[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]



      FOREIGN OPERATIONS, EXPORT FINANCING, AND RELATED PROGRAMS 
                        APPROPRIATIONS FOR 2002

_______________________________________________________________________

                                HEARINGS

                                BEFORE A

                           SUBCOMMITTEE OF THE

                       COMMITTEE ON APPROPRIATIONS

                         HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS
                              FIRST SESSION
                                ________
   SUBCOMMITTEE ON FOREIGN OPERATIONS, EXPORT FINANCING, AND RELATED 
                                PROGRAMS
                      JIM KOLBE, Arizona, Chairman
 SONNY CALLAHAN, Alabama             NITA M. LOWEY, New York
 JOE KNOLLENBERG, Michigan           NANCY PELOSI, California
 JACK KINGSTON, Georgia              JESSE L. JACKSON, Jr., Illinois
 JERRY LEWIS, California             CAROLYN C. KILPATRICK, Michigan
 ROGER F. WICKER, Mississippi        STEVEN R. ROTHMAN, New Jersey  
 HENRY BONILLA, Texas
 JOHN E. SUNUNU, New Hampshire      
                     
 NOTE: Under Committee Rules, Mr. Young, 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, John Shank, and Alice Grant, Staff Assistants,
                     Lori Maes, Administrative Aide
                                ________
                                 PART 3
                                                                   Page
 Agency for International Development.............................    1
 Department of the Treasury.......................................   79

                              

                                ________
         Printed for the use of the Committee on Appropriations
                                ________
                     U.S. GOVERNMENT PRINTING OFFICE
 75-099                     WASHINGTON : 2001





                      COMMITTEE ON APPROPRIATIONS

                   C. W. BILL YOUNG, Florida, Chairman

 RALPH REGULA, Ohio                  DAVID R. OBEY, Wisconsin
 JERRY LEWIS, California             JOHN P. MURTHA, Pennsylvania
 HAROLD ROGERS, Kentucky             NORMAN D. DICKS, Washington
 JOE SKEEN, New Mexico               MARTIN OLAV SABO, Minnesota
 FRANK R. WOLF, Virginia             STENY H. HOYER, Maryland
 TOM DeLAY, Texas                    ALAN B. MOLLOHAN, West Virginia
 JIM KOLBE, Arizona                  MARCY KAPTUR, Ohio
 SONNY CALLAHAN, Alabama             NANCY PELOSI, California
 JAMES T. WALSH, New York            PETER J. VISCLOSKY, Indiana
 CHARLES H. TAYLOR, North Carolina   NITA M. LOWEY, New York
 DAVID L. HOBSON, Ohio               JOSE E. SERRANO, New York
 ERNEST J. ISTOOK, Jr., Oklahoma     ROSA L. DeLAURO, Connecticut
 HENRY BONILLA, Texas                JAMES P. MORAN, Virginia
 JOE KNOLLENBERG, Michigan           JOHN W. OLVER, Massachusetts
 DAN MILLER, Florida                 ED PASTOR, Arizona
 JACK KINGSTON, Georgia              CARRIE P. MEEK, Florida
 RODNEY P. FRELINGHUYSEN, New Jersey DAVID E. PRICE, North Carolina
 ROGER F. WICKER, Mississippi        CHET EDWARDS, Texas
 GEORGE R. NETHERCUTT, Jr.,          ROBERT E. ``BUD'' CRAMER, Jr., 
Washington                           Alabama
 RANDY ``DUKE'' CUNNINGHAM,          PATRICK J. KENNEDY, Rhode Island
California                           JAMES E. CLYBURN, South Carolina
 TODD TIAHRT, Kansas                 MAURICE D. HINCHEY, New York
 ZACH WAMP, Tennessee                LUCILLE ROYBAL-ALLARD, California
 TOM LATHAM, Iowa                    SAM FARR, California
 ANNE M. NORTHUP, Kentucky           JESSE L. JACKSON, Jr., Illinois
 ROBERT B. ADERHOLT, Alabama         CAROLYN C. KILPATRICK, Michigan
 JO ANN EMERSON, Missouri            ALLEN BOYD, Florida
 JOHN E. SUNUNU, New Hampshire       CHAKA FATTAH, Pennsylvania
 KAY GRANGER, Texas                  STEVEN R. ROTHMAN, New Jersey    
 JOHN E. PETERSON, Pennsylvania
 JOHN T. DOOLITTLE, California
 RAY LaHOOD, Illinois
 JOHN E. SWEENEY, New York
 DAVID VITTER, Louisiana
 DON SHERWOOD, Pennsylvania
 VIRGIL H. GOODE, Jr., Virginia     
                                   
                 James W. Dyer, Clerk and Staff Director

                                  (ii)

 
      FOREIGN OPERATIONS, EXPORT FINANCING, AND RELATED PROGRAMS 
                        APPROPRIATIONS FOR 2002

                              ----------                              

                                            Thursday, May 17, 2001.

                  AGENCY FOR INTERNATIONAL DEVELOPMENT

                                WITNESS

ANDREW S. NATSIOS

                   Chairman Kolbe's Opening Statement

    Mr. Kolbe [presiding]. The committee on Foreign Operations 
will come to order. We welcome this morning our new 
administrator for the Agency for International Development, 
Andrew Natsios.
    Mr. Natsios has a very distinguished record of public 
service. He was a state legislator for seven years, so I can 
relate to that, having served six years in my own state 
legislature. He was a senior AID official for four years and 
most recently has been the chairman of the Massachusetts 
Turnpike Authority with a mandate to clean up the Big Dig in 
Boston, a challenge which might be about equal to the one that 
he has at AID.
    I would like this hearing to complement the hearing we had 
a week ago with Secretary of State Powell. In that hearing, he 
responded positively to my invitation to renew a productive 
relationship between this subcommittee and the executive 
branch. Discussion between Secretary Powell and the 
subcommittee was direct, and I think it was a productive one. 
The hearing is your opportunity to enlist in the new coalition 
and follow the secretary's lead, as I know you would want to 
do.
    As we have discussed before, when you visited me the first 
time in my office, Mr. Administrator, I said then that I had 
three priorities as chairman of this subcommittee. One is 
global health, second is the effective management of the 
agencies that are funded by our bill, and third is export 
promotion and trade.
    You, too, have decided to focus on the dysfunctional 
management system of the agency you now head. One of your four 
pillars is global health. So we share common interests.
    As you know, this subcommittee championed child survival 
and global health issues long before they attracted a lot of 
national attention or even international attention, certainly 
as they do today. Many members will want to know more about the 
president's announcement last Friday regarding a global health 
trust fund and the impact it could have on the bilateral 
programs the committee has supported for years.
    This time I am going to limit my remarks on global health 
to taking note that, while the African HIV-AIDS crisis 
continues to be the focus of our attention and certainly the 
largest piece of the problem, we must not neglect other major 
infectious diseases, such as tuberculosis and malaria. We must 
not neglect the emerging HIV pandemics in areas such as the 
Caribbean and South Asia.
    Five years ago, the subcommittee established a very popular 
child survival and disease programs account. Some of us believe 
that is why members who never before voted for a foreign aid 
appropriations bill came on board to vote with us in recent 
years.
    By incorporating reproductive health under the global 
health category and also shifting basic education from child 
survival to the economic growth category, you are reflecting 
the way these programs work in the field at the health clinic 
level in developing countries.
    The president did not seek a modification of the existing 
child survival account, but I think we need to look at 
reconciling the management structure and our account structure. 
And I will have some questions on this. The differences are not 
large, but I think they could prove to be confusing.
    As I said to Secretary Powell, the second priority that I 
have is management of the Agency for International Development. 
The division of labor between it and the State Department, 
which I think, is often confusing and is reflected in those 
differing ways of accounting for programs. You have made it 
clear that correcting the management deficiencies at AID is a 
top priority of yours as well.
    The subcommittee has a wealth of experience and knowledge 
about various assistance activity, and I know that all the 
members of this subcommittee would be very pleased to work with 
you and your staff in trying to help devise ways to better 
manage the agency. So we stand ready to work with you to help 
you in that regard.
    We would like you to share your understanding of how the 
proposed new Financial Resources Bureau of the State Department 
will affect you and AID. You have inherited a situation where 
many offices and bureaus in the State Department are convinced 
they are entitled to program funds from accounts in our bill 
that have traditionally been managed by your agency, and that 
was not the case five or 10 years ago.
    We know that you and Secretary Powell want more flexibility 
in the use of appropriated funds and what we call earmark 
reform, and you refer to that in your written testimony.
    The secretary discussed the subject at some length, and I 
am sure you have had a chance to review his testimony. We would 
welcome any additional thoughts regarding earmarks and 
directives you may wish to add to the brief reference in your 
written testimony. I might add that I think, generally, the 
problem is not so much the earmarks that you get, but it is 
more the directives.
    Our members will continue to have suggestions for 
activities in AID. We need to be convinced that reasonable 
proposals will receive rapid and fair consideration. That is an 
important quid pro quo for not having earmarks.
    In return, for your commitment to have senior staff review 
detailed written suggestions, we will work with you to clarify 
that support for a project in the committee report is not the 
same as having a check in the mail. And of course, Ineed to add 
we have to have cooperation from the other half of the legislative 
branch of government on this matter, too.
    Past breaches of comity between the executive and 
legislative branches are why our bill report carries so many 
restrictions and directives. You can look at each one of those 
in the bill or the report, and you can find the legislative 
history for how it got there.
    Over time, though, I think we can remove many of these 
statutory directives, as long as we reach an understanding and 
we respect each other and the process that we are following. I 
hope today we can begin that process.
    My final priority, the signature issue that I have had for 
many years, of course, has been trade and export promotion. 
Much of what this subcommittee is trying to accomplish would be 
adversely affected if the president's trade agenda is stalled 
in Congress. So I encourage you to do all you can in the 
economic growth sector that supports the rule of law and 
technical assistance to nations that require it in order to 
more fully share in the global economy.
    Mr. Administrator, there are many other matters of concern. 
We can take them up during questions. I want the record to show 
that the written testimony we have from you did not arrive 
until 17 hours ago, and that is really just not enough time for 
the members and the staff to prepare properly for a hearing 
like this.
    Also, the detailed budget justification in support of the 
president's appropriation request for your major program 
accounts has not yet arrived. We agreed to delay it until May 4 
in order to give you an opportunity to review the draft 
material prepared by your staff.
    At this time, the committee has in its possession only a 
general overview, lacking any of the detail that we need in it, 
and summary tables that are very partial which omits a lot of 
the important information that we need in order to examine 
these programs.
    We are certainly making allowances for the fact that you 
were only recently confirmed. We hope that we can improve in 
the coming years, and I know you will want to do that.
    As you can see from the bells there, we have a vote.
    But we will take Mrs. Lowey's opening remarks, and we will 
recess long enough to go vote, and we will come right back.

                     Mrs. Lowey's Opening Statement

    Mrs. Lowey. Thank you, Mr. Chairman.
    I join Chairman Kolbe in welcoming Administrator Natsios to 
your first hearing before this subcommittee. This subcommittee 
has always had a close working relationship with AID 
administrators, regardless of which party controlled the White 
House, so I look forward to a continuation of that tradition 
with you, Mr. Natsios.
    This relationship is important, not simply because of the 
fact that AID administers most of the assistance programs 
funded in the bill, but also because we all have a stake in 
making your work successful. I have always had a deep respect 
for those individuals working in the trenches, finding ways to 
make development programs work.
    While the new administration's emphasis seems to be that 
AID management problems need to fixed, I believe that we cannot 
lose sight of the fact that there is a difference between 
accounting systems and worthwhile development programs. While 
the problems with your accounting systems clearly need fixing, 
we must focus immediately on what makes sense to sound, 
sustainable development programs.
    For the most part, the AID projects in place today are 
effective. AID does has to re-examine itself and figure out a 
way to spend more staff time designing, implementing and 
monitoring development projects and less time on writing 
contracts for other entities to do those things.
    But I firmly reject the notion that AID is fundamentally 
flawed. There are problems, but most projects do accomplish 
their goals. I am always impressed when I have the opportunity 
to visit AID projects in the field. Our development staff is 
the best in the world, by far, and our bilateral AID programs 
are far more effective than those of the European Union, the 
United Nation agencies or the international banks.
    I also want to touch on the overall resource question, as I 
have with Mr. Powell and Mr. O'Neill. I hope, Mr. Natsios, that 
you will join with me and others in the Congress to ensure that 
adequate levels of spending for vital international assistance 
programs continue to be a priority.
    We may not receive a 302(b) allocation that equals your 
budget request, and with a consensus building to restore the 
funds to the Export-Import Bank, we will be forced to cut other 
requests in the bill.
    With respect to basic education, you know that this is a 
priority of mine. We have discussed it. I did want to mention 
that AID has to make a priority of education in its hiring. I 
know you have already moved to higher more experts in the 
agriculture area, and I would strongly urge you to begin to 
immediately recruit and hire higher education experts.
    AID is largely out of the business of improving basic 
education through direct assistance in country programs. There 
are many factors contributing to this, but basic education, in 
my judgment, remains a key element to long-term economic growth 
for many poor countries.
    Without people in place to design and implement these 
programs, no meaningful expansion of these programs will take 
place. With respect to the proposals to set aside $160 million 
for the Global Development Alliance, I look forward to finding 
out more about how this will work and how successful you think 
we can be in attracting private sector partners.
    I am, however, concerned that $160 million has been taken 
out of your request for ongoing programs. This has meant that 
ongoing development assistance, child survival programs for 
Africa, will be cut below last year's level in your request. It 
has also meant that proposed levels to spending on 
environmental programs could be cut by $90 million below last 
year's levels.
    New initiatives should be funded with new money, not come 
from vital child survival, education or environmental programs. 
We will talk more about this. I, obviously, feel strongly about 
that.
    And I want you to know, I am pleased that the president 
chose to, at least, maintain last year's funding level of $425 
million for international family planning. The question is, 
however, with the Mexico City policy now in place, will you 
administer the program in a way that continues to increase the 
number of women worldwide who have access to child and maternal 
health services that include family planning?
    And finally, Mr. Natsios, I am encouraged by our initial 
meetings and the fact that your statement recognizes the need 
to find new approaches to conflict prevention. I do notthink 
identifying them will be easy, so I hope you will be open-minded about 
different approaches, and I also hope that you can bring along your 
colleagues in the Defense Department, who have been reluctant in the 
past to play an active role in conflict prevention.
    Thank you. I tried to rush right through, so that we can 
vote. I look forward to your statement.
    Mr. Kolbe. Thank you.
    We want to hear your opening statement, so we will have to 
recess in order to that. And then when we return, we will take 
your opening statement, and we will begin with the questions in 
the order of the people who arrive here.
    So the subcommittee will stand in recess temporarily.
    [Recess.]
    Mr. Kolbe. The subcommittee will come to order again.
    Mr. Natsios, we are ready for your statement. As always, of 
course, the full text of the statement will be put in the 
record, and we would appreciate your summarizing it for us here 
today.
    Mr. Natsios. I am going to summarize it and then add some 
things that are my own, very bold direct remarks.
    Mr. Kolbe. But please proceed.

                     Mr. Natsios' Opening Statement

    Mr. Natsios. Thank you, Mr. Chairman, Mrs. Lowey, for 
allowing me to speak before you today.
    The United States is a great power, and I believe the 
foreign assistance program both serves to accomplish our 
foreign policy objectives, and to express the deep humanitarian 
instincts of the American people.
    Foreign assistance is an important tool for the president 
and the secretary of state to further America's interests. 
Foreign assistance implements peace agreements arranged by 
diplomats and often enforced by the military. It supports 
peacekeeping efforts by building economic and political 
opportunity. One senior general told me the best force 
protector he had in peacekeeping operations was not the 
military units. It was USAID's programs.
    It helps developing and transition nations move toward 
democratic systems and market economies. It helps nations 
prepare for participation in the global trading system and 
better enable them to trade with the United States.
    All these activities build a more peaceful, stable, 
civilized and prosperous world, which is very much in the 
interests of the United States.
    I believe foreign assistance does work, but it takes years 
of investment and hard work. I am asking for your support today 
to let me continue that work.
    USAID's 2002 budget marks the beginning of a new strategic 
orientation and the incorporation of a new way of doing 
business to ensure that USAID's long-term development 
assistance and humanitarian disaster relief programs better 
respond to U.S. national interests.
    The two most distinctive trends in the world since the fall 
of the Berlin Wall have been globalization and conflict, two 
contradictory trends. While many USAID programs already respond 
to these challenges individually, in order to improve the 
agency's effectiveness as a key foreign policy instrument, this 
administration intends to coordinate and focus agency resources 
and capabilities to address these twin characteristics.
    We will bring together USAID programs and activities into 
three program pillars that cut across all USAID funding 
accounts. By aggregating current and new programs that are 
mutually reinforcing into these pillars, USAID will be able to 
use scarce resources more effectively and to describe its 
programs more clearly.
    If you ask most USAID employees or NGOs or members of 
Congress or people familiar with what we do, it would take a 
half hour to explain in detail, because this program is so 
complicated. By simplifying, we may distort a little bit; some 
people may feel left out; but the reality is, these three large 
categories do comprise a great deal of what we do.
    The first is economic growth and agriculture. The second is 
global health. The third is conflict prevention and what we 
call developmental relief.
    Under economic growth and agriculture, more than 1.2 
billion people live on less than $1 a day. More than 800 
million people continue to go to bed hungry. More than 113 
million children are not in school.
    The economic growth and agriculture pillar will strengthen 
U.S. efforts to ensure these people are able to take advantage 
of the potential of globalization rather than becoming its 
victims. It highlights the interrelationship and 
interdependence of economic growth and agricultural 
development, environmental sustainability and development of a 
country's human capital, with the ultimate goal of creating and 
cultivating viable market-oriented economies.
    Programs in this pillar will encourage economic 
opportunity, agricultural development, education and training, 
and the effective management of natural resources. Without 
economic growth and food security, no development effort is 
sustainable.
    I might add, the reason people are poor is they have no 
family income, or little family income. The only way to change 
that is to increase their livelihoods, increase their family 
income. That is what economic development and, particularly, 
agricultural development focuses attention on.
    Three-quarters of the poor people in the world live in 
rural areas and are farmers or herders. If you want to focus on 
poverty, you have to focus on agriculture.
    It has been said that the most important and rewarding 
investment any country can make is its education of its 
children, especially girl children. The president believes 
that. I believe it, and so does Secretary Powell.
    For fiscal year 2002, USAID plans to increase its support 
for basic education for children from $103 million to $123 
million. Now, I recognize the base is low, but it is a 20 
percent increase.
    I might also add, Congresswoman, that we are adding 10 more 
staff who are experts in education to the USAID career staff by 
September of this year. We are in the process of hiring them 
right now.
    USAID will maintain its international leadership in health. 
Our programs in women's reproductive health, in children's 
health, in HIV-AIDS, infectious disease and nutrition are among 
the best in the world.
    I might tell you that one of the areas that I am most 
interested in is the least, perhaps, publicized, but it is in 
the micronutrition area. We know that micronutrients can have a 
profound effect on the health of children with verysmall, 
modest interventions.
    Over the past 15 years, USAID, with Congress's support, has 
spent $3.5 billion on child survival programs. Over this same 
period, we have seen a 20 percent reduction in the under-five 
mortality rate.
    Americans can be proud of the leadership role our country 
has played in eradicating polio around the world. We are poised 
to do that within the next few years. The number of reported 
cases in the world dropped from 350,000 in 1988 to fewer than 
7,000 in 1999, a year in which 470 million children were 
immunized against polio.
    I might add, we have eradicated smallpox as a result of 
collaboration between international institutions and USAID, 
along with other donor countries.
    The HIV-AIDS pandemic is devastating many nations in Africa 
and is spreading rapidly now in the former Soviet Union. In 
fact, the fastest-growing epidemic is in the former Soviet 
Union. And its transmission is escalating in other regions, 
such as South Asia.
    This administration pledged a 10 percent increase in the 
USAID HIV-AIDS funding account for 2002 to a total of $369 
million, with the emphasis on preventing the transmission of 
the disease.
    I might also add that USAID is spending $340 million in 
FY01, and CDC spends another $100 million, more money than all 
countries in the world combined. So we have for some time now 
had a substantial contribution. We add to that the additional 
$200 million which the U.S. will contribute to the global trust 
fund. The global health pillar incorporates $1.46 billion in 
fiscal year 2002 funds from all accounts.
    USAID continues to stand at the forefront of agencies 
around the world in its ability to respond to manmade and 
natural disasters. The request will enable USAID to maintain 
this capacity to provide needed help rapidly when international 
emergencies occur, particularly in the area of famine and 
conflict.
    As many of you know, in the first Bush Administration, my 
first time in USAID was in this area. I had asked a study be 
done in the Office of Foreign Distaster Assistance (OFDA) when 
I first started, because we had disaster records that go back 
40 years. I said, ``Tell me where most people have died in the 
last 40 years in disasters.''
    What they found was that 75 percent of the casualties in 
disasters in that 40-year period had occurred either in famines 
or civil conflict. The number of people actually dying in 
events such as floods, is relatively modest, even though there 
is a lot of suffering.
    So we focused attention 10 years ago and the focus remains 
on the area which has claimed the largest number of lives, 
which we also have a great deal of programmatic influence in 
preventing.
    USAID will continue in disaster assistance to improve its 
ability to promote conflict prevention. I have to tell you, I 
have taken this focus very seriously. I know from my own work 
with World Vision, when I was there for five years, as well as 
working with other NGOs, that there are things that we can do 
to prevent conflicts.
    We are in an experimental mode in some ways. In other ways, 
we know what works already. We need to continue to do it.
    There is a whole network of people who have been working on 
these sorts of programs very quietly for 10 years. We will now 
raise that to a much higher level of visibility and work the 
conflict prevention initiative into the programming of our 
regular program.
    Let me give you one example: Dayton Maxwell, my deputy at 
OFDA, was the first Bosnia mission director. When they began to 
reconstruct the infrastructure of the city gas, oil, water and 
electricity in Sarajevo, what he proposed doing was 
interconnecting the system so it would be impossible for one 
ethnic group in the future to shut the system down for all of 
the other ethnic groups without affecting themselves.
    What he said is that it is a conflict prevention measure, 
because during the last civil war, it was possible for one side 
to shut services down for another side without affecting 
themselves. If you know everybody gets the services shut down 
at the same time, it is much less likely you are going to make 
that kind of decision.
    These initiatives will integrate the existing portfolio of 
USAID democracy programs with new approaches to crisis and 
conflict analysis and methods for allowing conflicts to be 
resolved peacefully. A conflict prevention pillar will 
incorporate $2.193 billion in funds from all accounts. This 
includes the $835 million requested in the fiscal year 2002 
Public Law 480 Title II program, Food for Peace.
    It is not enough to reconsider our priorities. We need to 
change, fundamentally, the way we do business. I would like to 
create a fourth pillar that defines the agency, the Global 
Development Alliance (GDA). The GDA is USAID's commitment to 
change the way we implement our assistance mandate.
    The GDA will change this by actively seeking out partners 
willing to commit real resources, funding, information and 
personnel, to support development programs. With these 
partners, we will build alliances that target specific 
development objectives and leverage private funds from 
foundations and corporations to accomplish those objectives.
    USAID's role with these alliances will be to collaborate 
with non-governmental partners to provide the technical 
expertise needed to effectively use private funds and to use 
the field-based personnel and management systems that we have 
to track programs and funds. USAID's extensive field missions 
and technical expertise give the agency the ability to 
integrate, coordinate and facilitate these new alliances.
    This is not an entirely new way of doing business for 
USAID. We have done this before. The difference is that we are 
going to systematize this across the whole agency and leverage 
very large chunks of money and resources. Incorporating GDA as 
a pillar of our new approach means we will pursue a systematic 
approach to alliances on a much larger scale than in the past.
    To jump-start the process, I intend to assign $160 million 
in 2002 funds specifically to GDA projects. This, however, does 
not mean we are cutting other accounts. It means we are 
focusing attention for the program directors on this pool of 
money that comes from sectoral areas.
    Many of the cuts that you imagine, in fact, are not cuts. 
They are simply an allocation of those funds, not to a new 
program, sectorally, or even to a country, but into this 
temporary pot with a little more flexibility for these 
alliances we hope to form.
    The agency cannot make sweeping changes in its business 
model without overhauling the central management systemthrough 
which USAID does its work. Congressman, you are absolutely correct that 
there are programs that are very well-run.
    The problem is, the personnel system, the procurement 
system, the financial system and the information systems that 
assist our managers in the missions to manage these programs 
are not working well, and they need to be fixed.
    While some progress has been made in fixing these systems, 
it has been too slow and neither innovative nor sweeping enough 
to get the job done. I had a letter from five mission 
directors, I will not tell you who they are, with a paragraph 
that looked as though they had taken it out of my original 
testimony when I was up for my confirmation hearing. I was 
struck by the fact that what they had written in their 
paragraph was almost the same as what I had written in my 
testimony about these systems and how they impede their work 
and how these systems need to be fixed.
    The business of foreign assistance has changed drastically 
in recent years. The agency has 35 percent fewer staff than it 
did 10 years ago, while the number and size of awards and 
contracts have grown significantly.
    At the outset of the debate over the question of management 
and our relationship to the Congress, I want to say that the 
secretary of state and I do appreciate the support of the 
Congress in the work we do. It is clear to me and to the staff 
that he is my boss. I work directly for the secretary of state. 
All of us, ultimately, work for the president, but I know who 
my boss is.
    As a former military officer, I believe in hierarchy, and 
what we have agreed to is, if there is a dispute at lower 
levels, we will bring them up between USAID and other agencies 
in the foreign policy apparatus, and the secretary will decide 
those disputes.
    The secretary, in his remarks before your committee last 
week, focused a great deal of attention, over half of his 
testimony, on USAID, which is very unusual for any secretary of 
state in any administration. This is a great message to our 
staff and, I think, to the community, that the secretary deeply 
cares about these issues and wants to have an active role in 
what we do.
    To have the secretary of state as an active advocate for 
effective economic and humanitarian programs can only enhance 
our programs as they attempt to address these challenges. The 
secretary's leadership underscores the fact that USAID's 
program is an integral part of our foreign policy, though the 
time line and the time horizon of our programs, five to 10 
years on the development side, is very different than the State 
Department's or any foreign ministry, which tends to take a 
much shorter-term role. In the nature of political crises, that 
has to be the case.
    Some have expressed concern that the establishment of a new 
office within the State Department to coordinate management 
resources signals a reduction of USAID's role. I know that that 
is not the case.
    On the contrary, the secretary has said, on a number of 
occasions, that he values our perspective, the perspective that 
we bring to the table on foreign policy, and looks to us for 
help and leadership.
    Mr. Chairman, there are certain truisms that I have learned 
over the years in my government service: No one in the 
executive or legislative branch has a corner on the market for 
good ideas. Not all wisdom resides in one branch or the other.
    Having been a legislator for 12 years, I know very well 
that there is a little arrogance sometimes in the executive 
branch. It used to annoy me when I was in the legislature in 
Boston to listen to it. You will never hear it from me, and if 
you hear it from my staff, please tell me about it, because I 
would like to know who they are.
    I have always found that the profit and nonprofit private 
sectors and the Congress are a good source for new ideas and 
initiatives. That does not mean we will always agree.
    USAID is a decentralized, field mission-driven 
organization. It derives its ideas from the expertise of its 
technical people, the private sector partners that we work with 
and, most importantly, the people in the countries we are 
serving. Earmarks and directives can be too limiting and not 
necessarily the appropriate use of funds.
    Moreover, there are often unreasonable expectations on the 
part of the organizations or the university or college for whom 
the funds are earmarked, that they can walk into USAID and just 
get a check written out payable to them. I must tell you, that 
is very disturbing to me.
    I have had the practice of competitively bidding public 
funds, wherever possible, in my eight management jobs in the 
public sector over the last 25 years. We get the best ideas and 
avoid the appearance of favoritism when we competitively bid, 
using objective standards for public funds.
    You can expect from me the same on this job. I know that, 
to a very large extent, I am preaching to the choir. This 
subcommittee, more than any other, has avoided statutory 
earmarks, and I know Mr. Callahan and Mr. Obey have been 
sticklers on this during previous chairmanships, and I 
appreciate this very much.
    I recognize that for the subcommittee to continue this way 
with regard to statutory earmarks, given the political 
pressures I know you are under, things have to change. First, 
USAID needs to get its management house in order with people 
and systems in place to give you the confidence that we know 
what we are doing. There is no way that I can effectively 
manage, or my people can manage, without access to financial 
management systems.
    Secondly, Mr. Chairman, you said in your welcoming remarks 
to the secretary, bonds of trust need to be established between 
the Hill and USAID. I could not agree more. This lack of trust 
has expressed itself in many ways.
    For example, I think it is expressed in the earmarks and 
the directives in bills and reports and the inordinate number 
of general provisions contained in legislation and holds placed 
on reprogramming notifications. Although I would note, again, 
that this subcommittee's record is a very good one on this.
    Therefore, to the end of establishing this bond of trust, I 
would like to propose several new ways of dealing with your 
committee. First, I continue to be able to meet with you and 
Mrs. Lowey and other members of the subcommittee and your 
staffs for your counsel, ideas and perspectives and also to 
tell you of the progress we are making in USAID.
    I have enjoyed my meetings with you, Mr. Chairman, and with 
you, Mrs. Lowey and, as well, my conversations with your staffs 
and look forward to meeting with everyone on the subcommittee 
very soon.
    Second, I pledge that we will work with your staffs and the 
staffs of the oversight committees to revamp our reprogramming 
notifications so they are comprehensible in the English 
language. I am not into obscure language that obfuscates, and 
if we make a mistake, I think we should tell you.
    The way I got control of the Big Dig was to simply, 
whenever we made a mistake, to have a press conference and 
announce it, much to everyone's astonishment, including the 
news media.
    For the first month it did achieve headlines all over the 
state that someone would dare to do this, after the first 
month, it became less interesting from a media standpoint and 
began appearing on the comic strip page. That is actually more 
read than the front page, so, perhaps, the obituary page would 
be a better page.
    The reality is that when we announced good things that 
happened at the Big Dig, members of the legislature, my old 
colleagues, the media and the other members of the executive 
branch were much more likely to believe what I said if we told 
them the bad news, too. You cannot have it both ways. And so I 
am not going to obfuscate when we screw something up, including 
when I make a mistake.
    The third is a pledge with regard to the annual budget 
justification document. I have not had time to make any major 
input into the budget document for 2002. I did try to make some 
input, which I have to tell you is why you got the documents 
late. I was meddling, because I did not want to waste a whole 
year, and that did slow things down and I apologize for that, 
but I did not want to wait until the next budgeting process to 
have some input into it. It does have some of my input, but not 
anywhere near as much as I would like to put in the next 
document.
    I want my staff and yours to come together in a format for 
a document that will justify our request for 2003 and give you 
a complete description, for example, of the range of assistance 
efforts we are making in each of our country programs in a way 
that integrates both global and regional funding.
    I would be glad to answer any questions that you may have.
    [The statement of Mr. Natsios follows:]
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                DIVISION OF LABOR BETWEEN STATE AND AID

    Mr. Kolbe. Thank you very much, Mr. Administrator.
    I think we are very encouraged by what you just have 
proposed there and the way in which you would like to work with 
our staff and with the ranking member, myself and all the 
members of this subcommittee. I know that we will appreciate 
those and will respond accordingly, and we will look forward to 
working with you.
    I might just say that if you hold a press conference every 
time there is a notification, since we receive several hundred 
a month, you will be doing nonstop press conferences 24 hours a 
day.
    Mr. Natsios. Right. I recognize it is the more important 
ones that count.
    Mr. Kolbe. Right.
    Let me begin by asking a couple of questions in my time 
here, and we will stick to the five minute rule for all of us 
here, about the actual programs that USAID manages. As I said 
at the beginning, and you have also focused on the fact that 
USAID management and division of labor between USAID and State 
Department is one of the things we want to look at.
    In looking over the various documents that justifies the 
budget request, there really is no agreement on what ought to 
be a very fundamental and basic fact: the amount of money that 
comes under USAID management.
    Your written testimony in support of USAID's operating 
expenses refers to $7.7 billion in worldwide programs at USAID. 
The secretary's justification documents and our own bill 
structure show the USAID total closer to $3.2 billion. Now, 
that is a big difference between $7.7 billion and $3.2 billion, 
and if you are managing a program around $3 billion, you are 
right where you were at Boston. But if it is $7.7 billion, you 
have made a step up here in the size of the program that you 
have.
    So there is clearly a real difference here between AID and 
State over who owns or manages a particular program that comes 
from accounts jointly managed with the State Department. For 
example, is the agency suggesting that it manages the 
Department of Energy nuclear safety programs or State 
Department exchanges in Russia and Ukraine? Does USAID need 
operating funds to manage the $720 million in ESF, Economic 
Stabilization Fund, for Egypt, for Israel, for example?
    As I understand federal procurement rules, only one agency 
manages each distinct obligation. What percentage of those 
joint accounts are programmed by USAID?
    Mr. Natsios. I cannot tell you the exact percentage, but I 
can tell you that the ESF funds for the most part are managed 
by USAID, even though they are State Department Funds. The 
Egypt program is, in fact, not DA, Development Assistance. It 
is ESF funding.
    And we have a large USAID mission there. It is, in fact, 
our largest program. It is one of our best programs, in my 
view, from a technical standpoint. You can say those are, in 
fact, State Department funds, and they are, but they are turned 
over to us for management once certain decisions are made on a 
global scale or a sort of macroeconomic scale. When you get 
down to it, the management comes at the field level, at the 
mission level, and it is the ambassador and the mission 
director who run things.
    While there have been conflicts in Washington traditionally 
over the last 40 years between USAID and State, this is not 
anything that surprises anyone. If you talk to most 
ambassadors, and many of them are old friends of mine from the 
career service, whom I have known for many years, I pulled them 
aside privately. I meet whenever they come into the city. Even 
before I was confirmed, I was privately just having 
conversations because they were friends of mine.
    I said, ``How are we doing?'' And if they were having a 
problem, they would tell me. And they said, ``I love our 
mission director. Our mission director is doing a great job. We 
work together. And I love USAID's programming.''
    I did not hear any of the kind of acrimony we sometimes 
hear in Washington, in the field. And why is that? Because 
ultimately, the accounts that we are talking about have to 
bespent somewhere, and they are spent in the country. They are not 
really spent here. We may do the contracting here, but the money is 
spent in the field.
    And who is it? Is the ambassador going to personally 
administer some of these accounts? Of course not. He is going 
to go to the person with the management experience and staff to 
do it. I could give you at some point a precise number and 
different categories, if you wish, and I will do that. But that 
amounts to a great deal of the distinction.
    With respect to the money to Israel, that is not program 
money. We just send a check over once a year, as I understand 
it.
    [The information follows:]
                         USAID-Managed Programs
    The reason for the confusion in the size of the USAID program is 
that there are several different definitions, depending on whether the 
question is about the original USAID request, that portion the Agency 
manages, or the degree of management workload involved.
    The FY 2002 USAID request of $7.7 billion includes $3.2 billion for 
accounts that USAID manages directly, including the Child Survival and 
Disease Programs Fund (CSD), Development Assistance (DA), International 
Disaster Assistance, Transition Initiatives, and the Development Credit 
Program, as well as the Agency's Operating Expenses and those of our 
Inspector General. The balance of the $7.7 billion--for accounts 
jointly managed with the State Department and the U.S. Department of 
Agriculture (USDA)--totals $4.5 billion. This includes funding for the 
Economic Support Fund (ESF), Assistance for Eastern Europe and the 
Baltics (AEEB), Assistance for the Independent States of the former 
Soviet Union (FSA) and PL 480 Title II, which is initially requested 
through USDA.
    This, then, accounts for the two different figures for USAID 
programs cited in Chairman Kolbe's question.
    Of the $7.7 billion total USAID request, $581 million is for 
operating costs rather than programs, $825 million is planned for 
transfer from USAID to the Department of State and other agencies for 
implementation and $293 million is to be transferred from the 
Department of State to USAID for alternative development programs as 
part of the Andean Counterdrug Initiative. This leaves a net program 
size of $6.6 billion which USAID will manage in FY 2002.
    While there are varying degrees of management workload associated 
with different parts of this USAID program--the cash transfer to Israel 
involves relatively little staff time--the program in Egypt cited in 
the question, and even certain of the transfers to others, still demand 
management time--for example, to assure conditions are met for the 
release of funds and to account for use of the funds.

    Mr. Kolbe. Just a follow up to that, you have a number of 
countries where there is not a USAID presence, called 
nonpresence countries, where there is not a mission. So who 
manages those?
    Mr. Natsios. It depends. For example, there are a number of 
countries, and this goes back to my term 10 years ago, where 
USAID has programs with OFDA or Food for Peace in emergencies. 
There is no USAID mission, but there is an OFDA officer in 
charge on the ground. So you would not say that is USAID 
mission, but there is a disaster going on that USAID has an 
officer on the ground managing.
    In other cases, there are programs where we, for example, 
have the shipping program, I cannot remember the term for it, 
that is run out of BHR, where we pay for the shipping of goods 
to developing countries. In that case, there is a program, but 
it is run through an NGO on the ground in the field. They tend 
to be smaller programs, I have to say, some of them quite 
small. But they are countries in which there is some USAID 
money being spent.
    Mr. Kolbe. My time is up, but I was really trying to get at 
things like a country such as Pakistan, where you do not have a 
mission there, but you have an ESF program.
    Mr. Natsios. Right. Yes, we do.
    Mr. Kolbe. So that is really what I was talking about. Who 
is responsible for managing?
    Mr. Natsios. We still manage that centrally.
    Mr. Kolbe. You do. Okay.
    Mrs. Lowey?

                     GLOBAL DEVELOPMENT ASSISTANCE

    Mrs. Lowey. Thank you, Mr. Chairman.
    As I indicated in my statement, the concept of the Global 
Development Alliance and partnerships with a broad array of 
private companies and nongovernmental organizations intrigues 
me. There are, of course, numerous examples of these 
partnerships already in place at USAID.
    My first question, however, is why new funding was not 
sought for this initiative? I stress this because the apparent 
effect of taking $135 million from the child survival and 
development assistance accounts has resulted in a decrease in 
funds for Africa from these accounts: $814 million in fiscal 
year 2001 to $789 million requested in fiscal year 2002.
    Mr. Natsios. I might add that it is the appearance of 
reduction. And we had a debate on our staff. The staff said, 
``Well, it will be misinterpreted.'' I said, ``Put it down the 
way it is, and we will explain it. Do not try to obfuscate or 
confuse anybody, because it just creates mistrust.''
    We are not cutting from Africa; the $160 million we put 
from several different accounts into the Global Development 
Alliance has to be spent somewhere. It is going to be spent in 
the field. Even if we make no agreements with private 
foundations and companies, we have already begun to have some 
very interesting discussions that indicate to me this may be a 
really good idea in a practical sense, to increase the amount 
of money that is spent.
    Let me give you one example of it. Bill Gates has a 
foundation, a huge foundation. He has a permanent officer who 
has an office within USAID, and what they do is, they program 
their money piggy-back on us. They do not go through our 
accounting system, but they use our technical expertise, 
because they did not want to have the same size health staff 
that we have around the world or develop field missions the way 
the Ford and Rockefeller Foundations do because it costsa lot 
of money to do that.
    So we are already doing that in some ways. We know this can 
work. The question is, can we roll it out in a bigger way. 
There is not going to be any cut in the amount of money that 
Africa spends. It is, in fact, the case that it is very likely 
that it will be an increase, but it will not be a cut. It is 
simply, we have put these monies into this account, so I could 
go the person at the central office level and say, ``You have 
$160 million here. Go out and see what we can do in some 
alliances.''
    We think we can get them in different areas, but I do not 
want to make a promise here, because it reduces our flexibility 
to deal. If someone comes in and says, ``If you put $50 million 
in an agriculture program, we will put $200 million in a 
private foundation,'' I want to have the flexibility to say, 
``Yes, let's do that.''
    Mrs. Lowey. Thank you.

                    PRIVATE SECTOR DEVELOPMENT WORK

    The description given in your statement implies that there 
are numerous private sector companies who are anxious to deploy 
their people around the world to do development work. And I am 
concerned about how USAID will distinguish between genuine 
development projects, such as the GAVI program or the polio 
eradication efforts of Rotary International, and for-profit 
enterprises that might be proposed.
    Mr. Natsios. We have a 45-page business plan that we are 
working on, it is going through its third edit; I have not read 
it yet because I would like to see a more finished product 
before I read it to answer precisely the kinds of questions you 
are asking now.
    We had a very interesting thing happen at the LDC III 
conference that I just came back from in Brussels. A person 
from the private profit-making sector, Cisco Systems, an 
internationally known company in the information management 
business, gave a very interesting presentation.
    They have invested in a series of schools basically to 
train people in the developing world in using computers. And 
they did it with support from our agency. We actually have a 
relationship with them through our Global bureau. We have this 
Leland Fund of money for information management. The lady who 
was presenting it for Cisco Systems, went into enormous detail, 
in what they did and how they did it. I have to say it was the 
best speech of the whole time. The heads of state of many 
developing countries went up to her afterwards, and I think 
they were intrigued by the speech as well, as to how specific 
it was and how much they were able to get for the amount of 
money that they invested.
    So I am not sure that working with the private sector is a 
bad thing. I think it is a good thing. How we will do that, is 
kind of a distinction as to how we do it with a nonprofit, is a 
legitimate question that I do not have an answer for yet, but 
we are reviewing it.
    Mrs. Lowey. From what program areas will the $110 million 
for development assistance and the $25 million from the child 
survival be derived? It is my understanding, for example, that 
$90 million of the $110 million in DA, Development Assistance, 
is from environmental programs.
    Mr. Natsios. No, it is not. It is easy, given you do not 
have all the documents, to reach conclusions that might not 
reflect the reality of what we have proposed. There is a $54 
million reduction in that program area. I do not recall the 
amounts in all the other areas, but there were reductions in 
those accounts. But again, they are not reductions in the 
amount we are going to spend. They are simply putting the money 
aside, so that we can use that to leverage.
    I am a very strong advocate of agro-forestry programs. You 
could define those as agriculture programs. You could define 
them as environmental programs. An award was given to an 
environmental NGO in Costa Rica that has put aside a huge 
percentage of rain forest that is left in Costa Rica for actual 
timber use. And they got an award from the King of Belgium, 
from his foundation, and they had a wonderful program. It did 
have a tiny little mention that this thing was started by USAID 
working with the NGO community.
    And so, we know, for example, that there is interest in the 
private sector in doing agro-forestry programs with certain 
companies, there are other companies we may not want to do it 
with, and with NGOs that know how to do this well. I am hoping 
that we can put something together, but we will see.
    So it is not, again, an attempt to cut.
    Mrs. Lowey. Time is up.
    Mr. Natsios. Time is up. Does that mean I should stop 
talking?
    Mrs. Lowey. No, it is a clue to me.
    Thank you, Mr. Chairman. [Laughter.]
    Mr. Natsios. I thought it was a hint to me. [Laughter.]
    Mrs. Lowey. Maybe.
    Mr. Kolbe. We want to make sure we allow everybody the 
opportunity.
    Mr. Natsios. I understand that.
    Mrs. Lowey. Thank you.
    Mr. Kolbe. Would you provide for the record the 
documentation you just referred to in her last question?
    Mr. Natsios. I certainly will.
    [The information follows:]
          Sources of Funds for the Global Development Alliance
    Funding for the Global Development Alliance is intended as an 
incentive to encourage public-private alliances, which will leverage 
additional resources and new ideas to tackle critical development 
problems. This is a new initiative for Fiscal Year 2002, and the first 
of USAID's four pillars.
    The funding requested for the Global Development Alliance for 
Fiscal Year 2002 comes from three accounts; Development Assistance 
($110 million), Child Survival and Diseases Program ($25 million), and 
International Disaster Assistance ($25 million). Funds were not 
withheld from any particular sector, but rather taken ``off the top'', 
since this is a new funding request.
    It is our hope that all sectors will be able to benefit from an 
increase in total funding as alliances are formed with private 
companies, foundations and other groups. Until the alliances are 
actually developed and submitted for funding, it is impossible to know 
which sectors will receive what level of funding. It is also quite 
possible, and we believe desirable, that some alliances may work across 
sectors.

    Mr. Kolbe. Mr. Knollenberg?
    Mr. Knollenberg. Thank you, Mr. Chairman.
    Welcome, again, Mr. Administrator. We appreciate your being 
here.

                           LEBANON ASSISTANCE

    I have a, quick question on U.S. assistance to Lebanon. As 
you know, many of us on this panel, last fall, worked to put 
$35 million into the budget for Lebanon in light of Israel 
pulling out of south Lebanon. We felt there was a need to have 
the USAID Program looked at and improved, and this was what the 
money was for.
    You are also familiar, I am sure, with an amendment that 
passed yesterday by a slim margin. My view is that this money 
provides, stability for south Lebanon and in turn, provides 
stability for Israel. Now, the secretary of state spoke out 
very strongly and sent me a letter to advise against the 
amendment.
    My question to you is this, the concern was that this 
assistance was being used as aid to Hezbollah. Can you assure 
us that these funds are not used to support Hezbollah?
    Mr. Natsios. I want to first say that I agree with the 
Secretary of State, not just because he is my boss, but because 
he is right. These funds are going through five NGOs, and I can 
list them for you: Mercy Corps, the president of which is an 
old friend of mine, is an excellent NGO; CHF, Cooperative 
Housing Foundation; the YMCA; the Catholic Near East Welfare 
Association; and Creative Associates.
    They are all well known to USAID. We work with them. They 
are very reputable NGOs. All the money goes through those five 
NGOs. It does not go through the Government of Lebanon, and it 
does not go through Hezbollah by any stretch of the 
imagination. Just let me say it categorically. The funds from 
this program do not go to assist or through Hezbollah.
    Now, you can argue anywhere in the world that if you help a 
child by immunizing him against disease, that, in fact, in some 
ways you are helping a dictatorial government by saving that 
kid's life. Well, that is not an argument for stopping 
immunization programs in autocratic regimes. I mean, we should 
still do those kinds of programs. We should just never put the 
money through the government. And we are not doing that.
    In the case of Lebanon, we recognize the political issues 
which are beyond my charge here. I have to tell you, that is a 
State Department function, not my function. Our job is to 
insulate from the politics, which is a little difficult 
sometimes to do, but in this case, I think we have done it very 
well.
    I might also add that having hope for people who have been 
in the middle of a war zone for 30 years now is the best 
protection against this kind of violence and against this kind 
of extremism. The best protection for Israel is these programs 
in southern Lebanon, because the more hopelessness there is, 
the more the radical elements feed on to get young men, who 
have nothing else to do, involved in violence.
    So I think shutting these programs down will hurt the 
security of Israel.

                             KYOTO PROTOCOL

    Mr. Knollenberg. I appreciate your comments. Let me go to 
another question on climate change and energy.
    As you are well aware, the administration has spoken out 
against the Kyoto Protocol, which really manifests the 
regulation of CO2. That was one of the reasons the 
Senate, as you well know, voted 95 to nothing against the idea 
of signing the Kyoto Protocol.
    However, we see many problems at times. That is why there 
is this language in the fiscal year 2000 and 2001 AID 
appropriations bills that prohibits the spending on the Kyoto 
Protocol, including CDMs. Now, CDMs are clean development 
mechanisms. By any other word, it means the regulation of 
CO2. There are programs that are in play right now.
    I am sure you are aware of all the USAID activities that 
focus on this CDM issue, and I have a list of them, that I can 
certainly go to, and I am sure you have the same list: What I 
want to know from you in terms of a response is, will you work 
with us to ensure that no USAID monies will be spent for the 
implementation of the Kyoto Protocol, aka CDMs, aka regulating 
CO2?
    By the way, there is nothing in U.S. law that allows for, 
as I am sure you know as well, any regulation of 
CO2. Nothing.
    Mr. Natsios. Right. Let me say a couple of things. The 
first is that when the president made his announcement, the 
staff at USAID went through all of the existing programs to 
determine whether they could be interpreted to be 
[implementing] the Kyoto Protocol. And they stopped the 
programs. So that has already been done.
    There were some things that were being done, because they 
were ordered from the White House. A lot of the things we do 
that we get into political turmoil over are ordered by whoever 
is in the White House, and they are controversial issues 
sometimes. So we went through and took those programs and shut 
them down.
    However, let me just say, trees, agro-forestry programs, do 
deal with the CO2 problem. Now, I am not going to 
shut down all the agro-forestry programs, because they have 
agricultural consequences. Soil erosion is stopped by tree 
programs. There is a tree program in Africa now to put more 
nitrogen back into the soils because we cannot afford 
fertilizers, and there are some new technologies that we have 
developed, that the agronomists are astonishingly successful at 
doing that, without any fertilizer. Now, they also have a side 
effect of being a CO2 sink. I do not want to shut 
those programs down because they happen to also have that 
program.
    Mr. Knollenberg. I do not think you should, either.
    Mr. Natsios. Right. I know that is not what you were 
suggesting, but what I simply want to say is, things that were 
explicitly designed to carry out that protocol we have stopped.
    Mr. Knollenberg. Thank you, Mr. Chairman.
    Mr. Kolbe. We will have a second round of questions. We can 
get Mr. Bonilla's questions in before we have to break here.
    Mr. Knollenberg. Thank you.
    Mr. Kolbe. Mr. Bonilla?
    Mr. Bonilla. Thank you, Mr. Chairman.
    Thank you for being here, Mr. Natsios.
    Mr. Natsios. Thank you, Congressman.
    Mr. Bonilla. I have to tell you, your candor and your 
directness is very refreshing, and I think I can speak for most 
members of the subcommittee.
    Mr. Natsios. It is going to get me into a lot of trouble 
eventually.
    Mr. Bonilla. Well, long term, you are better served by 
doing what you are doing.

                         AIDS IN THE CARIBBEAN

    My first question this morning has to do with the AIDS 
situation, but not specifically in Africa. There is a problem 
that is prevailing and getting worse in the Caribbean as well.
    Mr. Natsios. Absolutely.
    Mr. Bonilla. My question is, are we as involved in that 
area as we are with the situation in Africa? And should it not 
be a higher priority since it is in our own hemisphere and has 
a greater direct threat to the United States?
    Mr. Natsios. We are deeply involved all over Latin America 
and the Caribbean, in our AIDS prevention programs.
    Let me say that there is an epidemiological sort of 
principle at work here, which is not widely known. And that is, 
when you get past an infection rate of 4 percent, the epidemic 
gets out of control. It is almost impossible once you get 4 
percent to stop the thing without a lot of interventions. What 
our efforts are directed at now is trying to prevent countries 
from getting there. So we have a particular interest, because 
most Latin American countries are not at 4 percent, yet. I 
think the one exception may be Haiti.
    So we have an interest, absolutely, and we are running 
aggressive programs. The addition of this money will allow the 
international community to focus on areas that have a very low 
percentage now. We do not want it to increase.
    The countries, we also might add, that have had the 
greatest success in reducing the infection rate are, where 
there is a principle involved in terms of political leadership 
within the country. For example, there has been a reduction of 
50 percent in the infection rate in Uganda. When the head of 
state makes it a personal priority, we find it makes a huge 
difference in convincing the population to begin to change 
behaviors and to start focusing attention on the public health 
aspects of this.
    President Bush announced a $20 million additional 
appropriation for the Caribbean AIDS effort in fiscal year 
2002, up from $12 million this year.
    Mr. Bonilla. Well, that is good to hear, because I want to 
make sure that, again, this problem that is at our doorstep is 
not overlooked in light of what is going on in Africa.

                      CORRUPTION IN LATIN AMERICA

    As you know, in Latin America, we are involved in a lot of 
economic development programs with a lot of our friends down 
there in places like Colombia, Bolivia, Peru and even Mexico. I 
know we do not give foreign aid in many of these cases, but in 
many of these cultures, the drug lords are continuing to 
dominate above and beyond anything we try to help them with.
    Is there anything in your plan or that USAID has now to try 
to deal with the corruption that is holding down a lot of these 
communities, and their cultures?
    Mr. Natsios. Let me mention two things. There had been a 
great deal of success some years ago in Peru, in Bolivia in 
virtually eliminating the growing of cocaine by using this new 
agricultural initiative of moving people into legal crops. It 
was very successful there, and that is the model we are using 
in Colombia. So there is something we are doing from a 
developmental perspective to reduce the growing of these crops 
that are so dangerous.
    With respect to corruption itself, we are actively engaged 
through the democracy and government programs, which we spend 
about $600 million a year, through the field or the mission 
programs, and a lot of that goes toward accountability systems. 
Many developing countries do not have institutions like 
inspectors general, general accounting offices, many of them do 
not even have accounting systems that they can use to audit 
against.
    They also do not have a tradition of investigative 
journalism. [I went to a press conference;] Mrs. Quayle and I 
were sent by President Bush 10 years ago to reassure the heads 
of state in southern Africa during the worst drought in African 
history, that we thought was going to turn into a major famine. 
We met with the heads of state to reassure them that we would 
provide sufficient food to make sure this did not turn into a 
famine.
    I was interested, and these were democracies, to see the 
lack of aggressiveness of the reporters in asking me questions. 
I basically had to ask them to ask me questions. And I said, 
``Boy, I would really like to have you come to the United 
States, because our reporters are so different in our 
country.''
    We do training programs now among the press, and some of 
the people who have been killed in some countries, were 
investigative reporters who were beginning to show that they 
can have a profound effect on the political system by 
disclosing this kind of corruption.
    Mr. Bonilla. That is why they do not do it or have not 
historically done it.
    Mr. Natsios. Well, but they are doing it more often in 
cases where countries are turning around. Peru is a good 
example of that. There is a revolution going on in Peru as a 
result of what has happened, as you know, with the Fujimori 
case.
    Mr. Bonilla. And lastly, if you would just provide for the 
record, update and assessment on our efforts to help with the 
El Salvador earthquake, I would appreciate that.
    Mr. Natsios. We will get you a written response.
    [The information follows:]
   Update on USAID Efforts To Help El Salvador After the Earthquakes
    USAID is rapidly mobilizing resources for the effort to help meet 
the $110 million pledge for reconstruction assistance made at the 
Madrid Consultative Group meeting in light of the damage inflicted by 
the first earthquake. to meet this pledge, $52 million is being 
provided this fiscal year. To complete the balance of $58 million to be 
provided next fiscal year. To complete the balance of $58 million to be 
provided next fiscal year, both State and USAID are conducting a 
thorough review of pipelines. If additional resources are identified, 
the USG pledge may be increased in order to also address housing damage 
and other needs caused by the second earthquake. Given the funding gap 
of approximately $600 million between reconstruction requirements and 
total donor pledges, we are also supporting the GOES call for an early 
donor follow-up meeting to identify additional needed resources for 
reconstruction.
    As part of the relief effort in the immediate aftermath of the two 
earthquakes, OFDA provided grants and plastic sheeting worth over $9 
million to six US PVOSs to construct 32,000 temporary shelters before 
the rainy season. All relief work is complete, and the focus has turned 
to reconstruction.
    On the reconstruction side, Project Concern International, with a 
grant of about $2 million is already at work on rehabilitating potable 
water systems and wells in the earthquake zone. USAID recently signed 
grants of $7.5 million with three US PVOs (CARE, Cooperative Housing 
Foundation and Samaritan's Purse) for permanent housing and an 
agreement for another $19 million with the Government of El Salvador 
for housing, other infrastructure (health, education, water), and 
economic reactivation. The PVO activities have now started. In 
addition, USAID has approved a loan portfolio guarantee for up to $4 
million for one of the top performing microfinance institutions whose 
borrowers were having trouble repaying due to earthquake damage to 
their businesses.
    USDA is providing Section 416 food assistance worth approximately 
$8.2 million to reactivate the rural economy and feed the hungry. The 
balance of $52 million for FY 2001 will be obligated well before the 
end of the fiscal year.

    Mr. Bonilla. I appreciate that, and again, do not let them 
get you down. Keep doing what you are doing.
    Mr. Natsios. I will not.
    Mr. Bonilla. Thank you.
    Mr. Kolbe. Thank you very much, Mr. Bonilla.
    We will recess temporarily while we go for this vote, but 
as soon as Mr. Lewis returns, he will resume the hearing with 
his questions here.
    So we stand in recess temporarily.
    [Recess.]
    Mr. Lewis [presiding]. I guess we can come back to order, 
Mr. Administrator.
    First, let me say that it is a pleasure to have a state 
legislator who straightforwardly will say, ``We do not 
automatically all have the answers just because we get elected 
to public office, nor does the administration.'' It is very 
refreshing indeed.
    You may or may not know that I have the privilege of 
chairing another subcommittee that deals with national 
security. But in the maze of the work of that subcommittee, I 
have spent a good deal of energy attempting to get particularly 
people who handle procurement, who are administering programs, 
to recognize that there is a broad variety and mix of good 
people out there doing good work, not all of them just huge 
corporations.
    And with that in mind, I wanted to bring to your attention 
a specific item, as you go about reacting to some of the 
systems whereby AID operates.
    Your statement is indeed a breath of fresh air for me. We 
share a common concern about the management practices of USAID. 
I welcome your commitment and hope to work closely with you in 
making needed improvements within the agency.

                           PROCUREMENT REFORM

    As you may know, I have been attempting to address a 
situation with USAID relative to small businesses that, in 
spite of outstanding professional track records, receive very 
few task orders under contracts awarded by competing firms.
    It is my belief that all contractors, large and small, who 
have been selected for awards should receive task orders, share 
in the opportunity to perform and build a track record upon 
which additional work can be based.
    Continuous requests to US AID to address this matter over 
this last year, year and a half, both personally and through 
the work of our fine committee staff, have been essentially 
futile. In fact, the lack of responsiveness and accountability 
at AID, to me, is startling, and I hope that you will address 
these questions.
    I applaud your decision to focus on procurement reform 
within the agency and remain willing to assist you in any way 
that I possibly can.
    To that end, I am going to leave with you a little packet 
here so I know it gets to your personal attention, a request 
from a small business that has been attempting to work with AID 
in making needed reforms in the procurement system.
    The owner of this business, a guy I do not, frankly, 
personally work with at all, but nonetheless a prime USAID 
contractor, attempted to repeatedly work with both your 
predecessor at AID and the professional staff. Essentially, 
they were not given the time of day.
    That, Mr. Administrator, is the attitude of the agency that 
you are going to be attempting to reform. And, frankly, it just 
is not good enough. And by way of your background and your 
comments, I think you are just the kind of guy who can perhaps 
get in the middle of this and say, ``Let's make sense out of 
it.'' Sometimes the third level gets in the way of doing that 
which is right.
    So I will leave this with you and you can go from----
    Mr. Natsios. And I will read it, Congressman.
    Mr. Lewis. Thank you very much.
    I would appreciate any additional comments you might have 
in connection with the thoughts I have here.

                           MANAGEMENT REFORM

    Mr. Natsios. Let me make several comments.
    One is, I have found it a useful technique in my other 
management jobs to focus the staff's attention by personally 
taking charge of changes, because when you delegate that, 
sometimes people sort of get the message that it is not quite 
as important as other things which you want to control 
yourself.
    Mr. Lewis. Correct.
    Mr. Natsios. So what I have done is focus on the things 
that need immediate attention and my direct attention and to 
reduce the amount of intrigue. You know, there are always 
differing points of view about what to do. Fewer games are 
going to be played if I, myself, am managing the direction of 
things.
    I am going to be meeting, at least for the next year, with 
the heads of each of the four systems that I mentioned earlier 
were dysfunctional, the procurement system, the financial 
management and accounting systems, the management information 
systems on the program side, and the personnel system, to go 
over what needs to be changed, because I have run these kinds 
of systems before, even though in a different context.
    And the other benefit I have is, I worked at an NGO for 
five years, and we made a decision not to go into contracting, 
for a variety of reasons. There were religious reasons, they 
were nervous about, you know: What would happen, and who do you 
work with and that sort of thing?
    But there was a larger question. We had other NGOs who had 
gone into this who had bad stories. Friends of mine who were 
CEOs of big NGOs said the same kinds of things you are saying.
    So when people tell me, ``You cannot change it,'' 
or,``Everything is fine,'' I can give you personal stories myself, from 
personal experience, to show otherwise.
    Now, I have to tell you, it is not because the career staff 
necessarily is doing anything wrong. It is because they have 
been handed a system that works a certain way and they do not 
have the authority to change it.
    In fact, some of them have come up to me, when I was in my 
initial period before I was sworn in, and said, ``Here are a 
whole bunch of things we would like to change but we have not 
been allowed to do it for a long time.'' And this goes beyond 
administrations, this is not a partisan question, this is a 
management question.
    Mr. Lewis. Correct.
    Mr. Natsios. There are, problems. One of the problems is 
that some of the companies that do these large contracts, that 
are very capable and very able, put in these smaller companies 
as subcontractors and then do not give them any business. And 
that means, technically, that they are not complying with the 
provisions of the contract.
    So I have already given instructions to have a meeting with 
the large contractors and the small contractors, face to face, 
and have them talk to each other, to explain that there is a 
lot of anger, that ``You are using our qualifications to get 
these contracts and then you are not giving them any task 
orders.''
    Mr. Lewis. Correct.
    Mr. Natsios. We approve grants based on the qualifications, 
in many cases, of the subcontractors, so we are giving them 
based on it. If they are not getting any benefits, the 
contract, in fact, is not being complied with, from my 
perspective and from the career staff's perspective, I might 
add.
    So I think there is something we can do very quickly about 
this. But I am not convinced that just doing this will change 
the system.
    I think frequently what we do in the public and the private 
sector is, we sort of yell at people. We call in people who 
were given a dysfunctional system, who are trying to make it 
work, and we get angry with them, instead of changing the 
system that they are stuck with enforcing. And that is what I 
look to do.
    I have always found that the people running the system have 
the best ideas for changing it, because they know all the 
intricacies. I think I have gotten everybody's attention now 
that I am paying a lot of personal attention. I obviously am 
taking a big risk, because I put in my testimony in my 
confirmation hearing that I was going to fix the four systems.
    The message to the staff is: We had better fix the four 
systems or in one year I am going to be in some trouble with 
this body and the other house of the Congress as well, because 
I made a public statement that we were going to change things.
    Mr. Lewis. I must say, Mr. Administrator, that both what 
you are saying and your style is very refreshing to me.
    One of the realities around this place is that, within the 
subcommittees of Appropriations, often members are very busy 
traveling around the country, going back and forth to their 
homes. Often our staff does not expect members to get involved 
in issues and actually read the bill and ask questions. It gets 
to be cumbersome when members get involved.
    What you are really saying is that, in the heart of this, 
just a few questions and a few directions could get some 
reaction that actually helps everybody, and we are in the this, 
in the final analysis, to serve people.
    Mr. Natsios. That is exactly right.
    Mr. Lewis. Well, further, I am very intrigued by your 
statements regarding encouraging private sector, nongovernment 
development in developing countries, working through very fine 
NGOs where they have done great work over time, leveraging 
money.
    I am hopeful that our committee, as we work together, can 
in a very positive way help you implement such changes.
    Mr. Natsios. Thank you, Congressman.
    Mr. Lewis. Thank you, Mr. Chairman.
    Mr. Kolbe [presiding]. Thank you.
    Well, we will begin a second round here, and we will go 
back to the regular order when others come.
    Thank you very much, Mr. Lewis, for helping us expedite 
this hearing. I have just been told by staff that you asked an 
excellent question on the procurement staff.

                          FINANCIAL MANAGEMENT

    I wanted to stay on this issue of the financial management 
issues here for a minute more. In mentioning the staff 
shortages that you inherited at USAID, I wonder if you really 
looked at the size and effectiveness of the Management Bureau. 
It is my understanding that it has basically avoided any of the 
cuts during the last administration that really decimated the 
field presence of AID and the Washington offices that provide 
direct support for the missions overseas.
    Also in this area of procurement, it seems that the Office 
of Procurement is the one that took the biggest hit of all. I 
think the Office of Procurement is a critical element in your 
reform plans. Your written testimony refers to that, the need 
for rebuilding the contracting and grant-making capacity.
    You have out-sourced your payroll to the Department of 
Agriculture. You have out-sourced many of the grant-related 
activities to the Department of Health and Human Resources, 
your loan servicing to Riggs Bank.
    As a result of doing all that, how many positions in the 
Management Bureau have been eliminated, and what is the extent 
of the savings, if any, from out-sourcing some of this 
financial management activity?
    And finally, I am wondering if you have given any thought 
to combining overseas payroll in AID with those of State 
Department. It strikes me as a very strange thing--we have two 
totally separate payroll systems operating side-by-side for 
overseas missions here, and it is just very strange.
    So those are just a few of the questions in that area that 
I would like you to address.
    Mr. Natsios. Let me try to answer them.
    I will get you specific data after this hearing, in terms 
of the number of positions. There has been a reduction in the 
Management Bureau's overall number of employees through 
attrition, but they did not take the RIFs that took place in 
the other bureaus.
    [The information follows:]
                  Outsourcing USAID's Payroll Function
    The Management Bureau outsourced three functions over the past few 
years--payroll, cash advance operations for certain grants and loan 
servicing.
    We entered into a cross-servicing agreement with the National 
Finance Center (NFC) for combined personnel and payroll transaction 
processing services and products to replace our legacy personnel and 
payroll systems. The legacy personnel system was over thirty years old 
and the Agency was increasingly vulnerable to disruptions in the 
maintenance and operations of the mainframe systems. We do not expect 
to reduce the number of positions allocated to payroll processing as a 
result of cross servicing; however, we have eliminated two positions 
supporting the legacy personnel system. Our estimated net savings over 
five years is $5.2 million, much of which is realized from savings by 
shutting down the Agency's mainframe computer.
    We have a cross-servicing agreement with the Department of Health 
and Human Services (DHHS) to handle cash advance operations for 
organizations with letters of credit. The original decision to move the 
DHHS for processing was catalyzed by the Y2K implications of continuing 
with the legacy system and the Chief Financial Officers' Council 
recommendation that all agencies cross-service letter of credit 
processing with expert partners. This arrangement is resulting in 
improvements in the management and liquidation of advances. The annual 
cost is currently $180,000. Moving to this arrangement eliminated the 
costs of contractor support, Y2K compliance, and mainframe operations.
    We retired the legacy loan servicing systems and outsourced the 
loan servicing function to Riggs Bank. The aging legacy systems were 
becoming less and less able to provide consistently accurate data and 
were increasingly inadequate to keep up with the demands of Paris Club 
reschedulings and restructurings and increased reporting requirements 
under the Credit Reform Act of Chief Financial Officer (CFO) Act. The 
annual cost for the Riggs contract is $1 million. Savings resulted from 
eliminating system and mainframe costs, and redeploying five direct 
hire positions within the CFO organization to the functional areas of 
payments and accounting.
    The outsourcing of these functions is consistent with USAID's 
overall systems modernization plans and regulatory requirements to 
utilize third party service providers when cost-effective. The cost to 
replace or modernize these systems in-house would have outweighed the 
savings by millions.
    We are currently working with the State Department to have them 
process payroll for our foreign service nationals. We chose the U.S. 
Department of Agriculture's (USDA) National Finance Center over the 
State Department for U.S. civil service and foreign service direct hire 
payroll transaction processing because USDA offered both personnel and 
payroll services and processing at a lower cost.

    Mr. Kolbe. Can you explain the reasons for that?
    Mr. Natsios. Well, I was not here, Congressman.
    Mr. Kolbe. I understand.
    Mr. Natsios. I am attempting to find that out right now. It 
may be that they ran the RIF process. The person----
    Mr. Kolbe. That is probably a very good guess.
    Mr. Natsios. Well, I mean, that is what happens, you know.

                              AID MISSIONS

    My view is, we exist to serve. All the central offices 
exist to serve the missions. That is where the work is done, in 
the developing world. And if we are not doing that, something 
is seriously wrong.
    And, again, those are political decisions made at a senior 
level. Those were not made by the career staff. I think a lot 
of people blame career USAID officers when in fact they are 
ordered to do things that they only shake their head at. That 
happens.
    In terms of the procurement staff, I just authorized an 
additional 10 positions in the procurement office. If we want 
to make the system better and work faster, we have to have more 
officers in that particular office. Not a huge number, but 
there has been a problem.
    There is also a very large number of vacancies, because 
there is a morale problem, because their workload is so 
intense, and there is so much acrimony, because the missions 
want to know when their contracts or grants are going to be 
approved and they are not getting approved. And so it feeds on 
itself. And so we are about to put a new package together of 
incentives to try to keep people in the procurement division.
    The other thing that is very interesting on procurement is, 
people are not leaving the procurement division to leave USAID. 
They go from procurement to the program division. They stay in 
the agency. They want to do the work.
    The problem is, sometimes they do not see the connection 
between their work and the actual programs that are being run. 
And that is a big problem, because if they did see the 
connection it would be much easier for them to see when 
something was out of line from a programmatic standpoint. They 
are procurement officers in a procedural sense. That is what 
they understand and do well.
    There has been a lot more effort by the two senior officers 
in that division to try to get some of our procurement officers 
to go out when there is a disaster in the field. We need a 
procurement officer to go with a DART team from my old office, 
OFDA, in an earthquake or a famine or something. We will put 
some of these people on teams. When they come back, we notice 
their motivation level has changed a lot, because they realize 
that without procurement, you cannot get any money spent, and 
if you slow things down, people die.
    So it is having an effect. And that has only been done for 
four or five months, and we have noticed a big change in 
people's motivation and behavior and willingness to do this 
work and be under a lot of pressure once they see the 
importance of their work.
    I might add, it is very interesting, if you go to most of 
the federal offices, you will note that there is not a huge 
number of applicants for positions. State is having a problem 
with Foreign Service.
    We have not been hiring for four years now, and there has 
been a cut of about 35 percent of career people in USAID in the 
last five or six years.
    But what is very interesting is, this year and last year we 
did hire what are called new entry professionals, for about 90 
positions. We lose about 10 percent of our workforce a year 
from retirements or deaths or people taking other jobs. We had 
10 applications for every position, which has to be one of the 
best records in the federal government.
    There is enormous interest among the American people in 
working in USAID because of the programs we do. And it is 
interesting that given the dysfunction of some of these systems 
that people still want to work in the agency, because they are 
so dedicated to the work.
    Mr. Kolbe. Thank you.
    My time is up. I would just note that I think that that 
number of people applying may be a little misleading, because I 
think a lot of them were people who had been on contract 
before.
    Mr. Natsios. No, no, actually they were not. There were a 
few who were, but many of them are actually former workers for 
NGOs and for private companies. I asked them. I asked for that 
data for precisely the reason you are talking about.
    Second round, Mrs. Lowey?

                       FAITH-BASED ORGANIZATIONS

    Mrs. Lowey. Thank you, Mr. Chairman.
    Your statement indicates that the $25 million from the 
disaster assistance account will be used to develop 
partnerships with faith-based organizations. I am trying to 
understand, I wonder if you can expand on your intention with 
these funds, since many of these organizations are already in 
the business of providing disaster relief. You talk about World 
Vision, certainly, Catholic Charities. So I am trying to figure 
out what is new here, unless the $25 million will be limited to 
faith-based organizations.
    Mr. Natsios. Oh, absolutely not. We are not limiting it to 
one category. We are going to get more involved in the work of 
NGOs, I might add, of all faith traditions, in conflict 
prevention. While there are secular NGOs that are involved in 
this, there is, and I have done a little[, just a] statistical 
analysis when I was doing an article some years ago on this, 
there tends to be a disproportionate number of NGOs from 
religious traditions, of many different categories, that are 
involved in conflict prevention, I think for philosophic 
reasons.
    But we are not limiting this to that. I think there is just 
talk about faith-based NGOs, so we added that into the 
language, Congresswoman.
    Mrs. Lowey. But it is business as usual----
    Mr. Natsios. No----
    Mrs. Lowey [continuing]. Because many of the faith-based 
groups have been doing an excellent job.
    Mr. Natsios. Yes, they have. They have been doing it for 40 
years and very well.
    I might add, 25 percent of the NGOs that are registered 
with USAID are faith-based NGOs, and 40 percent of the NGOs in 
InterAction, I counted, this is my count, not theirs, I was 
doing an article on this some years ago, it was 40 percent of 
the members of InterAction are faith-based NGOs, of three 
different faith traditions, Christian, there are a couple of 
Muslim, and there are several Jewish. So it is across the 
traditions.

                      GLOBAL DEVELOPMENT ALLIANCE

    Mrs. Lowey. Your statement also indicates that the Global 
Development Alliance will be used to a great degree in Eastern 
Europe and the Independent States. And what I was trying to 
understand, if this is the case, why is funding from those 
accounts, the specific accounts I mentioned, not being used to 
fund those alliances?
    Mr. Natsios. I do not know exactly what text you are 
reading, but we do not know yet where we are going to make the 
deals. So I do not know who wrote that, but----
    Mrs. Lowey. It is in your statement.
    Mr. Natsios. I know it is in my statement, but it does 
refer to the other areas too, doesn't it?
    Mrs. Lowey. Right.
    Mr. Natsios. Right. Other regions.
    Mrs. Lowey. But I just wondered why they would not be 
coming from those accounts.
    Well, we can talk about that. But I think----
    Mr. Natsios. I think there may be some evidence now from 
the career staff that there is some interest in specific 
foundations and companies to do some work in that area.
    I think if you look at the other areas, like under Africa 
and Latin America, you will see the same sorts of language.
    Mrs. Lowey. Well, I just want to make the point, and we 
could have further discussions, that if you are going to use 
the money in those areas, it should come out of the--
    Mr. Natsios. Well, the problem is, I do not have control. 
The money in Europe and Eurasia are not under USAID's control. 
That is the State Department's role.
    The reason we took it out of development assistance and 
child survival is those are USAID accounts. They are the $3 
billion you were talking about, that Congressman Kolbe was 
talking about.
    Mrs. Lowey. Well, we can continue talking about this, but 
if there is money allocated to specific areas, I think we 
should keep the money in those accounts, otherwise why are we 
determining specific amounts----
    Mr. Natsios. Because I did not want to be too arrogant my 
first two weeks on the job and take money out of State 
Department accounts over which I do not have the authorization 
to move money around. I do have them from the accounts that we 
took them out of.
    Mrs. Lowey. Okay.
    Mr. Natsios. The SEED account, for example, they tell us 
where to spend it. We manage it for them, but the State 
Department has a much heavier hand in negotiating how funds are 
used out of ESF and SEED, for example. I cannot move those 
funds around.
    Mrs. Lowey. Okay.
    Mr. Natsios. At some point, we will have a discussion about 
that.

                          CONFLICT PREVENTION

    Mrs. Lowey. Since the sand is dropping, I will move on.
    Okay. With regard to conflict prevention, first of all, I 
want to welcome again your focus on conflict prevention. This 
is an area that I care very much about. And I do hope this 
indicates a genuinely new approach.
    However, and we have talked about this, in order to 
accomplish your goal, you need the support of DOD and the State 
Department and the flexibility to redirect economic assistance 
resources to troubled areas and more funding for democracy-
building programs.
    Well, I do not want to sound too cynical, but I wonder if 
you have this support in your arsenal at the moment, and the 
initial indications from the DOD have been toward a reduced 
presence and involvement in overseas conflicts. Democracy 
funding has been cut in the 2002 request, particularly in 
Africa where many of these conflicts are occurring. And 
finally, the budget request before us provides very little 
flexibility in terms of moving resources from one country to 
another.
    Given these factors, I would appreciate how you intend to 
achieve the desired results, which we both support.
    Mr. Natsios. The first thing I want to say is, you may 
officially be getting comments from DOD that they are 
uninterested in this. I can tell you privately, and, you know, 
I was 23 years in the Army Reserves, and I was in the Gulf War 
in Saudi Arabia and Kuwait, I can tell you, the career officers 
are deeply interested in this.
    And there are a number of military intellectuals who write 
widely on this. I have written a couple articles for 
``Parameters,'' which is the Army War College journal, and you 
can just look at the journal, and there is talk about these 
things. There is deep interest.
    There is reluctance, I think, at a very senior level from 
previous administrations. I hope that may change. Whether it 
does or not, the career officers are interested in it.
    One of the first people who visited me, and I will not tell 
you who it was, it was a very senior officer, a career officer 
from the Pentagon, saying, ``Andrew, we love the Office of 
Transition Initiatives, we love your democracy programs, and we 
are very pleased by the reports we are hearing that you are 
going to do this conflict prevention stuff.''
    They do not want to send their soldiers abroad to do 
development work, and I think they are right. The Pentagon was 
never designed to do nation building. That is not what it is 
there for. They are uncomfortable doing it, because they are 
not trained to do it. And I can tell you, I understand why they 
are nervous.
    They, however, have resources that we do not have. They 
have worldwide outreach themselves; there are five regional 
CINCs, as you know, that cover the whole world. And I can tell 
you, in all of those five regional CINCs there are officers 
devoted to the question of peacekeeping operations, conflict 
prevention, conflict resolution, using this kind of thing.
    We have programs through which we coordinate with them. 
There are a number of Pentagon simulations being done now. In 
training exercises, we train jointly USAID officers and 
military officers and diplomats.
    One of these projects is called the Sense model, and what 
it does is it forces people in the three disciplines to 
realize, if they want to prevent these conflicts, they have to 
work together. Normally, I mean, to be very honest with you, 
there is stovepiping in all federal agencies, and it is not a 
function of any party or ideology, it is just in the nature of 
bureaucracy that people stay within their stovepipe.
    This Sense training is having a profound effect on our 
officers. I have jacked up the amount of money we are putting 
into it, because when they sit in the same room as a military 
officer and a diplomat and they are all saying, ``Look, if we 
worked on this together, we might have prevented this thing 
from blowing up,'' we could have probably prevented Bosnia, and 
I think we would have prevented the Rwandan genocide from 
taking place. And it would not have taken as much as it looks 
like. It would not have required troops being sent in.
    So I think we are going to work with them. There is a lot 
more interest than it may appear.
    Mrs. Lowey. My time is up. I agree with you 100 percent. 
And I just wish us all good luck: ``To be continued.''
    Mr. Natsios. Let me just add on the democracy, the amount 
for fiscal year 2001 is $56 million; the amount for fiscal year 
2002 is $56 million--in the Development Assistance account. 
There was no cut. I am not sure how that data was taken.
    Mrs. Lowey. We do not have all the information----
    Mr. Natsios. Okay.
    Mrs. Lowey [continuing]. So we will continue this. Thank 
you.
    Mr. Kolbe. We will take Mr. Knollenberg and then Ms. Pelosi 
here.
    Mr. Knollenberg?
    Mr. Knollenberg. Mr. Chairman, thank you very much.
    And, Mr. Administrator, again, I appreciate your 
straightforwardness on these questions.

                              THE CAUCASUS

    I have one now for the Caucasus. I know that you are aware 
the subcommittee has played a leading role in shaping U.S. 
assistance in the Caucasus area, including maintaining Section 
907 of the Freedom Support Act and supporting confidence-
building measures in the Caucasus region, and particularly 
assistance to Nagorno-Karabakh.
    In the fiscal year 2001 House report language, we 
stipulated that without further delay the remainder of the $20 
million in humanitarian assistance initially provided in the 
fiscal year 1998 act be released for obligation. However, up to 
this point only about $11.8 million has been obligated, and the 
additional funds are still lying there.
    Now, let me just ask, given the fact that there has been 
some success in Key West, for example, I know Secretary of 
State Powell met with the two leaders of Azerbaijan and Armenia 
to discuss the Karabakh situation, and from all accounts, the 
meeting was somewhat positive, and they have another meeting 
scheduled in Geneva in June: Can you give us any update on the 
situation with respect to the funds that have been 
appropriated, but have not been released for obligation? Any 
update you can give us with respect to the status of those 
funds.
    Mr. Natsios. I have not memorized all of this budget in two 
weeks yet, but I am trying to focus on it. There are notes here 
on it, and I will try to find them if I can.
    Mr. Knollenberg. If you want, in the interest of time, you 
can submit that in writing. But I would like to have a 
statement----
    Mr. Natsios. We will send you a response, Congressman.
    Mr. Knollenberg [continuing]. That would reflect what the 
status is. It appears as though nothing is happening, and that 
is the bothersome point.
    Mr. Natsios. I will check on that. I must also tell you 
that I want to be careful what I say because those negotiations 
are going on right now and I do not want to compromise 
Secretary Powell's efforts at ending that terrible conflict.
    I have a personal interest in the Caucasus, and so this is 
a subject of considerable personal interest.
    Mr. Knollenberg. And you can take your time and respond 
then----
    Mr. Natsios. I will, yes.
    [The information follows:]

                     Assistance to Nagorno-Karabakh

    USAID shares the concern of Members of Congress over the impact of 
the conflict in Nagorno-Karabakh (N-K) on the civilian population of 
the region. In response to congressional directives, USAID has provided 
funding to address the humanitarian needs of the people in and outside 
Nagorno-Karabakh and remains sensitive to continuing concerns about 
conditions there. USAID has obligated and has already expended $11.8 
million in FY 1998 and FY 1999 funds in programs that have raised basic 
shelter, health, water, sanitation, and subsistence income levels.
    Shortly, in FY 2001, USAID will obligate an additional $4.0 
million, bringing the total obligation for Nagorno-Karabakh to $15.8 
million. The pace of implementation has significantly increased after 
an initial slow start, as you are aware from our reporting to Congress.
    Given the current situation, we are reviewing our assistance to 
Nagorno-Karabakh residents with an eye to increasing the pace of 
expenditures, mindful of potential absorptive capacity issues. We are 
and will continue to closely monitor the situation to ensure that the 
valuable humanitarian work already achieved and still required in N-K 
is not undermined, or does not come to a halt.

                              MICROCREDIT

    Mr. Knollenberg. Another question I have is on microcredit. 
I think most of us here support the microcredit program, and it 
really has been effective in stopping, I think, dependence on 
U.S. foreign aid in many ways, because these people really do 
good work in the various settings around the world. And most 
importantly, I think, and most significantly, it is the women 
that are engaged in these programs.
    I know that you are supportive of this by virtue of your 
opening statement, which talks about the increasingly important 
role of microcredit in job creation and economic opportunity 
for these people.
    But what we have been trying to do for a long time is to 
get USAID to get the numbers up to the 50 percent level. I 
think currently there are around 41 or in the low 40s. And what 
measures----
    Mr. Natsios. Forty percent of what, Congressman?
    Mr. Knollenberg. Of the amount allocated for microcredit 
loans directed to the very poor. It is commonly called 
microenterprise monies that go to credit programs to serve the 
poor.
    Mr. Natsios. Right.
    Mr. Knollenberg. And I believe, if I am not mistaken, that 
we have actually mandated at least half of the amount, should 
be directed to the very poor. At least $155 million should be 
applied to microenterprise in the year 2002. My recollection is 
that it is $155 million.
    Does anybody that you have with you----
    Mr. Natsios. I know the intention of that, and I personally 
support it. But let me just tell you, a lot of those funds go 
through NGOs. World Vision, and I hate to keep mentioning World 
Vision, but I worked there, and I have practical experience 
with it, but if USAID told us you had to take a really 
brilliant new idea for a loan that might employ 20 or 30 
people, but might go to a person who is not the poorest person 
but who might employ some of the poorest people, I would refuse 
to take the grant, I have to tell you, if you did not give me 
that flexibility.
    So sometimes I know the intention is appropriate, but the 
practical consequence on the ground is, it is very difficult to 
either do it, and sometimes it can really give you the wrong 
message.
    What we want to do is, we want projects that will pay money 
back so that you can lend more money. And sometimes we get 
programs for a very poor person, I am just giving you an 
example. We started programs in Georgia, for example, and it 
was not always the case that the poorest loan proposal was the 
one that was most likely to be paid back so you could then lend 
the money out again. And so there are different demands that 
come on the NGOs that run these programs.
    I understand what you are saying, and I am very sympathetic 
to it, it is just the practical question of how you order 
people in remote areas to----

                            LOAN PROCESSING

    Mr. Knollenberg. Maybe you could, as my time is running 
out, get back to us with a response.
    What I am also interested in is that conceivably, because 
some of these loans are not being repaid, that there is a 
holdup in processing loans. I have heard that because of some 
of the famines and/or national tragedies that have taken place 
around the world, perhaps there has been a holdup on loans 
being granted. But I don't mean to put words into your mouth.
    Mr. Natsios. No, no, let me----
    Mr. Knollenberg. Could you respond in some way to let us 
know----
    Mr. Natsios. Yes.
    [The information follows:]

                            Microenterprise

    Under the Microenterprise Initiative Renewal, USAID had committed a 
minimum of $135 million each year in its microenterprise programs, of 
which at least 50 percent would finance poverty lending ($300 or less 
in most of the developing world and $1,000 or less in Europe and 
Eurasia).
    Microenterprise levels from FY 1997 through 2000 have actually 
averaged over $150 million per year. An average of 63 percent of the 
microfinance funding supported programs focussed on the very poor.
    USAID has targeted up to $155 million for microenterprise 
development each year for FY 2001 and FY 2002, of which 50 percent will 
continue to support very poor entrepreneurs. Efforts have also moved 
beyond just lending programs to include business development services.
    We are optimistic that we will meet the funding targets. With 
regard to the poverty target, USAID will track program results very 
closely. We will not have data on the poverty level of program 
beneficiaries until after the end of each fiscal year, when data from 
our implementing partners are submitted and tabulated.

    Mr. Knollenberg [continuing]. If there is any holdup on 
those loans being granted.
    Mr. Natsios. I actually asked our staff to do a study of 
how many conflicts there have been in the countries USAID has 
missions. Of 75 missions, two-thirds have had conflicts in the 
last 5 years, and they are extremely disruptive to any of these 
programs.
    But to answer your question, 50 percent of our program go 
to very poor people who take loans of less than $300. The 
problem is, to make these programs successful, you have got to 
train them. I can tell you this from personal experience. You 
have got to train them in doing a business plan, how you put it 
together, how you do marketing, how you decide your product 
line, how you develop an accounting system that tells you 
whether you are making money or losing money.
    And we found, sadly, in some of the former Soviet states, 
where the value system has been so distorted by 70 years of 
Marxist ideology, we had to do some ethics training. There are 
whole training programs now in business ethics, believe it or 
not.
    So it costs money to do that training, and that distorts 
the percentages that sometimes appear in the reporting we do. 
But in terms of the actual amount of money being loaned, I 
think it does comply with the language.
    Mr. Knollenberg. We will appreciate your expansion on that.
    Mr. Natsios. We will send a note to you on that.
    [The information follows:]

                         Microenterprise Loans

    Reports you may have heard about loan delays generally concern lack 
of liquidity in lending institutions resulting from increased demands 
caused by disasters. For example, some entrepreneurs needed the term of 
their current loan extended, and requested small amounts of additional 
credit to restart their businesses to replace inventory, tools, 
equipment, and workplaces that had been destroyed or damaged. In 
addition, new clients that became unemployed as a result of disasters 
were turning to microfinance institutions for start-up capital. This 
put pressure on the lending institutions' liquidity, which were 
sometimes exacerbated by clients withdrawing savings to meet short-term 
emergency needs.
    USAID has used both grant and credit instruments to help U.S.-
supported microfinance institutions obtain the additional resources 
needed for onlending during post disaster periods. When the earthquakes 
struck El Salvador, the Agency was able to package a loan guarantee 
very quickly to ensure that one of El Salvador's leading microfinance 
institutions had adequate liquidity to respond to its clients' needs. 
USAID intends to continue building on experience to craft better and 
faster support for well-performing microfinance institutions that are 
helping their clients, who are among the most vulnerable people in most 
societies, recover from natural disasters.

    Mr. Knollenberg. Thank you.
    Mr. Kolbe. Before I call on Ms. Pelosi, let me just note on 
the issue that Mr. Knollenberg raised, that last year we did 
defer to the authorizing committee and that legislation about 
going to the poorest of the poor countries was enacted into 
law. The different scale for different countries is a graduated 
scale.
    Ms. Pelosi?
    Ms. Pelosi. Thank you very much, Mr. Chairman.
    Welcome, Administrator Natsios. Good luck to you, as one 
who was not enthusiastic about the consolidation at State and 
USAID, I was pleased to hear your optimistic view of how this 
could work, and wish you much success.
    Mr. Natsios. Well, you and I agree on that issue, 
Congresswoman. [Laughter.]
    Ms. Pelosi. I look forward to helping in any way I can.
    This was going to be my last question, but I am going to 
make it my first question, because it springs somewhat from 
what Mr. Knollenberg was asking about, in that your response 
talked about other aspects of society impacting some of the 
assistance that we try to give.

                       MALARIA PREVENTION PROGRAM

    Last year, the Foreign Ops conference report contained 
language urging USAID to designate funding for a concerted 
approach to malaria prevention submitted jointly by the 
University of Notre Dame Center for Tropical Disease Research 
and Training and the Tulane University Department of Tropical 
Medicine. We are spending lots of money trying to fight 
malaria, but we need some money for training so that the 
absorptive capacity in these areas can be expanded.
    I understand that officials from Notre Dame and Tulane have 
been meeting with USAID and have presented their proposal to 
assist USAID in efforts to scale up to national level in four 
African countries to address urgent needs posed by malaria. 
When can we expect USAID to obligate these funds to the Notre 
Dame and Tulane consortia for the malaria prevention program? 
You may not know that right at your fingertips.
    Mr. Natsios. I do not. I can certainly find out. But I just 
want to make a comment generally. I said it in my testimony but 
I want to say it again. I do notknow anything about this 
program. It is not a criticism of either university, which are among 
the best in the country. Because the universities and schools and 
colleges have had a substantially reduced role in USAID efforts, which 
I am disturbed by, I have to tell you, they have tended to come to 
Congress with individual proposals to do individual things.
    Ms. Pelosi. Oh, we know that. [Laughter.]
    Mr. Natsios. And some of them are very good, and some of 
them are not very good.
    Ms. Pelosi. No, I understand.
    Mr. Natsios. What I would like to do, and this is my idea, 
it has not been approved by anybody, and this may cause a lot 
of controversy, but I would like to take all of the directives 
to universities and colleges, put them in sectoral funds, and 
then have a competitive bid. Because some of the proposals we 
get are very high quality. Others of them are indefensible, and 
yet we are asked to do it. And you know, there are so many of 
these now.
    Ms. Pelosi. Right. No, I understand your point, Mr. 
Administrator.
    Mr. Natsios. But I will check on this for you. In terms of 
the question of malaria and TB, the $200 million fund that the 
President has just announced for this trust fund is not just 
for HIV-AIDS. It is for malaria and TB and HIV-AIDS.
    Ms. Pelosi. And it is also no additional new money, so I 
have a problem with it as well.
    Mr. Natsios. But it is not from USAID. We have not had our 
money taken.
    Ms. Pelosi. Well, I commend the president and welcome his 
focus on global health issues. My concern is that there is no 
additionality in it, but hopefully this step that he is taking 
will demonstrate the need for there to be more money, rather 
than reprogramming money from last year. We have had that 
conversation with the secretary of the treasury and the 
secretary of state.
    Mr. Natsios. Right. I went through the OMB meetings, and I 
have to say, I was worried that they were going to tell me to 
move money from one account to another, and Colin Powell 
protected us from that happening. It did not happen.
    Ms. Pelosi. I just want to say about this malaria project, 
many of us have worked on the issue of infectious diseases, be 
it HIV, malaria and tuberculosis, for our entire time in 
Congress. And with all due respect to your comment, and I 
understand what you are saying, we are not frivolous in terms 
of proposals that we make or would ask an administrator about. 
This rises above, it focuses on the goals that we hope to 
achieve and our larger goal of training and broadening the 
absorptive capacity for a community to absorb the assistance 
that comes in. So I just pass that on to you.

                              Global AIDS

    The other issue I wanted to ask about: global AIDS. You 
said a great deal about it in your opening statement, I 
understand, but I had a responsibility in the Intelligence 
Committee and could not hear that, but I was pleased to hear 
what you had said. I am hoping that you will have a very 
collaborative approach to it with the secretary of HHS and NIH 
and CDC, and if you wanted to make any comment on that, I would 
hope that in the emphasis that you gave it, there would be 
additional resources to match it as I mentioned in my comments.
    Mr. Natsios. First, let me say, we work very 
collaboratively, intimately with CDC and NIH now. If we were 
not getting along, I would actually tell you bluntly that there 
are problems. In this case, there are not. In terms of 
collaborating with HHS generally at the senior level, I hope it 
has been announced. I do not want to announce something before 
the president does. This task force has been formed by the 
president with Secretary Powell and Secretary Tommy Thompson 
chairing this federal task force on this issue. And we, in 
fact, will be providing staff from USAID to staff that task 
force.

                              EL Salvador

    Ms. Pelosi. Just one more thing on El Salvador: We are 
concerned about the long-term housing needs, which I understand 
is about 175,000 dwellings. What is the larger donor community 
doing, and is the U.S. helping? If my time is up, I can just 
take the answer for the record.
    Mr. Kolbe. We will let him go ahead, since you got the 
question out there.
    Mr. Natsios. I will get you a written response on that.
    [The information follows:]
    [GRAPHIC] [TIFF OMITTED] T5099A.018
    
    [GRAPHIC] [TIFF OMITTED] T5099A.019
    
    Ms. Pelosi. Okay. There is a great deal of concern among 
our colleagues about our response to the second earthquake.
    Mr. Natsios. The second earthquake, I think we are moving 
on it.
    Ms. Pelosi. So many questions, so little time.
    Mr. Kolbe. That is all right. We will come back. We will 
have another round for you.
    Ms. Pelosi. Thank you, Mr. Chairman.
    Mr. Natsios. We will get back to you, Congresswoman, with a 
written response.
    Ms. Pelosi. Thank you again, Mr. Administrator. Good luck 
to you. Congratulations on your new assignment.
    Mr. Natsios. Thank you very much.
    Ms. Pelosi. Thank you, Mr. Chairman.
    Mr. Kolbe. Thank you.
    Mr. Lewis has been waiting patiently for his second round, 
and I will call on him.
    And then Mr. Kingston, I will come to you. I know you have 
not had a chance yet.
    Mr. Lewis?

                                 Bosnia

    Mr. Lewis. Thank you, Mr. Chairman.
    I would simply make a comment that from my perspective 
validates a portion of your testimony. Op tempo is one of the 
biggest challenges we have in the armed services side of my 
work. Recruitment and retention has been a disaster in part 
because of that. Questions like, how did we get to Bosnia in 
the first place and how do we get out, continue to press us.
    But nonetheless, you go and talk to those kids over there, 
once they are there, the fact that they are saving lives every 
day makes a big, big difference in their view of the work they 
are doing and the worth and value of it. Recruitment is a 
problem. Retention, though, re-upping in those ranks, among 
those soldiers serving, is higher than it is anywhere in the 
armed forces. So it makes your point clearly, and we are 
experiencing it every day.
    Thank you very much.
    Mr. Natsios. I will remember that, Congressman, because 
that is a very good piece of evidence of how important this is.
    Mr. Kolbe. Thank you, Mr. Lewis.
    Mr. Kingston?
    Mr. Kingston. Thank you, Mr. Chairman.
    And Mr. Administrator, I am sorry I had just a series of 
conflicts today out in the hallway and have only been able to 
lend half an ear, which is not unusual, I guess. Even if I was 
sitting here, you would probably----
    [Laughter.]
    You are funding a lot of AIDS research, and in Atlanta, I 
think CDC is one of the lead agencies, but Morehouse School of 
Medicine is also very involved in it in sub-Saharan and South 
Africa. I encourage you to continue that, but wanted to know 
how it was going.
    Mr. Natsios. With Morehouse or with CDC?
    Mr. Kingston. Well, with Morehouse. I know CDC is the lead, 
and I think Morehouse is involved kind of, you know, I mean 
they are involved, but it comes through that more than through 
USAID. Originally, it was going to come through you guys.
    Mr. Natsios. Right. My understanding is, and I spoke with 
one of the senior people at CDC recently, that it is coming 
along well. I can get back to you in writing, because my memory 
on these things is new.
    [The information follows:]

                      Morehouse School of Medicine

    In response to Congressman Kingston's question, the U.S. Agency for 
International Development and the Center for Disease Control (CDC) of 
the Department of Health and Human Services have awarded a grant to the 
Morehouse School of Medicine, through the Minority Health Professions 
Foundation in Atlanta, as of June 2001.
    The first year of this agreement is for $1,000,190 and runs through 
May 31, 2002. USAID and CDC are working with Morehouse to finalize 
selection of two African countries in which the project will be 
implemented. The interventions will test models for: (a) strengthening 
sexually transmitted infections (STI) diagnosis and case management; 
(b) improving the reproductive health skills of service providers and 
peer educators; and (c) promoting public/private collaboration to 
encourage STI/HIV/AIDS prevention activities in the workplace. We 
anticipate that lessons learned by this program will be disseminated so 
that other countries might replicate these models in addressing HIV/
AIDS prevention.

    Mr. Kingston. Okay. I would appreciate that.
    Mr. Natsios. We do not manage that, but I will find out for 
you how it is going.

                              Middle East

    Mr. Kingston. Yes, I know. A couple of sort of world-view 
things: In terms of our situation in the Middle East with the 
oil producing and exporting countries, what kind of diplomatic 
pressure can we put on them, or aid pressure can we put on 
them, to open up the tap a little bit more?
    Mr. Natsios. The OPEC countries in the Middle East are the 
biggest producers. We have no USAID programs there.
    Mr. Kingston. None of them?
    Mr. Natsios. Mainly because they are so rich they do not 
need any. Iraq and Iran, needless to say, are not getting much 
aid from the United States.
    There are very large deposits, of course, in Azerbaijan and 
in the Central Asian republics, and we do have USAID programs 
in Central Asia. We have humanitarian programs in Azerbaijan, 
but we have no USAID development programs because of the 
conflict over Nagorno-Karbakh.
    I did have a long meeting with President Obasanjo of 
Nigeria, which is a primary producer of oil for the United 
States. And it was a delightful conversation. Then the 
president had a lunch that I was asked to attend. And the 
issues around that for the Nigerians, their views are similar 
to our views on that. So I think with the Nigerians, at least, 
we are doing okay. The other countries, we do not have 
influence over because we do not have aid programs there.
    Mr. Kingston. And not one OPEC country?
    Mr. Natsios. Pardon me?
    Mr. Kingston. Not one OPEC country?
    Mr. Natsios. Well, I am trying to think. Obviously, Nigeria 
is it.
    Mr. Kingston. Nigeria is it.
    Mr. Natsios. But Venezuela is not a USAID country.
    Indonesia, that is right. We do have USAID programs in 
Indonesia. But the country is not exactly in a position to be 
pressured right now. Indonesia is quite unstable.
    Mr. Kingston. Okay. And then I am sure you have already 
answered, but in terms of the PLO and Israel, do you see us 
being able to facilitate part of the peace process?
    Mr. Natsios. That is a question I would have to leave to 
Secretary Powell. It is a very sensitive question right now, 
and I would not want to presume either to give him advice 
publicly or privately on that. But I can make comments, 
however, on our aid program there.
    We have shifted our aid funding away from road-building in 
the West Bank and Gaza, into desalinization and waste water 
treatment facilities, which have less of a political 
connotation to them, and into humanitarian aid through NGOs, 
which is obviously less political.
    At two different events, I was able to talk very briefly 
with Foreign Minister Shimon Peres, and the first thing he said 
when he heard my name, and I was surprised he even knew who I 
was before I shook hands with him, he said, ``I hope you are 
not going to stop those programs in the West Bank and Gaza and 
desalinization of waste water. We need those projects to 
continue.'' And I said, ``Yes, sir.'' We are continuing those. 
But we have shifted away from the road-building projects.
    Mr. Kingston. On those projects, are they doing well? Are 
you making some great scientific strides, because I think they 
will have application, of course, worldwide.
    Mr. Natsios. It would. I think they are using established 
technology, from what I understand. I do not think they are 
essentially research-oriented. They are re-using techniques 
that have been used before in desalinization. They are huge 
projects. And there are even larger projects in Jordan on this 
as well, that we are running.
    Mr. Kingston. Is that water for crops or water for 
consumption?
    Mr. Natsios. Well, let me see if I can remember the 
explanation, because I asked the same question you just asked 
when I heard about it. They were using pure water for 
wastewater purposes, when they should have used it for drinking 
water. And they were cleaning or they were taking gray water or 
water that was of marginal use when they did not need to.
    So what we have done is restructure, particularly in 
Jordan, for example, I think also in West Bank, to rationalize 
their water allocation system. So we are using money most 
efficiently to purify water for human consumption versus for 
wastewater or crop purposes.
    Mr. Kingston. When they do the water for crops, they use a 
ground irrigation system, rather than a spray system?
    Mr. Natsios. Where are you talking about?
    Mr. Kingston. Well, for example, in Israel.
    Mr. Natsios. Israel does. Israel has the most advanced 
irrigation drip techniques in the world. They are being used in 
other countries now.
    Mr. Kingston. They do not use that in Jordan?
    Mr. Natsios. I have to say, I have only visited Jordan 
once. In fact, I was training the Jordanian military in my 
reserve unit, nothing to do with USAID or anything else. I was 
in my last reserve duty before I retired, and we trained the 
Jordanian military peacekeeping operations and disaster 
response.
    I drove around a lot. I did not see a lot of agriculture, 
that kind of agriculture. There were olive trees, which do not 
use drip technology. It may be that they have it. I just did 
not see it.
    Mr. Kingston. Well, is that drip technology something that, 
you know, we should be involved in promoting more around the 
world?

                        AID Agriculture Programs

    Mr. Natsios. Congressman, the most appalling thing that has 
happened to USAID in the last 15 years is what has happened to 
our agriculture programs. In 1985, we were spending $1.3 
billion on agriculture. We employed 253 agriculturalists. We 
spend $320 million a year now, a cut of $1 billion. And we have 
gone from 253 in terms of our technical staff; we were at 40 
when I started. We are now up to 48 because we just hired eight 
more people who are agriculturalists. I am shocked at what has 
happened to that program.
    When I was at the least developing country conference in 
Brussels, I made a very impassioned plea on the agriculture 
side, because we are not doing what we used to do. And the only 
way you are going to reduce poverty in the world and reduce 
hunger is not by constant humanitarian programs, but by 
teaching people how to grow more food. And we are not doing 
that because all of the money has been shifted to accounts 
where there is more and legitimate interest. Agriculture seems 
boring to people, so we do not do it anymore. And I think it is 
a tragedy.
    Mr. Kingston. We walked away from $1 billion in funding 
because it was----
    Mr. Natsios. There were not a lot of organized interest 
groups behind it, to be very blunt with you.
    Mr. Kingston. Well, is there any way we can refocus on 
that?
    Mr. Natsios. Wait until 2003. We are going to have a lot of 
fights over this, but I am hoping to get some money for it. I 
am not supposed to be saying this publicly, but we are going to 
try.
    Mr. Kingston. You know, there should be interest groups 
focused in this, because application to American farmers would 
be great.
    Mr. Natsios. Absolutely. I am also finding a lot of 
congressmen and senators grew up on farms, own farms, have a 
deep interest in agriculture, come from agricultural districts. 
There is a lot of support. It just has not been organized.
    Mr. Kingston. You know, we are approaching possibly the 
fourth year of a farm disaster, and so to me there ought to be 
some dual applications to whatever technological innovations we 
can put our hands on.
    Let me ask you about that $75 million that you mentioned. 
You did not say the number, but----
    Mr. Kolbe. Let me just interrupt to say I am going to let 
you catch up with the second round of questions, but I would 
like this to be the last in this round.
    Mr. Kingston. Mr. Chairman, are you saying my questions are 
not making up for, you know, going out of order? I thought the 
interest level would be high enough, and you and Mrs. Lowey 
would be mesmerized. [Laughter.]
    Mr. Kolbe. The interest level is extremely high.
    Mr. Kingston. I thought so.
    This will be my last question, then. The $75 million, is 
that----
    Mr. Natsios. For what, Congressman?
    Mr. Kingston [continuing]. Economic support funds for West 
Bank and Gaza.
    Mr. Natsios. Say the question again?
    Mr. Kingston. I think in the budget, there is $75 million 
for economic support funds for West Bank and Gaza. Are we kind 
of auditing that very closely to be sure that it goes for the 
right purpose?
    Mr. Natsios. Oh, yes. None of it is going through the 
Palestinian Authority. It is all going through NGOs or direct 
contracting by us.
    Mr. Kingston. So you feel pretty solid about it.
    Mr. Natsios. Yes, I do.
    Mr. Kingston. Mr. Chairman, I reluctantly yield.
    Mr. Kolbe. Mr. Kingston, if you have some more questions, 
we will come back to you for yet another round.
    Mr. Natsios. I am astonished how much your committee knows 
about the intricacies of our budget, Congressman. I am very 
impressed, I have to say.
    Mr. Kolbe. Yes, my staff has suggested that is because you 
went to the Senate committee first. The contrast here with the 
House is obviously going to be much different. [Laughter.]
    Mr. Natsios. Having come from the lower house in 
Massachusetts, but I have to be careful what I say.
    Mr. Kolbe. I will let Mrs. Lowey go, and then I will ask a 
couple of final questions. I will see if Mr. Kingston has a 
couple more questions and then we are going to let you get out 
on your way, and close this hearing.
    Mrs. Lowey?
    Mrs. Lowey. Thank you, Mr. Chairman. I will be very brief.
    I just wanted to close by making a few points. First of 
all, I look forward to working with you, Mr. Administrator, and 
there is a real commitment to the work that USAID is doing 
around the world, and some reference was made, in fact, to 
sewage treatment plants. We had the real pleasure of visiting 
the Wadi Al-Sir sewage treatment plant in Jordan, and you could 
see the impact of our work there, which is very rewarding to 
us.
    And listening to King Abdullah and hearing about his clear 
commitment to economic development, and understanding that the 
only way you are going to see the region in peace, and let us 
hope that comes some day, is you raise the standard of living 
of all who are living there. And certainly AID has an important 
role to play, whether in Jordan or Egypt or certainly the West 
Bank and Gaza.
    So I certainly want to congratulate you and your work and 
your commitment to conflict resolution and basic education, so 
I will save those questions for another time.
    I just did want to close, because I do have such a strong 
disagreement with the administration. I was interested in your 
views on the global gag rule and the impact of the global gag 
rule. I did not want to disappoint you, to think I would not 
ask something related to that issue.
    Mr. Natsios. I knew you would ask the question.
    Mrs. Lowey. So I just thought I would close with that.
    I just believe that the administration's position with 
regard to imposing the global gag rule on international family 
planning just does not make any sense. And saved by the bell, 
but----
    Mr. Natsios. Did you time this? [Laughter.]
    Mrs. Lowey. First of all, I want to say I appreciate the 
administration's commitment to provide a high level of funding 
for international family planning. I have seen these programs 
in so many places around the world. The community is desperate 
for them.
    When you see families in Cambodia, for example, with eight 
to nine scrawny children, and you know that only 40 percent of 
the people have access to family planning, when 70 percent or 
more really want it, and the government supports it, for me, it 
is a real crime that we cannot provide more. So I am very 
grateful for the high number.
    One question I really would like to ask, because I hear 
this wherever I go, it is estimated that more than 150 million 
married women seek contraceptives to assist in planning and 
spacing their pregnancies and cannot obtain them. Then when you 
visit these areas, you see the connection between the lack of 
contraceptives, the lack of family planning with domestic 
violence, lack of health care and so many other problems that 
exist. If you could discuss with us your position regarding the 
role of contraceptives in our international family program, I 
would be most appreciative.
    Mr. Natsios. Let me comment on your wastewater comment.
    Mrs. Lowey. And if you want to tell us how the global gag 
rule will actually make abortion more safe, I will give that as 
a throwaway.
    Did I say safe? I meant rare.
    Mr. Natsios. Rare.
    Mrs. Lowey. Rare.
    Mr. Natsios. Let me make a comment, though, on the water 
issue. One of the issues that could have blown up the Middle 
East, had there even been, and we all pray there will be, a 
peace settlement in the Middle East----
    Mrs. Lowey. Now, do not use your time on that, because, 
see, we are running out of time.
    Mr. Natsios. I am trying to use as much as I can, but----
    [Laughter.]
    Mrs. Lowey. Okay.
    Mr. Natsios [continuing]. Is the water issue, because there 
is a serious water shortage in Jordan and in Israel and in the 
neighboring countries. And the use of the limited water 
resources is a potential area of enormous conflict, not only 
there, particularly there, but in other areas of the world as 
well. So we need to look at that as a conflict prevention 
measure.
    I support family planning. USAID supports it. The President 
supports it. The secretary supports it. However, you and I do 
not agree on this issue. I agree with the president on this. I 
am going to enforce the instructions I have been given.
    I have to tell you, in a practical sense, the overwhelming 
majority of groups that we do work with have signed the pledge 
saying they will not do this. They were not doing it before. 
Only a few organizations have not signed.
    The reality is, in most third world countries, abortionis 
illegal. In fact, even to save the life of the mother, it is illegal in 
many countries. I think in Africa, only one or two countries abortion 
is legal.
    I know there is a lot of debate over this in the United 
States, but to some degree, we are transferring a domestic 
issue here abroad. The big issue in the developing world is 
family planning, which is where we, in my view, should be 
focusing our attention. I think this issue has been so divisive 
on both sides of the aisle. I dealt with this in the 
legislature for 12 years. It is a very difficult issue, and I 
understand how heated it is and how strong people feel about 
it.
    In some ways, if you go back to the 1980s, the big jump up 
in family planning is when the Mexico City policy was put into 
effect, because then the issue for the people who do not 
support abortions became moot. Peter McPherson who was the 
Administrator then, will tell you stories, that by clearing 
away the abortion issue, we were able to focus on the 
reproductive health issues.
    Mrs. Lowey. Obviously, this is a longer discussion, because 
I would just say briefly----
    Mr. Natsios. Yes, it is, and I recognize that.
    Mrs. Lowey [continuing]. That the policy has a chilling 
effect and can cost the lives of millions of people around the 
world, but to be discussed another day.
    Thank you, Mr. Administrator.
    Mr. Kolbe. Thank you, Mrs. Lowey.
    And on that subject, before I go to Mr. Kingston for one 
question, since it is material to what was just being discussed 
there, I would like to talk to you a little bit about that.
    By incorporating the reproductive health under the global 
health category, you are reflecting the way in which a lot of 
these clinics actually function in developing functions. The 
difference is that between the existing child survival and 
diseases fund and your global health pillar, could, however, 
prove I think a little confusing to some people. A child 
survival and global health fund could make implementation and 
accountability less complex.
    I am wondering whether you think we ought to be reconciling 
our current accounts structure with the administration's 
approach to these health programs, because we are now a little 
bit at odds on that.
    Mr. Natsios. If we had had more time, Mr. Chairman, we 
would have done that. But we did not have time.
    Mr. Kolbe. We have time. We can work that out.
    Mr. Natsios. Okay. I believe a problem in government is 
excessive complexity. We can all argue about the size of 
government, but really complex systems confuse the public, 
confuse the groups we deal with, make it very difficult to 
administer the programs.
    You should see what it is like to be a mission director 
with all these different accounts, when, in fact, the reality 
on the ground is you have a clinic and kids get immunized at 
the same clinic where there is health interventions for women 
who are pregnant, and there is contraception that is available 
if women want to use that. And the way these programs are all 
run, to break down how much is spent, we have to distort in 
some ways the way we do contracting and all that.
    So what I tried to do, and we did not finish the work, is 
to simplify in these categories. Global health is global 
health; it is pretty clear what it is.
    In 10 African countries, sadly, for the wrong reasons, the 
population growth rate is at zero or declining because of the 
AIDS pandemic; population growth has declined recently in 
Eastern Europe. What mission directors are asking me is, why 
cannot we move some of that money into micro-nutrition? Why 
cannot we move some of it into child survival.
    It depends on the country. I hope that these new 
categories, which we created, which if we reorganize US AID, 
which I would like to do, around these categories, the budget 
will be the same, the structure will be the same as the 
program, with more flexibility.
    Mr. Kolbe. We only have a couple of minutes because of the 
vote, and this will obviously be the last time here.
    Mr. Kingston, very quickly?
    Mr. Kingston. Mr. Chairman, let me just yield back my time. 
I am happy.
    Mr. Kolbe. We were waiting for a scintillating question.
    Mr. Kingston. Okay, I am going to start with a softball 
then. [Laughter.]
    Mr. Natsios: Oh, I like softballs, Congressman.
    Mr. Kingston. You know, we will get you guys away from the 
abortion issue. I would like to talk to you about gun control. 
[Laughter.]
    Just keeping you on your toes.
    No, the administration is requesting $25 million in Iraqi 
opposition. Do you know how that money is going to be used?
    Mr. Natsios. That is through the State Department, and we 
do not manage that money. So I cannot tell you that.
    Mr. Kingston. Okay. All right.
    Mr. Kolbe. I am going to just ask one for the record, and 
you can give me an answer on the record. I would like to know 
why the computerized procurement system, Phoenix and NMS, I 
believe it is called, is being closed down for a week or more? 
And I would be curious to know how much notice people who work 
with that system, the working people got before they knew this 
was closed down. And how often is this occurring?
    Mr. Natsios. I will ask that question at our weekly meeting 
this week. I do not know the answer to it.
    Mr. Kolbe. I think there was not a lot of notice, as we 
understand, to it.
    Mr. Natsios. There was two weeks notice given, according to 
Barbara Turner.
    Mr. Kolbe. I think when you find the people who actually 
work with the system, it did not work out that way.
    Mr. Natsios. Okay. I will find out, Congressman.
    Mr. Kolbe. Thank you very much, Mrs. Lowey.
    Thank you, Mr. Kingston.
    Thank you.
    Mr. Natsios, we appreciate your being with us today.
    The hearing is adjourned.
    [Questions and answers for the record follow:]

            QUESTIONS FOR THE RECORD SUBMITTED BY MR. LEWIS

                        USAID Procurement Reform

    Mr. Lewis. Mr. Natsios, your statement is a breath of fresh air 
coming from an agency that is in tremendous need of attention. Let me 
be very frank-you have taken the reins of an agency that has been a 
disaster to deal with. In recent years, USAID has been unresponsive, 
even arrogant, in my view. We share a common concern about the 
management practices of USAID. I welcome your commitment and hope to 
work closely with you in making needed improvements with your agency.
    As you may know, I have been attempting to address a situation with 
USAID relative to small businesses that, in spite of outstanding 
professional track records, receive very few task orders under 
contracts awarded to competing firms. It is my belief that all 
contractors--large and small--who have been selected for awards should 
receive task orders, share in the opportunity to perform, and build a 
track record upon which additional work can be based. Continuous 
requests to USAID to address this matter over the previous year, both 
personally and through the work of our fine Committee staff, have been 
futile. In fact, the lack of responsiveness and accountability at USAID 
is startling. I applaud your decision to focus on procurement reform 
with the agency and remain willing to assist you in any way.
    To that end, I will leave with you a request from a small business 
that has been attempting to work with USAID in making needed reforms to 
the procurement system. The owner of this business--a prime USAID 
contractor--attempted repeatedly to work with both your predecessor and 
USAID professional staff. No one at your agency would even give this 
small business owner the light of day. That Mr. Natsios, is the 
attitude of the agency you are now tasked with leading. I would 
appreciate your comments on the types of reforms you hope to make and 
hope you will take time to review this material.
    Answer. I am sorry that you feel USAID was so unresponsive to your 
concerns in the past. You mention that one small business has been 
trying to work with USAID to make some procurement reforms. Members of 
my staff have met with this firm in the past. I will try to meet with 
the firm's representatives soon. I understand that as a result of these 
discussions USAID has already decided to make some changes in its 
practices relating to Indefinite Quantity Contracts (IQCs). We will 
raise the minimum guarantees under future IQCs from a maximum of 
$50,000 to a maximum of $150,000. We also decided that small firms will 
get the minimum amount within the first two years of contract award 
whenever possible. The firm was pushing us to raise the guarantees 
retroactively, for existing contracts; however, USAID explored that 
option with the Office of Federal Procurement Policy which advised 
against it. Instead, we will raise the minimum guarantees for future 
contracts. This seems to be a reasonable position and I am not inclined 
to undo it.

                       Economic Growth and Trade

    Mr. Lewis. In your testimony, you outlined your vision for greater 
USAID emphasis upon economic growth and trade. I am particularly struck 
by your focus on updating, in your own words, ``old, failed development 
assistance practices to move poor countries into a dynamic global 
economy dominated by private capital flows.'' This effort has many 
obvious dimensions. Outline for us the most critical barriers that must 
be addressed in order for poor and developing countries, including 
those former Soviet States, to attract private capital and eventually 
become part of the dynamic global economy that you described.
    Answer. The barriers preventing the flow of private capital and 
integration into the global economy are many and varied depending upon 
the region of the world. There are several common, persistent problems 
affecting most developing and transition countries: unclear rules of 
the game (poor policies and regulations and weak judicial structures); 
unfair rules of the game (corruption, and burdensome and skewed tax 
regulations); no field to play on (lack of reliable infrastructure, 
unreliable private and public sector support services and unclear 
property rights); and few players to play (insufficient education and 
technical skills, inability to adapt). Thus, the incentives for the 
flow of capital and technology and access to markets remain low.
    These constraints create overwhelming challenges and opportunities. 
However, USAID cannot pursue these alone. That is why we plan to 
broaden our efforts to achieve partnerships with other donors, the 
private sector, universities, foundations and non-governmental 
organizations within and outside of the U.S. to apply resources and 
influence to overcome these problems and make the most of the 
opportunities.

             Hansen Institute of San Diego State University

    Mr. Lewis. The Hansen Institute of San Diego State University 
submitted a bilateral proposal to the USAID Mission in Gaza/West Bank. 
The purpose was to initiate a bilateral program that will expand into a 
regional program. When do you expect this program to be funded? When do 
expect to expand the program into the regional program for which 
Congress has appropriated funds since 1996? Lastly, will USAID provide 
funding through Washington, DC in order to provide more flexibility to 
project administration when needed?
    Answer. In September 2000, USAID Missions in Egypt, Jordan, and 
West Bank/Gaza were preparing to award a cooperative agreement to San 
Diego State University (SDSU) to develop cooperative Arab-Israeli 
training programs in the use of saline water and wastewater in 
agriculture. USAID provided $600,000 in a planning grant for this 
activity and invested significant staff resources to develop a 
practical program that would support both SDSU and Agency objectives. 
In December 2000, however, after three months of the al-Aksa intifada, 
all U.S. government parties involved agreed that security threats, 
travel restrictions, and political constraints made the proposal 
unworkable, and SDSU was informed that the regional proposal would not 
be funded.
    USAID West Bank/Gaza stated at that time that is would be pleased 
to consider a program for the West Bank and Gaza alone. A proposal for 
such a program was received from SDSU on April 12, 2001. USAID West 
Bank/Gaza believes that the new proposal can be effective at the 
technical level with only minor modifications, and an award is expected 
in July 2001.
    Meaningful regional cooperation is doubtful at present due to the 
political and security situation. Once conditions stabilize, the USAID 
Missions in the region will consider expansion to a regional activity 
through a modification of the planned cooperative agreement and closer 
cooperation with similar multilateral programs that support the peace 
process.
    USAID plans to fund and manage this activity through field 
missions, where technical and political considerations are best 
understood. USAID Washington will continue to provide support to the 
activity as needed.

            QUESTIONS FOR THE RECORD SUBMITTED BY MR. WICKER

               The Middle East Peace Process and the ESF

    Mr. Wicker. The Economic Support Fund (ESF) advances economic and 
foreign policy interests of the United States. The FY 2002 ESF request 
is $2.3 billion. Of this amount, $1.682 billion will be used to support 
the Middle East Peace Process, including $720 million for Israel, $655 
million for Egypt, $150 million for Jordan, and $75 million for the 
West Bank and Gaza. Can you provide us with your observations on the 
continuing violence in the Middle East? How has the violence affected 
the efforts of USAID?
    Answer. USAID faces increased risks and costs associated with the 
violence and the fluidity of the situation on the ground in Israel and 
the West Bank and Gaza. However, USAID still is able to deliver results 
in support of U.S. foreign policy objectives in the Middle East, and is 
not providing any funds directly to the Palestinian Authority. 
Following reviews of the West Bank and Gaza program, USAID has 
refocused its activities on a combination of humanitarian and 
developmental objectives. The revised program emphasizes new water 
development projects, which enjoy the full support and cooperation of 
the Israeli government. In addition, USAID has begun to implement 
emergency and humanitarian activities in the areas of health, job 
creation, and community services.

                    Latin America and the Caribbean

    Mr. Wicker. Latin America and the Caribbean would receive $170.5 
million in ESF funds, including $54.5 for democratic institution 
building and economic growth program[s in] Peru, Ecuador, Bolivia, 
Venezuela, and Panama to augment a new Colombian Counterdrug 
Initiative. Funding for other Latin American programs would include 
earthquake assistance to El Salvador, Cuban democracy programs, and 
other regional democracy programs.
    Mr. Natsios, when we augment the Andean Counterdrug Initiative with 
ESF funds, then include what has been spent on Plan Colombia, the 
American taxpayers are looking at $2 billion to fight drugs in the 
Andean region. Can you elaborate on the efforts of USAID to improve the 
administration of justice to deal with drug traffickers?
    Answer. In the Andean region narcotics traffickers and associated 
criminals often carry out their illicit activities unimpeded due to the 
inefficient and ineffective judicial system. These same problems hamper 
the effective prosecution of human rights offenders. To improve the 
performance of the judicial system. These same problems hamper the 
effective prosecution of human rights offenders. To improve the 
performance of the judicial system, USAID is assisting with the 
promotion of oral advocacy and legal evidence gathering. In Colombia 
3,400 judges have received training in open, courtroom hearings that 
emphasize oral procedures, judicial argumentation, legal evidence 
gathering, and the use of a tracking system for monitoring court cases. 
In cooperation with the Bolivian Ministry of Justice, the Drug 
Enforcement Agency is currently assisting one District to integrate its 
anti-narcotics police into the case tracking system. Once this pilot 
effort is successfully completed USAID will promote oral trials 
nationwide to increase access to justice, promote human rights, and 
provide transparency to counter corruption. Already in Colombia, oral 
trial courtrooms operate in Cartagena, Cali, and more are scheduled to 
open shortly in Medellin, Manizales, and Pereira. The Superior Judicial 
Council, the Prosecutor General's office, the Public Defender's office 
and the Attorney General's office cooperate in transition to the oral 
trial system. The revised Criminal and Criminal Procedure Codes enter 
into force in July 2001, including crimes against international 
humanitarian law, forced disappearance, genocide, and forced 
displacement. Due process guarantees were strengthened by requiring 
greater scrutiny of persons being placed in preventive detention.
    Mr. Wicker. Can you describe how USAID provides farmers with 
economically sustainable alternatives to producing coca and other 
illegal substances?
    Answer. Alternative development aims at sustainable net reduction 
of poppy and coca by altering the governance and economic underpinnings 
that allow illegal crop production to thrive. Control of narcotics 
production relies on four factors, all of which must be present for 
local ownership of a drug-free area.
     Civilian law enforcement and security.
     Delivery of social services (education, health) and public 
infrastructure. The Governments of Bolivia (GOB), Colombia (GOC) and 
Peru (GOP) are financing school, health, water supply, electricity, and 
highway improvements.
     Participative civil governance. USAID's municipal 
governance activities in several Andean countries address this 
condition.
     Development of a viable licit economy. Introduction of 
high value marketable crops to replace illicit coca production in 
Bolivia, Colombia and Peru has gained widespread acceptance and reduced 
the acreage under coca.
    For example, USAID assists the GOC to deliver economic alternatives 
to enrolled farmers sufficient to sustainably eradicate 20,000 hectares 
of coca in Putumayo and 7,000 hectares elsewhere by December 2002. 
USAID assists the GOC to deliver economic alternatives to enrolled 
farmers sufficient to sustainably eradicate 1,300 hectares of opium 
poppy in Cauca, Tolima, and Huila by December 2002.
    Coca production by otherwise law-abiding farmers is driven by their 
poverty and isolation from markets, as well as by the absence of 
government services, such as health, education, and rule of law. The 
USAID approach to coca eradication addresses these conditions. The 
mechanism for coca eradication is a ``social pact'' between the 
national GOC, the municipality, and local farmers. When farmers agree 
to eradicate their coca (that is, reduce their cash income from this 
crop), they receive in return a combination of legal economic 
opportunities and governance benefits, plus other assistance as 
necessary.
    Under contractual agreements, coca farmers bind themselves to 
eradicate their crop, and the income they receive form it. Benefits 
during the eradication phase include provision of licit crops for home 
use and sale in local and not-too-distant markets, cash crops for 
national markets, and leverage of GOC resources to stimulate the licit 
economy. A further three-year consolidation period, after the coca has 
been eradicated, is required to ensure that farmers can resist 
subsequent pressure to replant coca. the demise of the coca-based 
economy might be accompanied by violence among illegal armed groups or 
by an economic contraction until the licit economy takes hold. USAID 
assists the GOC to deal with temporary dislocations of people due to 
violence and to provide vocational training or limited humanitarian 
assistance to those whose incomes are lost due to the decline in coca 
production.
    In the eradication phase, assistance is provided to municipal 
governments to ensure transparent linkages to national programs and 
revenue sharing. Municipal budgets and decisions are made more 
transparent and participative to increase the stake that the local 
population has in government. To lend urgency, USAID directly finances 
small municipal infrastructure projects in Columbia, Ecuador and Peru 
using the more transparent procedures. Rule of law activities aim at 
the family needs of the population, such as personal documentation, 
deed registry, etc, through access to a casa de justicia. During the 
consolidation phase in Putumayo, USAID may also assist the GOC to 
establish a district court in the departmental capital.
    Mr. Wicker. How is USAID involved in educating citizens on the 
dangers of drugs in the region?
    Answer. USAID works with a range of local non-governmental 
organizations and governmental institutions in Bolivia, Peru, and 
Colombia to promote a greater understanding of the social, economic, 
health, and environmental issues related to drug cultivation and 
trafficking. Indeed, one reason for communities to embrace alternative 
development without reservation is their concern for the violence, 
crime, and social disintegration that accompanies the drug economy. The 
rejection of the drug economy is especially strong among indigenous 
groups, who see their culture as being threatened.

                 National Unity in Developing Countries

    Mr. Wicker. Mr. Natsios, one of the problems we face in nations 
trying to meet the goals you have spoken about--instituting a rule of 
law, building a civil society, establishing economic institutions--is 
trying to establish a national identity within countries such as Kenya, 
Nigeria, and Mozambique where there are numerous languages and ethnic 
groups or tribes. Certainly, it takes time for all of these groups to 
meld and form one national identity, but I am curious to know how USAID 
addresses this problem. If we are going to maximize the chances for 
success in these areas, I believe we must have a strategy for 
addressing this issue.
    Answer. USAID's Democracy and Governance programs are designed to 
help nations thrive upon the multiple voices of their citizens. 
National identities are always heterogeneous, encompassing diverse 
linguistic, ethnic, religious and cultural groups. A variety of USAID-
sponsored interventions help to forge a shared sense of citizenship and 
economic inclusiveness among such populations. Civic education 
campaigns, for example, promote a common understanding of a citizen's 
legal rights and responsibilities. Media activities help to ensure that 
informed citizens are able to debate the character of national identity 
in a vibrant free press and other uncensored media outlets. Rule of law 
programs further strive to guarantee that all citizens have equal 
access to justice, and that the human rights of all minorities and 
disadvantaged groups are equally assured. Finally, support to civil 
society groups strengthens citizens' ability to convey their views to 
government decision-makers and to insist upon policies that are 
inclusive and appropriate for the entire nation. For example, in Kenya, 
USAID's democracy programs help forge a national identity peacefully 
and non-violently by involving marginalized as well as mainstream 
groups as beneficiaries in our civil society and other governance 
programming.
    USAID also supports decentralization and local governance 
initiatives that permit specific ethnic, tribal, or linguistic groups 
subnational expression. This tactic has been successful in South 
Africa, and will be needed in the large, complex country of Nigeria. A 
successful strategy for achieving national identity is based upon 
efforts that on one level help to forge national unity, and, at 
another, recognize important cultural differences within the nation.

                        George Mason University

    Mr. Wicker. Mr. Natsios, in the Statement of Managers which 
accompanies the Conference Report or the Conference Report itself in 
every year since FY 1997, language has been included asking USAID to 
work with George Mason University in Fairfax, Virginia to develop a 
program to improve health care in third world nations.
    The FY 2001 Conference Report accompanying the House bill ``directs 
USAID to provide not less than $1,000,000 to support a proposal by 
George Mason University'' for the purposes of cooperation on health 
programs in Latin America.
    Also as you may be aware, the Senate report again in FY 2001 
encourages USAID to provide up to $2,000,000 to continue and expand 
health care activities in developing countries. In addition, the 
statement of managers accompanying previous conference reports for 
Fiscal Years 1997-2000 also each year recommended that USAID make 
available not less than $2,000,000 for George Mason for this purpose.
    To date, however, although George Mason University and USAID have 
continued to discuss the development of this program, no funding from 
USAID has been provided to George Mason University who resides in my 
home state. I am concerned by the failure of USAID to address this 
issue in previous years and would like to get a commitment from you 
today that you will address this issue immediately and make every 
effort to ensure that funding is provided to GMU this calendar year.
    Are you aware of the reasons why USAID has not provided funding to 
GMU to date despite repeated direction by the Congress? Do I have your 
commitment to work to ensure that GMU receives funding for this 
important project?
    Answer. During the past two years, USAID has offered advice and 
provided guidance to George Mason University (GMU) School of Nursing 
and Allied Health to help GMU identify a program for possible USAID 
funding. Meetings were held on campus and at USAID headquarters, 
providing opportunities for GMU staff to learn about USAID priority 
programs and USAID's views on the pressing health problems needing 
attention in the developing world. Detailed briefings and discussions 
were held with GMU faculty and staff members, in consultation with a 
wide range of USAID health specialists. GMU anticipated submitting a 
proposal by September 2000; to date, no proposal has been received.
    I believe strongly, however, that universities along with our other 
partner institutions, should compete fairly for USAID grants and 
agreements rather than having general amounts of money earmarked for 
undesignated purposes. We have provided GMU staff information on how to 
participate in USAID procurements. We certainly look forward to their 
active participation in such programs.

            QUESTIONS FOR THE RECORD SUBMITTED BY MR. VITTER

                            Malaria Research

    Mr. Vitter. Last year this Subcommittee provided an extra $50 
million to reduce the incidence of malaria. In the conference agreement 
(HR 106-997) the managers encouraged USAID to designate $2.0 million of 
that funding ``to support the establishment of coordinated centers of 
excellence for malaria prevention in tropical and sub-tropical 
regions.'' What steps is the Agency taking to respond to that 
recommendation?
    Answer. USAID is currently working with an array of universities, 
non-governmental organizations and other U.S. and International 
partners to build innovative and multidisciplinary capacities for the 
prevention and control of malaria. This includes supporting the 
development of affordable and simple diagnostics for malaria, the field 
testing of new anti-malarial drugs, and developing cost effective and 
sustainable preventive and treatment strategies, such as the malaria 
vaccine.
    USAID is using the additional $21 million provided in FY 2001 for 
malaria to mount a strategically focused, high-impact effort in support 
of expanded malaria control activities. We have moved forward with a 
new malaria initiative in Africa to bring to national scale malaria 
control efforts in three countries. We are also building regional, 
coordinated efforts in the Amazon region of South America, and the 
Mekong region of Southeast Asia to address the growing problem of 
multi-drug resistant malaria. A key underpinning of our efforts is to 
build long term local capacity to effectively address malaria at the 
country and regional levels. In addition, we are collaborating closely 
with the Centers for Disease Control and Prevention (CDC) on two RFPs 
they will issue later this summer to foster a coordinated effort by 
U.S. Schools of Public Health and African counterpart institutions. 
This is aimed at strengthening the institutional capacities of African 
institutions to plan, implement and manage malaria prevention and 
control programs.
    Overall, USAID's investments in building local capacity for malaria 
and developing coordinated efforts at the regional level will far 
exceed $2 million in FY 2001.

        University Collaboration and Malaria Prevention Efforts

    Mr. Vitter. In addition, the managers urged USAID ``to favorably 
consider proposals for a concerted approach to limiting the resurgence 
of malaria'' to be submitted jointly by the Tulane University 
Department of Tropical Medicine and the University of Notre Dame.
    I understand that officials from Tulane and Notre Dame met with 
USAID officials and offered a proposal to assist USAID in its new 
effort to scale-up to a national level in four African countries, to 
address urgent needs of populations threatened by malaria who are 
living in areas of war and civil disorder, and slowing the emergence 
and spread of drug-resistant malaria in the Amazon region of South 
America, the Mekong region of Southeast Asia, and Sub-Saharan Africa. 
The consortium has recommended several specific support activities they 
can provide to the Agency's focus areas in addressing malaria.
    However, thus far, I understand the USAID officials have not been 
receptive to this proposal, even though it is clearly the interest of 
this subcommittee as expressed in the conference report, and is 
directly responsive to the needs articulated by USAID.
    When can I expect USAID to obligate funds to Tulane University and 
their university partners for malaria prevention efforts? How does 
USAID plan to work with CDC in malaria prevention activities? Does 
USAID plan an RFR with the CDC later this year? What will that RFP 
focus on? How much money is USAID planning to put in for that RFP?
    Answer. In January of this year USAID staff met with 
representatives from Tulane University,University of Notre Dame and 
Johns Hopkins University to discuss a proposal submitted to USAID to 
support the creation of coordinated Centers of Excellence for Malaria 
Research in Africa. During those discussions we pointed out that the 
proposal they submitted was duplicative of our current malaria research 
portfolio and did not adequately address some of the key priorities for 
combating malaria in Africa.
    In our conservation, we noted one area that we thought the 
institutional capacities of Tulane, Notre Dame and The Johns Hopkins 
Universities might be especially relevant. That area is strengthening 
the training and broader institutional capacities of African Schools of 
Public Health and other similar institutions in Africa, which is widely 
recognized as being a high priority for addressing malaria and other 
health issues.
    USAID and the Center for Disease Control (CDC) have a long history 
of close collaboration in malaria. This collaboration includes joint 
planning and coordination of the implementation of malaria prevention 
and control activities. In addition, CDC has provided USAID strong 
technical support, including secundment of technical staff to both 
USAID field missions and Washington headquarters.
    Over the past year USAID and CDC have been exploring how to best 
bring the unique capacities of U.S. Schools of Public Health to bear on 
the problem of malaria, particularly in the context of ``scaling up'' a 
full package of malaria prevention and control services. These 
discussions have led to the preparation of two related proposals that 
envision a coordinated effort by U.S. Schools of Public Health and 
African counterpart institutions in the prevention and control of 
malaria. The RFP's, to be released this summer by CDC, specifically 
target strengthening the institutional capacities of African 
institutions to plan, implement and manage malaria prevention and 
control programs. Both USAID and CDC have encouraged the 
representatives from Tulane, Notre Dame, and Johns Hopkins Universities 
to submit proposals to these RFP's.
    The planned budgets for the RFP's total $2.5 million. USAID will 
provide $1.6 million in FY 2001 to CDC to support our coordinated 
program.

            QUESTIONS FOR THE RECORD SUBMITTED BY MRS. LOWEY

                     International Family Planning

    Mrs. Lowey. Mr. Administrator, I understand that the administration 
reimposed the global gag rule on bilateral international family 
planning assistance in an effort to ensure U.S. funds do not support 
abortion abroad--and I would like to point out that this has been the 
case for nearly 30 years. I also understand that the administration 
wants to make abortion more rare--a goal I can safely say we all share.
    I think USAID has a lot to be proud of in terms of the 
contributions it has made to strengthening democracy around the world. 
In fact, I believe that one of the ultimate goals of our foreign 
assistance program is to encourage the creation of healthy, educated, 
and stable democracies. That is why I am particularly troubled about 
the message we send by imposing the global gag rule. Specifically, we 
ask NGOs in developing countries--where democracy is most fragile--to 
forgo their right to free speech as a condition of receiving our 
assistance.
    How will imposing the global gag rule make abortion more rare in 
the developing world? Could you address how the global gag rule 
contributes to strengthening the principles of democracy in the 
developing world?
    Answer. The best way to prevent abortion is to expand access to 
quality voluntary family planning services. By increasing funding for 
family planning to $425 million, nearly a 15 percent increase over the 
FY 2000 level, and continuing our annual support of $25 million to the 
United Nations Population Fund, the Administration is helping to expand 
the availability of family planning services in the developing world. 
Because very few of our current partners are expected to decline to 
accept the Mexico City Policy, the end result will likely be that 
family planning services will be more available than before the policy 
was reinstated and that, in turn, more abortions will be prevented.
    There are many foreign non-governmental organizations (NGOs) 
through which USAID an provide family planning information and services 
to people in developing countries. The President has elected that 
assistance for family planning programs are consistent with the values 
and principles of the foreign policy of the United States. Any foreign 
NGO can choose to advocate for changing abortion laws, but USAID is not 
obliged to provide family planning assistance to those that chose to do 
so.

                      Long-Term Planning at USAID

    Mrs. Lowey. Mr. Administrator, I wholeheartedly agree with your 
characterization of USAID, and foreign assistance in general, as an 
important tool of overall U.S. foreign policy. And I welcome your point 
that the work of foreign assistance takes ``years of investment and 
hard work.'' However, I am troubled by what I perceive is a disturbing 
trend, characterized primarily by the Administration's failure to 
request adequate new resources for disasters such as the earthquakes in 
El Salvador and India, and the HIV/AIDS crisis around the world. You 
have noted that there may be unspent funds within USAID that could be 
recaptured to deal with these pressing situations. But the long-term 
implication of this practice is that, somehow, the regular USAID 
program is not essential, and resources can easily be recovered and 
reallocated for ``emergency'' purposes without hurting overall U.S. 
foreign policy. Once we go down this road, we begin to feed an 
assumption that USAID should be primarily a disaster relief, rather 
than a development, organization.
    One way to avoid this, I believe, is to have clear short- and long-
term plans for ensuring that USAID is being used as the foreign policy 
tool it truly is. I realize we cannot anticipate everything before it 
happens, but I believe that careful strategic planning goes a long way 
to ensure that USAID is fulfilling its mission. Could you discuss your 
plans in this regard?
    Answer. I agree that USAID has important foreign policy 
responsibilities that have both a short and long-term dimension. 
Careful and coordinated planning is needed at both levels to ensure 
overall program coherence. I believe we have made significant progress 
in long-term planning for our development programs at the country and 
operating unit levels.
    On the other hand, while it is difficult to project resource needs 
for natural and man-made disasters, we must improve our capabilities in 
these areas. I am especially intent on doing this for conflict and 
crisis situations which are playing an increasingly important role in 
our ability to meet development and broader foreign policy objectives.
    Along these lines, we have taken several measures to strengthen 
USAID's staff capabilities in planning and implementing disaster and 
transition activities. We have also formalized communications and 
information exchange between the humanitarian and development sides of 
USAID, through the creation of the Emergency Response Council. The 
Council's mandate is to ensure coordinated planning and programming for 
the whole cycle, beginning with the crisis and extending through 
transition, reconstruction and an accelerated return to the development 
path. I consider activities in both the humanitarian and development 
areas equally important to the long-term success of programs, 
especially in the estimated 60 (out of 75) countries, where we now work 
and where significant political/social vulnerabilities threaten 
national stability and prospects for economic development.
    In terms of the funding question you raise, we are studying a 
number of options to streamline programming processes to ensure a more 
seamless transition from emergency to recovery and development. We will 
be seeking the Congress' support to enable us to move resources from 
development accounts to those for crisis and transition, and vice 
versa. In the past, funding restrictions, notification requirements, 
and limited authorities have impeded our ability to respond quickly. 
Even when received supplemental resources, the funds were not available 
for 6-8 months.
    I hope that we can count on support from you and your committee 
when we present a full set of recommendations for your approval.

                              Agriculture

    Mrs. Lowey. Mr. Administrator, you have indicated that USAID will 
devote more resources to agricultural programs. What do you envision in 
terms of resources and from what other programs will funds be taken? 
You have also indicated that this is an area where public/private 
partnerships will work. Can you give a specific example?
    Answer. USAID has requested $160 million in FY 2002 to fund 
agricultural activities. This level is expected to increase as we 
utilize funds under the Global Development Alliance (GDA) in the 
agriculture sector. Through GDA, we plan to leverage our resources 
through partnerships with other donors, non-governmental organizations, 
universities, foundations and the private sector.
    Agriculture is more than farming, and is now intimately related to 
what we do in trade capacity building, conflict prevention, 
environment, health and nutrition, and other areas. We can have greater 
success in both agriculture and in these other areas by ensuring more 
cross-sectoral linkages and synergies. For example, in FY 2000, USAID's 
health, nutrition, and agriculture officers worked together to develop 
a program in India and the Philippines to use biotechnology to make 
basic food crops more nutritious.
    Many potential agricultural partnerships lend themselves to the 
GDA. Examples of possible alliances include expansion of an existing 
partnership among small-scale coffee farmers in Latin America, the U.S. 
coffee industry, and U.S. environmental non-governmental organizations 
(NGOs). Another possible partnership involves United States trade 
associations, universities and NGOs, together with USAID, USDA, and 
participating African countries who are developing a shared approach to 
reduce hunger in Africa. Others being discussed with the United States 
private sector include: developing effective measures to deliver 
information to farmers; joining U.S. livestock producers with small 
farmers; geographic information systems to better guide agricultural 
and environmental investments and the food safety of imports; and a 
Global Genebank Trust to preserve the world's crop genetic diversity.

                      Development Credit Authority

    Mrs. Lowey. Administrator, you have asked for the Development 
Credit Authority (DCA) to support true risk sharing with private firms. 
This Committee, under its previous chairman, has been skeptical of 
these programs in the past. What are you going to do to eliminate that 
skepticism? How does this request relate to the Global Development 
Alliance proposal?
    Answer. The credit reforms USAID has instituted over the last year 
make Development Credit Authority (DCA) assistance a model for all 
federal credit programs. The heart of these reforms is true risk 
sharing with private lenders and bankers in developing countries. In 
addition, DCA activities are subject to review by the Agency's 
Independent Credit Review Board, which reports to the Chief Financial 
Officer. Indeed, USAID's history of providing credit enhancement to the 
private sector since the implementation of Credit Reform in 1992 speaks 
to the Agency's effectiveness in managing risks; claims have never 
exceeded the amount of funds set aside in the Treasury subsidy holding 
account, which is a reflection of conservative risk analyses and 
comprehensive portfolio monitoring. The best way to convert the 
skeptics is through performance and management safeguards. Thus far, we 
have done both well. This ability to meet appropriate standards is 
buttressed by OMB's certification to the Congress regarding USAID's 
capacity to manage credit assistance (risk analyses, proper financial 
reporting, etc.).
    The Global Development Alliance envisions partnerships with all 
types of institutions to address developmental issues. Engaging private 
sector financial institutions in helping to overcome credit constraints 
for entrepreneurs would have a significant impact on poverty reduction 
and economic growth.

                  Alternative Development in Colombia

    Mrs. Lowey. Mr. Administrator, during our hearing with Secretary 
Powell, I raised the issue of the slow pace of implementation of the 
alternative development programs in Colombia, and in the Putamayo 
province, in particular, USAID is not completely at fault for the lack 
of progress. However, the fact is, that the effect of Plan Colombia on 
the poor farmers of that region has been all stick with no ability to 
deliver the carrot.
    What is USAID doing to actually get food and agricultural 
assistance delivered to those communities in Putamayo that have signed 
pacts to stop growing coca?
    Answer. The causes of Colombia's illicit crop production are 
numerous and complex. At the root, Colombia's poorest and most remote 
farmers have not had opportunities to participate in the mainstream 
economy in a gainful manner. Agricultural research, extension, credit 
and land titling institutions have all failed to incorporate large 
numbers of Colombian farmers. Isolated farming communities cannot 
access basic social services, such as schooling for their children, 
health services, and potable water supply, which are essential for a 
sustained rural development effort. Nor has the Colombia State been 
successful in extending national services or the rule of law in broad 
areas of Colombia. Personal security and safety are not assured. 
Guerillas, paramilitaries and other criminal elements have all 
conspired to create organizations in neglected areas to promote the 
cultivation and marketing of illegal drugs.
    Alternative development, the USAID approach to coca eradication 
addresses these conditions. The approach aims at sustainable net 
reduction of poppy and coca by altering the governance and economic 
underpinnings that allow illegal crop production to thrive. The 
mechanism for coca eradication is a ``social pact'' between the 
national Government of Colombia (GOC), the municipality, and local 
farmers. When farmers agree to eradicate their coca (that is, reduce 
their cash income from this crop), they receive in return a combination 
of legal economic opportunities and governance benefits, plus other 
assistance as necessary.
    Under contractual agreements, coca farmers bind themselves to 
eradicate their crop, and the income they receive from it. Benefits 
during the eradication phase include provision of licit crops for 
household consumption and sale in local and regional markets, cash 
crops for national markets, and leverage for GOC resources to stimulate 
the licit economy. The first steps in alternative development have been 
taken in Putamayo, and 21,000 farm families have taken advantage of it. 
A further three-year consolidation period, after the coca has been 
eradicated, is required to ensure that farmers can resist subsequent 
pressure to replant coca. The demise of the coca-based economy might be 
accompanied by violence among illegal armed groups or by an economic 
contraction until the licit economy takes hold. USAID assists the GOC 
to deal with temporary dislocations of people due to violence and to 
provide vocational training or limited humanitarian assistance to those 
whose incomes are lost due to the decline in coca production.
    In the eradication phase, assistance is provided to municipal 
governments to ensure transparent linkages to national programs and 
revenue sharing. Municipal budgets and decisions are made in a more 
participatory and transparent manner to increase the stake that the 
local population has in government. To lend urgency, USAID directly 
finances small municipal infrastructure projects in Colombia using the 
more transparent procedures. Rule of law assistance activities focus on 
the family needs of the population, such as personal documentation, 
deed registry, etc, through access to a casa de justicia. During the 
consolidation phase in Putamayo, USAID may also assist the GOC to 
establish a district court in the departmental capital.
    Mrs. Lowey. One of the reasons for delay is the fact that all funds 
for Plan Colombia have to move through the Narcotics Bureau of the 
State Department. Do you favor direct appropriation to USAID of all 
development funds for the Andean countries?
    Answer. I would say that cooperation and working relationships 
between State Department Bureaus and USAID have been excellent. I would 
also say that, we are pleased with the overall start up we have 
achieved under the very difficult conditions of Colombia. Some delays 
in implementation have occurred, often due to the complexity of the 
approach, the need for coordination among a wide range of security and 
civilian authorities in both countries and the need to align local 
populations and organizations with our goals and objectives. Thus, I 
have no issue with the way in which funds for Plan Colombia are 
currently requested and appropriated.

                              El Salvador

    Mrs. Lowey. The U.S. response to the recent earthquakes In El 
Salvador has been to pledge only $110 million over two years from 
existing resources. I believe this low level of assistance to a country 
where we once invested billions to end conflict is tragic. Our lack of 
generosity has led other countries to do less at the recent pledging 
conference than they otherwise might have, and will ultimately force El 
Salvador to finance most of its recovery with loans--not grants. Can 
you explain why the U.S. did not provide more assistance, particularly 
in light of our generous response to the Hurricane Mitch disaster, 
where we provided over $800 million? From what accounts in 2001 and 
2002 will the $110 million be derived?
    Answer. Reconstruction costs for the two earthquakes in El Salvador 
are estimated as high as $2 billion. The $110 million pledge for 
earthquake assistance made at the Madrid Consultative Group meeting was 
developed in response to the damage inflicted by the first earthquake. 
To fulfill this pledge, $52 million is being provided in FY 2001 and 
the remaining $58 million is proposed in FY 2002.
    A $110 million United States response for reconstruction is 
substantial and represents almost 6 percent of the total need. It was 
also the largest bilateral donor pledge at the El Salvador Consultative 
Group (CG) meeting held in Madrid this past March. The Hurricane Mitch 
supplemental of $621 million in actual on-the-ground reconstruction 
response to an estimated $8.5 billion reconstruction need region-wide 
was about 7 percent of total need. Additionally, the President also 
pledged to provide Temporary Protective Status to undocumented 
Salvadorans for the next 18 months. Remittances they return to El 
Salvador represent additional U.S. Contribution to the reconstruction 
effort.
    Our quick response in pledging $110 million did result in other 
donors pledging substantial amounts. During the Madrid CG, the 
international donor community pledged a total of $1.3 billion in 
assistance to the El Salvador reconstruction. This is fully 65 percent 
of estimated reconstruction costs. The United States government intends 
to follow up with the international donor community in a second CG to 
ensure that they fully honor their pledges to El Salvador and the 
reconstruction effort. Nevertheless, we recognize that the Government 
of El Salvador will have to finance from its own coffers a short fall 
in reconstruction needs of over $600 million.
    The FY 2001 funding of $52 million includes $37 million in 
Development Assistance and Economic Support Funds, $10 million from 
U.S. Department of Agriculture (USDA) food relief programs, $3 million 
in International Disaster Assistance and $2 million in Transition 
Initiatives funds. Our current plan for the $58 million in FY 2002 is 
to provide approximately $30 million in Development Assistance and 
Economic Support Funds and up to $10 million in USDA food relief 
programs. We are still studying possible sources for the proposed 
balance.

                          HIV/AIDS Trust Fund

    Mrs. Lowey. It is currently unclear how the Administration's 
proposal to spend $200 million for a global trust fund to combat 
infectious diseases will actually work, although we do know that it 
will take $100 million from your current resources that might have been 
used combat AIDS, TB, or to prevent conflicts. $20 million of the $30 
million requested as an increase in the 2002 CS account for HIV/AIDS 
will apparently be taken for the new trust fund. In addition, $20 
million from 2001 CS funds will also be used for the new trust fund, if 
Congress concurs.
    Why should Congress agree to take resources away from ongoing and 
effective AIDS programs to deal with the AIDS pandemic?
    Answer. In recent months, both developed and developing countries 
have called for additional resources to address the high disease burden 
attributable to tuberculosis and malaria, and the unprecedented global 
threat posed by the spreading HIV/ADIS pandemic.
    A growing consensus is developing around the establishment of a 
global fund for HIV/AIDS and infectious diseases to respond to this 
need. The United Nations Secretary General has called for public and 
private sources to contribute to such a fund, and the recent 
announcement by President Bush highlights United States leadership in 
calling for others to contribute.
    The new global fund is intended to mobilize additional resources, 
leverage additional political and financial commitments from all 
countries, bring in new partners, and facilitate the strengthening of 
developing country health systems to respond to the critical challenges 
ahead. USAID's ongoing successful program will continue to expand at 
the same time, particularly at the country level, to complement the 
efforts of the new fund.
    From FY 1999 to the request for FY 2002, USAID's budget for HIV/
AIDS increased by 150 percent. As directed in the FY 2001 
appropriations bill, USAID set aside $20 million for an International 
AIDS Trust Fund at the World Bank. These resources were included in the 
75 percent increase that USAID received. An additional $20 million has 
already been earmarked from the FY 2002 budget. This total of $40 
million from the USAID budget will be made available when appropriate 
to the new global fund as announced by the President. I understand that 
the Department of Health and Human Services will provide an additional 
$100 million, and the Department of State will provide the $60 million 
remaining to make the total of $200 million.

                                HIV/AIDS

    Mrs. Lowey. What is the Administration's position on the use of 
unpatented generic drugs to treat AIDS in Africa?
    Answer. Generic antiretroviral drugs for the treatment of HIV 
infection present a mix of opportunities and risks. Since these drugs 
are offered at substantially reduced prices compared to their patented 
counterparts, more people living with AIDS in poor countries could 
potentially receive life-extending treatment. However, the quality of 
the generic products is not always known and the use of substandard 
drugs could do great harm. Additionally there is the risk that 
antiretroviral drugs will become widely available in settings where the 
capacity to use them safely and effectively does not exist.
    Recently the manufacturers of the patented versions of these drugs 
have lowered their prices substantially. This may make the generic 
versions less competitive. Still, it remains to be seen how widely 
available the products from either source will be.
    Finally, Federal procurement regulations prohibit USAID from 
purchasing pharmaceutical products that infringe on U.S. patents. This 
makes most, if not all, of the generic AIDS drugs off limits to USAID 
funded programs.

                                HIV/AIDS

    Mrs. Lowey. Surely USAID has the most expertise of any place in the 
U.S. government in designing and implementing programs.
    What role do you intend to play in the implementation of the new 
global trust fund?
    Answer. USAID staff has been involved from the earliest stages of 
planning for the global fund. A working group has been set up to 
develop initial ideas of how the fund would work, operating principles, 
and governing structure. USAID has provided critical input to this 
process, and will continue to be engaged as further discussions take 
place. USAID has insisted that the fund support a comprehensive, 
integrated approach to the fight against HIV/AIDS, tuberculosis, and 
malaria. We have also insisted on the importance of an impact 
orientation that puts the focus on results at the country level, and 
emphasizes scaling up proven interventions to reaching those most in 
need.

                              Microbicides

    Mrs. Lowey. I am sure you are familiar with the development of 
microbicides, a relatively new technology that will allow women to 
manage their own protection against HIV and other sexually-transmitted 
diseases.
    Could you discuss how microbicides fit into USAID's overall HIV/
AIDS strategy?
    Answer. USAID places a high priority on prevention technologies 
including male and female condoms and the development of microbicides. 
Microbicides are urgently needed, particularly by women who are unable 
to negotiate condom use.
    USAID has been supporting research on the development of 
microbicides for more than five years, with annual funding levels of 
about $2 million per year. In FY 2001, USAID intends to commit about 
$12 million for research and development (R&D) of microbicides with a 
focus on support for near-term activities aimed at developing a product 
as quickly as possible.
    USAID recognizes that it is essential to coordinate its research 
and development effort in this area with other U.S. government 
agencies, including National Institutes of Health and Center for 
Disease Control, with private foundations (e.g. Gates and Rockefeller), 
and with non governmental organizations to maximize the impact of 
resources going into this field and minimize any unnecessary 
duplication of efforts.

          QUESTIONS FOR THE RECORD SUBMITTED BY MS. KILPATRICK

                          Independent Agencies

    Ms. Kilpatrick. There is concern that the African Development 
Foundation and other traditionally independent agencies like it will be 
folded into the framework of USAID. The advocates of this proposal 
argue that USAID is prepared to do the same work that these independent 
agencies perform.
    The African Development Foundation has taken significant steps in 
reforming its operations. In addition, the projects that it supports 
have proven to be effective in contributing to the economic development 
of Africa. Many have called for similar projects in other regions of 
Africa. I am concerned that the elimination of a line item for 
foundations like the African Development Foundation will eliminate the 
flexibility and the creativity that these agencies have used in 
addressing problems in development countries.
    Can you please take the time to explain your and the 
Administration's view of this issue? Do you and the Administration 
support a separate line item in the International Affairs budget for 
the Independent Agencies including the African Development Foundation?
    Answer. I assume your question is prompted by the Administration's 
decision to include within the USAID budget request the amount 
requested for the African Development Foundation. I can assure you 
there is no intention to fold the African Development Foundation into 
the USAID budget. Indeed, we have specified in the request for USAID's 
Development Assistance account the amount that we would transfer to the 
African Development Foundation. It has been our practice in the past, 
when the annual Foreign Operations appropriations bill provided funding 
for the African Development Foundation within USAID Development 
Assistance appropriation, to make those transfers to the ADF as 
specified in the bill. We would expect to do the same in FY 2002. The 
rationale for including the request for the African Development 
Foundation within the USAID budget is because of a decision to align 
our request with the way these funds have been appropriate by the 
Congress in the past several years.

                             Africa Funding

    Ms. Kilpatrick. Last week Secretary Powell testified in front of 
our subcommittee about the Administration's International Affairs 
Budget. In that hearing I raised a similar question to the one I raise 
here. Looking at USAID's budget it appears that the administration has 
requested $1,055,160,000 for fiscal year 2002 under USAID's funding for 
Africa. This amount compared to an appropriation of $1,262,285,000 for 
fiscal year 2001 seems less.
    Can you tell me, does this truly reflect a decrease in the funding 
USAID sees requisite for Africa's needs? Why has the Administration 
requested less money for Africa in USAID's fiscal year 2002 budget? Do 
you feel that this shortfall in the Administration's fiscal year 2002 
request is accounted for in the Administration's overall 150 account 
request?
    Answer. We are not cutting assistance to Africa. In fact, we are 
likely to increase assistance to Africa in FY 2002.
    The confusion arises from the difficulty of year-to-year 
comparisons of budgets.
    Overall USAID-managed assistance to Africa shows as $1.262 billion 
for FY 2001 and $1.055 billion for FY 2002--an apparent $207 million 
cut. The net total allocated to Africa for other, non-food aid, 
programs is $894 million in the FY 2002 request compared to $884 
million budgeted in FY 2001--a $10 million increase.
    FY 2001 food aid levels include emergency food aid, FY 2002 levels 
do not. We make it a practice not to project emergency food aid 
allocations in advance of the operating year. Africa's regular PL 480 
Title II program request actually increases by $20 million from FY 2001 
to FY 2002. In addition, it is likely that Africa will receive a 
comparable amount of emergency food assistance in FY 2002 as they 
receive in FY 2001. This increase in food aid combined with the 
increase in non-food aid will result in an overall increased assistance 
level to Africa from FY 2001 to FY 2002.

                                HIV/AIDS

    Ms. Kilpatrick. President Bush recently announced the intention of 
his Administration to provide $200 million in funding for the HIV/AIDS 
pandemic which is ravaging the Continent of Africa and other parts of 
the world. I applaud the Administration's attempt to highlight this 
tragedy and wish it success in attempting to address this issue. It is 
not quite clear, however, if this funding is new money or simply the 
reprogramming of existing funds for U.S. International Assistance.
    I would like to know if you could provide us with a detailed 
account of where these funds will come from and how they will be 
apportioned in the International Arena. What role will USAID play in 
the administration of these funds?
    Answer. From FY 1999 to the request for FY 2002, USAID's budget for 
HIV/AIDS increased by 150 percent. As directed in the FY 2001 
appropriations bill, USAID set aside $20 million for an International 
AIDS Trust Fund at the World Bank. These resources were included in the 
75 percent increase that USAID received. An additional $20 million has 
already been earmarked from the FY 2002 budget. This total of $40 
million from the USAID budget will be made available when appropriate 
to the new global fund as announced by the President. I understand that 
theDepartment of Health and Human Services will provide an additional 
$100 million, and the Department of State will provide the $60 million 
remaining to make the total of $200 million.
    USAID staff have been involved from the earliest stages of planning 
for the global fund. A working group has been set up to develop initial 
ideas of how the fund would work, operating principles, and governing 
structure. USAID has provided critical input to this process, and will 
continue to be engaged as further discussions take place.
    USAID has insisted that the fund support a comprehensive, 
integrated approach to the fight against HIV/AIDS, tuberculosis, and 
malaria. We have also insisted on the importance of an orientation that 
puts the focus on results at the country level, and emphasizes scaling 
up proven interventions to reaching those most in need.

                      Global Development Alliance

    Ms. Kilpatrick. The Global Development Alliance is the 
administration's attempt to reach out to new constituencies in the 
effort to provide international assistance. Domestically, the 
Administration has also indicated that it will attempt to incorporate 
the help of Faith Based Institutions in providing for the many social 
needs in the United States.
    Does the Administration plan incorporate a faith-based aspect into 
the Global Development Alliance. Is this an effort to expand the 
principles of the Administration's Faith Based Initiative to the 
international arena?
    Answer. USAID has a long history of working with faith-based 
institutions--both U.S. and indigenous--in overseas development work. 
We have found them to be effective partners in delivering development 
assistance in many parts of the world. While we do not maintain a 
separate listing of faith-based institutions, we believe that 
approximately 24 percent of the 441 private voluntary organizations 
registered with USAID are religiously affiliated. USAID's Bureau for 
Humanitarian Response (BHR), which includes the administration of food 
aid under PL 480, reports that in FY 2000, faith-based organizations 
received about 35 percent ($389,105,000) of all BHR resources allocated 
to non-governmental organizations.
    The Global Development Alliance, a pillar of USAID's new strategic 
approach, will support strategic alliances with a variety of 
development actors: private voluntary organizations, non-governmental 
organizations, cooperatives, foundations, corporations, and the higher 
education community. The alliances will address development challenges 
of common interest. Faith-based institutions may partner in such 
alliances depending on the thematic focus and their respective 
interests and capabilities.
                                             Tuesday, May 15, 2001.

                       DEPARTMENT OF THE TREASURY

                               WITNESSES

PAUL H. O'NEILL, SECRETARY OF THE TREASURY

                   Chairman Kolbe's Opening Statement

    Mr. Kolbe [presiding]. The Subcommittee on Foreign 
Operations of the House Appropriations Committee will come to 
order.
    Mr. Secretary, welcome. We are delighted to welcome you, 
Secretary O'Neill in this first appearance before our 
Subcommittee on Foreign Operations. I know however, it is not 
your first appearance before a committee or subcommittee of the 
Congress, since you have been here very often. But we are 
delighted to have you here today to testify on the president's 
request for international programs as they are contained in the 
Treasury Department request.
    The secretary has come from the private sector, but I 
think, as many on this subcommittee know, he was a public 
servant for 17 years, most recently as the deputy director of 
the Office of Management and Budget during the administration 
of President Gerald Ford.
    This subcommittee funds multilateral assistance programs 
under the Treasury Department. That includes our U.S. 
contribution to the multilateral development banks, including 
the World Bank, the International Monetary Fund and the 
International Fund for Agricultural Development, overseas and 
multilateral and bilateral debt relief.
    Additionally, we know that a decision is going to be made 
fairly soon on whether the recently announced HIV-AIDS trust 
fund that the president spoke about last Friday at the White 
House, will be administered by the World Bank and therefore 
would come under the purview of the Treasury Department.
    With regard to debt relief, we would be very interested in 
hearing today about Treasury's oversight of the HIPC 
initiative. There are several issues here that are of interest 
to me.
    First, we have heard from some advocates that are worried 
that an AIDS trust fund is going to overshadow additional HIPC 
initiatives in the coming year. We would like to know your 
thought on that, Mr. Secretary.
    Second, some of the non-governmental organizations, the 
NGOs, are calling for full debt relief, calling on the World 
Bank and the IMF to forgive 100 percent of the debts of some 
60-plus nations. We would like your views about whether you 
think this is feasible or advisable.
    Leaving the popular and high-profile topic of debt relief 
for a moment, and looking at the nitty-gritty problems of the 
multilateral development banks, there are many problems that 
need to be addressed and will need tremendous political will 
behind them to get any real change in the multilateral system 
that we now have.
    Of all the reforms that have been proposed over the years, 
few have resulted in major changes to the basic structure or 
the functioning, the operations, of the World Bank. Mr. 
Wolfensohn crusaded for a three-year strategic compact to 
review and reform the World Bank operations in return for a 
temporary increase in the bank's administrative budget. Three 
years have passed, and now the World Bank is facing a large 
future budget shortfall.
    But today's greatest challenge, it seems to me, to the 
multilateral development banks, is to stay relevant in a modern 
global economy--in a world in which we now all use the buzzword 
of globalization. That is a challenge for the World Bank and 
for each of the regional multilateral development banks. If 
they are not relevant, I think the support in not only the 
United States but in other G-7 countries is going to disappear 
fairly quickly.
    For example, some developing countries today that have a 
chance to grow and participate in the global economy are 
reluctant to take on the large debt from the MDBs. For them, 
the MDBs are relevant only when a massive financial crisis hits 
them.
    I say we have to work to make the multilateral development 
banks succeed. Why? Because we need every foreign policy tool 
at our disposal to work effectively to promote private sector 
development and economic growth. I think the point that I would 
want to make is that economic growth is the only long-term 
solution to raising the underprivileged people of this world 
out of desperate poverty. No amount of aid from this committee 
or this country or any other country is going to do that. We 
have to have a real economic development.
    I hope this and I know this subcommittee will have an ally, 
Secretary O'Neill, in the Treasury Department as we try to make 
that happen.
    Many in this country think that the issues facing the 
developing world have no relevance to their lives, but I would 
suggest when they say or think that, that they look forward and 
look into the future. Look at the number of economic asylum 
seekers that are looking for a decent wage, either crossing the 
border into the United States or, as is so often happening now, 
into the European Union. Look at the future of U.S. stockholder 
companies and look at all their stockholders who already 
realize that many of these companies' long-term future is based 
on establishing markets in the developing world, whether we are 
talking about China or India or Romania. Raising the standard 
of living in these countries directly benefits all Americans.
    I want to thank you, Mr. Secretary, for coming today.
    And before we take your statement, I would like to ask Ms. 
Lowey if she would have some opening remarks.

                     Mrs. Lowey's Opening Statement

    Mrs. Lowey. Thank you, Chairman Kolbe.
    And I want to join you in welcoming Secretary O'Neill to 
your first hearing before the subcommittee.
    In our hearing with the Secretary of State, I indicated 
that I welcomed the increase in the overall request for 
international affairs, but that was tempered by the fact that 
overall increases are small and mostly devoted to narcotics 
enforcement programs.
    Many of us in Congress have fought hard to develop a 
consensus on the importance of spending enough in the 
international affairs arena to ensure that our nation's vital 
national security interests are maintained.
    I hope, Mr. Secretary, that you will join Secretary Powell 
and me in bringing the rest of Congress around to this point of 
view.
    Given the expectations created by the budget resolution for 
additional spending in the areas of education, agriculture, 
health and infrastructure projects, this will not be an easy 
task.
    There, of course, is no guarantee that this subcommittee 
will receive a 302(b) allocation of $15.2 billion as requested 
by the President, so I would ask you to address the 
consequences of a reduction to the request in your statement, 
as I did of Mr. Powell last week.
    Mr. Secretary, I will address several policy concerns that 
I hope you will comment on during your testimony. Your request 
for $1.439 billion for the international banks meets our 
ongoing obligations, but does not address any of the $498 
million the United States owes in arrears to the various 
institutions.
    I can assure you, Mr. Secretary, that Congress will not 
provide funding for the bank arrears if it is not asked. Thus, 
I fear the United States will make no progress this year toward 
paying our arrears and may even fall further behind.
    With respect to implementation of the HIPC debt initiative, 
progress has been slow. The incredible worldwide consensus that 
developed around this cause last year in the spirit of the 
millennium brought about an expectation that countries would 
receive substantial debt forgiveness in a timely way, that 
their annual repayment amounts would be immediately reduced, 
that conditionality would be realistic and sensitive to 
development needs, and that both the international banks and 
the IMF would contribute their share of the costs.
    Unfortunately, there is a perception that this largely has 
not occurred. To date, only one of the 22 countries that have 
reached a decision point has reached a completion point.
    The Inter-American Bank has yet to act internally to 
approve debt relief. The IMF continues to refuse to reduce 
payment streams in any country where other major creditors have 
also declined to participate.
    Finally, the process of developing so-called PRSPs that are 
acceptable to donors has become burdensome and has delayed, and 
in some cases halted, relief.
    I realize the importance of a sound framework for debt 
relief. However, in part because of these delays, many debt 
relief advocates are now calling for 100 percent debt relief 
with no conditionality.
    Mr. Secretary, I think the United States could be doing 
more to help these countries work through the morass of 
international bureaucracy.
    I am pleased that you address the importance of education 
in your statement, which has long been a priority of mine.
    We are still waiting for your report on education programs 
at the World Bank. And I look forward to working with you to 
develop effective programs that will increase educational 
opportunity in poor countries.
    I have many other questions, Mr. Secretary. I look forward 
to your testimony.
    Thank you.
    Mr. Kolbe. With that, Mr. Secretary, we will call on you 
for your testimony. Of course, as always, the full statement 
will be placed in the record. If you would like to summarize 
it, and then we will go directly to questions.
    Thank you.

            Statement of Treasury Secretary Paul H. O'Neill

    Secretary O'Neill. Mr. Chairman, Mrs. Lowey, it is a 
pleasure to be with you and the other members of the committee.
    I do have a prepared statement and, with your permission, I 
will simply submit it for the record and summarize.
    The brief period of time since January 20 has been filled 
with activity involving the institutions we are here today to 
discuss. I suppose it is always the case that although there 
may be a change in administration there is no change in the 
pace of activity in the world. So there have been lots of 
opportunities to have engagement about individual countries and 
about policy direction of the institutions and to learn about 
the historical development of these institutions and what they 
have been doing.
    It has been a good time, I think, but it has also been a 
time when the administration has begun to voice its views about 
these institutions.
    If I may put this in the first person, but in doing so say 
that I am speaking for the administration, I believe these 
institutions have been important and are important today and 
are prospectively important, both to the United States and to 
the world at large.
    But I have been concerned, even before I came here, that 
the institutions were too often associated with failure. It is 
important for everyone who cares about the future of these 
institutions to attend to the issues that have caused them too 
frequently be associated with failure--or what I would 
characterize maybe as inadequate performance, so that we can, 
in good faith, say to all of the people in the United States, 
and for that matter around the world, that not only is there a 
good humanitarian reason to do what these institutions are 
designed to do, but there is performance to be proud of and 
failure is the exception rather than the rule.
    It is with that overarching principle that we have begun 
our engagement with these institutions--with a view that we 
need not accept the world as it is, as though it cannot be 
changed with a proper intervention, and that there are 
substantial ways that these institutions can be of great help 
and instruments of a substantial change in the living standards 
of the people who are the objects of their attention.
    A principle that we have asserted in recent dealings, in 
the case of Turkey and Argentina particularly, is a general 
principle that I think will stand the test of time. It is that 
the international institutions should be the instruments of 
choice when there is a need to deal with financial instability 
or even crisis conditions, so that we do not create or 
perpetuate a notion that somehow these institutions are fair-
weather institutions and somehow the world will cobble together 
a combination of bilateral and multilateral one-off 
interventions.
    I fear, and others who have been close students of this 
subject fear, that doing otherwise puts us into a position 
where we teach the world that whatever bad policies may be 
followed and whatever failure to create the conditions for 
economic growth and improvement of living standards, whatever 
failure to attend to those issues, we in the United States and 
these institutions and other countries will always be there.
    We think it is not a good lesson to suggest to countries 
around the world that the American taxpayers are always there, 
no matter what these countries may do or what they have done to 
create a financially unstable condition, which in many cases 
furthers a less than adequate standard of living.
    And so, in the negotiations that we have had with the 
institutions, in the case of dealing with both Turkey and 
Argentina, we have suggested that it is important that, as 
reforms are agreed to with these international institutions--in 
this case the IMF and the World Bank--the reforms not be the 
province of a finance minister, but that hopefully in most 
instances the political leadership of a jurisdiction that we 
are engaged with owns both the proposed solutions and 
responsibility for the actions that are necessary to create the 
fundamentals for ongoing economic improvement and improvement 
in the standard of living for all the people in the country.
    I would submit to you that we know significantly what those 
things are. We know that improving standards of living and 
growth are associated, first of all, with the rule of law and 
with enforceable contracts and with minimum corruption and 
taking of money for individual benefit instead of for the 
benefit of the people in a country.
    And we know that whatever the standard of living may be in 
a country, there are certain fundamental rules of economics and 
finance that, in a broad way, indicate whether or not a country 
and a people are living within their means. So we know those 
fundamental things.
    As we have looked at what I would call the growth of 
conditionality, often well-intentioned conditionality, our 
observation would be that conditionality dimensions have been 
growing, oftentimes without an ability to measure their 
results. We do not think that is a desirable position to be in, 
because uncertain rules of conduct between international 
institutions and recipients, and an uncertain ability to 
measure whether or not the rules and agreements are lived up 
to, creates an uncertainty around any arrangements that are 
made.
    So we, in our policy review and work, have been looking at 
ways that, perhaps, conditionality can be substantially 
reduced, that what is left can be enforceable and measurable 
and purposeful and in the interest of the people in the 
recipient countries going forward.
    So we have been working, as I say, on specific cases, but 
at the same time we have been working to develop a set of 
principles that we believe will serve us well, will serve the 
interests of the American people well and of this committee 
well. You have a primary responsibility for judging what the 
United States position should be on these issues.
    And I do want to associate myself, Mr. Chairman, both with 
your remarks and Mrs. Lowey's remarks in your opening 
statements. I look forward very much to working with you, and 
finding at the end of our time that we have accomplished 
important things together for the people of the world.
    Thank you, Mr. Chairman.
    [The statement of Secretary O'Neill follows:]
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    Mr. Kolbe. Thank you very much, Mr. Secretary.
    We will begin the questioning. As always, we will go with 
the order of the people who come in, and we will stick to the 
five-minute rule.

                             DEBT REDUCTION

    I want to start with the debt reduction, which I mentioned 
in my opening remarks that you made some reference to. Last 
year, we provided $435 million for debt relief to the poorest 
countries, the so-called HIPC debt relief. And this year, you 
have, as your statement notes, $224 million, which I think, 
along with, $16 million in uncommitted debt account balance, as 
you said, completes our full commitment of the $600 million 
that we pledged to the HIPC debt relief trust fund.
    We are continuing to hear calls, of course as you know, 
from many in the NGO community and others out there in the 
private sector, community organizations, and from abroad as 
well, calling for full debt relief to forgive 100 percent of 
the debt of as many as 60 nations. That is over and above the 
41 countries now who are designated as HIPC countries. And my 
understanding, from talking to people at the World Bank, is 
that that kind of debt relief would wipe out the entire capital 
base of the multilateral development banks.
    Mr. Secretary, let me begin by asking, how is the 
administration going to respond to these calls for full debt 
relief?
    Secretary O'Neill. Well, Mr. Chairman, we have been 
reviewing this situation and we think the process that was set 
in motion make sense. As has been observed, it may be a little 
bit slower than some had hoped, but we think the process is a 
developing one and we should give it some time to run.
    Again in doing policy review, [we have been] looking at the 
implications of debt relief not just from our point of view but 
also from a recipient country's point of view. Think about this 
from the perspective--let me make this a theoretical case--of 
the president of a recipient country who receives a debt 
relief. What that means immediately, hopefully, is a reduction 
in interest service charges, and in the principal payments that 
were scheduled to be paid out over a period of time. I think 
that is all well and good.
    Along with that reduction, they have been getting direction 
and suggestion about the programmatic actions that ought to 
flow from the relief on principal and interest.
    I hope you will forgive me for being a business person, at 
least in one of my incarnations, but if I were faced with that 
circumstance as the president of a country, it would be 
interesting to know what was coming from the HIPC relief of 
principal and interest. But it would also be of importance to 
me to know my ongoing financial situation as a country, not in 
isolation, as though somehow the interest charges I paid for a 
particular debt lives in a world all by themselves.
    I have, frankly, a concern--across this area and across 
what we are doing with all the different interventions and 
activities we have in facing the outside world--about being too 
narrow in the way we think about these things, and not being 
encompassing enough in understanding from, say, a president of 
a country's point of view, what does the total financial 
situation look like?
    For example what is the benefit of having the ability to 
actually take interest service charges that are now forgiven 
and principal charges that are now forgiven and intelligently 
build back up the same amount of debt--even for the best of 
possible purposes--if it means five years from now you are 
going to be back in financial difficulty because you really did 
not have the ability to support an ongoing effort even though 
the interest and principal gave you some new financial 
wherewithal?
    And many of these countries, even without principal and 
interest payments, are in terrible financial positions. Many of 
them, I think, would be better off if they could simply not 
have the ongoing level of budget deficit that they have inside 
their country at least for some period of time.
    So, this is a plea, as we think about and work on these 
things, that we look in a more holistic way at the financial 
structure of the countries that are being assisted and aided 
with initiatives like the HIPC initiative.
    Mr. Kolbe. Thank you. My time is just expiring here, but 
let me just ask one other question here.
    How do you explain the apparent contradiction--some would 
say it is a contradiction, maybe it is not--but the apparent 
contradiction between the fact that, on the one hand, we are 
giving debt relief and, on the other hand, we are continuing to 
give loans to some of the same countries from the multilateral 
development banks?
    Secretary O'Neill. Well, Mr. Chairman, that is very much in 
the vein of what I was just saying. If you look at the 
financial condition of some of these countries, even after they 
have debt relief and principal relief, they are still in 
miserable economic condition.
    Again, I would make a point of principle: I think--and 
again, this is a business person's point of view--when you give 
someone money and you call it a loan, then I think you should 
expect to get your money back with interest. If it is really 
not your intent to get the interest and principal back, then I 
think you should call it a grant and be really very direct in 
what it is you are doing and what it is you are saying.
    I think in that regard, to your point now, there are some 
of these countries that honestly do not need more loans. They 
need grants because their financial condition will not really 
support their ability over time to pay back interest and 
principal on loans.
    This is my first time before this committee. Maybe this is 
not the right thing to say, but it is what I believe as a 
person who knows about borrowing and lending money and what 
those terms are supposed to mean. It seems to me we would be 
well-served if we were really very clear through all these 
devices about what it is we intend.
    Mr. Kolbe. Thank you.
    Ms. Lowey?
    Mrs. Lowey. Thank you, Mr. Chairman.
    If I may follow up on the debt relief questions, I would 
appreciate your response, Mr. Secretary.
    When do you anticipate that the Inter-American Bank will 
achieve the necessary internal approvals to actually make debt 
relief happen?
    Secretary O'Neill. I think they are just about there.
    Mr. Schuerch. At the annual meeting in March, they reached 
a Governors' Resolution agreement on a funding framework. So 
within the next month or two we think we should start seeing a 
decision.
    Mrs. Lowey. Thank you.
    Why has the United States done nothing to discourage the 
IMF from imposing the condition that they will not 
grantreductions in payment streams in any country where other major 
creditors have yet to do so? Could you explain that?
    Secretary O'Neill. I am not sure. Go ahead, please.
    Mr. Kolbe. For the record, since Mr. Schuerch did not 
identify himself, Bill Schuerch is the deputy undersecretary. 
Is that correct?
    Mr. Schuerch. Deputy assistant----
    Mr. Kolbe. Deputy assistant secretary. Thank you. And a 
former staffer, I believe.
    Mr. Schuerch?
    Mr. Schuerch. On the IMF question, we have had a long 
discussion over a period of time with the IMF on the issue. The 
IMF has taken the position that unless all the other major 
creditors are in line the IMF also should not put its money on 
the table. It is a matter of using IMF resources to leverage 
and put pressure on other creditors to come in line and 
participate in the programs. So it actually has a positive 
effect.
    The IMF has delayed Debt Service Relief in some cases but 
in the end the IMF will provide this relief.
    Mrs. Lowey. Now, there is an issue I would certainly like 
to continue the discussion on, because it is an issue which 
should come first. And I would appreciate some further input.

                               Mozambique

    It has recently come to my attention that judicial reform 
was made a condition of debt relief in Mozambique. Can you 
explain why that would be the case?
    Mr. Schuerch. Yes. I think there is, obviously, a wide 
range of items that might be included as conditions in 
different poverty reduction plans by governments. Judicial 
reform was part of the plan that the Government of Mozambique 
reached agreement on with its citizens' participation and with 
the Bank and the fund. So they reached agreement fully 
voluntarily on having that as a component of their program.
    The broad reason is simply that judicial reform is critical 
for economic growth in order to enforce contracts. That is why 
judicial reform is in many of the reform programs.
    Mrs. Lowey. I will try to move along, rather than pursuing 
that, because I see the sand is moving quickly.
    But another factor causing a delay in Mozambique's debt 
relief is the fact that foreign owners of a recently privatized 
bank have walked away from the institution after an audit 
revealed irregularities. How has the United States responded to 
help the government overcome a problem not of their own making?
    Mr. Schuerch. This is an issue, and we have just had an 
opportunity to look at it more closely.
    But the government has, in fact, intervened and taken over 
from the foreign purchaser. The concern is that you have a 
state bank that is losing vast amount of monies. That loss has 
a substantial effect on their fiscal envelope, and consequently 
affects their IMF program as well.
    So it is a problem. It is being worked on actively at the 
Bank and the Fund. It is not resolved yet. It is the most 
critical element, much more than the judicial reform element, 
in terms of the speed of getting the program resolved.

                         Delays in Debt Relief

    Mrs. Lowey. And if you can describe the process the United 
States has put in place to implement the 24-month moratorium on 
new lending that was imposed as a condition by the Congress 
last year, has this caused any delays in debt relief?
    Mr. Schuerch. There have been delays from the moratorium. 
At the moment, for the countries that are most affected by the 
requirement--which are Bolivia and Honduras--we have in hand 
letters from their governments that will satisfy the moratorium 
requirements. As yet, we have not had to use them. What has 
held up those two countries' process is the slowness on the IDB 
decision point.
    Mrs. Lowey. And lastly, with regard to this issue, clearly 
you will not obligate all of the funding approved last year for 
debt relief by the end of fiscal year 2001. I would appreciate 
if you could explain your anticipated plan for obligation of 
the fiscal year 2001 and 2002 requests for the HIPC trust fund.
    Secretary O'Neill. Let Bill give you this answer.
    Mr. Schuerch. We have changed the process of when we can 
obligate resources a little bit. We are obligating at the time 
of Paris Club agreements now, rather than at the time a 
bilateral agreement is signed. This has sped up the process.
    We anticipate by the end of this year there will still be a 
rollover. We think it might be about $100 million, so it is 
much down. If we are successful--and I will admit that is 
optimistic to a degree--but if we are successful we will have 
achieved obligating by the end of this year a very substantial 
amount of the resource we have gotten appropriated so far.
    Mrs. Lowey. I think my time is up. Thank you. Hopefully 
there will be a second round.
    Thank you, Mr. Secretary.
    Mr. Lewis. Thank you very much, Mr. Chairman.
    Mr. Secretary, it is a pleasure to be with you.
    I am most interested in your comments in your opening 
statement regarding the multilateral development banks. And I 
am particularly moved to suggest that the reforms that are 
being proposed are long overdue and hopefully will be in the 
direction of really helping these countries get a handle on the 
kind of development that will increase wealth.
    I sense that your thrust in the MDBs is to, while you are 
streamlining conditionality, emphasize very strongly loans that 
go in the direction of non-governmental loans and, private 
sector development incentive. Would you share with this 
committee the reaction you are getting from your colleagues you 
have been meeting with around the world?

                         Asian Development Bank

    Secretary O'Neill. Well, you may have read some of the 
accounts of, for example, the annual meeting of the Asian 
Development Bank last week. The overarching theme of the Asian 
Development Bank has been poverty reduction. The people who 
cover this issue closely made a lot out of the fact that I did 
not talk about poverty reduction when I addressed the meeting. 
And, indeed, I did not talk about poverty reduction; I talked 
about productivity improvement and improvements in the standard 
of living in the countries.
    The reason I did that is because I think poverty is a 
symptom. If you really want to eliminate poverty, you do not 
attack the symptoms. You go right at the cause of the problem, 
which is fundamentally an issue of productivity, which then 
drives you to ask, ``How do we get higher productivity?''
    One of the most fundamental things, it is a universal 
truth, is education. If you want to see higher rates of 
productivity, you need a more-educated pool of people in the 
society.
    Then you need stable capital flows. And you need to make 
products for markets that really exist--going right to 
yourissue about private enterprise.
    This is not to say that there are not necessary government 
processes, for sure, as we have noted. You need rule of law and 
you need enforceable contracts and you need a government 
process that is reliable and stable over time.
    I guess I would say the reaction to my emphasis on 
productivity is maybe a little jarring, but I think that is 
okay. I think it is not because all of us do not agree on the 
ultimate objective, but maybe we have a somewhat different idea 
about how to get there. One of the things I personally believe 
we need to do to get there faster is to have the right goals--
and they need to be measurable goals.
    I will go back to education as an example, which is an area 
on which I have spent an awful lot of time in my own life, both 
in the public and private sector. It is ever more clear to me 
that inputs are not the right thing to measure when you think 
about education. What is really important is the product of 
education.
    In the simplest terms, it means creating in human beings 
the ability to read and write and compute at a level that makes 
people independent self-learners. When you have achieved that, 
you have achieved a critical milestone for the prospects of 
economic development.
    And so, as we work with these institutions and they talk 
about education, I think we need to be very sympathetic and 
encouraging in what they do in the education area. But I think 
we also have to be hard-minded and demanding that the inputs 
produce valuable outputs that are the absolute foundation stone 
for the economic growth that needs to happen, so that people in 
these developing places around the world can have some hope 
that--hopefully in a generation or two of time--they can aspire 
to a standard of living that is worthy of the human race.
    Mr. Lewis. Mr. Secretary, I am particularly interested in 
how much you can share with the committee regarding the 
economic conditions that exist in those portions of the former 
Soviet Union, and what you see as the major challenges that we 
face near term.
    Secretary O'Neill. Well, frankly, it is a very mixed 
situation, at least from what I have seen. I have spent a fair 
amount of time in the former Soviet Union in the last 10 years 
or so. You probably have recently been to Moscow. I think it is 
really quite startling to see the change that has occurred in 
Moscow itself.
    When you went there soon after the Wall came down, it was 
really startling to find what a gray place it was. When you got 
out of the main square and the beautiful old churches and the 
things we would all see on night-time television, it was 
striking to see how gray and undifferentiated everything there 
was. There was no color and there was no sense of life and 
enthusiasm.
    Moscow has really changed I think in a quite remarkable 
way. If you go to St. Petersburg, you see some of that same 
kind of thing.
    On the other hand, if you go to a place like Krasnoyarsk, 
which is a famous nonexistent city that has a million people in 
it, where they had their phased-array radar during the Cold War 
period, you find a place where the life expectancy is 47 years, 
and they have radioactive contamination in the water supply 
from nuclear activity, and life is grim.
    And when you over-fly all of that--that is, 2,500 miles on 
the other side of Moscow and then another 2,500 miles to the 
Bering Sea; so it is in the middle of nowhere--I think it gives 
you some appreciation for how vast the country is and how large 
the challenge is for them to raise the standard of living 
outside of the two major metropolitan areas that I have 
mentioned. They have a lot to do.
    Part of it is, frankly, attitudinal. When they had their 
financial crisis in August of 1998, we had deployed some people 
there, and one of the young women who worked for us had put her 
money in the bank. And I said to her, after she lost all of her 
money, ``How do you feel about your money being gone?'' And she 
said, ``Well, I should have known better.'' She was not angry 
at the bank and she was not angry at the government. She 
faulted herself for being so stupid to trust that a bank could 
actually be trusted with her money.
    I think that is a really quite telling comment about the 
attitude of people. I think it tells you something about the 
challenge that exists to see Russia reach its true potential, 
because it is truly a country of enormous physical resources 
and brilliant people with what has been a quite good 
educational system. So I think the prospects are good, but it 
is not a short road.
    Mr. Lewis. Thank you, Mr. Chairman.
    Ms. Kilpatrick. Thank you, Mr. Chairman.
    Good afternoon, Mr. Secretary. It is a pleasure to meet 
you, and I look forward to working with you.

                                  MDBs

    I want to go back to the multilateral development banks for 
just a moment. In your opening remarks, you talked about the 
institution's associated with failure, inadequate performance 
and in many instances not what we would want them to be or to 
perform at, and in private world there is certainly a standard 
that must be adhered to, or else you go out of business; that 
is the difference.
    In government, with similar kinds of programs, sometimes we 
stretch the performance a bit, because in some instances we 
think it serves a purpose in our intent in this investment, I 
would call it, in poor countries. If the MDBs are to be 
measured by the same criteria as privates, I think we will 
fail. I think that is not their mission and we will certainly 
fail because they cannot live up to that. We help poor 
countries, because they are just that, from Honduras to Senegal 
to Uganda and the like.
    And on the one hand, the failures might be measured in 
dollars. But on the other hand when they are investing in 
training teachers and cleaner water, and I just was writing 
down some of the safer school, HIV-AIDS investment. Some of 
those cannot really be measured in dollars, so we are dealing a 
little bit with apples and oranges, even as we strive to make 
the MDBs much better, more efficient and much better in their 
performance.
    I do not want to lose the human partnership that this 
country has with our MDBs, because that is what really cannot 
be measured. And I think we have to be very careful when we 
work with the MDBs and with those poor countries the issues are 
not just black and white, because it is the human factor that 
many times cannot be measured.
    Am I off-track or do you understand me?
    Secretary O'Neill. Well, let me respectfully disagree with 
you.
    Ms. Kilpatrick. I am sure.
    Secretary O'Neill. Let me tell you why.

                      HIV TREATMENT AND EDUCATION

    First of all, as to what you said about water systems and 
HIV treatment and education, I agree with you completely that 
these are important things. I think that these institutions 
should be involved in these subjects.
    But I do not think we should expect a lesser performance 
from the taxpayers' dollars that we take from all of our 
constituents, or your constituents, than we would expect if we 
went to the store, or we went, say, to a small community in 
your district and we bought a private water system. I would 
expect the government to be able to operate a water system as 
efficiently as the citizen did.
    Ms. Kilpatrick. And in that illustration, so would I, sir.
    Secretary O'Neill. I also believe that when we say, through 
these institutions, that we are going to create the conditions 
for education, which means having decent school buildings and 
educated teachers and having performance standards and 
achievements for children, that we should be able to specify 
that and we should be able to buy it.
    What I am saying is, I do not think we should put up with 
the notion that somehow the leakage and corruption and misuse 
of funds is something that we accept as though it was----
    Ms. Kilpatrick. I am not saying that at all. I do not 
condone that, either.
    Secretary O'Neill. Well, see, but I think maybe we do not 
have an agreement, because we are not agreeing that we should 
have performance. I will give you an example where we did not 
get performance.
    When we sent billions of dollars to Russia, as far as I can 
tell, we did not get anything. Nothing. And I do not think the 
American people should tolerate that.
    Ms. Kilpatrick. You know, I am not far from you. I just 
think that there is a middle ground. It is not as pure. And 
that is a bad word in this context. You know, I certainly agree 
that we ought to be able to measure, some of the words you used 
as well--and I agree with that need enforcement for positive 
outcomes; I totally accept and agree with that.
    I am going to switch, but I want to keep talking to you on 
that.
    Secretary O'Neill. Okay.
    Ms. Kilpatrick. On the HIV-AIDS trust fund, this Congress 
and the last Congress created a trust fund. I think they were 
asking for some $300-plus million. I think we provided $20 
million in it.
    When the president and this administration talks about a 
trust fund, is it a different one, are we working with that, is 
it through the World Bank?
    Secretary O'Neill. Well, what the President said last week 
is that he believes we should allocate $200 million to this new 
initiative. There is still work going on on exactly what the 
chosen instrument should be for doing this, whether through the 
World Bank or through a U.N. institution. It is not a finished 
piece of business yet. I think there are legitimate discussions 
about how this should be done. It is not yet decided.
    I am sure you understand, this $200 million is in addition 
to over $2 billion, I think, $2.5 billion worth of U.S. 
government funding for HIV-AIDS research and another, almost, 
$500 million for other activities.
    Ms. Kilpatrick. And we need to put all that together in one 
place. I know we have a little in this budget, a little in HHS, 
and it is kind of spread out. I do not think we see the big 
picture in HIV-AIDS. We need to see what the country is--is my 
sand gone? Jesus Christ, let's get you on the next person. 
[Laughter.]
    Thank you, Mr. Chairman.
    Mr. Kolbe. Mr. Callahan?
    Mr. Callahan. Mr. Secretary, welcome to the committee. You 
will find as you go through these hearings that most members 
want to ask you something that you do not know the answer to.
    Secretary O'Neill. I have someone who knows all the answers 
with me.
    Mr. Callahan. So you are on your honeymoon and I am not 
going to try to--even though Bill has been married to this 
committee for quite a number of years, you are well represented 
in that capacity.

                                  HIPC

    But to hear your views on HIPC was refreshing. When we 
first started talking about HIPC, your predecessors, Mr. Rubin 
and Mr. Summers, argued that a moratorium ought to be a part of 
HIPC; that we ought not permit these countries to go back into 
debt the day after their loans were forgiven.
    And secondly, I argued to no avail that there ought to be 
some negotiations with the banks. You are a businessman, you 
come from the private sector, these banks made bad loans. If 
you are in the United States and you make a bad loan, the FDIC 
says you write it off. If you are in any other business and you 
make a bad loan, then you write it off. Instead of us getting 
money for the intended purposes of helping the needy in these 
poor countries, it appeared to me that a great percentage of 
the money was going to bail out banks more so than for its 
intended purpose.
    I would encourage you to continue your thrust in this 
direction, to make certain that negotiations take place with 
these banks. If they want to settle for 10 cents on the dollar, 
which most American banks would do with a debt they have no 
opportunity to collect, that the international community ought 
to be negotiating with these banks, which would probably 
discourage them from making bad loans again.
    And, this $600 million is not the end of HIPC 
contributions. We are going to be right back in the same 
situation next year, because you are going to have another 
meeting and then all of the intended purposes will not have 
been met. And then someone from our government is going to go 
some meeting in some foreign country and obligate the United 
States once again for another hundreds of millions of dollars 
in this cause, until such time as we recognize that a lot of 
this money is not going for the intended purposes.
    These countries were not paying interest anyway. They were 
not paying principal. They were just adding their interest to 
the principal each year creating this huge debt which did not 
give them the opportunity to have a borrowing capability 
because their balance sheet was out of whack.
    But this is not free. If we give some bank that has loaned 
money to some country, if we just pay off a $50 million loan, 
that does not help a single person in that country. It does not 
feed a single child. It does not provide any assistance to the 
needy. Because from a cash flow point of view, they were 
notpaying any money any way.
    So part of your views on HIPC were very refreshing. I think 
Secretary Summers, Secretary Rubin agreed with me privately 
that maybe I was right.
    And I think, Bill, we did finally insert some type of 
moratorium in there even though it was just for a few months, I 
think. But I wanted a two-year moratorium.
    In any event, let me encourage you to continue thinking 
like a businessman and not reward banks. If we want to help the 
needy, you are absolutely right, it ought not be through loans, 
it ought to be through grants. And it would be far better to 
give $600 million directly to needy countries to feed their 
children and to eliminate some diseases, rather than giving it 
to some banks so they can sit in their leather seats in some 
marble hall talking about what a good deal they got and getting 
themselves right back in the financial dilemma that some of 
them are in.
    Let me encourage you to continue to think like a 
businessman in that direction, to be compassionate. This 
administration, I am sure, will be compassionate, and we will 
want to help. But I would encourage you that if this $600 
million, along with the other contributions from the other 
nations, is insufficient to pay off debts to banks, then the 
next phase ought to be direct contributions to these needy 
countries that will go directly to their citizens.
    So welcome aboard.
    Secretary O'Neill. Thank you very much.
    Mr. Kolbe. Let me begin a second round of questions.
    Very quickly on the area that I was talking about, one 
quick question, I think a quick answer we can get and get 
finished my questions in the area of the debt reduction. Can 
you tell me if any of last year's contributions to the trust 
fund has been obligated to date?
    Maybe Mr. Schuerch knows the answer to that.
    Mr. Schuerch. We have not contributed the trust fund yet.
    Mr. Kolbe. None of it has been obligated to date?

                          HIV-AIDS TRUST FUND

    Let me turn to the HIV-AIDS trust fund then to IDA. The 
World Bank relies, of course, on repayments from borrowing 
countries to replenish IDA, the International Development 
Association, in order to be able to continue its lending of $6 
billion a year.
    But IDA is continuing to lend money, in many cases, to HIPC 
countries that also suffer from AIDS epidemics which raises, I 
think, a very serious question about whether or not repayment 
will be possible or not.
    Mr. Secretary, in your view, can the future of IDA be 
certain when the repayment of capital is doubtful? And is this 
just something we are going to have to accept, or what do you 
think our position should be on that?
    Secretary O'Neill. As I understand it, we are on a three-
year replenishment cycle, and to the degree loans are being 
made without a real prospect of repayment, we are going to have 
to look to the replenishment process to put funds back for----
    Mr. Kolbe. So you just see replenishment as, maybe, the 
only answer in that case?
    Secretary O'Neill. I think, to the degree that we are 
making loans that are not going to be serviced, we are going to 
have to look at replenishment.
    Mr. Kolbe. Okay. Well, I was going to say, I think their 
negotiations actually have commenced among the donor nations 
for the 13th multi-year agreement that would increase our 
contributions to the IDA fund.
    Is the creation of the HIV-AIDS trust fund going to impact 
those negotiations?
    Secretary O'Neill. I do not know. I think it is 
indeterminate at the moment.
    Mr. Kolbe. I am sorry?
    Secretary O'Neill. We do not know at the moment. It depends 
what happens out of that process.
    Mr. Kolbe. Mr. Secretary, the president was fairly, I think 
it is safe to say, vague on Friday when he talked about the 
HIV-AIDS trust fund. And I understand, at this point, it is 
still very conceptual. And I am wondering if it is possible for 
you to shed any light on this for us, what the source of the 
$200 million for the trust fund will be.
    There has been some talk that we can expect a budget 
amendment, and can you confirm that? Can you give us any idea 
of when that might be? You may be constrained from telling us 
what areas we might be looking at.
    Secretary O'Neill. I think it is going to be done fairly 
quickly. The draft work that is necessary is in OMB, and I 
think we should have it for you very soon.
    I do not know exactly what device is going to be proposed, 
but this funding is going to come, I think, $100 million from 
the State Department and $100 million from the HHS in fiscal 
year 2002.
    Mr. Kolbe. $100 million from the State budget and $100 
million from HHS, from within the existing--not new, but 
existing proposals?
    Secretary O'Neill. Exactly.
    Mr. Kolbe. I am sure there will be some questions raised, 
and there will be some controversy about that.
    Let me, if I might, turn to an issue, in my remaining time 
here, of interest to me, and this is the question of 
dollarization. This is an area that is a little bit outside the 
direct purview of this committee because it does not come under 
the multilateral development banks, but it is relevant to all 
of the other programs that we are doing.
    Four countries have dollarized, at this point, in Latin 
America: El Salvador; Ecuador, most recently: and, I think this 
week or next week, Guatemala's is going into effect. El 
Salvador is an informal dollarization; it is not by law. 
Panama, of course, was the first.
    When I was down in Colombia and in Ecuador, we got a fairly 
startling briefing from the Secret Service on the effects of 
dollarization. Counterfeiters in Ecuador are taking great 
advantage of this there. It is a great opportunity as a place 
where, now with the dollar economy, where people do not have 
the sophisticated devices or tools or knowledge to be able to 
discern counterfeit dollars down there, to use that economy as 
a place to launder dollars, to get real dollars out and put 
counterfeit dollars into the economy.
    I have been meaning to talk to the director of the Secret 
Service, but I would like to raise it with you, but I see this 
as a major area where I think the United States is going to 
have to place some real emphasis of our resources in these 
countries where the dollarization is taking place.
    And I just, I guess more in the form of a comment rather 
than a question, would like to have a response from you. But I 
think it is going to be very difficult for us to counter this 
problem when these countries have very little resources to 
target their own counterfeiting problem. And we have no person 
in Ecuador, for example. You have several billion dollars of 
currency floating around in that country now, U.S.currency; we 
have no Secret Service person there working on counterfeiting issues in 
that country.
    Secretary O'Neill. One thing that is going on inside the 
Treasury is expert work on the next--I guess I would say, not 
the next generation, but maybe the fifth generation from now--
of currency that is more and more difficult to counterfeit. 
There is some very interesting work going on.
    The people who would do ill are very clever, but the work 
that I have seen in my early tenure on our own efforts to 
develop currency that is more and more difficult to duplicate 
or counterfeit is really quite encouraging. So I think we will 
be okay.
    I think, you know, there is another interesting thing, and 
I am sure many of the committee members from your own travels 
around the world realize this fact: In some important ways, the 
whole world is dollarized now. It is almost impossible to go 
someplace where people would not prefer to have our currency 
over almost any other currency. It is fascinating to see that 
the dollar is, as I say, as good as gold almost everywhere in 
the world. I do not know of a single place where people do not 
respect and want our currency.
    Mr. Kolbe. It is true. A third of U.S. currency, or even 
more, circulates outside the United States. But I think that 
there is a special problem in countries like Ecuador that have 
chosen to move their entire economy to that so that the banks 
only accept dollars now, not their own currency. And I think 
there is a special problem in dealing with the counterfeiting.
    Yes, we are continuing to make improvements in our 
currency, to make it more difficult to counterfeit, but when 
you get to a country like Ecuador where they are not as 
sophisticated, that you can practically take Monopoly money and 
substitute it and call it U.S. dollars and substitute it for 
it, and I think what I am saying is I think this poses a great 
new venue, a great new opportunity, for the drug industry to 
find ways for laundering their money, to move it into real 
currency. I think this is a real factor that we need to take 
into account.
    My time is up.
    Ms. Lowey?
    Mrs. Lowey. Thank you, Mr. Chairman.
    Mr. Secretary, I was interested in the focus in your 
testimony on raising productivity as a means to achieving 
prosperity in developing countries, and I welcomed your words 
about the importance of making education a top priority for the 
world economy. I believe, as I have for some time, that 
education is the keystone of any sustainable development 
strategy and that we can expect natural increases in 
productivity as societies become better educated and healthier.
    Investments in education, health care, democracy, conflict 
prevention and other development priorities are prerequisites, 
in my judgment, for achieving productivity. And as I mentioned 
in my opening statement, I am very interested in how the World 
Bank is involved in investing in basic education for children 
in the developing world.
    This subcommittee has heard before how investments in basic 
education, and particularly in girls' education, are the most 
cost-effective and productive development investments we can 
make. The chain reaction that comes from educating girls is 
extraordinary: Families are better fed, children are healthier, 
more likely to attend schools, and society as a whole benefits.
    Would you please discuss with us the World Bank's program 
of basic education lending and how we are using our influence 
in the bank to encourage a greater commitment?
    Secretary O'Neill. Well, I do not know enough about exactly 
what they have done on the ground to be a credible witness on 
the subject.
    But believe me, in time I will know enough about what they 
are doing in specific countries' circumstances to answer your 
question and trust me, not about how much money they are 
spending, but about what they are achieving in terms of 
incremental numbers of human beings that have life-long 
learning skills.
    I quite agree with your sentiment about the importance of 
education, but I really do believe that we do not have to go 
offshore to find a lack of success in giving every child in our 
society the skills they need to be life-long learners. But we 
do know some things from our own experience. One of those 
things is that if you are really going to create life-long 
learning capability, it is necessary to have standards and it 
is necessary to have testing.
    Hopefully, we are going to have that in our country pretty 
soon. Then it will be easier to suggest to others that they do 
what we do, not just what we say.
    And it is one of the things I think is so powerful and what 
President Bush has said about ``no child left behind.'' When I 
talked to the Asian Development Bank finance ministers last 
week, I said to them, you know, what the President said about 
``no child left behind'' ought to be the mantra for everything 
that these international financial institutions do and say, 
beginning with the Asian Development Bank. It is the right and 
worthy objective for what it is they are trying to do, so that 
we can see real economic success for the people behind all of 
this.
    Mrs. Lowey. We are running out of time, and I want to get 
to the next issue. But I hope this is an issue we can continue 
to talk about together, because everyone agrees it is 
important. There are still little girls who have to dress as 
boys in parts of the world to get to school. There is too much 
illiteracy. There are too many people out of school--and I am 
not even concerned about standards at this point. They need a 
schoolhouse. They need to get to school, and we are not even at 
that point. So I look forward to working with you.
    Mr. Secretary, in another area, I understand that last week 
the World Bank approved an interim assistance strategy for a 
two-year hard-loan lending program for Iran totaling over $700 
million. This was approved over the objections of the United 
States as legislatively mandated, but was supported by our 
friends on the board. As recently as 1999, we were successful 
in securing the opposition of other G-7 countries to engagement 
with Iran, but our efforts have been met with opposition in at 
least two recent votes.
    Iran, as we know, is, according to the State Department's 
2000 Patterns of Global Terrorism Report, the most active state 
sponsor of terrorism. Iran continues to act as a destabilizing 
force throughout the world, and its efforts to obtain weapons 
of mass destruction continue to threaten the Middle East 
region, including United States troops stationed there.
    In light of these facts, I would hope that you and ourWorld 
Bank representatives were very engaged in trying to stop last week's 
vote from proceeding. Could you detail for me the department's efforts 
to discourage other World Bank members from voting for such a loan 
package or to postpone the vote itself?
    Secretary O'Neill. We forcefully objected to this idea, and 
shared our view with other relevant members. I have a letter 
back from the President of the World Bank indicating to me that 
what has taken place is actually a notional agreement; that 
there are very substantial and important prerequisites that 
have to be met by Iran before anything would happen; and that 
nothing is going to happen for at least the next 12 months.
    Mrs. Lowey. I see the time is up, but again, this is an 
important issue I hope we can continue to talk about.
    Thank you, Mr. Secretary.
    Mr. Kolbe. Thank you, Ms. Lowey.
    Since Mr. Sununu was here and returned, I am going to put 
him into the rotation at this point, if you do not object.
    Mr. Sununu?
    Mr. Sununu. Thank you, Mr. Chairman, and I thank the 
members of the committee for not objecting.
    Mr. Secretary, under what conditions will countries be 
available again for funding, either through the 
multidevelopment banks or directly from the United States, 
after a loan is forgiven? We heard some discussion obviously 
about concerns that are raised when we forgive loans and people 
go back and try to borrow more, especially in circumstances 
where they really do not have the facility to make those 
repayments.
    What are the specific restrictions for those countries 
borrowing again?
    Secretary O'Neill. I do not think I can give you a specific 
set of conditionalities, and I am not sure there is a specific 
set that apply in every particular case. But what I said 
earlier, seems to me, is kind of a rule of reason.
    In the first instance, if we forgive a loan--and that means 
the principal payment and the interest--it does not necessarily 
signify that a country is suddenly well. As I said earlier, 
there are many countries where, even after forgiveness, it is 
not as though the only loans that they had on the books are the 
ones that they got through these institutions.
    Mr. Sununu. I certainly agree. And that is the exact reason 
for my question, which stands to reason that we have some 
objective criteria for determining which countries are well 
enough to merit continued lending, either by the United States 
or through those MDBs in which we participate.
    Secretary O'Neill. Bill?
    Mr. Schuerch. In the U.S. agencies and in our own agency's 
lending programs, there is no central policy. In the budget 
appendix there is language that clearly indicates OMB is 
invested in achieving centralized policy on this issue, but at 
the moment Ex-Im Bank will have one policy on this area, 
Agriculture will have another. They will each make reasoned 
judgments, country by country, but it is not a consolidated 
approach.
    The one thing I would say that is an approach to this 
problem is the credit budget of the United States, whereby if a 
country is getting debt reduction and it is highly risky, you 
do not lend to it because it is very expensive in budgetary 
terms to do new lending to such a country. So there is an 
automatic mechanism which makes that less likely, or assures us 
that there will be less lending to those types of countries.
    Mr. Sununu. Well, to the extent that there is a program in 
place and a trust fund in place that is forgiving loans, we 
are, obviously, making the risk of bad loans less and, 
therefore, not necessarily achieving those goals. That would be 
a concern.
    Second, to the extent that all of these U.S.-based 
agencies, let alone the MDBs, have different sets of criteria 
for determining when it is appropriate to lend again, you are 
creating an environment where perhaps a borrowing nation can 
game the system and play different entities off of one another.
    Equally important, perhaps more important, you are creating 
an environment where we are using inexact and perhaps 
counterproductive terminology. You pointed out a very clear 
difference between loan and a grant, or situations where they 
are two very different things. We need to have a clear set of 
definitions for both.
    I supported the additional funds for loan forgiveness 
because I view it as a leadership initiative, a humanitarian 
initiative to those countries that truly are the poorest of the 
poor. And in that regard, it ought to be viewed more as a grant 
than as a loan.
    I submit to you, we need to have a much clearer definition. 
And if our own U.S. agencies have differing definitions of when 
and how we are willing to lend again, we are not achieving 
those goals.
    So I offer those comments on the ideas that you have 
already advanced and would encourage you to implement a more 
objective criteria.
    Secretary O'Neill. If I may say just a word about that. 
Again, I do not know whether you were here when I was talking 
about thinking about countries as a whole case rather than as 
the object of individual programs.
    But it seems to me, to your point, it would be useful to 
work toward an idea that, as the international lending 
institutions face individual countries, there be a notion of 
what a consolidated rate should be, as all of the international 
institutions are facing a particular country with an eye toward 
a market rate, so that we begin to do, if you will, 
differential pricing.
    I think there is room for concern that if the international 
institutions always have the lowest rate, they are always going 
to get the business.
    And as countries get better--maybe out of loan forgiveness 
and principal and interest forgiveness--it seems to me it 
merits some thought about what one might call a midway-to-a-
market rate or even a market rate, so that we do not confuse 
the decision-making process from the point of view of a country 
or from the point of view of competing with private enterprise.
    In that same regard, the process seems to me now to be at 
the point of what is called a moral hazard. One of the things 
that it is important for us to figure out is a way to not have 
moral hazard without consequences.
    What I mean is this: if a lender freely goes into a country 
where the risks are very high and the rate of return is double 
or triple the rate that is available in a developed country, 
that double or triple rate of return suggests a risk that isa 
very high risk, and, therefore, we need to figure out a way to let 
people who take those very high risks suffer the consequences of the 
risk and not be there, in effect, to underwrite their situation with 
the people's money.
    Mr. Sununu. Is this a parallel to the reform measures that 
were passed for risk-adjusted analysis in rates at the IMF? And 
if so, what is being done to make sure that the IMF is 
compliant with those reforms?
    Secretary O'Neill. Well, I think, you know, there is work 
going on in that direction, but I think there is more work that 
needs to go on.
    And I see why it is important. Besides the individual 
country situation, I think an area that we do need to be 
concerned about is so-called contagion. And we have seen 
instances of contagion moving around the world.
    If we can solve this problem of contagion, we can deal in a 
much more forthright and forceful way with individual countries 
by being able to say to them, ``If you followed obviously wrong 
policies and prescriptions in your own economy over the 
objection and technical assistance and all the other things one 
would try to do before you go down the drain.'' If we do not 
have to worry about contagion, it is going to be a lot easier 
to say, ``You bought it and you own it and we are not going to 
bail you out.''
    As long as we have the danger of the worldwide financial 
markets lickety-split like lightning carrying contagion effects 
around the world, we have got to be worried about this issue.
    And so this pricing question is an important aspect of 
getting these institutions and ourselves into a different 
position than the one we have been in.
    Mr. Kolbe. Thank you.
    Ms. Pelosi?
    Ms. Pelosi. Mr. Chairman, I am absolutely delighted to 
listen to the concerns expressed by colleagues and the 
responses of the secretary. Thank you for the recognition.
    Mr. Secretary, congratulations to you on assuming your new 
position and good luck to you.
    Secretary O'Neill. Thank you.
    Ms. Pelosi. We have many areas where we work together on 
this committee, and I hope we will be able to do so 
successfully as well.
    I have a couple of concerns that I wanted to raise. And 
forgive me, but just being in another part of the country 
prevented me from hearing firsthand your presentation, but I 
will read it. And forgive me if I am being repetitive of 
concerns that my colleagues have brought up, but I think some 
of them bear repetition, because some of them are a matter of 
life and death.
    One of them is the global AIDS issue. Since it is the most 
recent announcement on this subject by the president, while I 
appreciate the president's focus and welcome his announcement 
about global AIDS and global health issues, I was disappointed 
with the level of funding that the president announced, 
particularly since my understanding from the secretary of 
state, who was here, and perhaps there is some more 
clarification since last Thursday, I was disappointed that 
there was no additionality of funds included in the president's 
global health initiative.
    Can you shed any light on that? Is there anything new? It 
was my understanding that basically this is money that we had 
appropriated last year for similar purposes and were just 
reprogrammed into the president's proposal.
    Secretary O'Neill. No, this $200 million as, I said before 
you came in, is going to come half from the State Department 
and half from HHS in fiscal year 2002 and not from funds 
already appropriated for HIV and AIDS. These are reprogrammed 
funds, but they are not being reprogrammed from this purpose to 
the same purpose.
    Ms. Pelosi. Well, with all due respect, Mr. Secretary, I 
serve on the other committee that appropriates for Labor, 
Health and Human Services and Education, and as with this 
committee, we have limited resources, and with The Labor-HHS 
Subcommittee in particular it is a lamb-eat-lamb situation. 
Everything in that budget is something that would be worthy of 
priority and has a constituency that appreciates its worth.
    I would be very interested to see where the HHS money is 
coming from, because there were slim pickings over there when 
we tried to find offsets for AIDS or other emergency funding. 
And I do not know where it came from.
    The State Department, that is another committee that Mr. 
Kolbe sits on. So I will be interested to see there, because 
the State Department, in our relationship with this committee, 
is always in need of additional resources for our 
representational duties.
    But I wish that the announcement did, having said that, 
have a broader view and a real grasp of the need that is out 
there, as expressed by Kofi Annan.
    To that point, Mr. Secretary, I wanted to bring up the 
subject of the World Bank. We have $200 million that we hope to 
see in the World Bank trust fund this year. Although we have 
not seen the particulars of the president's budget, I would 
hope that you could tell us about a possible number for AIDS 
through the World Bank trust fund. Would you comment on that, 
Mr. Secretary?
    Secretary O'Neill. Well, I think it is unclear at the 
moment whether this is going to be proposed to be operating 
through the World Bank or through a U.N. agency. And I do not 
know how it is going to come out, as I said before you came.
    Ms. Pelosi. I am sorry.
    I certainly would not want it to come from any of our 
bilateral assistance, because that is a very strong, effective 
program.
    And the U.N. AIDS program is a good one, so I am not 
putting that down. But this was supposed to be a trust fund 
where there was distribution through the bank, we wanted to put 
resources into it. We thought that that was a good approach. 
That is why the Congress in a bipartisan way, headed by then-
Chairman Jim Leach and Congresswoman Barbara Lee from the 
Banking Committee, advanced that. They were disappointed last 
year so I hope they will not be disappointed this year.
    But I look forward to hearing more as to how this money 
will be spent with putting in that plug for the World Bank.
    I know much has been said about debt relief and I know you 
were asked your view on the Debt Cancellation For The 
Millennium Act. I want to add my words of support to that and 
ask, will the United States raise this proposal with our 
international partners in advance of the G-7 meeting this 
summer in Genoa and the boards of the World Bank and the IMF, 
the debt forgiveness 100 percent of the multilateral 
development banks?
    Secretary O'Neill. This is the question of whether or not 
we should go to 100 percent forgiveness. We do not think weare 
ready for that.
    Ms. Pelosi. So you would not be proposing it at the G-7 or 
the World Bank?
    Secretary O'Neill. No.
    Ms. Pelosi. On the subject of the G-7, now G-8, or did I 
miss something on my flight; is it the G-9, or something?
    Secretary O'Neill. There is a 10, and there is a 20. You 
know the 10 is really 11, but we call it the 10. It is a 
mystery how we got all those numbers.
    Ms. Pelosi. The G-somethings. I have been, for years, as I 
joined my colleagues on this committee, calling for the issue 
of AIDS to be high up on the agenda of the G-7, 8, 9, 10 or 
whatever. Because it is not just a humanitarian issue, but it 
is also an economic one. I do not want an opportunity to pass 
before a secretary of the Treasury without further asking that 
question.
    How am I doing on sand, Mr. Chairman? Oh, I guess I will 
have to wait for the next round.
    Mr. Kolbe. We will come back to you.
    Ms. Pelosi. Thank you, Mr. Secretary.
    Mr. Kolbe. Mr. Callahan?
    Mr. Callahan. Mr. Secretary, following up on Mr. Sununu's 
question about HPIC, maybe it is time for you, representing the 
United States, or for our representatives at the donor 
conferences for the second stage of HPIC, which we anticipate 
probably we will be meeting this year or next year, to send 
notice to these MDBs that we are not going to forgive debt to 
countries whose debt was paid off through the first advancement 
of HPIC monies.
    I mean, if we are going to encourage banks to lend money, 
with the thought in mind that the United States and the other 
G-7 countries are going to bail them out, then maybe you ought 
to be the one to give the message that we are seriously looking 
at the possibility of not advancing monies to any banks who go 
right back in and put themselves in a position that they were 
in. Maybe that is some initiative our country ought to take to 
send that message.
    To answer Mr. Sununu's questions of how it happened, it 
happened because that rock singer, Bono, came over here and 
lobbied Congress into agreeing to anything. And as a result, it 
was more than I could overcome as the chairman of this 
committee to give any indication of saneness to HIPC 
forgiveness. We all agreed with the intended result.
    Secondly, and as a side note, I made the inquiry last year, 
and maybe you did respond. If you do not know the answer, maybe 
someone can tell me later on. In the initial HIPC agreements 
when the donor countries met, some countries, like Costa Rica, 
were put in an unintended consequence, because they had to 
forgive debt to countries like Guatemala, and they could not 
afford to do it, which was going to make them a heavily 
indebted country.
    What did we ever do to assist Costa Rica?
    Mr. Schuerch. First of all, Mr. Callahan, you are right 
that the debt between countries of this nature, was not treated 
within the HIPC program in its structure. But in many cases 
these were debts that had not been paid for many, many years. 
So if we had used trust fund monies, for example, there would 
have suddenly been payments being made that had not been 
anticipated before the HIPC program, and there was a reluctance 
to do that.
    But in Costa Rica's case, specifically, in the context of 
the agreement that was worked out, there were unusual 
flexibilities and Costa Rica got a benefit. I think the numbers 
were in the range of $70 million more than otherwise would have 
been the case.
    Mr. Callahan. Thank you, sir.
    Mr. Kolbe. Well, we are going to begin another round here. 
Let me just finish up with a last question in one area here 
that I wanted to ask about.
    There was an interesting article, I think it was in the 
Financial Times, and it is a summary of a broader paper 
prepared by Adam Lerrick and Alan Meltzer. Of course, Meltzer 
is well-known to many of us here.
    The proposal in this--I do not know if you saw it--but it 
is, the IMF should develop a framework to help economies in 
crisis by agreeing to buy their debts at a discount, thereby 
allowing for an orderly default; a better idea than the kind 
that you are proposing, a much better idea than HIPC in that it 
allows market structures to actually work and to take care of 
the debt, and it would be a much better way to handle it.
    I am wondering, you personally, what your view of this is. 
I do not know whether you can comment on it from the 
administration's standpoint, but I am just, kind of, curious 
how you would react to this proposal.
    Secretary O'Neill. First, I would say, Alan is a long-time 
acquaintance. For the last 13 years, I have been living in 
Pittsburgh, and, as you know, he is at Carnegie-Mellon 
University. So we saw each other on a fairly regular basis at 
home.
    I did see this article. I know that there has already been 
some embracing of this notion by some members of the Congress, 
and frankly I am interested in knowing more about it and how it 
would work.
    I have to tell you, my initial reaction when I saw it and 
talked to others about it, was that this seems to be like the 
proposition of trying to manage foreign exchange rates. It 
suggests somehow that the IMF or the other institutions are 
smart enough to know what a proper below-value-market-clearing 
rate is.
    Let me give you a set of hypothetical circumstances to 
illustrate the concern that I have about this proposal. If you 
are holding a fully serviced piece of paper, a loan to someone, 
then it is worth its face value plus the present value of the 
future stream of income you are supposed to get from it.
    If you are in a country, however, where you made a loan say 
at an 8 percent interest rate and that country has fallen on 
bad times, the value of the instrument would go down to, say, 
80 cents on the dollar or something and the effective interest 
rate would be 20 or 25 percent, if you ever hope to get it paid 
off.
    On the other hand, if you are in a country where you are 
holding what was originally a 100 cent piece of paper and there 
is financial chaos, it is not possible to know whether the 
instrument is worth 75 cents or 50 cents or 20 cents. That is 
not to say you cannot be a speculator and say, ``I will pay X 
for it.'' But it seems to me the proposition of these 
institutions running in and establishing a floor is very much 
like trying to peg a currency. So frankly, I do not understand, 
in an operational sense, how these institutions become so wise, 
unless they go in on a market-clearing basis.
    I would say, you know, if you go to a country and youfound 
financial chaos and the 100-cent-supposed piece of paper is worth 2 
cents, well, maybe it is not a bad speculation. You do not have very 
much to lose.
    But the example they gave in their article of striking the 
price at 70 or 50 or whatever, feels like speculation to me, 
and it is not so clear to me we want these international 
institutions to get into the business of speculation any more 
than we want countries to peg their currency and lose all their 
reserves because they are trying to defend the undefensible.
    Mr. Kolbe. Thank you for the comment. Maybe I misread it; 
my understanding is that indeed it would be done through a 
market-clearing process, rather than trying to manipulate, or 
the IMF or the institution actually coming in and setting the 
floor, deciding what the price would be, that it would be done 
through market-clearing. But perhaps I did not read it 
carefully enough and do not understand exactly how the 
mechanism would work.
    Secretary O'Neill. I think in the example they give there 
is an assumption of having reached stability and that somehow 
things cannot go any lower. I think in just looking at the 
evidence of the last 15 years, there are a lot of cases one 
could look at where people thought they were at the floor and 
actually they were on the mezzanine. They did not even have an 
understanding of where the floor was really going to be.
    In that sense, I think there is a certain speculative 
quality to the idea, unless you wait until they have bankrupted 
the country and defaulted on all their loans, and then the 
paper is wallpaper and it is probably safe to buy it for a 
penny on the dollar or something. Then I could see how this 
could work.
    But I must say I think Alan is a brilliant guy. He has 
probably got good and sufficient answers for my doubts, but I 
have not had an opportunity to talk to him about it since he 
published his article.
    Mr. Kolbe. Well, maybe we should all get together and talk 
about it at some point.
    But would you agree that currently, the system as it works 
now, when the IMF comes in with a large bailout, really just 
effectively insulates investors from default risk?
    Secretary O'Neill. It certainly seems to have that effect, 
and that is not a desirable thing to do.
    Mr. Kolbe. I would agree with you.
    Ms. Lowey?
    Mrs. Lowey. Thank you, Mr. Chairman.
    Mr. Secretary, in your statement, you indicate that 
multilateral development banks reform and more performance-
based grants to poor countries committed to sound policies is a 
priority for your administration. And you talked about grants, 
rather than loans.
    Can you expand on the greater use of grants for poor 
countries? What uses are appropriate, for example, for grants 
versus loans? What sound policy needs to be in place for a 
country to receive grants? And maybe I should leave it at that, 
and then I will go on if there is time.
    Secretary O'Neill. Again, I think the fundamentals are 
clear and they are not too complicated. The rule of law is 
something we all take for granted but, as you all know from 
traveling around the world, not everyone has a rule of law. Not 
everyone has enforceable contracts. And not everyone has the 
same value standards we do when it comes to ideas of corruption 
and bribery and all the rest of that.
    If you can establish those as principal things that we 
expect to see when we are determining where we are going to 
send our taxpayers' money, I would say those are basic 
conditions.
    And they are independent of a question of poverty or wealth 
or where one is on the spectrum from no income to monumental 
amounts of income and wealth. I think poverty is not an excuse 
for corruption. It is not an excuse for no rule of law. It is 
not an excuse for no enforceable contracts. But without those 
basic conditions, it is difficult to find a place where you 
could say there has been substantial and lasting success.
    So I think, as a basic proposition, we need to have that 
conditionality in saying that we expect to see these things or 
very substantial progress toward them. And then we are prepared 
to make grants where there is not an ability to service 
interest and principal on loans.
    As countries develop more financial wherewithal, it is 
appropriate and desirable to provide less-than-market-rate 
financing, as humanitarian and economic development support, 
but with an expectation that countries will, in fact, graduate 
to a level of stability and income and wealth that they do not 
need outside assistance, that private market capital flows will 
bring them all the money they could possibly want.
    Mrs. Lowey. That is another area where I hope we can 
continue our discussion. Because when there are so many people 
desperately in need, and you referred to Russia before, we saw 
clearly that while money to the government was thrown down a 
black hole, money to NGOs and specific areas did have an impact 
that was positive.
    So when we give grants, when we give loans, how we 
facilitate this, I think, would be an area that I would like to 
pursue at some point.
    Your statement also indicates that MDB lending for cultural 
are heritage projects, with peripheral development impacts are 
questionable bank projects. Could you give us a specific 
example of that and explain your opposition to it?
    Secretary O'Neill. We have, I think, a two-page list--which 
I can give to you for the record--of things on the one hand 
that seem not undesirable, but on the other hand do not have 
very much to do with economic development or with productivity 
growth.
    It seems to me, some of those things that do not have 
anything to do with raising the standard of living or directly 
with economic development are more properly the province of 
people inside a country making a decision that that is what 
they want to do with their income from their own revenue 
system, and should not be a principal area of focus for these 
international productivity improvement institutions.
    We will, if it is okay with you, give you a list of things 
that we think fall on both sides of the line. There are some 
things that are labeled cultural that I think are very clearly 
in the interest of economic development, raising the standard 
of living. So this is not an all-purpose broad-brush 
condemnation of these things. But I think, yes, we can give you 
a specific list of examples.
    [The information follows:]

                       Cultural Heritage Projects

    While cultural heritage projects may be worthwhile, the MDBs' focus 
should be on reducing poverty and enhancing productivity growth. Other 
international institutions--like the UN--are better suited to 
addressing the cultural heritage needs of developing countries. In 
addition, such investments detract from the MDBs' comparative advantage 
as financial institutions promoting sound economic policies and basic 
development assistance. Following are examples of cultural heritage 
lending that may be worthwhile, but something that detracts from a bank 
focus on productivity growth and poverty reduction:
     Azerbaijan Cultural Heritage: In 1999, IDA approved a $7.5 
million credit for a Cultural Heritage Support Project for Azerbaijan. 
The project consisted of conservation and partial restoration of four 
priority sites, and preservation and restoration of historical 
monuments, including training of restorers, stocking archival 
equipment, and computerizing archives.
     The Mother Temple of Bali: The $10 million cultural 
heritage component of the World Bank's Bali Urban Infrastructure 
project (1997) included: improvements in infrastructure to the 
neighborhood of the Besakih Temple complex (the Mother Temple of Bali); 
upgrading of museums; a Heritage Trust; and an inventory of historic 
sites; and improved heritage signage.
     Brazilian Mounumenta Program: 1999, the IDB financed 50% 
of a $125 million loan to Brazil that was designed to preserve priority 
urban historical and cultural sites.
     Brazilian Mounumenta Program: In June 2000, IDA extended a 
$5 million credit to help finance research preservation (museums, 
manuscripts), building and site rehabilitation, and training in 
preservation of architecture and archives.

    Mrs. Lowey. Thank you.
    And very quickly--perhaps, I will save it for the next 
time.
    Mr. Kolbe. No, just go ahead. I think we are on our last 
round.
    Mrs. Lowey. Sophisticated electronic information-sharing 
systems that may duplicate work being undertaken in the private 
sector and do not take into account basic needs, is another 
area of unwise MDB lending you mentioned. Can you provide a 
specific country example and explain how the loan is 
duplicating a private sector effort?
    Secretary O'Neill. We will give you some specific examples 
to make the general point.
    [The information follows:]

                 Example of Information Sharing Systems

    Sophisticated electronic information sharing systems may duplicate 
work being undertaken by the private sector and do not take into 
account the more basic information and capacity improvement needs of 
these countries. Over the last few years, the World Bank has been 
emphasizing the need to invest in such systems. One idea is to create a 
partnership which solicits private financial support along with 
resources from the Bank to create Internet-based ``development 
portals''--among other initiatives--that are intended to promote the 
exchange of information on development practices around the world. We 
are not convinced that the Bank should be involved in this exercise 
given the scope for private sector investment and the lack of basic 
capacity in developing countries.

    Mrs. Lowey. Thank you, Mr. Secretary.
    And since these are our closing questions, I want to thank 
you, again, for appearing before us. I know that the chairman 
and the committee and I look forward to continuing our 
dialogue.
    Thank you.
    Secretary O'Neill. Thank you.
    Mr. Sununu. Thank you, Mr. Chairman.
    Mr. Secretary, I very much appreciate your emphasis on a 
couple of areas of reform that I would very much agree are 
fundamental to a country's ability to utilize their own 
resources, let alone those coming from one of the MDBs. That 
is, the need for what you described as the rule of law and 
addressing the issue of corruption. Where corruption is 
concerned, capital markets can have no confidence in theability 
to bring a pool of resources or funds to the kind of productivity 
improvements you talk about.
    This is not so much a question as a comment or even a 
suggestion. And you have used this terminology a couple of 
times in talking about the rule of law. You focus on the 
specific issue of contracts and private property rights.
    As Americans, as members of Congress, and in my case 
someone that does not have any legal background, the rule of 
law often brings with it a suggestion of justice, justice 
within a criminal system, human rights, and civil rights, which 
are extremely important.
    But where the workings of the economy is concerned, the 
specific areas of the system that defines and delineates 
private property rights and adjudicates disputes under 
questions of private property rights through a contract law 
system that works is central.
    And that is, in many cases, what, I think, one of the 
significant missing ingredients has been in Russia and other 
former Soviet states, even where justice systems might be in 
place that deal with criminal issues or even human rights or 
civil rights.
    Again, if you do not have that contract law system and a 
private property rights system, your economy will suffer, 
because basic transactions which we, as Americans, might take 
for granted are unable to transpire.
    So as you engage in these discussions with the public and 
certainly with members of Congress, I would encourage you to 
highlight those particular examples and continue to drive home 
that point.
    And I certainly wish you success in affixing those areas in 
conditionality, corruption private property rights, and 
contract law, because I do think those will make or have the 
most positive effects on the lending practices of the MDBs.
    Thank you.
    Secretary O'Neill. If I may say just one thing about that, 
I agree with you completely. I have a notion that we have begun 
discussing these concepts a little bit in some of these very 
large countries, ones where there are 5,000 miles from one 
border to the other. I think it could make sense to think about 
creating some virtual places for investment.
    Actually, in my personal experience in trying to make a 
very large investment in the former Soviet Union and being very 
close to making a billion dollar investment, we tried to reach 
an understanding that, while our operations would be 
geographically spread, we would be guaranteed rule of law, 
enforceable contracts, not having to pay bribes to anyone, and 
in return, we would bring the best technology and operate at 
world-class standards and be prepared to pay 35 percent tax 
rates.
    I think there is an element of a demonstration idea--you 
have seen the same kind of thing in China. Again, it seems to 
me, there are some opportunities to demonstrate the 
consequences of capital flows that I am very confident will 
come if there can be an understanding and an agreement that is 
enforceable that, in effect, creates a virtual Western-style 
operating environment.
    Mr. Sununu. Mr. Secretary, certainly, with all due respect, 
you have far more experience in this kind of an application 
than I. But it would seem to me that we have those 
laboratories, if you will. They are called Singapore, Hong 
Kong, some of the Gulf states now that are experimenting 
implementation of, essentially, a free trade zone. You could 
argue that NAFTA is an extension of that.
    Those countries, that have moved away from capital 
controls, controls on ownership structure and have implemented 
the kind of property rights system, contract law and fight 
against corruption that you described, have prospered, because 
of productivity improvements and the standard of living 
improvements that you spoke eloquently about.
    If you begin to encourage countries to offer a unique 
structure for capital constraints, investment constraints, to a 
specific company or a specific project at a specific time and 
place and, thereby, bring financing for that very specific, 
unique project, you are, in essence, creating an incentive for 
countries to maintain an arbitrary or a complex structure of 
taxation, import-export tariffs, ownership structure, so that 
they can, in essence, manipulate those structures in order to 
attract investment on a none-off basis.
    I do not know that necessarily sets the right tone, when we 
have seen that the stability that is created by a consistent 
government policy in each of these areas is much more important 
to economic growth.
    Secretary O'Neill. Well, I guess in a theoretical sense, I 
would like to be on your side. In a practical sense, some of 
these places are so geographically large that I think if we 
wait until the whole country is free of corruption--the ones 
that I am thinking about, I guess I will not do names--until 
they are free of corruption, until they have the rule of law 
every place and enforceable contracts, that is not going to 
happen for generations and generations.
    That is why I believe if we can create some demonstration 
effects, it will be so powerful that it would be possible to 
get some of these farflung provinces to understand the value of 
operating in a different way if they can see it up close and in 
a personal way that creates wealth, in effect, along a green 
belt that is unmistakable and desirable for everyone.
    You know, there is an old Russian saying that says, ``The 
mountains are high and the czar is far away.'' What that means 
is, you know, when you are a 1,000 miles or 2,000 miles away, 
you may think you are in charge. Go ahead and think whatever 
you want.
    So my mind is in a world of practical things, of how do we 
actually change the way the world operates. We have now seen in 
some places a lot more than 10 years of struggle. In some 
places, actually, we have seen countries go dramatically 
backward from the days of colonialism to where they are today, 
having been free of colonialism for four or five decades.
    It seems to me, if we care about the hundreds of millions 
of people who have no hope of ever achieving anything within 
shouting distance of our living standard, we are going to have 
to create some new formulations, because the ones we have been 
working on for the last 50 years have had some notable 
successes, but they are pretty few and far between compared to 
the need that exists out there.
    I am sorry, Mr. Chairman, for taking too long.
    Mr. Kolbe. I need to get Ms. Pelosi a chance to have 
another round of questions. I was going to stop Mr. Sununu 
before he jumped back into what is a very fascinating 
discussion.
    Secretary O'Neill. I am sorry.
    Mr. Kolbe. Ms. Pelosi?
    Ms. Pelosi. Fascinating, indeed. I was just listening to 
your last sentence when you said we are into a practical 
approach, that we want to have results or words to that effect. 
And we are not wedded to tactics; we are wedded to results. And 
in terms of those, I have a couple of issues I wanted to bring 
up.
    I did have a chance to at least peruse your statement, Mr. 
Secretary. And quite frankly, I was disappointed that it did 
not mention the subject of AIDS, recognizing the developmental 
and economic impact of it in addition to the humanitarian 
aspects of it.
    The same thing happened in HHS when the secretary came 
there; although in his oral statement he did mention AIDS, he 
did not in his written statement. So I gave him the opportunity 
that I am going to give you now to give voice to the commitment 
of the administration, as far as your department is concerned, 
on the issue of AIDS internationally.
    Secretary O'Neill. I think the president, in what he said 
last week, has made it clear. Beginning with the President 
there is an understanding and a compassion about the subject of 
HIV and AIDS.
    Ms. Pelosi. And the commitment of resources?
    Secretary O'Neill. Yes, and I think for sure you will see 
that. I do not have a summary number with me, but the number 
for the NIH Research program is $2.5 billion this year, and the 
other Agencies' number is $500 million or something on that 
order of magnitude. I saw a number the other day, and I can not 
verify it for you off the top of my head, but when you roll 
everything that we are doing, through all the departments and 
agencies, it is something like $11 billion, which is a 
significant amount of money.
    You know, I hesitate, but I guess I am not going to 
hesitate and will tell you what I think about this issue. I 
think this is a desperately important issue. But I am very 
attracted to what Senator Frist has done in his draft 
legislation, which includes, with HIV and AIDS as a central 
point, tuberculosis and malaria and what he characterizes as 
other diseases.
    You would not have a reason to know this, but when I was 
here before, my specialty area was domestic programs and most 
particularly health and medical care. In the last 10 years, I 
have also spent a lot of time working on these issues in the 
public and private sector at the state and local level.
    Combining that background with having on-the-ground 
experience in Africa and in impoverished parts of Latin America 
and in Asia, I am struck by, for example, in Africa, the number 
of children under 5 who die of diarrhea diseases--millions and 
millions of children. I am also struck by the fact that if we 
are really going to do a first-class job with HIV and AIDS, we 
are going to have to do something about sanitary water and 
sanitation systems.
    All these things go together. It is not to say that we 
should not care desperately about HIV and AIDS, and 
particularly about the orphans who are created out of this 
dreadful disease.
    Ms. Pelosi. If I may, Mr. Secretary, I appreciate the 
response that you are giving, but the chairman has only 
allotted me a certain few grains of sand, and I wish to make a 
couple of points on what you said.
    First of all, Congresswoman Lowey and I and others have 
worked very hard on the Labor-HHS Subcommittee to get those 
AIDS numbers up domestically. So we are well familiar with 
them, because we got them to where they are today.
    My interest was what you were talking about 
internationally, and certainly we have all on this committee 
worked on the child survival account. We call it the 
``Callahan'' account after our former chairman, and that is why 
we wanted this money to be additional, and not coming out of 
any other accounts, because the other accounts are so 
important. And we are all parts of legislation malaria and 
tuberculosis. Actually, I am asking the chairman in my letter 
for $200 million for tuberculosis in the budget--a dramatic 
increase.
    Again, so you bring me to my point, which is, the 
alleviation of poverty. Poverty and AIDS are just a deadly duo. 
You cannot talk about the eradication of AIDS without talking 
about the alleviation of poverty. I completely agree with what 
you have said about water supply and dysentery and other 
illnesses and the rest. Indeed, many of the people who die of 
AIDS really die of tuberculosis. But in itself, tuberculosis is 
enough reason for us to go forward.
    And critical to that alleviation of poverty piece is the 
debt forgiveness. And I would just like to take a moment to 
talk about that for a minute, and get your observations.
    First of all, Mr. Sununu said, ``Where do we get here?'' 
Sonny Callahan blames it on Bono of U2, the rock band--for the 
benefit of those who did not know which Bono we were talking 
about--and Bono was a part of it, certainly. But his holiness, 
the pope, was too, and a worldwide ecumenical movement, as part 
of Jubilee 2000, taking from the Bible in the jubilee year of 
the millennium as a time of forgiveness, and debt forgiveness 
was part of that. This was not about Bono only. It was about a 
grassroots effort worldwide to alleviate poverty by having debt 
forgiveness.
    Having said that, let us stipulate to certain things. 
Nobody wants anybody lending money to people who are not going 
to use it for alleviation of poverty or developing of their 
economy. You say raising per capita income, I say alleviation 
of poverty. I think they are two different things. They do have 
something in common, and that is something we can talk about in 
time, too.
    But the fact is that some of these debts were incurred by 
former regimes. So for us to say, ``Well, we are going to 
forgive the debt incurred by a corrupt regime. They have a new 
government now, but they cannot borrow because we just forgave 
their debts,'' really is just throwing them back into a cycle 
of not being able to invest in their own people, in the social 
service, health, the water supply disease the education of 
their people, and the empowerment of women. These things are 
all connected. You are so right.
    Make no mistake, we are not having a debate here as to 
whether countries should borrow from us and be profligate with 
the money. We are talking about also though not saying, ``If 
somebody else incurred a debt or even if a government incurred 
a debt, you are trying to do something new. You should be able 
to borrow, too.''
    Having said that, I want to just look to the environment 
and the World Bank because we do not have that much time.
    I am the author of something called the Pelosi 
amendment,which says that our executive directors on any MDBs must see 
an environmental assessment that must be made public to the indigenous 
people and internationally before we can vote on a project of the World 
Bank or any MDBs on which we sit.
    I would like to put in a word for our doing that and the 
banks doing it with their restructuring loans as well. Because 
that is a part of the impact that it has on the environment as 
well.
    I am trying to combine all my questions, Mr. Chairman, into 
one, because I think that it is very important, along with the 
International Monetary Fund. And I will close with one 
statement.
    The chairman is looking now.
    I appreciated what you said about maybe dividing countries 
up and giving in to some areas where on the other side of the 
mountain from the czar, and that might be a good idea. But I 
hope that we will not relax our harsh scrutiny of corruption in 
some countries and have it very harsh in the poorest of the 
poor countries in the world, and use it as an excuse not to 
give them a loan after we have forgiven a loan.
    So corruption is a bad thing. We want to fight it every 
place in the world. But just because a country is very poor it 
should not have a harsher scrutiny than a country where 
American business may profit and we ignore the corruption 
there. And that would be the word of caution that I would say.
    We have a lot to work on. I am hoping that we can find 
common ground on some of these issues. I think we can. But I do 
not want it to be seen as a debate between those who want to 
lend money to people, who do not want to use it for the right 
purpose and instead, as part of the, as I say, Jubilee 2000 
campaign to alleviate poverty.
    I want us to take time for the secretary to respond, Mr. 
Chairman. But thank you.
    Mr. Kolbe. Certainly will give him a moment to respond. I 
know he has a time frame. And the king of Swaziland is waiting 
for us.
    Ms. Pelosi. Oh my gosh. [Laughter.]
    Mr. Kolbe. We do need to wrap this up. But, certainly, if 
you would like to respond, then we will close this out.
    Secretary O'Neill. Maybe we can give you something for the 
record, if you like, Mr. Chairman, in the interest of time.
    I do not think we have a difference in opinion as to what 
it is we are trying to accomplish. I do think that it is 
important as we go forward that look at what we are doing with 
all the different trusts from the U.S. Congress and from 
legislatures around the world that contribute through these 
multilateral institutions, that we put all of our good ideas 
together and look at how does it feel from the point of view of 
someone who has to respond to all of it. Is it really practical 
to assume that a president in a country without a well-
developed governmental system can really do all of the well-
intentioned things we are laying on them?
    If the answer is no, is there a way that we can reduce the 
number of things we are insisting on so that they are 
measurable and doable and will accelerate the rate of progress?
    When I look at all of these things and, you know, I have 
the good fortune of a substantial education and 45 years worth 
of activity in public policy and private enterprise, I do not 
know how I would, frankly, respond to all the mandates that we 
are laying on these countries, as though they have thousands of 
super-educated people on the other end receiving this stuff.
    I think to the degree that we make unfulfillable demands on 
people out there, we are teaching them a lesson that it is all 
show business. And, you know, if you take care of the people 
who shout the loudest, you can get away without doing anything 
about lots of other important things.
    I think if we are really going to help people in these 
places succeed, we have got to be much crisper and focused and 
sure-footed in what we are doing to help them.
    In addition, I think we should approach this with a lot 
more humility than we tend to do. Because the truth is, if we 
were really so smart about how to create economic development, 
it would have already been done, if you look at the amount of 
money and words that we have invested in this subject.
    Forty years later, the sparkling example of economic 
development compared to where they were 40 years ago is South 
Korea. If you look at the difference between South Korea and 
North Korea, it is the difference between this century and 300 
years ago. All separated by a line on a map.
    So I think, you know, on the one hand we need to learn more 
from the things gone wrong. I think we do not make enough of 
the fact that we fail in lots of places. We need to learn 
something from the failures as well as the successes.
    And we need to be much more sharply focused and insistent 
that we are going to create real value for the people whom we 
are trying to help for the American taxpayers.
    And, you know, I think there is a very legitimate 
connection for the American taxpayers. This is about the future 
of the world, and increasingly the future of the United States 
depends on economic success and achievement and a higher 
standard of living in all those other countries around the 
world, not just the U.S.
    Ms. Pelosi. Thank you, Mr. Secretary.
    Mr. Kolbe. Mr. Secretary, thank you. Your responses have 
been extremely helpful to us, almost in some sense some musings 
from you. But I think they have helped us focus a lot of our 
thinking, and I really appreciate some of the things, the 
thoughts that you have shared with us that I know you have 
thought a great deal about and the wealth of experience you 
bring to this job.
    We appreciate very much your taking the time to be with us.
    For members and staff, questions submitted for the record 
will be due on Friday the 18th.
    And for everyone, the subcommittee will stand adjourned 
until our next meeting this Thursday at 10 a.m., when we have 
USAID Director Natsios here in this very room, 10 a.m. 
Thursday.
    Mr. Secretary, again, thank you. The subcommittee stands 
adjourned.
    Secretary O'Neill. Thank you very much.
    [Questions and answers for the record follow:]
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                           W I T N E S S E S

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                                                                   Page
Natsios, A.S.....................................................     1
O'Neill, Hon. P.H................................................    79


                               I N D E X

                              ----------                              

                  Agency for International Development
                          (Andrew S. Natsios)

                                                                   Page
Africa Funding...................................................    76
Agriculture......................................................60, 71
AID Managed Programs.............................................    31
AID Missions.....................................................    44
AID'S Payroll Function...........................................    43
AIDS in the Caribbean............................................    37
Bosnia...........................................................    57
Chairman Kolbe's Opening Statement...............................     1
Colombia.........................................................    72
Conflict Prevention..............................................    46
Corruption in Latin America......................................    37
Development Credit Authority.....................................    72
Division of Labor Between State and AID..........................    30
El Salvador..................................................38, 53, 73
Faith-Based Organizations........................................    45
Financial Management.............................................    42
George Mason University..........................................    68
Global AIDS......................................................    53
Global Development Alliance..............................32, 34, 46, 77
Hansan Institute of San Diego State University...................    66
HIV/AIDS Trust Fund..........................................74, 75, 76
Independent Agencies.............................................    75
International Family Planning....................................    70
KYOTO Protocol...................................................    36
Latin America and the Caribbean..................................    66
Lebanon Assistance...............................................    35
Loan Processing..................................................    50
Long-Term Planning at AID........................................    71
Malaria Prevention Program.......................................52, 69
Management Reform................................................    40
Microbicides.....................................................    75
Microcredit......................................................    49
Microenterprise Loans............................................50, 51
Middle East......................................................58, 66
Morehouse School of Medicine.....................................    58
Mr. Natsios' Opening Statement...................................     5
Mr. Natsios' Written Statement...................................    13
Mrs. Lowey's Opening Statement...................................     3
Nagorno-Karabakh.................................................    49
National Unity in Development Countries..........................    68
Private Sector Development Work..................................    33
Procurement Reform...............................................39, 65
The Caucasus.....................................................    48

                       Department of The Treasury
              (Paul H. O'Neill, Secretary of the Treasury)

Asian Development Bank...........................................    93
Capital Investment...............................................   119
Chairman Kolbe's Opening Statement...............................    79
Cultural Heritage Projects.......................................   110
Debt for Nature..................................................   120
Debt Reduction...................................................    89
Debt Relief......................................................    92
Export-Import Bank...............................................   120
HIV/AIDS.........................................................95, 98
Information Sharing Systems......................................   111
MDB Reform.......................................................   124
Mozambique.......................................................    91
Mrs. Lowey's Opening Statement...................................    80
Technical Assistance.............................................   121
Treasury Secretary Paul H. O'Neill's Statement...................    82
User Fees........................................................   125

                                

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