost of the project. More importantly, these practices can distort the choices of capital projects, introducing a bias towards large scale and import intensity, as well as a damaging bias towards investing in new projects rather than maintaining the existing capital stock. And, it can divert aid resources from critical concerns such as human resource development, institution building and policy reform. Tying aid can also be an expensive and inefficient way to promote exports. Export finance that qualifies as aid has to be highly concessional, entailing a large subsidy per unit of exports. Further, tying aid to exports and/or using aid as essentially a subsidy for exports can distort trade patterns and promote inefficiency. USAID analysis indicates that such practices have rarely had impacts on exports beyond the immediate specific transaction. In contrast, the payoff to exports that comes from successful long- term development efforts such as human resource development, institutional strengthening, and policy reform is direct and lasting. While the developing world as a whole represents a rapidly growing market, there is great variation in market growth among developing countries, with demand for imports expanding at annual rates above 20 per cent per year in some countries, and stagnating or contracting in others. USAID analysis indicates that progress in establishing policies and institutions supportive or private markets is the major factor that distinguishes rapidly expanding export markets. This has generated immediate, large and growing benefits for the United States in terms of export sales, benefits that dwarf the impacts of isolated capital projects, and which accrue to many more Americans. For example, our exports to Central America have increased by nearly 13 per cent annually since 1985, reaching over $7.5 billion in 1995. Our exports to Thailand have increased by over 24 per cent annually since 1985, and reached $6.4 billion in 1995. For Indonesia, the corresponding figures are 16 per cent and $3.3 billion. This performance has depended not just on improved policies and institutions in developing countries, but also should policies in the United States. Overall U.S. exports of goods and services over the past decade have expanded almost twice as rapidly as those of Japan, Germany, or the European Union. We have achieved this by focusing on sound policies that affect the basic determinants of competitiveness, rather than on the costly and wasteful aid practices mentioned above. At the same time, the U.S. has not remained blind to the practices of other donors. We have actively led a cooperative effort among donors to curb the use of commercially motivated aid practices that distort both trade and aid. This effort culminated several years ago in the Helsinki Agreement, which restricts (but does not eliminate) the use of tied aid credits as a device for financing exports. Other donors are now exercising leadership to reach agreements to further limit the use of tied aid. These sorts of efforts increase the development effectiveness of aid (with major positive implications for growth of U.S. exports) and also promote trade that is more efficient, effective, and fair. microcredit Question. Many are now focusing on microcredit as a ``silver bullet'' in making real strides in the lives of the poorest people, especially women, in developing countries. What is your view of the success of microcredit and does it call for a new and more substantial focus of our development assistance program? Answer. As we all recognize, there is no ``silver bullet'' for ending poverty. Microcredit is, however, one promising tool that is poised for significant expansion during the coming decade. By making very small loans to poor people for their microenterprises, we help them connect to the mainstream economy and give them a greater chance to take advantage of economic opportunities that come their way. Microcredit is particularly important for reaching women, as women constitute more than two-thirds of the clients of USAID's microenterprise programs. However, microcredit cannot substantially alter many of the facts governing the lives of the very poor: low demand for their products, lack of business and technical skills, harassment by local officials, high costs of accessing markets, and unstable economic and political environments, to name only a few. This is why USAID pursues a balanced approach to economic development that works on multiple levels, including focusing on improved opportunities for the poor. It is important to recognize microcredit as one valuable tool among many. bosnia Question. I remain concerned about the exit strategy for our military engagement in Bosnia. And, I believe it has now become inextricably linked to the success of civilian reconstruction. We have already made substantial military investment (over $2 billion) as well as contributed to the civilian side. Your budget requests an additional $225 million. What can we realistically expect by the time our military involvement is scheduled to end (according to Secretary Cohen eighteen months from now) and how long do you expect our contribution to civilian reconstruction to last and at what level? Answer. Civilian reconstruction programs are vital to the creation of a stable and functioning society in Bosnia which can continue the healing process after the departure of military forces. Since the signing of the Dayton Accords, many successes have been achieved in civilian reconstruction which are contributing to the area's rehabilitation. USAID efforts have helped create normalcy. They have brought about significant improvements in vital infrastructure repair, including the repair of water and power services; they have assisted health services and schools to reopen; helped businesses to start up, generating employment, economic stabilization, and the building of democracy. USAID civilian reconstruction programs have implemented $58 million worth of infrastructure repair projects, including: fifteen power sector projects ($33 million); five water sector projects ($6 million); six transport sector projects ($6 million); 10 education sector projects ($3 million); and three health sector projects ($2 million). At the community-level this translates into, the restoration of power, the rebuilding of schools and health facilities, improvements to local water supply and road repairs, all of which helps to stabilize communities, provide employment opportunities, foster economic recovery and encourage the return of displaced persons and refugees. To date, 67 loans, totaling $39.6 million have been approved through USAID's Bosnia Reconstruction Finance Facility program. These initial loans will provide employment to over 8,500 Bosnians, representing a mix of ethnic backgrounds and including demobilized soldiers and women adversely affected by the war. Employment is critical to economic regeneration and stability. USAID programs go beyond physical reconstruction and seek to help Bosnia stabilize the economy by helping build a strong, unified banking system to attract needed investment to Bosnia. USAID is also helping build the fundamental elements of a democratic society, such a independent media and judiciary. We providetechnical assistance, training, and equipment to non-state controlled television and radio stations, we are building management, marketing, and production techniques to bolster the emergence of an independent media in Bosnia. Equal access to information is a crucial building block for a democratic society. Equally important to a democratic society is a strong independent judiciary. Among the accomplishments of USAID's Bosnia Judicial Strengthening program are: inauguration of the Federation Constitutional Court and Supreme Court and the development of their administrative rules and procedures. Through USAID's continuing programs vital infrastructure will continue to be repaired, employment will continue to be generated, the tools needed to develop and manage a stable economy will continue to be strengthened, and the institutions critical to a functioning democracy will continue to grow. The entire priority reconstruction program will only repair, at most, about a quarter of the estimated $20 to $30 billion worth of war damage. Coupled with high growth rates (33% in 1996 and a predicted 25% to 30% in 1997), Bosnia-Herzegovina, which was one of the poorer Yugoslav Republics, is predicted to reach, at most, only two-thirds of its prewar GDP level by the year 2000. The Priority Reconstruction Program for Bosnia, called for a three year emergency effort. At the conclusion of the emergency reconstruction phase, Bosnia should have moved substantially toward peace and stability, but will continue to need assistance in creating democratic market institutions. That will be the task of the regular SEED programs that support the economic and political reforms in Central and Eastern Europe. The inclusion of Bosnia in these ``normal'' SEED economic development programs for several additional years now seems probable. albania Question. We have all been monitoring the situation in Albania. First and foremost, I hope that all of our USAID personnel have been safely evacuated. Given the chaos in Albania, how does it affect your planned assistance to Albania ($30 million in FY98)? Further, are there lessons to be learned about the risk and focus of our investments (approx. $50 million over the last two years) in countries in dramatic transition such as Albania? As other countries transition to market economies in this region, can we anticipate similar problems? Further, would you comment on the potential effect of developments in Albania on Greece and Macedonia? Answer. As you may know, U.S. Ambassador Marisa Lino initiated an ``ordered departure'' or evacuation on March 12, 1997. Four of the five American USAID staff, contractors and grantees and their families left in the helicopter airlift organized by the U.S. Marine Corps. All of the Americans are safe. The USAID Director in Albania, along with her Albanian staff, have remained on the job. They are providing USAID/ Washington and the Embassy in Tirana with up-to-date reports on the humanitarian situation. They are also providing guidance and support to the Albanian staff of the twenty-one USAID-financed activities remaining in Albania. The continuing crisis in Albania has caused us to reassess and re- prioritize our assistance programs beginning with the current FY 1997 budget. In reviewing the portfolio, we have identified the following areas of immediate need: emergency humanitarian programs;agricultural programs which impact food security; municipal services programs which affect citizens access to essential services (especially water and sanitation); and democracy activities which aim to bolster elements of civil society damaged under the state of emergency. These priority programs will move ahead. Other planned activities, intended to bolster economic and democratic reform in Albania over the longer-term, have been deferred for the time being. Priorities for the proposed $30 million FY 1998 program will be reviewed in the upcoming months; we anticipate phasing in longer-term economic and democracy reform programs over time, as the situation in Albania permits. Concerning lessons learned, recent experience in Albania demonstrates that reform is not a smooth, linear process, but rather can move two steps forward and one step back. This is perhaps particularly true in places like Albania where the standard of living is so low that there is little room for error, and where experience with democracy and free markets is particularly thin. In such situations, USAID has followed a strategy of focusing support on the private and nongovernmental sectors, while pursuing targets of opportunity to support government efforts in policy and legal reform whenever possible. Success in the reform effort is not a foregone conclusion, which is why U.S. and other donor assistance is so important. Yet we should not give up when setbacks occur. Over the longer term, with consistent pressure and assistance from the U.S., the EU and other donors, prospects for genuine and lasting reform in Albania are much better than they may seem in the immediate term. Regarding whether other countries in the region face similar risks, it is important to understand that every country faces a unique set of circumstances. Few countries in the region had such an extreme form of communism imposed upon them as the Albanians in the fifty years preceding the overthrow of the communist dictatorship in 1992. The democratic process in Albania has seen a major, hopefully temporary, reversal. On the other hand, many aspects of the transition to a free market economy have been surprisingly swift and irrevocable. The redistribution of state-owned rural and urban land has largely been completed. Small and micro-sized enterprises have emerged everywhere. However, the vestiges of the previous economic regime, such as the state-owned banking sector, still exist and privatization of many nationally-owned assets is still incomplete. The direction the post- crisis reforms will take is not yet clear. Finally, it is important to note that USAID investments over the past five years in a free-market democracy in Albania have not been wasted. These investments have trained and advised a significant number of potential leaders for a free-market democracy. Moreover, numerous democratic institutions, such as NGOs, have been created and supported with USAID assets. Other institutions, such as a free press, will continue to require support for some time to come. USAID is unable to comment on the potential effect of developments in Albania on Greece and Macedonia. We suggest that such a question may be better directed to the Department of State. consumers in the developing world Question. You state in your testimony that eventually 4 out of 5 of the world's consumers will live in the developing world. Have we evaluated the changing urban vs. rural demographics of the developing world? And, if so, does it call for a growing focus of our efforts on urban issues as some 2.5 billion people live in urban areas today and the number of people migrating to the world's cities continues to grow. Does USAID have an urban strategy for meeting its development strategy? If so, what are its major components? Answer. Today we stand on the doorstep of the first urban century. The share of the world's population living in cities is expected to pass the 50 percent mark by the year 2000. Over the next 25 years, an additional 2.5 billion people will be absorbed into urban areas. The large majority of urban growth will take place in the developing world. The urban population of Africa is expected to triple. In Asia alone, the number of cities with more than one million residents will increase three-fold, from 359 in 1990 to 903 by the year 2015. So we are always examining the Agency's urban-rural mix of programs. Accordingly, I recently directed the Agency to conduct a review that will focus attention on urban issues and better define the Agency's role in addressing these issues. I believe that USAID can build and lead an American alliance to help make cities work more effectively in the twenty-first century. This effort now under way in the Agency should sharpen our existing objectives for sustainable urbanization and improved pollution management. The major components of the current USAID urban strategy involve increasing access to safe water and sanitation services; promoting improved urban management; reducing harmful industrial emissions; and promoting improved pollution prevention practices. preventive health care Question. The increasing awareness of the role of Vitamin C in preventative health care prompted Congress, beginning in 1992, to recommend that USAID increase the fortification level of Vitamin C in USAID food/grain exports. In subsequent years, funds have been appropriated for a pilot program to fortify our PL 480 Program food with higher levels of Vitamin C. Would you please update the committee on the current status of the pilot program study? What are its preliminary findings? And, when can we expect that pilot study to be completed and the findings submitted to the relevant Appropriations subcommittee? Answer. USAID has assessed the uniformity of Vitamin C in both wheat soy and corn soy blends at the point of manufacture. In progress are review in Haiti, Tanzania and India to assess the stability of Vitamin C under actual field conditions. Assays of Vitamin C in the blended food samples collected from the field are being conducted by a reputable laboratory in the United States. Preliminary findings showed that Vitamin C uniformity was poor in the corn soy blend at the point of manufacture. Commodity manufacturers, USAID and USDA are trying to correct this. Some loss of Vitamin C potency during shipment and storage of the blended commodities overseas was shown. Preliminary results also indicate that Vitamin C is lost during the normal food preparation of these commodities. Perhaps only a small part of the Vitamin C added may be consumed by food aid program recipients. This still needs to be confirmed. We expect a preliminary report to be ready by mid-June, and a final report by fall 1997, following an Institute of Medicine/National Academy of Sciences review. Questions for the Record Submitted by Ms. Pelosi population assistance--impact of metering Question. What is the impact of metering on the ability of programs to deliver family planning and basic health services to women and children in the developing world? What is the impact of metering on USAID's ability to run an efficient program? Answer. Delayed release of population funds and metering in FY 1997, for the second year in a row, has two key effects, both of which translate into reduced family planning services to clients and increases in unintended pregnancies, maternal and infant deaths, and abortions: The first effect is to increase the risk that programs or services in the field will be terminated abruptly if funds cannot be shifted to meet urgent needs that were unanticipated in the FY 1997 funding plan. Programmatic consequences of a third year of metering, in FY 1998, could be even more severe. Second, with only limited population funds in hand, managers of USAID-supported programs are reluctant to make advance commitments that are essential to effective family planning programs in the field. Burdensome administrative tasks distract USAID staff as well as contractors and grantees from technical responsibilities for program implementation and oversight. Under metering of USAID population funds, the number of separate actions to fund USAID worldwide agreements and bilateral programs is nearly triple what would otherwise be required. By a conservative estimate, developing and implementing the funding plan for USAID populaton assistance for FY 1996 required the equivalent of 27 full-time persons' effort over a period of months, representing a cost to the government (and taxpayers) exceeding one million dollars. This estimate does not include the substantial additional costs of managing metering for the many U.S. universities, private voluntary organizations (PVOs) and commercial firms which are USAID's implementing partners. One U.S.-based implementing partner, AVSC International (Association for Voluntary and Safe Contraception), estimates that administrative costs have increased by 12.5 percent as a result of metering. No positive results can be imagined with a third year of such restrictions. If restrictions were continued for a third year, USAID's population program would have to be totally restructured and would lose its comparative advantage. There would undoubtedly be reductions in family planning and related services for developing world women. Moreover, continuation of these restrictions would establish a harmful precedent for USAID and for the U.S. government. global aids Question. I commend you for your support for continued funding to address the global AIDS pandemic and thank you for your efforts to address some concerns about the program, including staffing levels. I understand that a new director has been named for USAID's global AIDS program and I look forward to further discussions on effective ways to address the crisis. It is my understanding that a GAO study has been requested of the AIDS program, and I was hoping that you could address some of the issues to be reviewed, including particularly, the coordination between USAID and the United Nations and USAID and other bilateral donors. Answer. The final terms of reference for the General Accounting Office (GAO) audit of the HIV/AIDS program have not been received. We understand, however, that the audit will focus on the resources provided for the program over the last few years, and the impact or results derived from them. Although not targeted toward the question of coordination with other donors, we would expect that area to be included. With regard to UNAIDS (The Joint United Nations Program on AIDS), we view the organization as playing a critical role in the global response to the HIV/AIDS pandemic, especially for the coordination of the six key United Nations organizations which are actively working at the country level: the United Nations Development Program (UNDP), the World Health Organization (WHO), UNICEF, UNESCO, the United Nations Fund for Population Activities (UNFPA), and the World Bank. Recognizing the importance of UNAIDS, senior USAID staff are providing ongoing policy and programmatic attention. Ambassador Sally Shelton-Colby, the Assistant Administrator of USAID's Global Bureau, serves as the Chair of the UNAIDS Program Coordinating Board. Dr. Duff Gillespie, Director of USAID's Center for Population, Health and Nutrition, co-chairs the UNAIDS Monitoring and Evaluation Working Group. The HIV/AIDS Division within the Global Bureau is collaborating with UNAIDS counterparts in multiple technical areas, including surveillance, generation of international best practices, behavior change interventions, tuberculosis treatment and other care and prevention interventions. USAID has very close working relationships with other bilateral programs, especially in Japan and the United Kingdom. Through the Common Agenda, the U.S. and Japan have an HIV/AIDS initiative that encompasses nine countries. The U.S. and the United Kingdom are serving as co-chairs of the UNAIDS Monitoring and Evaluation Working Group, mentioned above. At the country level, USAID missions coordinate their HIV/AIDS activities, with other bilateral efforts, without exception. women in development Question. In 1991, the U.N. reported that despite increased international awareness that women play key roles in development, the situation of the world's women had not improved, and in some cases, had deteriorated. In 1993, the GAO looked at this problem and reported back to Congress that the ``U.S. has made slow progress in involving women in development.'' Can you provide the Subcommittee with a progress report on USAID's ``Gender Plan of Action,'' the plan you launched last year to ensure that women were not overlooked as USAID determines how to spend scarce foreign aid dollars? Are women gaining better access to USAID's credit, health and education programs? Answer. We are vigorously implementing the Gender Plan of Action. Our Office of Women in Development (WID) is working with our Program and Policy Coordination Bureau (PPC) on revisions to the USAID strategic framework to ensure that gender issues are addressed as strategic issues in the Agency. The WID Office is also working with our Office of Procurement on draft language for our new procurement guidance on competitive grants and cooperative agreements that will highlight the importance of addressing gender considerations in all Agency agreements. Similar guidance will apply to our contractual procurement requirements. Work is also underway to amend position descriptions to reflect staff accountability for addressing gender considerations. Staff training in gender issues is being incorporated into our regular technical training programs for field staff. Finally, we are working on a set of indicators of the impact of USAID programs on women's economic and social status to support ongoing integration of gender issues into all USAID programs. These are very positive steps. Even more important, we can clearly see the impact of increased attention to gender issues in USAID- assisted countries. In FY 1994 the Agency allocated $33.3 million to women's health interventions; $22.7 million to girls' education; and $65 million to microenterprise for women. In FY 1996, we have seen increases in all of these figures: $85 million to women's health and nutrition interventions; $58 million to girls' education; and over $88 million to women's microenterprise. Our efforts to focus attention on gender considerations are having a significant impact. microenterprises Question. What commitments did the U.S. make at the recent Microenterprise Summit and how are they reflected in your request? Answer. At the Microenterprise Summit the Clinton Administration affirmed its strong support for microenterprise development and microfinance, as both a highlight of its foreign assistance program and an important new program here at home. USAID's specific commitments reflected our renewed microenterprise initiative. In the renewed initiative we pledged: 1. To maintain total funding for microenterprise at the level of $120 million in FY 1997 and FY 1998. 2. To continue our strong central programs, under the Bureaus for Humanitarian Response and Global Programs. 3. To ``deepen'' our microenterprise programming at the regional and field mission levels through greater attention to how microenterprise fits into regional and country-specific strategic objectives. 4. To maintain our focus on reaching the poor and women, with at least 50 percent of clients being women and two-thirds of clients receiving loans of less than $300. This would ensure that half of our microcredit funding supports poverty lending. 5. To improve our monitoring system to focus more clearly on results. 6. To heighten USAID's global leadership in the microenterprise field. victims of torture Question. What is AID doing to assist victims of torture? How is support for treatment of torture victims being incorporated into AID's programs to promote human rights and development? Answer. Regrettably, victims of physical and mental persecution are found in many countries. It is our experience that torture often is a symptom of authoritarianism or anarchy. USAID's democracy, governance and human rights programs are attempting to treat the causes and consequences of torture. Strengthening the rule of law and respect for human rights are our objectives. This includes protection of people against arbitrary use of authority and against lawlessness. Successful U.S. diplomatic and democracy and governance assistance efforts hopefully will quell the use of torture. But there remain the unfortunate victims of past and present abuse. USAID also is involved in other activities that relate to the needs of victims of torture. The Displaced Children and Orphans Fund supports the psychological and social reintegration of children affected by war. Major activities are currently funded under this program in Angola, Eritrea, Liberia, Rwanda, the former Yugoslavia and Vietnam. The USAID War Victims Fund provides prosthetics and other related orthopedic assistance to civilian victims of war. The Fund currently operates in Angola, Cambodia, El Salvador, Laos, Liberia, Mozambique, Sri Lanka and Vietnam. Although there is no specific targeting of torture victims, the beneficiaries are primarily traumatized civilians who have lost limbs as a result of landmines and other weapons. Under the Trauma, Social Welfare, and Humanitarian Assistance project, USAID supports NGO programs that address issues of community health and training activities for mental health providers, teachers, volunteers and doctors working with traumatized refugees and displaced populations in the former Yugoslavia. Under this project, USAID has supported the following activities. Catholic Relief Services which is working with local psychological associations to provide training on post-traumatic stress syndrome and other psychosocial treatments. USAID provided $1.9 million in support of this effort. The International Rescue Committee which is addressing the psychosocial needs of war-traumatized women, children and other vulnerable groups by developing local organizations' capacity and to fund specific activities in both Bosnia-Herzegovina and Croatia. IRC has received a total of $8.5 million from USAID. In Croatia, the Center for Attitudinal Healing has received funding from USAID to build on its experiences working with Vietnam veterans using the group counseling approach to work with refugees and displaced persons in the camps and settlements adversely affected by the horrors of war. Question. Tibetan refugees, particularly monks and nuns, have often been victims of torture. The Department of Health Central Tibetan Administration in Dharmsala, India has established a Torture Victim Survivors Program. Could AID look into the needs of this program and determine whether there is some productive role which the Agency could play is assisting these refugees? Answer. USAID is assisting the Tibetan refugees in India that you mention with PL 480 food aid provided through Catholic Relief Services. The CRS program supports the Dalai Lama's Central Tibetan Relief Committee which has been a CRS/India counterpart since 1959. This Food for Work program supports education, health, and vocational training activities reaching 13,000 Tibetan beneficiaries. We will look into the torture victims program that you mention. Questions for the Record Submitted by Ms. Lowey Question. The U.S. has long maintained that Lebanon should function as a sovereign nation, out from under the control of Syrian President Assad. What are you doing to ensure that any projects USAID is involved with in Lebanon are not benefitting Syria, which essentially occupies Lebanon and is on the State Department's terrorism list? Answer. The U.S. assistance program is implemented through grants to U.S. private voluntary organizations and universities. None of our assistance is through bilateral grants to the Government of Lebanon. However, to further assure fiscal and program accountability for the expanded program, we have assigned a USAID Representative to Beirut for the first time since 1989. We are confident that our program will benefit the Lebanese people and not Syria. asha Question. Congressional Presentation accompanying the FY 98 budget request discusses the importance of the American Schools and Hospitals Abroad program. It points out that the institutions that receive funding from this program ``promote democracy, private initiative, free inquiry, and innovative approaches to problem solving.'' Given these obvious benefits, I am troubled by the decreased level of funding for the ASHA program over the last few years. What are you doing to ensure that this important program remains effective? Answer. While we cannot commit to a future level for this or any other program at this time, I want to assure you that the Agency plans to continue funding this program, on a competitive grant basis, within available appropriations for the Development Assistance account. tuberculosis Question. Next Monday is World Tuberculosis Day, and it has come to my attention that a disease that most of us thought was long gone is the number one killer of adults from a single infectious disease. In fact, TB kills more people around the world than all other infectious diseases combined. Can you tell me a little about USAID's efforts to eradicate this terrible disease? Answer. Tuberculosis is one of the most persistent killers in the developing world. One reason why greater in-roads in controlling this disease have not taken place is because its treatment and control is among the most labor-intensive of health interventions. The most effective approach is Directly Observed Therapy Strategy (DOTS), which is estimated to cost $11 per person to treat a single patient. In most of the developing world, where TB is prevalent, the foundation of building a health care delivery system is necessary before it would be effective to launch DOT. USAID does spend about 9 percent of its health care budget on health systems development and strengthening. But we do not ``count'' this funding as TB-related since it has effects on the control of virtually all major public health problems. Our efforts in system strengthening mean that the more closely targeted TB efforts of others have a chance of succeeding where they otherwise would not. We are assisting various organizations in (1) capacity building through operational research projects involving DOTS, especially in sub-Saharan Africa; (2) supporting UNAIDS with TB-designated funds for definition of cost-effective TB treatment regimes for HIV-infected individuals, and for surveillance of multi-drug resistant diseases; (3) developing a CD ROM-based interactive computer-based program for TB case management, which could be implemented throughout the developing and developed world; and (4) in prevention initiatives by providing $7.5 million for infant Bacillus-Calmette-Guerin (BCG) immunizations to minimize the complications and shorten the course of pediatric tuberculosis infection. ngos Question. NGOs in the U.S. and abroad have been extremely valuable implementers of programs on the front lines of biodiversity conservation where working with local people to solve the problems their communities face is the key to success. In the past, this Subcommittee has been supportive of partnerships between USAID and NGOs. What steps has your agency taken to permit USAID officers to access the special advantages of NGOs? Answer. USAID implements much of its biodiversity conservation program through NGOs. For example, USAID's biodiversity conservation programs in four of the world's centers of biodiversity (Indonesia, Brazil, Central African countries, and Mexico), are implemented primarily through NGOs such as the World Wildlife Fund, The Nature Conservancy, Conservation International, and the Wildlife Conservation Society. In FY97, USAID is working to conserve biodiversity in more than 30 countries worldwide, and many of these programs are, and will continue to be, implemented through NGOs to take advantage of their strong technical and management capacities and their commitment to people-centered conservation. The trend within USAID as a whole has been to increase implementation through PVOs (a subset of NGOs). We estimate, for example, that in FY96, 34% of our development assistance was implemented through PVOs, while in FY95 we implemented 30.5% of our development assistance through PVOs. Figures for NGOs per se are not available. Due to the particular strength of NGOs and PVOs in biodiversity conservation, we would estimate that the percentage of programs implemented through PVOs is higher in this sector. To ensure access to these NGO resources, the Global Bureau's Environment Center manages cooperative agreements that allow access by USAID field missions to eight NGOs with specific expertise in biodiversity conservation. Through these cooperative agreements, USAID field programs can, and do, obtain access to these leading conservation NGOs to help missions achieve their goals in biodiversity conservation. For example, the Biodiversity Support Program is a Global Bureau cooperative program implemented by a consortium of three conservation NGOs (the World Wildlife Fund, The Nature Conservancy, and the World Resources Institute). Through this cooperative agreement, USAID field programs will access over six million dollars of technical assistance and support for field activities in FY97. In addition, the Agency's New Partnerships Initiative (NPI) supports field Missions' efforts to build partnerships at the community level among civil society organizations (including NGOS), the business community, and local governance institutions to promote sustainable development. Questions for the Record Submitted by Mr. Foglietta impact of earmarks Question. One issue I know that you grapple with in the face of severely curtailed funding is the impact of earmarks that are included in foreign operations legislation. I am concerned that these earmarks may have the effect of limiting the Secretary of State and USAID from achieving broader U.S. policy objectives. It is my hope that our Committee will be able to resist further efforts to earmark funds in the FY 1998 bill to provide you with the flexibility you will need to accomplish our many missions overseas. Could you share with me some of the impact these country-specific earmarks may have had on on-going projects and activities? Answer. In FY 1997, cuts in our Development Assistance appropriation combined with earmarks and directives at higher than our planned levels, has necessitated a 14 percent cut from our request for economic growth, environment and democracy programs. As a result, we have been forced to reduce planned funding for many of our sustainable development objectives, including: agricultural research aimed at improving the productivity of crops and averting the threat of famine; increasing the involvement of the private sector in development; encouraging environmentally sustainable use of resources; and support for the transition to stable, representative democracies. In addition to ``functional'' earmarks and directives, the FY 1997 appropriations bill contains language affecting allocations of Development Assistance to Africa and Latin America which has had the effect of severely reducing our ability to fund planned programs in the Asia and Near East region. This has forced us to reduce sharply overall funding for programs in some countries, e.g., Sri Lanka, and to terminate activities in others, e.g., Morocco and Nepal, further tying our hands and denying us the flexibility to fund integrated approaches to serious development needs. [Pages 256 - 257--The official Committee record contains additional material here.] haiti Question. Can you share with the Committee your views on the impact of U.S. aid to Haiti, some of the benchmarks of progress you have met in your programs there and what if any new initiatives are underway there? Answer. U.S. objectives in Haiti are to help establish durable democratic institutions, to support macroeconomic reforms leading to broad-based growth, and to ensure political stability. USAID supports these objectives through programs which consolidate the democratic gains achieved over the last 18 months, develop policy reforms which promote economic growth led by the private sector, improve education and health, and expand commercial agricultural production based on sound environmental practices and resource management: Build Democracy. USAID efforts focus on promoting basic democratic institutions which strengthen representative government. USAID provides support for elections, training for the Haitian National Police, justice sector reform, local government development, assistance to the new Parliament, and help to community-based civic groups. Promote Broad-Based Economic Growth. USAID is working with the government and private organizations to establish appropriate open- market macroeconomic policies, increase the availability of credit for microenterprises and agricultural producers, and support the privatization of state-owned enterprises. USAID also supports efforts to introduce environmentally-sound, commercial agricultural practices which increase small farmer yields and household incomes. Strengthen Population, Health and Education. USAID supports efforts to alleviate malnutrition and illness among children and other vulnerable groups through direct feeding programs, basic health services, family planning and primary school education. USAID programs provide preventive, curative and reproductive health services to about two million people. USAID Budget. The USAID assistance program is moving from the extraordinary, emergency program level of $193 million in FY 1995 to a longer term, sustainable development program more consistent with historical levels. USAID economic assistance to Haiti in FY 1996 was $136 million, and the USAID budget for FY 1997 is $96 million (consisting of $57 million in ESF, $15 million in DA, and $24 million in PL-480 food aid programs). In FY 1998, we are requesting $70 million in ESF to support further consolidation of democracy and structural reforms in the Haitian economy. USAID traditionally has had a large humanitarian assistance program in Haiti given its employment, health, nutrition and education indicators which are among the worst in the hemisphere. Our FY 1991 (pre-coup) assistance levels was $78 million, and during the first two years of the de facto military regime our humanitarian assistance to Haiti reached $112 million. Building Democracy. Haiti has made measurable progress toward establishing a democratic society. Since 1994, six free and fair elections have taken place, including elections for one-third of the Senate and local authorities which took place on April 6, 1997. (We have contributed $1.36 million to a UN Electoral Assistance trust fund--as well as to IRI, NDI and IFES--for this purpose.) A popularly- elected President peacefully succeeded another for the first time in Haitian history. An elected parliament plays an increasingly important role, also for the first time in Haitian history. This progress has an impact on the United States. In 1994--before the restoration of democracy--the U.S. spent $400 million dealing with 25,000 interdicted Haitian migrants. In 1996, about 700 Haitian migrants wereinterdicted, with only 13 Haitians interdicted in the last six months of 1996. The U.S. is working with other donors to assist the Government of Haiti to reform the judicial and penal system. USAID--in conjunction with the Department of Justice--is implementing an Administration of Justice Project to help improve the competence of the criminal justice system. Through this project, USAID and DOJ are providing judicial training; developing and implementing a model parquets (prosecutor's offices) program in seven jurisdictions across the country (to be expanded into 15 jurisdictions this year); strengthening case tracking, trial preparation, and oral advocacy by prosecutors; providing training in the Courts of First Instance and Justice of the Peace courts; and providing grants for legal assistance in seven jurisdictions. In addition, USAID has financed renovations at the National Penitentiary, the cap-Haitien prison and others throughout the country. A special prison was established for women and juveniles in Port-Au- Prince to separate them from male prisoners held at the National Penitentiary. Assistance in basic materials and equipment was made to the first civilian Penal Administration. The USAID program established a current register of prisoners nationwide and a Haitian legal intern program which provides legal service to indigent defendants. A multi- donor effort to address comprehensively the issues of prison rehabilitation and management is now underway. The USAID Democracy Enhancement Project is helping Haiti to establish an independent Parliament with a transparent and responsive legislative process, and develop civic infrastructure based on grass- roots democracy and popular participation. The project has four elements: assistance to the Haitian parliament, local government development and decentralization, assistance to community-based civic organizations, and a Human Rights Fund. USAID is providing technical assistance to members and staff of both chambers of Parliament to strengthen legislative, oversight and constituency functions; newly elected local officials and mayors associations to develop administrative and financial management systems, improve public service delivery, and build relationships with constituents and local civic organizations to stimulate effective public participation in government and expand public awareness of democratic principles. The Human Rights Fund assists victims of human rights abuse, improves human rights monitoring and legal assistance capabilities, and strengthens citizen oversight of police. Promoting Broad-Based Economic Growth. USAID has several projects to rebuild the Haitian economy. In the policy area, the $15 million FY 1996 Budget Support Program is part of a $140 million, multi-donor effort which makes the IMF's far-reaching, three-year restructuring program viable. The USAID Policy and Administrative Reform Project has assisted the privatization effort by financing the technical studies for nine parastatals. Other USAID projects increase access to credit by micro-enterprises and small farmers. To expand rural credit further, USAID has finalized negotiations with commercial banks to permit borrowing by micro-enterprises--a first in Haiti. In February, the government-appointed council (CMEP) announced an ambitious schedule to privatize nine parastatals from May 1997 through March 1998. We will support the Government's privatization efforts by financing transaction costs of three of the parastatals. However, private investors will continue to view the privatization process with skepticism until there is at least one completed privatization. To assist this process, USAID is providing funding for technical assistance to the CMEP to establish a technicalsecretariat, and to complete privatization transactions for the airport, seaport, and telephone company. USAID also supports several important agricultural initiatives to enhance small farmer hillside agricultural production, promote environmental protection in rural areas, and support agribusiness development and marketing of high value agricultural products. USAID collaborates with the Ministries of Agriculture and Environment, the private sector, NGOs, and other donors in the development and implementation of agricultural programs. The USAID programs complement efforts by the Government of Haiti to stimulate alternative agricultural production on the plains. USAID programs are making significant contributions to food security and income generation for approximately 750,000 people in rural areas. USAID programs are based on successful agricultural models for improving small farmer yields and income while protecting the environment. USAID programs support the adoption of improved crop varieties, agronomic practices, and soil and water conservation techniques, and helps develop export and domestic markets for agricultural products. Support includes the expansion of fruit tree cultivation, intensive vegetable gardening, tree planting, and better marketing strategies. The USAID small farmer coffee program has introduced improved coffee production and processing techniques, helped to organize small coffee producers into associations and a federation of coffee producers, and developed niche markets in the United States that pay a premium price for high quality Haitian coffee. Coffee is marketed directly by the Haiti coffee federation, under the trade name ``Haitian Bleu,'' breaking the oligarchic hold of the Haiti coffee cartel and ensuring greater earning for 20,000 coffee producers (approximately 100,000 rural beneficiaries). USAID agribusiness and microenterprise projects provide loans to agribusinesses and rural enterprises. The Agricultural Guarantee Fund has made 15 loans totaling $2.5 million for mango exporting, sisal processing, tomato processing, and for the importation and distribution of fertilizer to small farmers. USAID, with USAID support, is helping mango exporters to meet international market standards. Strengthening Health, Family Planning and Education. USAID human capacity development efforts attempt to expand the role of the government in providing public services; as well as continue direct delivery of health, family planning, feeding and education services by NGOs. USAID feeding programs reached an estimated 700,000 people in FY 1996. This number will be reduced to 600,000 in FY 1997 and focus on maternal and child education and health projects. Levels of infant mortality, maternal mortality, and the nutritional status of children under 5 in areas served by USAID-supported private agencies are better than the national average. In basic education, USAID supports private schools which represent 75% of Haiti's primary schools, and is working with the public sector to improve oversight capabilities, as well expand its role in delivering primary education services. liberia Question. While attention in the world is focused on crises in Rwanda, Burundi and Zaire, there are other nations in Africa that could fall in to crisis at any moment. One of these nations, Liberia, is one that the U.S. has historic links to. I have been supportive of the Clinton Administration's efforts to forge a lasting peace in this nation. Thankfully, the international peacekeeping force has thus far succeeded in maintaining a tentative peace. I note that your FY 1998 budget request includes a significant increase in P.L. 480 assistance. Can you tell me about USAID's role in stabilizing this struggling nation? Answer. Since July 1990, the Economic Community of West African States (ECOWAS) has attempted to negotiate a durable peace in Liberia. The ECOWAS peacekeeping force (ECOMOG) was deployed to Liberia in August 1990 to stop the bloodshed and provide the security cornerstone of the peace process. A UN Observer Mission in Liberia (UNOMIL) was established in 1993 to assist ECOMOG monitor the cease-fire and supervise disarmament and demobilization of combatants. After six years of war, the leaders of the main warring factions signed the Abuja Peace Accord on August 19, 1995. However, in April 1996, fighting erupted in Monrovia and derailed the peace process. By late May, the fighting stopped and following a period of intense regional diplomacy, ECOWAS and the faction leaders amended the Abuja Accord on August 17, 1996. The amended accord named Ruth Perry as Chairman of the Council of State, called for an immediate cease-fire, disarmament, dissolution of the factions by January 31, 1997, and national elections by May 31, 1997. Since disarmament began on November 22, 1996, over 20,000 of the estimated 33,000 factional fighters have disarmed. Ending the Liberian conflict is in the national interest of the United States. First, the war is a serious threat to West Africa regional stability; its continuance adversely affects neighboring states and impedes regional economic development. Second, the United States has steadfastly supported ECOWAS' peace process which is a regional solution to a regional problem. The ECOWAS plan calls for free and fair elections and is consonant with a primary U.S. policy objective of democratization. The United States' relationship with Liberia is our longest with any sub-Saharan nation and our continued involvement in Liberia is an important signal of our commitment and interest in Africa. The current USAID program was in response to the human tragedy created by the civil war. U.S. policy and assistance to Liberia has been to seek peace and the establishment of a democratic government, while simultaneously providing relief for the victims of the war. Human suffering over the last seven years has been enormous. Since FY 1990, USAID has provided approximately $500 million in humanitarian, food aid, demobilization/reintegration, and democracy/governance assistance for Liberia. FY 1997 Assistance. In FY 1997 the United States will play an important role in cooperation with other donors, ECOWAS, UN agencies and nongovernmental organizations (NGOs) in support of the peace process as follows: Food Aid: Between 30-50 million of food aid, with an emphasis on targeted feeding, food-for-work projects, school feeding programs, feeding programs for the vulnerable (mothers, children, the elderly and initial feeding of disarmed fighters). Humanitarian Assistance: Between $7-10 million is available for emergency health, water/sanitation shelter, and agricultural assistance (seeds/tools) for war-affected populations, including demobilized fighters. Financial assistance will also be provided to cash-crop farmers to increase rural productivity and generate employment through NGOs such as Catholic Relief Service, Lutheran World Relief, Africare, and World Vision. Demobilization/Reintegration: Approximately $8 million is available for demobilization and reintegration programs, including: support for Liberian small businesses; nonformal education and skills development; trauma counseling, public information activities, including communications and media support; start-up costs of community-based rehabilitation programs; and public works projects which generate employment for ex-combatants and civilians. Elections: The security situation in Liberia has improved to where national elections can now be held. However, credible elections are no longer possible by May 30. Time is too short for voter registration, a meaningful campaign and other elections essentials. The Liberia Elections Commission's proposal to schedule elections 74 days after promulgation of the election laws is reasonable. The USG and the United Nations endorse this proposal. To assist Liberia with its elections, the U.S. is providing approximately $8.2 million to U.S. NGOs including the International Foundation for Elections Systems (IFES); the International Republican Institute (IRI); the National Democratic Institute (NDI); the African Leadership Forum; the Carter Center, the African Refugee Policy Group, and Friends of Liberia. aid to russia and the nis Question. I have been supportive of the Administration's efforts to aid Russia gain economic stability. I am aware that funding for Russia was significantly diminished by last year's Appropriations legislation. Can you tell me what impact the funding cut had on on-going programs with Russia? I am pleased that the Administration is proposing additional funding for Russia and the NIS. Could you tell me how much of that funding would go to Russia to help them meet challenges of building democracy and a market economy? Answer. Primarily because of budget decreases, we have made significant reductions in the Russia program: Post privatization support to firms has largely ended. Agriculture, including post privatization farm reorganization, will receive no further funding. Energy efforts will concentrate on electric power sector restructuring/privatization. Energy efficiency, oil and gas development and coal sector restructuring will be left to other donors. The U.S. Department of Energy will continue nuclear safety efforts. Housing reform will be cut sharply to provide minimal bridge funding to World Bank Programs. USAID's work in fiscal reform, financial market reform, environment and health have also been reduced. The main impact of budget decreases has been the early termination of or reduced support for effective, successful programs, which, we believe, would continue to make significant contributions to systemic change in Russia. For example, health care reform will receive no further funding after this year, although there have been significant accomplishments, and there are still many areas in which continued support could make a difference. Also, the uncertainty of budget levels over the last several years has made planning extremely difficult. This year is no exception. We are now awaiting Congressional action on the Administration's Freedom Support Act request to determine whether or not we will move ahead with a refocused, extended program under the Partnership for Freedom. Approximately $241 million of the $900 million requested for the Partnership for Freedom will support building democracy and a market economy in Russia by USAID and other U.S. Government agencies. Questions for the Record Submitted by Mr. Torres victims of torture--integration with human rights and development Question. This Subcommittee, under both Republican and Democratic majorities, has urged AID to support treatment centers for victims of torture. In last year's report, the Committee stated the following: ``the Committee urges AID to incorporate support for treatment of torture as an integral part of its promotion of human rights and development. In identifying appropriate countries in which to provide such services, AID should give special consideration to the State Department's Country Reports for Human Rights Practices. The agency should also work with organizations such as the United Nations Voluntary Fund for Victims of Torture and the Center for Victims of Torture.'' Establishment of democracy and human rights in countries afflicted with torture and repression requires not only appropriate institutions and laws. Its people require healing of the wounds of repression if an atmosphere of freedom is to flourish. Such is particularly obvious in countries such as Bosnia and Rwanda, but many others as well. Treatment centers provide one of the instruments for healing. What has AID done to respond to this recommendation? Answer. Regrettably, victims of physical and mental persecution are be found in many countries. It is our experience that torture often is a symptom of authoritarianism or anarchy. USAID's democracy, governance and human rights programs are attempting to treat the causes and consequences of torture. Strengthening the rule of law and respect for human rights are our objectives. This includes protection of people against arbitrary use of authority and against lawlessness. U.S. diplomatic pressure, combined with USAID democracy and governance assistance efforts, hopefully will quell the use of torture. The State Department's annual country reports on human rights practices provide substantive direction to USAID work in this area. But there remain the unfortunate victims of past and present abuse. USAID is supportive of the work financed by UN Voluntary Fund for Victims of Torture. The U.S. contribution this year, from the International Organizations and Programs account, will be $1.5 million. USAID has supported the Center for the Victims of Torture to carry out a program in Turkey, providing training and technical assistance to the Human Rights Foundation of Turkey and the Turkish Medical Association to build clinical capacity in treatment centers. The grant may lead to a multi-country conference and possible follow-on activities on the treatment of torture victims. USAID also is involved in other activities that relate to the needs of victims of torture. The Displaced Children and Orphans Fund supports the psychological and social reintegration of children affected by war. Major activities are currently funded under this program in Angola, Eritrea, Liberia, Rwanda, the Former Yugoslavia and Vietnam. The USAID War Victims Fund provides prosthetics and other related orthopedic assistance to civilian victims of war. The Fund currently operates in Angola, Cambodia, El Salvador, Laos, Liberia, Mozambique, Sri Lanka and Vietnam. Although there is no specific targeting of torture victims, the beneficiaries are primarily traumatized civilians who have lost limbs as a result of landmines and other weapons. Under the Trauma, Social Welfare, and Humanitarian Assistance project, USAID supports NGO programs that address issues of community health and training activities for mental health providers, teachers, volunteers and doctors working with traumatized refugees and displaced populations in the former Yugoslavia. Under this project, USAID has supported the following activities. Catholic Relief Services which is working with local psychological associations to provide training on post-traumatic stress syndrome and other psychosocial treatments. USAID provided $1.9 million in support of this effort. The International Rescue Committee which is addressing the psychosocial needs of war-traumatized women, children and other vulnerable groups by developing local organizations' capacity and to fund specific activities in both Bosnia-Herzegovina and Croatia. IRC has received a total of $8.5 million from USAID. In Croatia, the Center for Attitudinal Healing is receiving funding from USAID to build on its experiences working with Vietnam veterans using the group counseling approach to work with refugees and displaced persons in the camps and settlements adversely affected by the horrors of war. victims of torture--support to institute of educational research (ier) at addis ababa Question. Ethiopia is a case in point where providing treatment to the victims of the Mengistu regime can provide healing and help lay the foundations for human rights and democracy in that country. Moreover, torture continues to be a problem under the current government. The Institute of Educational Research (IER) at Addis Ababa University is providing treatment to students who were survivors of torture but it sees the need for a professional center to provide treatment throughout the country. Can AID explore this need with EIR? Answer. USAID does not have a program directly supporting the Institute of Educational Research at Addis Ababa University, but I have instructed that the Agency look into this possibility. Wednesday, April 9, 1997. NIS AND CENTRAL EUROPE WITNESSES AMBASSADOR RICHARD L. MORNINGSTAR, SPECIAL ADVISOR TO THE PRESIDENT AND SECRETARY OF STATE ON ASSISTANCE TO THE NEW INDEPENDENT STATES JAMES H. HOLMES, COORDINATOR FOR EAST EUROPEAN ASSISTANCE, U.S. DEPARTMENT OF STATE THOMAS A. DINE, ASSISTANT ADMINISTRATOR, BUREAU FOR EUROPE AND THE NEW INDEPENDENT STATES, UNITED STATES AGENCY FOR INTERNATIONAL DEVELOPMENT Chairman Callahan's Opening Statement Mr. Callahan. Good morning, and I apologize for being four minutes late. We've started every Committee hearing since I've been Chairman exactly on time; but this morning we had a conference and it made me late. So I apologize to you. As a result of our tardiness, maybe we ought to establish a policy of abbreviating our statements. We've had the opportunity to review your statements, and I hope that we don't have to listen to the entire thing since we have already digested your motives and your intents. So I will abbreviate mine and I will ask everybody but Mrs. Pelosi to abbreviate theirs. She can have as long as she wants. We're pleased to welcome this morning the officials responsible for the American assistance to Central Europe, the Baltic States, and the nations of the former Soviet Union. Ambassador Morningstar, Tom Dine, and Jim Holmes are well known to many of us and each of them have worked hard to keep our Subcommittee informed on their successes and their setbacks. Each of them, incidentally, are professional in their endeavors. We don't always agree with you on everything, like housing Russian soldiers; we nevertheless appreciate very much your keeping us informed. I would like to focus on four areas at least: the President's proposal for a 40 percent increase in assistance to Russia and Central Asia; the situation in Bosnia that requires a continuing presence of US troops long past the original December deadline which the President indicated he was going to keep; the unstable situation in Armenia, Azerbaijan, and Georgia; and the mixed record of the 11 diverse enterprise funds in the region. You know your areas of responsibility and each of you can, if you would, respond to those several questions. This morning I'm sure none of you had any responsibility of the timing of the article in ``The New York Times,'' but it was a very, very interesting article that's going to cause you some heartburn and caused me great heartburn when I read it. My fear is that it's not only prevalent in the Ukraine, but it's prevalent in other countries as well. The Subcommittee had the opportunity last week to visit several countries in the Caribbean and Latin America. The indications we saw indicated the same activities taking place there that ``The New York Times'' indicates is taking place in the Ukraine, and naturally we're going to have to respond to that to our constituents. This is exactly what they fear; this is exactly why they're against foreign aid. I've been going back to my district and talking to every group that invites me to speak about the need for foreign aid, and Secretary Albright is now going all over this country talking about we're becoming a second-rate nation with respect to our involvement in the foreign operations arena because we're not giving enough money, and this is exactly why we have problems getting the American people to support our efforts in foreign aid. So we're going to have to ask for your response on that article as well as the four areas of concern that I mentioned to you. So with that, I yield at this time to my colleague from California, Mrs. Pelosi. [The article from the New York Times follows:] [Pages 265 - 266--The official Committee record contains additional material here.] Ms. Pelosi's Opening Statement Ms. Pelosi. Thank you very much, Mr. Chairman. I want to join you in welcoming our witnesses this morning, and I appreciate the fact that you used your time to lay out some of the concerns that the Subcommittee has. I did want to speak for a moment about some historical context for this, as I welcome the witnesses to this hearing on the New Independent States and Eastern European programs. The programs, taken together, represent perhaps the most innovative and hopeful aspects of our foreign aid programs. Just a few short years ago, the foreign policy of the United States was deeply mired in the Cold War, and most of our actions were based on that reality. Today, 7 years after the beginning of the Eastern European aid programs and a few short years into our NIS assistance programs, we are negotiating items such as tax reform, anti- crime laws, energy sector investment agreements, and bilateral investment treaties instead of troop withdrawals from Afghanistan. That has to be considered progress. In Eastern Europe, we have completed or nearly completed our assistance programs in several countries which are well on their way to completing the transition from authoritarian governments to free markets and democratic forms of government. Our assistance reform efforts have provided the grease to make the wheels turn and, indeed, in many ways have been the primary engine for progress. Few people remember these aid programs all started in this Subcommittee, Mr. Chairman, when it provided a small amount of money under Mr. Obey's leadership to a struggling labor movement in Poland called ``Solidarity'' way back in 1987. Today our aid levels are decreasing in Eastern Europe with the exception, of course, of Bosnia, and increases are requested for the New Independent States. I'm looking forward to hearing from our witnesses on the particulars, but I wanted to mention a little bit of the history. The most significant fact in the funding of these programs is that they have been funded on a largely bipartisan basis, and that has been the case in both the Republican and Democratically controlled Congresses. I hope this spirit will continue as we go forward this year. In light of the article in the New York Times this morning, since our chairman has called it to all of our attention, it reminds me of what we saw last week, Mr. Chairman, under your leadership. You took us on what I consider to be a very product and meaningful trip, and I thank you for your leadership in doing that and in giving this hemisphere priority. The grueling schedule kept driving home the message, which is in here, too, that unless we have a system of law and order, an independent and functioning judiciary, and the ability to say to people who are tempted to corruption that justice will prevail, it is going to be very difficult to attract the capital and justify the other support that we are giving in the hope of opening markets, of privatization, and of creating jobs for people so they can enjoy some of the economic benefits of democracy. And with that, Mr. Chairman, I thank you again for yielding and look forward to our witnesses' testimony. Mr. Callahan. Thank you. Ambassador? (Asides.) Ambassador Morningstar's Opening Statement Ambassador Morningstar. Thank you, Mr. Chairman and Members of the Subcommittee. I appreciate the opportunity to appear before you today to discuss one of the Administration's top priorities in the foreign affairs budget, the Partnership for Freedom, and as you know the Fiscal Year of '98 request for NIS assistance is $900 million, and this request is based on a strategic refocus of our assistance efforts as we move into the 21st century. The Partnership for Freedom rests on one simple principle: we, the United States, have no greater national security interest than the stability of Russia and the NIS, and the consolidation of their transition to market democracies. Our most dangerous adversary of all time, the Soviet Union is no more. We have an enhanced opportunity today to influence and shape the future of the New Independent States that were the Soviet Union. Stability in this region over the next 5 to 10 years is dependent on the achievement of economic growth. If growth cannot be achieved, we could face destabilization that could bring about a renewed national security threat. With respect to Russia, I thought there was an interesting article in this morning's paper. It's not the Ukraine article that we can talk about a little later. It was an article in this morning's ``Financial Times,'' which, I think, frames the issue very well in connection with Russia. Will Russia choose open and fair capitalism or corrupt, monopolist capitalism with all that could entail? The article pointed out that it might take more than a generation to answer the question, and that recent changes in the government could present opportunities. This is why the Partnership for Freedom is important. How can we help Russia and the other New Independent States give their citizens a more tangible stake in reform? First is by mobilizing capital and increasing investment to create jobs. This will require more aggressive policy and legal reforms to improve the environment for business; more capital, particularly in the regions and for smaller businesses; and increased efforts to combat crime and corruption, which directly relates to that article this morning. Second, we need to stay engaged to strengthen the democratic organizations that allow citizens to influence government and advocate change. We must continue to persuade and cajole at the national level, but the real change will come from the bottom up. Why have we asked for a larger budget this year, and why is our opportunity to have an impact greater than it ever was? First, the Partnership for Freedom responds to the need for a second phase of engagement in the NIS which builds on the foundation of basic structural reforms such as privatization and macroeconomic stabilization. Our active engagement, which will focus on the push for real growth in these economies, is crucial. Second, we've looked hard at what we can do with our assistance resources to make the biggest impact. On the subject of investment, for example, we have identified that a major gap exists in financing small businesses in the regions. This finding is based on over 50 interviews that I and my staff have done with professionals and experts, both here and in the NIS, and at least 8 business round tables getting the views of American and NIS business people, and the answer keeps coming back the same. It is quite interesting that just one year ago I would not have been able to report the same findings. One year ago we were hearing about the lack of the qualified demand for financing. That has changed and we've learned from EBRD's small loan program, from NGO's like Eurasia, and CCI, and FINCA, that demand in the regions and the expected small business far outstrips the supply for capital. Another crucial opportunity is our proposal to more than double the amount of resources we direct to anti-crime and law enforcement work. These last few years have built foundations that allow us to do more to fight crime and corruption. Third, now is the time to emphasize cooperative, mutually beneficial activities. US business, universities, scientific organizations, hospitals, towns, and cities all over the United States see the benefits in developing close linkages with the NIS. These ties do more than governments could ever do to achieve constructive relationships and have an impact on the community level. I see new examples of this every week. Just last week, for example, I learned of a partnership, a university partnership, between Case Western Reserve law school and Cleveland State law school, and universities in St. Petersburg and Volgograd where law students who finish their studies in those Russian cities come to Case Western Reserve or Cleveland State for another year of training, which is essential and very helpful in allowing them to be able to advocate for change when they go back to their country. Fourth, we continue to hear from our ambassadors in the NIS and from notable leaders of reform such as Andrei Kozyrev or Igor Yavlinski, that our largest returns in investment and assistance dollars is in exchanges and support for the hundreds of nascent democracy NGO's, human rights groups, and political parties. I would submit that these programs cannot be done by anyone but the United States. We represent the clearest vision of the future. The Partnership for Freedom proposes to do more than double the number of exchanges. We propose to do more democracy work in countries in Central Asia and the Caucasus that are lagging in democratic reform. Another recent illustration on exchanges: Ambassador Courtney in Georgia, who I might add I think is one of our best ambassadors anywhere, in a cable outlined the profound impact that the alumni of US exchange programs are having in Georgia. He mentions the chairs of two key parliamentary committees, a leader in the independent media, and several others that are in high profile community work, education, and business. These are all graduates of our exchange programs. Fifth, and last, the regions have emerged as the promising basis for reform and growth. One illustration is Novgorod, the Novgorod region, in Northwest Russia. It is really a model of where we need to be working. The regional government there has taken aggressive steps to improve the investment climate and encourage growth through tax incentives for foreign investors, strong early results in getting investment projects actually done, action over just words. This region and others like it are where we can and must do more, and where we will see the kind of results that push and pull a country alive. We're currently developing a Partnership for Freedom pilot program using existing funds in Novgorod to mobilize more investments and more partnerships now. I must add here that the new Russian cabinet includes two notable leaders of Russia's aggressive regions--Novgorod and Samara. This bodes well for increasing our efforts in the regions, and high success there will affect the center. We face many security challenges in the world today. This region presents us with an urgent and a unique opportunity to truly make a difference in strengthening the democratic voices and market economies that emerge, and once and for all to relegate our Cold War concerns to the history books. My written statement and the charts are over here and, I think, would answer questions with respect to that, and during the questioning period show the details, and I look forward to answering your questions on this proposal. I might add, at the end I'm fully prepared, clearly, to respond to ``The New York Times'' article with respect to the Ukraine. I can do that during the question period, after the other statements, or whenever you would like. [The Statement of Ambassador Morningstar follows:] [Pages 271 - 292--The official Committee record contains additional material here.] Mr. Callahan. Okay, thank you. Mr. Dine or Mr. Holmes? Mr. Holmes' Opening Statement Mr. Holmes. Mr. Chairman, I, too, want to thank you for the opportunity to appear before you at this time on behalf of the 1998 Support for East European Democracy programs. With your permission, I'd like my already submitted formal statement to be entered into the record and provide you a brief oral statement. In my view, Mr. Chairman, the SEED program has been successful primarily because you and we, the Congress and the Executive, recognize the value of the program for US interests and because both have remained faithful to a basic compact: First, that assistance to Central and Eastern Europe could be transitional. Second, that our objectives would be finite and achievable. Third, that the Executive would keep you, the Congress, fully informed--both about problems and successes; and, fourth, that when our objectives were met we would wrap up our assistance program and get out. Mr. Chairman, in the two budget years that I have been responsible for coordinating the SEED program, including the critical 1996 Bosnia Supplemental, your support, and, indeed, this Committee's bipartisan support, for that compact has been full and we greatly appreciate it. It is in that spirit, therefore, that I appeal for the Committee's further support for the Fiscal Year 1998 appropriation of $492 million. At first blush this may appear to be a reversal from my commitment to keep SEED funding on a declining slope. In fact, however, it represents a further decrease of $18 million over the 1997 funding and $31 million over the 1996 funding in the non-Dayton-related SEED countries, and for the Dayton-related states, it reflects our preparation to mount a $10 million program of SEED-type programs, if political conditions permit, for Serbia and Kosovo; $15 million in reconstruction for Eastern Slovonia; and $25 million in up-front acknowledgement that in the case of Bosnia SEED will be expected to fund a broad variety of other civilian implementations. The 1998 large ticket requests, therefore, are $225 million for Bosnia, $35 million for the rapidly diminishing Poland program, and three important programs in the $25-to-$33 million range for Romania, Bulgaria, and Albania. For our part of the bargain, I can report to you that the graduation of our SEED assistance programs in three states by the end of this fiscal year will have taken place, and the expected last year of SEED assistance funding for five more states in the next two fiscal years; a total, therefore, of eight states which I expect will be graduated by the end of Fiscal Year 1999, including the original ``big three'' of Poland, Hungary, and the Czech Republic. I can also report real gross domestic product growth in 1996 throughout the region, with the exception of Bulgaria. Inflation further decreased in 1996 in 10 of the 14 states. The private sector's share of the economy exceeded 50 percent in all but 2 states, and the rate of unemployment dipped below that of the European Union average for 9 of our 14 states. I can report the emergence in 1996 of two genuine reform-- minded governments in Romania and Bulgaria, and, accordingly, the redesign of our assistance programs to respond to these perhaps one-time-only opportunities. I can also report the remarkable and early success of the Polish-American Enterprise Fund. The U.S. Reconstruction Assistance Program for Bosnia is on budget, on time, and on target. With respect to your statements at the beginning of the hearing, Mr. Chairman, might I add that in terms of oversight and control in the case of Bosnia, our largest program, we conduct monthly concurrent audits of all our programs. It is a constant auditing process. Unfortunately, I must also report that the Czech-American Enterprise Fund lost 90 cents on the investment dollar, and its board of directors became sufficiently dysfunctional for us to replace the entire original board and close the fund. I would describe the past 10 months in Albania as a major disappointment economically and politically, leading to the need months before the March anarchy to place our Albania Assistance Program under restriction and under constant review. And I would describe our partnership in the international program of Assistance to Independent Television in Bosnia as unexpectedly troubled, not least of all because of the failure of the international community itself to provide a clear, professional management plan. In my view a correct conclusion is that overwhelmingly the SEED program continues to be in America's interests. SEED is succeeding in the creation of an environment for durable, prosperous, free market democracies to emerge from the ruins of the Warsaw Pact and the Soviet empire. Central Europe is a growing market for US goods and services. The peaceful, democratic Central European states that emerged give the United States and the Atlantic Alliance substantially greater assurance of security at lower cost. And these states provide valuable models of political and economic reform for countries farther to the east. For the SEED program, we are entering the home stretch. Our focus and our resources are shifting rapidly southward. I urge this Committee to continue to appropriate a full measure of fuel to get us through to the finish. Thank you. [The statement of Mr. Holmes follows:] [Pages 295 - 311--The official Committee record contains additional material here.] Mr. Callahan. I thank you. Tom, before we recognize you, how about I apologize to our recorder. I didn't realize this microphone was right here when I banged that gavel a while ago. I'm sure it burst an eardrum. I'm sorry about that. Mr. Dine's Opening Statement Mr. Dine. Do you need any technical assistance? Thank you, Mr. Chairman and Members of this Committee for this opportunity. I would like to follow up on what the two coordinators have presented here today and to provide as clear a picture as I can on what AID is doing in the context of the progress that both coordinators have mentioned. I think this progress will show that the $492 million that the Administration is requesting for SEED and the $900 million in the Freedom Support Act, particularly the new Partnership for Freedom program will make analytical sense. I want to utilize five charts, Mr. Chairman, this morning. Normally we just read our statements but I would like to be a little more graphic if possible. The data used in these charts comes from the European Bank for Reconstruction and Development. It also comes from Freedom House in New York. We've matched this data with other available data--for instance, Heritage Foundation has done a lot of analytical work--as well as our own data in-house. The Heritage Foundation, for instance, does not incorporate the Central Asian republics, so we relied on these charts for the data from the EBRD and Freedom House. Chart No. 1 shows that most countries have restructured their economy to privatized production and to promote the conditions in which businesses can compete and thrive, andas Mr. Holmes has indicated, we see that most particularly in the northern tier countries of Central Eastern Europe, and AID has helped them to do that. You see here that the extent to which the region has been structured. The GDP shared in Central Eastern Europe started off in 1989 at about 15 percent. It's now up to 60 percent, probably more, although, as Mr. Holmes has indicated, you've got problems in Bulgaria and Albania, but the thriving economies of Poland, the Czech Republic, Hungary, Estonia, Slovakia, Slovenia, drive that GDP share in that respect. In the former Soviet Union countries, you see that it's lagging. They started off with less than 10 percent. Frankly, I'd have considered that number probably closer to zero, and now up to about 49 percent. So then you see dramatically a change in this region of Central Eastern Europe with the fall of the Berlin Wall, and the former Soviet Union republics with the demise of the empire. Throughout both regions, AID has helped to promote this economic restructuring. In privatization, we've had an enormous success with working with the Czechs, and with the Russians. As ``The Economist'' claimed, though, last year in an article, Russia has a higher percentage of GDP from the private sector now than does Italy, and this is a potential waiting to continue to modernize and progress. I was in the Czech Republic in Prague last April when the Minister of Privatization and I had a ceremony to close down the Ministry of Privatization because the program had been such a success, and he gave great praise to what the United States has done. We've provided assistance--technical assistance--for fiscal reforms. And, Mrs. Pelosi, as you indicated in your opening, tax reform and tax administration are a major focus for us now. We've provided assistance to enterprises to get them to understand how to govern themselves and how competition is the name of the game. So they do not rely on government to start to enter the competitive world. Enormous amounts of technical assistance have gone to the development of capital markets. Our most recent success has been in Romania, where we've not only helped develop the Bucharest Stock Exchange, but then went further to develop an electronically modern, sophisticated over-the-counter market there as well. Instead of calling it a NASDAQ, we now call it ``RASDAQ.'' And we believe that's a terrific advance. Same in Russia. In Lithuania and Latvia, where we've had some problems with the banking system in the past year and a half, AID technical advisors have been there to help stop the erosion and to begin the recovery. And finally we've provided enormous help in the energy sector area in so many of these countries. While Ukraine is getting a bad press here this morning, I can say to you, Mr. Chairman, that our work with the energy sector in the Ukraine, helping it to restructure to improve its efficiency and reliability and become a private sector is showing great progress. All of this work in economic restructuring is starting to show results in terms of real economic growth. As Mr. Holmes just indicated, all the countries of Central Eastern Europe are now showing real economic growth except Bulgaria. We don't have statistics on Albania, but it'll be Albania as well. And, we see no real economic growth in Bosnia and Serbia. But in the NIS countries, eight of those countries are now showing real economic growth. The largest, most potent, Russia, still has not reached that level yet. Let's go to Chart No. 2. This chart shows that from this restructuring and reform have come investments, both domestic and foreign. And, this chart, prepared for Members of the Committee, tries to make the point that the Partnership for Freedom is where the future lies, as it has already been shown in the Central Eastern European areas. All the countries of this region, with the exception of oil and gas rich Kazakstan, Azerbaijan, and Turkmenistan, fall neatly along this trim line, associating economic policy reforms and per capita foreign investments. This tells us that our efforts to assist reform will result in growth, and the new statistical data just published in Prague based on Czech managers' information that I just got last night, shows that Czech managers of privatized companies now don't want 100 percent ownership but want foreign involvement, because they show more productivity under such a situation, and that's our goal. Let's move on to the next chart. Chart No. 3 shows progress in the democratic institution building area--it has been as dramatic as in the economic area, and, again, AID has been central to this progress. In promoting citizen participation in a civil society, AID has helped install the machinery of free and fair elections; strengthened in competitive political parties; assisted the development of NGO's; and aided the growth of independence of public broadcast and print media. As Mr. Holmes indicated, they are having a great deal of problems on that last score in Bosnia, what Internews, for instance, a Northern California NGO is doing a fantastic job in Russia, Ukraine, Kazakstan, and elsewhere. AID is also assisting countries throughout the region to strengthen the rule of law. We've helped draft constitutions-- as in Ukraine. We've helped to train judges, prosecutors, and trial attorneys, and establish jury trial systems. There is a lot more work to be done, and perhaps I should have undergirded all my comments to say that wherever we, the United States government, can do, whatever the international donors can do, it will not happen unless there is a will on the part of governments, on the part of leaderships, on the part of reformers to work that will through the political systems in these countries to reform, to reconstruct, to restructure. Finally, AID in the democratic area is helping bringing good government to the people by assisting with decentralization of power from the national to the local level, and we worked with mayors and municipal authorities to improve governance and delivery of the essential public services. This has been most effective in Bulgaria, and in Poland, Ukraine. Where it's been difficult to deal with central governments, we've gone to the local areas, gone to the grassroots and found that even if mayors are under the label of communist/ neocommunist/socialist, they want to bring reform to their people. They're on the ground and we've had more success with mayors. If I could start this whole program over again, and obviously I can't, I would start with the grassroots up rather than the national level down because that's where we're showing the most momentum, the most activity, the most progress, and that, for me, is the most thrilling part of this whole situation. We had a conference in Sofia, 200-plus mayors and municipal authorities, this December from all over the regions; from 20 plus countries. I think there were 11 languages, and the idea of just helping them understand how you raise money through municipal bonds was a big eye opener for all of them, and, again, I consider that important. This chart shows a comparison. In 1989, Bulgaria and Slovakia were basically, in terms of democratic freedoms, where North Korea is today. And, look where they are on the chart in 1996. And, in 1989, Poland and Hungary were at about the level where Haiti is today. In 1997 look where Poland and Hungary are today. Now they compare with France and Venezuela. This is enormous progress over such a short period of time, and all of us want completion, all of us want success, and as we know from this article, Mr. Chairman, which has now become the centerpiece of your hearing this morning, it is very difficult. So when you see progress, you've got to continue it and keep it going. Chart No. 4, this is the final chart in terms of what I'm trying to get across to all of you this morning. Not all of the countries have shown equal zeal at reforming and not all are sharing equally fruits of reform. But if you rank the progress of 25 countries--Serbia and Bosnia don't make it--Twenty-seven countries now make up the former communist bloc in this area. If you rank the progress of 25 Eastern European and NIS countries in terms of their progress and economic policy reform along the vertical axis, and in terms of the democratic freedoms they've achieved as the horizontal access, we see three clear results. First, none of the countries are ready for EU membership, and some are not ready for WTO membership. And we, and the EU itself, the World Bank, the International Monetary Fund are conscious of this and we've got to be working with them. Second, and this should not shock any of you, economic and democratic reforms go hand in hand. The countries that have come the furthest in their economic reforms are the very countries that have achieved levels of democratic freedom nearly the same as those of our Western allies, as I've just mentioned, and this trend line is the path along which we want to see the CEE and NIS countries move, certainly the middle cluster. If nothing else, if we've got a couple of years left in this whole effort, we've got to move that middle cluster into where the top rung, northern tier countries of Central and Eastern Europe are today. And, thirdly, there's a clear disparity among the regions and between the countries. The countries of the northern tier of Eastern Europe, the Czech Republic, Hungary, Poland, Slovenia, the Baltics, are clustered at this successful end of the trend line. These are the countries that Mr. Holmes mentioned are scheduled for early graduation from the rolls of US assistance. We've already closed down Estonia. Mr. Holmes and I were there in September. We had a big graduation ceremony. The president, the prime minister, and the finance minister, were nervous as can be, frankly, that we were leaving. And, once we left, they understood that they were on their own, and they could do it. There's plenty of Scandinavian investment, some American investment trickling in, and they can do it on their own. The southern tier countries in Eastern Europe, Bulgaria, Romania, Croatia, Macedonia, Albania tend to populate the middle of the graph as do the most advanced NIS reformers of Russia, Turkistan, Ukraine, Moldova. And, again, these countries with some more modest reformers like Armenia, Georgia, and Kazakstan are clearly in the midst of their transition and positioned to utilize US assistance. In the lower part of this chart are the NIS countries that have not yet taken off, and I mentioned that Bosnia and Serbia belong in that lower cluster, and we're watching those. We're trying to work with them modestly, but frankly whatever steam, whatever political support we have in this city for our efforts, we've got to focus on those middle cluster countries. They're the ones that hopefully we can move up. And, finally, foreign assistance from all the donors remains a critical catalyst in helping the reformers. As I mentioned, an internal will is required, foreign aid is required, foreign and domestic investment are required, and hopefully we will be able to succeed in the next couple of years. Let's go back to what was said here on this chart. I think I really made all those points. Mr. Chairman, I'll end there. I just ask this Committee for its support. I think we're doing the job. It is not easy. Don't expect great successes, and when we've got them, let's relish them and continue to reinforce them. Thank you very much. [The statement of Mr. Dine follows:] [Pages 316 - 353--The official Committee record contains additional material here.] nis funding Mr. Callahan. I thank you, and I--ironically today have in the audience a friend of mine from Mobile who lives in Mobile and who also has extensive land holdings in Monroe County, Alabama. I would just make a pact with you that I'll give Mr. Bedsole the authority to go back to Monroe County to explain what he just heard to the people of Monroe County, and if he can get 5 people out of 50 to say they think it's the way we should go, then I will push to get you the money you're asking for. Mr. Dine. Well, if we're going to make a deal, Mr. Chairman, you let me go with him. Mr. Callahan. I would let you go with him provided he would give us a disclaimer of responsibility because I would fear for your life, frankly. Mr. Dine. As you know, I did in my previous incarnation some organizing in Monroe County---- Mr. Callahan. Yeah. Mr. Dine [continuing]. And I had a little bit of success. Mr. Callahan. And then Mr. Morningstar has relatives in Mobile in the form of Dick Ranner. Dick Ranner is not as conservative as the people of Monroe. If you want to get Ranner to go to Mobile Country Club and say, ``Do you think Sonny ought to give us $300 million more than we got last year to operate your three areas of jurisdiction?'' Seriously, I think you know, all three of you, that you're not going to get the $300 million increase. $1.1 billion is a lot of money whether you're at Monroe County or the Mobile Country Club, and we're not going to have the allocation to increase money for the former independent states. That's a reality. That's not Sonny Callahan saying that. That's the Congress telling me, ``Sonny, here's $12 billion. You and Nancy decide how it's going to be split up.'' So what we're going to do with this Committee is to try not to interfere with your ability to promote democracy, and to protect human rights, and to build up health care; we're going to try to give you as much latitude as we can, and we do. We want you to talk about Ukraine. Neither this Committee nor this House earmarked money for Ukraine last year. It was done in the Senate, and we cut out about 90 earmarks, but we did that on our own. So if the Administration thinks that they need latitude and flexibility in order to have an effective foreign policy, you better go to work in the Senate, and you'd better insist that the Senate not earmark, and I think that this article in ``The New York Times'' tells you, or gives you a good enough case to make your argument, but when we, the only committee that you have representing the Administration--and the Congress have to sit in an all-night session with the Senate in a conference committee pleading and bargaining with them to reduce the number of earmarks that they put in there, it makes it very difficult on us. But if we had our way, we wouldn't earmark anything, but we are going to have our way on one thing and that is there is not going to be an increase in the allocation that you receive as a whole last year, period. So if you want to redesign your priorities, then redesign them. If you don't want to, then we will do it. It's as simple as that. So the 292 million is not in the cards regardless of the justification. haiti In one of your charts you mentioned Haiti, and you indicated that Haiti was in the middle of the spectrum with respect to advances in democracy. Hell, we just got back from Haiti. I didn't see any indication of democracy except they had an election Sunday and 15 percent of the people voted in the election---- Ms. Pelosi. Five. Mr. Callahan [continuing]. 5 percent? Five percent of the people voted in the election, and the rest of them were standing outside the polls afraid to go in, or else they had not yet been paid to vote. Crime is rampant. Human misery is probably the highest that it is in the world. In one 3-hour span, if you have a spectrum of the quality of life, I went from the lowest point in Haiti to the highest point when I got to Mobile 3 hours later. So to say that Haiti is in the middle of the spectrum of advancements is not a good indication. I don't think you should have put it in there anyway, but if that is an indication of improvement, of progress, it's a very, very weak indicator. We're going to have to have accountability, so if you guys want to resubmit your request and tell us how you would like this money appropriated, whether it's in a lump sum or whether divided three ways or four ways, or to enterprise funds or however, submit your requests, but forget about the $300 million increase. It's time to ask questions so I'm going to defer on that question and let Mrs. Pelosi and the other Members of the Subcommittee submit questions and I'll ask mine at the end. Wait a minute, Nancy, excuse me. Would you like to go ahead and comment on ``The New York Times'' article first? ukraine Ambassador Morningstar. Yep. We might as well get to it now. First of all, I'd just like to start by saying that it goes without saying that Ukraine is a very important country. It's the second largest country in the former Soviet Union. It has great potential to make it. If it doesn't, it will threaten stability. We have a basic interest in general in supporting Ukraine. With respect to--Ukraine, you made the point in respect to the earmarks. Our Members are emotional when we suggest $225 million with respect to this--and are based on the assumptions that the major reforms that have been proposed by President Kuchma and will take place, that the investment climate will improve and steps will be taken to clean up corruption. We do have major, very major, concerns as indicated by that article. If, in fact, these steps are not taken, then we will have to review the program and look at how much money now should go to Ukraine. And, this is the reason why earmarks, I believe, are fully inappropriate. On the other hand, you know, we could say today that we should cut off everything to Ukraine; I disagree with that. There has been enough that has been going on and it still gives us some hope. There's a battle going on between the reformers and others. We have to see if the reform program will, in fact, go forward. Things change. We have to look at things on a long term basis. Six months ago, we would have said, ``Yeah. We should be spending more money in Ukraine.'' Hopefully, six months from now we should be saying the same thing. But the point is, we need to have flexibility and we need to be able to respond to problems as they arise. The other thing that I think is important, no doubt, the Ukrainian issue with respect to corruption is a Ukrainian problem and is not an American problem, and we can work with them and we deal with them every day with respect to investment disputes and we have major concerns. And we--but we have to, we have to accept the fact that it's going to take the political will of the Ukrainian government to clean up corruption. Many of those reforms that are in--now involving regulations and tax reforms, in itself have an--effect with respect to corruption. Now, there are obviously major problems. We have Mr. Lemire in our audience today from Gala Radio. Gala Radio has been treated outrageously. There are other companies in the American business community that have been treated very poorly and it's our obligation to deal with those issues and work with the Ukrainian government on a very close basis and use whatever leverage we can to solve these disputes. We do have to remember that it is the Ukrainian---- Mr. Callahan. Well, I think that it may be a problem of the Ukrainian government, but in situations like the Gala Radio situation, that becomes a problem for the American government. Ambassador Morningstar. Oh, absolutely. Mr. Callahan. Because he's an American citizen over there trying to do something, trying to invest or make the quality of life better in an entrepreneurial position. So, that is an American product. Ambassador Morningstar. And, I didn't mean to convey for a moment that the issues relating to Gala Radio and other companies are not issues that the American government needs to be involved in. My only point, and we need to work this hard and be as tough on the Ukrainian government as possible to cure them or to eliminate these problems. The only point that I'm making is it's ultimately the Ukrainian government that has to take the step to clean up the corruption. We have represented our companies as best as we possibly can. Mr. Callahan. One other thing. We have been requested by the Administration, once again, to come up with about $4 billion in a supplemental bill to handle disaster and other areas of concern with the government. In order to do that we have to rescind appropriations that we appropriated last September. Though they come to our Committee and said, ``Give us your contribution,'' like the United Way. All right. So, under the circumstances, you have said you do not like your earmarks. It's interfering with your ability in the Ukraine to be able to effectively have a foreign policy there. Would you recommend that we rescind the earmark? earmarks Ambassador Morningstar. I know the Administration opposes earmarks. If earmarks are rescinded, I don't think that money should come from the total package of $625 million because one of the problems with the earmarks, I believe, is that not enough money is available for other countries in the NIS, certainly in the context of that 625 million dollar budget. So, I would hate to see that, with our overall funds being restricted with respect to the---- Mr. Callahan. Well, do you think if we left the 625 million there and eliminated the earmarks it would give you an advantage in dealing with the apparent problems of the Ukraine? Ambassador Morningstar. I think it would give us the flexibility to respond to some of these issues. Mr. Callahan. Would you go so far to say the President supports that? Ambassador Morningstar. I don't want to speak for the President. I can say that our office and those involved with respect to the assistance program certainly support it. Mr. Callahan. Well, if you will contact the President this afternoon and ask him to contact me and make that request. If it's the desire of the Administration to have this language in the appropriation bill, all the President has to do is call and I will put it in the bill. So, if you would like to remove that--I'm not saying that a few Members of the Senate on the other side might not put it back in here, but when it leaves the House, we'll remove the restrictions if the President makes that request. Nancy. corruption in ukraine Ms. Pelosi. Thank you, Mr. Chairman. I, too, had some concern about the impact of the earmark and the flexibility it diminishes for the Administration. In fact, in the case of Ukraine, we had earmarks within earmarks. We had sub earmarks. And, I assume that what you said about earmarking applied to the sub earmarks as well. The article in the paper is not the centerpiece of this hearing. We have so much to cover, I don't know how we'll ever get around to all the questions--in writing, I suppose. But, I recall last summer being in Russia and hearing from people who came over from the Ukraine to talk about what was happening there. Anecdotally they were telling us that people are not prepared for foreign investment. They said you can't even find a hotel that has a lighted stairway to come in and out of and I thought, well, if I go there I better be prepared for some discomfort. But, after reading this article about the corruption, I too have questions. I know what you did not intend it to mean but I note the fact that you said that corruption is not an American problem to deal with; it's a Ukrainian problem to deal with. If indeed our investment in the Ukraine is to lead to private investment going in there, then we all have a problem with corruption. To the extent that the U.S. can use its leverage to fight corruption, I think we have to use it. If the corruption is going to eat up the opportunity for privatization and for free markets, how are they ever going to attract the talent and the capital to grow? As I said in my opening remarks, one of the most important things we can do for a wide range of reasons, whether it impacts the individual, personal human rights of individuals in these countries, or the ability for the economy to thrive, is that they have to have some system of justice that works, that is effective, and that is independent. It is our business to, as a country, to provide that leadership. Maybe this is the most valuable thing that we can do to protect our other investments as well as help those countries. Ambassador Morningstar. I agree with you 100 percent. And, again, to clarify, it's very much of an American problem from the standpoint of dealing with the Ukrainians. The Ukrainians have to show a political will. I probably, as much or more than anybody in this Administration, have been standing up front with respect to this issue. I was not a very popular figure in the Ukraine last fall when I noted this publicly, and talked about these concerns. And, we are, again, working every single day with respect to these issues that Mr. Lemire and others are facing. So, I don't want to downplay our roles at all. Ms. Pelosi. No, I understand, but in addition to talking about individual companies, which I think is an important thing to do, we have to work on the systemic problem. We can be helpful with that, I think, if we condition some of our assistance. Thank you, Mr. Morningstar. I was so pleased to hear Mr. Dine refer to Internews, which is a San Francisco based organization and is attempting to work with the emerging independent media in nine of the 14 New Independent States. Unfortunately, as you may know, recently one of the employees of Internews was killed in one Republic while pursuing his work. We also have another pillar in the Partnership for Freedom in expanding exchanges and partnership for U.S.-based institutions in the Center for Citizens' Initiative, also based in San Francisco, I know it has been quite active with AID. Can you comment, just a little further on the importance of these kinds of initiatives in your work, Mr. Dine? Mr. Dine. First of all, they are both working at the grassroots level and as I indicated before, my one enthusiasm for such efforts, I think, shows in the results, that both groups are achieving. I've already indicated that I think Internews is productive and so did you. But, let me just focus a little bit on CCI. It's one of the most innovative groups that I've come across in my time in the Executive Branch. Small business development, credit, financing, innovations. Even in St. Petersburg, CCI has been the leader, encouraging people to have gardens on rooftops so that cafood production can be brought within the city. Both are small. Both are highly productive. Both are deeply committed to the goals which follow this. investment initiatives Ms. Pelosi. Thank you, Mr. Dine. Mr. Morningstar, in your testimony you focused on the strategic refocus on economic growth and investment and I think that that's very important. And, we've talked about the fact that in Russia, and in many of the other Republics, despite our efforts so far, the framework for investment simply does not exist. You mentioned various agencies will carry out initiatives including Exim Bank, OPIC and TDA. They're all funded in our bill in specific mandates and separate funding. Will you tell us how they participate in these programs in the NIS? Ambassador Morningstar. Let me start by talking about the program with respect to the regions. We have discussed--as well with other Members, a discussion of what agencies and what programs we should be involved in--with regard to initiatives. As you may know, we are deferring any consideration with respect to Exim, as it is--comes to reauthorization and your questions relate to--we delete the Exim from a pilot standpoint, it's still very much being involved in the regions under their existing authorities in a much smaller way than-- before. OPIC, and OPIC does operate under--it's operating under its own budget as major commitments with respect to both large and small businesses within Russia. They do not need money at all to--it would be also looking at the participation in EBRD which has had a very successful small loan program in Russia working with banks at a local level and we've had extensive discussions with them--I believe that that could be significantly expanded as well as it can be used to leverage other European donors to contribute. We also need to expand NGO programs, some of which we've talked about and the Eurasia Foundation, and CCI with respect to small lending. FINCA I've mentioned before, with respect to micro credit, has had some extremely successful programs in the region. We think that we should expand those significantly to take care of the gap on that--I referred to in my testimony. Ms. Pelosi. Thank you, Mr. Morningstar. Mr. Chairman, I have many other questions about military sales that Russia is making and Ukraine's reported sales to Libya, and other questions about Turkey and Azerbaijan and Bosnia, of course, which I will submit to the record unless another round is allowed. Time prevents me from asking all these questions, but I did want to mention them as areas of concern. In closing, I would like to thank the three gentlemen giving us testimony this morning, Mr. Holmes, Mr. Morningstar and Mr. Dine, for their testimony and for their hard work and their leadership. You are really changing the world as we knew it and I thank you for that work and I appreciate the great challenge that it is. Thank you. Mr. Callahan. Well, Mr. Morningstar, let me just say that Congressman Knollenberg told me he had a meeting he had to go to and, Joe, have you resolved or do you need to go further? Mr. Knollenberg. I echo the Chairman's comments about our experiences in Haiti, and your comments that it was in the middle of the spectrum with respect to advances in democracy. I would suggest it should be at the lower end. In fact, having been to Haiti more recently, and Bosnia as well, I thought Bosnia in June of '96 was in better shape than Haiti was in January, or April of '97. So, that, that's my own limited observation. Mr. Dine. I was only using data supplied by Freedom House. Mr. Knollenberg. Well, I was using my eyes. Mr. Dine. I understand. section 907 Mr. Knollenberg. Let me look at the situation with Armenia and let me just get to--question as quickly as I can. I know the position that the Administration has on 907. I know it was reported in, I think, Mr. Morningstar's comments that the Administration opposes Section 907 and continues to, in fact, even since 1992. I also know there have been some changes in Armenia in terms of the leadership. The Prime Minister, Mr. Kocharian was recently announced and I think he brings with him some political neutrality, at least I've been told that. And, if for example, I know you promote, in your statement of the continuation of helping the parties resolve the--conflict and to provide, as best you can, humanitarian assistance. But, I guess if you oppose 907, then what is it that you would suggest in the way of some interim agreement or some way to bridge the problem in the interim and to bring humanitarian assistance to those people, both in Nagorno-Karabach and also in Azerbaijan. Is there anything that you have in place to consider addressing the seriousness? Ambassador Morningstar. I have the section 907 and I think it's been a hindrance in general to our providing humanitarian aid. Unidentified Voice. Why do you say that? Ambassador Morningstar. Because it isn't getting through now--and I think that we would be a lot better off with Section 907, both from a political standpoint in getting the situation resolved and also in allowing for humanitarian and other assistance to be provided anywhere within that region without, particularly humanitarian assistance, without reference to the political issues. And, one of the concerns that comes up with respect to Nagorno-Karabakh is, are we getting enough assistance into Nagorno-Karabakh and where--and we're looking at that section. I think that humanitarian assistance there, as well as everywhere, needs to be de-linked from the political questions--overall of Section 907 doesn't help solving political problems in the region. Mr. Knollenberg. I want to talk, too, about the U.S. Ambassador to Azerbaijan, who made some comments. This wasn't in a written form, but he admitted in February that there were demonstrative steps that could be taken, and he is technically a member of the Administration, there were steps that could be taken to eliminate or alleviate problems associated with the delivery of humanitarian assistance. Are you aware of what those steps are and, if so, why aren't they being considered? Ambassador Morningstar. This is a matter of continuing political dialogue with Azerbaijan as well as Armenia. I'm, frankly, not the person, not the best person to be answering those types of policy and political questions. Mr. Knollenberg. Who is the best person? Ambassador Morningstar. It probably should come from Ambassador Collins as to the specifics for these. Mr. Knollenberg. And, are you doing anything to secure Azerbaijan in compliance with Section 907 or is that, is 907 just a throwaway? Ambassador Morningstar. No, it's part of the continuing, ongoing negotiations to solve the problems within the region. Mr. Knollenberg. Mr. Chairman, how much time do I have, if any? Mr. Callahan. Very little. Mr. Knollenberg. All right. Well I--what I will do and I do appreciate the extension from my colleagues to allow me to go first. I'll get into the second round later and I do appreciate very much the opportunity to---- Mr. Callahan. Ms. Lowey. democratization Ms. Lowey. Thank you, Mr. Chairman, Mr. Morningstar, Mr. Holmes, Mr. Dine. Thank you, too. I want to thank you for your presentation and we understand that democratization is not easy and I certainly share the frustrations of our Chairman. Having joined Speaker Gingrich and Majority Leader Gephardt two years in a row to Russia and the newly independent states and Ukraine, the first year, I believe it was '93, we came back filled with optimism about the seeds of democracy. We saw real change. The second year, corruption was rampant. Mafia was surrounding every kiosk. We were told not to leave the hotel room and here we are in 1997, and we're still using--Norgorod and Boris Nemtsov as our examples of success. In fact, I remember in 1994 coming back and our final report focused on exchanges and how important the exchanges are. In fact, I must say if I recall the report, several years ago, that was the area where we strongly advised AID and the other officials-- working on this area to focus on exchanges because we felt this was concrete, as you explained so well. Here we are, 1996, and I believe Tom--what is it? 1997. Oh, thank you, so much. The year's just flying by. And, we're getting younger, right. And, I believe Tom said, ``We wished we had focused just on the mayors and the places like Nagorno-Karabakh and we're still talking about that success.'' I'd like to make two points and then ask a question. It seems the corruption, whether it's Ukraine or Russia or many other places in this world, it's just out of control. But, we are providing aid and so, our rationale is that we could have an impact and work within these nations to move them closer to democracy and economic reform. Number one, perhaps you can explain to us more clearly, what the doubling of resources for anti-corruption is expected to accomplish and unless it's top secret, perhaps you can expand on that. Secondly, if in fact you can explain Tom, or Mr. Morningstar and Mr. Holmes, how effective the aid can be to smaller units of government. Why cannot we direct our aid more effectively towards those goals? And, perhaps I'll ask the third question and you can address it as a whole. I'm very much interested, as is Mrs. Pelosi and other Members of the Committee, in the successes we've seen in that region and the other regions of the world, in micro credit programs because we know the money is going specifically. I do believe, and there are a lot of good men out there, Mr. Chairman, that if we can educate the women and the $300 or $400 that can help a woman establish a business has a terrific impact on the entire community. So, perhaps you can explain to us why we are still giving aid. And, I know there are questions--about the central government which is taking the money out of the country. Why can't we focus the money more on the exchange programs, the micro credit programs, the programs to Novgorod and--why can't we build on our successes and put in place some safeguards so we don't have these frustrations? And, we know it's not easy but we're going to stumble and take a few steps back and a few steps forward. Could you tell us how we are redirecting the programs to focus on the successes so, Mr. Chairman can say, ``We are delighted to provide this money.'' Right, Mr. Chairman? Ambassador Morningstar. Well, if you stated, you stated in a way probably more succinct and better than I did during my opening, why we are requesting more money and why we have a new partnership. You basically, within your statement, you raised three questions, one with respect to doubling the money going to fight corruption, monies going to smaller units, local governments and so on--micro credit, in no particular order. Let me just say that the whole emphasis of this program is to push the money to the smaller units. Part of the trade and investment program that we're talking about is to field regional initiatives in those regions where they have shown progress, where elements and local citizens have shown a real desire to--it isn't just the Far East which has a very close relationship to Alaska. Another area that we would hope to focus on is Samara. In fact the Mayor of Samara is now the new deputy within the national government. In these places, changes are just taking place. This is something we do have to address. I agree that exchanges, for the reasons stated in my opening statement, are extremely important. They have tremendous effect and they affect people at the local level. Everybody who goes back, people who are professionally trained and have been getting that professional training, they also have a new vision of what the United States is about and they have families, they have friends, they have colleagues--it's amazing the feelings that they radiate and what they can do when they go back. Part of this initiative is increasing the partnerships. That's all designed to have an impact on the local community. It's not just creating relationships; it's having substantive impact at a local level in providing help at a local level. The Municipal bond example that I menetioned with Tom--earlier during his testimony, is the type of thing that can be done. If you have a recent city to city relationship that's spawned a major investment. And with respect to micro creditors, this also has been very successful. That's why we want to expand on these programs. The repayment rate, with respect to micro credit, is at least 95 percent and we're getting numbers that would show that it's, in fact, considerably higher than that. When you lend $100, $500, $1,000, $2,000 to local businesses, they feel a pressure to pay that money back and they feel a pressure to be successful. With respect to more than doubling the monies with respect to crime and corruption, that involves several things. We need to work with these countries with respect to codes and with respect to enforcement mechanisms. One of the major problems in Ukraine is the incredible amount of regulation that takes place. The more regulation you have, the more opportunity you have for corruption. One of the programs that they're trying to get through and have not been terribly successful at, at the moment, is deregulation. Tax reform and tax administration are critically important. If you don't have a rational tax administration system, you just multiply almost infinitely the chances that officials, that officials can take part in corruption. You have to face these issues. But, we've also had some successes with respect to law enforcement training. We need to do more of that. With countries, you know, it's not a black and white situation. It's not that every official in every country is corrupt or that every business in every country faces corruption. More and more, there are people within these countries that are recognizing that if you're going to survive and if the country is going to achieve stability and not fall back in dire consequences that could happen if they do fall back, you're going to have to address these issues. And, there are more people willing to do that with training programs and to recognize that. The legal program in Budapest has been singled out as being particularly successful. I could go on and on with that. Ms. Lowey. Well, I thank you and I think you'll be very helpful to those of us who strongly support the AID programs. We've seen them. We've talked with the people who are implementing them. We support the micro credit program. We support the exchange programs because I feel, ultimately, that is the way that we can help bring understanding. It would be very helpful to us, and I'm sure the Chairman would like to present this case effectively to his constituents in Mobile, Alabama, if we can have continued examples of successes and be assured as best as you can that the money is not going into the central government where there is so much corruption. Ambassador Morningstar. I would, in fact, if I might just add for one second, I would like to take your challenge, Mr. Callahan, and I would like to go with you--and I would like to talk to a group of any people that we'd like to bring together and try to explain the program and let's see what they say. Mr. Callahan. You're welcome to come but the Secretary of State is also coming. Rather than take the spotlight off her, I would suggest, Mr. Morningstar, that you wait till after her visit. Ambassador Morningstar. I'll do it afterwards. Mr. Callahan. With respect to the gentle lady's remarks about micro credit, you know, that's a good way to circumvent corruption in government. So are--volunteer organizations. And, I'd like the lady from New York to know that her comment about successful women and then also men did not go unnoticed and remind her behind every successful woman, there's a strong man. Ms. Lowey. Well, I would say, Mr. Chairman, you're correct and our spouses certainly fill those roles. Did we together use up our time? Mr. Callahan. Yes, we did. Ms. Lowey. I would say, Mr. Chairman, that I have questions concerning Armenia, Bulgaria---- Mr. Callahan. We're going to, we're going to get back around a second round. Ms. Lowey. Oh, are we? Mr. Callahan. Everyone has a whole lot of questions, too. So, let's get through everybody with the five minute rule. Ms. Lowey. Thank you, very much. Mr. Callahan. And, then we'll go back. Ms. Lowey. Thank you, Mr. Chairman. Thank you. budget request Mr. Frelinghuysen. Thank you, Mr. Chairman. Good morning, Mr. Ambassador and your colleagues. I certainly, first of all, want to associate myself with some of the frank comments of the Chair and the ranking member. I agree with many that there are sentiments. While I attempted to get, country specific, I'd like to get a clearer picture of your overall budget numbers as well as the proposed changes in policy and direction for this aid. Am I correct, Mr. Ambassador, that to date the United States has provided $9 billion in direct aid to the former Soviet states? Ambassador Morningstar. If you conclude the value of privately-donated humanitarian assistance that has been transported by the government, you'll be very close to that 9 billion number. Mr. Frelinghuysen. And, of this, if the 9 billion dollar number is firm and you said it comes from a variety of sources, how much has actually been spent? Ambassador Morningstar. If you include September 30th as the end of the last fiscal year, the exact number, if you'd give me a moment. Mr. Frelinghuysen. And, while you're looking for that figure, Mr. Ambassador, if it hasn't been spent, how much of it has been obligated? Ambassador Morningstar. Okay. The total cumulative U.S. government expenditures for the NIS as we reported as of September 30th, 1996, was $6.794 billion. Mr. Frelinghuysen. Okay. Has the rest been obligated? Ambassador Morningstar. If you include, yeah, this is from all, from all sources, including non-freedom support act, the total obligated amount is 8 billion 500 million. This includes all sources not just freedom support. This would also include-- USDA, U.S. Department of Energy. I can give you the freedom support act numbers as separate numbers. Mr. Frelinghuysen. Let me just sort of continue in my line. These are fairly basic questions but that's really why we're-- -- Ambassador Morningstar. Right. Mr. Frelinghuysen [continuing]. In this Committee. Your request is an increase of 44 percent over last year's levels. Ambassador Morningstar. Right. Mr. Frelinghuysen. 625 billion, and the overall request is 900 million? Ambassador Morningstar. That's correct. Mr. Frelinghuysen. Correct. Of this amount, and correct me if I'm wrong, 372 million is for the current--and 528 million is for newly proposed-- partnership for freedom Ambassador Morningstar. That, that's correct. The way we have the program structured is that the more traditional technical assistance side of the program will be phasing down as shown on--maybe you can put that graph back up on the easel--will be phasing down over--just put it on the easel-- over the next several years as partnership for freedom phases out. Now, the consequence of that, briefly, is that, for example, in Russia, in fiscal year 1998, virtually all, almost all of the monies that would be allocated to Russia would come from the Partnership for Freedom. It would be less--in respect to other countries and it would--as we move out in time, the Partnership for Freedom will pick up in all countries as the other programs phase down. Mr. Frelinghuysen. So, for the average citizen, you have several unappropriated, unobligated balances from prior years. You've told me you have those balances. Ambassador Morningstar. That's---- Mr. Frelinghuysen. Of the balances left, are we now going to use them for the new Partnership for Freedom program? Ambassador Morningstar. No, we're---- Mr. Frelinghuysen. Some of your phasing down, correct me if I'm wrong. You're phasing down one program? Ambassador Morningstar. Right. Mr. Frelinghuysen. And, you're starting a new program? Are any of the monies from the overall grant going towards the purposes that have been set down for the new program? Ambassador Morningstar. If I understand your question correctly, there are monies from, for example, '96 and '97, that will be going to some of the types of activities that are part of the partnership agreement. For example, exchanges. Some of the local partnerships. The Partnership for Freedom program is refocusing our efforts to be more of those very specific kinds of activities. Mr. Frelinghuysen. I understand the notion. As you explained, it's strategically focused. I don't see it, Mr. Ambassador, in your budget and proposed timetables for this new partnership. As the current program winds down, how long can we expect the new program to last and what do you have as the proposed budget over that time frame? Ambassador Morningstar. I think you can see that going through the year 2002 on that chart. Mr. Frelinghuysen. Just for the record, if you could give us what the time frame of the new program is and the dollar amounts in association with that. Ambassador Morningstar. Okay. What we, what we have provided to you are numbers that--and we also attached the testimony as well. The numbers--in 2002, which show that by the year 2002, monies will be solely going towards the Partnership for Freedom at a total level of approximately $500 million. And that, as far as looking out into the future, the point is these are the types of activities, increasing investment in the private sector, working with private sector companies, and working on a local level with respect to changes in partnerships and so on, are the kinds of activities that we should be supporting out in any event for these countries looking, looking at--because they're really cooperative activities as opposed to purely assistance related---- Mr. Frelinghuysen. I'm supportive of those activities and goals. I just wanted to know what the timetable is. Ambassador Morningstar. We have no---- Mr. Frelinghuysen. Because the average citizen would like to know how long you perceive this Partnership for Freedom to continue and at what cost? Ambassador Morningstar. We do not have such an arbitrary time that--cause these are the kinds of activities that we should be carrying out as this generational transformation for--and I would hate to say that the year 2002 we'll not longer be doing, after 2002, we would no longer be doing these cooperative activities, if in fact, it's in our national interest to do. We're talking about, in the big picture, we're going to be talking about smaller amounts of money and for activities that will help sustain this transformation. So, if you want to set an arbitrary deadline---- Mr. Callahan. Rod, we'll give you the opportunity later on, but we've got to---- Mr. Frelinghuysen. Thank you, Mr. Chairman. Mr. Callahan [continuing]. Get to everyone. I just might comment that what the Congressman was saying and what we're saying is that the--stack ought to be on top of the red stack. That what you've done is redefine aid through the Partnership of Freedom. We support the concept of it, that if you looked at what has taken place since I've been chair of this Committee. You know, you went from two and a half billion down to less than--what, about 800 mil--600 million, or something to that extent. And now, what you're doing is reducing there somewhat but when you stack that blue on top of it, you're back up to pre '95 levels. Ambassador Morningstar. We're backed up to---- Mr. Callahan. To--yeah, yeah. Ambassador Morningstar. To about a 95 level, really. Mr. Callahan. You're about 200, 300 million above '95 level and that's why I say, you run the State Department, you run foreign policy, you create the Partnership for Freedom but stack that blue on top of the red and recognize it's going to be lopped of. Mr. Foglietta. cold war Mr. Foglietta. Thank you, Mr. Chairman. I have numerous questions--Bosnia, Albania--earmarks. However, if I may, with your permission, I would like to digress for a moment. I must, with all due respect, and I do have a great deal and admiration for our Chairman, take issue with some of the statements that were made earlier concerning the logic or the feasibility of increasing by $375 million, these various programs that we're dealing with today. Mr. Chairman, I think what we're doing here today in trying to expend this kind of money, is to prevent a reoccurrence of something that I think most of us lived through for the past 40 years, namely the Cold War. I sat for 12 years on the Armed Services Committee. On that committee we spent billions upon billions upon billions of dollars. I think the total amount for this--Cold War was estimated--$45 trillion. And, I sat there as we spent money on the development of nuclear weapons, on fighter planes or stealth bombers and tanks and on stationing our troops throughout the world. What we were trying to do at that time, to alleviate the suffering of half of the world's population--and to bring it freedom and a level of human dignity. We were able to do that. With God's help, we were able to break down that wall and saw the collapse of the Soviet empire. These nations are now trying to develop themselves to become self sustaining, to become economically independent and democratically free. Over the last years of the Cold War, I don't know how many trillions--estimates were 40-50 trillion dollars we spent. I also heard that the estimate being that it cost $80,000 per average for every person in this country, man, woman and child, to fight the Cold War. What we're trying to do now, Mr. Chairman, is to prevent the reoccurrence of another Cold War and I think that there's no better investment we can make better than the money we have to spend on other programs, stealth bombers, B-2 bombers, attack submarines. We need to maintain our national defense. I don't disapprove of that, but to talk about not spending an additional $300 million to prevent the world from falling back into the--of deprivation of human rights and human dignity and the--of the free market system throughout the world is hard to understand. Mr. Chairman, if I may, some remarks were made about the nation of Haiti. Well, members of this subcommittee know I'm very, very deeply involved in Haiti. I've been there a dozen times in the last five years, maybe more than that. And, I take issue with the idea that Haiti should not be considered as a success story. Democracy is thriving in Haiti right now. You say that only five or ten percent of the people, voted in the last election. I agree with that. That was a protest election. But, we don't talk about the fact that the last election, over 90 percent of the people participated in that election. We don't talk about the fact that foreign investments doubled in Haiti over the last two years. Economic growth is being achieved albeit slowly. Jobs are being created. Privatization, is moving. A privatization law has passed. The difference from the past was the horrible look of fear on the faces of the people of Haiti which now has been eliminated. Now there's a look of hope, a look of joy, a look of freedom on their face. I think this is what we're trying to achieve for the world, and again, I say that an investment of $300 million is a very small investment to make to try to create this throughout the world. Mr. Callahan. Well, the gentleman from Pennsylvania knows I have tremendous respect for him, so much respect that I was confident the President was going to use his tremendous acumen in selecting you for an administrative post. And, even though the President's inaction benefits this Committee and this Congress by having you stay here, that does not preclude the fact that I disagree with you, especially on Haiti and I think that we could get into a full discussion on Haiti. You mentioned privatization. No privatization has made any advancement, not one single of the main areas that were supposed to be privatized has been privatized. We have spent $1.5 billion there. You talk about human dignity? There is very little human dignity in Haiti. You talk about the 300 million dollar increase here. This is not the question. The question is whether or not we're going to increase the 12 billion. If the Administration wants to come back and juggle the figures and recognize that the Middle East is not the only problem area of the world and that Haiti is not the only problem area of this hemisphere, then they can spend 300 more million dollars there. We overlook the fact in our debate over foreign aid, and you're going to face this. When the two of you come to debate me, and I hope it's about three weeks before the election--you come down to Monroe County and you are going to debate me in Mobile, Alabama, as to whether or not we ought to increase foreign aid $6 billion. Mr. Foglietta. My pleasure. Mr. Callahan. Hey, come down, fellows but make sure--very seriously, I have invited the Secretary there and she has agreed to come. And, we don't take lightly our responsibility and I recognize one thing we failed to include is the ingredient of our national defense. You mentioned the national defense. It must be like a security blanket for some of these nations to know that if a problem exists, then our $300 billion that we're spending on the national defense will protect them and we must include that when we talk about our contribution towards world affairs. Japan doesn't have that problem. They say, well Japan's given more than the United States. Big deal. Japan doesn't have the responsibility we have to provide a back up, a safety valve for people like Kuwait, a safety valve for people in Bosnia, where the United States can make that contribution. So, we can debate Haiti and I would love to talk with you about Haiti and talk with you about what we saw and what we heard. But that will be another day because I'm already---- Ambassador Morningstar. Is it possible, Mr. Chairman, with your permission, to respond briefly to some of the comments by Mr. Foglietta? Mr. Callahan. Well, what is this, a hearing, you think? Certainly, Mr. Morningstar. Russia Ambassador Morningstar. And, it also actually indirectly addresses some of Mr. Frelinghuysen--well, he's not here right now, I guess. But, Mr. Frelinghuysen's been--I think we have to ask ourselves the question and I think Mr. Foglietta's point is well taken. The argument for doing what we're proposing is an argument that this is in America's interest, not that it's in Russia's interest or the Ukraine's interest or whatever. One of the reasons why we're asking for more money is so that we would be allowed or we would have enough to provide $240 million, approximately, is what we're talking about. We know the number, we have a chart to show the numbers. $240 million for Russia. Russia is still the one country in the world that has the power, if not to destroy us, but to wreak considerable havoc on us. And, if we can spend that money in an intelligent way, to increase the private sector, to work at a local level, as you were talking about just a few moments ago, which is what this program is all about, and by doing that, at least have some effect on increasing the chances of stability and Russia becoming a market democracy. There has to be a worthwhile investment. The other thing the Partnership for Freedom says, is that, and reason for more money, is that it will allow more money to go to Central Asian countries and Caucasus countries, but these are countries that have been, I think, neglected in the past and allow for 50 to 60 percent increases of very small numbers, the countries which are politically important, commercially important and where we need to do considerable democracy. Mr. Callahan. Mr. Packard. Ukraine Mr. Packard. Thank you, Mr. Chairman. I don't think we disagree that the goal is noble and worthy of the expenditure of money because of American interest. I think the fact is that we're not getting our money's worth. We're simply not accomplishing our goal and putting more money into a failed foreign policy in the two biggest countries in the New Independent States, is not always the best solution in my judgement. I will come back to the Ukraine. Now I'd like to talk about Russia because I think the problems that I see in our policy there are similar. But, the Ukraine is perhaps the most vivid example of failure in terms of the amount of money that we've spent. The American taxpayers are simply subsidizing crime and corruption in that country with our foreign assistance. We invest more money in the Ukraine and Russia than all the rest of the NIS put together and frankly, the charts have shown that we have received the least progress there, or among the least progress of any of those countries. This is not a good policy and it is not a good investment of our money. We are putting more in and getting the worst results. You've mentioned, Mr. Morningstar, that we are making progress on the reforms in the Ukraine and yet at the same time and I don't see that progress. The best reformers in the Ukraine are resigning. In fact, the Prime Minister said that his, I think the quote was, ``His captain of economic reform'' is the way he identified the very person that is, in deep frustration, leaving and resigning. American business is retreating from and fleeing from the Ukraine. We're frankly, in my judgment, losing the battle on reform. Corruption is increasing and to me the answer is not to send a bigger check to solve the corruption problem. It is the money that's flowing into the Ukraine that is being exploited by corruption and making millionaires out of government bureaucrats on our taxpayer's money. So, I have deep, deep problems with our policies there and our solutions there. I personally would strongly urge that we, as we have tried to do with China, where we tie human rights progress to the MFM agreements, that we tie progress in corruption and crime and to our assistance to the Ukraine and Russia, especially to the Ukraine. I would much prefer, and I think you're right in saying that we ought to be involved, and keep our involvement there. That's our best hope for democracy there, and, I have no problem with that. I would suggest that we divide our assistance where we would give half, or $100 million, to them with no strings attached as we've been doing and the rest of it would be contingent upon measurable and demonstrable progress on their human rights--I mean, on their corruption and on their problems within the government. If there is no demonstrated progress there, they do not get the other half, frankly, in this year, in this new budget year and something to the effect where we put strings attached that require some results. I don't see that in our current policy. I have not seen that in the past policy and, frankly, I just don't believe we're getting our money's worth. Would you respond? Ambassador Morningstar. First of all, let me again reemphasize that I know that the Administration as a whole is very concerned about the issues that are raised with respect to the Ukraine. That we do condition our assistance upon these issues. We made it very clear that unless certain steps were taken with respect to privatization, the monies that were going to that area were going to be sharply reduced. I think we have to give some tough messages to the Ukraine with respect to the need for reforms to continue, the need for corruption to be cleaned up. But, I also don't think we should have our hands tied. We have to be able to deal with the issues. I also think that it's important to recognize that this isn't a zero sum game. We're never gong to be in a situation where everything is all bad or everything is all perfect. There are issues, issues we need to be concerned about. We have to keep our eye on the long term goal--and we have to have the ability to do that. But, we also have to get the tough messages out that you're talking about. The other thing that I have to take some exception to is the comment that U.S. monies are going to make government officials corrupt. I think we have to understand, all of us understand, that the monies that we are providing do not go directly to the governments, whether they be in Ukraine or in Russia. Nobody is getting rich, as far as I know, as far as officials, on specific assistance monies. And what we have to concentrate and the whole reality, the whole reason for Partnership for Freedom Program is to do the kinds of things that I hope you would agree that we ought to be doing, working at the committee levels to build that pressure from the bottom up so that there is pressure within Russia, pressure within Ukraine, pressure within these other countries, that constituencies build to advocate for change, because it's not necessarily going to come from the top down. So, I agree with you that there are very major issues and we have to address them. Mr. Packard. If in fact you have--and then I'll conclude, Mr. Chairman. If in fact you have placed conditions and said to them in the past that if they don't meet these conditions then the money will not--would not come, then I don't understand your request, your request for equal amounts of money going to the Ukraine and more--considerably more going to Russia. I don't understand why there hasn't been cutbacks, because it's obvious that there has not been improvement in the corruption problems. Ambassador Morningstar. When we, when we came up with a number through--I mean, of $225 million---- Mr. Packard. Which is about the same as last year. Ambassador Morningstar. Which is the same as last year. We were in a situation where the Ukranian government, through the leadership of President Kuchma have provided to the Rada a major reform package which I think is critical to their ultimate involvement and ultimate stability. They have just passed a constitution. They have done well with respect to operating in a democratic fashion with respect to elections and the like. This is balanced by this whole question of this-- these issues with respect to corruption, whether, in fact, this reform package is going to pass. If this reform package doesn't pass, if we don't start seeing some very quick action to deal with some of these egregious issues, then yes, I think we have to look at that our total numbers. As we did in the case of privatization in the past. And through our efforts, although things are nowhere near cured at this point for Mr. Lemire, because of our involvement I think we have made at least some progress, and more than would have been the case otherwise. Mr. Packard. But in light of that, Mr. Chairman, I would strongly urge that we put language in our bill this year that would absolutely fulfill that commitment, that we do not allow money to flow if we have not seen a commitment on their part towards these reforms through their parliament and through their government leaders. Mr. Callahan. Ironically, the problem is not the House nor the Administration. Mr. Packard. I understand. Mr. Callahan. The problem is the United State Senate. Jim, I guess, had some response to that. Mr. Holmes. Mr. Chairman, it looks to me as though I'll have one shot and one shot only with respect---- Mr. Callahan. No. seed program Mr. Holmes [continuing]. To SEED, and I'd like to take it. The Congressman's remarks with respect to getting our money's worth and achieving our goals I think is the opening for me to make a point that we need to be careful that the good story of SEED not be buried in this. It would be silly for me to claim that there is no corruption in central and eastern Europe, particularly in light of the events--in Albania in the last month and a half, the ``Ponzi schemes'' and the demise of the government and the anarchy which resulted from it. We were not parties to that in any way and we did--we make every effort to oppose it. But overwhelmingly SEED has been successful in creating the sort of climate in central and eastern Europe which is in the U.S. interests and, I would submit, enables America, whether from Mobile or from upstate New York where I come from, to be able to flourish. Investment, trade, our own security has increased dramatically over the last eight years, and I would submit not least of all because of the effect in this of our SEED Program. I can also assure you that our close-out strategy, which we are implementing now, particularly in the Northern Tier countries, focuses very heavily on a few remaining requirements to complete the picture. And it identifies those aspects which may be at the grassroots: It may be civil society; it may be assistance to nongovernmental organizations; it may be the improvement of legal systems and commercial law; it could be, as Congresswoman Lowey suggested, that we focus increasingly on micro-credit schemes, where, in the case of Poland, we have mounted the world's largest micro-credit scheme, in excess of $20 million, much of which goes to women in Poland. These are the sorts of things which we have focused on in order to be able to say to ourselves, and to our recipient states, that we have succeeded in the job which we had set out for ourselves. In SEED I believe that we are approaching the point where we are completing this picture. I believe that we have been faithful to our undertaking with respect to the commitments made to the Congress and to this Committee to do so. I think overwhelmingly we have demonstrated an ability to manage these funds and the objectives in a way which merits our full funding for the next fiscal year. Mr. Callahan. Well said. I'll respond after we hear from Chairman Wolf. Sorry---- Mr. Wolf. Thanks, Sonny. Mr. Callahan [continuing]. To be so long in recognizing you, Mr. Chairman. corruption Mr. Wolf. Okay. A couple of comments. The Administration really hasn't done a very good job on the whole corruption issue, when you look and see some of the names of people that have been invited to White House coffees. And you have too with regard to this a Mr. Tamaras, or whatever his name is, with regard to the pipeline, and you've had the Russian mafia guy, Louchensky, or whatever his name is. So, I think it's important that you walk the way you talk and you speak out on those issues. They should be persona non grata, not only in the White House but in the embassies around the world, and we should make it very, very clear: we do not deal with these people as government officials. And I think the Administration has been very, very weak. Secondly, as I see there today, I wonder about this whole NATO thing. I think in a year from now the American people are going to begin to wonder whether they can afford this. And when I see some of these numbers here, I think it would be preferable for these countries to be putting their money into economic development and transportation and telecommunications rather than tanks and AK-47s and missiles and things like this. So, I think the Administration's position on NATO may end up being a mistake. The last point I wanted to make is, though, we have emphasized the negatives. I want to congratulate--I mean, there have been a lot of very, very positive things. Romania is a great story. In 1989, Ceausescu, bad things--In 1997, Constanstinescu is a democratically elected president. The parliament is democratic and there are a lot of positive things. Things in Bulgaria hopefully at the end of the month will be very, very positive. So, there have been some bad things, but I also don't think the record should show that just bad things have happened. A lot of very, very positive things. Section 907 Quickly on three issues: 907, Nagorno-Karabakh, Azerbaijan. Section 907 only restricts aid to the government, not humanitarian assistance. You have given, or we, the country, has given $16.4 million to Azerbaijan. You've given nothing to Nagorno-Karabakh. And I think you really are going to have to deal with that issue. I supported changing section 907 to make it easier to provide humanitarian assistance. I went there and saw what I saw. And now the Administration opposing. Will you do something some way somehow? The Red Cross did an evaluation of the children in Nagorno-Karabakh--very, very bad. Diarrhea, respiratory problems, limb problems. Will you pledge here you'll do something with the government in Nagorno-Karabakh? Ambassador Morningstar. What I will, what I will pledge is that we are assessing the needs in Nagorno-Karabakh, that we do in fact provide something through the Red Cross, that--to the extent we will try to do whatever we can through the Red Cross to meet those needs and do what we can to de-link this humanitarian assistance/political issue throughout the region. Mr. Wolf. Well, you've got--I mean, every day more kids die there. And I think it's unbalanced when you look at what you're putting in to these areas. I favor assistance. I felt that we should do that. But then you turn around and not do it, and then Armenia is getting so much here. I think you really are going to have to deal with that. Secondly, with regard to Tom, is there more you should be doing to help with technical advice for the Romanian government? The indications are, I'm having, there's a delay. The elections were four months ago. We still haven't done everything we possibly can. I'm not talking about big-dollar programs now. But technical assistance? Romania Mr. Dine. Congressman Wolf, we are very much engaged with the Romanian government. We just sent a technical advisor from our own military who has had experience at the National Security Council level to work with the Office of the Presidency on reforming that office and also with the thought that President Constantinescu may reformulate Romania's former National Security Council. There have been technical advisors already assigned to the Finance Ministry. The Finance Minister was here two weeks ago. And there will be more. We are engaged with the State Property Fund, with the privatization efforts. We've had several exploratory groups there. They've come back and made recommendations. We're trying to get them going out as fast as we can. Next week not only will I be there but all mission directors in the Europe and the Independent States Bureau are going to have our annual conference in Bucharest. Mr. Wolf. Oh, good. Mr. Dine. And the President has agreed to address us on this Sunday night and will be meeting with other officials. Mr. Wolf. Good. Mr. Dine. This is of utmost importance to all of us. As I've said to you privately, I've said to others, Romania is the keystone country in the southern tier. If we can help them be a success for the first time, it will spread to Bulgaria. Mr. Wolf. Exactly. And I think it helps you make your case around the country too as to the positive aspects that have taken place. Why hasn't President Constantinescu, and I know this is not your area, been invited for a visit to the United States? I'm worried that somebody is trying to control this in the State Department. Here is a guy who's democratically elected. We have a democratically elected parliament. In a country that has such a bad record with Ceausescu, why are we not bringing him over here, If not for a state visit whereby he can meet with the President, why not meet with the Secretary of State? Mr. Holmes. Congressman, I'd be happy to take that request back. I can assure you that it is not the consequence of lack of regard for the reform prospects and the opportunities---- Mr. Wolf. When I see some of the people, though, that the President's meeting with and I compare it--I mean, I'll go back to the coffees of John Wang, who was head of the PolyCorporation who sold the weapons for the street gangs in L.A., If he can meet with the President, and Constantinescu who is a democratically elected president can't. I really think you've got to get him in here very, very fast and you also should have the President of Bulgaria in here very, very fast. They are two--they are good success stories. I mean, I give you guys credit for a lot of that. I mean, they're---- Mr. Holmes. I've just been handed a note which says that the--that a request has been made for--to the White House for the President of Romania to visit during the first half of this year. Mr. Wolf. The first half? So, by---- Mr. Holmes. I'm not giving you an assurance it's going to happen, but that's the, that's the request. Bulgaria Mr. Wolf. Well, I tell you, if it doesn't happen, then, I'll tell you, my attitude would be for these is you'all are not walking the way you're talking. When I again see some of the visitors who are, who are running through the White House and you can't get a guy like him in and the new President of Bulgaria, who have done--they are, they are to your credit. I-- and I saw Mr. Dine there and I think a lot of that is very, very positive. This is a great story to tell. I mean, we remember the orphanages in 1989. We remember all the bad things. There's a positive activity. There's total religious freedom there. There's a market economy coming in. You've got to get a guy in like that whereby he can go back and demonstrate to his people--they are going to go through, as Mr. Dine knows, some very tough times because of their economy, what they're going to have to go through. We have an obligation to bring them in--and I'm a little bit worried that we don't recognize that. So, I would hope, if there's anyone listening, that they bring both the President of Romania in and also the new President of Bulgaria, particularly after the April 19th elections, which I think are going to be very, very positive. They I think will anchor that sell. So, if you can look at how we get aid into Nagorno-Karabakh and if you can--and I know you guys are kind of in the same building with--let us know when will the President of Romania be invited and when will the President of Bulgaria? And I second what the Chairman has said on the problems and corruptions, but I also do want to say that I do want to congratulate--you have had some successes. And while we just-- we can stress Ukraine and we can stress some of the other, we also should talk about some of the good things. Thank you very much. Thank you, Mr. Chairman. Mr. Callahan. I thank you. How long would it normally take for the White House to give you an indication as to whether or not they were going to accept your advice on the invitation to the President? I mean, what are you talking about, two weeks or three weeks or--or will they call you up? Mr. Holmes. I can't say, Mr. Chairman, but I will be happy to check and---- Mr. Callahan. Well, I'd like for Congressman Wolf, and I would like also, to have some type of indication from the Administration. If it takes three months to prepare the letter, we can understand that. Or I guess if it's going to be in the first half of this year, it's got to take less than three months. But I think some indication coming back this week, if you contact the White House, and let us know what they say. Is it going to happen or is it not? They can tell you that. It may take some protocol to put the invitation in the mail. But I think Congressman Wolf is right. I think he deserves an answer and this Committee does, a response as to: what is the response from the White House going to be, yes or no? Mr. Holmes. I can assure you that the interests of this Committee is shared by the Administration to see that the political and the economic risk-taking which the new governments in both Romania and Bulgaria have indicated they are prepared to undertake, will have the support of the Administration. Public Perception of Foreign Aid Mr. Callahan. But I'd like to also echo some of Congressman Wolf's comments about the good that you're doing. This Committee hearing is in no way an indication that we disagree with everything you do, because we agree. In fact, this Committee feels like we ought to give you the latitude to do what you want to do. But we joke about going to Mobile, Alabama, to have a debate on foreign aid. A perception is here. The perception they have of the articles they read in the ``New York Times.'' The perception is that we're giving money to a country whose government leaders are skimming off of contracts being brought to their country by American business people. I mean, that is the perception of foreign aid. The people in Monroeville, Alabama, would probably vote 25 to 0 to fund the Child Survival Account. But when you're talking about giving money to countries, you have almost absolute knowledge that the leadership of the country are skimming millions of dollars off the top of contracts for government services being rendered or sold, how can we justify that? How can I justify the rumors of Haiti, where I'm told that former government official of Haiti demands 25 percent of every contract and yet the people are starving to death? How can we justify that? And I know that's outside of your realm of responsibility. So, it's not a damnation of the program. The President has requested $5 billion more, not just $300 million more. We're not going to give him $5 billion. We're not going to give him $1 billion. We're not going to give him $300 million. If he wants to shake this request up a little bit and say that the needs of the former Soviet Union are greater than they are in any other section of the world, hecan, he can spend it, as far as I'm concerned. He was elected by the people of this country to run foreign policy. He has hired professionals to administer his foreign policy. And the Constitution gives us the authority to appropriate. And I think we abuse our authority when we start earmarking. And this House and this Committee has not done that since I've been its Chairman, or even my predecessor. Dave Obey didn't earmark. So, we're doing the responsible thing in the House, but part of our responsibility is to play a part of the overall Congress, where the people of the First Congressional District of Alabama pay $1 billion a year in Federal income taxes. They probably pay $5 billion in Nancy's rich district. Ms. Pelosi. One thing is we pay more than we get back. I know that. budget request Mr. Callahan. Well, what I'm saying, each Congressional district actually pays about a billion dollars in Federal income taxes. So, if we are saying to the people of Alabama that we want all of the money you pay in your income tax and five times that amount to give to other countries, it's a difficult political sell. Now, we could talk about the rights and the wrongs and morality and immorality of not doing it, and world involvement and our obligation to make this a better place and an area of human dignity and an area of human rights. We all support that. So, it's not your $300 million request. It's the $5 billion request that we're not going to be able to give you. I mean, the President knows that. You all know that. So, you force us then to start making decisions that belong to the Administrative branch of government. So, it's not a carte blanche damnation when we question you. We support most of the activities that you do. But, Dick, you don't have to go home and listen to people griping about foreign aid. You know. Well, I guarantee you Rogers (Phonetic) in Alabama are probably the ones planning the meeting. We have a political responsibility here too that we have to respond to. We have to justify this. We can't go and say: oh, don't pay any attention to the ``New York Times.'' That's a liberal northeastern newspaper. That sells big in Alabama. But they believe this part of it. So, we have the problem too. But I've got some questions and I didn't ask my questions first time around. I sort of editorialized after we had gone through this. bosnia Jim, you went with me to Bosnia when the President came to us and said, really to this Committee, because he couldn't find a whole heck of a lot of support in the Congress, he said: we want this Committee to look at the situation in Bosnia. Come back and sell the Congress of the United States on a $600 million contribution, which is the only way we can get international acceptance of this program to reform and rebuild Bosnia, and therefore do your American duty. So, I didn't tell the people of Alabama I was going to Bosnia to act like Santa Claus. We did the constitutionally correct thing. Even though I told the President, and many others did, we disagreed with our entry into Bosnia, militarily and otherwise, but, Mr. President, you are the President, you make that executive decision, and then I'm going to do what I can to support you if that is your decision. And that's what I did. I went to floor. I talked. And I convinced, or helped to convince, our colleagues to make the commitment of the $600 million. And you and I went over there to look at it. One of the things we agreed when we were all over there was that in meeting with Snuffy Smith--incidentally, a Mobilian--who was head of the forces there, the IFOR forces there, when we met with him he emphasized that the military ought to be the determining factor of our share, at least, or the lion's share, of how the money should be spent. Now, I'd like to know had we followed the request of the military in spending the monies we sent there to--we have put up $400 million of our $600 million promise--had the other international community members contributed their full share, and if not, who has not; and, number three, what's going to happen in Bosnia when the President pulls these people out. Now, originally at the White House when he was saying: Sonny, go get me that money; Sonny, go to Bosnia; Sonny, go to the floor, do this. When I say that ``Sonny,'' I mean this Committee: go convince your colleagues that we are only going to be there for a year. He promised me that. And now it's two years. Can we get out? Is the international community cooperating? And is it going to do any good at all other than the good it's already done, by stopping the people from killing each other over there? Mr. Holmes. Mr. Chairman, first of all, let me express the Administration's appreciation for your personal strong support and the strong support of this Committee. Specifically with respect to that, the supplemental request and the follow-on request for funding in Bosnia, your willingness to do this, as I said in my opening statement, is greatly appreciated. With respect to the--responding to the interests of the U.S. forces and the IFOR commander at that time, Admiral ``Snuffy'' Smith, and your interests, the community's interest, to see that our recovery and reconstruction money was directed towards U.S. IFOR areas and U.S. IFOR projects, a twofold answer: One, virtually 100 percent of our assistance program in 1996 was directed towards the U.S. IFOR area--SFOR/IFOR. Two, in addition to that the U.S. SFOR/IFOR Command has repeatedly registered with us their priorities for what was-- what they originally called ``Task Force Eagle lists,'' as I recall--their priorities for local reconstruction projects. And we have been able to fund those local reconstruction projects, whether they are in the, in the Bosniac Federation Area or in the Republic of Srpska area. We have been able to fund a substantial number of those local infrastructure projects to the tune of about 5 or 7 million dollars this past year. So, I would answer to your first question that we have abided faithfully to the understanding which you had with us and which you had with the, with the U.S. Command. With respect to the second question, whether other countries are doing their full share, the pledging conference of last year was to raise $1.9 billion. $1.9 billion was indeed pledged. Of that amount, the U.S. pledge was approximately $290 million. It represents something on the order of 14 percent of the amount pledged by other countries, other bilateral countries. The overwhelming, the lion's share, in excess of 50 percent of the share of the pledging came from the European Union and member states of theEuropean Union. We believe that this is an appropriate relative share for the United States and they have indeed followed through with their pledges. And in excess of $900 million of the 1.9 billion which was pledged has been put into play into implementation in Bosnia this past year. The U.S. record in this regard, and I would say it's a credit to the outstanding work of USAID and our other implementing agencies, the U.S. record is even better than that. Of the 290 plus million dollars which we pledged, we have now in various stages of implementation in excess of $260 million. So, we have, we have not only taken the money, we've identified the--and designed a program, but we have it in play and our--the result is a program mounted by the U.S. which I believe is a model for others to emulate in delivering reconstruction civilian implementation assistance to Bosnia. With respect to the third question of what will happen in Bosnia, I don't know what will happen, but in 18 months the U.S. troops will come out. U.S. troops were extended for 18 months, not because the civilian implementation hadn't fallen into place, not because economic reconstruction wasn't doing its job. I think that we certainly had opportunities for us to do a better job. But, rather, because it was clear to all that in the absence of an international security force, not sufficient groundwork had been laid for the two entities to exist together without recourse again to violence, or at least the high risk of recourse to violence. We believe that an additional 18 months will help us immensely in making progress in terms of creating the sort of conditions between the entities which can be politically successful for them to exist without reference to violence as the international military forces withdraw. It depends upon the success of the reconstruction effort. It depends upon the successful mounting of an international police task force, police training but, most of all, it depends upon the success of the political leadership in the two entities to find ways in which they can co-exist, accommodate, and work together. Mr. Callahan. Well, if you will recall, you know, I mentioned Santa Claus, I guess I was like Santa Claus because the world was telling Bosnians that if we--the United States-- somebody else would. So, they requested, the Administration did, that we go over there and we did. But it became apparent to me that there we were, like Santa Claus, determining whether or not $1.9 billion was going to be pumped in to reconstruct the former Yugoslavia. That's what we were doing there. And if we were impressed and if we were certain that all of the money was to be spent in an appropriate fashion for appropriate needs, this was going to start this huge expansion process of the economy of Bosnia. If you would recall, we couldn't get a Serbian mayor to meet with us in the same room with a Croatian mayor. Now how, under those circumstances, could we possibly expect, once we withdraw, if they will not even meet with Santa Claus, how do we expect they're going to get along when all of our forces are moved out and our money stops coming, the 1.9 billion is spent? That's an observation I had and a fear that I had from the day I left Bosnia to this day. Mr. Holmes. Mr. Chairman, I believe if you would go again, today, tomorrow, you would find ample evidence for you to continue to husband some of those fears, but there have also been successes. We have been successful in--I would describe a dramatic increase in employment, a dramatic increase in economic growth and economic activity. It is clearly the result of the in-flow of money from outside. What we are looking for is more economic activity which is self-sustaining. That will come with time. We have also made some political progress and we can share with you some of the details of that political progress. But there continues to be outstanding problems with respect to the interaction between the leadership of the two entities which will require every day, every month, every day of the remaining period of time over the next 18 months for us to feel that we have created a certain environment which can be self-sustained by them as the international force withdraws. Mr. Callahan. One more thing. Twice you've said: the next 18 months. Mr. Holmes. Now, you can correct the, correct the record in that regard if you wish. It's an 18-month commitment from December of 19---- Mr. Callahan. I understand, but this is April, so we have four months. So, we're talking about the next 14 months instead of the next 18 months. You're going to be out in July of '98? Mr. Holmes. The Administration's commitment is for the military units to be--for the task to be completed on time; 18 months after last December. Mr. Callahan. Are you optimistic that we're going to be able to successfully withdraw all of our forces from the former Yugoslavia by, what is it, July 1, '98? Mr. Holmes. That's a question which is best addressed to someone else. I would either lose my head or some other part of my anatomy if I attempted to answer that. Mr. Dine. Mr. Chairman, can I make this---- Mr. Callahan. Sure. Mr. Dine. One of the themes of this whole discussion this morning has been earmarking and restrictions and flexibility. And I would just like to join with Jim in expressing appreciation to you and the Members of this Committee because you, in allowing us to have sufficient funds and no strings, have helped make AID's work in Bosnia so praiseworthy. I don't have to say it this morning. It would be stupid of me to say it. But we've been successful so far and I say to you, I submit to you, that one of the major reasons has been that you gave us the funds and you gave us the flexibility. I wish that would be the model of the rest of our efforts. Mr. Callahan. When you all get down to Mobile, there's a couple of things I would like for you all-- to remember let's not talk about my cooperation with the President. Ambassador Morningstar. '98 is a long way---- Mr. Callahan. Let's not even let it be known that I'm chairman of Foreign Operations Subcommittee. bilateral commissions Let me see. Mr. Morningstar. You're the President's coordinator for the former Soviet Union. The Vice President now heads this bilateral commission that appeared to control the relations with Russia and the Ukraine, and we don't know anything about that commission or what he's doing. The only thing we know is what we read in the papers and that these spare people or national security counsel staff and the Vice President's people who are accountable only to him and the President. And how are your duties affected by that commission? Are they abetting you or are they assisting you or does this interfere with your ability to have an effective relationship with the countries? And how can we as a committee become better informed on what he is talking about? Ambassador Morningstar. First of all, it's had absolutely no negative effect on what I'm trying to do. And---- Mr. Callahan. I wouldn't expect you, Dick, to say that it was anyway. Ambassador Morningstar. No. And I say that in all candor. And I am actually a member of the Gore-Chernomyrdin Commission. And the Gore/Kuchma Commission was set up in a slightly different way. And then I'm co-chair along with Mr. Lipton, Assistant Secretary Lipton of the Treasury Department, on a Joint Committee on Economic Cooperation with respect to Ukraine. So I'm very much involved. I can't comment on the coordination of communication with the staff in the White House with respect to that. I can say that I think that it includes an agreement in both cases. I think it's extremely helpful. It provides a vehicle, a dialogue with the leaders of those countries which I think is unusual, and it allows us to deal with very substantive issues in any number of economic related areas and other areas in both Russia and the Ukraine. I know that there probably is concern: is this causing increases in budget, increases in monies being spent, and so on. It really isn't any. I think I can say that, I could give you more details at a later meeting, that our actual spending has not been significantly increased by the activities of those two commissions. I do think that it's better directed, better coordinated, as a result of it. I think it's something that the Administration can be proud of and ought to be communicated with---- enterprise funds Mr. Callahan. We briefly touched on the Enterprise Fund with Jim and, I guess, Tom. The Polish American Enterprise Fund, I guess one of the first funds we created, and doing quite well. And it's achieving the status that they intended that the money ultimately was to grow through private contributions and through investments and then their debt paid back to the United States--or the advance be paid back, without interest, I might add. Now, officials from the Fund told us they could turn over $100 million back to the Government in the near future. We need the status of those funds. Now, what would you do with those funds if they were returned? Does it go back to the Treasury for re-appropriation or can you re-donate or re-allocate these funds? And is the Polish Fund a model? Is it the model for an enterprise fund? Well, let's talk about the Polish Fund first, and then we can talk about the Czech Fund and the Slovak Funds. But let's talk about the Polish Enterprise Fund first. Mr. Holmes. Mr. Chairman, if I could take the last question first and that is: is this a model? And one of the reasons that we are being so careful with respect to this is that we believe it is indeed a model and that we ought to get it right with this first opportunity to deal with the issue of re-flows. It is certainly well out in front of any of the other Enterprise Funds in terms of the, of the opportunity, and therefore we want to get it right. We want to see that it's coordinated with Congress because we have an outstanding commitment from 1993, with Congressman Obey, that whatever happens with respect to this issue and re-flows, it will be consulted with Congress before the Administration pursues. Now, with respect to the issues of amounts and what happens to the re-flows, I am hopeful that before this month is out we will be able to come back to this committee, staffers and Members, with a detailed Administration proposal in this regard. There are several options. What is clear is that the Polish-American Enterprise Fund has been sufficiently successful for monies in the form of sales of subsidiaries and for profits from its investments to be returned. Whether it is returned to the U.S. Treasury or whether it is returned to us for reprogramming in the form of a foundation, or whether it is, it is dealt with in a mixture of this, it's something which we need to complete the formulation on and bring to you, Mr. Chairman, and to this committee as a proposal of the Administration for handling this. The clear thing for me is that we are seeing the success of a unique mechanism of foreign assistance here, which not only will have the consequence of demonstrating the technology of private investment in central and eastern Europe, but also returning profit and enabling us, enabling some foundation perhaps, or enabling other entities of the U.S. Government to make further use of the money which results from the re-flow of these funds. This is an outstanding good story. We look forward to coming back to you with a proposal and to working with this committee on the final U.S. Government position, which we would then need to take to the government of Poland. Mr. Callahan. I've encouraged the Polish Enterprise Fund to look at the possibility of an adopt-a-country program. Specifically, I had suggested Jamaica. That Jamaica has great needs that an enterprise fund, even without Federal contributions, because of their ability to raise money from Jamaican Americans in this country. Or that maybe the Polish Fund could adopt a country like Jamaica and assist them in establishing a self-sufficient enterprise fund for Jamaica. And I have not heard back from them about that prospect. And I don't even know if it's a good idea or a bad idea. It's just an idea that I had, because General Colin Powell has indicated to me that he would be willing to titularly head up an enterprise fund. And certainly somebody with the expertise and ability of the Polish Enterprise Fund--or maybe we could do it without Government contributions. Maybe with a little administrative contribution from the Polish Fund to assist them in establishing, it might be a further contribution that the Polish directors could--the Polish Fund directors could even make a greater contribution. And I guess, Nancy and Nita, I've got one other, and that is the Czech and the Slovak Funds. Now, tell us about those two funds? Mr. Holmes. In my oral statement I mentioned that, with respect to the Czech Fund, we express enormous disappointment, both in the performance of the, of the original board of directors and in terms of the performance of their invested instruments. In an economy which was otherwise doing spectacularly, they managed to lose 90 cents on a dollar. We have, we have this year closed out that fund. The fund has been sold for an amount of approximately $1.2 million, based on an investment which was about $11 million. It has been sold to a company which is in part U.S.-based: Renaissance Corporation. It reflects one investment which has some genuine worth and a token payment for the rest of it. They are in the process--all of the $1.2 million has been put into an escrow account. And as the legal paperwork associated with the divestiture of each one of these investments is completed, the money from that escrow account then comes and is transferred to the Slovak Enterprise Fund, where we decided that we will concentrate the remaining assets, which will amount to approximately $23 million, $24 million from the original, from the original obligation for this combined fund. We will concentrate our efforts in Slovakia. So, we have a new small board which is focusing on Slovakia in terms of investments and loans. It has the assets which remain for the old fund. And we are essentially out of the business in the Czech Republic. Mr. Callahan. What about any other Enterprise Funds that might be in trouble that you're aware of? Mr. Holmes. I am not aware that there are other Enterprise Funds which are in trouble in this degree. We have a semi- annual review. We have mounted a--I would describe it a rather aggressive oversight effort with all the funds in the wake of this development and we do not at this point see any of the other Enterprise Funds for central and eastern Europe in this sort of difficulty. There has been a substantive problem in terms of the divisions within the board on where investments should be made and the amount of investments which should go into capital and developmental institutions. In the case of the Romanian Enterprise Fund, we have received over the past month the resignation of three of the board members from the Romanian Enterprise Fund, and the consequence of that, I believe, will be to eliminate the factionalization, which---- Mr. Callahan. Tom, do you know of any Enterprise Funds that might not be solvent or might be headed toward demise? Mr. Dine. The issue has not been solvency for the Romanian Fund. It's been---- Mr. Callahan. Well---- Mr. Dine [continuing]. Management. Mr. Callahan. Yeah. Mr. Dine. And as the Czech failure demonstrates so clearly, we don't have anything--you can't do the job using---- Mr. Callahan. Well, first of all, I might say that solvency to you might mean one thing. But when you have $11 million in assets and you are able to gain $1 million for the sale of the assets, in Alabama we call that insolvency. But go ahead. You get the point. Mr. Dine. I got the point. Mr. Callahan. Well, what about the Albanian Fund? Mr. Dine. Right now it's going to have to wait till things develop in Albania itself. And, like the others, it was slow starting, but I don't think it's--until the current dysfunctionality took place in the last six weeks, I don't think it was headed for failure. I think it was plodding along. Mr. Holmes. Mr. Chairman, we checked on the consequences of the anarchy of last month with the Albanian Enterprise Fund. We did it--we've done it regularly. We did it as recently as last week. Two of the investments suffered damage as a result of the destruction and disturbance. Some motor vehicles were destroyed in one case and the contents of a soap factory was looted. The production capacity of that soap factory was not affected. They believe that they can quickly restart it and are in the process of restarting. At the present time, with the exception-- including those entities, there are no loans, there are no investments which are delinquent or outstanding in Albania. That may change as the unsettledness persists, but Albanian Enterprise Fund at the present time is not in distress as a result of the events of last month. Mr. Callahan. You say the Polish Fund is the most successful of all, and yet they're telling us they need to ensure that they maintain quality people to run the fund, that the capital and limitations of employees is not mandatory but is there. That indicates they can't pay people $400,000 a year or $500,000 to keep the fund solvent, to keep the monies coming in and the investments going out, to keep it solvent. But I see the current chairman of the Czech and the Slovak Fund is the former Deputy Director of White House Personnel. Now, what expertise does the former Deputy Director of White House Personnel have? Mr. Holmes. If I could respond to the first part of it with respect to the Polish American Enterprise Fund? There is a transition underway with respect to Polish American Enterprise Fund which will result in the privatization of that fund. We are already past the halfway point. More private money---- Mr. Callahan. Well, I understand that. We don't need to get into where--why they need to---- Mr. Holmes. All right. That---- Mr. Callahan [continuing]. To be thinking that out. We said that they are successful. And yet here is a fund that we want to be successful that obviously is not---- Mr. Holmes. As far as the Czech and Slovak Fund is concerned, in the wake of the, of the dysfunctionality of the original board, we decided that it was important for us to reform the board, and we decided on the basis of a recommendation of an interim group, none of whom are on the current board, that it should be small. The result of that was to identify needs and to recruit people to address those needs. One of the needs which was, which was apparent as far as the Slovak Fund is concerned was the recruitment of an experienced CEO. The identification of the chairman of that board, who now is a professional in terms of executive recruitment, was and has been successful in terms of recruiting an experienced CEO to lead that fund. The other two members of the board are experienced investment banker--investment officers and loan bankers. Mr. Callahan. All right. Briefly, the Central Asian Fund is in good shape, bad shape, right direction, wrong direction? Ambassador Morningstar. I think, in my view of the Central Asian Fund, is that it's in reasonable shape. To talk about the Central Asian Fund raises what I think is a very interesting issue. They have been most successful in getting projects out. They've had some issues with some of the projects, not to the extent certainly at this point of the Czech and Slovak Fund. I come from the private sector, as you know, and I know that these funds like to be left alone and to develop as private companies, and that's sort of the principle in which they've been, bywhich they've been created. And sometimes the funds create--or forget that the U.S. taxpayer is in effect a shareholder of that fund. And that we have to somehow balance the question of letting them go about doing their business as a private entity and U.S. policy objectives. So, that the issue that we get into with the funds, and the Central Asian Fund is maybe one side, one-- maybe one extreme of that issue, is how do you balance the necessity of coming up with the deals that are decent deals and at least are going to show some profit and have a good demonstration effect on the one hand, and on the other hand getting money out the door and creating that balance. So, what I've been spending most of my time doing with respect to the funds is working on those policy issues as to how to create that balance and helping them to become maybe a little more creative on how to get the money out the door and hopefully will not have problems with---- Mr. Callahan. Maybe they ought to insure their investment funds through OPIC. Ambassador Morningstar. Well, hopefully OPIC will still be around---- Mr. Callahan. Yeah, I understand that. Ambassador Morningstar [continuing]. And helping support that sort of---- Mr. Callahan. That's another subject. I'm sorry, Nancy, to---- Ms. Pelosi. Well, Mr. Chairman---- Mr. Callahan [continuing]. Talk so long, but, in any event, I'll devote the rest of my evening to you and to Nita, let you---- Ms. Pelosi. Well, I would be---- Mr. Callahan [continuing]. Grill these people. Ms. Pelosi. I'll be very brief, Mr. Chairman, because you asked so many good questions that I get my questions answered on your time. So, I appreciate that. I want to take up something the chairman--president--I'm always calling you ``president.'' Mr. Callahan. Someday. Ms. Pelosi [continuing]. That our chairman said earlier, and that is that in these hearings we have a tendency to ask questions about some areas that we either have some disagreement or some question about. The fact is, at least in my case, I want to commend all of you for the great jobs that you are doing and the Clinton Administration for its leadership in this part of the world. I can't think of anything more important to our children's future than what is happening, especially in the countries of the former Soviet Union, and all that is implied in that in terms of the weapons of mass destruction that are there and the stake that we have in a transition that is sure. bosnia As far as Bosnia is concerned, I'm very proud of the Clinton Administration's efforts, and yours, Mr. Holmes, and all of you, who have been involved. I know you had Mr. Dine as well. And, we have great pride in San Franciscan Mr. Sklar, who's worked on restoring the infrastructure there. Again being boastful of San Francisco, Mr. Chairman, you recognized Mr. Bedsel, who is a friend of mine as well. I want to recognize Father Floyd Lotito from the St. Anthony Foundation in San Francisco, who takes seriously the word of the Bible to feed the poor in the gospel of Matthew. Father Lotito could tell us all tales about how to be effective in helping people. People in my district don't share many--some of the concerns that Mr. Callahan has about foreign aid. San Francisco is a very international kind of a city. But nonetheless our chairman's district is one that is more representative of the questions that people have about our foreign aid and we have to justify it every step of the way when we have people like Father Lotito feeding the poor in our own country. I'm very proud of the work that you'all do. I want to commend you for it. If I just had one little footnote I would say, and I don't want to go into it now, that you'll be hearing more from me about the Humanitarian Aid Corridor Act and what is happening in the Armenia and Azerbaijan area. After having gone off on a tangent on that, I want to again thank you for your testimony, for your hard work, and for the leadership of the Clinton Administration. I think all Americans should be proud of particularly what is happening in Bosnia and hopefully celebrate the Fourth of July, 1998, with all of our troops at home, Mr. Chairman. Mr. Callahan. Well, thank you. Father Lotito, welcome to our committee hearing. And we've gone through this Lenten season and Easter season. I keep asking the same question of all the theologians: do you reckon St. Paul ever heard back from the Corinthinians? Father Lotito. Now, he has. Mr. Callahan. Ms. Lowey? armenia Ms. Lowey. Thank you. Thank you, Mr. Chairman. I'll be brief, because the hour is late. I just wanted to ask another question about Armenia. According to U.S. Centers for Disease Control and Prevention, the Armenian people are facing really tremendous risk for mortality from acute health problems, nutritional deficiency, hypothermia, epidemics. The dire situation is at least partially a result of the blockade of Armenia by Turkey and Azerbaijan. At a time when the Administration is making a gradual shift from humanitarian aid in Armenia towards development assistance, can you give us confidence that the vulnerable Armenians won't be left out of this progress and they will receive the important assistance that they need? Ambassador Morningstar. I can give you the absolute confidence in respect to that. When you look at the assistance numbers for Armenia, whether we talk about earmarks or not, the actual value of dollars that go to Armenia are in fact significantly above the earmark when you count USDA numbers and you count the value of the commodities. We expect the value of our actual assistance program to Armenia to be in the vicinity of $140 or $150 million, of which probably at least 60 percent of that is humanitarian assistance. And our office has been extremely involved with respect to the transport of commodities. In fact, we had a--just in the past several months, we had a major shipment to Yerevan of excess hospital supplies and medical and pharmaceutical supplies. I think it was something close to $15 million, just in respect to that shipment. So--and every time that we need, setting again aside the political issues, whatever that may be, every time that we meet the President of Armenia or the Prime Minister or other high officials, they just go and effusively thank us for that kind of assistance that we do--have transferred and will continue to transfer. And, so, they could not have survived as a country. Mr. Dine. Mrs. Lowey, AID has actively engaged in combating infectious diseases in a variety of places in the former Soviet Union. Diphtheria, polio, malaria, tuberculosis have been very much on our scope. And in terms of Armenia and central Asia and Ukraine, we'll be spending in fiscal 1997 $3.6 million on this whole question. I'm most concerned about Tajikistan and the area surrounding the Aral Sea. bulgaria Ms. Lowey. Thank you. Another area that we discussed before: Bulgaria. I forget which one, but I think several of you referred to the fact that they are moving towards free- market democracy from an era of communist oppression, but we all know that to say the economic situation there is not good would be an understatement. And there is tremendous hardship among the Bulgarian people. Perhaps also, Tom, Mr. Dine, you could tell us what AID is doing to address some of that hardship. Mr. Dine. Sure. Ms. Lowey [continuing]. The entire situation? And, in fact, I remember very clearly on that same trip, that we stopped by to meet with some of the officials of Bulgaria. I guess it was about three or four years ago. You were beginning to work there, and we've seen some success, and perhaps you can expand upon it? Mr. Dine. As I indicated earlier, Ms. Lowey, it has been a very difficult chore working with the previous government Socialist Party. It has been antithetical to reform efforts. What our creative on-the-ground AID mission director then decided to do, instead of hitting his head against the wall, was to go to ten different cities in Bulgaria. He started this two years ago--Ruse, Stara Zagora, so many others--and he worked--developed a program with these ten mayors, nine of whom were members of the Socialist Party, and developed a program in privatization, municipal financing, a whole host of other efforts to build a modern market economy. And it's working. And I was there in December. I traveled from the Danube River on all the way down, visiting different cities with our ambassador there, and it's just very exciting to see results, to see successes, and to see that we can work well in adversity. Now, the economy has gone, obviously, for the worst. Inflation has become hyperinflation. And hopefully a new leadership will take over on April 19th. Yes, President Stoyanov wants to push his government, his country toward modernization, and I think he has the brains and the political will to do so. And, so, we're anxiously awaiting for that election and we will be engaged with the central government, hopefully, this spring and summer. Ms. Lowey. Mr. Chairman, I also want to mention again for the record many of us have heard about Denmark's resistance during World War II to the Nazis in protecting their Jewish community. And I think it's important that we note again the strength, the outright courage of the Jewish community in Bulgaria--excuse me--of the community in Bulgaria in protecting the Jewish community against the Nazi onslaught. Bulgaria reacted with courage and strength in protecting the Jewish community, and here we are years later. And I feel that whatever we can do to help the Bulgarians going through this very difficult period is certainly well deserved. I'll submit the rest of the questions for the record, but I just want to say in closing that we applaud the work that you are doing. I think it is very important for us to continually tell the success stories, the exchange stories, the micro- credit stories, the stories of the various funds such as the Polish Funds, the various AID projects that really have made a difference to the people in these communities. The chairman talks about Mobile, Alabama. Even in Yonkers, New York, the polls show that people don't believe that foreign aid is less than 1 percent and the polls will show--CNN recently did a poll that people believed that it was 65 percent, which is extraordinary. And I would hope that whether it's in Mobile, Alabama or Yonkers, New York, that we who know better would continue to tell the story about--and Tom Foglietta has stated it so eloquently--how important this is and how it really is a good investment for the United States to protect us from greater expenses in the long run. So, I congratulate you on the work you've done and I hope we can continue to direct our assistance to those projects that bring success so we can let the people in Mobile know and throughout this country, because many people share the frustrations which our chairman expressed so well. Thank you very much. balancing the budget Mr. Callahan. Well, I thank the gentlelady, not only for her many contributions to this committee but for her willingness to put up with sometimes opposing views. But I try to be Alabama-kind to the gentlelady in our dealings and to tell you that in Alabama also they go along with the belief that we're giving 65 percent. If you include congressional pay, then they think it's 90 percent. So, they are firmly convinced that if we do away with foreign aid and congressional pay, we'd balance the budget. Ms. Lowey. You are always a gentleman. Mr. Callahan. And I appreciate---- Ms. Lowey [continuing]. Mr. Chairman. Mr. Callahan. And if I thought that would do it, we would forsake our pay in order to balance the budget, but I don't think that would quite do it. But there's one more question I'd like for you all to answer carefully, each of you, very briefly. In fact, it could be yes or no. Have you personally or through approaches through your staff been asked to assist or to meet with Vadim Rabinovich or Mr. Louchansky? Yes or no? Through your staff or directly to you? Ambassador Morningstar. I guess I'll go first. No. Mr. Callahan. Okay. Mr. Holmes. No. Mr. Dine. No. Mr. Callahan. Okay. Well, we do appreciate your professionalism and we appreciate the cooperation you give to us year-round. We sort of enjoy having this opportunity to have this dialogue with you. We try to remain polite and to express the convictions and concerns that are expressed by the people of our districts through us to you. But we do applaud the good that you do and the professionalism especially that the three of you provide, and we have a great affinity to you in that respect and we appreciate very much your coming today. And with that, we'll consider this meeting adjourned. [Questions and answers for the record follow:] SUBMITTED TO AID Questions for the Record Submitted by Mr. Porter focus on privatization in ukraine Question. During today's hearing, we heard a great deal about corruption problems in Ukraine, and the need to reevaluate the way our aid programs there are working. I believe that U.S. foreign assistance can be instrumental in Ukraine's reform process, if it is properly targeted. USAID has received criticism of its programs in Ukraine, particularly its penchant for working primarily with large, for-profit firms which have limited understanding of the real social, economic and political needs of the people of Ukraine, and whose employees receive large salaries and extremely generous benefits packages. In fact, it is my understanding that USAID recently had to lower the per diem allowance for these contractors due to complaints by other organizations. Is such a strong focus on privatization realistic when there is dramatic need for assistance with basic needs such as child and maternal health, domestic violence and alcoholism, basic education, etc.? Answer. USAID's focus in Ukraine, as it is elsewhere in the NIS, is on assisting with the building blocks that are fundamental to Ukraine's evolution toward a market democracy. Primary among these building blocks is development of the institutional and regulatory framework for a market economy, including the fundamentals of privatization, or shifting ownership of resources to the private sector where competition leads to efficiency. Also key is support for developing democratic institutions and practices. USAID well understands the importance of social considerations to Ukraine's successful transition, and provides assistance to Ukraine in health, social protection, and strengthening of non-governmental social service organizations, as well as humanitarian assistance. These are all activities which address urgent needs of the people of Ukraine. In health, USAID is supporting efforts to (1) reduce the cost of health care and increase its efficiency, (2) improve patients' access to health care and the quality of that care, (3) provide better reproductive health care and greater access to contraceptive alternatives to abortion, (4) improve infectious disease surveillance and monitoring, (5) screen, diagnose and treat breast cancer, and (6) develop legislation for the introduction of health insurance, family medicine and hospital licensing and accreditation. USAID also supports partnerships between U.S. and Ukrainian hospitals focusing on improving the efficiency and productivity of health providers. This has resulted in initiatives in infection control, neonatology and emergency care. USAID's social protection program is assisting Ukraine to move from universal price subsidies to those based on income, and to lay the foundation for a sustainable system of social insurance. By the end of 1996, this program had assisted over 5 million families and saved the Government of Ukraine an estimated $1 billion. USAID is supporting the development of non- governmentalorganizations (NGOs) which can play an important role in providing social services which the government can no longer afford or chooses not to provide. Many of the roughly 5,000 NGOs formed in Ukraine since the break-up of the Soviet Union are now providing social services. USAID also provides humanitarian assistance to the most vulnerable members of Ukrainian society, such as the elderly, children and disabled, to help alleviate their suffering and give hope to the Ukrainian people during the difficult transition period. Since 1993, the USAID-supported Counterpart Humanitarian Assistance Program has provided more than $28 million worth of humanitarian aid to government social service institutions and local NGOs providing needed social services. Approximately $9 million worth of clothing, bedding, footwear and other humanitarian assistance has been provided to 280 orphanages and boarding homes for the elderly and severely disabled. ukrainian privatization Question. Does USAID feel that these privatization programs have been successful and cost-effective? If no, what steps are needed to restructure these programs to make them more cost-effective? Would smaller, non-profit organizations, perhaps in cooperation with indigenous organizations, be most effective, both financially and results-wise, in dealing with the most pressing problems in Ukraine? Answer. Ukraine's privatization program began in earnest in 1995. By the end of 1996, significant progress had been achieved in accelerating medium and large-scale privatization. As of January 1997, 5,000 of 8,000 medium to large-scale enterprises were privatized. This enabled Ukraine to receive the second tranche of its World Bank Economic Development Assistance Loan (EDAL) as scheduled. It is the Government of Ukraine's goal to privatize the remaining 3,000 enterprises by the end of 1997. Completion of the program in 1997 will be a challenge to the Kuchma Government. Since the beginning of this year, the pace of the program has slowed due to political and economic issues outside the scope of the program. One major concern, for example, is that the passage of a law regarding compensation to citizens for savings eroded during the transition has confused people as to their right to possible future cash compensation if they obtain and use compensation certificates. Therefore, people are not using compensation certificates to purchase shares in privatizing companies, greatly slowing down the privatization process. USAID's approach in addressing problems related to Ukraine's privatization program has been to establish consensus among the donor community on targets and goals for privatization and to work with the highest levels of the Ukrainian Government to resolve barriers to reaching these goals. Recently, the donors sent a letter to Prime Minister Lazarenko suggesting ways in which the current problems could be resolved. This multi-donor approach has been successful in resolving problems associated with this program in the past. Although the program cannot be characterized as a complete success due to the measured pace of privatization in the Ukraine, serious attention has been given to the cost effectiveness of this program; whereby the program is being implemented mostly by a Ukrainian staff, with only five expatriates (of a total staff of 90) providing advisory and policy oversight to the program. Moreover, a series of discussions last fiscal year, between USAID, the State Department Coordinator's Office for NIS affairs, addressed the concern of the Congress regarding cost-effectiveness of the program. As a result, the program has been overhauled in various areas, cutting costs and stressing the utilization of the Ukrainian talent, trained by the Contractor, to administer the program. With respect to small-scale privatization, the program has been a success, with 40,000 small-scale enterprises privatized as of April 1997. Small-scale privatization is being implemented on a non-profit basis through a USAID grant to the International Finance Corporation; it is entering its final phase with emphasis on the selling of unfinished construction sites. strengthening albanian democracy Question. In light of recent events in Albania, I am gravely concerned about the efficacy of our assistance programs in that country. On many of the charts submitted with the Administration's testimony today, Albania's economic situation got relatively good marks and the Department's justifications virtually ignored the flawed 1996 elections. In short, despite warnings from many who watch this country closely, the Administration seemed caught completely unaware of the possibility that conflict would spread so rapidly and widely in Albania following the collapse of the pyramid schemes. What steps are being taken to strengthen democratic institutions, and truly democratic political leaders, in Albania and help that country move towards early elections in the wake of the highly volatile situation there? We are also interested in knowing what role U.S. programs in Albania will play in ensuring that future elections are free and fair. Answer. USAID activities have strongly supported democratic institutions and political leaders in Albania. Both the International Republican Institute and National Democratic Institute have had representatives working in Albania to promote a more active exchange between politicians and their constituencies by providing training in the rights and responsibilities each has in a democracy. Strong support has been provided to non-governmental organizations (NGOs) to increase their advocacy role vis a vis government. Advisors also work with local governments to better equip them to serve their constituents and move toward greater decentralization. Currently all American advisors are still evacuated, but most activities continue with local staff. We are hopeful that U.S. personnel will soon be allowed to return to Albania and a priority will be placed on those who can assist in the election process, e.g., participate in drafting new election legislation and regulations, work with the Central Election Commission, train election administrators, etc. In addition, the National Democratic Institute works closely with the Albanian Society for Democratic Culture (SDC), which is an independent election monitoring association. The SDC and U.S. advisors will be closely involved in election monitoring, as will U.S. Embassy personnel. economic assistance to albania Question. What kinds of economic assistance are we currently providing to repair the damage to Albania's economy? Has the Administration indicated to the Albanian government that continued assistance will be predicted on progress towards democratization and real economic reforms? Answer. Over 50% of U.S. assistance to Albania supports economic growth. Much of that assistance goes to the agricultural sector which accounts for over 50% of GDP and 50% of employment in Albania. Agriculture was one of the first sectors privatized in Albania, and it is worth noting that during the recent crisis, the agricultural sector has been little affected. Other U.S. support includes the Albanian- American Enterprise Fund, which provides loans and equity capital to private businesses, an MBA program, technical assistance to small and medium enterprises and technical skills training. When the situation allows for the return of U.S. advisors, assistance can quickly be provided to start rebuilding the Albanian economy. Little support in the area of economic growth is provided directly to the Government of Albania. Virtually all is directed to the private sector. We have, however, made it clear to the interim Government of National Reconciliation that our ability to restart or expand our assistance programs (beyond the limited number of activities which were recently announced by the Secretary of State) is dependent on a number of factors. These include improved security and the stability which can only come from free and fair, new parliamentary elections. We have also expressed our support for the World Bank and IMF positions on Albania. The International Financial Institutions have indicated that they will be unable to deliver substantial additional financial and technical assistance to Albania until there is a stable security environment, an effective government, fiscal and monetary discipline, and aggressive Albanian action to deal with the pyramid schemes. independent media in albania Question. During the recent crisis, I was gravely concerned by the treatment of the independent media by Berisha and the Albanian government. What specific efforts are underway to promote a more positive environment for independent media and freedom of the press? Answer. Treatment of the independent media in Albania, especially over the past two years, has been a serious concern. Constraints include a repressive broadcast law, state control of TV and radio, harassment of journalists, a lack of understanding among journalists of the ethics of reporting, and a lack of public confidence in journalists and the media in general. U.S. support for introducing the concepts and importance of independent broadcast and print media has been through several mechanisms. Under the USAID Professional Media Program, advisory assistance and training have focussed on radio production and newspaper management. Efforts to work with three journalists' associations have had limited success. With SEED funding, USIA provides U.S.-based media training for broadcast and print personnel in management, reporting, editing, sales and marketing, etc. Short-term workshops, as well as non-credit academic years of professional development at U.S. universities (two per year), are offered. In addition, the Voice of America has provided radio relay equipment to several ``pirate'' radio stations. A new private broadcasting law has been drafted which, through flawed, will be a major step forward in allowing independent television stations to operate. Initially introduced with the state of emergency imposed in March, state censorship of media has just been lifted. soviet-eastern european research and training Question. When the Soviet Union collapsed, we were unprepared for the after-shocks that this historic event would have around the world, and here at home. The massive assistance apparatus we quickly erected has dealt with many of the most pressing and obvious issues, but I believe that we will continue to confront previously uncontemplated aftereffects of forty years of communism on these countries. The progress we have made and the work we have ahead of us has been assisted immeasurably by a small but highly effective program authorized by the Soviet-Eastern European Research and Training Act of 1983 and administered by the Department of State (commonly known as Title VIII). Title VIII supports university-based language training, graduate education, exchanges and postdoctoral research focused on the Soviet successor states and the formerly communist countries of Eastern and Central Europe. This program plays a critical role in maintaining and developing American expertise about this important region. (a) Given the need to have qualified professionals working in these countries to advance American interests, why has the State Department chosen to fund this program far below the level of support requested by Congress? Answer. We share your confidence that the Title VIII program has produced significant research on the countries of Central and Eastern Europe and the NIS. For that reason, we continue to support the Title VIII program, although at a rate reduced from 1995-96. The budget for Title VIII (NIS and Central and Eastern Europe) will be $4.2 million for Fiscal Year 1997, with $900,000 from the SEED budget and $3.3 million from NIS funds to support research in Central and Eastern Europe. Congress urged funding of Title VIII in the SEED and FREEDOM Support Act budgets. While we understand why this was done, it is a very tenuous arrangement. The non-Bosnia funding under the SEED Act continues to decline. Further, we expect SEED, as a temporary program, to be greatly reduced by the year 2000. We have recently announced the ``graduation'' of five more Central European states from SEED over the next three years. As a result, we have had to apply cuts to the Title VIII program along with the rest of the SEED program. To preserve the good work of Title VIII, a more durable funding vehicle than SEED must be found. At the request of the State Department's Bureau for Intelligence and Research, we have agreed to seek Fiscal Year 1998 funds for Title VIII within the combined resources of the SEED Act and FREEDOM Support Act accounts. Beginning with Fiscal Year 1999, we intend to return Title VIII to the regular State, Department budget at a level of $5 million per annum. We look forward to working with Congress to find a better lasting funding arrangement than the SEED Act and FREEDOM Support Act accounts. assistance to disputed territories in the nis Question. The International Committee of the Red Cross (ICRC) recently released a needs assessment concerning the humanitarian situation in Nagorno-Karabakh which found that the refugees there are suffering dramatically and current assistance is far from sufficient. The State Department continues to resist the provision of direct assistance to the people of Nagorno-Karabakh, insisting that it is Azerbaijan's responsibility to provide assistance to the refugees there. (a) How much assistance has the U.S. provided to the breakaway Russian state of Chechnya? What form has this assistance taken; from which account(s) is it drawn; and through whom will it flow? (b) It is my understanding that USAID is planning to provide assistance to Abkhazia. How much assistance is planned; what form will it take; from which account(s) will it be drawn; and through whom will it flow? (c) Can you provide the legal or policy rationale for differentiating Chechnya and Abkhazia from Nagorno-Karabakh with regards to the provision of humanitarian assistance? (d) Ambassador Morningstar, you have stated that Section 907 was the hindrance to assistance to Nagorno-Karabakh. In the FY 1997 appropriations process, we endeavored to clarify that Section 907 was in no way intended to prevent the provision of humanitarian assistance to Nagorno-Karabakh and we met with resistance from the State Department on this matter. In light of the fact that the U.S. maintains a thriving assistance program to Azerbaijan despite Section 907, why are we unable to assist the people of Nagorno-Karabakh? Answer. In order to correct the record, it should be pointed out that the International Committee of the Red Cross (ICRC) has not recently released a needs assessment of the humanitarian situation of ``refugees'' in Nagorno-Karabakh. Reports from the region indicate that thereare a small number of Internally Displaced Persons (IDPs) within Nagorno-Karabakh, perhaps 4,000. This number should be compared with the nearly 800,000 IDPs in Azerbaijan. Due to the unresolved conflict between the two countries and continuing economic dislocation, living conditions are poor throughout the region and all identified humanitarian needs are not being met, but there are no indications that critical needs in Nagorno-Karabakh are going unmet. (a) The U.S. Government has provided no assistance to the ``breakaway Russian State of Chechnya.'' USAID has provided $6.42 million to international organizations (ICRC), the International Organization for Migration (IOM), the United Nations High Commissioner for Refugees (UNCHR), and the World Food Program (WFP), which are engaged in assisting victims of the conflict in Chechnya. These organizations work in the region with the approval of the Russian Federation and have provided medical, shelter, and food assistance, primarily to IDPs located outside Chechnya's borders. USAID funding has been with FREEDOM Support Act funds. Additional U.S. assistance has been provided by the State Department's Office of the Coordinator for Assistance to the NIS and the State Department's Bureau for Population, Refugees, and Migration. The dangers inherent in working in this region are highlighted by the deplorable killings of ICRC workers in Grozny last December, the worst incident in the history of the ICRC. (b) At the request of the U.S. Embassy in Tbilisi, Georgia and the Republic of Georgia, USAID is examining the feasibility of providing assistance to the people of Abkhazia. This request was made due to improving prospects for rendering assistance to these impoverished people and for further assisting the peace process. A rapid assessment by USAID personnel has already been undertaken. Assistance levels are still under discussion, but could involve up to $1.5 million of Fiscal Year 1997 FREEDOM Support Act funds. (c) The U.S. Government responds to identified humanitarian needs, wherever they exist, based on urgency of needs, feasibility of delivery, and the availability of funds. To date, U.S. humanitarian assistance to the people of Chechnya, Abkhazia, and Nagorno-Karabakh has been channeled primarily though international organizations. The situation with regard to access, security, and political status is different for each of these regions. For example, access to Chechnya has been problematic at times, depending on local Russian commanders, but security concerns have largely mandated that relief activities be limited to areas outside Chechnya. In Abkhazia, security concerns and the region's status as a rebellious territory of Georgia have made international organizations the main mechanisms for relief delivery. If programs by U.S. Private Voluntary Organizations (PVOs) in Abkhazia are undertaken in due course, it will be due to the changing situation there. Georgian IDPs are beginning to return to their homes to Abkhazia. Additionally, due to progress in the Abkhazia. Additionally, due to progress in the Abkhazia peace process, the Republic of Georgia, whose soevereignity the U.S. recognizes in the region, is supporting the humanitarian activities of U.S. PVOs in Abkhazia. In Nagorno- Karabakh, by contrast, return is still a remote propsect for the ethnic Azeri IDPS who fled the region. With no progress in settling the dispute, the Republic of Azerbaijan, whose sovereignty the U.S. recognizes in the region, has not approved the entry of US PVOs. Thus, international organizations remain the appropriate instrument for relief activities in Nagorno-Karabakh. (d) It is inaccurate to characterize U.S. Government assistance to Azerbaijan as ``thriving.'' In FY 97 it is estimated that the two Caucasus countries not affected by Section 907, Armena and Georgia, will receive $144 million and $91 million respectively in USG assistance. Azerbaijan will receive approximately $31 million. The U.S. Government has been able to assist the people of Nagorno-Karabakh through donations to the regional ICRC appeals, $16.57 million in 1966. Of the over $62 million in USG assistance committed to the ICRC Regional Appeal since 1992, it is estimated that approximately $3.5 million will have been expended meeting Nargorno-Karabakh needs by the end of this year. We are currently considering a request from the American Red Cross, which will be working under the auspices of the ICRC in Nargorno--Karabakh in the health sector, and we are willing to contribute along with the rest of the international community to any needs assessments dealing with the region. humanitarian aid corridor act Question. Last year, Congress again expressed its strong support for the Humanitarian Aid Corridor Act (HACA) and it was permanently extended in the FY 1997 appropriations process. (a) Do Turkey and Azerbaijan continue to maintain a blockade of Armenia, which includes the blockade of U.S. humanitarian assistance? (b) What is the cost, in terms of having to take more expensive alternate land routes or use the air corridor, of this blockade to the U.S. taxpayers? Can you give me concrete examples of how this blockade reduces the effectiveness and availability of our assistance to Armenia? Answer. (a) There are no blockades within the NIS which would trigger the Humanitarian Corridors Act. The border between Armenia and Azerbaijan remains closed on both sides. The resumption of communications links between the two countries is one of many issues connected with the ongoing peace process. However, humanitarian assistance is getting to all areas of both countries. (b) There is no identifiable cost to U.S. taxpayers due to the use of land routes to Armenia through Georgia, rather than through Turkey, because the Georgia route has a much higher capacity and is thus more cost-efficient. The U.S. Government internationally competes contracts for the transport of humanitarian assistance to Armenia. On the occasions when firms have submitted bids involving transportation through Turkey, the price has been higher than competing proposals using the Georgia route. One reason for this is the greater efficiency of railroad transportation compared with truck transportation. The route to Armenia from the Georgian Black Sea ports of Batumi and Poti is entirely via railroad. Routes through Turkey involve either expensive truck transport, or use of the rail link between the two countries at Akhurian, Armenia, which has a very low capacity due to the different rail gauges used by European countries such as Turkey and former states of the Soviet Union such as Armenia. The USAID-funded Caucasus Logistics Advisory Unit (CLAU) of the World Food Program (WFP) has assessed this cross-loading facility and found it to have a capacity of only approximately 1,800 Metric Tons per day. This figure can be compared with the current average of 8,000 Metric Tons per day carried by the Georgian rail system, which is below its full capacity. Use of the low-capacity, high-cost Turkish land corridor for past shipments of U.S. humanitarian assistance could have imperiled vulnerable beneficiary groups in Armenia due to slower transit times and would likely have cost U.S. taxpayers more than the routes actually used through Georgia. Questions for the Record Submitted by Mr. Forbes microenterprise support Question. Microenterprise is one of the most effective strategies USAID supports, providing small loans that allow poor people to start and expand individual businesses. Not only do these programs reduce poverty, they recycle foreign aid dollars as loans are repaid allowing new loans to be made. Microcredit programs reach the very poor, especially women. In the past USAID has supported microenterprise activity in Asia and Latin America. Can you illustrate the kind of support that USAID has provided for microenterprise activity in Eastern Europe and the Newly Independent States? Answer. USAID supports a number of microenterprise programs in Eastern Europe and the NIS. In Russia, USAID supports micro-enterprise lending programs in four cities (Rostov-on-Don, Nizhny Novogorod, St. Petersburg, and Volkov). Two of these programs are just over two years- old, one has been operating since 1993, and one just began in the last year. These programs are being implemented by Opportunity International, the Center for Citizen Initiatives, and the Alliance for American and Russian Women. In Kyrgyzstan, USAID is supporting micro- enterprise lending through the development of a network of village banks. This three-year program is being implemented by the Foundation for International Community Assistance. In Ukraine, USAID has recently undertaken a program of credit union development, which will provide financial services (loans and savings opportunities) to small and micro-enterprises. This three-year program began in October, 1995 and is being implemented by the World Council of Credit Unions. In Central and Eastern Europe, Opportunity International has received $10 million to implement its program of creating microlending NGOs in Croatia and Macedonia, while the World Council of Credit Unions works in Poland, Lithuania, Latvia, Romania, and Macedonia. Aid to Artisans has a $1.0 million grant to assist grassroot handicraft makers in Romania and VOCA/ACDI runs its 5.0 million program region wide. usaid administrative costs Question. Do you foresee an increase in administrative costs in FY 98 over FY 97? Has there been a streamlining of administrative costs at USAID over the past 5 years? Answer. While there will be an increase in administrative costs associated with ENI programs in FY 1998, total recurring administrative costs for the Agency will decline by about $6 million. The latter will be possible only because of the efforts at streamlining Agency operations. In the area of streamlining, since 1993 the agency has reduced the number of organizational layers, redesigned and simplified the way business is done, focused on fewer, more attainable objectives, set out explicit goals and performance indicators, closed 27 missions, and reduced its staff by 30 percent. We will continue to work toward further improvements in overall Agency operations in the coming years. poverty lending institutions Question. Of USAID's microenterprises activities in Eastern Europe and the NIS, how much of it is devoted to poverty lending institutions that provide loans of under $300? Answer. Microenterprise development targets the lowest economically viable population. In the industrialized countries of Eastern Europe and the NIS, most of this population's capital needs range from $1,000 to $10,000 consequently, a small percentage of our microenterprise programs make loans of $300 or less. Nonetheless, USAID does provide some support for very small loans. In the NIS, $750,000 was provided to Opportunity International in Russia, $1.0 million was provided to World Council of Credit Unions in Ukraine, and $6.2 million was provided to the Foundation for International Community Assistance (FINCA) in Kazakstan to facilitate loans, many of which were under $300. In Eastern Europe, close to $10 million has been provided to the World Council of Credit Unions for work in Poland, Lithuania, Latvia, Romania, and Macedonia. This work supports institution building as well as loan disbursement. effectiveness and efficiency Question. In 1994, USAID Administrator J. Brian Atwood in speaking at the Center for National Policy, remarked that 70 percent of all USAID funds never even reach the developing countries. For example, in 1993, a U.S. company, Planning & Development Collaborative International, contracted with USAID to sponsor a 1993 exchange in the U.S. for the Romanian Union of Architects. Another example: a U.S. company, Development Associates, Inc. contracted with USAID to study the Agency's own evaluation studies (i.e., conducted a study to study USAID's studies). I want to see our Nation's foreign assistance programs succeed, but I need some assurances from you that USAID is operating in an effective and efficient manner. Can you provide for the Committee a percentage or dollar figure denoting how much of your FY 1996 appropriation for the NIS and Central Europe is reaching those countries? Answer. Based upon the introductory comments, there appear to be two separate questions: the first pertains to who benefits and where funds are disbursed; and the second regards the effectiveness of USAID's program performance. The great majority of the USAID Bureau for Europe and the New Independent States' (ENI) assistance programs involve technical assistance and training rather than commodities or cash, and they are implemented in the beneficiary country by U.S. and beneficiary country organizations. U.S. procurement laws and regulations direct that, in most cases, when we buy goods and services to carry out activities overseas, we purchase fromU.S. suppliers. Particularly in the ENI Bureau, we also firmly believe that, in order to provide clear examples of the market economies and citizen-driven democracies, it is imperative for program beneficiaries to engage directly and become immersed in the U.S. institutions that we portray as models. This naturally means that U.S. service providers who are sending advisors abroad or are conducting training courses will receive payment in the United States. However, these organizations, whether contractors, private voluntary organizations, or non-governmental organizations, provide value to the beneficiary country in the form of training, technical assistance services, partnership arrangements, or equipment and other commodities which are necessary to carry out the project. In this sense, we would say that close to 100 percent of our program reaches the benefiting country even if a large percentage is paid out to suppliers in the United States. Secondly, as to program effectiveness, USAID evaluates its program performance regularly in order to take steps to increase the effectiveness and efficiency of its operations. In the ENI Bureau, we designate a small part of Congressional appropriations for audit, evaluation and project support--funds for the purpose of ensuring that our programs remain on track. From the total FY 1996 appropriation of $1.163 billion in the ENI Bureau (combined SEED Act and FREEDOM Support Act), a total of $33.6 million was budgeted for this purpose. This constitutes approximately 2.9% of the total appropriation and should be regarded as funds well-spent to help us ensure that U.S. programs are achieving their intended result. usaid's assessment process Question. Numerous studies have shown that there is no correlation between economic growth and development assistance. Much of USAID's efforts are targeted to countries with economies plagued by excessive government regulation, high taxes, restrictions on foreign private investment, and corruption. The Index of Economic Freedom documents that the U.S. economic assistance is not effective. The Index, which measures the level of economic freedom in 150 countries, in 1996 found that of the 78 countries with economies classified as ``mostly not free'' or ``repressed,'' 35 have been receiving U.S. development assistance for over 35 years, some as long as 52 years. For example, Haiti has depended on U.S. foreign aid for 52 years, yet it is one of the world's poorest countries. During this time, Haiti has received almost $1 billion in foreign aid from the U.S. alone, not including the money the United States spent in its military operation to ``restore'' democracy in Haiti in 1994. In 1995, Haiti's percapita GDP was $360, in 1994, it was even lower: $225. Over one-third of foreign aid recipients have become poorer. Development aid is essential to the NIS and Eastern Europe's economic prosperity. Having said that, what kind of assessment process is USAID using to ensure that our efforts in those countries will not mirror situations, like Haiti, where after decades of receiving U.S. assistance a country is no better off or in some cases poorer? Answer. USAID assistance to Central and Eastern Europe and the NIS is based on the explicit recognition that the support is not open-ended but rather a bridge to help those nations' transitions to free market, economically prosperous democracies become sustainable and irreversible. An important part of the ENI Bureau's strategic planning and performance assessment system is the establishment and continual monitoring of graduation and close-out plans and criteria for each country. This includes the setting of end- targets for each strategic objective. Progress toward meeting the targets is measured annually, which allows us to determine if the objectives can be achieved to the threshold level within the remaining timeframe set for the program, as well as what adjustments may be needed to enhance graduation prospects. Taking these criteria into account, and working with the State Department Coordinator for U.S. Assistance to Central and Eastern Europe, we have already closed out in Estonia, and have established graduation dates between now and FY 1999 covering seven other Central European countries. In addition to monitoring the impacts of our assistance programs, we assess the progress of the countries more generally to determine whether continued assistance is necessary or justified. We do this first by looking at the movement of each country towards economic reforms and democratization, the two pillars of USAID in the region. Then we look at indications of sustainability; that is, macroeconomic performance and social conditions that are showing improvement. Indicators are drawn from standard, well- established data sources external to USAID, such as the World Bank, the IMF, the European Bank for Reconstruction and Development, the U.S. Bureau of the Census, and Freedom House. positive results Question. Can you briefly describe for the Committee the kinds of positive results USAID programs have yielded in the NIS and Eastern Europe. Answer. The end of the Cold War raised the curtain on Eastern Europe after more than forty years of Soviet hegemony. For the people of this region it meant renewed hopes for democracy and economic freedom. The United States moved quickly to establish USAID programs under the SEED Act to help Eastern Europe realize these hopes. Since 1989, a remarkable transformation has occurred in most of the region. Free and fair elections with voter turnouts exceeding Western levels are the norm. A free press and citizen activists make governments more responsive and accountable. Region-wide, minorities enjoy legal protections for the first time. USAID's democracy and governance programs helped to make these things happen. The greatest challenge for democratically elected governments has been to deliver economic freedom. Several countries in the Northern Tier have emerged as solid economic reformers with generally favorable investor ratings. Among the leaders are Poland, Hungary and the Czech Republic, which between them account for 80% of foreign direct in- vestment inflows to Eastern Europe since 1989. USAID assistance to these countries has helped to improve the business climate for investment by assisting privatization and capital market development. Wherever countries have struggled to adapt their economies to the rigors of the market, USAID and other donors have provided technical assistance, training and institutional support. As a result, a more secure financial, legal and regulatory environment has been created in a number of countries. The rapidly expanding new business sector has directly benefited from USAID information, training, and credit facilities. Southeastern Europe has been handicapped by war and slower economic and democratic reforms; so too has been much of the NIS. In these countries, USAID has focussed equally on the local level as on the policy environment in response to crisis circumstances and in recognition of reform opportunities. For example, while USAID humanitarian relief operations helped to bring stability to areas of Bosnia, the Caucasus and Central Asia, its assistance to reform-minded local governments in Bulgaria helped to bolster public support for national level reforms. USAID has helped to make the transition from totalitarian rule to democracy a successful feature of the transformation of the NIS. While this process is by no means complete in any former Soviet republic and is lagging considerably in some, there is no denying the significant progress made particularly in Russia. The Russian NGO sector has expanded rapidly so that there are not some 40,000 registered NGOs up from a mere handful in 1991. Their advocacy at the national and local levels has surely been a factor on the new Russian political landscape. The national, parliamentary and local elections held in Russia during 1996 marked a watershed in that country's political transformation. The results of Russia's presidential elections offer the United States and the West some assurance that reform and cooperation will continue. An example of the reform has been work USAID has led in the area of criminal and commercial law. Judicial reform has resulted from workshops, training and exchanges, including a pilot program to introduce jury trials for serious criminal offenses. USAID has made copies of the Civil Code, Part I available to all judges and trained over 40% of them in commercial law. In Central Asia, a revolution in health care is occurring as the health sector becomes more privatized and women's reproductive health is significantly improved. Health partnerships forged with NIS institutions are complemented by USAID efforts such as the Aral Sea Initiative, which aims to improve public health. The insolvency of the health care sector mirrors the state of public finances in general. USAID support for strengthened means-testing of subsidies enables governments to realize savings of scarce budgetary resources. Other savings are also being achieved through energy sector reform and the adoption of cleaner technologies. The modernization of Russian and other NIS industry holds enormous promise for Western business. USAID support for trade and investment with the NIS is underlined by its assistance provided for World Trade Organization accession negotiations. For example, support for Kazakstan's accession helps improve that country's investment attractiveness and complements activities such as support to the Ministry of Finance. In December 1996, Kazakstan was able to launch a very successful $200 million Eurobond issue with key input received from USAID-funded U.S. Treasury advisers. usaid accountability measures Question. Does USAID utilize a standard of measure to determine what is working and what is being wasted in administering assistance programs in the NIS and Eastern Europe? In other words, what kinds of accountability measures are in place? Answer. USAID utilizes an extensive series of measures to try to ensure that assistance activities are effective and that our programs are having the intended impact on achieving the successful transition of the countries of Eastern Europe and the former Soviet Union to democratic market-oriented economics. For USAID financed activities, grantees and contractors develop annual workplans that are reviewed by USAID staff. Process against these workplans is reported at least annually by USAID staff in the ENI Bureau's unique Monitoring and Reporting System (MRS). These reports are available to staff in both the field and Washington and are one of the tools to monitor activity progress. They also serve as input to more comprehensive annual reports by our country-based operating units on progress in achieving those of the Bureau's strategic objectives being pursued in particular country programs. Strategic objective reports include narrative descriptions of progress, quantitative assessments of progress against agreed upon targets that show whether or not intended results are being achieved, and an overall assessment of whether progress against each objective is above, below, or meeting expectations. Where progress is not meeting expectations, operating units identify steps they are taking to improve prospects for achieving results. As part of the annual review of our programs ENI also assesses each country's social conditions and the progress of each assisted country in achieving economic policy reform and democratization, utilizing data from non-USAID sources such as the World Bank and Freedom House. After annually reviewing progress towards achieving our objectives in each country, we cluster in quartiles all bureau objectives based on such factors as performance, importance to USAID's overall objectives, and the commitment of the country to reform. Activity performance, performance against objectives, and the overall place in the clustering against all bureau objectives are important considerations in determining the level of funding that should be provided. Strong performance may merit more funding, or, of success has been achieved, the elimination of funding for an activity, objective, or complete country program. Similarly, poor performance could result in termination of funding, or more assistance if the factors impeding performance can be overcome. Along with these various systems, processes, and measures we continue to utilize more traditional means of assuring the effectiveness of our programs and the careful use of U.S. assistance. These include audits by independent firms and Office of the Inspector General and the invaluable oversight of our own experienced staff. Questions for the Record Submitted by Mr. Kingston safe chernobyl shutdown Question. Last year you received $25 million more to help shutdown Chernobyl and make the area safe. Can you please update the subcommittee on progress made with these funds in the last year? How far along is that project? Answer. USAID has transferred the $25 million to the U.S. Department of Energy in an interagency agreement for the following activities: (1) development by an international experts group of a Shelter Implementation Plan for transforming the sarcophagus over the destroyed Unit #4; (2) early implementation of critical elements of the Shelter Implementation Plan; (3) feasibility analysis of the options for meeting the heat/power needs of the facility when Unit #3 is closed; and (4) other decommissioning/decontamination planning. The Shelter Implementation Plan, estimated to cost up to $758 million over seven years, has been developed with significant U.S. expert involvement and jointly agreed to by the G-7 and Ukraine authorities. The first stage is stabilization of the present structure to eliminate the greatest risk: its possible collapse. The U.S. Department of Energy has committed and begun about $11.7 million of activities at the sarcophagus that are part of the Shelter Implementation Plan (i.e. radiation monitoring and protection for the workers). Prefeasibility work has been completed on the heat/power plant and several options have been developed. The United States is considering the most cost-effective approach and will likely agree to use some of the $25 million for this facility. This facility will complement other predecommissioning waste facilities being funded by the Nuclear Safety Account of the European Bank for Reconstruction and Development and the European Union. In addition, the G-7 countries are working with the EBRD on a multilateral public and private funding mechanism for the Shelter Implementation Plan. family planning Question. The Committee has also earmarked funds in the past for family planning in the New Independent States. Please provide some information (and data later) regarding the impact of these funds on prevention of unwanted pregnancy in the NIS and the impact on the abortion rate. Answer. Since 1993, the Women's Reproductive Health Program has been modernizing NIS reproductive health services reducing reliance on abortion, which was the most common ``fertility control'' method and which resulted in high levels of maternal mortality. In the NIS, Women's Reproductive Health Programs totalling $32 million have been established in Russia, Ukraine, Moldova, and Central Asia, with 43 USAID-funded centers providing clinical contraceptive training, services and counseling. New programs are planned for Armenia and Georgia in late 1997. In addition, in Russia, Ukraine, Central Asia and Armenia, the American International Health Alliance's Hospital Partnerships are developing hospital-based, clinical women's services, including family planning. USAID programs have achieved impressive results. In Central Asia, a 1995 USAID study of 1993-95 data from 33 project sites in five countries reported a 58% increase in new contraceptive acceptors and a 30% decrease in induced abortions. In Bishkek, Kyrgyzstan for the period 1994-96, a USAID site, the Marriage and Family Center reported that induced abortions decreased by almost 50% and oral contraceptive use by women increased 200%. A 1996 Centers for Disease Control Reproductive Health Survey found that 60% of Russian women now use some type of contraceptive method and that 70% of these women used a modern method. In Ukraine, the Ministry of Health reported an 8.6% reduction in induced abortions in the first six months of 1996 that can be directly attributed to USAID assistance. currency transition in ukraine Question. Can you comment on the currency transition that took place last fall in Ukraine? Has the transition been successful? Has there been positive or negative economic impact? Were the old ``coupons'' phased out slowly to allay fear among citizens and to prevent an even bigger inflation push prior to transition? Answer. The introduction of the new currency, the Hryvnia, was unique in the region in that it had no confiscatory element. The Hryvnia replaced the previous Ukrainian currency, the Karbovanets. There was a month-long transition period during which the old currency was withdrawn. The introduction of the currency was a resounding success as evidenced by the fact that the currency has maintained its value against the U.S. dollar. A brief devaluation of the currency in October was unrelated to the introduction of the currency. It reflected inexplicable debt service delays by the Ministry of Finance in service of maturing Treasury debt. Inflation subsequent to the introduction of the new currency continues to decelerate, which reflects the National Bank of Ukraine's continuing commitment to stringent monetary policy. There is no street market for the Ukrainian currency, further evidence of people's confidence in this currency. changing focus of assistance Question. I appreciate the effort to transfer aid focus from more technical aid to more economic stimulus and trade promotion. I actually think this type of a fundamental shift is at least a couple years overdue. I have been told by entrepreneurs in Russia that they have received all the training, technical assistance and classes they need except perhaps for legal reform assistance. I know you've been doing this to some extent all along, but they have needed more assistance in the form of U.S. equipment, private business investment, and trade stimulation for some time. It is my understanding that some of these old programs are being continued through into at least the year 2000. Why must we do that? Are they previously awarded multi-year contracts? Are they legal/tax reform programs? Answer. As your question correctly observes, USAID has already begun to move away from an emphasis on straight technical assistance for Russia toward promotion of enduring society-to-society partnerships. We are able to make this transition precisely because of our success in building up the capacity of the private business sector through the more traditional types of USAID programs; this strengthened capacity allows Russian business persons to take advantage of the opportunities now opening up in trade, investment and small business development. However, we believe some technical assistance and practical, targeted training is still needed for the next couple of years, in Russia to ensure that the institutional capability to seize the opportunities is sustainable and irreversible. Such programs also are needed to help solidify the environment in which mature trading and investment relationships flourish. Some limited, traditional assistance mechanisms remain in place in Russia, focused on legal and regulatory reform. The thrust of the new Partnership for Freedom (PFF) focuses on establishing and promoting strong Russian-American linkages that will foster small business development, increased trade and investment, and a supportive civil society--particularly at the local and regional levels where the success of Russia's historic effort to join the ranks of free-market democracies may ultimately be decided. President Yeltsin's new team of advisers in demonstrably committed to economic reform, increasing the likelihood that USAID assistance will have a significant impact. Facilitating the growth of trade and investment requires a business-friendly legal and regulatory environment. USAID continues to work closely with the Russian Government, including the relevant executive branch ministries, to implement reforms to create a climate conducive to the growth of small business. Our support for overhauling thetax system and for the creation and regulation of a robust financial market are essential to advance the cause of economic reform in general, and the development of a dynamic small business sector in particular. In addition, USAID has helped to fund Business Support Institutions across Russia. These centers provide precisely the type of technical advice demanded by promising entrepreneurs, and have resulted in the formation of some 5,000 new businesses. Other countries in the NIS region--such as those in Central Asia and the Caucasus--still have far to go to reach Russia's level of success in economic restructuring and democracy building. They are not yet poised to take full advantage of the types of linkages embodied in the Partnership for Freedom. Therefore, additional technical assistance resources need to be targeted at them to provide the foundations upon which sound trade and investment relationships with the U.S. can be built. Questions for the Record Submitted by Mr. Obey central europe title viii funding Question. In both the House and Senate reports last year language was included endorsing full funding for the Russian, Eurasian, and East European Research and Training Program (Title VIII) from the NIS and Central Europe accounts. Although the NIS account has provided full funding of $3.3 million, to date the Central Europe account has only provided $900,000 of the $1.7 million needed for full funding. What steps are being taken to complete the additional $800,000 for Central Europe funding for Title VIII? Answer. Congress urged funding of Title VIII through the SEED and FREEDOM Support Act budgets. While we understand why this was done, it is a very tenuous arrangement as far as SEED Act funding is concerned. The SEED non-Bosnia funding continues to decline. Further, we expect SEED, as a temporary program, to be greatly reduced by the year 2000. We have recently announced the ``graduation'' of five more Central European states from SEED over the next three years. As a result, we have had to apply cuts to the Title VIII program along with the rest of the SEED program. The budget for Title VIII (NIS and Central Europe) will be $4.2 million for Fiscal Year 1997, with $900,000 from the SEED budget to support research in Central and Eastern Europe. To preserve the good work of Title VIII, a more durable funding vehicle than SEED must be found. At the request of the State Department's Bureau for Intelligence and Research, we have agreed to seek Fiscal Year 1998 funds for Title VIII within the combined resources of the SEED Act and FREEDOM Support Act accounts. Beginning with Fiscal Year 1999, we intend to return Title VIII to the regular State Department budget at a level of $5 million per annum. We look forward to working with Congress to find a better lasting funding arrangement than the SEED Act account. Questions for the Record Submitted by Mr. Yates leveraging funds with the partnership for freedom Question. Does the Partnership for Freedom program leverage any funds from the private sector? How has the United States business community contributed to your efforts? Is there any way we could work more closely with the private sector? Answer. One of the operating principals that we will employ under the Partnership For Freedom is cost sharing by partners. Both partners (NIS and American) should bring something to the table. Many of the partnerships we will support will link the U.S. business community, through individual firms and through professional associations, with businesses in the NIS. To the extent that we require contributions from these partners, we will be leveraging private sector funding. More importantly, these partnerships will be designed to help establish ongoing business relationships, which should result in larger private sector investments in the medium-term. nis concrete successes Question. We have already spent a great deal of money in Russia and the New Independent States (NIS) countries. Do we have any concrete successes to show for our efforts? Answer. Perhaps the single most dramatic and unprecedented achievement of the transition throughout the entire former Soviet sphere, and one for which USAID deserves a large measure of credit, has been the mass privatization of the Russian economy. Ownership of approximately 120,000 enterprises now resides directly in the hands of over 40 million private shareholders. In just a few short years, the private sector has blossomed from contributing a paltry 5% of economic output near the end of the Gorbachev era to 60% of GDP and employing half of the labor force in 1996. USAID has helped to make the legal and regulatory environment conducive for the creation of new private businesses and the protection of private property. As a result, there is an emerging broad-based Russian business class with a growing stake in the development of well-ordered commercial relations. A residential housing market has been established. And the stock market is booming, driven not simply by speculative funds but by investor perception of the greater transparency and safeguards made possible through USAID's efforts. Although uneven, freedom has grown remarkably in several former communist societies. In Russia, people no longer fear the coercive and corrupting power of a totalitarian state. That particular Orwellian nightmare is over. The proof was on display in 1996 before a worldwide audience, as Russia held presidential, parliamentary, and local elections. The electoral process was deemed credible by the competing parties, the electorate, and international observers. The lifeblood of the new Russian society is the media. In 1991, televised news was received from one government controlled service. Today, at least 500 broadcasting companies produce original programming in Russia. The rapidly growing NGO community increases the leverage which ordinary citizens can provide to the reform process at the national and local levels. With USAID assistance, local governments in Ukraine are becoming more responsive to their constituents. They have introduced a variety of democratic reforms such as more open budgeting, town meetings, citizen task forces, constituency outreach and local government watchdog groups, many of which never before existed. Municipal services are more efficient and better financed. Although working in an environment where economic reform has been slowed by political gridlock and corruption, USAID-assisted enterprise privatization in Ukraine has resulted in some 400 companies a month being auctioned. Approximately 30,000 of the 40,000-45,000 small-scale state enterprises and over 3,500 medium and large enterprises have been privatized. Cash-strapped Ukraine has also benefitted from budgetary savings to the tune of $600 million in 1995 and as much as $1 billion in 1996, which were realized through USAID support for better targeting of housing and utility assistance to the vulnerable. In addition, Ukraine has achieved the most far-reaching power sector restructuring of any republic of the former Soviet Union. Increased efficiencies in power generation, transmission and distribution reduce Ukraine's heavy dependence on fuel imports and unsafe nuclear power. In other parts of the NIS, USAID has also had success reforming the energy sector. Efforts are well under way in Armenia to de-monopolize the electricity sector, rationalize energy pricing, and improve tariff collection. Similarly in Georgia, restructuring has resulted in the sale of a number of hydro power plants to private investors, and creation of a national regulatory body for the power sector. Strategically important energy transit issues in the Caucasus and Central Asia are being addressed in the context of the creation of an investor-friendly oil and gas legal, regulatory and environmental framework for the exploitation of the Caspian Sea. Elsewhere, as aresult of USAID technical assistance and partnerships between Cincinnati Gas and Electric and local utilities, 70% of electrical generation in Kazakstan is being sold to the private sector, including American investors. In the health sector, USAID has helped privatize the pharmaceutical distribution and retail system in Kazakstan. Of 1,378 pharmacies, 691 have been auctioned and 562 were privatized by the end of 1996. USAID reproductive health programs in Central Asia have reported a 58% increase in modern contraceptive use and a 30% reduction in abortions since 1994. In Russia, health reform is helping that country improve the quality, organization, and financing of the health care system. Hospital partnerships with U.S. institutions have taught Russian health professionals state-of-the-art practices in several specializations, including women's clinical services, and contributed to improved hospital management. As in Central Asia, modern contraceptive use is increasing and abortions are decreasing. USAID assistance to the Caucasus has been predominately humanitarian, given the severe hardships engendered by regional conflict. Food shipments have fed needy citizens, refugees and displaced persons; fuel shipments have increased electric power; winter warmth programs have provided heat for houses and schools. School attendance rose significantly as a direct result of this heating program. Pharmaceuticals have met medical needs and large segments of the vulnerable populations have received vaccines against infection diseases. Integration of the NIS into the global marketplace will immeasurably enhance the security of Western Europe and the United States. Towards that end, accession to the World Trade Organization would provide investors with greater confidence that a legal framework and safeguards are in place. Kazakstan and Kyrgyzstan are two beneficiaries of USAID support which are well advanced in this process. Such efforts are paying off more broadly as foreign investors increasingly supply badly needed credit and technology to the public and private sectors. usaid's role under the partnership for freedom Question. What is the United States Agency for International Development's (USAID) role under the Partnership For Freedom? Answer. The Special Advisor to the President and to the Secretary of State on Assistance to the NIS will continue to establish strategic directions for our assistance and to allocate this budget among implementing agencies and among recipient countries. Among the implementing agencies, USAID will continue to manage the single largest share of the assistance program under the PFF. usaid capabilities under partnership for freedom Question. How does this initiative affect USAID's capabilities throughout the region? Answer. This increase in resources requested by the President will greatly increase USAID's ability to address crucial reform needs throughout the New Independent States. It will also enable USAID to ensure the sustainability of those reforms by strengthening linkages between American and NIS institutions, both public and private. funding for partnership for freedom Question. If the subcommittee does not fully fund this program, where does that leave the Partnership For Freedom program, and how will it affect other USAID assistance programs? How does it affect other NIS programs? Answer. If the Partnership For Freedom is not fully funded at the $900 million request level, USAID and the other USG implementing agencies would have to scale back the scope of their assistance activities. The highest priority would still go to assistance aimed at restructuring economies and building democratic institutions. Reductions in the appropriation would impact most severely on activities promoting trade and investment and on those promoting lasting institutional relationships between the United States and the NIS. Questions Submitted by Ms. Lowey ukraine chernobyl project Question. The tragic explosion 11 years ago of the nuclear reactor at Chernobyl has had a devastating impact on the Ukrainian people. Each day, we learn more and more about the long-term environmental and medical impact that the explosion left in its wake. In fact, it is only now, over a decade later, that medical researchers expect to begin to see the incidence of breast cancer rise as a result of the Chernobyl disaster. That is why I am pleased that USAID has been working on several projects to address the very serious health consequences of Chernobyl. I understand that USAID is involved in projects in both Ukraine and Israel to diagnose, treat and prevent breast cancer among individuals living in the region affected by Chernobyl. Could you give me an update on this project and why this type of research is so important to the region. Answer. USAID developed the $4 million Ukraine Breast Cancer Assistance Program to improve the access to and quality of breast cancer screening, diagnosis, treatment and rehabilitation services that Ukrainian women receive, particularly those exposed to Chernobyl radiation. This three year program also will enhance the cost- effectiveness and sustainability of those services. Following a competitive procedure, in December 1997, USAID awarded a grant to the Program for Appropriate Technology in Health (PATH), in collaboration with the Fred Hutchinson Cancer Research Center and other Seattle-based cancer facilities, to implement this program. The group, with its Ukrainian partner institutions, recently completed an in depth assessment of breast cancer screening, diagnosis and treatment in Ukraine, and is now finalizing a specific and detailed action plan. Major first year activities are expected to focus on: a breast cancer registry; laboratory support for diagnosis and patient monitoring; a pilot activity to implement a standard U.S. chemotherapy protocol; and clarification of mammography screening modalities. Although the Program is an operational activity benefiting breast cancer victims, it may add to the information available on the health impacts of the Chernobyl disaster. In a separate activity, USAID agreed that $1 million of existing funding in the U.S./Israel Cooperative Development Program could be used to support a grant to Technion. The grant will support research in Israel on radiation-exposed populations who have immigrated from the former Soviet Union to Israel in regard to their risk of developing breast cancer and other health impacts. Results from the research are not expected for a number of years. When available, Technion has pledged to share those results with authorities in the Ministries of Health in Ukraine, Belarus, and other countries which might benefit from this information. Questions for the Record Submitted by Mr. Foglietta albania projects Question. Much international attention has been focussed on a nation that has rarely, if ever been in the spotlight--Albania. While it is difficult to attribute the recent lawlessness and violence that has gripped Albania to one cause, citizens clearly became resentful because of wide scale and seemingly government sanctioned corrupt investment schemes. This, compounded with autocratic political leadership and the existence of armed and criminal factions, has spelled disaster for the nation. (a) The U.S. has provided a modest amount of aid to Albania over the past few years. Can you tell us what types of projects we have sponsored there? Answer. USAID activities have strongly supported democratic institutions and political processes in Albania. Both the International Republican Institute and National Democratic Institute have had representatives working in Albania to promote a more active exchange between politicians and their constituencies by providing training in the rights and responsibilities each has in a democracy. Strong support has been provided to non-governmental organizations (NGOs) to increase their advocacy role vis a vis government. Advisors also work with local governments to better equip them to serve their constituents and move toward greater decentralization. Over 50% of U.S. assistance to Albania supports economic growth. Much of that assistance goes to the agricultural sector which accounts for over 50% of GDP and 50% of employment in Albania. Agriculture was one of the first sectors privatized in Albania, and it is worth noting that during the recent crisis, the agricultural sector has been little affected. Other U.S. support includes the Albanian-American Enterprise Fund, which provides loans and equity capital to private businesses, an MBA program, technical assistance to small and medium enterprises and technical skills training. When the situation allows for the return of U.S. advisors, assistance can quickly be provided to start rebuilding the Albanian economy. Little support in the area of economic growth is provided directly to the Government of Albania. Virtually all is directed to the private sector. With regard to social sector restructuring, USAID has supported programs in health service management and family planning, to both improve the quality of care and reduce the use of abortion as a means of contraception. current situation in albania Question. (b) Obviously, with the evacuation of U.S. personnel from Albania our work there has stopped, but could you give the Committee any additional information on the situation in Albania as the international peace force prepares to deploy there? Answer. While it is true that the majority of USAID American staff and USAID-financed project personnel were evacuated in March, I would like to note that the USAID Representative to Albania, Dianne Blane, and her Albanian staff have remained at their posts throughout the crisis. Since the hearing on April 10, she has been joined by one additional USAID direct hire staff person, at the request of our Ambassador in Tirana. They have been principally occupied with reporting on the humanitarian issues linked to the crisis, monitoring the emergency assistance programs supported by the U.S. Government, coordinating those efforts with other donor representatives, and advising the many Albanian staff of USAID-financed projects who have also remained on the job. Those project staff have demonstrated their commitment to our assistance objectives in Albania by securing project sites and offices, maintaining communications with headquarters offices and evacuated American staff, and attempting to maintain an assistance presence in Albania despite the crisis. In some programs, such as support to Albanian non-governmental organizations, that advisory presence has been of critical importance during these very trying times in Albania. From reporting by USAID Representative Blane and her staff, we know that humanitarian relief efforts are going well, that the security situation in Tirana has improved since the worst days of March, and that the current focus of Albanian and international efforts is preparation for planned new parliamentary elections, as early as June. building a durable peace in bosnia Question. Another nation that has held the international spotlight for so long is Bosnia. The amount and extent of suffering that took place in that nation is beyond imagination. The Administration should be applauded for dealing with an issue that has eluded peacemakers for centuries. Healing the wounds there and repairing the extensive damage inflicted by the war will be a long time coming. We have committed millions to help this process continue but sometimes it is hard to see how we can be successful when the Bosnians themselves still can't agree on the simplest matters. Can you talk about progress on building a durable peace in Bosnia and how we are, or are not, succeeding in laying the foundations to revitalize their economy and build political institutions to prevent any future tragedies? Answer. Economic reconstruction is central to a durable peace in Bosnia. The USG has led the international community in the development and implementation of economic reconstruction programs. USAID also seeks to foster ethnic reconciliation wherever possible in the implementation of assistance. USAID's Municipal Infrastructure and Services (MIS) program provides critical infrastructure repair. At the community level, the restoration of power, the rebuilding of schools and health facilities, improvements to local water supply, and road repairs are helping to stabilize communities and provide employment opportunities. In turn, this fosters economic recovery and encourages the return of displaced persons and refugees. To date, under the Bosnia Reconstruction Finance Facility (BRFF) loan program, USAID has approved 67 loans totaling approximately $39.6 million dollars. These initial loans will provide employment to over 8,600 Bosnians representing a mix of ethnic backgrounds, including demobilized soldiers and women adversely affected by the war. By providing technical assistance, training and equipment to alternative radio and television stations, USAID is striving to build management, marketing, and production techniques to bolster the emergence of an independent broadcast media in Bosnia. Among the accomplishments of USAID's Judicial Strengthening program are the inauguration of the Federation Constitutional Court and Supreme Court and the development of their administrative rules and procedures; establishment of a Federation judges' association to promote the independence and reform of the judiciary; bar reform; and legal education reform. USAID is also helping strengthen canton and municipal governments by assisting them to develop sound frameworks for revenue and expenditure management; and the establishment of open, transparent and accountable budgets. As a result of bank supervision technical assistance, the Federation banking Agency was established. This Agency unified banking supervision in both parts of the Federation. It is also a visible and functioning symbol of cooperation in the Federation. Bank supervision is also critical to the functioning of a Federation/Republika Srpska Working Group which is harmonizing banking laws between the entities and working to unify the Bosnia banking system. impact of earmarks Question. One issue I know that you grapple with in the face of severely curtailed funding is the impact of earmarks that are included in foreign operations legislation. Probably the NIS and Central and Eastern Europe have been impacted more than anywhere else in the world and I am concerned that these earmarks limit the State Department and USAID from achieving broader U.S. policy objectives. It is my hope that our Committee will be able to resist further efforts to earmark funds in the FY 1998 bill to provide you with the flexibility you will need to accomplish our many missions overseas. Could you share with me some of the impact these country specific earmarks may have had on ongoing projects and activities? Answer. Earmarks do limit USAID's ability to foster systemic change in the NIS countries. For example, based on program objectives and results to date, we requested--for FY 1997--$55 million for Armenia, $183 million for Ukraine and $173 million for Russia. Funds made available in the FY 1997 Appropriations Act included $95 million for Armenia, $225 million for Ukraine and $95 million for Russia. These final budget figures had a major impact on USAID's program in Russia and limited USAID's ability to pursue program objectives in other countries. Specifically, these earmarks required USAID/Moscow to cut back its activities in legal and regulatory reform, which in turn has limited our ability to influence the business transparency and predictability needed to promote private investment and trade in Russia. They also forced USAID to make significant cuts in the local government program in Russia--preventing a devolution of power and capacity-building needed to match the additional responsibilities thrust on municipalities--and to phaseout successful programs in other important areas such as agriculture, environment and energy. SUBMITTED TO STATE DEPARTMENT Questions for the Record Submitted by Mr. Porter assistance to disputed territories in the nis Question. The International Committee of the Red Cross (ICRC) recently released a needs assessment concerning the humanitarian situation in Nagorno Karabakh which found that the refugees there are suffering dramatically and current assistance is far from sufficient. The State Department continues to resist the provision of direct assistance to the people of Nagorno-Karabakh, insisting that it is Azerbaijan's responsibility to provide assistance to the refugees there. (d) Ambassador Morningstar, you have stated that Section 907 was the hindrance to assistance to Nagorno Karabakh. In the FY 1997 appropriations process, we endeavored to clarify that Section 907 was in no way intended to prevent the provision of humanitarian assistance to Nagorno Karabakh, and we met the resistance from the State Department on this matter. In light of the fact that the U.S. maintains a thriving assistance program to Azerbaijan despite Section 907, why are we unable to assist the people of Nagorno Karabakh? Answer. It is inaccurate to characterize USG assistance to Azerbaijan as ``thriving.'' Section 907 was written to ensure it is not, and its protagonists have achieved their goal. In FY97 it is estimated that the two Caucasus countries not affected by Section 907, Armenia and Georgia, will receive $144 million and $91 respectively in USG assistance. Azerbaijan will receive approximately $31 million. The USG has been able to assist the people of N-K through donations to the regional ICRC appeal, $16.57 million in 1996. Of the over $62 million in USG assistance committed to the ICRC Newly Independent States (NIS) Appeal since 1992, it is estimated that approximately $3.5 million will have been expended meeting N-K needs by the end of this year. We are currently considering a request for funding assistance from the American Red Cross, who will be working under the auspices in N-K in the health sector, and we are willing to contribute along with the rest of the international community to any needs assessments dealing with the region. We know of no needs assessment recently released by the ICRC which portrays refugees as suffering dramatically. All available information from various sources including the ICRC indicates that needs in N-K are similar to those in other areas of the Caucasus region; the response to meeting critical needs in N-K, though complicated by the conflict situation, is similar to that in other regions of Azerbaijan and perhaps better. operation support freedom Question. It is my understanding that Operation Support Freedom (OSF), an enormously successful NIS program which provided door-to-door transport of humanitarian assistance from private entities in the U.S. to the NIS, is being terminated and replaced by an ocean freight program which will reimburse non-profits for port-to-port shipping costs for containers of humanitarian assistance. (a) What is USAID's justification for ending a successful private- public partnership which has cost-effectively sent so much assistance to the region? Answer. Operation Support Freedom was a program operated with Freedom Support Act funding through the Office of the Coordinator. It officially ended on April 1, 1997. The decision to terminate the State Department contractual relationship with Military Professional Resources Incorporated (MPRI), who called their program to facilitate the transport of commodities donated by private volunteer organizations (PVOs) Operation Support Freedom, was strictly a budgetary one. Freedom Support Act funding has dropped from $2.5 billion in 1992 to $625 million in FY97. The transportation funding has dropped from $60 million in 1992 to $15 million in FY97. These types of decreases in dollars available have made it necessary for us to modify our transportation program in order to increase effectiveness and to leverage the expenditure of taxpayer money in assisting those in most need in the NIS. (b) What provisions are being made to deal with the impact that elimination of OSF will have on a land-locked state such as Armenia, where there is no port to ship to and its neighbors are blocking the country--including a blockage of humanitarian aid? Answer. The elimination of OSF will have no impact that we can see on this situation. Private organizations delivering commodities to countries like Armenia under grant provided through the USAID Ocean Freight Program will use established overland routes after delivery to accessible ports. In the case of Armenia these will be through the ports of Poti and Batumi, Georgia with direct rail access into Armenia. Since Armenia is a land-locked country, the USAID OFR Program will pay the ocean freight and inland transportation costs of the delivery of goods to Armenia. Many of the small organizations that have been using Operation Support Freedom, such as individual church congregations that collect a container of goods every couple of months, will not meet USAID's qualifications for reimbursement nor have the expertise to apply for USAID reimbursement. It is also likely that they will not be able to afford to transport their containers to a port, especially in inland areas in the Midwest, as required by the new program. It will be extremely difficult, if not impossible, for them to continue to send assistance to the NIS at all. What steps are you taking to ensure that such donors are not left out of the new program? What assistance-- technical, financial and otherwise--does USAID intend to make available to these organizations to assist them in utilizing the new program? If such donors cannot participate in the program what amount of lost benefit would this represent? Answer. Fiscal constraints brought on by diminishing transportation dollars have resulted in required program changes. The bottom line is that under current budgetary constraints the USG could no longer continue its PVO transport program at its previous FY92-FY96 levels. When the decision was made to provide funding to the USAID Ocean Fright Program, the Coordinator's Office worked very closely with USAID and our contracted freight forwarding agent to ensure that all PVOs who had shipped under Operation Support Freedom were informed early of intended program changes. PVOs were informed in August of 1996 of the pending change in the status of the NIS Program and were sent materials acquainting that with the new program administered by USAID. A requirement of the USAID Ocean Freight Reimbursement Program is that PVOs must be registered with USAID to ship donated humanitarian commodities overseas through a competitive grant process. USAID's office of Private and Voluntary Cooperation sent out registration applications to former participants of the Operation Support Freedom Program that were not registered with the Agency. Small organizations that do not qualify for shipping under the new USAID programs may find assistance to ship to the NIS through USAID's Denton Program. The Denton Program, administered through USAID, the Department of State, and the Department of Defense, permits U.S. donors to ship privately donated goods and supplies overseas on space-available military transport. Organizations are not required to be registered to participate in the Denton Program. Donors submit an application to initiate the process requesting space-available transport. During the transition period the Coordinator's Office tried to assist smaller organizations by making final shipments of commodities already collected by referring them to larger more established PVOs like Counterpart or Project Hope. These larger groups can often furnish donated goods as well as provide assistance to smaller PVOs in shipping goods to the NIS. USAID's office of Private and Voluntary Cooperation annually administers a PVO/PVC Partnership Workshop which presents in detail the criteria and guidelines for competing for grant programs offered to the U.S. PVO community. Other pertinent technical and financial information is shared with the many workshop participants. All PVOs registered with USAID receive the announcement for the annual workshop. The workshop, usually held in September, will reveal opportunities for other PVO grant programs administered by USAID while serving as an excellent opportunity for these organizations to network. (d) It is my strong preference that State be directed to continue the OSF program, and I have previously made this known to Ambassador Morningstar. If such a requirement is in the FY1998 appropriations bill, what will be the costs of restarting OSF once it has been dismantled? How do they compare to projected savings that the ocean freight program is expected to generate? How do they compare to the costs of maintaining the OSF program without interruption? Answer. The reestablishment of the OSF program would be a very expensive proposition at a time of diminishing budgets. At its height this program cost approximately $18 million per year and, as a virtual entitlement, lacked many of the desired controls needed to maximize its effectiveness. The new program of approximately $15 million per year consists of a USAID budget fenced to provide PVOs grants for shipment of humanitarian commodities to the NIS and a Coordinators budget focused more clearly on need and the shipment of high-value medical assistance. It is designed to maximize and leverage the expenditure of available dollars. No comparisons can be made on continuing the OSF program without interruption since it ended on April 1, 1997. Questions for the Record Submitted by Mr. Livingston corruption in ukraine Question. There are serious reports of widespread corruption in Ukraine. This corruption is having a devastating impact on U.S. businesses and seriously undermining Ukraine's transition to a free- market economy. GALA Radio and Television Company, the first Voice of America affiliate in Ukraine, is experiencing this corruption firsthand with the Ukrainian government. Specifically, the government is not honoring its license agreements with GALA, which to date has cost the radio station approximately $1 million in actual cost and $12 million in potential revenues ($5 million from the lost Kiev license and $7 million from other city license agreements). While the Ukrainian high court ruled last December in favor of GALA Radio, I am told that the ruling has been largely ignored by Ukrainian officials. To make matters worse, the station was robbed and a pirate station soon began operating on their frequency using their name and equipment. The station director was also physically threatened by Ukrainian police. And, despite assurances by both Ukrainian and American officials that the matter would be resolved, the situation persists. GALA Radio is not the only American company that has experienced problems with the Ukrainian Government. Other American investors such as Marathon Oil, Motorola and John Deere have had their share of difficulties. In fact, Motorola recently canceled a potential $500 million investment because of ever-changing terms and conditions of their license agreement with the government. What is the Administration doing to address the growing problem of corruption in the Ukraine government? Does the Administration have a strategy to help American companies who have suffered losses because of government expropriation and contract violations? What efforts are being undertaken to see that the GALA situation is resolved according to Ukrainian law? What efforts are being undertaken to see that other situations involving American companies are resolved according to Ukrainian law? How can the Administration help assure that future cases of government expropriation and contract violations are avoided? How is the Administration helping American companies who have been victims of Ukrainian corruption? Last year, Congress made available $225 million for Ukraine. Of that amount, $15 million was available for legal restructuring necessary to establish an independent judiciary and bar, legal education for judges, attorneys, and law students and education of the public designed to promote understanding of a law-based economy. In light of Ukrainian court rulings in the GALA Radio matter and lack of government response, what are the concrete benefits of the funding? Is the Ukrainian government taxing technical and humanitarian assistance? Answer. The Administration has recognized that to address the problem of corruption, we have to encourage change from above and from below, and that both public official and private citizens have to abide by the law. A legal framework, effective regulatory and enforcement mechanisms, and political will are needed at the top; and, demand for cleaner government in a law-based society must come from below. The U.S. Government's broad-based program to address the problem of corruption in Ukraine includes such activities as: working to frame the content of new laws and codes (civil code, criminal code and criminal procedure code are high-priorities, working to design and strengthen the legal and regulatory institutions to implement the legal framework, strengthening civil society,including human rights and citizen advocacy groups, and independent media, and working to professionalize investigations into criminal and corrupt activities and to strengthen enforcement of judgments in both civil and criminal cases. Through the Committee on Trade and Investment under the U.S.- Ukraine Binational Commission, U.S. and Ukrainian officials periodically review investment cases where disputes have arisen. The Subcommittee on Business Facilitation, consisting of U.S. Embassy representatives and appropriate Government of Ukraine (GOU) officials, examines the progress being made to resolve these cases. The U.S. Government, at all levels, continues to press the GOU to address situations where U.S. companies may be disadvantaged by corruption or other discriminatory activities. Most recently, Vice President Gore referred to these cases during the May 16 meeting with President Kuchma and the U.S.-Ukraine Binational Commission. Although some problems still remain, through these efforts, GALA has returned to 24-hour broadcasting on FM100. Deputy Prime Minister Durdynets has pledged his personal efforts to resolve the case, and said he would follow up any information provided on criminal or other complaints related to the case. All sides are continuing to meet in Kiev in an effort to resolve the dispute. The best assurance for U.S. investors in Ukraine to avoid government expropriation and contract violations is a truly reformed economy. We are working diligently to convince the Government of Ukraine to stay on the reform track and keep to the conditions agreed to with the IMF and the World Bank. While there is no guarantee future cases of expropriation and contract violation will not arise, we remain well positioned to address any new cases promptly and forcefully. The U.S. continues to press the Government of Ukraine to resolve a number of investment dispute cases. All too often, these problems arose because of corruption at some governmental level. During the recent meetings of the U.S.-Ukraine Binational Commission, we proposed, and the Government of Ukraine was receptive to, an initiative to increase the level of transparency in government. U.S. Embassy personnel continue to provide assistance to U.S. companies which seek help. Officers have escorted U.S. business persons to meetings with Ukrainian officials to convey our serious attention to each particular case. While we cannot provide legal advice to U.S. companies, we do strive to assure that appropriate legal representation had been made available and remind the Government of Ukraine that we expect all rights be respected. The $15 million that was made available for legal restructuring in Ukraine is being used in part to support ongoing work with the judiciary. A key activity since 1994 has been to support the system of arbitrage courts as they make the transition from their role under communism to their role in a market economy. In 1991, the arbitrage courts were responsible only for resolving disputes among state enterprises. After the collapse of communism, their role was redefined to give them jurisdiction over any dispute that involves an entity that is not an individual (be it a private company, a government agency, or an NGO). The arbitrage courts, now called commercial courts, have faced an increased caseload involving disputes among businesses and disputes wherein individuals sue the Ukrainian state. USAID has supported retraining of these judges in specific new topics such as bankruptcy and international commercial disputes and introducing them to the concepts of an independent judiciary in general. It is disappointing that an appointed official of the Government of Ukraine has not been fully responsive to a ruling of the commercial court. However, the Gala Radio case only serves to highlight how important it is not to ignore the judiciary. We must provide assistance to the courts as the guarantors of the permanence of reforms embodied in laws. Without the court ruling, the Gala Radio case would be even more intractable as there would be no independent authoritative ruling to point to the injustice done in the case. The Gala Radio matter also highlights the inadequacy of focusing only on the drafting of new laws. Our assistance must be evenly invested in the various institutions that comprise the legal system, from drafting to enforcement, as the earmark directs. The Government of Ukraine has affirmed that its policy is not to tax technical or humanitarian assistance. However, there have been instances where U.S. assistance has been stopped pending assistance status clarification. We are working with the Government to address these situations and hope that future instances of where U.S. assistance is disrupted because of tax questions can be minimized. Questions for the Record Submitted by Mr. Packard russia Question. Russia is a particular interest of mine. Nobody wants to see Russia slide into the role of an enemy of the United States, but what has our aid accomplished there? They continue to oppose NATO expansion, they continue to assist Iran with their nuclear power plant, they are selling anti-aircraft missiles to Cyprus which could destabilize that region, and yet the largest increase in this account is for Russia. If our aid does not increase our influence and it does not increase their transition to a free market society, why the increase? Answer. Our assistance to Russia has supported a great deal of democratic and economic progress in the last few years: the adoption of a new constitution; the holding of free and fair elections; mass privatization; marcroeconomic stabilization; the emergence of a free press; and other steps towards reform. Russian commitment to reform along with U.S. and other foreign donor support has enabled the Russian people to attain an unparalleled level of freedom. In early 1997, Russian reform has picked up speed with the appointment of a new, more reform-minded cabinet. Unfortunately, U.S. assistance to Russia has declined markedly in recent years due to heavy earmarking of NIS assistance and to general declines in foreign assistance overall. Yet Russian stability and reform remain critical to the U.S. national interest. That is why we requested an increase in assistance for Russia in FY 98. These funds will be targeted to supporting free enterprise and exchanges and partnerships; very little aid will go to the Russian Government. The limited assistance we provide to the Russian Government is not sufficient to influence all aspects of Russian foreign policy, but it can improve prospects for a stable, market-based Russian democracy whose interests are similar to ours. Question. I note in your Congressional Presentation that Russia is also scheduled to receive Foreign Military Financing (FMF) of $3 million in FY97 and $1.5 million in FY98 pending a Presidential Determination. I find this stunning. Why should the United States provide such financing to Russia? Russia is still one of the world's leading arms producers and they openly compete with the US on the world market. I know my constituents would find this proposal unacceptable. Has the President made any determination on this and has any FMF gone to Russia? Answer. The Partnership for Peace (PFP) aims to expose Russia and other PFP partners to NATO's community of values and methods of operation and to increase their interoperability with NATO, all of which create a more secure and stable environment. The President's Warsaw Initiative for the New Independent States and Central Europe partners is an important source of support for partners' participation in PFP and increased operability with NATO. The Warsaw Initiative includes both DOD and State programs. The State Foreign Military Financing (FMF) Warsaw Initiative programs are targeted to help partners increase interoperability with NATO, in particular, by providing English language training and non- lethal NATO-compatible equipment such as radio and other communication gear. Our joint peacekeeping efforts in Bosnia are a good example of the benefit of greater cooperation between NATO and Russia. Integrating Russia into global security and economic institutions is an important goal of our foreign policy and FMF Warsaw Initiative funding to assist in this interoperability with NATO is crucial. The President signed the determination which will make Russia eligible to receive this assistance, but to date, none of the $2.25 million in FY97 FMF funds allocated for Russia has been released. The Department has notified Congress of the intention to make these funds available. new independent states Question. Can you explain to the subcommittee what impediments you have found in your efforts to improve the conditions for a free market and for improved U.S. investments in the NIS and particularly Russia? Answer. In order to understand the impediments to increased U.S. investment in Russia, I have facilitated numerous government and private sector discussions on policy and resource constraints to investment, focussing on U.S. assistance, trade, and investment programs that might address constraints. Several key themes emerged from these discussions. First, ``massive'' investment will only follow changes in the Russian legal and regulatory environment, in particular, rule of law, tax and accounting reform, and passage and implementation of new legislation on production sharing. Second, capital for potential equity investments and trade finance (primarily for large projects) is significant but actual disbursement of funds versus commitments is low. Third, investors and financing agencies typically do not have the human resources needed to bring projects, many of which are insufficiently developed, to fruition. Even once a deal has closed, implementation of the project continues to require intensive participation on the part of fund management. Problems with customs, tax issues, demand for paychecks, and bureaucratic delays in processing licenses and approvals as either the federal or regional level require fund managers to allocate personnel resources that might otherwise go toward developing new projects. What the above underscores is one of the basic problems confronting investors in Russia: competition with other investors over ``good'' (that is, fully developed) projects. Several interlocutors noted that one way to help increase the number of ``good'' projects might be project-specific technical assistance aimed at improving those projects under active consideration for investment. A fourth theme that came up repeatedly during discussions is the general lack of debt financing. Because projects are poorly formulated and lending institutions do not have the basis on which to lend, significant equity capital goes unutilized because equity investors are not able to raise the necessary level of debt financing to make their projects viable. Debt financing for small and medium sized projects ($1-5 million) is a particular problem. OPIC is focused on large deals ($10 million was considered small by OPIC standards); OPIC-backed funds are involved with equity rather than debt; and TUSRIF does not have a license to lend in Russia (although it is increasing its on-lending programs through Russian financial institutions). While EXIM can handle smaller loans, its resource limitations constrain its ability to be more active in this area. Moreover, EXIM programs are de facto unavailable for many Russian importers, particularly those involved in importing consumable items, because of the need to first get a sovereign guarantee from Moscow-- something virtually impossible for most Russian firms, especially in the regions. A fifth theme that emerged was that investment continues to be focused mainly within the Moscow-St. Petersburg corridor. Up to eighty percent of all capital in Russia remains in Moscow. Foreign investment has also been concentrated in the Moscow region. A final theme had to do with length of time it takes U.S.-backed institution to take action on a project and to return a decision to the applicant. Some participantsrecounted that they had worked with a particular institution for up to a year, expending considerable time and effort on the project, only to learn at the end of this process that they would not receive funding--with no explanation provided. While this is partly attributable to the shortage of human resources at many U.S. finance agencies, it also seemed to reflect a general perception that transaction costs associated with government programs are significantly greater than those of private finance agencies. Based on this review of impediments to investment, this office has worked to establish a Regional Investment Initiative, which was announced by Vice President Gore and Prime Minister Chernomyrdin earlier this year. This initiative is designed to address many of these issues, both by working with Russian federal and regional authorities to improve the climate for investment and by better coordination and deployment of U.S. trade financing mechanisms and assistance resources. Question: If corruption and a continued state bureaucracy are stifling investment and the transition to a free market economy, why is the administration requesting an increase for the NIS? It seems as if our aid is being wasted. I thought, in fact, that our aid to the NIS was supposed to be going down by now yet here is a request for even more money. Answer. We are asking for an increase for the NIS for two reasons: first, the resources available to support reform in the NIS over the past several years have been inadequate and falling. This has severely hampered our ability to provide assistance to the reformers in Russia and the other NIS who are continuing to try to keep reform, efforts that it is clearly in our national interest to support. Second, it is clear that transformation of these economies and governments is a generational effort, an effort that we must stay engaged in for several more years. The outcome of these reform efforts is not yet assured; we cannot simply phase out our assistance. We need to find new and improved ways of being engaged with the reform process in these countries. The Partnership for Freedom initiative with its emphasis on mutually-beneficial activities in both the economic and democratic arenas will provide the vehicle for this continued engagement. We had planned to phase down technical assistance to Russia in FY98 and that is still our plan. We intend to stay engaged with reformers through private sector support, grass-roots activities such as exchanges and partnerships, trade and investment. These are the components of the Partnership for Freedom. Question. Does the Foreign Military Financing (FMF) funds facilitate your programs in the region? It is my understanding that Russia is receiving $1.5 million in FY98. How do these funds, which I am sure are intended to encourage democratic reforms and help stimulate a market economy, affect your programs in the region? Are these FMF funds taken into account when you assemble your budget for the Partnership for Freedom programs in the region? If not, please explain. Answer. The Partnership for Peace (PFP) complements U.S. assistance programs to the NIS by fostering and promoting many of the same objectives. PFP seminars, conferences and workshops address such issues as democratization, civilian control of the military, regional cooperation and threats from weapons of mass destruction, translational crime and international drug smuggling. The FMF funds are intended to facilitate NIS participation in the PFP, exposing Russia and other PFP partners to NATO's community of values and methods of operation and increasing their interoperability with NATO. These activities create a more secure and stable environment which encourages foreign trade and investment and further integrates the NIS into global security and economic institutions. The President's Budget request for the Partnership for Freedom is structured to operate in parallel with activities such as the Partnership for Peace and other US security-related programs to promote arms control, nonproliferation and regional stability. FMF funds to implement PFP activities and other agency's funds for NIS programs such as the Department of Defense Cooperative Threat Reduction and Counterproliferation programs, are viewed as a cohesive package which together fulfill U.S. national security objectives. Questions for the Record Submitted by Mr. Kingston organized crime in russia Question. I am very concerned about the dominance of organized crime over the economy in Russia. It is my impression that some of these groups are more efficient in collecting ``taxes'' from entrepreneurs in Russia that the government itself. In fact, I have been told that mafia groups even maintain de facto control over many major ports in Russia. These problems are bound to have an extremely negative impact on the success of economic liberalization efforts there. Can you please evaluate the nature and scope of the problem for me? Answer. Although it was not widely recognized, organized crime and corruption were prevalent in the Soviet Union. However, the collapse of the Soviet Union and the move towards a free market brought with it new opportunities for organized crime and government corruption. At the same time, the lack of market-oriented civil, legal and commercial codes, as well as the absence of law enforcement personnel trained to handle commercial crime, provided a new climate in which crime and corruption could flourish. This climate of course has a major impact on the ability of business to operate. In Russia today, many businesses are routinely forced to pay for ``protection,'' and must pay bribes to obtain licenses or avoid fines. We have therefore targeted some of our assistance toward commercial, legal and civil reform, as well as government ethics and training of law enforcement personnel to fight organized crime and handle commercial crimes. Of course, it will take many years to resolve these problems. Nevertheless, it is encouraging to see the extent to which private business in Russia has been able to develop and flourish in spite of these and other very difficult obstacles. Question. Does organized crime also interfere with development projects? To what extent and in what ways? Answer. Organized crime has been recognized as a serious barrier to the further promotion and sustainability of the reforms, both democratic and economic, which we seek to promote through our assistance program. To this extent, crime and corruption have a negative impact on our development efforts. Global economic and democratization trends are now beginning to expose the full extent, as well as political and economic costs, of criminal activity, which is often linked to systematic corruption. Our criminal justice programs help to combat the negative effects of organized crime. So too do civil society programs, in that they foster the rule of law and empower non- government watchdog and advocacy groups to promote demand for anti- crime and anti-corruption measures. We do not believe that our assistance program itself, or specific development projects contained within the assistance framework, are vulnerable to or disrupted by organized crime. Direct payments are given to U.S. contractors to carry out work in the NIS. Organized crime groups do not appear to view U.S. assistance programs or specific development projects as lucrative targets. Question. How is the United States trying to prevent interference in aid implementation? Answer. We are using mechanisms least able to be influenced by organized crime. These mechanisms include partnerships, exchanges, limited technical assistance provided by U.S. experts. These activities are generally not susceptible to organized crime. We do not provide cash. Further, we are beginning to focus on specific regions in Russia. Our regional investment initiative will focus investment assistance and assistance more generally on four regions outside the capital and major cities, where organized crime is most located. One of the most important criteria for the selection of these regions is the absence of organized crime and other corruption. Question. I read a very brief editorial in the Washington Post last month that charged that U.S. proposals to fight Russian crime may even strengthen the institutions that are part of the problem. To be honest, I don't know what they meant by that. At the risk of straying to the edge of your jurisdiction over this problem, can you address that statement? Answer. The objectives of our Anti-Crime Training and Technical Assistance program are two-fold: to deepen government-to-government cooperation in the criminal justice sector, particularly to combat the activities of organized crime; and to reduce corruption and other practices injurious to democracy and the rights of the individual in the criminal justice sector. Through our diplomatic representations abroad, we work to identify trustworthy and reliable law enforcement personnel to participate in these programs. Basic to our law enforcement training program is the commitment to locate, encourage and cooperate with trusted officers to build permanent, long-lasting ties between U.S. and Russian law enforcement officials. Our programs emphasize how U.S. law enforcement agencies function to enhance the rule of law and respect for individual rights. They are part of the solution to the Russian crime problem, not its cause. Question: The Partnership for Freedom is characterized as a refocus of our aid to the New Independent States on economic and grass roots linkages. It has been my impression that this has been at least a large part of our focus for 3 and 4 years now in the NIS. Will you explain what is changing (besides the price tag)? Answer: The Partnership for Freedom includes a combination of new activities, expansions of successful ongoing programs and continuation of existing programs. New activities and new emphasis include small loan programs to small enterprises in the regions of Russia and the NIS, elimination of barriers to U.S. trade and investment, explicit support for international financing institutions loans, training focussed on enterprises receiving U.S. investment, and endowments for one or more foundations. Expansions of existing programs include exchanges, partnerships and law enforcement. We will continue our ongoing support for science exchanges and technical assistance to the non-Russian NIS. Questions for the Record Submitted by Ms. Pelasi bosnia Question. The United States has pledged $600 million to assist in the international effort to rebuild Bosnia. The process of rebuilding has taken longer than expected and we still have US troops on the ground. Mr. Holmes would you assess the relationship of the aid program to our ability to remove US troops from Bosnia. What kind of progress are we making? Answer. While the security situation in Bosnia has a direct bearing on the attitudes of the people toward economic reconstruction, the effort to enforce the military annex of Dayton and the effort to economically rebuild the country are on two very different time tracks. As the President and Secretary Cohen have said, we expect the conditions to exist next summer for the withdrawal of U.S. forces from Bosnia. Bosnia will need assistance from other countries for many years. In my estimation, even under the best circumstances, it will be one of the last countries in Europe to graduate from the SEED program. The World Bank estimates that Bosnia suffered between $20 and $30 billion in war damage. The initial three to four-year Priority Reconstruction Program, with a target of $5.1 billion from donors, will, at most, fix only a quarter of that damage, and then only well into the year 2000. The World Bank projects that the high rate of economic growth experience in Bosnia in 1996 can be sustained if proper macroeconomics choices are made and inter-entity cooperation occurs. That would mean, that by the year 2000, Bosnia, which was one of the poorer Yugoslav Republics, would reach, at most, only about two-thirds of its prewar level GDA. Another three to four years would certainly be needed before prewar level GDP is recovered. As I mentioned in my testimony, donors have done their share to rebuild Bosnia. In 1996, the donor community exceeded targets for pledges and disbursements of pledges. USAID, which manages most U.S. bilateral assistance to Bosnia, did a particularly good job in its programs, which became models for other donors. The economic reconstruction program is not succeeding in three areas, due principally to the failure of the parties to implement key Dayton promises and due to their failure to cooperate on inter-entity economic and political matters. The Republika Srpska's failure to implement freedom of movement, refugee return, arms reductions, and war crimes tribunal cooperation provisions of the Dayton agreement has resulted in that Entity's receiving very little economic reconstruction assistance (only about 3 percent of the total). Consequently, the RS economy has probably experienced negative growth over the past year, while the country as a whole had a 50 percent economic growth rate. The second area where economic reconstruction progress has been very limited is where it involved politically charged inter-entity matters. There has been little cooperation between and sometimes within the Entities in the major network sectors (electric power, gas, roads, railways and telecommunications). Finally, we are dismayed that the central government, which was formed in January of this year, has failed to agree on initial and very basic macroeconomic policies, policies necessary for an IMF agreement, such as establishment of a central bank, national and entity budgets, a debt law and common customs and tariff policies. The donor community has used its economic leverage to try to resolve these three problem areas. We must and will keep at it, but progress in all three areas continues to be very discouraging. world bank Question. Are the funds from the World Bank and other donors being made available for actual programs at this point? Answer. Yes they are. According to the World Bank, as of December 31, 1996, $1.360 billion was under implementation by donors (the Bank defines monies ``under implementation'' as those firmly committed funds for which contracts have been tendered, signed, underway or completed). Of the amount under implementation, $262 million was from the United States, $296 million was from the World Bank, $263 million was from the European Commission, and the rest, $541 million was from 47 other countries and 9 organizations that have pledged funding for Bosnian reconstruction. war crimes tribunal Question. Can you comment on the work of War Crimes Tribunal? Several members including myself recently sent a letter to the Secretary of the Treasury urging him to condition international lending on progress in these cases. Has that had any effect? Answer. I think this has had a positive effect with regard to Croatia. Croatia has cooperated with the War Crimes Tribunal, although not to the degree we, or the Tribunal, have expected. We are aware of numerous press reports of the presence of indicted war criminals in Croatia, but despite repeated efforts, we have been able to only confirm the presence of two individuals indicted by the Tribunal. General Tihomir Blaskic voluntarily gave himself up to the Tribunal a year ago and he is awaiting trial. A second indictee, Zlatko Aleksovski had been in GOC custody for about a year and the GOC had refused to turn him over to the Tribunal, claiming that his health was too precarious for him to travel. To signal displeasure at this delay, the U.S. abstained on a vote to approve a $500 million IMF loan to Croatia which came before the Board in March. Shortly after this vote, the GOC invited the Tribunal to send physicians to examine Aleksovski, and agreed that if they judged him fit to travel, he would be sent to The Hague. This was done and on April 28 the GOC handed him over to the Tribunal in The Hague. Neither the IMF nor World Bank have considered loans to either the Republika Srpska or Serbia and Montenegro (the ``Federal Republic of Yugoslavia''), both of which harbor indicted war criminals, since the end of the Bosnian conflict. arm and train initiative for bosnia Question. The U.S. provided $50 million in military equipment through a special drawdown authority for the Arm and Train Initiative for Bosnia. The committee has recently been notified of the intent to provide additional equipment (145 M114A Towed Howitzers) through the Excess Defense equipment authorities. Can you explain our current policy regarding the provision of military equipment to Bosnia? The committee had understood that the $50 million was the extent of our assistance. Answer. The Congress authorized $100 million of surplus DoD equipment and services for Bosnia under Section 540(b) of the FY96 Foreign Operations Appropriations Act (P.L. 104-107). So far under this drawdown authority, the United States has provided approximately $85.5 million of equipment and services including M60 tanks, M113 armored personnel carriers (APCs), M16 rifles, M60 machine guns, AT-4 light antitank weapons, computer hardware and software for training, and communications equipment. We anticipate providing the remaining $14.5 million worth of equipment and services by October, 1997. This will include transportation of heavy equipment transporters (HETs) from Germany to Bosnia, M114 howitzer refurbishment and ammunition, tank ammunition and spare parts for the M60 tanks and M113 APCs. The U.S. equipment being provided to the Bosnian Federation under drawdown authority represents an important but not complete part of their overall military equipment needs, which were identified by the Department of Defense in a study completed in February, 1996. The U.S.- led, international Train and Equip Program is supported by several countries for the remainder of the equipment. While the Bosnians have asked for NATO-standard equipment, the continued European arms embargo on Sarajevo has forced the program to go to non-NATO countries to obtain much of the remaining equipment. Field artillery was identified in the DoD study as one of the most critical requirements to give the Federation the ability to react if the Bosnian Serbs were to resume shelling their population centers. While searching for sources to provide field artillery, we discovered the availability of U.S. Army M114 howitzers which were being declared excess defense articles. Since they are NATO-standard and would be available only for the cost of refurbishment, the decision was made to obtain 261 of them. Using some of the remaining drawdown authority to provide for refurbishment and ammunition, we will be able to provide approximately 116 fully mission-capable howitzers. (The other 145 will be used as sources for spare parts in the refurbishment process.) This fulfills a critical need for the Federation and provides NATO-standard equipment at minimal cost. framework for investment Question. In many of these republics and in many regions of Russia, and despite our aid efforts so far, the framework for investment simply does not exist. How will the 1998 program respond to this vacuum? (Framework in this case implies banking systems, laws on financial transactions in place, and laws that are enforced.) Answer. I agree that this is a key issue and we are devoting a great deal of attention to finding ways to improve the investment climate in the NIS. Our FY98 initiative, the Partnership for Freedom, will focus our assistance in two areas: trade and investment support to promote economic growth; and exchanges and partnerships to help us remain engaged in what is clearly a generational transformation in the NIS. In the area of trade and investment, we will focus on removing impediments to investment, including technical assistance in support of tax reform and law enforcement. In Russia, we are establishing a Regional Investment Initiative, which was announced by Vice President Gore and Prime Minister Chernomyrdin earlier this year. This initiative involves working with Russian federal and regional authorities to improve the climate for investment by identifying ways to remove existing impediments, as well as improved coordination and deployment of U.S. trade financing mechanisms and assistance resources in Russia's regions. In Ukraine, we are working directly with Ukrainian authorities to promote transparency in government ethics, procurement and licensing, all of which have a direct impact on investment. Our planned Partnership for Freedom activities for FY 98 will include the following in the area of investment: Expand regional credit and equity investment programs emphasizing the involvement of small business implemented through Eurasia Foundation, EBRD or other non-profit organizations; through USAID's Loan Portfolio Guarantee program; through a pilot mortgage market fund; through existing enterprise funds; through microlending programs; and through existing EX-IM Bank, OPIC and TDA programs, up to $163 million. Provide continued support to NIS enterprise funds, up to $64 million. Remove impediments to trade and investment, specifically, tax reform, international accounting standards, WTO accession, implemented through USAID, Treasury and Commerce, $25 million. Facilitate and accelerate World Bank and other IFI funds, help NIS governments meet conditions imposed by World Bank and IMF that must be met before large loans are provided, implemented through USAID, $12 million. Link training to specific investment projects to increase capabilities of managers of enterprises receiving support from enterprise funds, U.S. private investment and other support, implemented through USAID, EBRD and/or IFC, $25 million. nis increase Question. Mr. Morningstar, the level of increase requested for the NIS program is by far the largest increase in assistance for any region of the world in 1998. It also comes at a time when our chairman has announced his intention to freeze funding levels for foreign aid. Why is this increase so important? Answer. This increase is important because we the United States have no greater national security interest than the stability of Russia and the NIS as these new nations consolidate their transition to market democracies. We face many new challenges in the world today, but this region presents us with a unique and urgent opportunity--to help strengthen democratic voices and market economies, and once and for all relegate our Cold War concerns to the history books. The current 1997 fiscal year budget for assistance to the New Independent States is $15 million below the Administration's request last year. Freezing the budget at its current level of $625 million unacceptable for several reasons. The first reason is the primary rationale behind the Partnership for Freedom initiative. Several countries in the region, such as Russia, Moldova and Georgia, have now reformed to the point where they are able to utilize some very crucial programs in the area of trade and investment that focus on the achievement of economic growth. This region is not going to remain stable if their citizens cannot count on improving economic conditions over the next several years. In the important area of civil society, again, we are at a moment where many important breakthroughs are near-- in the implementation of new legal systems, in joint efforts between our governments to fight crime, and in the emergence of free and fair electoral systems. These nations are now halfway home; it is in our national interest to provide the appropriate levels and forms of assistance that meet these new conditions. Second, country earmarks in the last two fiscal years have created an imbalance in our programs. Certain countries, such as the Central Asian nations, Georgia, and Russia this past year, have gone without crucial programs that are needed to accelerate and secure their transitions. nis earmark Question. Last year the NIS account was heavily earmarked and even subearmarked. My impression is that this action significantly reduced your flexibility as program administrator, and wiped out any leverage the U.S. might have had in obtaining reforms in these countries. Can you comment on the effect of this earmarking on your flexibility and on obtaining important reforms? Answer. You are absolutely right and that is why we oppose earmarking. The earmarks and especially the subearmarks dramatically reduce our flexibility to respond to changing circumstances in the NIS. Reform efforts tend not to be constant--they are under attack from those elements of the societies most resistant to change. We need the flexibility to tailor our assistance to these changes. For example, one large subearmark--$35 million for agriculture in Ukraine--requires us to spend a very large amount of money in a sector of the economy that was singularly not reforming. While we have gone to great effort to use these earmarked funds effectively, we need flexibility so that our assistance will support reform. When reformers make attempts to change a sector, we need to be there to support them; when a government resists reform or reform in a sector begins to flag, we need the flexibility to slow or even cut off support to that sector. Earmarks made that nearly impossible. Question. What would the impact be if your request of $900 million is not fully funded by the Congress, and last year's earmarks remain in place in 1998? Answer. In these circumstances the United States will be missing a major opportunity to improve our national security. It is clearly in our national security interest to see market economies and democratic governments where the Soviet Union once was. Continued phase out of our engagement with reformers in these countries will reduce our ability to engage with and support these reforms. The earmarks will further inhibit our ability to provide assistance to those countries and those sectors where reform is occurring. We must not lose this opportunity. armenia and azerbaijan Question. Human rights groups have expressed concerns about the September 1996 elections in Armenia, classifying them as seriously flawed. The elections in fact did not win the approval of the OSCE election observing unit. I am aware that the Armenians have promised to improve. I am wondering how we are helping to improve the human rights situation, both through our aid and in diplomatic arenas. Answer. Prior to Armenia's parliamentary elections in 1995, U.S. and international NGOs implemented programs designed to help Armenia develop an effective election law. In response to our efforts, the Government of Armenia passed an improved election law and elected new members of the Central Election Commission (CEC). Unfortunately, however, the way in which the Armenian Government conducted the country's presidential elections in September 1996 resulted in a number of violations of the new election law, which were noted by international observers. Consequently, there was an overall lack of confidence in the integrity of the election process, as the OSCE noted in its final report. Perhaps the most important lesson we have learned from the elections is the importance of independent means of verifying the election results. It is also important to have fully transparency in the election process, including the timely release of all vote summary protocols and the presence of domestic and international observers throughout the process. While the election itself was flawed and raised several questions, many of the electoral reforms advocated by the United States were successfully carried out. Some precincts in Armenia did conduct the elections without any allegations or irregularities. Moreover, the conduct of the pre-election campaign--except for the opposition's limited access to the media--was an improvement over the 1995 parliamentary elections. All qualified candidates were registered by the CEC. Opposition representatives participated as minority members of electoral commissions in all regions and most precincts and communities. The opposition campaigned effectively and drew an impressive response from the voters. While support for free and fair elections is a crucial element of our democracy program, our other, longer-term programs have also begun to contribute to democracy-building in Armenia. For example, USAID grantee Internews works with eleven independent television stations. Seven of these stations have collaborated in an independent news exchange, and two have established independent broadcast facilities with support from the Democracy Funds Small Grants Program implemented by USIA. The USIA-sponsored Yerevan Press Club has had major successes lobbying the Government of Armenia against an onerous draft media law which was subsequently retracted, and has conducted seminars and training programs which have raised the level of professionalism in the Armenian media. The American Bar Association's USAID-funded Central and East European Law Initiative (ABA/CEELI) has provided commentary on several draft laws, some of which has been incorporated into the drafts. ABA/ CEELI is also supporting the establishment of a judges' association and bar associations to raise the professionalism of the legal profession in Armenia. The judges' association is already active in promoting judicial reform and changes to the constitution. We have also begun a training program for judges and lawyers on commercial legislation passed during the past few years. This program will eventually become the base for a national judicial training center. russian arm sales Question. Russia has recently become more aggressive in its marketing of arms to various countries around the world. Most recently news accounts have indicated that cooperation between Syria and Iran will enable the export of significant amounts of Russian military equipment to Syria. We of course have continued the requirement in our bill on restrictions military cooperation between Russia and Iran, but concerns remain. It has even been speculated that Turkey in the absence of their ability to purchase arms and ships from the US may turn to Russia as an arms supplier. How should the US deal with Russia military exports as a policy issue? Answer. Russia has joined the Missile Technology Control Regime, The Wassenaar Arrangement, the Nuclear Non-Proliferation Treaty and has pledged to abide by the terms of the Chemical Weapons Convention even though it has not formally ratified the Convention. We, and others in the international community, have made it clear we expect Russia to adhere to the restrictions imposed by these agreements. Further, we have made sure that Russia is aware of the provisions of U.S. law prohibiting assistance to countries which provide arms to ``pariah'' states and countries listed as state sponsors of terrorism. We believe Russia is abiding by the restrictions on arms sales to Libya and Iraq imposed by the UN Security Council. The Russian Government agreed in 1995 to limit sales of military equipment to Iran to items already contracted for and is well-aware of U.S. laws pertaining to sales to Iran. Russia sees the sales of military equipment as a legitimate means of maintaining its defense industrial base in a time of severe budget shortages for the Russian military. Nonetheless, we are engaged in a dialog with Russia and other arms producing nations on ways of preventing arms sales to areas of conflict or tension, and preventing sales of arms which are potentially destabilizing or which may encourage a regional arms race. Question. Should our aid program be conditioned with restrictions on Russian arms sales? Answer. Our aid program to Russia is conditioned on responsible arms sales behavior by existing law. We carefully monitor arms sales by all NIS states and let these countries' governments know that irresponsible behavior will result in sanctions including assistance reductions. Additional conditions and restrictions are not necessary. Question. What specifically has the U.S. done to indicate our views on the Iran-Syria deal? Answer. We have raised with the Russians at a high level our concerns about the transfer or sale of lethal military equipment to countries of concern. We have been assured by the Russians that they are abiding by their international obligations. We continue to engage the Russians on this issue and to monitor compliance. As you know, we do not comment on details of confidential discussions with other countries. We would be happy to provide you with additional information on this issue on a classified basis. ukraine Question. Ukraine, according to news accounts, is reportedly pursuing arms deals with Libya, despite the restrictions placed in last year's bill. Those provisions contain authority for the President to waive aid restrictions for national security reasons. What is the situation on this sale and the President's intention on a waiver? Answer. We have seen these reports and are investigating them fully. Based on available information, we have not yet been able to determine whether sanctions violations have taken place. As a result, the President has not yet made any decisions regarding a waiver. pakistan Question. Pakistan has reportedly increased its defense spending by 14 percent despite its owing over $48 billion to international donors and banks. Ukraine may sell Pakistan up to 330 tanks worth $650 million according to press reports. How do these facts enter into our policy discussions with the Ukrainians on our aid program? Answer. This sale is not in violation of any U.S. legislation or other international restrictions. As a result, we have not raised this issue with Ukraine in connection with our assistance or with relations in general. armenia and azerbaijan Question. The Congress last year clarified the authorities for the delivery of humanitarian assistance to refugees in Nagorno Karabagh to enable assistance to flow without impediments to the refugees displaced by the conflict. Can you tell us the status of that delivery, define its scope, and comment on the condition of the refugees. Answer. The USG currently provides assistance to Nagorno Karabagh (N-K) through the International Committee of the Red Cross (ICRC). In FY96 the Department of State's Bureau of Refugee Affairs responded with $16.75 million, approximately 25% of the $65 million annual appeal for the Newly Independent States (NIS). We estimate that the annual budget of ICRC in N-K over the past year has been approximately $2 million and their work included such projects as: The distribution of relief supplies to over 38 towns and villages, benefiting 14,000 recipients of wheat seed, cement, nails corrigated iron and plastic sheeting; The delivery of vegetable and potato seedlings, flour, sugar, oil, school materials, and shelter building and repair materials; Visits by ICRC medical staff in Barda to six military hospitals treating wounded, supplying materials and drugs as needed; and Visits to detainees, facilitated and exchanged over 203 Red Cross messages to families in the fall of 1996 alone. The needs of the displaced, who make up a small portion of the population, along with the needs of others settled in the area are similar to those found throughout the Caucasus region. All available information dealing with N-K indicates that emergency needs are being adequately addressed. Question. The Minsk process involving the U.S., Russia and France to mediate the peace process between Armenia and Azerbaijan has recently been revived. Can you comment on the status of those efforts, and any discussions that may have occurred in the recent summit talks between Mr. Yeltsin and the President? Answer. The Minsk process has existed since April, 1992, when the Conference for Security and Cooperation in Europe (now the OSCE) called for a peace conference to meet in Minsk. The conference never met, and negotiation efforts in this context have been stalemated. A cease-fire has been in effect, with some violations, since May 12, 1994. Earlier this year, the U.S. and France joined Russia as three Co- Chairs of the Minsk process. We have been working with our French and Russian colleagues to develop a new approach that might break the stalemate. Impetus for this effort comes from the highest level. The President discussed the issue with President Yeltsin at the recent summit in Helsinki. The two agreed to give priority to finding a solution, and to order close cooperation, along with the French, towards that end. Secretary Albright met on May 1 with Russian Foreign Minister Primakov and French Foreign Ministry Political Director Blot for a discussion on the way forward in the Nagorno-Karabakh peace process. Questions for the Record Submitted by Mr. Yates Question. What are the risks to the region if we should fail to continue our involvement in these countries? Answer. The risks are significant and quite unnecessary, when one considers the scope of this historic opportunity. The worst-case scenario is, of course, a return to a Cold War type of relationship with Russia, and the re-targeting of nuclear warheads at the United States. The risks are also there to miss many opportunities for productive working relationships between our governments in reducing other threats to our security, and fighting international crime and terrorism. The economic opportunities for the United States, in sectors that are highly competitive in today's global economy, are also at risk if we do not step up to continuing engagement with the New Independent States, and help their reformers and citizens create and sustain civil societies, which just five short years ago most of us could not have imagined were possible. Question. It is my understanding that most of the assistance in the Partnership for Freedom program is intended for countries other than Russia. Is this true? Could you provide a detailed list of who will receive this assistance and how it will be used in each country? Answer. About a quarter of the overall NIS assistance request of $900 million is budgeted for Russia. Nearly all of the $241 million for Russia is in Partnership for Freedom activities--trade, investment, private sector, law enforcement, partnerships and exchanges. This is because Russia has nearly completed the institution-building phase of its reform and no longer needs technical assistance in this area. Other NIS countries are moving in that direction, but most need additional technical assistance to put in place the institutions necessary for a market economy and democratic government. Nonetheless, less than half of the Partnership for Freedom activities in our overall request are budgeted for Russia. A detailed breakdown of our assistance request, both by country and by activity, is included as an attachment to my written testimony. My office would be happy to respond to additional questions about our request. Question. I have been informed that crime is an increasing problem in the region. How does this initiative address this problem? Please give specific examples and results, if any, of the program. Answer. Crime in the NIS is a threat not only to the people who live there, but to the entire international community. It undermines the credibility of democracy and the market economy; it weakens the rule of law; and it impedes investment. In recognition of these serious dangers, we will significantly increase cooperative anti-crime and anti-corruption activities under the Partnership for Freedom. These efforts will build upon the achievements of the first phase of our Anti-Crime Training and Technical Assistance Program, 1994-1997. Initially, the focus of our programs was to work with NIS officials to combat international organized crime, financial crimes, and narcotics trafficking. U.S. law enforcement and criminal justice agencies trained some 2000 NIS officials annually in this period. In 1996, the interagency program led by the State Department's Bureau of International Narcotics and Law Enforcement Affairs (INL) expanded to address commercial crime that is harmful to international trade and investment. In support of the Gore-Chernomyrdin process, INL also funded an expansion of the Department of Commerce-led interagency program to combat commercial crime. As a result of these efforts, NIS bankers and regulators are increasingly aware of their vulnerability to corruption and organized crime; U.S. and NIS officials are working together to convict criminals and reduce corruption within law enforcement agencies; more NIS countries are asking for our help in halting the growth of trafficking in narcotics across open borders and organized crime's infiltration of financial and political institutions; and NIS law enforcement agencies are asking about programs to collect and manage physical evidence in criminal cases and about community policing. Their interest in criminal forensics and community policing is a first step in what is likely to be a difficult shift to policing in a democracy. With the Partnership for Freedom, we will expand criminal justice and law enforcement and cooperation with the NIS exponentially. With full funding of these programs, we intend to: Deepen the developing partnerships with Russian and NIS law enforcement agencies to address transnational criminal activity that negatively affects privatization and democratization, including international organized crime, financial crime, and narcotics trafficking; Expand international cooperation in the criminal justice sector to include U.S. state and local agencies in bilateral programs; and Focus new resources on strengthening legislative and regulatory reforms to prevent crime and corruption. We believe that this type of coordinated law enforcement and regulatory action, combined with a broad and vigorous Rule of Law program and increased support for citizens' advocacy groups creating demand for law-based society, will help turn the tide of crime and corruption in the NIS. Question. How does the Partnership for Freedom support investment by United States businesses and encourage trade between individual countries and the United States? Answer. The Partnership for Freedom initiative supports bilateral U.S. trade and investment with the NIS in two ways. First, if fully funded, we intend to transfer funds under the Partnership for Freedom to the U.S. Export-Import Bank to carry out programs involving lending to small and medium business through local banks in support of U.S. trade in Russia and the other NIS. Second, the Partnership for Freedom includes a focus on improving the investment climate in the NIS through supporting the removal of trade impediments in these countries. For example, in Russia, our U.S. investors have told us that the key issue affecting their ability to operate involves the existing, outmoded Russian tax code. As a result, we are helping the Russian government and parliament to write a new, market-oriented, transparent, fair and effective tax code. Recognizing the important role that Russian regional governments can play in the area of investment, we are working under our Regional Investment Initiative to help regional governments attract both foreign and domestic investment. Question. Please explain why the Congress should extend more support for economic development in Russia and the other NIS of the former Soviet Union. Hasn't the private sector taken root yet? Couldn't we achieve the same objective through other vehicles, i.e., TDA, OPIC and the Export-Import Bank? Answer. It is critical to our national security that Russia and the other NIS develop into stable, democratic, free-market economies. Instability in this part of the world could affect U.S. national security. The Partnership for Freedom (PFF) initiative is based on this premise, along with the recognition that we must remain engaged for what will clearly be a generational transformation. PFF activities therefore focus on two areas: support for economic growth through trade and investment; and support for exchanges and partnerships to build durable ties between our countries. Our ability to engage with the NIS is possible precisely because the private sector has taken root in the NIS as a result of the difficult reforms which the NIS governments have undertaken in support of macroeconomic stabilization. These reforms, however, have had a high social cost. It is essential to NIS stability that macroeconomic stabilization be followed by economic growth. It is true that TDA, OPIC and the Export-Import Bank are already engaged in the NIS; in fact many of their activities have been supported by Freedom Support Act funds. Some limited Partnership for Freedom funds will continue to support these activities, with a focus on small and medium business. But these activities alone cannot ensure economic growth. This is why the PFF will also support additional lending programs for small and medium business and efforts to remove NIS impediments to expanded trade and investment. Question. Many private voluntary organizations and nongovernmental organizations are already involved in Russia, Ukraine and the other NIS countries. Why should we duplicate what they are already doing? Answer. We agree that we should not duplicate the work of other organizations in the NIS. The mandate of the Office of the Coordinator is to ensure that all Freedom Support Act in the NIS activities are properly coordinated. As for the activities of these private voluntary organizations (PVOs) and nongovernmental organizations (NGOs), many are in fact funded under the Freedom Support Act with U.S. assistance funds. The expertise of PVOs and NGOs has been critical to our ability to provide needed humanitarian and technical support throughout the NIS. Under the Partnership for Freedom, our goal is to move many of these organizations away from complete reliance on U.S. assistance funds by requiring matching contributions from the private sector. Further, in certain cases, we intend to consider providing one-time grants to serve as endowments which could allow organizations to continue their activities on an entirely private basis. partnership for freedom Question. What is the value of doing exchanges and partnerships with these countries? Answer. We stand to gain a great deal by expanding our linkages with the peoples of the NIS countries. These grassroots linkages contribute to our national security by promoting the development of Western-style democratic, market-based societies in place of the large, autocratic command economy that was the Soviet Union. The success of this generational transition will greatly enhance our national security by contributing to stability in the region. On a more personal level, U.S.-NIS linkages are mutually beneficial in that they provide opportunities for each side to learn about the other by addressing problems of mutual concern. We have had over 200 years to develop our country's democratic and free-market institutions, whereas the people of the NIS countries are faced with the daunting task of building and perfecting these same institutions in a much shorter amount of time. We can learn as much from them as they can learn from us, and by working together we can address our mutual concerns much more effectively. Question. I guess at first glance, NATO expansion makes eminent sense. With Eastern Europe turning toward democratic reforms and market economies and Russia's economic and political direction still unsettled, it is logical to want and extend NATO membership as a deterrent to a revival of Russian expansionism. While I can sympathize with the apprehensions felt by the Eastern Europeans, the collapse of the Soviet Union cost NATO its natural enemy and with it a reason to exit. The simple truth is that Russia is not a military threat and will not be for some time to come, possibly a decade. With this in mind, I question the logic of NATO expansion. Is it necessary? What will expansion do to our programs in the NIS? How will it affect USAID? Will the increased tension with Moscow hurt U.S. business interests and trade with the region? Simply put, from your perspective, is NATO expansion a good idea or the folly of an organization trying to survive by venturing into areas outside its intended purpose? Answer. NATO enlargement is the cornerstone of our fundamental goal to build, for the very first time, a peaceful, democratic and undivided transatlantic community. As President Clinton said, by enlarging NATO, we will do for Europe's east what NATO did for Europe's west. We will extend the peace and prosperity that western Europe has enjoyed for the last 50 years to the east; we will gain strong new partners in security and trade; we will strengthen eastern Europe's commitment to democracy, peace and integration; we will erase forever the dividing line that ran through the heart of Europe for half a century; and we will gain confidence that we will not have to send U.S. forces to fight another war in Europe. Since the end of the Cold War, NATO has changed. Its focus on meeting the new challenges we face today--ethnic conflicts, the threat from weapons of mass destruction, terrorism and international crime and drug trafficking--make it as vital an institution as when its primary purpose was defending against a threat from the east. But, NATO's fundamental basis as a collective security organization continues to provide the secure and stable environment which enables its members to grow, prosper and join together in promoting their shared values, ideals and interests. NATO enlargement poses no danger to Russia and will benefit all members of the transatlantic community, including by helping to create a more secure and peaceful environment in which trade and economic growth can flourish. It will complement our aid programs. We recognize Russia's concerns about enlargement and want to ensure Russia has the opportunity to play a constructive rule in the creation of Europe's new security systems. Russia's willingness to work with NATO to develop a stronger NATO-Russia relationship through a charter or similar document and to adapt the CFE treaty is an important opportunity. Question. What effect does NATO's PFP program have on your programs in the NIS? Answer. First and foremost, by extending NATO's PFP program to the NIS (except for Tajikistan, which has chosen not to join PFP), the Alliance has demonstrated its commitment to build a new, inclusive European security space which breaks down old dividing lines and brings all the countries of Europe and the former Soviet Union together. Through PFP, the NIS countries are exposed to NATO's community of values as well as is methods of operation and interoperability. PFP complements our aid programs to the NIS by fostering and promoting many of the same objectives. PFP seminars, conferences and workshops address such issues as democratization, civilian control of the military, good neighborly relations, regional cooperation, and threats from weapons of mass destruction, transnational crime, and international drug smuggling. Participation in PFP exercises enables Partner countries to learn NATO's procedures and practices for dealing with crisis situations and to improve their interoperability with NATO in the humanitarian, search and rescue and peacekeeping fields. PFP has been the means by which Partners have joined NATO in IFOR and SFOR in Bosnia and will provide the basis for future joint peace support operations. PFP helps create a more secure and stable environment in which economic growth and reforms can prosper. Thus, it is an essential component of our overall relationship with the NIS. Question. How is NATO expansion viewed in the NIS? Answer. Most of the NIS countries (except for Russia and Belarus) have been cautious about stating an opinion about NATO enlargement. However, all the NIS have demonstrated an interest in developing a deeper relationship with NATO by joining the PFP, except for Tajikistan who chose to participate only in the North Atlantic Cooperation Council (NACC), a forum for political consultation with NATO. Many of the NIS countries have been actively supportive of the new initiative for a Euro-Atlantic Partnership Council which would merge PFP and the NACC to form a stronger and deeper consultative and cooperative mechanism between Allies and Partners/NACC members. Russia has clearly stated its opposition to NATO enlargement. Belarus has echoed that opposition. But it is clear that, although the elite in Russia is opposed to NATO enlargement, most ordinary Russians do not have a strong view one way or the other. Question. Does the military cooperation of PFP/NIS member nations translate into cooperation in business endeavors? Answer. To date, most NIS countries have not been very active in PFP, largely due to lack of funding. However, the recent signing of Presidential Determinations for eight of the countries (Russia, Ukraine, Kazakstan, Kyrgyszstan, Uzbekistan, Georgia, Moldova and Turkmenistan) will enable those countries to receive U.S. Warsaw Initiative assistance for use in promoting their participation in PFP. In Central Europe, Warsaw Initiative funds have been spent on goods and services from American suppliers, such as communications equipment and training. This has helped establish new business relationships between U.S. companies and CE firms which previously bought Soviet or East European goods. In turn, the experience under the Warsaw Initiative program has engendered contacts and greater familiarity between U.S. and CE companies leading to expanded business relationships. For example, Hungary has recently commissioned two major studies, one from the Rand Corporation, and one from a consultant firm. Many U.S. companies are actively competing for such contracts. U.S. defense contractors also have established good relationships with CE firms and are promoting U.S. products and services. We expect similar benefits to occur as the NIS countries become more actively involved in PFP. Question. In layman terms, could you explain what the Partnership for Freedom program is, and how this initiative will support the nation security strategy of the United States? Answer. The Partnership for Freedom (PFF) is not a new program, but is a strategic re-focusing of our existing programs that creates a new package of assistance that is both appropriate and urgent in supporting the NIS in their stage of transition to democratic market economies. This means that many forms of technical assistance will end-- particularly those activities that supported the first building blocks of reform such as privatization, bank sector reform, the building of capital markets, the creation of a whole new set of institutions, both governmental and non-governmental, which are the foundation of civil society. The Partnership for Freedom builds on the lessons learned from the past five years, as well as the reform progress made by the NIS nations, and supports the national security interests of the United States by staying engaged with these nations in ways that are mutually beneficial. The PFF works to further integrate each NIS nation, from the government to the grassroot levels into the community of Western democracies. The Partnership for Freedom will accomplish these goals by focusing on two primary groups of activities. The first, investment and capital mobilization, and the second, consolidation of democracy and civil society gains, are comprised of highly focused groups of activities that emphasize economic growth and the role of the private sectors in both the U.S. and Russia. The PFF will emphasize cooperative activities between a wide variety of U.S. and NIS organizations, such as industrial associations, municipal governments, universities, hospitals, bar associations, social services and charities. The PFF will more than double our activities in the area of fighting crime and corruption, and will more than double the number of exchange programs that are doing so much to help shape and prepare the NIS leaders of tomorrow. The national security of the United States is enhanced immeasurably and concretely by the quickest possible transition of the NIS nations to market democracies, for several reasons. First, Russia is still a nuclear military power. Second, the post-Cold War world presents still other threats to our security. A strong, active relationship with Russia and the other NIS nations is of tremendous strategic importance to the United States, in order to manage and reduce these other real threats. Third, there are significant economic opportunities for the United States in the NIS region. The energy and natural resource sectors, and a huge untapped consumer market, and fledgling capital markets are just the most striking and well-known examples of where our country is benefitting economically now, and where tremendous growth is possible as these NIS economies mature. Questions for the Record Submitted by Mr. Foglietta albania projects Question. Much international attention has been focussed on a nation that has rarely, if ever been in the spotlight--Albania. While it is difficult to attribute the recent lawlessness and violence that has gripped Albania to one cause, citizens clearly became resentful because of wide scale and seemingly government sanctioned corrupt investment schemes. This, compounded with autocratic political leadership and the existence of armed and criminal factions, has spelled disaster for the nation. (a) The U.S. has provided a modest amount of aid to Albania over the past few years. Can you tell us what types of projects we have sponsored there? Answer. USAID activities have strongly supported democratic institutions and political processes in Albania. Both the International Republican Institute and National Democratic Institute have had representatives working in Albania to promote a more active exchange between politicians and their constituencies by providing training in the rights and responsibilities each has in a democracy. Strong support has been provided to non-governmental organizations (NGOs) to increase their advocacy role vis a vis government. Advisors also work with local governments to better equip them to serve their constituents and move toward greater decentralization. Over 50% of U.S. assistance to Albania supports economic growth. Much of that assistance goes to the agricultural sector which accounts for over 50% of GDP and 50% of employment in Albania. Agriculture was one of the first sectors privatized in Albania, and it is worth noting that during the recent crisis, the agricultural sector has been little affected. Other U.S. support includes the Albanian-American Enterprise Fund, which provides loans and equity capital to private businesses, an MBA program, technical assistance to small and medium enterprises and technical skills training. When the situation allows for the return of U.S. advisors, assistance can quickly be provided to start rebuilding the Albanian economy. Little support in the area of economic growth is provided directly to the Government of Albania. Virtually all is directed to the private sector. With regard to social sector restructuring, USAID has supported programs in health service management and family planning, to both improve the quality of care and reduce the use of abortion as a means of contraception. Question. Over the past months, discussion on international affairs has been dominated by President Clinton's goal of enlarging NATO. In the budget we have talked about the significant increase for Russia and the NIS. One key component to stabilizing the Russian government and keeping them engaged must be helping them to get their own fiscal house in order. There was a goal embraced by President Clinton and Yeltsin at Helsinki. Can you tell us how the new funding would be used to work with the Russian government to help them make the structural adjustments to strengthen their fiscal system? Will we see an increase in the amount of aid we are giving Russia for this type of technical assistance? Answer. Under the Freedom Support Act, we have provided assistance to the Russian Government in the fiscal area. In particular, we have provided extensive technical assistance in the Russian government effort to draft and pass a new, more effective and market-oriented tax code. In addition, we have provided two budget advisors to assist the Russian Government under the Treasury advisor program. To their credit, the Russians have made a good deal of progress on fiscal issues, but continue to face problems with revenue shortfalls, an issue we have tried to help address through our tax program. The Partnership for Freedom Initiative envisions limited technical assistance to the Russian Government in FY 98, given the amount of progress made to date and our view on the need to redirect assistance toward promoting economic growth through support for trade and investment. Our FY 98 plans call for providing some limited technical assistance to the Russian Government to help remove impediments to investment and economic growth, which would include the area of tax reform. Of course, the provision of such assistance will depend also on the desire and need of the Russian Government. Questions for the Record Submitted by Mr. Torres armenia Question. Why is Armenia the only NIS country that you are requesting a significant decrease in assistance for in your FY98 budget? Answer. We develop our budget request based on the progress of reform and the need to support reform in each NIS country within severe budget constraints. Our budget request for Armenia in FY97 was $55 million; our budget request for Armenia in FY98 is $80 million. Hence, our request for Armenia has increased. As you are aware, Congress saw fit to earmark $95 million for Armenia in FY97. turkey's blockade of armenia Question. 3. The State Department has said that Turkey's blockage of Armenia runs counter to U.S. interests in the region. The government of Armenia has repeatedly offered to establish normal, diplomatic relations with Turkey without pre-conditions. What is the Administration doing to support the Armenian government's offer to Turkey? Answer. The Administration has repeatedly urged the governments of Turkey and Armenia to normalize their relations and expand contacts in a broad spectrum of areas, including opening up cross-border trade. This is not only in the best interests of Armenia and Turkey, it is in the interests of the Untied States as well. Question. As you know, Turkey's blockade of U.S. humanitarian assistance designated for Armenia, now in its fourth consecutive year, is in violation of U.S. law. What specific steps has the Administration taken to assure Turkey complies with U.S. law? Is the Administration planning on enforcing the Humanitarian Aid Corridor Act or at the least, notifying us of your intention to exercise the waiver provision? Answer. Turkey kept its land border with Armenia open until March 1993, when ethnic Armenian forces attacked and occupied Kalbajar province, in western Azerbaijan. Turkey closed its land border to protest this offensive, and has pledged to reopen the border if the parties can agree on a statement of principles for its resolution. The Humanitarian Aid Corridors Act (HACA) requires the Administration to cut off U.S. aid to any country that blocks the delivery of U.S. humanitarian aid, although the act also contained a national interest waiver provision. The Administration has strictly enforced the provisions of HACA, and will continue to do so. On April 14, the President notified Congress of his intent to again exercise his right to waive the provisions of the HACA in accordance with the provisions of that law. The closure of the land border between Turkey and Armenia does not greatly constrict the flow of U.S. aid to Armenia. There is an extensive port, road and rail network through Georgia that effectively provides Armenia with goods, including aid. Most of the shipments that reach Armenia come through the Turkish Straits with the active cooperation of the Turkish Government authorities. Turkey has undertaken several multilateral and bilateral efforts to facilitate a resolution of the N-K conflict. In 1995, Turkey reopened the air corridor between Armenia and Turkey, and regular bus service now runs from Yerevan through Georgia to Turkey. It is in the U.S. national interest that Turkey continue to play an active, positive role in the search for a resolution to the conflicts in the Caucasus, and to take unilateral steps to improve its relations with Armenia. We will continue to encourage the Turkish government to pursue these policies, just as we will encourage the Armenian government to respond positively. Thursday, April 17, 1997. EXPORT AND INVESTMENT ASSISTANCE WITNESS J. JOSEPH GRANDMAISON, DIRECTOR RITA M. RODRIGUEZ, ACTING PRESIDENT AND CHAIRMAN MILDRED O. CALLEAR, ACTING PRESIDENT AND CHIEF EXECUTIVE OFFICER Chairman Callahan's Opening Statement Mr. Callahan. Well, good morning and welcome to the subcommittee. I know this may be the first time that you have appeared before our committee for some of you, and we are happy to have you here. We are having a Republican conference this morning. At the conference I just left, Speaker Gingrich announced how he was paying the $300,000 fine that has been assessed against him. He is borrowing the money from Mr. Dole and he is paying Bob Dole back at the rate of 10 percent per annum. Ms. Pelosi. At what interest? Mr. Callahan. With interest, and this hopefully will settle all of that for the time being anyway. Ms. Pelosi. Bob Dole is lending Newt Gingrich $300,000 to pay his fine? Mr. Callahan. Right. If I ever get in trouble, Nancy, I am coming to you. Ms. Pelosi. Anything you want, Mr. Chairman. And I will be there for you. Mr. Callahan. The committee is pleased to welcome you. We have Mr. Joe Grandmaison, the director of the Trade & Development Administration; Dr. Rita Rodriguez, the acting president of EXIM Bank and; Mrs. Mildred Callear acting President of OPIC. As you well know, this committee has been a strong supporter of your agency, for the past 3 years anyway. Mr. Grandmaison, your agency appeared to have escaped the label of ``corporate welfare.'' In this morning's paper I see that Ralph Nader has indicated that the other two of you are considered by him to be corporate welfare. I disagree with his allegation; I disagree with the logic and the innuendoes of his article. But it expresses a perception that many Members of Congress now have as a result of this misinformation that has been put out, and frankly, as I expressed and as did Mrs. Pelosi last night at a dinner at Blair House with the leaders of the administrative branch, unless we can muster together the truth, get the facts assimilated and delivered, and convince a number of our colleagues in the House, then OPIC and Eximbank are going to be facing some serious problems. The President committed to us last night that he, especially in the OPIC arena, is going to exercise a full court press that is going to become a top priority of his for the next several weeks. I emphasized how crucial the timing was with respect to OPIC since the International Relations Committee is coming forth with a bill that the Nader forces will probably try to attach an amendment that could very seriously impede our ability, as we did last year, to correct the problem in conference committee. This year your authorizing committees must do their jobs. Not only is it going to take them, but all of you, and all of you who are interested in the continuation, especially of OPIC, to get your statements out, to contact Members of Congress, contact members of this committee, and to make certain that we fully understand the ramifications of the abolition of either of the agencies. Mr. Grandmaison, your group owes us a vote of thanks for our support of you in helping to establish enough credibility about your agency to let you escape the problem OPIC and Eximbank face. I will submit my opening statement for the record and I will not force you to sit through a lengthy explanation of that. I am going to recognize in just a second Mrs. Pelosi for a brief opening statement. I would ask you all to respect the time limitations of this committee in your opening statements and let's get through this as expeditiously as we can. When Speaker Newt Gingrich makes his announcement on the Floor, which will be right after we go into session, there is no doubt going to be a flurry of activity by some of those who do not hold in the high esteem that I hold Mr. Gingrich in. There are probably going to be a lot of votes this morning. Probably about 10:30 we will have the first one and vote every 15 minutes thereafter. We will apologize for the interruptions and try to keep the committee going. [Chairman Callahan's statement follows:] [Pages 425 - 426--The official Committee record contains additional material here.] Good morning, Mrs. Pelosi. You have the Floor. Ms. Pelosi's Opening Statement Ms. Pelosi. Thank you very much, Mr. Chairman. Good morning. I want to join you in welcoming our witnesses for today's hearing on the fiscal year 1998 request for Export-Import Bank, for OPIC, and for TDA. Mr. Grandmaison, it is always a pleasure to see you. This portion of our bill, as you know, provides funding through various mechanisms to help American business to promote the export of American products overseas. For this reason, both OPIC and Eximbank have enjoyed widespread support in Congress, except, as our Chairman has said, until recently. If I may say, our Chairman was a very vocal advocate for OPIC and Eximbank, at Blair House last night, and helped the President understand what exactly the task is before us in the Congress. So I think that you all have a very good friend in our chairman. You all know that the reauthorization of OPIC failed to pass the House in September. I think part of that was because of the larger request for a bigger amount of money, but it did serve as a wake-up call to many people on the Hill and in the business community. While I have concerns about some of the policies of both OPIC and Exim, I have generally supported funding for them in the context of this foreign operations bill and with balanced priorities. Last year, many people in the House voted against reauthorization based on what I thought were narrow considerations and not understanding how these programs work. So I know you both come here fully ready to address those concerns and educate the Congress on the effectiveness of your programs and how they help American business. I have specific concerns, and I will ask them during the Q and A--environmental concerns, Russian program, Colombia, and small business. I will end with that small business issue. I have said year in and year out, especially in the case of Exim, to the extent that more business is in our country, small and moderate size businesses receive some of the benefits of OPIC, women and minority-owned businesses receive the benefits of OPIC--excuse me, of Exim--then we will build a stronger constituency in the country. It cannot exist and have a constituency if it persists to be Boeing's bank or just the bank of some exporting elites without having as primary customers the smaller and more moderate sized businesses in the country. Thank you all. Thank you, Mr. Chairman. Mr. Callahan. Mr. Grandmaison, since you have appeared before the committee before and since you are sitting to the left, we will start with you. Mr. Grandmaison's Opening Statement Mr. Grandmaison. Mr. Chairman, members of the committee, thank you for the opportunity to be with you this morning. As I point out, Mr. Chairman, this is the first time I have had the opportunity to lead off. Had I known to acquire this position all I had to do was get rid of Brody and Harkin, I would have tried to do it much earlier. However, what I won't do is abuse that, because I respect the fact that what you are really interested in is to get into the Q and A. I will try to this year use complete sentences, however, as opposed to when someone is situated at the end of the table. The task today, as we all know, is to help create jobs for Americans, and to a great extent the World Bank lays out for us what the picture is. The World Bank estimates that in the next 5 years, to the year 2000 actually, we are talking about $200 billion worth of infrastructure being developed around the world. And in those middle income and developing countries, what we have to work towards, we at TDA and our sister agencies, is to try to ensure that we get a piece of that business. It is a mistake, however, to assume that there isn't competition, as we all know, because the secret that the French and the Germans have used, and the Japanese, is to go in early and to do early project--provide early project planning assistance. And that is what TDA attempts to compete with. And compete is what we must do. Allow me just to ask my colleague to put up a chart that shows as a by-product of one's GDP the type of competition we face just in the area of feasibility studies or project planning assistance. As you can tell from this chart, as an example, Britain supports its firms 17 times more than we do, as it relates in this narrow area of export promotion. And as we go down the chart, we see that even our neighbor to the north, Canada, is more heavily involved in providing early project planning assistance than we would. Now, in a perfect world one would say this shouldn't be necessary, that each project should stand on its own merit. Unfortunately, we don't live in a perfect world, and what we try to do is just begin to level the playing field so that when an American company is competing overseas and one of their competitors gets what we would argue would be unequal support from their country of origin, we go in and say, but we want that business as well. Now, is that a guarantee that when the project is actually developed, that they buy U.S. goods and services? No, it is not. But if we go in and U.S. consultants develop the technical requirements, at the very least we know that the equipment manufactured here then qualifies. The one thing you can be certain of, that you can bet on, is if we aren't involved, our companies won't get the business, because our competitors in many respects don't develop their work for international competition, they more narrowly define it to their own narrow interests. So what we try to do is develop the codes, the technical requirements, the standards, for U.S. goods and services. And I want to offer what I think is a great example, to be very honest with you, Mr. Chairman, and this has to do with the telecommunications market in Poland. Poland is in the throes of defining its public policy on how to privatize their telephone company, TPSA. We came in and offered them a grant, $422,000, so they could hire a U.S. company to develop their policy options using an American model. Now, the American model would be a highly decentralized body, so that it would inspire competition. At the same exact time, as fate would have it, the British know-how fund went in and offered them similar money, actually more money, to develop the European model, and the European model is highly centralized. Now, what is at stake?2-plus billion dollars worth of export opportunities. That is what is at stake. So we come in and offer what we would suggest is a responsible amount of money to help move their policy in a fashion that opens that door for U.S. companies. Just 2 weeks ago in Chicago, as an example, we had the Minister of Telecommunications from Poland and several of his colleagues, and they met with over 50 people from the telecommunications industry, a third of which, by the way, Mrs. Pelosi, were small business people. What we tried to do was render the assurance to the Minister that he could be confident that if they make the right public policy decision, that U.S. interests would be there to back it up, that we have the companies that want to compete in that marketplace. But the ground rules have to be such that, from a business point of view, it is an intelligent investment. Nearly every other week we have an orientation visit, is what we call them here. An example: Next week we have the Argentine and Bolivian hydro and irrigation project officials, not ministry level, but the decision makers, and they will be visiting Alabama and Tennessee to see U.S. policy at work. The following week, it is African health ministers that will be in Boston, Philadelphia, New Jersey, and other locations looking specifically at the technology that they need to hopefully help their countries while at the same time, if you will, help our industry. A good example, however, is that next week we are working with the FAA on this conference in L.A. And this is an interesting one. This is aviation project opportunities in Asia. What we are doing is, we are bringing this, outlining 30 airport projects in Asia, all of the information for the estimated 400 U.S. businesspeople in attendance. What we will do, we provide them with the information and then, during the course of the conference, set up one-on-one meetings between the project sponsor and the U.S. business. Now, the companies that benefit most by this sort of an investment by TDA are small businesses, because they, for all practical purposes, couldn't afford the time or the dollars to go to, in this case, the seven countries that are involved to learn by themselves what the opportunities are, much less get access to the individual that is going to be making the procurement decisions. So these sorts of investments, in addition to the early project planning assistance or feasibility studies, is really the meat and potatoes of what it is we try to do. Now, you make a most important point, Mr. Chairman. This committee, the Congress generally, we have benefited by the advice that we have received over the past 3 years. Example: 68 percent of our agency's investments in feasibility studies are cost shared. So for every dollar we have put in of taxpayer money--and we try never to forget that--the private sector has come in with 72 cents of their actual costs, therefore bringing up the total value, monies that we impact. Additionally, when it comes to success fees, something that this committee expressed very strong interest in--and all I can explain is, we heard you--93 percent of our sole sourced feasibility studies now have a success fee attached to them. If the taxpayer comes in and helps you get the project, when the project is successful and implemented, pay the taxpayer back. Now, because we invest so early, that doesn't happen in the 2 or 3 years, because we invest, usually it is a 4, 5, 6-year turnaround before the investments we make actually develop exports. But we are doing a better job stretching the monies that we have to work with. From a TDA point of view, this has been a most important year. And I want to show you one other chart, if you will, keeping in mind that we have been in business since 1981. This year, however, we finally passed--and we are pleased with this--the $10 billion mark in terms of exports that our agency's investments have facilitated, $10 billion. So that means that for every--and we track every project; it is the only way we can come up with these hard numbers--for every dollar we have invested, we have facilitated $30 in exports, and we believe that is something to be proud of. This committee and your support is obviously vital to our ability as a group of 38 professionals on our staff to use our money as wisely, as prudently as possible, bearing always in mind that what we are talking about is U.S. jobs. Thank you, Mr. Chairman. [The statement of Mr. Grandmaison follows:] [Pages 431 - 438--The official Committee record contains additional material here.] Mr. Callahan. I thank you, Mr. Grandmaison, and say we are extremely pleased--at least I am--to hear about the reimbursement program that is working. I think that was an idea of this subcommittee, and we are happy that you have implemented it. Mr. Callahan. Dr. Rodriguez. Opening Statement of Ms. Rodriquez Ms. Rodriguez. Thank you very much, Mr. Chairman. I must apologize for my voice, but it is considerably better than it was 2 days ago when I thought I would have no voice. I am delighted to appear in front of this subcommittee-- it seems I do this every 4 years--, during a transition period. As you know, I am the Acting President and Chairman of the Ex-Im Bank. Ex-Im Bank's mission is to protect and increase jobs in the United States by supporting exports that otherwise would not happen; and it is very important to focus on that point. Like Mr. Grandmaison has said, we shouldn't be needed were it not for the fact that every other major country in the world has a powerful export credit agency which tries to support their exports as broadly as possible. As a result, other countries support much larger percentages of their total exports than we do. Our efforts, however, are highly successful. We are targeted. They go to those transactions where we are really needed, because the competition from these other export credit agencies is a reality, a competition that comes not only from one but from several of them, usually at the same time. Last year, we authorized about $11.5 billion in financing, and we support $14.6 billion in exports. This is an increase of about $1 billion over the previous year. But, first I want to address the current state of management at the Bank, because I know that has been an issue of concern to this Committee and to the Congress in general. Over the past year, there have been extensive reforms in our management system, including the creation of a new position in our General Counsel's office, one that is devoted to administrative law. We have restructured the Bank and have strengthened the management ranks of the Bank. All this will assure that every major administrative decision is thoroughly examined. We have also obtained the advice of independent management consultants on many aspects of the Bank's processes and procedures. In short, I have complete confidence that Ex-Im Bank is able to do the vital work that we need to do. Ex-Im Bank's appropriations request for 1998 is $632 million. This is a $94 million decrease from what was enacted for 1997. The decrease is based on $50 million that we are not requesting in tied aid, which we did last year, and a $44 million decrease in program budget. This should be music to your ears. We are doing our part to contribute to a balanced budget. However, I must be very candid with this Committee, as I promised to be with Congress during my confirmation hearings some 15 years ago, almost in a situation similar to the one that we confront today. After reviewing our data for this first half of fiscal year 1997, we have determined that our spending rate for our program budget is a little over $1 billion for this year, which runs well ahead of the appropriation for the year. An overall increase in demand, especially in higher-risk markets, which we did not anticipate when we proposed the budget last year, accounts for a large part of this increase. We will, through management of our resources, probably be able to continue to provide finance to low-cost transactions and small business programs through the end of 1997. However, we must contemplate the possibility that some transactions requiring a large draw on our budget may have to be postponed until fiscal year 1998. Mr. Chairman, negotiated agreements in the OECD resulted in a large reduction in tied aid offers. We have also negotiated lower interest rates so we no longer lose money making loans at interest rates lower than our borrowing rates. One of the primary reasons for Ex-Im Bank besides meeting competition is to be at the negotiating table to bring competition to rates and prices that are commensurate with the market. I would just like to use as an example what I consider to be one of the great successes we have had in the negotiations in the OECD. In that chart, you have two lines. The red line is the cost of funds to the United States, essentially for 7-year treasuries. The blue line is the lowest permissible OECD rate. As you go back to the early eighties, you can see that the blue line, the rate that we are charged for export credits from OECD countries, was considerably below the cost of funds to their governments. This is not to say the cost of funds necessarily even to the borrowing country. Through negotiations, tough negotiations, as well as the willingness and capability to act, we were able to succeed in getting an agreement in the early nineties whereby that difference has disappeared. In fact, today on every loan that Ex-Im Bank makes, we are guaranteed a positive spread of 100 basis points over the cost of funds to the U.S. Treasury. To put a little bit of aggregate value on this, if we look at the books of Ex-Im Bank and we look at the period since 1980 to the early nineties when we had this discrepancy in interest rate, U.S. taxpayers had to lose $3 billion--actually a little bit over $3 billion--because of the situation that existed in the competition with other export credit agencies. Since 1992, that situation has been reversed to the point, as I said, we make money when we make loans to foreign borrowers who are chosing between U.S. exporters and competing producers from other nations. That is one of our great successes in the OECD negotiations. But if we are to continue having successes, we need both top negotiating and financial resources to assist our efforts to level the playing field, and counter the goal of many of these countries. Our major competitors who pay attention to reports from the United States assume that Ex-Im Bank is an institution somewhat at risk at home. I know this from my personal negotiation experience. I would like to share just a couple of stories with you. When the OPIC vote took place in Congress last fall, the following week there were negotiations in Paris. I was met with paper clippings reporting on the vote in Congress on OPIC with a follow-up question: What does this mean for Ex-Im Bank? I answered, well, we are paying attention. Needless to say, this kind of situation gives them little incentive to agree to raise fees, one of our objectives in the current negotiations. We want to work with Congress and the Administration to solve this dilemma between saving money in the short term and keeping our exporters competitive. In the area of the administrative budget, this year we are requesting $48.8 million, which is an increase of $2 million over last year. This $2 million increase is primarily to allow for renovation of our building, which is considered one of the worst buildings by GSA. There are real health hazards in the building. Small business is a matter of great interest to many members of this Committee and to Congresswoman Pelosi. Congress has mandated that 10 percent of Ex-Im Bank's finances be set aside directly for small business. Last year, in fact, 21 percent of our financing, which represented 81 percent of our deals went directly to support small business exporters. And that is in addition, of course, to the indirect support that small business receives as subcontractors from larger transactions. This chart illustrates my point. All in all, small business has been a real success story for us, as is shown by the quotes from letters we have received. As you see from the other chart, the number of small businesses receiving support from Ex-Im Bank, the absolute number of companies has significantly increased. In fact, not only has the total volume of business doubled but the number of companies receiving support through the various programs has also more than doubled, and that support is highly concentrated in the insurance program and the working capital guarantee program. Ms. Pelosi. May I just--is this directly because these businesses engage, or is this some kind of a ripple effect of subcontracts? Ms. Rodriguez. That is direct. That does not include the subcontractors of engineering companies, for example. Let me read to you a quote from one of the companies that testifies to the success of this program. John Crossno, chairman and CEO of Air-Dro Cylinders of Decatur, Alabama, which was carefully selected, manufacturers hydraulic cylinders. He writes to Ex-Im Bank, quote: If these programs are eliminated or altered significantly, the customers we have that utilize them will be placed at a disadvantage and we will lose the privilege of serving them. If these programs are eliminated or altered, over 30 percent of our employees will be affected. Mr. Chairman, I would like to submit four letters for the record in which small companies testify to the support and the difference that it makes to have support from Ex-Im Bank to sell their products abroad. [The information follows:] [Pages 442 - 446--The official Committee record contains additional material here.] Ms. Rodriguez. Another area that the Committee also has shown interest in is Russia and the NIS, so I thought I would touch on what we are doing there. We are open for business in Russia, Ukraine, Uzbekistan, Turkmenistan, and Kazakstan. In 1996, we approved nearly $1 billion in authorizations for the region, including nearly $200 million secured under non- sovereign programs for long-term export contracts. The so-called OGFA agreement is an arrangement, which serves as, a template for many of our transactions in the region. Transactions of this nature are secure, and allow us to charge the program budget 25 percent less than if it were done on a sovereign-risk basis. We are proceeding in Russia and the NIS with all due caution, operating only in countries where economic conditions provide the needed reasonable assurance of repayment, and after insisting that ample security be provided before we approve a transaction. In conclusion, Mr. Chairman and other members, I am proud to be here representing an institution with a clear mission. We know what our goal is. We are staffed by loyal employees who are unsurpassed in either public or private sectors. We are confident of our future because we promote jobs and give excellent value to the U.S. taxpayer. And I will be happy to answer any questions. [The statement of Ms. Rodriguez follows:] [Pages 448 - 468--The official Committee record contains additional material here.] Mr. Callahan. Thank you, Dr. Rodriguez. We will get to the questions in just a moment. I appreciate your brilliance in reading a letter from someone from Alabama. Maybe we could help you educate Mr. Grandmaison when you ask for a decrease, and maybe next year we will want to say you go first. Ms. Pelosi. Mr. Chairman, don't you think it is just alphabetical, Alabama? Mr. Callahan. Yes. The one in L.A. I assume is Lower Alabama. I am also planning to write to Willie Nelson. I had suggested that he rerecord that song, ``Mama, don't let your children grow up to be cowboys.'' I had suggested that he say ``bankers.'' Now I am going to go back to ``lawyers.'' Mr. Callahan. Ms. Callear, we are going to have to ask you to limit yourself to about 5 or 6 minutes. Then we are going to stand in recess. Ms. Callear's Opening Statement Ms. Callear. Mr. Chairman and members of the committee, I thank you for holding this hearing and for your continued support. You played a very important role for OPIC last year, and we know we wouldn't be here without you. I appreciate this opportunity to testify, and I, like Ms. Rodriguez, have been at OPIC for 15 years. I am very pleased to join my colleagues to talk about the continuing commitment this administration has to a coordinated trade and investment strategy. OPIC's role in promoting American trade is to sell political risk insurance and financing to help qualified U.S. investors compete for projects in the emerging markets. OPIC is needed because private financing and political risk insurance is not always available in the markets in which companies want to compete. OPIC can only involve itself if the private sector is not available to fulfill 100 percent of the needs of these companies. Since 1971, with never more than 200 employees, OPIC has mobilized more than $107 billion in new U.S. investments around the world. These investments have had a very positive impact on the economies of these countries, and we are very proud of that. But OPIC is careful never to export U.S.jobs. In fact, over the past 25 years we have created more than 225,000 American jobs as well as $52 billion in U.S. exports, all-the-while supporting a strong foreign policy. We have been a Partner for Peace in the former Soviet Union, the Middle East, South Africa, and throughout Latin America. We have kept our commitment to operate on a self- sustaining basis at no net cost to the taxpayer. And with this record in mind, I am pleased to tell you a little bit about our 1998 budget request. We are requesting an end to direct appropriations. Instead, we are requesting the authority to use the income from our operations to cover our costs. In 1998, we anticipate that we will have gross collections of over $300 million and $60 million of that would be used to fund our credit program. These funds will, in turn, support $2 billion in project financing. For administrative expenses we are requesting $32 million, which is the same as last year. At this level of authority, we will continue to provide valuable funds for the function 150 account which this subcommittee oversees. We will provide $158 million in 1998 for that assistance. Now, let me talk a little bit about reauthorization. As you know, the President has submitted legislation to the International Relations Committee for the 3-year reauthorization of OPIC and a slight adjustment in our contingent liability cap to give us room to operate for the next 3 years. This is a more modest proposal than the one we made last year, and it responds to many of the concerns we have heard across both sides of the aisle. I want to assure you of the administration's commitment. I am pleased to hear your words about the meeting last night, and that the Administration will be working closely with this Congress to achieve reauthorization as quickly as possible. Let me use my remaining time to speak to those who say we would be better off without OPIC and talk about what a decision to eliminate OPIC would mean. For starters, America's access to the growing markets in the world would be ceded in large part to our global competitors, and that is because, as many of the panelists up here have said, every one of our competing economies around the world are doing exactly the same thing, helping their industries compete. If we did not assist, U.S. business would be at a huge disadvantage in bidding on major privatization and infrastructure projects that are truly available to all countries today. In other words, without OPIC, instead of exporting American products overseas, the United States would be exporting jobs to our G-7 competitors, competitors who relish the thought of a global marketplace without OPIC. Without OPIC, environmental standards and worker rights around the world would be eroded, because many of the foreign agencies that would take our business do not care as much about these values as America does. Without OPIC, 140 developing countries would be deprived of critical American investment made possible by OPIC; investments that improve living standards and promote economic stability. In addition to this, without OPIC, a valuable foreign policy tool and a valuable member of the Government's trade promotion team would be lost. That is what life would be like without OPIC. Would we gain anything? Would the deficit be cut? No. I have already described how OPIC not only pays for itself but earns a profit for the Government. Would corporate welfare be reduced? Here too, reality defies the rhetoric. I want to correct some of the misperceptions, including some of the ones you mentioned up here as recently as this morning. First, all of OPIC's clients pay market-based fees, interest rates, and premiums in return for every service we provide. We do not give companies anything for free, there are no grants, there are no handouts of any kind. In support of this, I would point to the $2.7 billion in reserves that have grown up during the many years of OPIC's operation from the fees paid by our users. Second, all OPIC loan recipients make long-term equity commitments and assume risks. If things get bumpy in a new market, those investors can't just walk away and leave the Government holding the bag. They have a great deal at stake, and they are side by side with us, in terms of liability. Third, OPIC insures against political risks. We don't insure currency devaluation and we don't provide a guarantee that an investor will make a profit; those are outcomes determined by the market. Fourth, a large proportion of our clients are small business, not just big corporations. This doesn't even include the thousands of small companies that provide the goods and services to our projects. One example: In Peru today we are supporting an oil and gas project that has generated $20 million in procurement for companies in 23 States, including 6 companies in Alabama, 5 in Illinois, and 2 in California. The fact is that all transactions that-- Mr. Knollenberg. What about Michigan? Ms. Callear. He is the chairman. Ms. Pelosi. He reminds me of that all the time. Ms. Callear. The fact is, all transactions in which OPIC engages in, involve fair deals between buyer and seller. It is wrong to describe a fair deal as welfare. We are not giving anything away when we sell political risk insurance and project financing to buyers who pay market-based prices that more than cover the cost of running OPIC. Do private American companies benefit from OPIC's services? Sure they do, and let's not forget we are promoting capitalism in countries that used to favor communism, as well as free enterprise around the world. But make no mistake, private companies have to pay for everything OPIC provides, and shareholders put their own money at risk in every project we support. To those who say our insurance program forces taxpayers to cover huge losses, I would simply point out that of all the insurance coverages we have sold in 25 years, less than 1 percent has resulted in claims and we have been able to successfully recover 98 percent of these claims. Financially speaking, the bottom line is OPIC has not cost the taxpayer money but has made money for 25 straight years. This is a bargain all taxpayers should be pleased to support. In conclusion, a decision not to reauthorize OPIC would not reduce corporate welfare or save taxpayers a dime, but rather, it would cost American jobs, U.S. exports, business opportunities, millions of dollars in support of foreign assistance, and an effective tool of American diplomacy. I hope and trust that this Congress will reach the same conclusion. [The statement of Ms. Callear follows:] [Pages 472 - 486--The official Committee record contains additional material here.] Mr. Callahan. I thank the three of you. We are going to recess the committee until 12:00. I apologize for this interruption, but we have to go and swear in Congressman Rodriguez, who is a new Member of Congress from Texas, and then we are going to listen to Speaker Gingrich explain his methodology of payment of the fine against him. So I apologize for this. We hope it gives you the opportunity to get a cup of coffee or a snack, and we will see you at 12:00. Mr. Callahan. The committee will come to order. We appreciate your testimony, and I too will submit some questions for each of you to respond back to us, and the entire Subcommittee will have the opportunity to do the same. Just let me go through some of the vital ones. I don't know if other members will be back, but I hope that we will be able to get out of here by 1:00, and I know that is only 40 minutes and gives you a little time to do so. President's Budget Request Reduction Let me say, Dr. Rodriguez, some of the companies that make use of Eximbank are concerned about the impact of the President's reduction in his budget request. Some of those that utilize the bank wonder why do you no longer need the appropriation for the tied-aid war chest? And have our competitors stopped this practice? And to what extent would Exim fees increase under this budget request? Will the new fee structure reduce the competitiveness of American firms? Ms. Rodriguez. Thank you. Regarding the request or lack of request for increase in the tied-aid capital fund, I think that is because of the great success that we have had with our policy. That fund was established primarily as a deterrent force. It is a fund that is available for us to offer matching offers when other export credit agencies are using tied aid to compete. The ultimate objective of course, is to have these countries know that we have the money, we have the capability, and convince them to take their offers to other projects where U.S. exporters are not competing, because at that point it will become a zero sum game. Given the actual use of the fund, we consider that the current amount is adequate for the coming year in spite of the matching offers that we have outstanding. Mr. Callahan. Will we ever reach a stage where there is no longer any need for additional capital? Ms. Rodriguez. I surely hope so. Mr. Callahan. For the Eximbank. Will it be in this century or the next century? Ms. Rodriguez. I am not sure it will be in this century, given what is left of it. Mr. Callahan. I hope you can understand what I am saying. When Exim was founded, we continued to advance you capital, you would continue to give good loans, those loans would be repaid, and as a result of the repayment you would have sufficient capital to fully finance any needs that we, as a country, might have. And I know inflation and other factors play into that, but there must come a time when we recognize that capital infusion must stop and that repayment of loans and reserves will have to be sufficient. I know that you can't give me a date, you have already expressed that, but I know that that is basically the purpose of Eximbank. And maybe you can give me a projection of what we can expect for the next 20 years. [The Information follows:] Under Credit Reform procedures, each year the President will send to Congress a request for appropriations to cover any estimated losses which may be incurred, net of the risk fees the Bank charges for the business the Bank expects to do that year. We hope that as we negotiate subsidies down in the context of the OECD those subsidy amounts necessary will decrease. So we hope and expect that U.S. exporters will continue to be successful in the U.S. marketplace and we will continue to support our exporters, and we believe that over time the Bank's cost of doing business will become less and less. Expansion of Small Businesses I know the global market is expanding, American businesses are interested in that market, and therefore the needs are going to expand. But I was real pleased to see the percentage of small business loans. I don't know how much that percentage has increased in the last 3 years, but I can remember, my first year as chairman, a real concern about the seeming pattern of Eximbank to only look at huge projects such as dams and electrical plants and things of that nature, and not to recognize that there are other needs that create jobs, such as small boat building, shipbuilding, and things of that nature that also create export opportunities and investments in other countries as well. So I would encourage you to continue to encourage small businesses to utilize the bank and the financing capabilities that the bank offers. I might also tell you that four members of our panel stopped me and said: Does the Exim or OPIC do business in any place but California and Alabama? I told them I kind of objected to California. So next year, I think it would be appropriate for you to just mention the other States of the other subcommittee members. Ralph Nader Allegations Ms. Callear, I had an interesting conversation with you yesterday, and I think you know my feelings about OPIC. But at the same time, I am going to be one of the ones who has to answer to my colleagues on the Floor the allegations that are put forth by some Members of Congress about the continuation of OPIC. And I guess the most serious allegation that they have passed on to me is the fact that your investment fund is not a solvent fund to the extent that it is an almost guaranteed--or guarantee that the Federal Government is not going to be called upon to pay off some of these guarantees that OPIC has guaranteed on loans and that the liability is far greater than what OPIC is willing to admit. I don't believe that. I asked your predecessor to give me a detailed report. She did that. I am satisfied that your portfolio is fine. The history of OPIC indicates that it is fine. I think you mentioned 1 or 2 percent and that is fine. But nevertheless, I am going to have to have concrete figures, and we are going to have to answer the Ralph Naders of the world in a responsible fashion, because they are misleading the American people on the one hand by indicating that you are giving these companies a grant, you are giving them special consideration; they could immediately go to private companies and get the same insurance at a competitive rate; which I disagree with, because insurance companies don't have the wedge that the United States Government has in the event that something does go wrong, in the event of some kind of nationalization. The insurance company does not have the ability that the United States does. We may not have the legal, but we have the power, and we have countries depending upon us, and they are not going to renege or take away an asset that we have insured. But we must have detailed information arguing those points, and we would like for you to use every opportunity you have in order to convey the facts and the truth and to reveal the mistruths of the Nader allegations, because as I told the President last night, it is going to be soon. We look for the International Relations Committee to bring some bill before the House within the next several weeks. We anticipate that is when the attempt will be made, and we must be prepared. I don't know if we have a legal way for you to notify the pending danger to those users of OPIC, but nevertheless, if there is a way that they could be notified, they should be notified. Whether it is through some national organization or however, they should be made aware, because we are not going to be able to do, I don't think, what we did last year. We handled it, as you will recall, in conference committee. Congressman Kasich was very distressed over that, so I imagine that it is going to be very difficult if there is a test vote on the Floor, and if the OPIC authorization fails, it is going to be extremely, extremely difficult. The question comes up about the fact that last year you gave $150 million back to the Congress. That, I think, was scored as a plus for our ability to fund OPIC and the Eximbank. I brought this up to the President last night. If that ceases to be, then I imagine it would impede our ability to assist the President in fulfilling his request for other areas of foreign policy. I imagine it will be scored, and I don't know what your projections are for next year, but I imagine whatever that scoring is, that it conceivably could be reduced. I don't know the answers to that as yet, but that could be a double-edged problem for the administration. I don't know why Mr. Nader fails to mention that you are returning $159 million a year, that your portfolio is a safe one, that there is not an extreme danger of the United States-- like he refers to it, as a savings and loan, there is no similarity---- Ms. Callear. That is right. Mr. Callahan [continuing]. To the problems. And somehow or other we have to open Mr. Nader's eyes to that fact, and if that is impossible, which it probably is, regardless of the facts, he has found another way to get national attention and he is going to milk it for all it is worth. That is his living, and that is his life, but I think he is doing the country a great disservice by his allegations, giving indication to the American people that this is some type of corporate welfare program, because it is not, as you well know. So with that, I am happy to see that some of our members have now joined us. Either one, whoever has questions. Mr. Packard. Mr. Packard. Thank you, Mr. Chairman. All of your programs, I think, are effective and are doing good things. I was not as enthusiastic, Mrs. Rodriguez, about your reduction in Eximbank funding as you are. I would prefer, frankly, to see it kept at level funding. I think the administration has cut back in that area perhaps to increase funds to Russia or other places, but I would prefer it go to Eximbank activities. Taxpayers' Return on Ex-IM Investment What kind of--Dr. Rodriguez, what kind of return do the American taxpayers receive on their investment in theEx-Im Bank, I think you covered that to some degree in your testimony. For example, over the past 5 years, how many dollars of exports have you generated for every appropriated dollar in the program? Ms. Rodriguez. I am very happy to hear that question, because really the answer shows the great contribution the Ex- Im Bank makes to the economy. Over the last 5 years, approximately $73 billion of exports have been supported by Ex-Im-Bank with appropriations of about $3 billion. That is, every dollar appropriated has directly supported about $20 of U.S. exports. If you include the accompanying finances since--we are allowed to support only 85 percent of the export value--that leverage factor goes up to 25, 25 to 1. I would say that is a great return to American taxpayers. Mr. Packard. That is very commendable. What efforts has Ex-Im Bank undertaken in the last few years to develop better programs and better use of your budget? Ms. Rodriguez. We are very mindful of the intent of the Congress and the Administration to eventually reach a balanced budget, and we want to do and have been doing our share. This has taken several forms. One is much tighter scrutiny of transactions in terms of whether we are really needed in a transaction. I mean, we have always done that as part of Ex-Im Bank's mandate, but as judgment, you can apply different levels of scrutiny, and there is no question in my mind that scrutiny has been intensified. We have also been working to structure the transactions in such a way that they require less funds in appropriations. Let me give you two examples. The Project Finance Division The Project Finance Division was established as a separate division in 1994. Although we have done project finance before, we created a separate division with the explicit mandate of pricing so budgetary effect will be as close to zero as possible. Last year, we supported over $2 billion in project finance, and the budget used was around $50 million, which is quite a nice multiple. In addition to that, we have in Russia instituted the practice of pricing non-sovereign strcutured transactions separately, which led to better management of the price and the risk of the transaction. This has had a bonus in terms of budget use because under the previous regime, there would have been only one price charged for all private transactions. Once you are allowed to segregate them according to the risk, you are able to charge higher prices for the riskier transaction. Those are just three examples of what we have been doing. Reductions Mr. Packard. Did I hear in your oral statement earlier today that you are having to cut back on staff and perhaps programs because of the reductions? Ms. Rodriguez. We have committed to a reduction in full- time equivalent as part of the Government-wide program to do so. As to reductions in the use of the program budget, this year the submission is for a lower level than last year. Mr. Packard. Yes. I guess my question is, is there a linkage between the cutbacks in your proposed funding level and the need to cut back on full-time equivalents? Ms. Rodriguez. No, not necessarily. The two numbers, in a sense, are computed separately. The number for the program budget is calculated in terms of the demand and the composition of that demand, what countries and the risk associated with the demand in those countries. The number of employees of full-time equivalence is a function of what kind of work needs to be done. Sometimes the large transactions do not necessarily require the most time on the part of the staff. Sometimes it is the smaller transactions that require a larger amount of time by personnel. Mr. Packard. I guess the question I would really like answered--and maybe I am not stating it right--is if you were given funds equivalent, level, to last year, which is quite a bit more--what, $90 million--more than what the President is requesting, would you be able to do more export work and more leveraging of the funds? Ms. Rodriguez. The answer is yes. Given the problem we are confronting this year, as I mentioned during the oral testimony, there is a real possibility that we will run into 1998 with an overflow of transactions from 1997. Under those conditions, clearly additional funds could be used. Mr. Packard. So the bottom line: As you are proposing to cut back, the bottom line is, we will be reducing services in our export and import work. Ms. Rodriguez. The bottom line: If the demand is larger than anticipated, we will have to create new ways of financing exports. Mr. Packard. Prioritizing? Ms. Rodriguez. Better risk assessment and risk sharing and other alternative ways of handling it. Mr. Packard. Thank you, Mr. Chairman. I have no further questions at this time. Mr. Callahan. Mr. Frelinghuysen. Mr. Frelinghuysen. Thank you, Mr. Chairman, and following your lead from earlier hearings, I would like to take a minute to introduce a student from my congressional district. Laurie Patrick, who is with us today, from Flanders, New Jersey, is a junior in college. And for our witnesses, Laurie has been doing a college research project on the Export-Import Bank, so she has been helping me prepare for these hearings. I won't place any responsibility on her for the way I may ask the questions, but she has been a valuable asset. Mr. Callahan. Laurie--welcome to our committee hearing. We encourage you, as you finish your project, to give us your estimation as to when Ex-Im Bank can be a freestanding entity. Welcome again, Laurie. Mr. Frelinghuysen. This is all within 30 days, Mr. Chairman. My question might be directed to all of you, but perhaps to Mr. Grandmaison, the director of the U.S. Trade and Development Agency. You talk with great optimism, and let me say that I am supportive of the work of all of your agencies, even as I learn more as a new member of this committee of what all of you do. But all of you have a high level of optimism, and you appear to show the committee tremendous results, greater rates of return, potential success fees, some pretty impressive figures. Cumulatively, TDA projects have resulted in higher exports. While you have the necessary optimism, which is what we, as a committee, want to hear--what have been some of the areas where you haven't been so productive? I wouldn't classify them as failures, but I assume you must have a win-loss record. Youhave dropped your wallet there and any available money--looks like it is a pretty thin billfold. In all seriousness, you come here telling a very positive story. I think we want to be supportive, but I would like to know whether there are aspects of this economic warfare, which one might consider to be rather ruthless, considering the money other governments are putting into the battle. What have you won and lost, and what have you expended in those types of situations? win/loss ratio Mr. Grandmaison. Thank you very much for the question. Our win/loss ratio is really 1 in 3. It must be remembered that we invest very, very early in a project, and we divide the type of projects that come to us in three categories. The first third would be projects that will presumably go forward, irrespective of U.S. Government involvement. In those cases, we don't get involved. We don't believe--we don't bring additionality to the table. There is no reason why the American taxpayers should invest in that project. The last third are dogs; nothing is going to make that project happen. So therefore, what we have to try to figure out is the middle third--how, through our involvement, we can make them a successful project. We have a 1 in 3 record along that line. Mr. Frelinghuysen. So I guess this is clear: There are some you don't enter into; then there are some that you classify, as you call them, in the canine category, the dogs; and then there is a group where you assume a degree of risk, and that is what you are going to be concentrating on. Mr. Grandmaison. That is correct. And of those projects, one in three is successful, which is exceptionally high in terms of a win/loss ratio, given how early we invest in a project. Now, the reasons often why--keeping in mind some of the investments, the purpose of the feasibility study is to determine whether the proposed project is feasible, and obviously in some cases the research determines that it is not. Therefore, those are not going to move forward. In other cases, what happens--and this gets into Mrs. Rodriguez's point relative to the financing--it is conceivable we may come in and offer the study money and do the study, but at a point in time the OECF, the Japanese fund, comes in and says, we are going to do the financing. At that point in time, our company gets pushed out unless they are, in unusual circumstances, able to make arrangements to use OECF financing to use U.S. procurement, which is most often not the case. We are optimistic, I would guess, because there is an inherent belief that if our companies are given an opportunity to perform on that level playing field, we will offer best value, best goods, best services. Where, as an agency, we sometimes are discouraged, it is usually when an American company loses faith in making a project work. There is a--not every company should be going overseas. The reality is that you need deep pockets in these risky markets in order to survive. Mr. Frelinghuysen. Well, in the limited time I have, I would like an example. In other words, you have been somewhat country specific, and you have mentioned a lot of countries, but unless it is proprietary information, I would be interested in knowing an example of something that has not worked out, and give the committee an idea of how much it cost in terms of our partnering with somebody from the private sector. russia Mr. Grandmaison. A specific example by company I am not able to give you at this point in time, but I will give you a broad example--I will be happy to provide you with it, but let me give you a broader set of examples, and they have to do with Russia. We happen to have a very exciting program in Russia. Over the course of the past several years, it has been our largest program, primarily because of the money that has been transferred in under the Freedom Support Act. Companies have to have, in most cases--in our Russia program, there is a U.S. company that has been identified as being interested in a marketplace. The time it takes for anything to come about in Russia is truly unbelievable. Often what happens is, a U.S. company will lose faith, and we find ourselves going back to them and encouraging them to go the distance with us on this project, to the point, in all honesty, of saying: Let's go back and renew our partnership. What else can we do? Can we bring the U.S. Ambassador in? Can we use some advocacy over at the Commerce Department to help? Mr. Frelinghuysen. You are giving me some parameters here, but what might be the average commitment of U.S. tax dollars towards a typical Russian project? Let me say I have a number of people in my district who are fairly ingenious, innovative, entrepreneurial driven, who are over there, who tell me--and I am very supportive of what your agency is doing--that it is a den of thieves in Russia, that there is thuggery, corruption, and we should watch very closely any money we send abroad. I am not going to worry with other countries' investments, but from my own perspective, I would like to know specifically if we have been taken to the cleaners. I will believe your optimistic statistics, but I think there are lessons to be learned from the failures. So what would be a project that did not succeed? average feasibility Mr. Grandmaison. The average feasibility study is $33,000. The U.S. company, on average, would have added to that 72 percent of their own money, which means the total cost of the feasibility study is somewhat over the half-a-million-dollar mark. Often a company will come to us, and again I will be happy to provide you with the specific examples of situations where, as I described it, a company has learned through the process they don't wish to follow through. But often what we get called upon to do--and if you will forgive me, I will use a New Jersey company as an example. Lummas Crest has had great success in Russia. However, as recently as last week, they were in to talk about a specific project. All they needed from us was $164,000 on a 400-and- some-odd-thousand-dollar project, but what we lent them was the imprimatur of the U.S. Government being interested in that project, and when it comes about, they return the money to us. What you have to do, what we learned, what you have to do in that sort of an environment, is you have to keep the political profile, if you will, the priority, high on the project, if you want it to be successful. So that, yes, I have never been one to disparage the value of a dollar, and yes, that is a contribution, but more often than not it goes back to what the chairman referred to in terms of, it is the U.S. Government's credibility that comes in. Now, in that particular case, we have every reason to believe it will again be a successful project, but there are cases, and often businesses--we don't try to influence a business. We have no right to influence a business in terms of making its own business decisions. All we can do is say, if you make this decision, this is how we would be willing to work with you. In some cases the projects don't come about. The overall successes, I would suggest, are very, very high. We are the feeder system for Exim and OPIC to a great extent. A third of the exports that we facilitate are financed by Eximbank. A third are financed by the host country's own resources. But it is getting in early through the door that hopefully tilts it to our favor but, at the very least, makes it a level playing field. Allow me to get you more specific information, please. Mr. Frelinghuysen. I would like that. I am not sure if the chairman will give me leeway to ask some more general questions. I think all of you tie together quite nicely and complement one another, so this relates more to the OPIC mission. opic From what I can gather, OPIC provides sort of political risk insurance. And what about the whole idea that providing insurance against that risk--aren't we sending--to a certain extent, wrong sort of incentives to those governments. In one sense, we are providing political risk coverage, but, on the other hand, we are allowing these types of conditions to exist, tolerating their existence. Ms. Callear. Actually, it is far from that. The fact that OPIC is involved in a transaction puts the project company, the U.S. investor, on the host country's radar screen. These U.S. investors might not otherwise be on the radar screen if they were going in without the support of the U.S. Government. The host government knows that that company is coming in with insurance that covers against expropriation, against political violence and against convertibility. They also know that if they violate international law with respect to expropriation or if they violate their own internal rules on the convertibility of their currency, the U.S. Government is going to step in and an issue that might otherwise have been simply a private sector dispute becomes a government-to-government issue. So really, OPIC provides a very catalytic role to make sure that these problems receive high-level government attention and that they get resolved. And the fact that OPIC's a track record on claims recoveries is as good as it is, the 98 percent record that we had described earlier, says that when we sit down at the table and negotiate with these governments, these violations are corrected. The companies are compensated in the end for any acts that occur, and, during that process, these foreign governments begin to understand even more the fact that if they want to compete successfully for private investment-- and it is a very competitive environment, every developing country wants this foreign investment--that they have to play by a fair set of rules. Mr. Frelinghuysen. Does the scale exist as to who has been most cooperative? And is your involvement mirrored--your greater involvement in those particular cooperative countries, is that mirrored by a greater investment there? Let's say there are some bad actors. There are a few we saw on our recent committee trip to Haiti, for instance. Ms. Callear. Sure. It is a very, very good question and a good point. Private sector investment flows are going to follow good investment regimes and good investment climates. Companies need to know there is certainty, that there is transparency; if they make an investment and make a profit, they can repatriate it to the United States, and that is the market at work. Countries that have good regimes and good investment climates are going to garner more investment. What we are trying to do early on is to help level that playing field for the American companies so they can go in and compete with other countries who are already in there competing. We also are trying to make sure that the U.S. invstors have these protections and yet, at the same time, we are always pushing for reforms, both on a project-specific basis and in terms of working with the other elements of our Government as a foreign policy tool, as a development institution, making sure that appropriate reforms are always pursued. So we see it as a very catalytic role, not simply one where we suffer these bad actors but where we actively prompt them to make changes, and then the private sector reinforces that by making their investment decisions. Mr. Frelinghuysen. Just for the record, I am not sure whether you provided the committee or you will provide for the committee, you have a certain budget number. I would be interested in knowing what you actually sought from OMB. Ms. Callear. Well, we obviously support the administration's request---- Mr. Frelinghuysen. Some people share that with the committee, and it actually helps to provide a greater degree of cooperation. Mr. Callahan. That is like asking General Shalikashvili if he asked for more money for defense or not. They are not going to tell you. Mr. Frelinghuysen. I figured no harm getting it on the record, Mr. Chairman. I have a number of questions I would like to submit more for the record, if I may. Mr. Callahan. Thank you. We are going to try to wrap this up. We are going to give Jack an opportunity in just a moment, but let me just run through, and I recognize your professionalism and your knowledge of these subjects. You must recognize we only have a few minutes for answers. russia But we have been hearing a lot. Senator Domenici told me last night he had just visited Russia and one problem they have there is the fee system in Russia. He says there is an 80 percent tax on deposits. Therefore, if a businessman goes to Russia and he puts $100,000 in the bank to make his payroll, the Russians in some instances are taking $80,000 of that money in the form of a fee. We wonder if you are running into this type of opposition to the entrepreneurial investment in Russia or any other country, any type of fee on deposits, which, if that is the case, no one is going to invest in Russia, and your RBI of 333, as Congressman Frelinghuysen has mentioned, is going to go from 333 to maybe 100. So we would like to know what you can find out about that deposit fee in Russia, because if that is the case, free enterprise will never prevail in Russia. He said the businessmen that he talked to actually had to carry cash in their briefcase to make their payrolls, and not deposit it in banks because of the fee. latin america Secondly, I was pleased last night, and I want toemphasize to you, all three, that this committee has visited Central America, Latin America, and the Caribbean. We, as a body, think that this hemisphere has been ignored by the administration, that your concentration seems to be now in the Middle East or either the Far East or in Europe or the former Soviet Union. And the President last night emphasized that the direction of this administration is going to be that we are going to first recognize the needs of this hemisphere. And I was so pleased to hear him say it, because I have not heard anyone else in the administration say that as forcefully as he said it last night. This committee has been suggesting that. We think you should recognize the opportunities in Latin America, in Central America, in the Caribbean, and in South America, because we are losing out to the Europeans. We are losing out tremendously, because now South America is buying more from the Europeans than they are buying from the United States. We can correct that if we stop ignoring them and recognize that there is something in this hemisphere other than Haiti. haiti We visited Haiti, this committee did, and let me tell you, it was sickening to see it. Zero progress made. Now, maybe progress was made, maybe they have risks, but God help them if they were lower than they are now, because it was absolutely sickening to see. No indication of any progress there, yet the administration for the past couple of years has been saying let's spend all of our money that is available for this hemisphere in Haiti. We, as a committee, put a stop to that, and we have requested that only 20 percent of the monies available for this hemisphere will be spent in Haiti. We would encourage you to adopt the same type of percentage philosophy, to recognize the needs here and to recognize the opportunities here and what is going to happen if we permit the Japanese and the Germans and the French to take over the economics of this hemisphere. jamaica The Japanese are spending millions and millions of dollars in Jamaica. While we are concerned about the human rights and all of the human misery in Haiti, the Japanese are building airports and roads and creating industry in Jamaica. That is taking all the opportunity away from American businessmen to be doing the same thing. So we have got to recognize it, and I encourage the three of you to emphasize to your staffs the importance to this committee of you recognizing that most--not all of it, but a higher percentage of your concentration should be made on countries in this hemisphere. I am not sure what OPIC would have to do with it, but I had suggested to the Ambassador when we were in Jamaica that the prominent Jamaicans try to get an enterprise fund established for Jamaica. There are, I think, 1 million Jamaicans living here in the United States, some of them extremely influential and successful businesspeople who would be willing to help fund an enterprise fund that could directly help Jamaica, and all it needs is organization and effort. And I think that we should concentrate on setting up an enterprise fund or some special fund. I talked with General Colin Powell. He indicated he would be the honorary chairman of it. So we have an opportunity there we are overlooking, and if any of you have the opportunity to move in that direction, I would appreciate it. And maybe in the essence of time, because we want to give Jack time, let me just tell you that we are concerned with what is now being referred to as participation by people connected with the government in any type of new endeavor in any country where they are being told, private businesspeople, if they want to obtain a contract where the government of that country is involved, they are going to have to allow participation without any contribution--incidentally, participation by either former political, or cronies of incumbent political, people in those countries. And we think your contracts should be transparent. We think the question should be asked: Have you ever been approached by an official suggesting participation without contribution in any of the countries where you are doing business? This is a grave concern of American businesspeople. This is why you can't get people interested, because when they go into a country like Haiti and are told that regardless of the size of the project or the cost of it, they must put up 25 percent of the stock of that new company and give it to some former official or relative of that official, that has got to stop. And I don't know how you stop it, but I do think you should make extensive inquiry to the participants, to your customers, or to your vendors, if indeed they have been requested or that there is any participation by someone who is not making any contribution towards the establishment of the capital of that company or towards the establishment of the workings of that company. And I think that you should design questions which should be asked on every loan, if this has been requested of them and if indeed it is so. We talked about this to Jim Wolfensohn earlier this week. He indicated there is no problem, but I can assure you there is a problem. Mr. Kingston, we welcome you to the committee, and we are going to give you as much time as you wish. However, I am going to leave here in 4 minutes. But you can stay as long as you want, and I am sure they will be happy. ukraine Before I go, let me announce to the committee that we have rolled all the members with regard to the supplemental bill that is floating through Congress now, some language for inclusion in the supplemental. It involves the former Soviet Union and especially, I guess, Ukraine, whereby we are suggesting that the earmark be removed that was put in in conference and by the Senate for the Ukraine. We have polled the committee; we find no objection, and having heard none, we will forward this language to the full committee for inclusion in the supplemental. Mr. Kingston. Mr. Kingston. Thank you, Mr. Chairman. Ms. Callear, I don't have it with me, but I understand there was an article in the Boston Globe a couple of weeks ago. Are you familiar with that article? Ms. Callear. Yes, I am familiar with that article. Mr. Kingston. Now, I only heard about it on the radio, I think, but the article said something like that of the number of companies who contributed to the Clinton administration, there were only three that did not get OPIC loans. Is that---- Ms. Callear. No, I think that is not quite what it said. The article implies that there were companies who have received OPIC loans or insurance who may also have made contributions. The article did acknowledge that many of those companies have made contributions to both the Democrats and the Republicans. We had also written a response which the paper printed before Ruth Harkin left OPIC. Our response is very firm: there is no company who receives any OPIC support, whether it is political risk insurance or financing, that does not do so on the merits. We---- Mr. Callahan. Why don't you provide a copy of your response for the record. Ms. Callear. We would be glad to do that. [The information follows:] [Pages 500 - 501--The official Committee record contains additional material here.] Mr. Kingston. I guess I am really more concerned because I can understand the big dogs eat both sides of the aisle. There were only a few companies, though, that did not get loans. Ms. Callear. I don't think that is the case. It was a list of companies that apparently had been pulled out of our annual reports over the last several years. Our response also pointed out that when you look at that list many of those companies have been OPIC clients for many years. So there is nothing new or particularly interesting about this, other than someone comparing annual report listings with contribution records and, assuming that there is a connection. This connection absolutely does not exist. Mr. Kingston. Were there lots--well, now, I think--excuse me, I will stop on that, keep that thought in my head, Mr. Chairman. But there are, presumably, hundreds of other companies who participate in OPIC who are not politically active, who don't have lobbyists. Is that fair to say? Ms. Callear. Certainly. Mr. Kingston. And the reason I want to emphasize that is because I understand if you make a loan to McDonald's, there are other small interests who benefit from it, but McDonald's is the one that everybody is going to jump on as corporate welfare. But I just want to hear it directly from you, there are lots of other small companies that weren't in at that article that don't contract to politics, that don't have lobbies, that don't have Washingtonian and so forth. Ms. Callear. Absolutely. We support a tremendous number of small companies and have done so over the years. Some have never found their way to Capitol Hill, and many wish not to come here. So the bottom line is: OPIC financing, and insurance is provided on the merits and always has been. Mr. Kingston. All right. Mr. Chairman, I yield. Mr. Callahan. Thank you. We appreciate you all coming today. We are sorry to delay you with the interruption, but we appreciate your professionalism and thank you. [Questions and Answers for the Record Follow:] Submitted to Trade and Development Agency Questions for the Record From Mr. Frelinghuysen levelling the playing field Question. In a perfect world where emerging markets posed no risk to investors and where the U.S. had a fair shot on a level playing field, would we need your program? I know that we are pursuing a more level playing field through OECD negotiations and other avenues. What are your thoughts on the success, or failure, of those efforts? What can we realistically anticipate the playing field to be in the near term and over the long term? Answer. Realistically, we do not anticipate a time when Export Credit Agencies will cease to exist, though we are pleased that U.S. leadership in OECD negotiations has produced tougher rules regarding their activities. In such an environment, our competitor nations will always seek to gain a competitive edge where ever they can find one. Support for feasibility studies is one example, and as long as our competitors are in this business, the U.S. must remain engaged as well. Questions for the Record From Ms. Lowey middle east projects Question. Could you give us a status report on some of the Middle East regional projects TDA has been involved with in the last five years? Where do they stand now, and how has TDA involvement contributed to their success? Answer. TDA has an exciting program in the Middle East. Though we have supported a number of projects in North Africa and the wider Middle East for some time, we are proud to have been at the forefront of U.S. government agencies supporting the peace process, and we have significantly expanded out Middle East program since 1993. Following the signing of the Declaration of Principles between Israel and the PLO in September 1993, the State Department asked TDA to consider how we might make a contribution to advancing the peace process. TDA set out to demonstrate to Middle Eastern communities that peace will also bring economic prosperity. We do this by bringing the strength of the U.S. private sector to bear in developing Middle Eastern infrastructure that will improve the lives of local peoples. In January of 1994, the first TDA team arrived on the ground to identify projects and recommend potential TDA investments in the power, telecommunications, transportation, and water sectors in Gaza and the West Bank. Shortly thereafter, we sponsored two Training Visits of senior Palestinian officials in the telecommunications and power sectors to the United States to meet with U.S. firms active in those sectors. After the signing of the Israel-Jordan peace treaty in October, 1994, we held our first major event in the region--the Jordan Rift Valley Development Symposium, January 30-February 1, 1995. Then Israeli Foreign Minister, Shimon Peres and HRH Crown Prince El Hassan Bin Talal of Jordan presided over the event. In fact, the occasion of this symposium represented the first visit to Jordan by a sizable Israeli delegation of Private sector firms. The symposium showcased business opportunities for U.S., firms in a region which is a development priority for both Israel and Jordan. Despite the great challenges of doing business in this region, TDA has achieved some notable successes. We have invested more than $5 million of our roughly $40 million annual budget throughout the Middle East, including North Africa, since 1994. The following three projects exemplify what we have done and what we hope to do in this region in the future. Jordan Israel-Fiber Optic Telecommunications.--Telecommunications has been a target sector for TDA activity in the Middle East since our first Orientation Visits in early 1995. In 1996, TDA invested in a feasibility study of a proposed fiber optic telecommunications link between Jordan and Israel. This cable system will result in greater telecom connectivity between the two nations. Booz-Allen Hamilton is conducting the study which is expected to be completed this summer. Potential U.S. exports exceed $15 million, as the project will require optical fiber, switching, transmission and network management equipment. Gaza Business Center and Hotel.--In 1994, TDA made a grant to General Resources Design Group in support of its proposal to construct a business center and hotel just outside of Gaza City. This small Virginia based hotel developer has arranged engineering, construction and financial packages in support of the project, and construction began in March of this year. TDA's early support was critical to moving the project beyond the planning stages. Orders are already being placed for U.S. exports in excess of $20 million for water and sewerage equipment furnishings and fixtures, and construction management services. Cairo Metro Line 2.--TDA provided the Egyptian National Authority for Tunnels a Training Grant in 1992 to position Parsons-Brinkerhoff to compete for the engineering and project management contract in the construction of Line 2 of the Cairo Metro system. The grant enabled U.S. companies to beat tough French competition by getting in early and defining the project from the beginning. Parsons-Brinkerhoff has already been awarded a $32 million contract, of which $24 million will be sourced in the U.S. We have recently learned that the firm has been awarded a second contract worth $11 million which the original TDA activity was also instrumental in facilitating. Submitted to Overseas Private Investment Corporation Questions for the Record From Mr. Frelinghuysen investment encouragement Question. OPIC wastes American capital by encouraging companies to undertake ventures they would not take if they had to bear the risk. OPIC alters where companies invest, not how much they invest. Please respond. Answer. OPIC does encourage U.S. companies to invest in regions of foreign policy importance. However, while OPIC programs mitigate some project risks in exchange for premiums and fees, OPIC does not guarantee the profitability of a project. These companies bear the full risk of the success of their projects. And the fact that OPIC has consistently generated profits in an indication that the premiums and fees it charges for its services are appropriate for the risk incurred. Instead, these U.S. companies are able to use OPIC programs to help them manage the risks of investing in developing countries, and thus take advantage of profitable investments in these fast-growing economics. For companies active in mature sectors of the U.S. economy, such as power, OPIC programs help them utilize and maintain their competitive edge and technical leadership position by expanding overseas. This helps to increase the global competitiveness of U.S. companies and actually increases the future capital base available here in America. After taking into account initial capital outflows and the reflow of profits, interest, principal, royalties, and technical fees over the first five years of operations, projects assisted by OPIC since its inception have resulted in a net positive gain of $274 million, with even larger gains thereafter. Furthermore, unavailability of OPIC assistance does not mean that companies will invest in the U.S. instead of investing abroad. They will simply seek assistance from other governments, and source the necessary equipment from the assisting country. For example, Enron International of Houston, Texas has $1.4 billion in current to prospective projects in China, Pakistan and Vietnam, where OPIC programs are not available for foreign policy reasons. Enron plans to use German, Japanese and French equipment and services, respectively, for those projects. However, a single OPIC-assisted Enron project will generate $310 million in procurement from 260 suppliers in 21 states, resulting in 1083 jobs for Americans. OPIC programs help capture the benefits of international investment without displacing investment in the U.S. economy. self-funding Question. Although it is supposedly a corporation, OPIC pays no taxes. If anything, it displaces taxpaying activities. Furthermore, it pays no dividends to the Treasury. In 1994, two-thirds of OPIC's income was derived from interest on Treasury securities. This represents merely a transfer of funds from one government to another. Please respond. Answer. OPIC was established in 1971 as a wholly-owned government corporation to facilitate U.S. private investment in developing countries and emerging market economies. Its authorizing legislation specifically exempts the corporation from paying taxes of any kind, and as an agency of the Federal government, this is neither unusual nor atypical. OPIC has, in fact, paid dividends to the U.S. Treasury throughout its 25-year history. In 1982 and 1983, OPIC paid a total of $106 million in dividends, representing a return in full of the start- up appropriations OPIC had received from 1971-1974. With the passage of the Credit Reform Act of 1990, OPIC was required to accept direct appropriations to fund its credit programs even though it had always funded these programs with its own earnings. To indicate that OPIC is capable of self-funding its credit programs, OPIC has, for every year it has received direct appropriations, declared and paid dividends equal to the direct appropriations it has used as result of the credit reform law. Between FY1992 and FY1996, OPIC paid dividends totaling $95 million. OPIC's authorizing legislation further stipulates that OPIC can invest earnings in U.S. Treasury securities. Congress recognized that OPIC, like any prudently run financial institution, or insurance company, must invest its excess cash to build strong reserves. Congress' decision to permit investments only in U.S. Treasury securities no doubt stems from the recognition that: Treasury securities represent a reasonable rate of return with minimal risk. Treasury security investments guarantee that OPIC's significant cash reserves stay within the U.S. government and are available for the government's cash needs. If OPIC had been able to invest outside the government, its investments over the past 25 years would have created a portfolio worth nearly $7 billion, rather than OPIC's current reserves of over $2.7 billion. Even at the $2.7 billion level, however, OPIC's reserves provide solid protection to the taxpayer that OPIC will not have to draw on tax dollars to cover claims, should they arise. This is backed by OPIC's impressive record of claims recoveries. prudent management Question. OPIC is generally described by its proponents as a fiscally conservative agency that has a long history of managing risk. While that may have been true at one time, this claim is not supported by recent events. OPIC has changed dramatically in the past several years. It has grown rapidly, it has offered new products and it has entered some of the riskiest regions of the world. These trends call into question the agency's commitment to prudent management. Please respond. Answer. While OPIC's portfolio has grown over the past few years, it continues to apply the same stringent standards in reviewing projects and assessing project risk. OPIC recognizes that entering new markets and offering new products requires increased attention to risk management. OPIC continues to monitor its portfolio closely and insist on diversification. To date, there are no indications that the new regions in which we offer products demonstrate a level of risk higher than the areas in which we have traditionally been involved. Indeed, during our 25-year history, OPIC has been involved in certain very high risk areas--Iran and Vietnam, for example--and has provided investment support to our clients without exposing the U.S. taxpayers to major losses. It should be remembered, however, that one of OPIC's functions is to provide investment assistance to American businesses that cannot receive it from private sector sources, which may be unwilling or unable to operate in certain countries. Of course, once that climate improves, OPIC is ready to step aside to allow the private sector to take over or to cooperate with it in joint underwriting or co-lending. While OPIC is willing to accept a somewhat higher level of risk, in so doing, OPIC applies sound risk mitigation practices--such as portfolio and sector diversification--to ensure that the risk it accepts is carefully managed. We also require investors to share in the risk by contributing significant amounts of their own capital to the projects. Finally, OPIC manages its portfolio of projects on a case-by-case basis, and each project is structured to deal with the unique risk factors inherent in it. By applying all these measures, OPIC is able to ensure that the actual impact of the risk taken on is kept to a minimum. Questions for the Record From Ms. Pelosi environmental reforms Question. The Authorization Committee is considering imposing several new requirements on OPIC that include more transparency and public participation, raising standards on environmental compliance, independent auditing and the submission of an annual report to Congress. Can you comment on your willingness to abide by new requirements in each of these areas in the context of reauthorization. Answer. Your office has been helpful in conveying to OPIC several proposals advanced by environmental organizations along the lines suggested in your question. Your staff has also organized a meeting with environmental groups to discuss various proposals. OPIC has always been a leader among its international counterparts in developing and maintaining environmental standards. In that spirit, we are developing new provisions on transparency and public participation and welcome the opportunity to report to Congress. Question. One concept is that OPIC be required to ``harmonize upward its environmental standards to meet the higher of the host country, World Bank, World Health Organization or US domestic standards. Can you comment on your work under this kind of requirement. Answer. OPIC rigorously implements the provisions contained in the Foreign Assistance Act (FAA), regarding environmental protection, social impacts and human rights. OPIC already applies the more stringent of host country or World Bank environmental standards to its assessment of each prospective project. It is worth noting that although the World Bank itself continues to apply standards issued in 1988 OPIC applies a more rigorous version of the World Bank standards that were developed by the Bank as a draft in 1994, but not formally adopted. Where host country or World Bank standards are absent or dated, OPIC draws on U.S. domestic or, in some cases, World Health Organization (WHO) standards. With respect to current environmental practices, OPIC has assessed the environmental impacts of every project considered for support since 1985, when the environmental provisions were added to OPIC's authorizing statute. As a result of these assessments OPIC has declined to support projects that did not meet the standards set forth in the FAA. OPIC has also thoroughly implemented the host country notification provisions set forth in the statute. The procedures set forth in OPIC's environmental handbook, including public notification of pending projects and public release of non-business confidential information during the application process go well beyond what is required by the FAA. The International Union for the Conservation of Nature has cited OPIC as an example of a bilateral investment financing and insurance agency that uses World Bank guidelines as minimum standards. OPIC has also faithfully implemented its mandates regarding worker rights and human rights OPIC's mandate requires that OPIC operate its programs only in those countries that are ``taking steps to adopt and implement internationally recognized worker rights.'' In implementation of this provision, OPIC has suspended its programs in a number of countries on worker rights grounds. These decisions have been made as a result of OPIC's annual public hearings at which labor and human rights organizations testify. OPIC's mandate also requires that OPIC insurance contracts and finance agreements contain language committing the US sponsor to observe internationally recognized worker rights. OPIC has not only applied this language to all projects, but has supplemented it to provide additional protection to workers where the standard contract language is not sufficiently protective. OPIC's implementation of its human rights mandate takes the form of consultation with and clearance by human rights officials at the Department of State for every project that OPIC considers for insurance or finance. This has been the case of every project OPIC has supported since OPIC's human rights mandate was enacted in 1978. Considering OPIC's record of implementation of its environmental, social and human rights mandates, we believe that OPIC's record is exemplary with respect to these mandates. opic participation in direct investment funds Question. OPIC Participation in Direct Investment Funds I understand that OPIC supports almost two dozen direct investment funds which are privately owned and managed. Some of these funds have screening requirements for meeting social and environmental criteria, however, the majority of them do not. How does OPIC ensure that its environmental, development and worker rights standards are upheld by the private financial intermediaries? (Examples of OPIC investment- Africa Growth Fund, AIG Brunswick Millennium Fund, South Asia Integration Fund, Emerging Europe (Fund) Answer. In fact all OPIC supported investment funds have requirements for environmental, development and worker rights standards with respect to the funds itself as well as the subprojects in which the funds invests (`subprojects''). The environmental screening process is consistent with the assessment process used for prospective OPIC insurance and finance projects, including environmental impact assessments for projects with potentially diverse, significant and irreversible impacts and environmental reviews of other projects. In addition, three of the funds--the Global Environmental Emerging Markets Fund I and II and the Aqua Global Fund--are focused on projects that improve the environment. Fund subprojects are screened for their development impacts and standard worker rights representations and undertakings are applied to all subprojects. Question. Do you favor expanding and refining of the types of projects OPIC is prohibited from participation in? Answer. Yes. OPIC has categories of projects it will not support under any circumstances and this list is always under review to make certain we fulfill our environmental mandate. Questions for the Record From Mr. Lowey project screening Question. One of the most important, and least discussed, benefits of OPIC is the requirements it places on projects to meet a high standard of protection of the environment, worker rights and the American economy. I understand that you screen new projects to ensure that they will meet these statutory mandates and you monitor ongoing projects for compliance with these mandates. Could you tell us a little about how the monitoring process works? What do you do when you find that a project is not meeting the mandates you have set up? Answer. All projects are subject to OPIC's annual investor reporting requirements for U.S. economic effects, environmental effects and worker rights. [Additional US effects monitoring requirements]. With respect to environmentally sensitive projects effects, OPIC requires regular reporting by investors on their compliance with OPIC guidelines on such matters as air and water quality as well as worker health and safety. All such projects are monitored on site by OPIC staff and/or OPIC consultants during construction and when the projects reach operational status. Worker rights conditions are also monitored on site when OPIC undertakes U.S. economic or environmental monitoring. If a project is not meeting OPIC contractual commitments, OPIC works with the investor to bring the project into compliance. If this is not possible, OPIC can take steps leading to termination of the insurance contract or loan commitment. freeport mcmoran Question. I understand that OPIC has canceled its contract with the Freeport McMoran mining project in Irian Jaya. Let me just say that I am very pleased with this turn of events. The human rights and environmental conditions at the mine are deplorable. But I'm interested in knowing why the contract was canceled. Was there inadequate research done of the part of OPIC in entering into this contract, or did the situation with the project change mid-stream? I hope the answer to this question will give us a good indication of how effective monitoring OPIC-supported projects can spot trouble projects. Answer. We believe that the termination of OPIC's relationship with this project demonstrates the effectiveness of OPIC's environmental monitoring process and the fact that OPIC is willing to take necessary actions to ensure that projects it supports comply with its statutory mandates. OPIC's issuance of the insurance contract for the Freeport project in 1990 was based on representations by Freeport concerning the scale of the project and the information from consultants hired by OPIC to visit the site and report on the projected environmental impacts of that level of production. At the time OPIC monitored the project in 1994 the scale of the project had been expanded substantially beyond the initial representations and the resulting environmental impacts were no longer consistent with the projected impacts nor with OPIC's statutory standards of acceptable environmental impact. In other words, the situation with the project did ``change mid-stream.'' caribbean market fund Question. I know that OPIC has begun to offer loan guaranty commitments to investment funds. Have you looked at expanding your work with these types of funds into the Caribbean region? The Multilateral Investment Fund (a part of the Inter-America Development Bank) is in the process of establishing a Caribbean Market Fund, and they have asked for OPIC's support. Could you comment on the status of OPIC's support for the Caribbean Investment Fund? Answer. OPIC recognizes that the Caribbean Basin and Central America lack investment capital for their development as markets and trading partners for the United States. Consequently, we would like to support an investment fund serving this region, and have met with several potential sponsors and managers who have proposed such a fund. It is particularly important that we support a manager with significant experience and contacts in the region, since it is spread over a wide geographic area, and the capability and requirements of each country in the area is different. To date, we have not been presented with a plan which combines effective and experienced management with a program of investment which could attract private equity and offer safety and soundness for an OPIC loan. However, we are working with potential sponsors to develop a successful proposal for a fund in this region. Questions for the Record From Mr. Foglietta corporate welfare Question. I know you can't come to Capitol Hill without defending your agency against accusations of being a corporate welfare program. I have had a chance to look at your program and the way it works. I don't personally think that OPIC is a corporate welfare program. Any program that returns money to the Treasury isn't welfare--it sounds like an investment that pays returns. Nonetheless, many of my colleagues do feel that OPIC is corporate welfare. One of the main problems is how we define corporate welfare. Could you give me an idea of how you would define corporate welfare. And how OPIC's programs differ from that definition. Answer. ``Corporate welfare'' lacks a precise definition, but some have suggested it is a special government subsidy. OPIC is not a welfare entitlement. If anything, OPIC is a model of corporate welfare reform: small, effective, non-bureaucratic government with no subsidy and where users pay the government's entire cost of operations. No corporation, big or small, receives any subsidy or grant or handout of any kind from OPIC. All clients pay fees for service--$1.2 billion since 1971. All clients must repay the money they receive from OPIC plus interest at market-based rates, and all clients pay insurance rates that are among the highest in the world. (1.5-2% of amount covered per year, more than competing rates of OPIC counterparts in Europe and Asia. No client receives automatic assistance, even if they qualify. All projects are analyzed on a case-by-case basis and undergo rigorous due diligence before any loans or insurance are granted. Question. I, along with others, have devised the idea to create an Independent Commission similar to the Base Closure Commission, to strike genuine forms of corporate welfare. The Commission would weigh the costs and benefits of programs that give unfair advantages to corporations and would make reductions in those programs. How do you feel OPIC's benefits outweigh its costs? Do you feel confident the OPIC would pass muster with this type of Commission? Answer. OPIC would welcome the type of review an Independent Commission on Corporate Welfare would conduct. Because OPIC, by statue, operates as a self-sustaining program, we feel very confident that the Commission's conclusion on OPIC would indicate that OPIC programs are the very antithesis of corporate welfare. OPIC's benefits are very real--we promote the development of market economies in developing countries and emerging markets while at the same time providing significant positive U.S. effects in the form of American exports and the creation of U.S. jobs: Over the next five years alone, OPIC projects will generate $43 billion in U.S. exports and more than 130,000 U.S. jobs. More importantly, we do all this at zero cost to the American taxpayer. Questions for the Record From Mr. Torres opic equity fund for caribbean and central america Question. Does OPIC have any plans to support an equity fund in Central America and the Caribbean Basin? How is OPIC encouraging the development of such a fund in Central America and the Caribbean Basin? Answer. OPIC recognizes that the Caribbean Basin and Central American lack investment capital for their development as markets and trading partners for the United States. Consequently, we would like to support an investment fund serving this region, and have met with several potential sponsors and managers who have proposed such a fund. It is particularly important that we support a manager with significant experience and contacts in the region, since it is spread over a wide geographic area, and the capability and requirements of each country in the area is different. To date, we have not been presented with a plan which combines effective and experienced management with a program of investment which could attract private equity and offer safety and soundness for an OPIC loan. However, we are working with potential sponsors to develop a successful proposal for a fund in this region. Question. What projects is OPIC undertaking to support the development of a private sector in the Caribbean and Central America? Answer. OPIC has been actively writing political risk insurance for this area for several years. OPIC is presently supporting $1 billion in political risk insurance for private sector projects in the Caribbean and Central America. Over the years OPIC has also financed a number of projects in the area. It currently has project finance commitments of $364 million and has a $250 million pipeline for additional finance projects. We have supported projects in a wide variety of sectors which will promote the private sector and sustainable development, including projects in power, telecommunications, financial services, food processing, and tourism. Submitted to Ex-Im Bank questions for the Record From Mr. Frelinghuysen leveling the playing field Question. In a perfect world where emerging markets pose no risk to investors and where the U.S. had a fair shot on a level playing field, would we need your programs? Quesion. I know that we are pursuing a more level playing field through OECD negotiations and other avenues. What are your thoughts on the sucess, or failure, of those efforts? What can we realistically anticipate the playing field to be in the near term and over the long term? Answer. In a perfect world in which U.S. exporters did not face an exaggerated perception of risk in emerging markets and a playing field titled by foreign official export credit, there would probably be no conceptual role for an Ex-Im Bank within the framework of current U.S. economic philosophy. However, this is not a perfect world and Ex-Im Bank is there to help correct market imperfections. Although some countries have been elevated economically such as the Asian tigers, it is highly unlikely that emerging market risk will disappear entirely in the foreseeable future. Regarding establishing a ``level playing field,'' this is an area where Ex-Im Bank is capable of exerting some significant degree of influence--through both its actions in support of U.S. exports and by participating in multilateral negotiations held under the auspices of the Organization of Economic Cooperation and Development (OECD). Right now, Ex-Im Bank enables U.S. exporters to successfully compete for sales of high value-added capital goods and equipment and highly skilled services in emerging markets. Working within budgetary and personnel constraints--with which our major competitors are not burdened--Ex-Im Bank makes every effort to leverage its resources to the fullest extent possible. Nonetheless, we cannot neutralize every competitor's best offer on every deal, and should there be no ``rules of engagement,'' we would quickly be overwhelmed by the sheer weight of the competition--who are all actively engaged in ``picking winners'' and promoting exports at any cost. In this context, the best and brightest source of significant relief is the negotiation table. Over the course of the past fifteen years of negotiations, the U.S. has been able to achieve significant reductions in foreign subsidies in the areas of interest rates and tied aid. We now are engaged in further efforts to tighten the existing rules and come up with the first ever set of restrictions on the subsidies inherent in exposure fees. The process of adopting multilateral rules to eliminate official export credit subsidies involve the following three steps: 1. creation of a system or framework of rules which can lead to reductions in subsidy; 2. establishment of a yardstick within the framework by which progress can be measured (e.g., charging ``market'' level interest rates or requiring a project to be ``commercially non-viable'' in order to allow tied aid); and 3. moving the yardstick higher (i.e., requiring ever-higher interest rates until ``zero'' subsidy is achieved, or increasing the minimum concessionality in tied aid). With respect to the interest rates that must be charged by official export credit agencies, we have already succeeded in reaching the final stages of step three. Tied aid represents another success story which can be characterized as having moved from step 2 to the beginnings of step 3. Finally, we hope to soon ink a deal on exposure fee subsidies which would create a framework for continuing reductions in these subsidies and establish the needed yardsticks as well. In summary, we have already achieved significant results via negotiation, and the prospect for further positive developments is bright--both in the near as well as far term. Although progress in the negotiations is slow and halting, once achieved it has a significant and lasting impact. Hence, there is no question that multilateral negotiations represent the best and most viable possibility for creating the ideal world identified in the first part of the question. in the real world--demand for ex-im services Question. What is the current demand for EX-IM financing and what is your projected spending for this year? Answer. Currently, Ex-Im Bank is experiencing a higher level of demand for its financing, particularly in the higher risk markets, than had been anticipated. For the first seven months of FY 1997, the Bank authorized $8.4 billion in loans, guarantees, and insurance which utilized $555 million of program budget. At this time, we are projecting that Ex-Im Bank will use all of the $726 million of program budget appropriated for FY 1997. Question. If you are ahead of schedule, will you cut off activity for the rest of the year? How will this affect your efforts to get more small U.S. companies involved overseas? Answer. Ex-Im Bank is looking at various options to handle the increased level of demand, and at this time we believe that this Bank will not have to cut off activity before the end of the year. But, some cases, which do not require approval this year, may be deferred into the next fiscal year. We do not anticipate that this budget situation will impact the Bank's short-term small business efforts, since those transactions are typically smaller in amount and require relatively less program budget. Question. Given this level of demand for your program, why are you asking for less next year? Answer. Ex-Im Bank's budget request for FY 1998 was based on the best estimates at the time the budget was prepared of the likely demand for the Bank's financing support. The Bank does not program funds but rather responds to requests for export finance assistance, and those requests have been running this year at a higher level than anticipated. tied aid Often, when we talk about the role of EX-IM, we focus on the need for EX-IM because of the unfair practices of our competitors. In particular, the practice of ``tied aid'' by other countries. Question. If this is the case, why aren't you using your tied aid authority? Answer. The theory behind the Tied Aid Capital Projects Fund (TACPF) is simple: If we keep the playing field level at every stage in the bidding/negotiating process of a project, U.S. companies will win export sales on the basis of superior quality and value of their product. In addition, foreign governments will be unable to ``lock-in'' long-run commercial advantages for their exporters. However, the bidding/negotiating process for these tied aid transactions usually takes several years before the foreign borrower makes a decision to award the contract. Consequently, this is one of the reasons why Ex-Im Bank has not utilized much of the TACPF as we have out in preliminary commitments. Moreover, some transactions originally supported under the TACPF may not require Fund use due to the withdrawal of the foreign tied offer by the foreign government--allowing for competition to be based on standard financing terms. This is another illustration of the success of the TACPF in that the foreign government decides that it is not worth engaging in the costly subsidization of the project through tied aid. However, without the leverage and the ability to match tied aid, which comes from the availability of the TACPF, the foreign government would probably have continued to provide tied aid financing to the detriment of the U.S. exporters. Thirdly, there are transactions where Ex-Im Bank offered the availability of tied aid to match the foreign tied aid offers for an entire project, but the U.S. exporters may only be awarded a portion of the project. Lastly, there are those scenarios where Ex-Im Bank matched a tied aid offer and the U.S. exporter loses the contract--not because of Ex-Im Bank's failure to match foreign tied aid--but rather due to non-financial considerations. Ex-Im Bank was able to level the financing playing field so the U.S. exporter could compete fairly on price, technology and performance. ex-im financial status and fees Question. Given your explanation of EX-IM's current shortage of funds, how do you assess your prospects for savings in the higher risk countries. (Background: Ex-Im currently projects a shortfall in 1997 of $200 million due to higher demand for loans and more loans to businesses in higher risk countries such as Russia, Venezuela, and Africa.) Answer. Ex-Im Bank, along with the Office of Management and Budget, is currently exploring options for savings in higher risk countries. Policies such as fee increases, and increasing the amount of direct loans as opposed to guarantees, can yield some savings in such markets. As far as project finance is concerned, Ex-Im Bank's projected 1997 transaction backlog will not entail project finance transactions in higher risk countries. In fact, with respect to your specific reference to Venezuela, currently project finance transactions are being covered by the private market since they find projects in the oil sector acceptable risk. This is also true of the Philippines. However, it is apparent that for 1998, project finance activity will primarily be in the higher risk countries which are not as ``appealing'' to the private market such as Turkey and Mexico. Further, we are mostly seeing infrastructure projects which earn local currency and not hard currency and do not exceed the country ceiling in terms of risk. Question. How are the companies being asked to pay higher costs for Ex-Im loans going to respond to this proposal. Will any loans not go forward due to the proposed increase in costs? Answer. There is a possibility that a fee increase will make U.S. exporters less competitive on some transactions. At present, Ex-Im Bank is already one of the most expensive lenders in most transactions. Raising costs further would be of concern since it may serve to steer export sales to other Export Credit Agencies if private financing is not available. Question. What is the status of your request for more funds within the Administration? Answer. As to the Bank's current program budget situation, the Administration is studying this issue and the various options that are available to address it but has not as yet reached a final decision on the appropriate action to take. Question. The FY 1998 budget assumes an increase in fees totalling $30-$40 million. That fee proposal has been stalled in the context of international negotiations with the French and Japanese. What difficulties does the fee proposal present in these negotiations, and what plan do you have to make up for the loss, if fees are not ultimately increased. Answer. The danger the fee proposal contained in the FY 1998 budget poses to the negotiations is that it strongly implies to our competitors that they do not need to negotiate seriously with the United States. Rather, external forces such as budget pressures will force Ex-Im Bank to raise fees unilaterally and our competitors will not need to give anything up to get the United States where they want us. Ex-Im Bank does have a variety of actions it could take to compensate for the absence of a fee increase. Which one and where would depend on strategic considerations at the time. russia ex-im program Question. The Partnership for Freedom initiative originally contained a request for $160 million for the Ex-Im Bank to conduct a special program in the NIS which would have differed from the regular Ex-Im program. That proposal has been modified as I understand it (down to $20 million for small business only). Tell us how and why the proposal has changed so drastically from its original conception. Answer. Since Ex-Im Bank needs to have its overall statutory charter extended this year, both Ex-Im Bank and the Administration determined that it was better not to introduce at the same time a new program which would necessitate a change in Ex-Im Bank's statutory standard of creditworthiness. The lesser figure about $30 million reflects what Ex-Im Bank may be able to do to assist small business in the NIS without any change in the Bank's creditworthiness standard but with additional administrative resources. Moreover, a more in-depth analysis will be conducted in the coming months to develop the type of program that could most successfully accomplish the goal of providing financing on commercial terms for small business in the NIS. Question. What factors are responsible for the recent increase in Ex-Im loans to Russia? Answer. Many of the programs that we have been working on over the past several years have now reached the stage of implementation. Thus, a significant portion of our recent activity has been under the Oil and Gas Framework Agreement and the Gazprom memorandum. We are also expecting the first cases to be processed under the forestry sector memorandum. We will be developing similar programs in the fishing and other sectors of the Russian economy. Finally, in November 1996 we opened in the commercial banking sector and expect to become increasingly active there. three gorges dam--status Question. Last year the Bank indicated that it was going to not approve the Three Gorges Dam project in China. However, they also indicated that they would continue to study the proposal. What is the status of your work on the Three Gorges project, and do you anticipate any change in your position on your participation in it? Answer. On May 30, 1996, Ex-Im Bank's Board of Directors withheld issuing Letters of Interest for the Three Gorges Project though it indicated that it could ``reconsider support for the project if the Bank received further information with respect to development and mitigation of the environmental issues involved in the project.'' In June, 1996, Ex-Im Bank's former Chairman and President, Martin Kamarck, visited China and reiterated the Bank's position for reconsidering support for the project. After his return, Ex-Im Bank sent a letter the Chinese buyer in July containing a detailed explanation of our concerns and outlined the type and scope of information that we needed in order to adequately review the environmental effects of the project. We also provided copies of this letter to the U.S. exporters and discussed it with them. At that time, Ex-Im Bank informed them that the information we requested in our letter would be similar in nature to that contained in a comprehensive environmental assessment of the project. During September of 1996, the U.S. exporters that had applied for the letters of interest dispatched an engineering consultant to China in an attempt to secure the necessary information about the potential environmental effects of the project. Following his visit to the region, where the project is being constructed, the consultant briefed Ex-Im Bank staff, including members of the Engineering and Environment Division on the results of his visit, and provided Ex-Im Bank with a report detailing the information he had obtained. While in China he had been able to obtain some of the information we had requested. However, although the information was useful, it did not address the whole range or scope of environmental information we requested in our July letter. Based on the results of his visit, it became clear that the process of obtaining the requested information remained difficult to pursue. Ex-Im Bank's Board of Directors was subsequently briefed by the staff on the status of its activity on the project. Staff also pointed out that in October 1996, Rotec, one of the three applicants for an LI, was awarded a contract for an initial phase of construction equipment supply without Ex-Im Bank financial support. In the interim, Ex-Im Bank's Engineering and Environment Division continues to review any useful information it obtains with respect to the project's status and its environmental effects. The Bank has also shared information about the project with officials from Japan's MITI and Germany's export credit agency in an attempt to persuade these countries to follow Ex-Im Bank's position with respect to the obtaining of information about the environmental effects of the project. To date, the Chinese buyer has yet to respond to Ex-Im Bank's July 1996 letter that outlined the type and scope of information needed for the Bank to adequately address the environmental effects of the project. In fact, it has received no official or useful information from the Chinese with respect to the environmental effects of the project since May, 1996. Nevertheless, Ex-Im Bank remains ``open'' to reconsider support for the project pending the receipt and result of the request information about the environmental effects of the project. Questions for the Record Submitted by Ms. Pelosi opic and ex-im reauthorization Question. Both OPIC and Ex-Im Bank require reauthorization this year. Opponents of these programs argue that they should be eliminated because they are corporate welfare, expand the credit exposure of the U.S. government in risky investments, and ultimately hinder free trade by imposing governmental subsidies. Can each of you comment on the need for reauthorization, respond to the arguments of your critics, and finally give us some indication of what the impacts on U.S. business will be if Congress does not reauthorize these programs? Answer. Ex-Im Bank provides competitive financing to U.S. exporters facing sales competition from foreign exporters who enjoy unlimited financial access and support from their respective government's export credit agency. These are the export sales which are most competitive for the U.S. exporting community. While Ex-Im Bank provides financing for less than three percent of all U.S. exports, this support is critical for U.S. companies' position in the high-growth developing markets. Both Japan and France provide substantial financial support to their exporters. In 1995 (latest data reported), the Japanese government export credit programs financed 32% of its country's exports; and France financed 18% of its exports. If the U.S. Government were to walk way from its exporters in this extremely competitive arena, it would mean unilateral economic disarmament in the near term and ensure lost competitive positioning for the future. Ex-Im Bank is not corporate welfare since Ex-Im Bank's funding benefits society by strengthening the U.S. economy, because it charges fees to mitigate transaction risk and because the terms and conditions of credit approvals require repayment from the borrower. Ex-Im Bank's mission is to sustain jobs in the United States by providing financing for exports of U.S. manufactured products and services. In fiscal year 1996, on less than $900 million in accumulated program budget, Ex-Im Bank authorized $11.5 billion which supported $14.6 billion in exports that would not otherwise have gone forward. These exports directly sustained 200,000 jobs and indirectly sustained one million jobs in the U.S. In the same time period, 81% of its 2,422 authorized transactions supported small businesses. Over the last five years, through financing authorizations of $65.6 million, Ex-Im Bank favorably impacted employment in 2,024 communities nationwide. Ex-Im Bank has not exposed the taxpayer to untoward risk, and, in fact, has been a prudent overseer of the public purse. Ex-Im Bank's philosophy has been to support only those transactions where the U.S. exporter faces foreign competition and on those deals where the private sector either cannot or will not act. This does tend to concentrate Ex- Im Bank's activities in riskier, but often fast-growing markets in the major developing countries. However, Ex-Im Bank never displaces the private sector, and has done an outstanding job of risk assessment. Ex- Im Bank's loan loss ratio is 1.9% for the period 1980-1995, a time period that was very tumultuous for international business. This loss ratio is better than that recorded by the private commercial banking sector, which reported a loss ratio of 3% on domestic credit card business. Questions for the Record From Ms. Lowey russia Question. In your statement, you indicate that Ex-Im Bank has been proceeding with caution in Russia and the NIS and only when you can secure assurances of repayment. I am very concerned about the stability in the that region and the rampant corruption that has spread throughout the country, impeding business and undermining economic reforms. Could you expand on what you are doing to ensure that this corruption does not negatively impact Ex-Im supported businesses in the region? Answer. Corruption is a major problem in the NIS as it is in many other parts of the world, and Ex-Im Bank is extremely concerned about it. However, it should be kept in mind that our financial support is structured so that either (i) the money is paid directly to the U.S. suppliers, or (ii) money is paid to reimburse the foreign borrower for payments which have already been made to the U.S. suppliers. (The first procedure is by far the most common, particularly in Russia). Thus, U.S. suppliers are the real recipients of the Ex-Im Bank-support funds, and they are subject to the Foreign Corrupt Practices Act and other relevant U.S. legislation. In addition, the supplier's certificates provided to us before every disbursement include a representation from the relevant supplier that to the best of its knowledge, as of the date of shipment (or, where no shipment occurred, as of the date of the work performed), the contract to sell the items being exported, and the performance by the parties of their respective obligations thereunder, did not violate any law then applicable. These supplier's certificates also must disclose whether there have been unusual payments. (A note to each certificate specifically warns the supplier that any person who makes a false representation to Ex-Im Bank may be subject to fine and/ or imprisonment pursuant to 18 U.S.C. Section 1001). Finally, we have developed a special document for use in the NIS--the so-called ``disclosure certificate'' that financial intermediaries, offtake purchasers and others must complete regarding payments they may have made as well as other activities in which they may have engaged. Ex-Im Bank is not a regulatory or enforcement agency, but the documentation for each deal we support makes it clear that we will not tolerate corruption. If for any reason we believe that any representations or undertakings we have received in connection with a transaction have been false or violated, we turn the transaction over to the Department of Justice and the U.S. Attorney's office for investigation and possible civil and/or criminal actions. small business Question. I am pleased that you mentioned Ex-Im Bank's efforts to increase its financing of small businesses. One of the criticisms we have heard about Ex-Im Bank is that your programs are too complicated for small businesses. Could you let us know how Ex-Im Bank has improved its programs to attract more small businesses, which I understand accounted for 81% of your deals last year? Answer. Because of our emphasis on reaching more potential small business exporters, Ex-Im Bank made a number of changes to various financial programs in an effort to make them more accessible and attractive to small business exporters. Specifically, Ex-Im Bank has made changes to its insurance and working capital guarantee programs as well as expanded our delivery systems to our City/State partners and outreach efforts through intermediaries. This has resulted in an explosion of small business activity, as demonstrated particularly by almost a doubling of authorizations under our working capital guarantee program. Under Ex-Im Bank's insurance program, we have changed the export credit insurance policy which is tailored specifically to small and new to export company needs. The eligibility level has been increased to $3 million sales/annually, which has made the policy available to more small businesses and provides for a 95% cover with no deductible, as well as ``hold-harmless'' to lenders who finance the export sales insured under the policy. This ``hold harmless'' protection encourages lenders to provide financing to small company transactions that they otherwise might not support because it shifts the burden of exporter performance risk from the lender to Ex-Im Bank. Ex-Im Bank has also improved its Umbrella policy along the same lines as the small business policy. This policy is designed for use by state agencies, export trading and management companies, insurance brokers, and similar agencies which act as intermediaries between Ex-Im Bank and their small business clientele. In addition, we have introduced an Environmental Exports Policy as well as enhanced our medium-term insurance cover to 100%. With the medium-term insurance policy, lenders are assured under a preapproved documentary format that as long as the documents reviewed are on their face in compliance with the policy requirements, they will be protected against exporter performance risk, disputes over product performance, or fraud. As a result of the acceptance by lenders of this change alone, Ex-Im Bank issued approximately 400 policies in 1996. Finally, we have provided a commission to insurance brokers on our small business insurance policies. This commission provides incentives for insurance brokers to offer their expertise and services to small business exporters that are typically under served. These broker services are invaluable to these inexperienced companies since they assist in the submission of applications as well as the handling of the administrative aspects of the policy. Of particular significance to Ex-Im Bank's increased small business activity are the changes made to Ex-Im Bank's Working Capital Guarantee Program, which is almost exclusively used by small business exporters. For example, language in the Working Capital Guarantee Program documentation was greatly simplified and clarified because of complaints from both the exporting and banking communities. In addition, Ex-Im Bank has expanded its Working Capital Guarantee Authority to lenders whereby qualified lenders can commit Ex-Im Bank's guarantee without seeking prior approval. This feature has been extremely instrumental in enabling an increasing number of banks throughout the U.S. to provide prompt and effective service. Moreover, there has been a harmonization of Ex-Im Bank's and SBA's Working Capital Guarantee. Under the harmonization of the programs, SBA handles those transactions with a maximum guaranteed amount of $750,000 and below and Ex-Im Bank focuses on transactions greater than $750,000. All of these changes have been important to Ex-Im Bank's increase in small business activity. But, none of the changes would have been quite as effective if it was not for our expanded focus on delivery systems with several different partners. In addition to Ex-Im Bank's lending programs for small business, we have been able to expand the breadth and depth of our reach through our City/State program. To date, Ex-Im Bank is working with 33 City/State entities to network Ex-Im Bank's programs to small and medium-sized exporters. One particular incentive network Ex-Im has provided to this program over the last year was to allow the City/State partners the ability to charge and earn fees on Ex-Im Bank applications which they package and submit for consideration. In addition, we have added a feature to the program that allows qualified City/State partners to become Delegated Authority lenders under the program. This enables qualified organizations to commit Ex-Im Bank on working capital guarantee transactions without seeking our prior approval. In addition, Ex-Im Bank's participation along with the Department of Commerce and the Small Business Administration in the U.S. Export Assistance Centers (USEAC) have enabled more outreach to potential small business exporters. These centers have provided an extremely important role to small exporters needing local hands-on assistance covering all aspects of their exporting strategies, including export finance. Since 1992, when President Clinton announced the creation of these centers in his ``National Export Strategy'', 10 USEACs have been created with another 14 District Export Centers. Questions Submitted for the Record From Mr. Foglietta Question. Dr. Rodriguez, the Ex-Im Bank allows American companies to trade with some of the U.S.'s best friends and some of our most troubled relationships. What foreign policy benchmarks do you use to decide where you make our investments when they involve nations where we may have foreign policy concerns? Some examples that come to mind are China, Indonesia and Colombia. Answer. Ex-Im Bank does not use any foreign policy benchmarks. In fact, Section 2(b)(1)(B) of the Bank's charter mandates that Ex-Im Bank has the ability to deny transactions only on the basis of financial or commercial considerations. We leave all foreign policy concerns to the State Department, which has the mandate as well as the personnel to handle such issues. W I T N E S S E S ---------- Page Atwood, J.B...................................................... 1 Callear, M.O..................................................... 423 Dine, T.A........................................................ 263 Grandmaison, J.J................................................. 423 Holmes, J.H...................................................... 263 Morningstar, Ambassador, R.L..................................... 263 Rodriguez, R.M................................................... 423 I N D E X ---------- Agency for International Development (J. Brian Atwood) Page Africa........................................................... 46 Agriculture...................................................... 240 Albania.......................................................... 248 American Schools and Hospitals Abroad (ASHA)...................231, 253 Assistance Priorities............................................ 226 Basic Education.................................................. 42 Bosnia........................................................... 248 Budget........................................................... 169 Bureaucracy...................................................... 52 Cambodia........................................................63, 230 Campfire.......................................................172, 232 Chairman Callahan's Opening Statement............................ 1 Child Survival....................39, 173, 205, 222, 234, 235, 241, 242 Children's Vaccines.............................................. 217 Congressional Presentation Documents............................. 224 Consumers in the Developing World................................ 249 Crisis Prevention................................................ 244 Democracy and Foreign Assistance................................. 240 Disease Research................................................. 200 Earmarks......................................................... 254 Economic Growth.................................................. 238 Environmental Programs..........................................61, 243 Family Planning Programs......................................... 49 Federal Triangle Building........................................ 223 Food Security Initiative......................................... 226 Food Security...................................................63, 228 Former Soviet Union.............................................. 43 Funding Levels................................................... 64 Global AIDS.....................................................62, 251 Grant and Contract Oversight..................................... 243 Haiti............................................................ 258 Institute of Peace............................................... 60 International Financial Institutions............................. 229 International Education and Training............................. 47 Israel's Expedited Transmission.................................. 57 Jordan........................................................... 48 Latin America.................................................... 41 Legal Reform..................................................... 241 Liberia.......................................................... 260 Malaria.......................................................... 201 MED Bank.........................................................56, 58 Microenterprise....................................43, 47, 50, 236, 247 Middle East Development Bank..................................... 40 Mission Closings................................................. 227 Mongolia......................................................... 229 Mr. Atwood's Opening Statement................................... 4 Ms. Pelosi's Opening Statement................................... 2 Multilateral vs. Bilateral Assistance............................ 246 Nagorno-Karabakh................................................. 233 NATO............................................................. 40 New Management System............................................ 219 NGOs...........................................................173, 254 NMS-IG Report.................................................... 220 Office of Emerging Markets....................................... 242 Partnership for Freedom.........................................40, 238 Polio............................................................ 222 Political Freedom................................................ 245 Poor Performance................................................. 218 Population Assistance............................................ 250 Preventive Health Care........................................... 250 Public Perception of Foreign Aid................................. 44 Public Sector.................................................... 239 Regional Funding Priorities...................................... 225 Russia.........................................................236, 261 Southwest Voter Research Institute............................... 217 Subcommittee Jurisdiction........................................ 54 Sustainable Development.......................................... 228 Trade and AID.................................................... 239 Tuberculosis..................................................... 253 U.S. Ships....................................................... 245 United Nations................................................... 203 Victims of Torture...................................230, 252, 261, 262 Vitamin C........................................................ 222 Women in Development............................................61, 251 World Summit Goals............................................... 205 NIS and Central Europe (Ambassador Richard L. Morningstar) (James H. Holmes) (Thomas A. Dine) Accountability Measures.......................................... 396 Administrative Costs............................................. 393 Albania...............................................90, 389, 402, 421 Ambassador Morningstar's Opening Statement....................... 268 Armenia...................................................414, 416, 422 Balancing the Budget............................................. 387 Bilateral Commissions............................................ 379 Bosnia..........................................376, 384, 403, 411, 412 Budget Request.................................................363, 375 Bulgaria..................................................374, 386, 399 Central Europe................................................... 399 Chairman Callahan's Opening Statement............................ 263 Changing Focus of Assistance..................................... 398 Chernobyl Shutdown............................................... 397 Cold War......................................................... 366 Corruption....................................................... 371 Democratization.................................................. 361 Earmarks.......................................................356, 403 Effectiveness and Efficiency..................................... 394 Enterprise Funds................................................. 380 Family Planning.................................................. 397 Haiti............................................................ 344 Humanitarian Aid Corridor Act.................................... 392 Investment Initiatives........................................... 358 Microenterprise Support.......................................... 393 Mr. Dine's Opening Statement..................................... 312 Mr. Holmes' Opening Statement.................................... 293 Ms. Pelosi's Opening Statement................................... 267 New Independent States.....................354, 391, 399, 404, 408, 413 Operation Support Freedom........................................ 404 Pakistan......................................................... 416 Partnership for Freedom..............................364, 399, 401, 419 Positive Results................................................. 395 Poverty Lending Institutions..................................... 394 Public Perception of Foreign Aid................................. 375 Romania.......................................................... 373 Russia....................................................368, 407, 410 Russian Arm Sales................................................ 415 Section 907....................................................359, 372 SEED Program..................................................... 371 Ukraine.....................355, 357, 368, 388, 389, 398, 401, 406, 416 War Crimes Tribunal.............................................. 412 World Bank....................................................... 412 Export and Investment Assistance (J. Joseph Grandmaison) (Rita M. Rodriguez) (Mildred O. Callear) Average Feasibility.............................................. 494 Chairman Callahan's Opening Statement............................ 423 Environmental Reforms............................................ 505 Expansion of Small Businesses.................................... 488 Export-Import Bank....................508, 509, 510, 511, 512, 513, 514 Haiti............................................................ 497 Investment Encouragement......................................... 504 Jamaica.......................................................... 497 Latin America.................................................... 496 Middle East Projects............................................. 503 Ms. Callear's Opening Statement.................................. 469 Mr. Grandmaison's Opening Statement.............................. 427 Ms. Pelosi's Opening Statement................................... 427 Opening Statement of Ms. Rodriguez............................... 429 OPIC.......................................494, 504, 505, 506, 507, 508 President's Budget Request Reduction............................. 487 Project Finance Division......................................... 490 Prudent Management............................................... 505 Ralph Nader Allegations.......................................... 488 Reductions....................................................... 491 Russia...............................................493, 496, 511, 513 Self-Funding..................................................... 504 Taxpayer's Return on Ex-Im Investments........................... 490 Trade and Development Agency...................................502, 503 Ukraine.......................................................... 498 Win/Loss Ratio................................................... 492