    Peacekeeper: Multinational Force And Observers Maintaining
    Accountability, but State Department Oversight Could Be Improved
    (23-JUL-04, GAO-04-883).

    Since 1982, the Multinational Force and Observers (MFO) has
    monitored compliance with the security provisions of the
    Egyptian-Israeli Treaty of Peace. The United States, while not a
    party to the treaty, contributes 40 percent of the troops and a
    third of MFO's annual budget. All personnel in the MFO civilian
    observer unit (COU) are Americans. GAO (1) assessed State's
    oversight of the MFO, (2) reviewed MFO's personnel and financial
    management practices, and (3) reviewed MFO's emerging budget
    challenges and U.S. MFO cost sharing arrangements.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-04-883
        ACCNO:   A11099
      TITLE:     Peacekeeper: Multinational Force And Observers
    Maintaining Accountability, but State Department Oversight Could
    Be Improved
         DATE:   07/23/2004
      SUBJECT:   Auditing standards
    	     Auditors
    	     Civilian employees
    	     Cost sharing (finance)
    	     Financial management systems
    	     Financial statement audits
    	     Internal controls
    	     International relations
    	     Labor force
    	     Military budgets
    	     Military personnel
    	     Personnel evaluation
    	     Personnel evaluation systems
    	     Personnel management
    	     Treaties
    	     Employee retention
    	     Blackhawk Helicopter
    	     Egypt
    	     Egyptian-Israeli Treaty of Peace
    	     Huey Helicopter
    	     Israel
    	     UH-1H Helicopter
    	     UH-60 Helicopter

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    GAO-04-883

                     United States Government Accountability Office

                         GAO Report to Congressional Requesters

    July 2004

    PEACEKEEPING

        Multinational Force and Observers Maintaining Accountability, but State
                         Department Oversight Could Be Improved

                                           a

    GAO-04-883

    Highlights of GAO-04-883, a report to congressional requesters

    Since 1982, the Multinational Force and Observers (MFO) has monitored
    compliance with the security provisions of the Egyptian-Israeli Treaty of
    Peace. The United States, while not a party to the treaty, contributes 40
    percent of the troops and a third of MFO's annual budget. All personnel in
    the MFO civilian observer unit (COU) are Americans.

    GAO (1) assessed State's oversight of the MFO, (2) reviewed MFO's
    personnel and financial management practices, and (3) reviewed MFO's
    emerging budget challenges and U.S. MFO cost sharing arrangements.

    July 2004

    PEACEKEEPING

    Multinational Force and Observers Maintaining Accountability, but State
    Department Oversight Could Be Improved

    The State Department has fulfilled some but not all of its operational and
    financial oversight responsibilities for MFO, but lack of documentation
    prevented us from determining the quality and extent of its efforts. State
    has not consistently recruited candidates suited for the leadership
    position of the MFO's civilian observer unit, which monitors and verifies
    the parties' compliance with the treaty. State also has not evaluated
    MFO's financial practices as required by State's guidelines because they
    lacked staff with expertise in this area. However, State recently formed
    an MFO management advisory board to improve its oversight of MFO
    operations.

    MFO has taken actions in recent years to improve its personnel system,
    financial accountability, and internal controls. For example, it has
    provided incentives to retain experienced staff and taken steps to
    standardize its performance appraisal system. It has received clean
    opinions on its annual financial statements and on special reviews of its
    internal controls. MFO has also controlled costs, reduced its military and
    civilian personnel levels, and kept its budget at $51 million since 1995,
    while meeting mission objectives and Treaty party expectations.

    GAO recommends that the Secretary of State (1) resolve the concern of
    recruiting for the chief COU post; (2) ensure that staff with accounting
    expertise carry out State's MFO financial oversight responsibilities; (3)
    direct State's MFO advisory board to monitor State's compliance with its
    oversight guidelines; and (4) work to reconcile Army and State views on
    the MFO cost-sharing arrangement.

    We received comments from DOD, State, and MFO. DOD and MFO generally
    agreed with our conclusions. State agreed with three of our
    recommendations and was nonresponsive to the recommendation that the
    oversight board monitor State's compliance with MFO oversight guidelines.

    www.gao.gov/cgi-bin/getrpt?GAO-04-883.

    To view the full product, including the scope and methodology, click on
    the link above. For more information, contact Joseph Christoff at (202)
    512-8979 or christoffj@gao.gov.

    U.S. Infantry Battalion Deployed as MFO Peacekeepers

    MFO faces a number of personnel, management, and budgetary challenges. For
    example, leading practices suggest its employees' access to alternative
    dispute resolution mechanisms for discrimination complaints, and the
    gender imbalance in its workforce, could be issues of concern. Moreover,
    MFO lacks oversight from an audit committee or senior management review
    committee to ensure the independence of its external auditors. Finally,
    MFO's budget is likely to increase because of costs associated with
    replacing its antiquated helicopter fleet. U.S. and MFO efforts to obtain
    support from other contributors generally have not succeeded. Army, State,
    and MFO officials have yet to agree who should pay the increased costs
    associated with changes in the composition and pay scales of U.S. troops
    deployed at MFO.

    Contents

      Letter

    Results in Brief
    Background
    State Has Met Some of Its Oversight Responsibilities but Has

    Limited Evidence Documenting These Efforts
    MFO Has Taken Some Actions to Improve Personnel Management
    but has not Systematically Reformed Its Personnel System
    MFO Has Improved Financial Accountability, but Additional
    Oversight May Be Needed
    After 9 Years of Flat Budgets, MFO Faces Financial and Other

    Challenges
    Conclusion
    Recommendations for Executive Action
    Agency Comments and Our Evaluation

                                           1

                                          2 4

    10

    15

    19

    24 31 32 32

    Appendix I Scope and Methodology

    Appendix II MFO's Small but Challenging Workforce

    Appendix III	GAO's Model for Strategic Human Capital Management Planning

    Appendix IV	Calculating MFO Budget in Terms of International Dollars

    Appendix V Cost of U.S. Participation in MFO 48

      Appendix VI Comments from the Department of State 51

    Appendix VII	Comments from the Multinational Force and Observers 56

    GAO Comments 61

    Tables

    Table 1: MFO Civilian Staff by Location and Type, 2003
    Table 2: MFO Expenditures in Nominal and International Dollars
    Table 3: Cost of U.S. Participation in MFO, Fiscal Years 1995

    through 2003 Table 4: U.S. Troop Contributions to the MFO as a Percentage
    of the Total, Fiscal Years 1995 through 2003

                                         39 45

                                           48

                                           49

    Figures

    Figure 1: Sinai Peninsula and MFO Area of Operations 6 Figure 2: U.S.
    Soldiers on Duty at an MFO Outpost Near South

    Camp 7 Figure 3: MFO Organizational Chart (as of December 2003) 9 Figure
    4: MFO Budget in Nominal and Constant Purchasing Power

    Dollars 25 Figure 5: U.S. Army Helicopter Options for MFO Service 27
    Figure 6: Total Number of MFO Troops (including U.S. troops) and

    Number of U.S. Troops for Fiscal Years 1995 through 2003 29 Figure 7: Cost
    of U.S. Participation in MFO 30 Figure 8: Excerpts from GAO's Strategic
    Human Capital

    Management Model 43 Figure 9: Percentage of MFO Dollar Budget Spent in
    Israel and Egypt 44 Figure 10: Percentage of MFO International Dollar
    Budget Spent in Israel and Egypt 46

    Abbreviation

    COU Civilian Observer Unit
    COSO Committee of Sponsoring Organizations of the Treadway

    Commission DOD Department of Defense HNSI Holmes and Narver Services,
    Incorporated MFO Multinational Force and Observers NEA Bureau of Near
    Eastern Affairs, U.S. Department of State NEA/EX Office of the Executive
    Director, Bureau of Near Eastern

    Affairs NEA/RA Office of Regional Affairs, Bureau of Near Eastern Affairs
    OIG Office of Inspector General, U.S. Department of State PPP Purchasing
    Power Parity U.N. United Nations

    This is a work of the U.S. government and is not subject to copyright
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    work may contain copyrighted images or other material, permission from the
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    separately.

    United States Government Accountability Office Washington, DC 20548

    July 23, 2004

    Congressional Requesters

    Following years of violent confrontation, Egypt and Israel signed a treaty
    on March 26, 1979, that ended the existing state of war and agreed to the
    withdrawal of all Israeli forces from the Sinai. Although the treaty
    proposed that U.N. forces and observers supervise these security
    arrangements, the United States committed to providing a multinational
    force if the U.N. process failed. When the U.N. Security Council failed to
    reach an agreement, the governments of Egypt and Israel signed a protocol
    to the treaty in 1981 that established the Multinational Force and
    Observers (MFO). The treaty can be terminated by the consent of the
    parties; it does not contain a specific end date or establish specific
    conditions that, if met, would allow MFO to withdraw troops. MFO currently
    has 1,685 troops and a civilian workforce of about 108 international and
    local national staff who manage the organization and its annual budget of
    $51 million. To manage its operations, the MFO has developed personnel,
    financial management, budget, and internal control systems. This review
    examines these systems including MFO's personnel practices as they pertain
    primarily to its international civilian workforce.

    The United States, although not a party to either the treaty or the
    protocol, agreed to provide military forces and a group of civilian
    observers to the MFO to monitor compliance with military limitations. The
    United States now contributes the largest share of military troops and
    about one third of the organization's financial resources. In addition,
    the Department of State conducts oversight of U.S. participation in the
    MFO. In 2001, the United States reviewed its commitments worldwide to
    security and peacekeeping operations, and in 2003 reduced the number of
    troops serving in the MFO.

    Given your interest in MFO's management practices and State's oversight
    responsibilities, we (1) assessed the Department of State's oversight of
    the MFO, (2) reviewed MFO's personnel policies and practices, (3) examined
    MFO's financial management practices, and (4) reviewed MFO's emerging
    budgetary challenges and cost-sharing arrangements.

    To achieve our objectives, we interviewed officials at the Departments of
    State and Defense (DOD), and the MFO and collected key documents from
    those officials. We reviewed State's guidelines for overseeing MFO's
    activities and finances. We met with MFO officials in Rome, Cairo, and Tel

    Aviv; with Egyptian military and foreign affairs officials in Cairo; and
    with Israeli military and foreign affairs officials in Jerusalem. We also
    visited MFO force installations in the Sinai Peninsula. We reviewed MFO
    budget and related documents and the external audit reports of finances
    and internal controls. Finally, we met with MFO, State, and DOD officials
    to discuss the MFO budget and U.S. contribution to the MFO. We determined
    that the data they provided were sufficiently reliable for purposes of
    reviewing trends in the MFO budget and U.S. contributions between fiscal
    years 1995 and 2003. A detailed description of our scope and methodology
    is included in appendix 1. We conducted our review from September 2003 to
    May 2004 in accordance with generally accepted government auditing
    standards.

                                    Results in Brief

    State has fulfilled some but not all of its operational and financial
    oversight responsibilities described in its guidelines for overseeing the
    MFO. Overall, we could not determine the full extent of the department's
    efforts because it did not document the nature, quality, and range of its
    oversight activities. For example, a State official visited MFO locations
    twice a year to observe MFO operations and compare these observations to
    MFO regulations. However, because he did not document the results of his
    visits, we could not determine the range and quality of his oversight
    activities. In addition, the guidelines called for State officials within
    the Bureau of Near Eastern Affairs (NEA) to review the external auditors'
    reports and evaluate MFO financial practices. While staff reviewed the
    auditors' reports, they did not evaluate MFO financial practices because
    they lacked the accounting expertise to do so. State is exploring options
    for obtaining the necessary financial expertise; however, it has not yet
    determined how it will address this issue. The guidelines also direct
    State oversight through the transfer of U.S. government personnel to key
    MFO positions. While State has successfully recruited staff for the
    civilian observers unit, a number of chiefs of the unit exhibited poor
    leadership capabilities. Recruiting for the chief observer post remains a
    concern for State because many candidates at State seek higher priority
    posts, such as the U.S. Embassy in Cairo, to enhance their careers rather
    than seek an MFO position. In response to recommendations made by the
    State's Office of the Inspector General in February 2004, NEA agreed to
    form a board to improve its oversight of MFO operations and to address
    civilian observer unit personnel issues. In June 2004, the board held its
    initial meeting and discussed, among other topics, various approaches for
    recruiting for the chief observer post. However, the board has not yet
    developed the range of issues that it will address or established
    timelines for resolving these issues.

    MFO has made changes to improve its personnel system and respond to some
    employee concerns. To improve its ability to retain experienced staff, MFO
    provided recontracting bonuses and incentive awards to staff. In addition,
    MFO standardized its employee performance reviews to improve the
    transparency of its appraisal system and upgraded the chief of personnel
    services position to a longer-term civilian position for greater expertise
    and continuity. MFO has also taken steps to improve workforce planning but
    has not undertaken a systematic review of its personnel system since 1985.
    Moreover, leading personnel practices suggest that other aspects of MFO's
    personnel system could be reviewed and subsequently modified. For example,
    MFO regulations and procedures do not clearly provide for outside
    mediation or external avenues of appeal for MFO employee complaints
    involving discrimination or sexual harassment. In addition, the MFO has
    neither addressed disparities in the representation of women in its
    workforce, especially in management positions, nor identified where
    barriers may operate to exclude certain groups and address these barriers.

    The MFO has taken steps to improve its financial management and internal
    controls over the past 9 years. MFO installed a new financial management
    system and hired a management review officer to improve the efficiency and
    effectiveness of its operations. In addition, MFO changed its external
    auditor since the prior auditor had audited MFO's records for several
    years. Both auditors issued unqualified or "clean" opinions on MFO's
    annual financial statements. In addition, the current auditor audited the
    organization's internal controls and provided a clean opinion as well.
    Internal controls are audited every 3 years at MFO. However, unlike other
    international organizations, the MFO does not have an audit committee to
    independently oversee the external audits. According to leading internal
    control practices, an effective audit committee can provide an important
    oversight function. It can also play an important role in ensuring
    effective internal controls because of management's ability to override
    system controls. Establishing an additional oversight body or having the
    newly established State MFO management advisory board review and evaluate
    MFO financial practices could provide further assurance to MFO
    contributors on the state of MFO finances since the Director General has
    broad management authority not found in other international organizations.

    For the past 9 years, MFO's budget has averaged about $51 million
    annually. However, the organization faces a number of challenges that will
    make it difficult to continue operating within its current budget. Most
    important, the MFO must address the cost of replacing its antiquated fleet

    of helicopters by fiscal year 2006, which preliminary estimates provided
    by DOD could total about $18 million. As a result of this and other
    pressures on the budget, the major contributors' cost of supporting the
    MFO are likely to increase if the MFO maintains its current level of
    operations. Israeli and Egyptian officials stated that their governments
    do not support increases in their contributions. U.S. and MFO efforts to
    obtain support from other contributors generally have not succeeded. In
    addition, U.S. officials have yet to make a decision about increasing U.S.
    support to the MFO or adjusting its current cost-sharing arrangements with
    the MFO. Army, State, and MFO officials have yet to agree who should pay
    the increased costs associated with changes in the composition and pay
    scales of U.S. troops under current cost-sharing arrangements.

    In this report, we recommend that the Secretary of State take steps to
    resolve the recurring concern of finding qualified candidates for the
    chief of the civilian observer unit, ensure that staff with accounting
    expertise are available to carry out State's financial oversight
    responsibilities for MFO and review the terms of the external audits,
    direct the MFO management advisory board to monitor and document the
    bureau's compliance with its guidelines for overseeing MFO, and work with
    Army officials to reconcile differences between Army and State views about
    the current MFO cost-sharing arrangement.

    We have received oral comments from DOD and written comments from the
    Department of State and MFO, which we have reprinted in appendixes VI and
    VII. DOD generally agreed with our findings and conclusions. The Army also
    provided technical comments. State agreed with three of our
    recommendations but was not responsive to our recommendation to direct the
    advisory board to monitor and document NEA's compliance with its
    guidelines for overseeing MFO. The MFO generally agreed with our comments.

    Background 	The mission of the MFO is to observe and report on Israeli and
    Egyptian compliance with the security aspects of the 1979 treaty of peace.
    The agreement established four security zones-three are in the Sinai in
    Egypt, and one is in Israel along the international border. The
    multinational force occupies checkpoints and conducts periodic patrols to
    observe adherence of the treaty parties to agreed force limitations and
    patrols the Strait of Tiran between the Gulf of Aqaba and the Red Sea to
    ensure the freedom of navigation. The agreed force limitations for the
    four zones (see fig. 1) are:

    o  Zone A: One Egyptian mechanized division containing up to 22,000
    troops;

    o  Zone B: Four Egyptian border battalions manned by up to 4,000
    personnel;

    o  	Zone C: MFO-patrolled areas within Egypt, although civil police units
    with light weapons are also allowed; and

    o  Zone D: Up to four Israeli infantry battalions totaling up to 4,000
    troops.

                  Figure 1: Sinai Peninsula and MFO Area of Operations

    The Department of State oversees U.S. participation in the MFO, nominates
    a U.S. citizen as the Director General, and helps recruit Americans to
    serve in the MFO civilian observer unit. MFO headquarters are located in
    Rome and the organization also maintains offices in Cairo and Tel Aviv to
    address policy and administration issues. The Force Commander-who is
    responsible for command and control of the force- and his multinational
    staff are located in the North Camp at El Gorah in the Sinai Peninsula.
    The U.S. infantry battalion and the coastal patrol unit are based in the
    South Camp near Sharm el Sheikh on the Red Sea (see fig. 2). The MFO's
    annual operating budget of about $51 million is funded in equal parts by
    Egypt, Israel, and the United States.1 All parties pay their contributions
    in U.S. dollars.

    Figure 2: U.S. Soldiers on Duty at an MFO Outpost Near South Camp

    1The governments of Germany, Japan, and Switzerland provided a combined
    financial contribution that averaged about $1.4 million annually between
    fiscal years 1995 and 2003.

    Currently, 11 countries deploy troops to the MFO. As of December 2003, the
    MFO military force consisted of 1,685 multinational troops, of which 687
    were from the United States (see fig. 3). Colombia and Fiji also provide
    infantry battalions and Italy provides the coastal patrol unit. In
    addition, there is a civilian observer unit of 15 U.S. citizens that
    performs reconnaissance and verification missions. The chief observer and
    about half of the other observers temporarily resign from the State
    Department to fulfill 1- or 2-year MFO contract commitments; the other
    civilian observers are usually retired U.S. military personnel with
    renewable 2-year MFO contracts. (See app. II for details on the MFO work
    force.) Retired military personnel are often hired for their familiarity
    with military weapons and organizations, while State personnel are often
    hired for their diplomatic skills and experience in the region. All
    members need to become proficient in navigation, map reading, and driving
    in the Sinai, according to an MFO official.

    Figure 3: MFO Organizational Chart (as of December 2003)

    Note: The Operations function is currently headed by a Norwegian officer.

    The MFO Director General must be a U.S. citizen that is nominated by the
    State Department and appointed by the parties for a 4-year renewable term.
    The Director General appoints the Force Commander for a 3-year term that
    can also be renewed. The Force Commander cannot be of the same nationality
    as the Director General. MFO's other civilian employees are generally
    hired on 2-year contracts that can be renewed at the Director General's
    discretion.

    In a 1995 report, we reported that the parties to the treaty and the U.S.
    government viewed the MFO as effective in helping maintain peace and in
    reducing certain costs. However, we found that State needed to provide
    greater oversight due to a lack of assurance regarding the adequacy of
    internal controls.2 The report noted that, unlike other international
    organizations, the MFO does not have a formal board of directors or
    independent audit committee to oversee audits. Our recommendations in 1995
    included that State take steps to improve its oversight by examining MFO
    annual financial statements for discrepancies and having MFO's external
    auditor periodically perform a separate audit of MFO internal controls
    that State was to review. State has implemented our recommendations except
    for examining MFO's financial statements for discrepancies.3

    State Has Met Some of Its Oversight Responsibilities but Has Limited
    Evidence Documenting These Efforts

    State has developed but not completely fulfilled its operational and
    financial oversight responsibilities described in its guidelines for
    overseeing the MFO. These oversight responsibilities included evaluating
    MFO financial practices, conducting oversight visits of MFO operations,
    and recruiting staff for the civilian observers' unit. We could not
    determine the full extent of the department's compliance with its
    guidelines because it does not have sufficient documentation to describe
    the quality and range of its efforts. The Office of Regional Affairs
    within State's Bureau of Near Eastern Affairs (NEA) is the single U.S.
    focal point for all MFO-United States government interaction and
    oversight. NEA's guidelines called for State officials to review the
    external auditors' reports and evaluate MFO

    2U.S. General Accounting Office Peacekeeping: Assessment of U.S.
    Participation in the Multinational Force and Observers. GAO/NSIAD-95-113
    (Washington, D.C.: Aug. 15, 1995).

    3In our 1995 review, State officials said that management of the U.S
    contribution was based on a relationship of mutual trust with MFO
    management coupled with the reports of MFO's external auditor. We noted,
    however, that the generally accepted auditing standards for financial
    statement audits do not require an opinion on MFO internal controls and
    that MFO's external auditor reports had not included one.

    financial practices. While reviews of the auditors' reports were
    performed, the staff did not possess the accounting expertise to evaluate
    MFO financial practices and did not do so. NEA is exploring options for
    obtaining the necessary expertise; however, it has not finalized its
    approach for redressing this issue. According to the guidelines, oversight
    is also informally conducted through the transfer of U.S. government
    personnel to key MFO positions, including a U.S. civilian observer unit.
    While State has successfully recruited many civilian observers, it has had
    difficulty in consistently recruiting candidates with strong leadership
    capabilities for the chief position. Recruiting for the chief observer
    post remains a concern because many candidates at State seek higher
    priority posts, such as the U.S. Embassy in Cairo, to enhance their
    careers rather than seek an MFO position. In response to a February 2004
    recommendation made by the State Office of the Inspector General (OIG),
    NEA agreed to form an advisory board to oversee MFO operations. In June
    2004, the advisory board had its initial meeting and discussed options for
    making the chief observer position more attractive. The board has not
    fully developed the range of issues that it will address or established
    timelines for resolving these issues.

    Guidelines Did Not Require Documentation of Oversight Efforts

    NEA developed guidelines for conducting MFO oversight in 1995 and updated
    the guidelines in 2002; however, the guidelines did not require that NEA
    document its oversight efforts. The guidelines sought to ensure that (1)
    U.S. government agreements and foreign policy objectives were being met;
    (2) MFO personnel practices were appropriate and in accordance with MFO
    regulations; (3) MFO operations were in compliance with its regulations;
    and (4) MFO resources were spent appropriately, financial transactions
    were recorded accurately, and internal controls were adequate. We could
    not determine whether State fully complied with its oversight
    responsibilities because it did not have sufficient documentation to
    support the extent and quality of its oversight efforts.

    We reviewed documentation to support State's efforts to provide oversight
    of MFO from 1996 to 2004. These documents recorded communication between
    MFO and State officials about daily activities and operations of the MFO.
    However, we found that this documentation did not fully describe State's
    oversight efforts, the condition of MFO operations, State's views on MFO
    policies/practices, or recommendations for improving MFO operations. As a
    result, we could not determine the extent and quality of NEA oversight
    activities. The maintenance of accurate and timely records document
    efforts undertaken, and reviews by management help ensure

    that management directives are carried out. Records are an integral part
    of an entity's stewardship of government resources. In addition,
    documentation provides information so that oversight activities can be
    assessed over time.

    State Has Fulfilled Some but Not All of Its Oversight Responsibilities

    State Officials Regularly Communicated with MFO Officials and Participated
    in Annual Trilateral Meeting

    Recruiting Candidates Suited for Chief Observer Position Remains a Concern

    While State has met some aspects of the guidelines for overseeing MFO, it
    has not fully complied with its guidelines in other areas such as
    evaluating MFO's financial practices. As discussed below, we reviewed the
    operational and financial oversight guidelines and State's efforts for
    complying with them.

    NEA guidelines called for its officials to maintain regular communications
    with key MFO officials, discuss U.S. foreign policy issues with MFO, and
    participate in the annual MFO Trilateral Meeting between Egyptian,
    Israeli, and U.S. officials. We reviewed letters of correspondence,
    reports, cables, and e-mails documenting regular communications with MFO
    officials and State's participation in the MFO Annual Trilateral
    Conferences of Major Fund Contributors. At the Trilateral, senior MFO
    officials discussed with delegates from Egypt and Israel information of
    interest to the United States. The U.S. delegate conveyed the U.S.
    position to the treaty parties and the MFO and discussed issues that
    ranged from routine matters relating to management and other
    administrative issues to major issues concerning MFO finances.

    NEA guidelines note that the transfer of U.S government personnel to key
    MFO positions-including the U.S. civilian observer unit (COU)-is an
    informal mechanism of U.S. oversight. While NEA has successfully recruited
    many candidates for the civilian observer positions, it has not
    consistently recruited candidates with the qualities that senior State
    officials regard as important for the chief civilian observer post. These
    qualities include having the capacity to exercise strong leadership and
    management skills in a predominantly male military culture in an isolated
    environment. Annually, NEA recruits U.S. government employees for about
    six 1-year observer positions and a chief observer who serves 2 years in
    the MFO. State reviews the applications for these posts, develops a "short
    list" from which the MFO Director General selects a candidate, provides
    input into the final selection, and recommends the candidate for the chief
    observer position. In recent years, according to the MFO and State
    officials, ineffective leadership in the chief observer position
    contributed to considerable turnover in the unit. A number of chiefs or
    interim chiefs were dismissed or transferred due to poor leadership

    Some Financial Oversight Responsibilities Were Met, but Staff Lacked
    Financial Expertise to Meet All Responsibilities

    capabilities. These problems resulted in low morale in the unit and to the
    early resignation of several observers.

    Recruiting for the leadership post remains a concern because many
    qualified candidates at State desire and accept higher priority posts to
    enhance their careers rather than seek MFO positions. According to a
    senior State official, the qualities that make a good chief observer-
    regional experience, including Arabic language skills, and managerial
    experience-are in demand at regional posts with higher priority staffing
    demands. The MFO Director General stated that he would like to broaden the
    pool of candidates and recruit from other sources for the leadership
    position if State could not provide a candidate with appropriate
    credentials. State officials oppose this approach, stating that the
    position was an important symbol of U.S. commitment and required an
    experienced Foreign Service Officer. According to senior State officials,
    the department is reviewing options, such as elevating the position to a
    more senior Foreign Service level, to make the position more attractive to
    Foreign Service Officers. However, a timeline for addressing this issue
    has not yet been established.

    NEA has fulfilled some of its financial oversight responsibilities;
    however, its staff lacked the expertise to perform many required tasks.
    The guidelines called for NEA to review MFO budgets and financial plans;
    analyze income, expenditures, and inflation rates; review and analyze
    annual audit and internal controls reports issued by the external auditor;
    and evaluate MFO financial and auditing regulations. NEA guidelines stated
    that the OIG would provide assistance in evaluating MFO financial and
    auditing regulations. While NEA officials reviewed budgets and financial
    plans, audits, and internal control reports, they did not evaluate the
    financial and auditing regulations of the MFO, review its accounting
    notes, or assess the potential financial impact that inflation rates had
    on the MFO budget request. NEA officials stated that its staff did not
    possess the needed accounting and auditing expertise to fulfill all of the
    financial oversight responsibilities and that the OIG has not provided
    accounting and auditing assistance to NEA since 1998. In June 2004, NEA
    officials stated that they were exploring options for obtaining the
    necessary accounting expertise to review MFO financial practices; however,
    they have not yet determined how they will redress this issue or a
    establish a timeframe for doing so. Leading practices indicate that
    personnel need to

    State Annually Reported to Congress and Inspected MFO Locations

    NEA Is Considering Improvements for Conducting MFO Oversight

    possess and maintain the skills to accomplish their assigned duties.4
    Staff with the required skill could provide reasonable assurance that U.S.
    contributions are being used as intended and that financial reporting is
    reliable-including reports on budget execution, and financial statements.

    Public Law 97-132 authorized U.S. participation in the MFO and established
    a requirement that the President submit annual reports to Congress every
    January 15. The report is to describe, among other things, the activities
    performed by MFO during the preceding year, the composition of observers,
    the costs incurred by the U.S. government associated with U.S. troops
    participating in the MFO, and the results of discussions with Egypt and
    Israel regarding the future of MFO and its possible reduction or
    elimination. State has met the annual reporting requirement.

    NEA officials conducted biannual oversight visits to MFO headquarters and
    field locations as called for in the guidelines but did not document the
    results of those visits. In addition, the OIG reported that it found no
    trip reports that were prepared by NEA during that office's 20 years of
    MFO oversight. The guidelines stated that the purpose of the visits is to
    observe MFO operations and conditions in the field and compare observed
    practices with published MFO regulations. Among other things, oversight
    visits were to include tours of MFO facilities, including offices,
    warehouses, check points, and facilities for U.S. soldiers; meetings with
    all key MFO and U.S. military officials; and meetings with members of the
    U.S. civilian observer unit. According to State officials, briefings were
    held afterwards to describe the visits but written reports of these visits
    were not completed. However, without the maintenance of accurate and
    timely records, it is difficult to determine whether management directives
    were appropriately carried out.

    In November 2003, State's Inspector General conducted an internal review
    of NEA and made recommendations in February 2004 to improve NEA oversight.
    The OIG recommended that NEA transfer some of its oversight
    responsibilities from its Office of Regional Affairs to the Office of the
    Executive Director of NEA (NEA/EX). The OIG also recommended that NEA
    establish an advisory board to review MFO management practices and
    internal controls, including internal audits, and ensure the

    4See U.S. General Accounting Office: Standards for Internal Control in the
    Federal Government, GAO/AIMD-00-21.3.1 (Washington D.C.: Nov. 1999).

    MFO Has Taken Some Actions to Improve Personnel Management but has not
    Systematically Reformed Its Personnel System

    independence of these audits. NEA plans to give responsibility for the
    oversight of management/personnel issues to NEA/EX while the Office of
    Regional Affairs retains responsibility for the oversight of policy
    issues. NEA also agreed to form an oversight board to oversee MFO
    operations that is to be chaired by NEA/EX and include representatives
    from the OIG and the bureaus of Human Resources, International Operations,
    and Political-Military Affairs. The board, which met for the first time in
    mid-June 2004, discussed approaches to attracting candidates for the
    position of chief observer and other COU recruiting issues. The board has
    yet to determine its full range of responsibilities or scope of work. In
    addition, it has not yet established timelines for addressing these areas.

    MFO managers have made improvements to MFO's personnel system but have not
    systematically updated the personnel system since 1985. For example, the
    Director General recently appointed a longer-serving civilian with
    personnel management expertise to replace the short-term military
    personnel officers serving short rotations on the MFO command staff.
    Moreover, leading personnel practices suggest that other aspects of the
    MFO personnel system could be reviewed and subsequently modified. For
    example, MFO regulations and procedures do not clearly provide for outside
    mediation or external avenues of appeal for MFO employee complaints
    involving discrimination or sexual harassment. In addition, the MFO has
    not addressed disparities in the representation of women in its workforce,
    especially in management positions, nor identified where barriers may
    operate to exclude certain groups and address these barriers.

    MFO Has Made Some Improvements to Its Personnel System

    MFO's current Director General has taken steps to update personnel
    policies to retain staff. In 2003, the Director General appointed a
    longerserving civilian with personnel management expertise to replace the
    shortterm military personnel officers serving short rotations on the MFO
    command staff. According to MFO documents and officials, this new manager
    for personnel in the Sinai provides continuity over personnel issues,
    takes a more active role in recruitment, has surveyed employees and acted
    on their concerns about safety and other quality of life issues, and is
    responsible for the equitable allocation of housing. Moreover, he has
    sought additional training to improve his effectiveness in this new role.
    Finally, MFO leadership has updated grievance procedures pertaining to
    sexual harassment complaints to boost employee confidence in the system
    and reemphasized to employees that they have zero tolerance for
    infractions of this policy. As the current Director General left in June
    2004,

    his successor will have to demonstrate a similar commitment to these
    changes in personnel policy to ensure that they succeed.

    MFO management is taking steps to improve workforce planning. MFO managers
    stated that the personnel system was originally modeled in 1982 on State
    Department and U.N. systems. In addition, the MFO personnel manager stated
    that MFO managers have not undertaken a review of the personnel management
    rules since an outside consultant examined MFO personnel policies in 1985.
    However, MFO reviewed and updated some sections of its personnel manual in
    January 2004. MFO has also begun to make increased use of information
    technology to compare its future work requirements with its current human
    resources, and is using existing U.S. Army efficiency reviews of the U.S.
    contingent's operations to suggest ways to restructure its own military
    staff (see app. III for excerpts from our model for strategic human
    capital management planning).

    To acquire, develop, and retain talent, MFO management has updated its
    recruitment practices to ensure that its new hires are both qualified and
    a good "fit" for the demanding work conditions in the Sinai. MFO uses
    professional recruiters to obtain civilians better suited to the MFO
    environment. MFO management has also updated its introductory materials,
    handbooks, and Web site to give prospective recruits a more comprehensive
    view of work requirements, benefits, and living conditions. MFO managers
    stated, however, that the "temporary" nature of the MFO mission precluded
    it from developing a career track for international staff. It does not,
    for example, provide the benefits that a career service track would offer,
    such as routine opportunities for promotion and pensions for long-serving
    employees.5 Nevertheless, the MFO has introduced incentives to retain
    long-serving staff, including pay increases normally worth 2 percent of
    salary for every employee who signs a contract extension and special
    nonmonetary service awards for 10-year and 20-year employees.

    The MFO has also introduced improved performance appraisals for new staff
    on their probationary period and at the end of their contract period.
    These appraisals include basic assessments of job skills, performance,
    leadership, communications, cost management, initiative, and adjustment to
    the work environment and document performance feedback sessions. Staff are
    allowed to read and comment on their appraisals. MFO, however,

    5MFO employees are eligible to receive a monthly premium worth 7 percent
    of employees' base salaries for use in retirement plan investments.

    does not require its managers or staff to use a detailed formal appraisal
    to document annual performance reviews and feedback sessions. Instead,
    managers have the option of declaring that a staff member has performed
    satisfactorily. The new chief of personnel services stated that it was his
    intention to systematically collect employee feedback to help adjust MFO's
    human capital approaches and workforce planning, but he had not yet
    developed any data collection instruments as of December 2003.

    MFO Has Not Addressed Other Important Personnel Management Practices

    Despite its efforts to improve its personnel management practices, the MFO
    has not addressed two challenges that leading practices indicate could
    adversely affect its ability to strategically manage its human capital
    resources more effectively. These challenges are (1) the degree to which
    its grievance procedures are subject to outside and neutral arbitration or
    other alternative dispute resolution mechanisms and (2) the gender
    imbalance in the international civilian workforce.

    Although the MFO employee grievance policy encourages early reporting and
    resolution at the lowest level practicable, it does not clearly provide
    for an independent avenue of appeal in cases of discrimination or sexual
    harassment. MFO's policies against discrimination and harassment allow for
    the possibility of employees using outside mediators to resolve complaints
    when an internal inquiry or investigation determines that sexual
    harassment or discrimination has occurred. However, the decision to use
    mediation rests with the Force Commander or Contingent Commander, not the
    complainant.6 Furthermore, MFO procedures do not allow complainants to
    seek mediation or pursue appeal outside the MFO when an investigation
    results in a finding that harassment or discrimination has not occurred.7
    In contrast, the Equal Employment Opportunity Commission calls for U.S.
    agencies to make alternative

    6Multinational Force Standing Orders, Policy Against Discrimination and
    Harassment, Ch. 38, S: 38.14 (a-b) and 38.15(j) (Vol. 2). These procedures
    pertain to civilian employees of the MFO or to MFO soldiers when the
    complainant and the accused are soldiers from different national
    contingents. MFO's policy notes that when the complainant and accused are
    soldiers from the same national contingent, the contingent commander will
    handle the complaint.

    7Broader MFO regulations allow for international arbitration of disputes
    or controversies involving employment contracts or the regulations, which,
    the MFO General Counsel states, could be invoked by employees who allege
    harassment or discrimination. Nevertheless, these regulations do not
    specifically cover sexual harassment or discrimination, and, according to
    the General Counsel, in the 22-year history of the MFO have never been
    used by MFO employees to take the organization to outside arbitration.

    dispute mechanisms, such as mediators, available to complainants and U.S.
    antidiscrimination laws allow complainants to appeal their cases in court
    if necessary.8

    We noted in past work that a one single model for international
    organizations' grievance procedures does not exist because criteria such
    as the degree of independence of a grievance board or committee depend on
    the legal environments in which these organizations operate.9
    Nevertheless, our analysis of leading practices in the World Bank and
    other organizations indicates that a lack of clear means for resolving
    such grievances could be a concern for an organization's management
    because it could undermine employee confidence in the fairness of the
    personnel management system. For example, the U.S. government and the
    private sector employ alternative dispute resolution mechanisms such as
    arbitration, mediation, or management review boards to resolve
    discrimination complaints and other grievances in a cost-effective
    manner.10 Moreover, we noted that U.S. government agencies and
    international organizations have determined that access to alternative
    dispute mechanisms and providing an avenue for an independent appeal can
    enhance employee confidence in the entire human capital system.11

    MFO's current gender imbalance in management may also merit attention. The
    imbalance may indicate that there are obstacles to women attaining
    management positions that may need to be addressed. The United Nations,
    for example, determined that the gender balance of its professional

    8State Department and MFO officials stated that members of the COU from
    the State Department can informally appeal to State in such cases, but
    State's OIG has concluded that the department has no jurisdiction because
    COU members are not State employees.

    9The World Bank, for example, found that no one single model could be
    easily adapted to restructure its grievance procedures to meet its needs,
    because of the diverse approaches to workplace dispute resolution and
    differing legal structures found among Bank members. We noted that the
    World Bank did not follow through on our recommendation to collect
    meaningful data on employees' perspective on the fairness and credibility
    of its proposed reforms. See U.S. General Accounting Office, World Bank:
    Status of Grievance Procedure Reforms, GAO/NSIAD-99-96 (Washington, D.C.:
    May 13, 1999).

    10See Alternative Dispute Resolution: Employers' Experiences with ADR in
    the Workplace, GAO/GGD-97-157 (Washington, D.C.: Aug. 12, 1997); and Human
    Capital: The Role of the Ombudsmen in Dispute Resolution, GAO-01-466
    (Washington, D.C.: Apr. 13, 2001).

    11See U.S. General Accounting Office, Human Capital: Preliminary
    Observations on Proposed DHS Human Capital Regulations. GAO-04-479T
    (Washington, D.C.: Feb. 25, 2004), and GAO/NSIAD-99-96.

    workforce was problematic, particularly in the management of peace
    operations. To address this imbalance, the United Nations is trying to
    achieve a professional work force with a 50 percent gender balance. We
    examined MFO prepared documents that showed that women represented 29
    percent of the workforce (31 out of 108 international and national
    civilian positions)12 and women filled only 8 percent of management
    positions (1 of 13 as of June 2004).13 In the United States, the Equal
    Employment Opportunity Commission would consider that such a gender
    disparity could be evidence of a differential rate for selection for women
    that warrants management attention.

    State and MFO managers have noted that there are mitigating circumstances
    that may explain the lower representation of women in MFO's workforce.
    They stated a number of factors that might make the MFO posts in the Sinai
    an unattractive workplace for women: It is a predominantly male and
    military culture, there are few posts that allow for accompaniment by
    spouses, and it has no facilities for children. Nevertheless, these gender
    differences also exist at MFO locations in Rome, Tel Aviv, and Cairo,
    where these factors are not necessarily a concern. Leading practices among
    public organizations include evaluating the composition of their
    workforce, identifying differences in representation among groups,
    identifying where barriers may operate to exclude certain groups, and
    addressing these barriers.

    The MFO has taken steps to improve its financial accountability and its
    related financial internal controls over the past 9 years. It has also
    taken additional steps to improve its financial reporting to the State
    Department and to strengthen internal controls in response to
    recommendations we made to the MFO through the Department of State in
    1995. Since then, the external auditors of its financial statements found
    no material weaknesses. The external auditors who reviewed MFO internal
    controls determined that the internal controls they tested were effective.
    However, internal control standards adopted by the MFO suggest that the
    MFO could do more to enhance the external audit function, particularly
    through the use of an independent audit committee to review the scope of
    activities of the

    MFO Has Improved Financial Accountability, but Additional Oversight May Be
    Needed

    12The total includes four vacancies as of early 2004.

    13MFO officials stated that they have selected a female manager as the
    next chief observer of the COU. In addition, MFO officials commented that
    local support staff hired by its labor contractor in Egypt employee some
    women in professional positions.

    internal and external auditors annually.14 MFO and some State officials
    stated that this concern has been addressed by the new audit and review
    mechanisms adopted by the MFO since our last report. Israeli and Egyptian
    officials stated that their governments are satisfied with the degree of
    financial oversight and control they exercise over the MFO. Nevertheless,
    officials from State's OIG and senior managers within State's NEA Bureau
    acknowledged that the bureau's new MFO management advisory board needs to
    examine the issue of creating an external oversight board.

    MFO Strengthened Financial Accountability and Internal Controls in Recent
    Years

    The MFO has taken steps to improve financial accountability and strengthen
    internal controls. To keep the budget under $51 million and improve the
    efficiency of the organization by emulating leading commercial management
    practices, MFO has (1) adopted a business activity tracking software
    program to improve management visibility over financial activities and
    logistics management, and (2) hired a management review officer to
    identify cost savings through the reviews of management procedures and
    contracts.15 Although we have not performed any direct testing of the
    software, or assessed the role or performance of the management review
    officer, both initiatives appear to be positive steps for MFO.

    According to MFO staff, its adoption of a commercial business activity
    tracking software package in 2001 led to greater management oversight over
    all stages of procurement and other transactions and has strengthened
    internal controls. MFO officials state that this new system has built-in
    requirements for managerial approval at each step of the procurement
    process. Under this system, MFO procurement officers are assigned preset
    spending authority. Further, all procurement over $50,000 and any sole
    source contract over $30,000 requires the approval of the Director
    General. According to MFO officials, the visibility and control

    14In line with the best practices of major financial institutions in the
    United States, the World Bank, and other international organizations, the
    MFO assessed its financial controls using the criteria for effective
    internal control established by the Committee of Sponsoring Organizations
    of the Treadway Commission (COSO), according to internal control
    evaluations conducted in 1998 and 2001. This control framework, known as
    the "Internal Control-Integrated Framework," establishes a common
    definition of management controls and provides a standard by which to
    assess improvements in these controls.

    15Since 1995, MFO's leadership has committed itself to keeping the budget
    under $51 million.

    provided by this system have also simplified the external auditor's task
    in conducting its latest review of internal controls. MFO officials and
    documents did not attribute any budget savings directly to the
    implementation of this new system. However, they stated that they were
    able to reduce the number of staff and centralize four procurement
    operations. MFO officials did not make available the results of any recent
    implementation testing, however, and noted that many of the key
    performance indicators the system will track are under development.

    In 2001, MFO hired a management review officer to identify cost savings
    through the reviews of management procedures, logistics contracts, and
    compliance with MFO requirements and controls. At the request of the
    Director General, this official performs some inspector general functions
    by conducting investigations on specific operations and accountability
    controls, and makes recommendations to improve procedures.16 According to
    MFO records and estimates, the MFO has conducted 19 "most efficient
    organization (i.e., leading practice) reviews" through January 2004. The
    management review officer's recommendations contributed to more than $1.6
    million in budgetary savings.

    MFO Has Received "Clean" Opinions on Annual Financial Statements and
    Reports on Internal Controls since 1995

    All MFO special reviews and annual financial audits since 1995 have
    demonstrated to the satisfaction of the external auditor that MFO
    maintained sufficient financial accountability. First, in late 1995, its
    external auditor, Price Waterhouse, reviewed MFO's internal control
    structure and made recommendations to strengthen them, which MFO agreed to
    adopt.17 Second, in 1996, MFO switched to a new external auditor, Reconta
    Ernst & Young, to conduct its annual financial audits. It issued
    unqualified or clean opinions on MFO's financial statements between 1996
    and 2004.18 Third, MFO commissioned the auditor to perform

    16According to leading public sector internal control practices described
    in GAO's Standards for Internal Control in the Federal Government,
    GAO/AIMD-00-21.3.1 (Washington, D.C.: Nov. 1999), public agencies should
    have mechanisms in place to monitor and review operations and programs.
    The mechanisms could include an Inspector General independent of
    management to audit and review agency activities. The MFO management
    review officer consults with the Director General on the logic and scope
    of each review in advance, however.

    17Price Waterhouse is now part of PricewaterhouseCoopers.

    18In the external auditor's opinion, each of the MFO's financial
    statements between fiscal years 1995 and 2003 was prepared in conformity
    with modified generally accepted accounting principles (GAAP).

    management compensation and benefits reviews in 1996, 1997, and 1999,
    which concluded that management received compensation and benefits
    substantially in compliance with MFO regulations.19 In 2000, however, the
    Director General terminated further compensation audits on the external
    auditor's recommendation that concluded that these reviews duplicated the
    annual audit and other reviews. Fourth, MFO commissioned Reconta Ernst &
    Young to perform separate internal control reviews every 3 years beginning
    in 1998. Reports issued in 1998 and 2001 stated that its auditors assessed
    the MFO's use of internal controls in relation to the criteria established
    in "Internal Control-Integrated Framework" issued by the Committee of
    Sponsoring Organizations (COSO) and found that the internal controls it
    tested were effective.20

    MFO Could Strengthen the Independence of the External Auditor

    The Treaty Protocol and MFO administrative and financial regulations
    provide the Director General responsibility for political, operational,
    and financial control issues pertaining to the organization. However,
    leading practices suggest that the MFO could better use independent input
    and oversight over external audits. The Director General selects and
    receives the reports of the external auditor. In addition, he can change
    MFO operations, policies, and procedures without review, consent, or
    approval from an oversight or senior management board. We previously
    reported that this level of authority is unique among international
    organizations, noting that other international organizations have an
    independent governing body above the chief executive to oversee and
    approve operations and finances. COSO internal control standards note that
    an effective internal control environment could depend in part on the
    attention and direction provided by oversight groups. These groups, such
    as an active and effective board of directors or audit committee, could

    19The external auditor reached this conclusion in each compensation and
    benefit report using generally accepted auditing standards set forth in
    Statements of Auditing Standards number 35 (SAS 35) "Special Reports -
    Applying Agreed Upon Procedures to Specified Elements, Accounts or Items
    of a Financial Statement" as stipulated by Professional Standards of The
    American Institute of Certified Public Accountants.

    20The results of the 2004 internal controls review will not be available
    until autumn 2004, according to State Department officials.

    enhance the audit function through their various review duties.21 Our
    standards for internal controls in the federal government similarly note
    the importance of independent audit committees or senior management
    councils as part of effective monitoring and audit quality assurance.22

    MFO and some State officials stated that there is no need for an oversight
    board to provide this extra degree of assurance. They note that our
    concern about the Director General's autonomy-and the potential for abuse
    of authority raised in our 1995 report-has been mitigated by the external
    auditor's reviews of management compensation and internal controls, as
    well as steps the MFO has taken to improve financial accountability and
    strengthen internal controls. Moreover, these officials stated that the
    organization is too small to employ a full-time independent inspector
    general. Finally, Israeli and Egyptian officials said that their
    respective governments are satisfied with the degree of oversight that
    they exercise through formal annual meetings, informal daily contacts, and
    review of MFO financial reports. However, officials from State's OIG and
    NEA acknowledge that a State oversight board could help ensure that the
    scope of work for audits are set independently from MFO management
    direction. Neither State nor its OIG has reviewed the scope of these
    external audits. The Inspector General concluded that, while State can
    only advise the MFO on these matters, the board is important because U.S.
    confidence in the integrity of the MFO is crucial to its continued support
    for the force.

    21COSO standards caution that not all such mechanisms must be present to
    conclude that an internal control system is effective. They also note that
    there are no preferred methods to conduct and document internal control
    evaluations because the circumstances that different entities and
    industries are under dictate their choice of evaluation methodologies and
    documentation techniques. Small entities, for example, tend to be less
    formal and less structured than large organizations, and rely more on
    direct and continuous communication between management and lower-level
    personnel. COSO standards note, however, that the evaluation tools
    described in its framework can be used by entities of any size.

    22See U.S. General Accounting Office: Standards for Internal Control in
    the Federal Government, GAO/AIMD-00-21.3.1 (Washington D.C.: Nov. 1999).

    After 9 Years of Flat Budgets, MFO Faces Financial and Other Challenges

    The MFO has maintained a flat budget of about $51 million for the past 9
    years, but it faces a number of challenges that will make it difficult to
    continue operating within its current budget. In particular, the MFO must
    address the issue of replacing its antiquated fleet of helicopters by
    fiscal year 2006. DOD projects that replacing the fleet could cost about
    $18 million. As a result of this and other pressures on the budget, the
    costs of supporting the MFO are likely to increase if the MFO maintains
    its current level of operations. However, Israeli and Egyptian officials
    stated that their governments do not support increases in their
    contributions, and U.S. and MFO efforts to obtain support from other
    contributors have not succeeded. U.S. officials have yet to make a
    decision about increasing U.S. support to the MFO or adjusting its current
    cost-sharing arrangements with the MFO. In addition, the U.S. Army, State,
    and MFO officials have yet to agree on who should pay the increased costs
    associated with changes in the composition and pay scales of U.S. troops
    under current arrangements.

    MFO Has Maintained a Level Budget of $51 Million since 1995

    MFO financial reports show that the organization has kept its budget at
    about $51 million between fiscal years 1995 and 2003. Contributions to
    MFO's annual budget are paid by all parties in U.S. dollars. We reviewed
    MFO's budget from fiscal years 1995 through 2002. We found that when
    adjusted using a U.S. dollar inflation rate, MFO's budget has declined 12
    percent between fiscal years 1995 and 2002 (see fig. 4). We also estimated
    the MFO's budget in constant international dollars because MFO purchases
    goods and services in countries such as Egypt, Israel, and the United
    States, where the U.S. dollar has different purchasing power.23 Because
    similar goods are inexpensive in dollar terms when purchased in Israel and
    Egypt as compared to the United States, the purchasing power of MFO's
    budget was significantly greater when measured in constant 1995
    international dollars. This figure was $72 million in fiscal year 1995 and
    $69 million in fiscal year 2002. However, the MFO budget was $51 million
    in fiscal year 1995 and $45 million in fiscal year 2002 when measured in
    fiscal year 1995 dollars. Moreover, we found that, between fiscal years
    1995 and 2002, the MFO budget declined only about 5 percent using

    23Purchasing power refers to the amount of goods that one international
    dollar can purchase in different countries. An international dollar is
    equivalent to the amount of goods and services that 1 U.S. dollar can
    purchase in the United States. For example, in 1995, 1 U.S. dollar could
    purchase goods in Egypt worth $2.69 in the United States. In 2002, 1 U.S.
    dollar could purchase goods in Egypt worth $2.93 in the United States. For
    purposes of this analysis, we assumed all MFO purchases not made in Egypt
    or Israel were made in the United States because MFO could not provide
    data regarding purchases made in other countries.

    constant 1995 international dollars as compared with the 12 percent
    decline in fiscal year 1995 U.S. dollars. This decline was partially
    offset because MFO was able to reduce the economic impact of U.S. dollar
    inflation by shifting more of its purchases to Egypt and Israel during
    this period. MFO increased its purchases in Egypt and Israel from 43
    percent of its budget in 1995 to 54 percent in 2002 as measured in nominal
    U.S. dollars. When measured in international dollars, however, goods and
    services purchased from those two countries increased from an estimated 60
    percent of the MFO budget in 1995 to almost 70 percent in 2002 (see app.
    IV for details on calculating MFO budget in international dollars).

    Figure 4: MFO Budget in Nominal and Constant Purchasing Power Dollars

    Dollars in millions 80

    70

    60

    50

    40

    0 1995 1996 1997 1998 1999 2000 2001 2002

    Fiscal year

    Nominal
    FY95 dollars
    FY95 international dollars

    Source: GAO calculations using World Bank and MFO data.

    MFO has attained cost savings in recent years through better management
    oversight and reduction of inventory costs. As mentioned previously, the
    adoption of a commercial business activity tracking software package and
    the hiring of a management review officer in 2001 led to greater
    efficiencies in logistics and facilities management, vehicle maintenance,
    personnel, finance, and contracting. As a result, according to a senior
    MFO official, recommendations of the management review officer contributed

    to almost $1.7 million in savings. Moreover, according to a senior MFO
    official, more effective management of tracking of freight costs and
    services has contributed to a 46 percent reduction in total storage and
    freight costs between fiscal years 2002 and 2003, or a savings of
    $265,000. Furthermore, its projects to connect its two camps in the Sinai
    to the commercial Egyptian power grid is projected by MFO to save about
    $825,000 a year on electricity costs, once the North Camp project is
    completed in 2004.

    New Challenges Complicate Future Budget Outlook

    One of the key cost issues for the immediate future is the replacement of
    aging UH-1H Huey helicopters. The U.S. Army provides an aviation company
    with 10 UH-1H helicopters to the MFO to perform various mission-related
    tasks for the MFO. As of December 2003, the unit had about 97 associated
    Army personnel. According to DOD officials, U.S. Army plans call for the
    retirement of its entire UH-1H helicopter fleet by fiscal year 2006.
    Furthermore, Army officials stated that DOD has considered various options
    as replacements for the MFO helicopter fleet and is waiting for the
    Secretary of Defense's decision on this matter. First, the Army is
    considering outsourcing its MFO aviation unit to a private contractor.24
    This option would reduce U.S. military personnel participation in the MFO,
    but preliminary DOD estimates indicate that it would cost about $18
    million in the first year and $13 million annually thereafter.25 Second,
    according to U.S. Army officials, Army is considering replacing the MFO
    Hueys with eight UH-60 Black Hawk helicopters (see fig. 5). These
    officials stated that MFO prefers the outsourcing option because there
    would be no need to upgrade hangar facilities and other infrastructure to
    support the Black Hawks, thereby limiting their financial obligation.
    Officials from Israel and Egypt stated that they would leave the decision
    to the United States. They do not, however, want to incur additional
    financial obligations.

    24According to Army officials, the helicopter equipment and support would
    be provided through the Logistics Civil Augmentation Program, a single,
    centrally managed worldwide planning and services contract used by the
    Army to (1) preplan for the use of contractor support in contingencies or
    crises and (2) take advantage of civilian resources in the United States
    and overseas to augment active and reserve forces. Halliburton's
    subsidiary, Kellogg Brown & Root, currently holds this contract.

    25According to an Army official, this figure is based on a rough order of
    magnitude cost estimate prepared by Kellogg, Brown & Root in 2002. The
    final cost is likely to be significantly higher when adjusted for
    inflation and a revised statement of work is prepared.

                 Figure 5: U.S. Army Helicopter Options for MFO Service

    As part of U.S. efforts to reduce troop deployments throughout the world
    to better meet the demands of the war on terror-and the cost of these
    deployments-the United States has tried to obtain troop and financial
    contributions from other nations to reduce its MFO obligation, according
    to U.S. officials.26 To date, these efforts have not been successful. In
    2003, the Department of State requested military contributions from more
    than 20 countries that would then enable the United States to draw down
    its forces. Five countries responded favorably, but only an offer by
    Uruguay to send additional transportation personnel to replace a U.S. Army
    transport company was considered feasible by the MFO. The increased

    26In addition to the income that the MFO receives from the United States,
    Egypt, and Israel, it also receives some additional financial
    contributions from Japan, Germany, and Switzerland. In fiscal year 1995,
    these countries together provided an additional $1.7 million to the MFO.
    However, these annual contributions have steadily declined and totaled
    less than $1 million in fiscal year 2003.

                              UH-1H Huey UH-60 Black Hawk

                           Sources: GAO (left), DOD (right).

    The need to replace aging infrastructure and fund new capital improvement
    projects will also require additional funding. According to U.S. military
    officers in the Sinai, the North Camp accommodations for the soldiers will
    need to be replaced over the next 2 to 5 years. A senior MFO official
    stated that the MFO has begun to consider replacing some of these
    accommodations and will be exploring several options in the near term.
    However, no plan has been finalized, and the official did not have cost
    estimates to provide as of March 2004.

                               Efforts to Increase Other
                                Sources of Support Have
                                Not Generally Succeeded

    Uruguayan deployment in July 2003 allowed the Army to draw down its MFO
    contingent by 74 troops.27 U.S. officials also requested financial
    contributions as part of this query, but other countries declined to
    provide this support. U.S. attempts to obtain increased financial
    contributions from Israel and Egypt have also not been successful.

    Army, State, and MFO Have Yet to Agree as to Who Should Pay the Increased
    Expense for Providing U.S. Troops to the MFO

    In addition to the annual U.S. financial contribution to the MFO of about
    $16 million, the United States incurs an annual expense for deploying
    several hundred troops to the MFO that averaged about $45 million annually
    from fiscal years 1995 through 2003. The cost of supplying U.S. troops to
    MFO has risen since fiscal year 1999, even though the number of U.S.
    troops has declined (see figs. 6 and 7). The increase is due to rises in
    salaries and in the amount of special pay provided to U.S. troops. The MFO
    agreed to compensate the U.S. Army for special pay categories and other
    allowances incurred when U.S. troops are deployed to the Sinai. However,
    in recent years, the U.S. Army has raised the rates for some cost
    categories and has created additional costs categories that did not exist
    at the time of the initial or revised cost-sharing arrangement. Currently,
    Army disagrees with State and MFO over who should pay these additional
    costs.

    27The United States also reduced its infantry battalion by 104 soldiers in
    2003, for a total reduction of 178 U.S. troops.

    Figure 6: Total Number of MFO Troops (including U.S. troops) and Number of
    U.S. Troops for Fiscal Years 1995 through 2003

    1,500

    1,000

    500

    0 1995 1997 1999 2001 2003

    Fiscal year

    Total MFO Total U.S.

    Source: GAO analysis of MFO data.

    Figure 7: Cost of U.S. Participation in MFO

    The increased expense for supplying the MFO with U.S. troops is due
    primarily to a rise in troop salaries, which are paid by the Army, and
    changes in special pay categories such as foreign duty pay and family
    separation pay, which are partly paid for by the MFO. For example,
    salaries have increased because beginning in 2002, National Guard troops
    have been deployed instead of active duty soldiers. National Guard troops
    tend to have been in grade longer than active duty soldiers and are
    consequently paid more. The U.S. Army pays for the increases in troop
    salaries. (See app. V for details on the cost of U.S. participation in MFO
    between fiscal years 1995 and 2003.)

    The MFO and the United States agreed to share the costs of providing U.S.
    troops to the MFO in 1982 and revised these arrangements in 1994 and 1998.
    Under these agreements, the Army agreed to credit the MFO for the costs
    these troops would have normally incurred had they remained in the United
    States, including food and lodging, base support, and operations and
    maintenance costs. The MFO agreed to pay some of the additional costs
    incurred by the deployment of U.S. troops to the Sinai, including special
    pay categories and other allowances.

    Conclusion

    In the revised 1998 arrangement, the U.S. Army and the MFO did not reach
    specific agreement on how Imminent Danger Pay would be shared. While the
    agreement increased rates for other special pay categories, these rates
    were less than those established in U.S. law. Army officials believe that
    MFO should pay these increased costs for supplying U.S. troops; however,
    MFO and State officials disagree with this position.28 According to an
    Army official, the Army will seek MFO reimbursements for special pay
    categories totaling $3.3 million for fiscal year 2004; an MFO official
    stated in June 2004 that the MFO protested this action to the Army and
    Department of State. In addition, Army officials stated that MFO should
    pay a greater share of the costs for sustaining National Guard troops
    while they are on duty at the MFO. Army officials reduced by $1 million
    the credit it will provide to the MFO for sustaining the U.S. infantry
    battalion in fiscal year 2004 because the formula it used to calculate the
    credit was out-of-date since National Guard battalions have been sent to
    the MFO in place of active duty units in recent years.29 In May 2004, U.S.
    Army and State officials met with MFO officials to discuss differences but
    did not present a unified U.S. government position on how the cost-sharing
    arrangement should be modified.

    The two parties to the treaty and the United States are satisfied that the
    MFO is effectively fulfilling its mission of helping to maintain peace
    between Egypt and Israel. MFO has maintained its peacekeeping operation
    with a multinational force in the Middle East, a troubled and unstable
    part of the world. The organization has modified several of its policies
    and practices to make them consistent with leading practices in financial
    management and personnel. There are, however, opportunities for the
    organization to further improve in these areas. MFO has made several
    changes to its operations even though its budget has been flat for the
    past 9 years. The organization has benefited greatly because it has
    increased the amount of goods and services purchased in Israel and Egypt
    where the

    28According to State and MFO officials, the MFO is only required to
    reimburse the Army for certain special pay categories at the lower levels
    set in the March 1982 letter and annexes exchanged between the Secretary
    of State and the MFO Director General, and as increased in cost-sharing
    memorandums of understanding signed in 1994 and 1998. These agreed upon
    rates are lower than those currently provided under U.S. law.

    29These reimbursement costs originally were calculated based on the cost
    to the U.S. Army of sustaining an active duty infantry battalion in the
    United States. According to an Army document, the cost-sharing formula is
    out-of-date because the Army does not generally pay costs for National
    Guard troops that are deployed in the United States.

    purchasing power of the U.S. dollar had increased during that period.
    Despite these changes, MFO contributors may face increased budgetary
    challenges due to the possible replacement of MFO's helicopter fleet.
    State is the organization charged with overseeing U.S. participation in
    the MFO and recruits State employees to fill key MFO positions.
    Nevertheless, State has not provided employees who possess the expertise
    to carry out many of its financial oversight responsibilities. In
    addition, MFO raised concerns about the leadership capabilities of some of
    the staff whom State recruited for the chief civilian observer post.
    Finally, since the MFO does not have an external oversight board, as do
    many international organizations, effective State oversight of MFO and
    agreement between the United States and the MFO on cost-sharing
    arrangements is essential to ensure that the cost of U.S. troop
    participation is equitably shared.

    While NEA has begun to address some of the issues that are stated below,
    it has not established timelines for their resolution. To promote improved
    oversight of the MFO and ensure that NEA redresses these issues, we
    recommend that the Secretary of State take the following four actions:

    Recommendations for Executive Action

    o  	resolve the recurring concern of finding qualified candidates for the
    chief of the civilian observer unit;

    o  	ensure that staff with accounting expertise are available to carry out
    NEA's financial oversight responsibilities for MFO and, if necessary,
    review the terms of MFO's external audits to ensure that they are
    appropriate;

    o  	direct the MFO management advisory board to monitor and document NEA's
    compliance with its guidelines for overseeing the MFO; and

    o  work with Army officials to reconcile differences between Army and
    State

    Agency Comments
    and Our Evaluation

    views about the current MFO cost-sharing arrangements.

    The Department of State and MFO provided technical and written comments on
    a draft of this report (see apps. VI and VII). The Department of Defense
    provided oral comments and generally agreed with our findings. It also
    provided technical comments that we incorporated where appropriate. The
    Department of State agreed with three of the four recommendations and did
    not respond to one of the recommendations. State agreed with our
    conclusion that it had experienced problems in consistently recruiting
    chief observers with the necessary leadership skills

    and stated that the new State MFO Management Advisory Board is considering
    measures to encourage highly qualified State employees to fill the chief
    observer position. State agreed with our recommendation that staff with
    accounting expertise carry out NEA's financial oversight responsibilities
    for MFO. However, State believes that the current NEA oversight regime
    provides the assurances necessary and its limited resources do not allow
    hiring additional accounting personnel to evaluate MFO's financial
    practices. As a result, State plans to ask the OIG to periodically
    evaluate MFO's accounting and financial practices. We do not agree that
    the current oversight regime provides the assurances necessary regarding
    MFO's finances. We found that NEA did not perform several aspects of MFO
    financial management oversight-such as evaluating MFO financial practices-
    because of a lack of expertise among NEA staff. We agree, however, that
    having the OIG periodically review MFO accounting and financial practices
    is sufficient. Finally, State also agreed with our recommendation to work
    with Army to reconcile differences about current MFO cost sharing
    arrangements.

    State was not responsive to our recommendation to direct the MFO
    Management Advisory Board to monitor and document NEA's compliance with
    its guidelines for overseeing MFO. State responded that it plans to
    supplement the annual report to Congress that describes its MFO oversight
    activities with quarterly reports to the newly formed advisory board. The
    OIG recommended that NEA establish an advisory board because it found that
    while NEA policy oversight was strong, its management and personnel
    oversight were not as satisfactory. While the board works to define its
    authority and responsibilities, it should ensure that NEA exercise more
    concerted oversight of MFO activities by complying with NEA guidelines and
    documenting its efforts for overseeing MFO.

    The MFO generally agreed with the report's findings. The MFO welcomed the
    report's recommendations for State to improve the recruiting process for
    the chief observer and for the U.S. government to develop a unified
    position regarding the Army's claims for increased payments by the MFO.
    MFO also stated that it would consider our report's findings regarding
    additional outside mediation or review mechanisms for complaints involving
    discrimination and sexual harassment. It also noted that it will also
    consider our findings of a perceived gender imbalance in the MFO
    workforce.

    The MFO took exception to our finding that, with few exceptions, MFO
    employees tend to stay in the same positions for which they were

    contracted. They stated that six headquarters' employees had been promoted
    or transferred from other positions. However, the MFO personnel manual
    states that there is not a career path for employees due to the temporary
    nature of the organization. Moreover, MFO does not have systems in place
    that establish standard employment grades for its positions, requirements
    for competitive promotion opportunities, or advertise opportunities for
    promotion. We interviewed several longserving staff in the field who
    stated that opportunities for advancement were not available and that they
    have remained in the position for which they were hired. Finally, MFO
    accepts that there are opportunities to improve its human resource
    management but noted that the adoption of U.S. government or U.N. human
    resource practices may entail significant costs and overhead for a small
    organization. We agree that organizations must be careful to consider
    their unique characteristics and circumstances when considering the
    applicability of human resources practices that we have identified in
    appendix III. MFO also disagreed with the factual accuracy of one of the
    numbers in appendix II. We made changes to reflect MFO corrections.

    We are sending copies of this report to other interested Members of
    Congress. We are also providing copies of this report to the Secretary of
    State, the Secretary of Defense, and the Director General of the
    Multinational Force and Observers. We will also make copies available to
    others upon request. In addition, this report will be available at no
    charge
    on the GAO Web site at http://www.gao.gov.

    If you or your staff have any questions about this report, please contact
    me
    at (202) 512-8979 or christoffj@gao.gov, or Phyllis Anderson at (202) 512
    7364 or andersonp@gao.gov. In addition to the persons named above, B.
    Patrick Hickey, Lynn Cothern, Elizabeth Guran, and Bruce Kutnick made
    key contributions to this report.

    Joseph A. Christoff
    Director, International Affairs and Trade

    List of Requesters

    The Honorable Joseph I. Lieberman
    Ranking Minority Member
    Committee on Governmental Affairs
    United States Senate

    The Honorable Daniel K. Akaka
    Ranking Minority Member
    Subcommittee on Financial Management, the Budget,

    and International Security
    Committee on Governmental Affairs
    United States Senate

    The Honorable Richard J. Durbin
    Ranking Minority Member
    Subcommittee on Oversight of Government Management,

    the Federal Workforce, and the District of Columbia
    Committee on Governmental Affairs
    United States Senate

    The Honorable Mark Pryor
    United States Senate

                           Appendix I: Scope and Methodology

    We (1) assessed the Department of State's oversight responsibilities for
    U.S. participation in the MFO, (2) reviewed MFO's personnel policies and
    practices, (3) examined MFO's financial management and accountability, and
    (4) reviewed emerging budgetary challenges.

    We focused our audit work at MFO and State on activities and transactions
    starting in 1996 through 2004, the period subsequent to the prior GAO
    report. We visited MFO offices in Rome, Cairo, and Tel Aviv and force
    installations in the Sinai Peninsula. We also met with the Israeli and
    Egyptian Ministries of Foreign Affairs and Defense in Jerusalem and Cairo.

    To assess the Department of State's oversight responsibilities, we
    reviewed the oversight guidelines developed by the Office of Regional
    Affairs of State's Bureau of Near Eastern Affairs (NEA/RA) and supporting
    documentation including State's Annual Reports to Congress, cables, MFO
    Director General Annual Reports for the Trilateral Conferences of Major
    Fund Contributors, MFO external auditors' financial statement audit and
    internal control reports and turnover statistics of staff working in the
    civilian observer unit. We could not determine the full extent of State's
    efforts because it did not document the nature, quality, and range of its
    oversight activities. We also met with State/NEA officials responsible for
    overseeing U.S. participation in the MFO to discuss the frequency, nature,
    and extent of State contact with MFO. We discussed the views of the
    Egyptian and Israeli governments on the MFO's performance with military
    and foreign affairs officials from both countries. We interviewed NEA and
    MFO officials and current and former members of the Civilian Observer Unit
    to obtain an understanding of State's recruiting efforts and interaction
    with the COU. We met with officials from State's Office of Inspector
    General (OIG) to discuss their inspection of NEA, and we also reviewed
    relevant OIG reports. In addition, we assessed the status of State's
    compliance with prior GAO recommendations.

    To review MFO's personnel management system, we examined MFO personnel
    regulations, internal reports and briefings that described personnel
    policy changes, personnel statistics, performance appraisal forms, and
    other documentation on the organization's personnel practices. We also
    examined leading human capital management policies and practices of public
    organizations to determine if MFO personnel regulations and policies
    relating to employee expectation setting, performance appraisals, employee
    grievance processes, alternative dispute resolution mechanisms, and sexual
    harassment policies followed the spirit of leading practices. We
    interviewed MFO officials, members of the

    Appendix I: Scope and Methodology

    civilian observer unit, MFO staff, and NEA officials to obtain their views
    on the organization's personnel system.

    To examine MFO's financial management and accountability, we reviewed the
    external auditors' financial statement audits and internal control
    reports, other special reviews performed by the external auditor, and
    reports completed by State's OIG. We also reviewed MFO management review
    officer's reports, MFO financial regulations, and documentation on MFO's
    recently installed financial management system. We discussed the scope and
    nature of the management review officer's position and recent work with
    MFO officials. We interviewed NEA, DOD, MFO, Israeli, and Egyptian
    officials to determine their views on MFO's financial management and the
    degree of accountability of the Director General.

    To report on some of the potential budgetary challenges MFO may face, we
    examined budget data and supporting documentation for fiscal years 1995
    through 2003 provided by MFO, NEA, and the U.S. Army's Office of Assistant
    Secretary of the Army for Financial Management and Comptroller. We
    discussed with DOD, State, and MFO officials trend data on costs and
    estimates for substituting U.S. Army UH-60 Black Hawk helicopters or a
    private contractor's helicopter unit for the current MFO force of UH-1H
    Huey helicopters. We did not verify the accuracy or completeness of the
    estimates or verify the accuracy of the budgetary savings MFO officials
    associated with particular cost saving initiatives.

    To assess the reliability of the data on the costs associated with U.S.
    participation in the MFO, we (1) interviewed State, Army, and MFO
    officials about the sources of their data and the means used to calculate
    costs, (2) reviewed MFO's annual financial reports and State's annual
    report to Congress on the MFO, (3) traced U.S. Army's reported costs for
    its contributions to the MFO back to the source documents, (4) traced the
    Army's calculation of the costs associated with providing salaries to the
    soldiers stationed with the MFO-these salary costs constitute over 80
    percent of the total costs of the U.S. Army contribution to the MFO- back
    to the DOD personnel composite standard pay and reimbursement rates for
    fiscal years 1999 through 2003, (5) performed tests on the data provided
    by the U.S. Army regarding the cost of U.S. participation in the MFO
    between 1999 and 2003 to check for obvious errors or miscalculations, and
    (6) reviewed the report of the MFO's independent external auditor on
    State's contributions. However, we did not audit the data and are not
    expressing an opinion on them. We determined that the data were
    sufficiently reliable for the purpose of reporting the total costs of U.S.
    participation in the MFO.

    Appendix I: Scope and Methodology

    We conducted our review from September 2003 to May 2004 in accordance with
    generally accepted government auditing standards.

    Appendix II: MFO's Small but Challenging Workforce

    MFO has a small and varied professional civilian workforce of 108

    1

    international and local national staff located in Rome, Cairo, and Tel
    Aviv. Contractors provide an additional 59 expatriate support staff and
    454 local workers. Eight of the 13 management-level employees are U.S.
    citizens. The international staff, including 14 U.S. citizens, support and
    direct the operations of 1,685 peacekeeping troops from 11 countries with
    unit or individual tours of duty varying between about 2 months and 1
    year.2 A further 15 U.S. citizens serve in the civilian observer unit
    (COU): about half the observers, including the chief observer, temporarily
    resign from the State Department to fulfill 1-to 2-year contract
    commitments; the other half are civilian contractors, usually recruited
    from retired U.S. military personnel serving under renewable 2-year
    contracts. Table 1 provides details on MFO personnel locations, types, and
    numbers.

                 Table 1: MFO Civilian Staff by Location and Type, 2003

    National - Local-Sub-Contracted

            International- Administration Professional Contracted Local Technical
                                                                            Total
    managerial and COU & Support Contract Hire Technical and and Support staff
                                                                               at
          other direct hire staff (Italian and Total MFO Civilians Support Staffa
                                                                    Personnel MFO
            Location civilians (U.S.) Israeli) employees (Egyptian) (expatriates)
                                                                (Egyptian)b sites

           Rome           12    -      11     23      -      -          -
         Tel Aviv          1    -      18     19      -      -          -
           Cairo           2    -      0       2      14     -          -
           Sinai          49   15      -      64      15     59       454     592
           Total          64   15      29     108     29     59       454     650

    aU.S.-based firm Holmes and Narver Services Incorporated (HNSI) employs
    the expatriate technical and support staff.

    bAn HNSI subcontractor, Care Services, Incorporated, provides these
    employees.

    MFO working conditions present challenges for management and staff. MFO
    workers have limited prospects for advancement or job mobility because the
    organization views itself as having a temporary mission. The international
    workforce has decreased by about 62 percent since 1982. With few
    exceptions, MFO employees tend to stay in the same positions

    1The total includes four vacant international positions in the Sinai.

    2Other international civilian staff come from Great Britain (35),
    Australia (2), Canada (2), France (1), New Zealand (2), Italy (1), and
    Mexico (1). A staff member of unidentified nationality fills one position.

    Appendix II: MFO's Small but Challenging Workforce

    for which they were contracted and its many long-serving workers in
    administrative positions lack opportunities to progress to higher
    positions.

    MFO managers stated that while MFO's pay scales and other benefits help it
    successfully compete for staff with oil companies and other commercial
    international organizations in the region, it is challenging to find
    civilian employees with the ability to work successfully in the austere
    military atmosphere and isolated living environment in the Sinai. The main
    camp at El Gorah in the northern part of the Sinai is in a sparsely
    populated area with few amenities outside the camp. Only 17 military and
    civilian positions in the Sinai allow for accompaniment by a spouse, and
    facilities for children are lacking. Visits by family members are also
    very limited. The force's personnel system reflects the "temporary" nature
    of the MFO's mission; most international contractors serve under initial
    2-year contracts that can be renewed at the discretion of the Director
    General. According to MFO documents, employment with the MFO is not a
    career service and initial employment with the MFO does not carry any
    expectation of contract renewal or extension. Several long-term employees
    stated that there are limited job progression opportunities with the MFO.
    Heightened concerns about terrorism since September 11, 2001, and ongoing
    violence in areas under Israeli control has led to significantly
    restricted opportunities for travel off the bases.

    Appendix III: GAO's Model for Strategic Human Capital Management Planning

    U.S. and international public organizations have found that strategic
    workforce planning is essential to (1) aligning an organization's human
    capital program with its current and emerging mission and programmatic
    goals and (2) developing long-term strategies for acquiring, developing,
    and retaining staff to achieve programmatic goals.1 We have developed a
    strategic human capital management model based on leading practices to
    help U.S. and international public organizations assess their efforts to
    address the key challenges to developing a consistent and strategic
    approach to human capital management. We caution that agencies applying
    this model must be careful to recognize the unique characteristics and
    circumstances that make organizations different from one another and to
    consider the applicability of practices that have worked elsewhere to
    their own management practices.2

    Our work has shown that the public organizations face four key human
    capital challenges that undermine agency efficiency. The model consists of
    four cornerstones designed to help public organizations address the
    challenges in the four areas-leadership; strategic human capital planning;
    acquiring, developing, and retaining talent; and results-oriented
    organizational culture. Each cornerstone is associated with two critical
    factors that an agency's approach to strategic human capital planning must
    address. Moreover, for each of the eight critical success factors, the
    model describes three levels of progress in an agency's approach to
    strategic human capital planning:

    o  	Level 1: The approach to human capital is largely compliance-based;
    the agency has yet to realize the value of managing human capital
    strategically to achieve results; existing human capital approaches have
    yet to be assessed in light of current and emerging agency needs.

    o  	Level 2: The agency recognizes that people are a critical asset that
    must be managed strategically; new human capital policies, programs, and
    practices are being designed and implemented to support mission
    accomplishment.

    1See U.S. General Accounting Office, Human Capital: Key Principles for
    Effective Strategic Workforce Planning, GAO-04-39 (Washington, D.C.: Dec.
    11, 2003).

    2See U.S. General Accounting Office, Human Capital: A Self-Assessment
    Checklist for Agency Leaders, GAO/OCG-00-14G (Washington, D.C.: Sep. 1,
    2000).

    Appendix III: GAO's Model for Strategic Human Capital Management Planning

    o  	Level 3: The agency's human capital approaches contribute to improved
    agency performance; human capital considerations are fully integrated into
    strategic planning and day-to-day operations; the agency is continuously
    seeking ways to further improve its "people management" to achieve
    results.

    Figure 8 illustrates the critical success factors an organization in the
    second level of progress must address as it develops a strategic approach
    to managing its human capital.

    Appendix III: GAO's Model for Strategic Human Capital Management Planning

         Figure 8: Excerpts from GAO's Strategic Human Capital Management Model

    Source: U.S. General Accounting Office: A Model of Strategic Human Capital
    Management. GAO-02373SP (Washington, D.C.: Mar. 15, 2002).

    Appendix IV: Calculating MFO Budget in Terms of International Dollars

    The MFO receives dollar contributions from Egypt, Israel, and the United
    States and purchases goods and services from Egypt, Israel, the United
    States, and other countries. The MFO's budget has remained flat at 51
    million in nominal dollars between fiscal years 1995 and 2002, although it
    has declined about 12 percent over the same period when adjusted for U.S.
    inflation. However, MFO officials stated that they increased the
    purchasing power of its budget by shifting its purchases of goods and
    services away from the United States and other countries to relatively
    lower cost Egyptian and Israeli markets. As figure 9 demonstrates, MFO
    spending in Egypt and Israel rose from 43 to 54 percent of the budget
    between fiscal years 1995 and 2002. On average, the MFO spent 26 percent
    of its budget in Egypt and 23 percent in Israel in this period. By
    converting the MFO's budget into international dollars, we are able to
    better assess the impact of these shifts to the lower cost Egyptian and
    Israeli markets on the overall purchasing power of the MFO budget.

    Figure 9: Percentage of MFO Dollar Budget Spent in Israel and Egypt

    Percentage 100

    60

    50

    40

    30

    20

    10

    0 1995 1996 1997 1998 1999 2000 2001 2002 Fiscal year

    Source: GAO.

    As table 2 demonstrates, expressing the MFO budget in international
    dollars reveals that: (1) the purchasing power of the budget-ranging
    between $72.3 million in fiscal year 1995 and $69 million in fiscal year
    2002-was significantly higher than its nominal level of $51 million
    suggests; and (2) the real decline in the budget between fiscal years 1995
    and 2002 was about 5 percent rather than 12 percent.

         Appendix IV: Calculating MFO Budget in Terms of International Dollars

    Table 2: MFO Expenditures in Nominal and International Dollars Fiscal years 1995
    1996 1997 1998 1999 2000 2001 2002 In 1995 international dollars, millions

                     Egypt 32.1 31.0 29.6 32.6 31.8 30.6 29.4 34.0

                     Israel 10.9 10.4 10.5 12.5 12.4 12.5 12.9 14.3

    a

             US and other countries 29.4 28.1 27.1 23.3 23.2 22.3 22.2 20.8

    Total $72.3 $69.5 $67.2 $68.3 $67.4 $65.4 $64.5 $69.0 In nominal dollars,
                                        millions

                     Egypt 11.7 12.2 12.4 14.2 14.2 14.4 13.6 14.2

                     Israel 10.1 10.3 10.6 12.4 12.1 12.5 12.9 13.5

    a

             US and other countries 29.2 28.5 28.0 24.4 24.7 24.1 24.5 23.3

                 Total $51.0 $51.0 $51.0 $51.0 $51.0 $51.0 $51.0 $51.0

    Budget in real fiscal year 1995 dollars, millions $51.0 $50.0 $49.2 $48.6 $48.0
                                   $47.0 $45.9 $45.1

                              Nominal dollars (percentage)

    Egypt 23 24 242828 28 27

    Israel 20 20 21 24 24 25 25

    a

    US and other countries 57 56 55 48 48 47 48

    1995 international dollars (percentage)

    Egypt 44 45 444847 47 46 49 Israel 15 15 16 18 18 19 20 21

    a

    US and other countries 41 40 40 34 34 34 34 30

    Source: GAO calculations using World Bank and MFO data.

    aThe MFO reported its total expenditures in Egypt, Israel, and the United
    States between 1995 and 2002, but breakdowns are not available for the
    other countries. For computational purposes, we assumed that purchases
    made in the other countries are made in the United States.

    Appendix IV: Calculating MFO Budget in Terms of International Dollars

    Moreover, figure 10 demonstrates that MFO purchased a larger proportion of
    its goods and services in Egypt and Israel when calculated in
    international dollars than the nominal-dollar budget expenditures
    suggest-70 percent versus 54 percent for fiscal year 2002, for example.
    Also, it purchased a significantly greater percentage of its budget in
    Egypt than in Israel on average when calculated in international dollars
    during this period-46 percent versus 18 percent on average.1

    An international dollar is equivalent to the amount of goods and services
    that 1 U.S. dollar can purchase in the United States. Two steps are
    required to convert an amount valued in local currency into international
    dollars:

    o  	First, convert the local currency figure into U.S. dollars using the
    official exchange rate; and

    o  	Second, divide this dollar amount by the country-specific purchasing
    power parity (PPP) conversion factor to official exchange rate ratio.

    The PPP conversion factor converts into international dollars the cost of
    a basket of tradable and nontradable goods and services valued in local
    currency units (pounds in the case of Egypt and shekels in the case of

    1Data for fiscal year 2003 purchasing power parity in Egypt and Israel are
    not available as of June 2004.

    Appendix IV: Calculating MFO Budget in Terms of International Dollars

    Israel). The PPP conversion factor is the number of local currency units
    required to buy the same amount of goods and services in the domestic
    market that a U.S. dollar would buy in the United States. For example, a
    basket of goods that could be purchased in the United States for $1, equal
    by definition to 1 international dollar, could be bought in Egypt for
    1.259 Egyptian pounds in 1995. Therefore, the PPP conversion factor is
    1.259 Egyptian pounds per international dollar. In calendar year 1995, the
    official annual average exchange rate (based on monthly averages) was
    3.392 Egyptian pounds per U.S. dollar. The ratio of the PPP conversion
    factor to the official exchange rate is 0.371.2 The nominal dollar amount
    the MFO spent in Egypt in fiscal year 1995 ($11.7 million as shown in
    table

    2) is divided by the fiscal year ratio, to compute the international
    dollar 3

    amount of 32.2 million.

    2A ratio of less than 1 implies that a basket of goods in the foreign
    country costs less in U.S. dollars than in the United States. For example,
    in 2002, a basket of goods that would cost $1 in the United States would
    cost $0.34 in Egypt, $0.81 in Israel, $0.78 in Italy, and $1.22 in
    Switzerland.

    3The fiscal year conversion factor ratio is calculated as a weighted
    average of calendar year ratios. The calendar year ratio in constant 1995
    dollars is computed as the ratio of nominal gross domestic product
    expressed in U.S. dollars to the gross domestic product expressed in
    constant 1995 international dollars.

    Appendix V: Cost of U.S. Participation in MFO

    The United States agreed in 1981 to provide one third of the annual MFO
    budget and provide a military contingent in support of the force. Annex II
    of the 1982 Exchange of Letters between the MFO Director General and the
    U.S. Secretary of State set the financial arrangements for the U.S.
    military contribution. The Memoranda of Understandings between the MFO and
    the Department of the Army established in 1994 and 1998 confirm additional
    understandings and procedures to supplement Annex II of the 1982 Exchange
    of Letters.

    Under the terms of these cost-sharing arrangements, U.S. costs to support
    the MFO has increased from a low of $55.8 million in fiscal year 1996 to
    $70.8 million in fiscal year 2003 as depicted in table 3-a 20 percent
    increase overall. While State Department's contribution to the annual MFO
    budget has averaged about $16 million since fiscal year 1995, the number
    of U.S. military personnel participating in the MFO has declined 11
    percent since then, as depicted in table 4 below. However the cost of U.S.
    military participation has risen approximately 25 percent between fiscal
    year 1996 and 2003.

    Table 3: Cost of U.S. Participation in MFO, Fiscal Years 1995 through 2003

                                  Millions of dollars

                                      Fiscal years

                      1995 1996 1997 1998 1999 2000 2001 2002 2003

    1. Total Net Cost Of DOD Contributions (A-B) $45.37 $40.34 $41.04 $42.95
    $42.55 $44.64 $45.20 $50.82 $54.58

             A. Total
         Non-Reimbursable
          Costs for DOD
          Contributions     47.27 42.58 43.51 44.29 42.78 45.12 46.43 49.94 55.62
          Salary Cost of    40.68 35.72 36.03 35.75 34.46 36.61 37.80 39.92 45.50
              Troops
          Predeployment      1.13 1.07  0.99  1.06  0.94  1.09  1.32  2.15   1.20
             Training
         Special Pays and
        Allowances: Family
           Separation /
         Imminent Danger/
            Hardship/
        Foreign Duty/ Per    0.31 0.30  1.39  2.12  2.05  1.89  1.88  2.19   3.01
               Diem
        MFO-Related Travel   0.07 0.12  0.08  0.04  0.11  0.14  0.13  0.18   0.05

    Training, Base Operations and Subsistence

    a

    Costs 4.47 4.81 4.57 4.82 4.74 4.75 4.63 4.60 3.51

         aHelicopter Operations &   0.61 0.57 0.45 0.51 0.49 0.63 0.67 0.91. 1.08
               Maintenance
          B: Total Net DOD Costs
            Reimbursed by MFO
                 (B1-B2)            1.90 2.24 2.47 1.34 0.24 0.48 1.23 -0.88 1.03
        B1. Total Reimbursed Costs  6.98 7.62 7.49 6.66 5.47 5.86 6.53 4.63  6.90

    o  Special Allowances/ Foreign Duty Pay 1.68 1.74 1.88 1.92 2.09 2.09 2.14
    2.18 2.24

    o  Transportation, Per Diem, etc. 1.04 1.55 1.30 1.61 2.40 2.01 2.24 1.04
    2.80

                     Appendix V: Cost of U.S. Participation in MFO

                                  Millions of dollars

                                      Fiscal years

                      1995 1996 1997 1998 1999 2000 2001 2002 2003

    o  	Sale of DOD Supplies and Equipment to MFO 4.27 4.33 4.32 3.14 0.98
    1.77 2.15 1.37 1.79

    B2. Less Offset Credit Provided by DODb 5.08 5.38 5.02 5.32 5.23 5.39 5.30 5.51
                                          5.87

    2. Net State Contribution $16.09 $15.41 $15.43 $15.41 $15.60 $15.90 $15.95
    $16.02 $16.21

     Assessed Share of MFO Cost Paid by State 16.35 16.03 16.09 16.06 16.112 16.37
                                   16.35 16.25 16.35

     Less U.S. Share of MFO Budget Surplusc 0.26 0.62 0.66 0.65 0.52 0.47 0.40 0.23
                                          0.14

      Total U.S. Net Contribution (1+2) $61.46 $55.75 $56.48 $58.36 $58.14 $60.54
                                  $61.15 $66.87 $70.86

         Fiscal Year 2003 Deflator 1.15 1.13 1.11 1.09 1.08 1.06 1.03 1.02 1.00

    Total U.S. Net Contribution In Constant
    Fiscal Year 2003 Dollars $70.55 $62.83 $62.52 $63.85 $62.80 $64.12 $63.22
    $67.90 $70.80

    Source: GAO analysis of U.S. Army data.

    aEstimates are based on the expense (offset cost) that the United States
    would have incurred for training, food and lodging, base support, and
    operations and maintenance for such units when stationed in the United
    States .

    bCredit to the account of the MFO by the U.S. Army for the amount of the
    offset costs.

    cMFO returns budget surplus in the form of a reduced assessment for the
    following fiscal year.

    Table 4: U.S. Troop Contributions to the MFO as a Percentage of the Total,
                      Fiscal Years 1995 through 2003 Fiscal years

                             1995 1996  1997  1998  1999  2000  2001  2002   2003
           U.S. Troops        970  917   917   917    871  865    865   865   687
         Total MFO Force    1,954 1,896 1,896 1,896 1,844 1,838 1,835 1,835 1,685
         U.S. Troops as a
        Percentage of all
               MFO
              Troops          50%  48%   48%   48%   47%   47%    47%  47%    41%

    As depicted in table 3, a number of factors account for this increase in
    the total cost of U.S. commitments to the MFO over this period:

    o  Total troop salaries increased 27 percent, despite a decrease in the
    U.S.

    troop contingent between fiscal years 1995 and 2002.1 These salaries
    constitute over 80 percent of the cost of the total Army contribution. In
    FY 2002, the Army substituted Army National Guard forces for the regular

    1The budgetary impact of the further reduction of U.S. troops from 865 to
    687 soldiers in late 2003 did not effect DOD's cost calculations for
    fiscal year 2003. The impact will be measurable beginning in fiscal year
    2004.

    Appendix V: Cost of U.S. Participation in MFO

    Army personnel, contributing to a salary cost increase of 12 percent
    between fiscal years 2002 and 2003. National Guard troops tend to be older
    and have been in grade longer than regular Army forces and are
    consequently paid more. Across-the-board salary increases for all military
    forces is another factor contributing to rising military costs, according
    to Army officials.

    o  	Special pay and allowances paid to U.S. soldiers participating in the
    MFO mission have increased nearly ten-fold since fiscal year 1995, going
    from about $300,000 to $3 million in fiscal year 2003. Under the March
    1982 Exchange of Letters between the MFO Director General and the
    Secretary of State, the MFO agreed to pay for certain special allowances
    to U.S. military personnel participating in the MFO mission, including a
    Family Separation Allowance for married personnel and Foreign Duty Pay for
    enlisted personnel. The coverage and rates of these existing allowances
    has been expanded since then to include both enlisted men and officers and
    costs about $250 per soldier per month. Moreover, in fiscal year 1997, DOD
    began providing imminent danger pay to military personnel serving in
    Israel and Egypt. The current rate amounts to $225 per soldier per month.
    In fiscal year 2003, the imminent danger pay allowance constituted 78
    percent of total DOD special pays provided to military personnel
    participating in the MFO.

    o  	Reimbursement payments from DOD to the MFO increased 13 percent.
    Currently, the U.S. Army provides the MFO a credit or "offset" for certain
    costs associated with the support of U.S. forces. These costs are those
    which would normally have been incurred by the U.S. government for food
    and lodging, base support, and operations and maintenance for such units
    when stationed in the United States.

    o  	MFO purchases of supplies from DOD decreased by about 60 percent. In
    fiscal year 1995, the MFO reimbursed DOD for the purchase of supplies,
    equipment, and rations totaling $4.3 million dollars. MFO has sought to
    replace DOD as a source of supply with lower cost local commercial vendors
    in recent years, limiting its purchases from DOD to medical supplies and
    certain helicopter parts. In fiscal year 2003, these purchases totaled
    about $1.8 million.

    Appendix VI: Comments from the Department of State

    Appendix VI: Comments from the Department of State

    Appendix VI: Comments from the Department of State

    Appendix VI: Comments from the Department of State

    Appendix VI: Comments from the Department of State

                            Appendix VII: Comments from the
                           Multinational Force and Observers

    Note: GAO comments supplementing those in the report text appear at the
    end of this appendix.

    Appendix VII: Comments from the Multinational Force and Observers Appendix VII:
                  Comments from the Multinational Force and Observers

                                     See comment 1.

           Appendix VII: Comments from the Multinational Force and Observers

                                     See comment 2.

    Appendix VII: Comments from the Multinational Force and Observers Appendix VII:
                  Comments from the Multinational Force and Observers

    GAO Comments

    (320220)

    The following are additional GAO comments on the Multinational Force and
    Observers letter dated July 9, 2004.

    1. 	In its comments, MFO stated that the report does not mention a number
    of female employees occupying senior positions. Our analysis is based upon
    information obtained from an early 2004 report that lists all
    international and national staff by gender in management positions. There
    may have been some changes made to the data since that time.

    2. 	In its comments, MFO stated that there were factual inaccuracies
    regarding the number and classification of civilians employees. GAO made
    changes based upon MFO technical comments and noted that these changes
    disagreed with data in the MFO 2004 Annual Report. MFO's annual report
    notes that there are 636 civilians, while the information provided to us
    from MFO totaled 650.

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