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 [email protected].

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

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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 [email protected], or Phyllis Anderson at (202) 512
7364 or [email protected]. 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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