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entitled 'Export Promotion: Export-Import Bank and Treasury Differ in 
Their Approaches to Using Tied Aid' which was released on June 28, 
2002.



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United States General Accounting Office:



GAO: Report to the Chairman, Subcommittee on International Monetary 

Policy and Trade, Committee on Financial Services, House of 

Representatives:



June 2002:



Export Promotion: Export-Import and Treasury Differ in Their 

Approaches to Using Tied Aid:



GAO-02-741:



Contents: 



Letter: 



Results in Brief:



Background:



Treasury Had Authority to Direct and Control Use of Tied Aid Credit 

Funds:



Ex-Im Bank and Treasury Agreed on Broad Principles for Tied Aid 

Financing:



Ex-Im Bank and Treasury Place Different Emphases on Tied Aid 
Principles:



Agency Comments and Our Evaluation:



Appendix I: Activity under the Tied Aid Program:



Tied Aid Application Process:



Tied Aid Program Activity:



Appendix II: Application of Criteria for Matching Foreign Tied Aid 
Offers:



Appendix III: Objectives, Scope, and Methodology:



Appendix IV: Comments from the Export-Import Bank:



Appendix V: Comments from the Department of the Treasury:



Appendix VI: GAO Contacts and Staff Acknowledgements:



GAO Contacts:



Acknowledgements:



Tables: 



Table 1: Decisions Made in Selected Tied Aid Cases:



Table 2: Tied Aid Activity, January 1, 1991-February 22, 2002: 



Figures: 



Figure 1: The Evolution of Tied Aid Policy, 1983-2001:



Figure 2: Distribution of Approved and Authorized Tied Aid Cases by 

Recipient Countries, January 1, 1991-February 22, 2002:



Abbreviations:



Ex-Im Bank: Export-Import Bank:



OECD: Organization for Economic Cooperation and Development: 



June 28, 2002:



The Honorable Doug Bereuter:



Chairman, Subcommittee on International Monetary Policy and Trade:



Committee on Financial Services:



House of Representatives:



Dear Mr. Chairman::



The Export-Import Bank (Ex-Im Bank) provides assistance to U.S. 

exporters facing foreign competitors supported by tied aid. Tied aid is 

government-to-government concessional financing of public sector 

capital projects in developing countries that is linked to the 

procurement of goods and services from the donor country. Tied aid can 

distort trade when it is used to influence competitions for foreign 

government procurement rather than allowing those procurements to be 

decided on the basis of quality, price, or service. The provision of 

tied aid is subject to a nonbinding Organization for Economic 

Cooperation and Development (OECD) arrangement, to which the United 

States is a party, that sets rules restricting the instances in which 

such offers can be made.



Through the Tied Aid Capital Projects Fund, [Footnote 1] known as the 

War Chest, Ex- Im Bank may provide tied aid financing to support the 

negotiations and policing of OECD tied aid rules and to match foreign 

tied aid offers to level the playing field for U.S. exporters. In 

consultation with the Department of the Treasury (Treasury), Ex-Im Bank 

assesses applications from U.S. exporters for tied aid financing to 

counter foreign offers. In March 2001, the interagency decision-making 

process for determining the eligibility of applications for tied aid 

financing broke down when Ex-Im Bank and Treasury disagreed on two 

applications and Treasury “vetoed” them. [Footnote 2] While Ex-Im Bank 

and Treasury at the time agreed that Treasury had the authority to veto 

these applications, Ex-Im Bank changed its position in June 2001 and 

challenged Treasury’s veto authority. The dispute over the handling of 

the two cases and the extent of Treasury’s authority over the tied aid 

program was highlighted in congressional hearings on reauthorization of 

Ex-Im Bank during May and June 2001. [Footnote 3] While the two 

agencies instituted formal consultation procedures in July 2001 to 

prevent future breakdowns in the interagency decision-making process, 

these new procedures did not address the issue of whether Treasury had 

statutory veto authority over the use of tied aid.



You expressed concern about the nature of Treasury’s authority over the 

use of tied aid and the underlying reasons for Ex-Im Bank and 

Treasury’s differences. As requested, we assessed (1) whether Treasury 

had a statutory veto over the use of Ex-Im Bank’s Tied Aid Capital 

Projects Fund, (2) what the principles were for using tied aid, and (3) 

how Ex-Im Bank and Treasury applied these principles.



To determine whether Treasury had a statutory veto over the use of the 

tied aid funds, we examined the program legislation in effect at the 

time of the disagreement, legislative history, and relevant Ex-Im Bank 

and Treasury memorandums. To identify the principles governing the use 

of tied aid, we examined agency records related to the tied aid policy 

and decision-making principles, and we interviewed agency officials. To 

assess how the principles for tied aid financing were applied, we 

examined eight tied aid applications, including the two applications 

that led to the March 2001 disagreement. Of the eight selected cases, 

half were approved and half denied. Appendix III provides further 

information on our scope and methodology.



Results in Brief:



Under the tied aid program legislation, [Footnote 4] Treasury had the 

authority to direct and control the use of Ex-Im Bank’s Tied Aid 

Capital Projects Fund, in effect allowing Treasury to veto individual 

tied aid proposals. This legislation required Ex-Im Bank to administer 

the program in consultation with the Secretary of the Treasury and in 

accordance with the Secretary’s recommendations on the most effective 

use of the fund in carrying out the program’s purposes of achieving 

certain U.S. trade policy objectives, a responsibility assigned to the 

Secretary. The provision’s legislative history makes clear that, to 

assist the Secretary in carrying out this responsibility, Congress gave 

the Secretary control of the fund as a negotiation and enforcement tool 

and intended that the Secretary’s authority to direct use of the fund 

extend beyond the policy level to a case-by-case basis. Therefore, the 

legislation required Ex-Im Bank to comply with a Treasury 

recommendation that the fund not be used to support an export financing 

package for a particular project.



Ex-Im Bank and Treasury have agreed on a set of broadly stated 

principles for making decisions on using the Tied Aid Capital Projects 

Fund. Tied aid can be used to support the negotiation and policing of 

the OECD tied aid rules. It can also be used to match otherwise 

allowable foreign tied aid offers that would disadvantage a U.S. 

exporter’s competitive position for future commercial-term sales. In 

the latter case, two primary criteria must be met: tied aid recipient 

countries must have sufficient economic growth to support future 

commercial-term sales (the dynamic markets criteria), and the U.S. 

exporter requesting tied aid must demonstrate the potential for 

additional future sales on commercial terms (the follow-on sales 

criteria).



While Ex-Im Bank and Treasury both seek to help U.S. exporters, they 

place different emphasis on the principles used for matching tied aid 

financing, based on their different missions and perspectives. 

Treasury, which takes the lead in negotiating and policing the OECD 

tied aid rules, takes a strategic approach to financing tied aid. It 

focuses more on the use of tied aid financing to advance U.S. interests 

at OECD negotiations, police foreign competitors’ compliance with the 

rules, and deter other governments from offering tied aid. Ex-Im Bank, 

which works directly with exporters, takes a transactional approach to 

financing tied aid, placing emphasis on helping U.S. exporters by 

matching foreign tied aid offers that would disadvantage their 

competitive position for future commercial-term sales. Treasury and Ex-

Im Bank sometimes differ in their assessment of whether the 

requirements for follow-on sales have been met, particularly regarding 

whether there will be sufficient additional U.S. economic benefits.



Background:



Congress first established the tied aid credit program in 1983 to 

counter foreign tied aid offers and to encourage OECD members to 

negotiate a reduction in the use of tied aid credits, as shown in 

figure 1. In the Export- Import Bank Act Amendments of 1986, Congress 

established the Tied Aid Credit Fund, also known as the War Chest. This 

fund was intended to (1) make other countries aware of the United 

States’ willingness to challenge foreign tied aid offers when U.S. 

exporters were in a disadvantageous competitive position and (2) create 

bargaining leverage in U.S. negotiations with the other OECD members to 

discipline or set rules for tied aid. 



Figure 1: The Evolution of Tied Aid Policy, 1983-2001:



[See PDF for Image]



Source: Ex-Im Bank.



[End of Figure]



OECD negotiators concluded a landmark tied aid agreement in 1992, known 

as the Helsinki Package. It established a comprehensive framework for 

the use of tied aid based on two major principles: (1) tied aid should 

not be used for commercially viable projects and (2) higher-income 

developing countries should be graduated from eligibility for tied aid 

credits.



In 1994, Ex-Im Bank established the Tied Aid Capital Projects Fund, 

which incorporated the Tied Aid Credit Fund. The $150 million fund was 

established to provide the United States with the means to support its 

efforts to discipline tied aid in OECD and to match trade-distorting 

foreign tied aid offers that were undermining U.S. exporters’ 

competitiveness. Appendix I provides more information on activity under 

the U.S. tied aid program.



Ex-Im Bank became concerned that the Fund’s restrictive criteria might 

have discouraged U.S. exporters from bidding on projects in which tied 

aid was offered by foreign competitors. In 1998, Ex-Im Bank initiated 

an internal policy review, followed by an interagency review with 

Treasury in 1999. These reviews resulted in modifications of the 

criteria for matching foreign tied aid offers, making them somewhat 

less restrictive. The review also resulted in a set of separate 

criteria that were designed to facilitate the matching of foreign tied 

aid credits in Africa. 



Although the policy review was intended to ease the criteria and 

facilitate additional opportunities for tied aid matching, the lasting 

effects of international events, such as the Asian financial crisis of 

1997 and the enhancement of the Highly Indebted Poor Countries 

Initiative in 1999, as well as reductions in the level of foreign tied 

aid offers, had a significant impact on its implementation. The 

devastating effects of the Asian financial crisis of 1997 on Indonesia, 

the second largest recipient of U.S. tied aid matching funds (see app. 

I), made meeting the U.S. tied aid criteria, especially for follow-on 

sales on commercial terms, more difficult to satisfy. The 1999 debt 

relief initiative, which accelerated and deepened debt relief 

treatments, specifically prohibited participating countries from 

receiving financial capital on commercial terms. The result was that 

fewer countries were eligible for tied aid under the U.S. program 

rules. 



Treasury Had Authority to Direct and Control Use of Tied Aid Credit 

Funds:



During Ex-Im Bank’s reauthorization hearings in May 2001 before the 

Subcommittee on International Monetary Policy and Trade, House 

Committee on Financial Services, the Bank’s then Deputy General 

Counsel, representing the position of the Bank’s then General Counsel, 

testified that Ex-Im Bank’s ability to use the Fund must be done in 

consultation and in accordance with the Treasury Secretary’s 

recommendations, and that the legislative history “makes it fairly 

clear” that the Secretary “has the final word in how and when the 

[Fund] is used.” [Footnote 5] At the time, Ex-Im Bank and Treasury 

officials were in agreement regarding this view of Treasury’s 

authority. Subsequently, Ex-Im Bank’s new General Counsel issued a 

memorandum dated June 19, 2001, that concluded that Treasury does not 

have a statutory veto or other unilateral decisional authority over Ex-

Im Bank’s use of tied aid funds on a case-by-case basis. This latter 

memorandum reflects Ex-Im Bank’s current official position on the issue 

of Treasury’s veto authority under the program legislation prior to 

enactment of the 2002 reauthorization legislation.



We reviewed the General Counsel’s memorandum and the legislation 

establishing the Fund and its legislative history. Our review of that 

legislation and its history indicates that Congress intended to place 

control of the Fund under the Secretary of the Treasury as a 

negotiation and enforcement tool of U.S. trade policy and that the 

Secretary be able to direct the use of the fund at a policy level and 

on a case-by-case basis. Therefore, under the legislation, Ex-Im Bank 

was required to comply with a Treasury recommendation that the fund not 

be used to support an export financing package for a particular 

project.



Subsection 10 (b)(2)(A) of Ex-Im Bank’s charter, at 12 U.S.C. 635i- 

3(b)(2)(A), required the Bank to administer the tied aid program “in 

consultation with the [Treasury] Secretary and in accordance with the 

Secretary’s recommendations on how such credits could be used most 

effectively to carry out the [program’s] purposes.” Subsection 10 

(a)(5) of the charter, at 12 U.S.C. 635i-(a)(5), defined the program’s 

purposes as enforcing compliance with the existing international 

agreement restricting use of tied aid credits for commercial purposes 

and facilitating efforts to negotiate, establish, and enforce new 

international agreements.



The conference report on the Export-Import Bank Act Amendments of 1986 

(Public Law 99-472), the legislation originally establishing the Fund, 

states that:



[t]he structure and purpose of the War Chest have been carefully 

designed.… Its overriding purpose is to strengthen the hand of the

Secretary of the Treasury in negotiating a comprehensive agreement

to limit the use of mixed credits. To serve that purpose, it is 

essential that the Secretary, who is in charge of these negotiations 

for the United States, play a role in the use of the funds from the 

War Chest. Thus, though the War Chest is lodged administratively in 

the Bank, the Secretary’s role is assured by the statutory language 

in this section that requires the Bank to administer this tied aid 

credit program ‘in consultation with the Secretary of the Treasury 

and in accordance with the Secretary’s recommendations.’ [Footnote 6]:



In addition, statements during debates on the House floor regarding the 

authority intended to be given to the Treasury Secretary over the use 

of War Chest funds reflected, as the Congressional Record makes clear, 

the views of the Banking Committees of the House and Senate conferees. 

These statements specifically indicate that the language requiring Ex-

Im Bank to administer the program in accordance with the Treasury 

Secretary’s recommendations was intended to give the Secretary 

“practical control over the use of the funds” and the ability “to 

direct the use of the funds.” The original legislation establishing the 

program was amended in 1989 and 1992, and we found nothing in the 

provisions or legislative histories of either amendment indicating that 

Congress intended any change regarding Treasury’s control over, and use 

of, the Fund as a negotiation and enforcement tool of U.S. trade 

policy.



Ex-Im Bank and Treasury Agreed on Broad Principles for Tied Aid 

Financing:



Under the broad principles established for the tied aid program, the 

United States will provide tied aid financing under three basic 

circumstances: (1) to support OECD negotiations aimed at reducing 

trade-distorting aid, (2) to police compliance with the OECD tied aid 

rules, and (3) to protect U.S. exporters when foreign tied aid that 

meets OECD rules threatens to undermine the exporters’ competitive 

position for winning future commercial sales. When U.S. exporters 

request tied aid financing from Ex- Im Bank under the third 

circumstance, their application generally needs to meet two primary 

criteria: the country receiving the financing should be considered a 

“dynamic market,” and there must be the potential for follow- on export 

sales on commercial terms.



Principles for Using Tied Aid:



In setting up the Tied Aid Capital Projects Fund, Ex-Im Bank and 

Treasury agreed on a set of broadly stated principles that would guide 

its use. Overall, the agencies agreed that the United States will not 

initiate tied aid but only respond to and match foreign governments’ 

tied aid offers. They agreed that the United States will provide tied 

aid offers to support the U.S. negotiating position at the OECD to 

continue to reduce trade-distorting aid, enforce other governments’ 

compliance with the OECD tied aid rules, and protect U.S. exporters 

when foreign tied aid allowed under the OECD rules disadvantages their 

competitive position for future commercial sales. In addition, in using 

the fund, the United States is to preemptively counter potential 

foreign tied aid offers without triggering foreign tied aid use 

[Footnote 7] and to defend potential U.S. sales to projects that are 

developmentally and environmentally sound.



Because the fund is not nearly large enough to match all instances of 

foreign tied aid offers, [Footnote 8] Ex-Im Bank and Treasury developed 

criteria designed to maximize the benefits to the U.S. economy when 

tied aid is used. Also, Congress required that when the United States 

matched foreign tied aid offers that complied with the OECD 

Arrangement, Ex-Im Bank was to determine that such cases were in the 

national trade or economic interest. [Footnote 9] To maximize the 

benefits of each use of the fund, the agencies agreed to examine two 

other aspects of each tied aid application--whether the country 

receiving the financing could be considered a dynamic market and 

whether there would likely be follow-on U.S. exports financed on 

commercial terms. Because the circumstances of each tied aid case are 

so different, the criteria cannot be automatically applied and a 

certain amount of flexibility is inherent in how they are applied in 

each case, according to Ex-Im Bank and Treasury officials.



Dynamic Markets Criteria:



To be considered a dynamic market, the country receiving the tied aid 

financing needs to show reasonable signs of future economic growth to 

ensure prospects for additional U.S. sales of similar equipment. The 

Tied Aid Capital Projects Fund is thus to be used to match foreign 

offers in markets where there is greater chance that future tied aid 

offers (i.e., concessional lending) would not be necessary for U.S. 

exporters to compete for sales.



Specifically, the recipient country must have an annual gross national 

product greater than $5 billion. It must also meet a majority of the 

following factors:



* Average gross national product per capita growth of greater than 1.5 

percent.



* Investment as a percentage of gross domestic product greater than 1 

percent.



* Foreign direct investment as a percentage of gross national product 

less than 2 percent.



* Net aid flows as a percentage of gross national product less than 2 

percent.



* Private investment as a percentage of gross domestic fixed investment 

greater than 60 percent.



In addition, since 1999, there have been separate, special dynamic 

market criteria for Africa, designed to facilitate tied aid matching. 

These criteria are as follows:



* Ex-Im Bank is open for cover in the country’s public sector.:



* OECD does not require 50 percent concessionality (required for least 

developed countries).



* Average gross national product per capital growth exceeds 1.5 
percent.



Follow-on Sales Criteria:



To determine whether a U.S. exporter’s tied aid credit application has 

follow-on sales potential, Ex-Im Bank and Treasury examine whether 

there is potential for additional business in the same or a neighboring 

country. Such potential follow-on sales could be by the applicant or by 

other U.S. exporters of the same or similar technology as long as (1) 

potential sales can be attributed to the applicant’s tied aid sale and 

(2) future sales can be financed without Ex-Im Bank tied aid support. 

The intent behind the follow-on sales criteria is to counter foreign 

donor governments’ efforts to use aid to “lock in” long-run commercial 

advantages for their exporters. The criteria are also intended to 

exploit an initial market penetration opportunity, to enable a U.S. 

exporter to gain a competitive position for winning future sales on 

nonconcessional terms.



The existence of any of the following factors may also meet the follow-

on sales requirement:



* International financial institutions, such as the World Bank, are 

active in financing the technology, and follow-on sales in the same 

industry could reasonably be expected to take place in the future under 

international competitive bidding rules.



* The project would be considered commercially viable if it were 
located 

in a different place (e.g., in an urban area).



* The sector is undergoing a credible privatization process, [Footnote 

10] and so part of future expansion of the sector could be financed 

without concessional financing and such expansion is reasonably 

expected in the near future.



* The project can be expected to involve significant amounts of 
operating 

expenses in spare parts.



In addition, small businesses (as defined by the Small Business 

Administration) are not held to the same standards as larger U.S. 

exporters, and favorable consideration is given to the sale of 

environmentally beneficial goods and services.



Appendix II provides additional information on how the tied aid 

matching criteria are applied.



Ex-Im Bank and Treasury Place Different Emphases on Tied Aid 
Principles:



While Ex-Im Bank and Treasury both seek to help U.S. exporters, they 

place different emphases on the principles used for matching foreign 

tied aid financing, based on their differing missions and perspectives. 

Treasury, which takes the lead in negotiating and policing the OECD 

tied aid rules, takes a strategic approach to financing tied aid. Ex-Im 

Bank, which works directly with exporters, takes a transactional 

approach to financing tied aid, placing emphasis on helping U.S. 

exporters match foreign tied aid offers that would disadvantage their 

competitive position for future commercial sales.



Our analysis of eight tied aid cases indicated that the agencies 

sometimes differed in how they assessed whether the requirements for 

follow-on sales had been met. In particular, they differed in how they 

assessed whether there would be sufficient additional U.S. economic 

benefits attributable to the tied aid financing.



Treasury’s Strategic Approach to Tied Aid Financing:



Treasury takes a strategic approach to tied aid financing. It is the 

lead U.S. agency at OECD in negotiating and policing the tied aid rules 

agreed to under the Helsinki Package in 1992. Treasury focuses on using 

tied aid financing to advance U.S. interests at OECD negotiations to 

expand the coverage of the Helsinki Package and to bring “untied” aid 

[Footnote 11] under the OECD disciplines. Treasury also seeks to police 

foreign competitors’ compliance with the Helsinki tied aid rules. These 

policing efforts have included using the fund to combat other 

countries’ use of untied aid that is de facto tied. Treasury’s primary 

aim is to deter other governments from offering tied aid that does not 

meet the Helsinki rules in both letter and spirit. It also seeks to 

remove tied aid as an export promotion tool, allowing U.S. exporters to 

compete on a level playing field without needing export subsidies. It 

also seeks to ensure that matching foreign tied aid offers helps U.S. 

exporters compete without having these individual transactions 

undermine the cooperation of other governments in achieving this 

broader goal of a level playing field. 



Treasury does not want tied aid to be used routinely to match allowable 

cases, because it fears that this would cause foreign competitors to 

once again increase their use of tied aid and because it would be 

expensive for the U.S. government to engage in this kind of subsidy 

competition. Because the rules established under the OECD Arrangement 

and the Helsinki Package are voluntary rather than legally binding 

agreements, Treasury is concerned about losing the gains achieved over 

years of negotiations at the OECD to reduce use of tied aid. It 

emphasizes that far more benefit has accrued to U.S. exporters by the 

removal of tied aid from major segments of the market than could 

possibly have been provided by even vastly increased levels of tied aid 

financing. 



Treasury’s other concern is that the tied aid allowed under the 

Helsinki rules is for projects that are not commercially viable and 

would therefore not allow for regular commercial financing. Such tied 

aid is generally part of the foreign assistance programs of the other 

OECD members, who do not define foreign assistance as generally 

precluding capital projects the way the United States does. [Footnote 

12] According to Treasury officials, if a foreign tied aid offer is 

designed to lock in market share, the offer would meet follow-on sales 

criteria. Otherwise, it is generally a legitimate aid project that 

Treasury does not think U.S. tied aid offers should challenge. Such 

matches would have to be made over and over again, with no possibility 

of follow-on sales made on commercial terms. According to Treasury 

officials, this would make the U.S. appear to be preying on bona fide 

foreign aid programs.



According to a Treasury official, the department has been successful in 

achieving its objective of reducing trade-distorting tied aid. While 

tied aid offers accounted for about $9.3 billion in 1991 before the new 

rules under the Helsinki Package were put in place, that amount had 

been reduced to around $3.5 billion by 1998. By 2001, tied aid 

financing from all donors other than Japan was down to about $1.5 

billion. Owing to a shift in Japanese aid programs from untied to tied 

aid after 1998, Japanese tied aid rose to about $1.9 billion, so that 

the total amount of tied aid offers in 2001 was about $3.4 billion. 

According to Treasury officials, despite these reductions, Treasury is 

aware that tied aid can still affect future commercial competitions in 

some cases, and it supports use of tied aid matching under such 

circumstances.



Ex-Im Bank’s Transactional Approach to Tied Aid Financing:



Ex-Im Bank takes a transactional approach to tied aid financing. Its 

overall mission is to finance and promote exports of U.S. goods and 

services. In the tied aid arena, it helps U.S. exporters counter 

foreign competitors that can use their government’s offer of 

concessionary or subsidized financing terms to skew competition for 

foreign government capital projects. Ex-Im Bank focuses on establishing 

that such foreign tied aid offers have actually been made and on 

determining whether the exporter has a reasonable prospect of follow-on 

sales on commercial terms from that tied aid deal. If so, and if Ex-Im 

Bank finds the borrower government and the exporter to be creditworthy, 

it is ready to move the transaction through its decision process to 

final approval by its Board of Directors.



Ex-Im Bank works directly with U.S. exporters who are competing with 

foreign tied aid offers. Although Ex-Im Bank officials do not 

specifically advocate the routine use of tied aid to match allowable 

cases, they cite the very low level of exporter applications for tied 

aid and the even lower level of approved cases that get funded (see 

table 2, in app. I). They also state that more should be done to assist 

U.S. exporters facing tied aid in overseas markets. The belief that 

U.S. tied aid rules were too restrictive led to Ex-Im Bank’s internal 

policy review in 1998 and an interagency review in 1999, resulting in 

modifications to the tied aid criteria that were designed to expand the 

potential for tied aid matching. In fact, however, the level of U.S. 

matching has steadily decreased, because the lasting effects of 

international events--such as the 1997 Asian financial crisis and the 

1999 restrictions on concessional borrowing by African participants in 

international debt relief programs--have made meeting U.S. tied aid 

rules for commercial-term follow-on sales more difficult. Another 

reason is related to the reduction in the level of foreign tied aid 

offers. According to an Ex-Im Bank official, the tied aid criteria were 

developed in order to ration limited War Chest funds at a time when a 

high level of foreign tied aid offers was expected, so that the 

justification for the strict adherence to these eligibility criteria 

has since been eroded. 



According to an Ex-Im Bank official, the Bank does not share Treasury’s 

concern about harming foreign governments’ “legitimate aid” programs. 

Ex-Im Bank’s view is that when the foreign aid offer is used to tilt 

the playing field against the U.S. exporter of a better product, Ex-Im 

Bank offers the recipient government an alternative and the chance to 

get the best value for its money. Ex-Im Bank officials also did not 

share Treasury’s concern that increasing the amount of U.S. tied aid 

provided to exporters would jeopardize the gains made at OECD on 

restricting tied aid use. 



According to an Ex-Im Bank official, the Bank is also concerned about 

the sometimes predatory character of foreign tied aid offers and the 

potential impact on the U.S. exporters competing for the bid. The 

predatory effect of foreign tied aid offers is seen, for instance, when 

a U.S. exporter is successfully competing with a foreign company for a 

commercial bid, and the foreign competitor suddenly makes a 

concessionary tied aid offer. Ex- Im Bank is also concerned about the 

potential impact of losing the sale on the U.S. exporter, which may 

have invested extensive time and money to develop the deal.



Differing Assessments of Follow-on Sales Criteria:



One result of Ex-Im Bank and Treasury’s differing approaches to tied 

aid has been that they sometimes have differed in assessing the 

requirements for follow-on sales. Our analysis of selected tied aid 

cases indicated that when the two agencies disagreed on the eligibility 

of a tied aid case, their disagreement was based on differences in how 

they assessed the potential for follow-on sales to provide sufficient 

additional U.S. economic benefits attributable to the tied aid 

financing.



Ex-Im Bank has tried to keep the assessment of follow-on sales 

straightforward by determining whether there is a potential for follow-

on sales to occur in the recipient or neighboring country that can be 

linked to the tied aid sale without more Ex-Im Bank tied aid financing. 

Ex-Im Bank prefers that follow-on sales be on commercial terms. 

However, under the revised criteria, it is prepared to accept future 

sales on concessional terms as long as another institution, such as the 

World Bank, provides the concessional financing. According to an Ex-Im 

Bank official, if the application fits the criteria, then Ex-Im Bank is 

ready to consider financing the tied aid transaction. In this view, a 

finding of potential follow-on sales in itself meets the need to 

demonstrate economic benefits from the tied aid financing.



In applying follow-on sales criteria, however, Treasury assesses 

whether the tied aid will provide substantial additional U.S. economic 

benefits. In Treasury’s view, a finding of potential follow-on sales is 

necessary but not sufficient; there must also be a concomitant finding 

that there would be substantial additional economic benefits for the 

United States that are attributable to the original tied aid 

financing.



In the eight selected tied aid cases that we reviewed, half were 

approved and half were denied, and all had been decided since the 1999 

revision of tied aid criteria (see table 1). The decision-making 

process was fairly straightforward when, as in case B, the decision to 

approve a case was strategic, either to support negotiations or police 

compliance with the Helsinki rules. Again, in cases in which the 

foreign tied aid offer was allowed under the Helsinki rules and the 

U.S. eligibility criteria were clearly met or not met, the decision-

making process was generally concluded without major disagreement 

(cases C, F, G, and H). Thus, in three of the denied cases, there was 

no real disagreement between the two agencies. However, in cases in 

which the eligibility criteria were not clearly met (cases A, D, and 

E)--generally involving the follow-on sales criteria--then the two 

agencies’ differing approaches to tied aid heightened the potential for 

disagreement. On the basis of the cases we reviewed and interviews with 

agency officials, we observed that differences arise when follow-on 

sales potential is marginal or its attribution to the tied aid sale is 

questioned.



Table 1: Decisions Made in Selected Tied Aid Cases:



[See PDF for image]



Source: Ex-Im Bank case files.



[End of table]



In the three cases we reviewed that raised significant disagreement 

between Ex-Im Bank and Treasury, the disagreement arose over the 

agencies’ differing assessments of whether the application met the 

follow- on sales criteria. Ex-Im Bank determined that the criteria had 

been met in all three cases. Treasury determined, in the first of these 

three cases (case E), that follow-on sales would not be attributable to 

the tied aid sale; in the second case (case A), that linkage to follow-

on sales in the private sector in a neighboring country needed to be 

better established; and in the third case (case D), that stronger 

assurance was needed that product sales would supplant the foreign tied 

aid offer instead of being used to supplement the offer. These three 

cases are discussed in detail in the following paragraphs.:



:



In case E, Treasury and Ex-Im Bank disagreed over whether the follow-on 

sales would be attributable to the tied aid sale. Ex-Im Bank thought 

that the exporter, a manufacturer of irrigation machinery, had made a 

strong case for follow-on sales. The company had made prior sales on 

commercial terms in China. The Xinjiang provincial government had plans 

to irrigate vast tracts of agricultural land, and Ex-Im Bank believed 

that follow-on sales potential existed. Ex-Im Bank also believed that 

Austria’s numerous tied aid offers showed its intent to lock in market 

advantage. However, Treasury did not accept that the follow-on sales 

criteria had been met because it believed (1) that the U.S. exporter 

had superior technology and an already well-established market position 

in China and (2) that the technology involved was not unique and the 

foreign competitor could not use it to lock in market share. Thus, 

Treasury’s view was that the U.S. exporter did not need tied aid to get 

follow-on sales, because its position was so strong that it would get 

follow-on sales in any case. Treasury also believed that demand for 

financing such equipment in the future would far exceed expected aid 

financing, therefore ensuring commercial competition. The follow-on 

sales thus would not be attributable to the tied aid. Treasury also 

explicitly warned the Austrian export credit agency against any future 

tied aid offers, stating that Treasury would support tied aid matching 

if the Austrian agency continued to offer tied aid in this sector when 

in competition with U.S. firms.



In case A, Treasury and Ex-Im Bank disagreed over whether the linkage 

from the tied aid sale to follow-on sales in the neighboring country’s 

private sector had been adequately established. This case involved a 

U.S. exporter of solar lighting equipment, which faced a tied aid 

financing offer from a Spanish competitor for a project in Ghana. 

Follow-on sales on commercial terms were problematic in that the 

government of Ghana could enter only into concessional borrowing 

arrangements, owing to the provisions of an International Monetary Fund 

program to which it was a party. However, the U.S. exporter claimed 

that because of the demonstration effect of the tied aid deal in Ghana, 

it would be able to make follow-on sales on commercial terms to the 

private sector in Nigeria. Ex-Im Bank concluded that the exporter had 

made a credible case for follow-on sales in Nigeria, that this 

transaction offered the kind of initial market penetration opportunity 

intended by the follow-on sales provision, and that many potential 

projects in the region could follow. Treasury, however, did not believe 

that the follow-on sales criteria had been met, saying that the 

exporter needed to establish a clearer connection between the Ghana 

project and the follow-on sales in Nigeria. It required the exporter to 

provide additional information establishing the potential private 

sector buyer’s actual intent to purchase similar equipment and their 

ability to obtain such financing. Once the exporter provided this 

information, Treasury removed its objection to the transaction. By that 

time, however, Ghana had defaulted on other Ex-Im Bank debts and the 

transaction, although officially approved, was not made operative.



In case D, Treasury and Ex-Im Bank initially disagreed over whether 

there was adequate assurance that a U.S. tied aid offer involving 

product sales would supplant the foreign tied aid offer instead of 

being used to supplement the offer. This case involved a U.S. exporter 

of medical equipment that was faced with tied aid competition from 

Spanish and Austrian exporters for a project in Ghana. Ex-Im Bank again 

concluded that a credible case had been made for follow-on sales. The 

Bank had obtained information from the U.S. embassy in Ghana that a 

potential market for new or used medical equipment in the private 

sector existed; it had also obtained information from the U.S. embassy 

in Nigeria that both the Nigerian government and the private sector 

were potential customers of U.S. medical equipment. Treasury thought 

that the case for follow-on sales was not strong, but it was most 

concerned by the fact that the export involved product sales, which are 

inherently fungible or interchangeable. A central element of the U.S. 

tied aid matching policy is that each use of tied aid should supplant a 

foreign tied aid offer, not be used to supplement the offer and 

actually increase the amount of tied aid in that market. For instance, 

a recipient government could manipulate a bid for X-ray equipment and 

find a way to accept both the foreign and the U.S. tied aid offer, 

perhaps by using the U.S. tied aid to fulfill the original bid and 

switching the foreign offer to another set of hospitals in another 

city. The result would be that the United States would be supplementing 

rather than supplanting the foreign tied aid offer. In the end, 

Treasury decided to support the use of tied aid in this case, although 

it had serious misgivings. [Footnote 13]:



Agency Comments and Our Evaluation:



We received written comments on a draft of this report from Ex-Im Bank 

and Treasury. Ex-Im Bank declined to provide substantive comments. 

Treasury generally agreed with the report and its summary of the 

history of the Tied Aid War Chest, the legal authority for its use, and 

the past criteria to determine its use. It also stated that the scope 

of the report should have been broader. The comments we received and 

our evaluation of them are contained in appendixes IV and V. In 

addition, Treasury provided technical comments, which we incorporated 

in the report as appropriate.:



Ex-Im Bank said that, while it does not agree with the report’s 

characterization of the Bank’s position or approach on some issues 

identified in the report, it would not provide specific comments on the 

draft report. It stated that (1) its July 2001 agreement with Treasury 

on a new set of principles and procedures for administration of the 

Tied Aid Credit Program and (2) the signing into law of its 

reauthorization legislation, which modified its relationship with 

Treasury, had made the findings of this report not relevant to its 

future administration of the program. We believe it is important to 

provide transparency regarding the criteria used in decision making, as 

well as to explain how and why Ex-Im Bank and Treasury’s differing 

approaches to using tied aid sometimes resulted in disagreement. 

Neither the July 2001 agreement between Ex-Im Bank and Treasury nor the 

recently enacted Ex-Im Bank reauthorization act changed this dynamic.



In addition, we were asked to clarify whether Treasury had veto 

authority in March 2001 when the decision-making process broke down. 

Between March and June 2001, Ex-Im Bank had changed its position 

regarding Treasury’s veto authority, resulting in conflicting legal 

opinions between those agencies, which needed to be addressed. 



Treasury, while generally agreeing with the report, stated that the 

scope of the report was too narrow. It said that the broader objectives 

of tied aid policy should have been analyzed. Our report was not 

intended to provide a comprehensive evaluation of the tied aid program, 

but rather to address the specific questions raised relating to 

Treasury’s legal authority over the program and the problems with 

program administration. 



Treasury raised three specific issues regarding the report. First, it 

said that we should not have included Ex-Im Bank’s view that increased 

U.S. tied aid levels would not jeopardize the gains made at OECD on 

restricting tied aid use, without requiring Ex-Im Bank to justify this 

belief. We are reporting Ex-Im Bank’s view, as clearly attributed in 

the report. Second, it objected to the statement on page 1 of the 

report that Treasury had vetoed two tied aid cases in March 2001. It 

said that this statement was misleading because it implied that 

Treasury had used its statutory authority to overturn two Ex- Im Bank 

Board decisions, while it had actually indicated its objections in 

advance of the Board vote. We do not believe our statement is 

misleading since we make clear in the report that, under the program 

legislation, Ex- Im Bank was required to comply with a Treasury 

recommendation not to fund a particular project, which in effect 

allowed Treasury a veto of tied aid proposals. In addition, we do not 

discuss the Board vote, its circumstances, or its timing, but merely 

describe the Ex-Im Bank and Treasury disagreement on the two 

applications and Treasury’s objection to them. We do not intend any 

implication that Treasury’s veto occurred after the Ex-Im Bank Board 

vote, and we added a footnote to provide this clarification. Third, 

Treasury said it was misleading to state that half of the eight tied 

aid cases we examined were denied tied aid, because it might give the 

impression that Treasury alone denied tied aid in all four cases. Our 

statement that we selected eight cases to review, of which half were 

approved and half denied, is a simple statement of methodology. In 

order to prevent any misunderstanding that Treasury was solely 

responsible for denying these four cases, we added a statement to the 

detailed discussion of our findings related to these cases that, in 

three of the denied cases, there was no disagreement between the two 

agencies.



We are sending copies of this report to the Chairman of the Export-

Import Bank, the Secretary of the Treasury, and other appropriate 

congressional committees. We will also make copies available to others 

upon request. In addition, the 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 on (202) 512-4128. Additional contacts and staff 

acknowledgments are listed in appendix VI.



Sincerely yours,



Loren Yager:



Director, International Affairs and Trade:



Signed by Loren Yager:



[End of Section]



Appendix I: Activity under the Tied Aid Program:



Tied aid is government-to-government concessional financing of public- 

sector capital projects in developing countries that is linked to the 

procurement of goods and services from the donor country. Tied aid can 

distort trade when it is used to influence competitions for foreign 

government procurements rather than allowing those procurements to be 

decided on the basis of quality, price, or service. When a U.S. 

exporter is faced with tied aid use by a foreign competitor, the 

exporter can request assistance from the Export-Import Bank (Ex-Im 

Bank) by applying for tied aid financing to match the foreign offer.:



Tied Aid Application Process:



In the tied aid application process, Ex-Im Bank tries first to deter 

tied aid offers by foreign competitors. If the foreign tied aid offer 

is not deterred, depending on the stage of the offer, Ex-Im Bank can 

provide a number of different instruments with which to counter the 

foreign offer. These instruments consist of a letter of interest with 

willingness-to-match indication, a tied aid letter of interest, or a 

preliminary commitment. Approved tied aid cases have been accepted for 

tied aid matching; however, they do not become authorized cases until 

the U.S. exporter wins the bid. Ex-Im Bank financing packages for 

authorized cases generally include three options: a soft loan, a mixed 

credit, or a direct loan with 0 percent interest rate.



Once the U.S. exporter notifies Ex-Im Bank of the foreign tied aid 

offer and requests matching tied aid financing, the application process 

starts with a determination by Ex-Im Bank of whether the Organization 

for Economic Cooperation and Development (OECD) has been notified of 

the foreign tied aid offer. If it has not, Ex-Im Bank can propose a “no 

aid common line” at the OECD, requesting that other members agree not 

to offer tied aid for that particular project. If the proposal is 

rejected, Ex-Im Bank will start its internal process for reviewing the 

tied aid application.



The Ex-Im Bank Board of Directors must approve all applications for 

tied aid, in consultation with the Department of the Treasury 

(Treasury), and in accordance with Treasury’s recommendations. Both 

agencies determine whether the application has met the requirements of 

the tied aid program and review the application to ensure that the 

principles established by the Tied Aid Capital Projects Fund for using 

tied aid are met. If so, Ex-Im Bank can issue a letter of interest with 

willingness-to-match indication, a tied aid letter of interest, or a 

preliminary commitment, depending upon the evidence available (e.g., 

foreign government notification of tied aid offers to the OECD) to 

prove that a foreign government has made a tied aid offer. 



Ex-Im Bank will approve a letter of interest with willingness-to-match 

indication when an OECD no aid common line has been rejected by other 

governments. The letter’s purpose is to deter the foreign tied aid 

offer by showing the United States’s intention to challenge the foreign 

competitor’s source of advantage, the concessional financing, in the 

hope that tied aid will be withdrawn and the bidding continued on a 

commercial basis. It is not a tied aid offer but an indication of 

intent to match such an offer if necessary. Ex-Im Bank will consider 

approving a tied aid letter of interest if there is documentary 

evidence of a foreign tied aid offer--for instance, a bilateral tied 

aid protocol between the donor and recipient governments that 

identifies the project--but the OECD has not yet been notified of the 

offer. This letter offers to match a foreign offer with respect to the 

specific project, credit size, and equivalent financing terms. If a 

foreign tied aid credit offer of which OECD has been notified has 

cleared the OECD challenge and consultation process, Ex-Im Bank will 

consider approving a preliminary commitment--a formal offer that 

specifies the terms for financing. If the U.S. exporter wins the bid, 

and once the contract is signed with the recipient government and all 

financing requirements are met, a preliminary commitment can be 

converted directly to a final commitment to provide a tied aid credit. 



It is important to note that in the tied aid lexicon, an approved tied 

aid case is one that has been found to meet the tied aid criteria and 

for which tied aid matching has been approved. A case can start at any 

one of the stages discussed above, depending on the circumstances of 

the foreign offer. Each time the case moves up a stage--for example, 

from letter of interest to preliminary commitment--the Ex-Im Bank Board 

of Directors, in consultation with Treasury and in accordance with 

Treasury’s recommendations, must determine whether to approve the tied 

aid matching. However, the tied aid credit offer is not completed until 

the U.S. exporter wins the bid and signs the contract with the foreign 

recipient government. At that time, it is converted to a final 

commitment and is considered to be authorized . Thus, approved cases 

have been approved for tied aid matching but are still awaiting a 

decision by the purchasing government, whereas authorized cases have 

been finalized and funding has been provided for them.



Ex-Im Bank typically includes three options in its tied aid financing 

packages: a soft loan with a grace period, a mixed credit with a grant 

and a standard export credit component, and a direct loan with a 0 

percent interest rate. For example, a soft loan with a grace period 

might mean a 25- year loan with a 5-year grace period and an interest 

rate of 3.66 percent. A mixed credit might comprise a grant for 35.23 

percent of the contract price and a 10-year direct loan for 64.77 

percent of the contract price, with no grace period and 6.13 percent 

interest. The direct loan with a 0 percent interest rate might be 

structured with a 12.5-year loan with no grace period and 0 percent 

interest. All three options would have an overall concessionality level 

of roughly 35 percent, as required by the OECD.



Tied Aid Program Activity:



According to our review of program data, [Footnote 14] there have been 

73 tied aid cases approved since 1991, as shown in table 2. [Footnote 

15] These cases may comprise letters of interest with willingness-to-

match indication, tied aid letters of interest, preliminary 

commitments, and final commitments, approved at each stage by the Ex-Im 

Bank Board of Directors in consultation with Treasury. Individual cases 

may have stopped at any of these stages of application; the highest 

level reached is shown for each case. Of the 73 approved cases that Ex-

Im Bank and Treasury agreed to (totaling $2.7 billion), Ex-Im Bank 

offered final commitments or authorizations in 26 cases. [Footnote 16] 

The most active period of tied aid matching approval was from 1995 to 

1997, with a total of 38 cases, representing 52 percent of all 

activity. After 1999, the number of cases dropped significantly. From 

January 1, 2000, through February 22, 2002, there were a total of 5 

cases, or 7 percent of the total. In terms of tied aid results, U.S. 

exporters lost contracts in 51 percent of cases while winning contracts 

in 37 percent of cases. The outcome in the remaining 12 percent of 

cases was deferred or pending. The largest number of authorized cases 

was in 1996, with 9 authorizations for a total of $135.6 million. From 

January 1, 2000, through February 22, 2002, there were 2 authorized 

cases. 



Table 2: Tied Aid Activity, January 1, 1991-February 22, 2002:



[See PDF for image]



Source: Ex-Im Bank]



[End of table]



Figure 2 shows the distribution of countries for which tied aid 

matching was approved (the top part of the figure), as well as those 

for which it was authorized. China and Indonesia are the countries in 

which U.S. exporters encountered the most foreign tied aid use. 

Together, China and Indonesia accounted for 43 of the 73 approved 

cases, representing 59 percent of the total, and received 15 of the 26 

authorizations, or 58 percent. However, after 1997, the year of the 

Asian financial crisis, there were only 2 cases of U.S. exporters 

attempting to counter foreign tied aid offers in Indonesia, and both 

were authorized. Also, starting in 1999, Ghana had the highest number 

of cases in which U.S. exporters were trying to compete against foreign 

tied aid credits (8 cases); of these, 3 cases were authorized. Ghana, 

as well as many other sub-Saharan countries, was going through economic 

reforms that prohibited it from receiving international financing on 

nonconcessional terms, making the tied aid criteria requiring follow-on 

sales on commercial terms difficult to meet. 



Figure 2: Distribution of Approved and Authorized Tied Aid Cases by 

Recipient Countries, January 1, 1991-February 22, 2002:



[See PDF for image]



Source: Ex-Im Bank.:



[End of figure]



Appendix II: Application of Criteria for Matching Foreign Tied Aid 
Offers:



After an extensive review of the principles established for using tied 

aid, including a review of eight selected case files and interviews 

with Ex-Im Bank and Treasury officials, we developed an outline of the 

tied aid decision-making process. The following conceptual framework 

shows how the established criteria for matching foreign tied aid offers 

were applied during the May 1999 to July 2001 period. This period 

followed the 1999 tied aid policy review’s expansion of the criteria 

for matching, and it preceded the two agencies’ establishment of formal 

consultation procedures and a new, more concise statement of tied aid 

principles in the aftermath of the March 2001 dispute. 



U.S. tied aid policy allows foreign tied aid offers to be matched under 

three basic circumstances::



1. To support international negotiations aimed at reducing trade-

distorting aid (tied aid can also be initiated under these 

circumstances).



2. To police compliance with the OECD tied aid rules.:



3. To protect U.S. exporters when foreign aid that meets OECD rules 
would 

nevertheless undermine the exporters’ competitive position for winning 

future commercial sales.



The following outline presents specific criteria that have been 

developed for matching foreign tied aid offers under the third 

circumstance. 



I. U.S. response to foreign tied aid when U.S. exporter is not 
involved:



A. Confirm tied aid eligibility of project under OECD rules:



* Apply 35 percent minimum concessionality rule (50 percent for least 

developed countries):



* Apply country eligibility rules (no “wealthy” countries or certain 

Central and Eastern European/Newly Independent State countries):



* Determine project eligibility (no “commercially viable” projects):



* Refer to OECD’s Ex-Ante Guidance and recent tied aid consultations 

decisions; evaluate project on its merits:



* Make exception for de minimus projects (less than about $2.6 
million):



* Make overall exception for projects with concessionality level of 80 

percent or higher:



B. If project appears ineligible, “challenge” project within OECD, 
perform 

detailed technical analysis to refute foreign analysis, debate foreign 

technical expert in presence of other OECD members:



* If OECD declares project ineligible, project cannot receive tied aid 

(except via rarely used procedure requiring involvement of Ministry-

level official):



* If OECD declares project eligible, project proceeds with tied aid:



II. U.S. response to foreign tied aid when U.S. exporter is involved:



A. Confirm whether foreign government has notified tied aid to OECD, as 

required:



* Search OECD tied aid notifications:



* Query foreign governments, as necessary:



* If foreign government has not yet notified tied aid:



* Query foreign government, as appropriate, on U.S. exporter’s 
allegation 

of tied aid:



* Request, as appropriate, “No Aid Common Line” to ensure that OECD 

members refrain from offering tied aid for that particular project:



B. If OECD tied aid notification located, or “No Aid Common Line” 

rejected, consider whether to issue Ex-Im Bank Willingness-to-Match 

Tied Aid Indication based on criteria below:



III. U.S. determination whether to match eligible foreign tied aid 
offer:



A. Screen tied aid matching request for national trade and economic 

interest (required by Congress):



B. Recipient country must qualify as a “dynamic market”:



* Annual gross national product (GNP) greater than $5 billion and a 

majority of the following tests must be met::



* Average GNP per capita growth of greater than 1.5 percent:



* Investment as a percentage of gross domestic product greater than 1 

percent:



* Foreign direct investment as a percentage of GNP less than 2 percent:



* Net aid flows as a percentage of GNP less than 2 percent:



* Private investment as a percentage of gross domestic fixed investment 

greater than 60 percent:



* Special “dynamic market” criteria for Africa:



* Ex-Im Bank open for cover in the public sector:



* Country is not a least developed country (requiring at least 50 
percent 

concessionality):



* Average GNP per capita growth of greater than 1.5 percent:



C. “Follow-on sales” requirement:



* Tied aid sale should generate substantial follow-on sales in the 

recipient or neighboring country that are expected to be financed on 

commercial terms. Follow-on sales of identical or reasonably similar 

equipment should be attributable to the tied aid sale (e.g., through 

brand and performance preference, technical standards compatibility, 

etc.):



* Follow-on sales may also be considered to exist when any of the 
follow 

conditions are met::



* International financial institutions are active in financing the 

sector:



* Project would be considered commercially viable were it located 

elsewhere (e.g., rural vs. urban setting):



* Sector is undergoing a credible privatization process:



* Project will require fairly significant expenditure on imported spare 

parts that would be financed out of current revenues or on commercial 

terms:



* Follow-on sales requirement will be applied less stringently to U.S. 

small business exporters:



D. Budget cost should normally not exceed 50 percent:



E. Project must be environmentally sound:



F. Willingness of U.S. exporter to cover exposure fee will be a 
positive 

factor:



Appendix III: Objectives, Scope, and Methodology:



The Chairman of the Subcommittee on International Monetary Policy and 

Trade asked us to examine the nature of the Department of the 

Treasury’s (Treasury) authority over the use of tied aid and the 

underlying reasons for the breakdown in the decision-making process 

between the Export-Import Bank (Ex-Im Bank) and Treasury in March 2001. 

To address these concerns, we assessed (1) whether Treasury had a 

statutory veto over the use of Ex-Im Bank’s Tied Aid Capital Projects 

Fund, (2) what the principles are for using tied aid, and (3) how Ex-Im 

Bank and Treasury apply these principles.



To determine whether Treasury had a statutory veto over Ex-Im Bank’s 

use of the Tied Aid Capital Projects Fund, we examined the legislation 

establishing the fund and its legislative history, as well as relevant 

Ex-Im Bank and Treasury documents.



To identify the principles for tied aid financing that were in effect 

in March 2001, when Ex-Im Bank and Treasury disagreed on the two tied 

aid applications, we interviewed Ex-Im Bank and Treasury officials and 

reviewed tied aid policy and procedures documents from the Ex-Im Bank 

Policy and Planning Division. We also conducted a historical review of 

the tied aid policy to develop a better understanding of the policy in 

effect in March 2001. In addition, we reviewed the tied aid rules set 

by the Organization for Economic Cooperation and Development (OECD) to 

understand the international context in which the U.S. tied aid policy 

principles were developed. 



To understand the application of the tied aid principles, we reviewed 

eight tied aid cases. We interviewed Ex-Im Bank and Treasury officials 

to gain their perspective on how the tied aid principles were applied 

and how the interagency decision-making process functioned. In addition 

to reviewing the two cases cited in the request, we selected six other 

cases to establish a broader basis for analysis. This provided us with 

the needed additional perspective, when examining the way that the 

criteria were applied and the consultation procedures were followed, as 

to whether and how the actions in the two cases cited in the request 

might differ from those cited in other cases. We selected cases that 

were reviewed under the criteria established by the interagency tied 

aid policy review of 1999, so that they would all be subject to the 

same decision-making criteria. Of the eight cases, four were approved 

and four were denied. We included five cases involving China and Ghana, 

the recipient countries in the two cases cited in the request, so that 

we could review cases that had been both approved and denied for each 

country. The remaining three cases involved three other countries: 

Indonesia, Uzbekistan, and Senegal. We also interviewed representatives 

from the companies involved in the eight cases to obtain their 

perspectives on the application of U.S. tied aid policy.



We performed our work from September 2001 through May 2002 in 

accordance with generally accepted government auditing standards. We 

spent 2½ months negotiating access to tied aid files at Ex-Im Bank from 

October to mid-December 2001.



Appendix IV: Comments from the Export-Import Bank:



EXPORT IMPORT BANK OF THE UNITED STATES:



June 19, 2002:



Loren Yager:



Director, International Affairs and Trade General Accounting Office:



441 G Street, N.W. Washington, DC 20548:



Dear Mr. Yager:



Thank you for the draft GAO report entitled “Export Promotion: Export-

Import Bank and Treasury Differ on Approach to Using Tied Aid” (GAO-02-

741). As the draft report mentions, in July 2001, the Export-Import 

Bank and the Department of Treasury reached agreement on a new set of 

principles and procedures for administration of the Tied Aid Credit 

Program, which principles and procedures were provided to the Congress. 

In addition, last week, the President signed the Export-Import Bank 

Reauthorization Act of 2002 which made changes to the legislative 

provisions governing the use of the tied aid credit fund including 

clarification of the Bank’s authority to make the final case-by-case 

decisions on the use of the tied aid credit fund subject to a 

Presidential determination.



As a result of these developments over the past year, most of the 

substance of this report has been overtaken by events or is otherwise 

not relevant to the program as the Bank moves forward with the 

Department of Treasury on a cooperative basis to implement the new 

interagency agreement and new amendments. In particular, the report 

focuses on past criteria and issues of legislative authority that 

are no longer applicable.



While the Bank does not agree with the draft report’s characterization 

of the Bank’s position or approach on some of these issues, the Bank is 

not providing specific comments on the draft report given the recent 

developments. Rather, the Bank looks forward to working with the 

Department of Treasury and the Congress to administer the tied aid 

credit fund under the revised legislation.



Sincerely,



James K. Hess Chief Financial Officer:



Signed by James K. Hess:



[End of section]



Appendix V: Comments from the Department of the Treasury:



DEPARTMENT OF THE TREASURY WASHINGTON, D.C. 20220:



June 21, 2002:



Loren Yager:



Director, International Affairs and Trade U.S. General Accounting 

Office:



441 G Street, N. W. Washington, D.C. 20548:



Dear Mr. Yager:



Thank you for providing the opportunity to comment on GAO’s draft 

report entitled, “Export Promotion: Ex-Im Bank and Treasury Differ in 

Approaches to Using Tied Aid.” You and your staff did a good job of 

summarizing the history of the Tied Aid War Chest, the legal authority 

for its use, and the past criteria to determine its use.The 

Administration strongly believes that the interests of all US exporters 

are maximized by international competition that is market-based, not 

subsidy-based. Market-based competition is also optimal for the overall 

efficiency of the international economy, and is clearly the best policy 

for the U.S. taxpayer. Therefore, Treasury has consistently worked to 

build an international trading system that provides US exporters a 

level playing field by reducing the scope for subsidies from government 

sponsored institutions that distort markets. Treasury is proud of its 

success in limiting subsidies through the OECD tied aid disciplines and 

will not only continue to enforce them but also to expand them to 

untied aid and to any other forms of subsidies that develop over time.



U.S. tied aid policy is much broader in scope than the three specific 

questions on tied aid matching policy that GAO was asked to examine in 

its report. However, in assessing this subset of U.S. tied aid policy, 

the report fundamentally concludes that the principal difference 

between Treasury’s and Ex-Im Bank’s approach to matching foreign tied 

aid offers is that Treasury approaches the use of tied aid from a 

strategic perspective while Ex-Im Bank approaches it from a 

transactional perspective. We agree with this assessment and believe 

that it is important to include the broader policy backdrop to the 

report’s findings in order to provide a better understanding of why 

Treasury must take a strategic approach in the use of this taxpayer-

subsidized financing to achieve systemic market-opening benefits for 

all U.S. exporters. It is important to provide this broader policy 

perspective to better appreciate the few specific comments we have on 

the report.



History of Tied Aid:



Tied aid first arose as a major competitive issue in the early 1980s. 

Other governments used tied aid to subsidize financing for large 

capital goods projects in developing countries, and thereby distorted 

trade. The volume of tied aid grew to $10-12 billion annually. The U.S. 

was therefore faced with two fundamental choices: 1) either seek to 

negotiate limitations on the use of foreign tied aid; or 2) operate its 

own tied aid export promotion program. Under the guidance of the NSC, 

the Reagan Administration concluded that the fundamental U.S. policy 

objective of free market-based export competition, coupled with the 

high budget cost of a U.S. tied aid program, impact on future 
commercially-

financed sales without appearing to attack legitimate, non-trade 
distorting 

foreign aid programs for narrow commercial benefit. Such actions 
seriously 

undermine U.S. negotiating credibility and the continued cooperation of 

foreign governments to limit the use of their tied aid and open foreign 

markets. Since the strength of the tied aid rules must be reconfirmed 

in each case the U.S. challenges in the OECD, the loss of other 

governments’ support for these rules would quickly lead to the U.S. 

losing these challenges, thereby reversing tied aid case law, and 

rapidly lead to a substantial increase in the level of tied aid that 

would likely not be reversible.With Japan now a major tied aid donor 

and actively seeking to weaken the tied aid rules itself, the U.S. can 

no longer expect the support it provided earlier in securing the 
current 

level of disciplines.



Treasury’s broader policy responsibility for tied aid is at the heart 

of the different emphasis placed on follow-on sales by Treasury and Ex-

Im Bank. Since Ex-Im Bank does not have the responsibility for U.S. 

tied aid policy, but rather has a general mandate to keep exporters 

competitive in individual transactions, it places greater emphasis on 

assisting the individual exporter in the individual transaction.



Finally, in assessing the potential for follow-on sales (synonymous 

with the concept of economic benefits referred to in the report) that 

could be expected to result from U.S. tied aid matching policy, 

Treasury also weighs these additional exports/benefits against the 

expenditure of taxpayer-financed export subsidies.Tied aid requires 

that about one third of the project’s value be provided as a grant from 

the donor government to the recipient government. This is an extremely 

costly way to support U.S. exports and must be carefully justified. 

Treasury seeks to ensure that War Chest subsidies are used to protect 

the broader market position of U.S. exporters and that the use of these 

subsidies does not devolve into a de facto, ad hoc U.S. subsidized 

export promotion program in competition with foreign development 

ministries. This would not only undermine the U.S. anti-trade 

distortion policy agenda, but it would also undermine U.S. credibility 

in the area of development assistance policy.



Specific Comments on Report:



There are three issues that I would like to highlight. First, as noted 

in the report, Treasury has the policy lead on tied aid within the 

Administration and takes a strategic approach to tied aid matching, 

while Ex-Im Bank approaches tied aid matching from a narrower, 

transactional viewpoint. Therefore, we do not believe it is appropriate 

to include in the report an Ex-Im Bank staff view that dissents from 

Treasury’s strategic assessment of the impact of U.S. matching policy 

on OECD negotiations without requiring a detailed explanation of the 

reasoning behind that view.



The second is the characterization that Treasury and Ex-Im Bank 

disagreed on two particular tied aid cases in March 1, 2001, and 

Treasury (then) “vetoed” the projects. This is misleading because it 

implies a sequence of events that is incorrect. We strongly feel that 

the record should be clear that Treasury staff clearly indicated its 

objections before the Exim board voted on the cases in question and, 

indeed, in all other cases. Treasury has always provided its advice 

prior to a board decision. In this case, the Secretary of the Treasury 

himself wrote a letter recommending against the use of tied aid, and 

this recommendation was provided in advance of Board action,

necessitated a negotiated solution to the tied aid problem. And every 

Administration since has shared this assessment, taking a systemic 

negotiations-based approach to disciplining the use of tied aid in 

order to achieve the maximum collective benefit for all U.S. exporters 

and taxpayers.



Using as leverage the Tied Aid Credit Fund (War Chest) provided by 

Congress in 1986 expressly for tied aid negotiations, the U.S., led by 

Treasury, made strong political representations to other governments. 

Coupled with a U.S. negotiating strategy that emphasized pressing a 

pro-market-opening, pro-development tied aid discipline philosophy, 

the U.S. successfully initiated negotiations in the OECD in the mid-

1980s and again in 1989. The tied aid compromise reached with other 

governments in 1992, after almost three years of grueling negotiations, 

was groundbreaking. This is because, for the first time, agreement was 

reached to draw an objective line between the types of projects that 

would be viewed as inherently commercial (commercially viable) and 

therefore reserved for market rate financing, and projects that would 

be viewed as inherently not commercial (commercially non-viable) and 

therefore permitted to receive tied aid financing for development 

objectives. This represents a major compromise by some of the largest 

aid donors that view commercially viable projects, such as large-scale 

capital projects, as providing the greatest development benefits. Seen 

from the perspective of tied aid donors, the OECD agreement provides 

that if they no longer offer tied aid financing for commercially viable 

projects, they are free to pursue their development objectives through 

commercially non-viable projects. This compromise agreement, like all 

OECD agreements, is not legally binding and its continued successful 

implementation requires the ongoing cooperation of our OECD partners.



Success of Tied Aid Policy:



This cooperation has produced a major trade policy success. Since 1993, 

cumulative tied aid trade distortions have been reduced by at least $50 

billion and, as a direct result, U.S. capital goods exports financed 

without U.S. subsidies are estimated to be $1 billion higher each year 

($9 billion over 1993-2000) than they would have been without the tied 

aid agreement. The magnitude of this achievement is illustrated by the 

fact that if, in the absence of this agreement, the U.S. had to compete 

for these additional exports with tied aid, Ex-Im Bank would have 

required an additional $300 million in annual appropriations - a 

savings to the taxpayer of almost $3 billion since 1993.



Further evidence of the success of the OECD tied aid agreement is the 

dramatic decline of tied aid offered by the primary donors of tied aid 

at the time of the 1989-1992 negotiations (all OECD members except 

Japan). In 1991, they provided 93% of all tied aid and offered

$8.8 billion of such aid. In contrast, these donors offered only $1.5 

billion of tied aid last year - an 83% reduction and the lowest level 

of tied aid offers on record. Total tied aid last year, while less than 

40% of its 1991 level, is now dominated by Japanese tied aid. The large 

increase in Japanese tied aid primarily represents the shift of a large 

portion of its aid from untied to tied form, and therefore a shift from 

a form of potentially trade distorting aid not currently covered by 

OECD agreement to a form that is covered.Increases in Japanese tied aid 

should not be seen as offsetting the massive declines in non-Japanese 

tied aid when analyzing tied aid volumes.



In addition, the tied aid that remains is concentrated in what are 

generally recognized as bona fide development sectors - social sectors 

such as health, education, water, and in rural infrastructure, 
renewable 

energy and agriculture. Tied aid for major power, telecommunications, 
energy 

pipelines, manufacturing, industrial and other commercial projects is 

now prohibited by the OECD compromise agreement. These results clearly 

demonstrate that U.S. commercial negotiating objectives have been met 

by the OECD tied aid agreement, and the benefits for exporters and the 

U.S. economy have been substantial and have been achieved at very 
little 

budget cost. In addition, the quality of development assistance has 
been 

improved by the reallocation of aid financing in favor of social sector 

projects, while allowing for a much greater role for market financing 
in 

the development process.



Treasury Tied Aid Strateay:



With our initial tied aid anti-trade distortion objectives largely met, 

the key and interrelated policy priorities for Treasury are to: 1) 

preserve the existing tied aid agreement and its market-opening 

benefits for all U.S. exporters and taxpayers; 2) secure disciplines on 

the use of so-called untied aid that creates systemic trade distortions 

that close markets and disadvantage U.S. exporters; and 3) ensure that 

the tied aid that remains is used for bona fide development purposes 

and not to provide longer-term commercial advantages to foreign 

exporters. It is the implementation of this third policy objective that 

gives rise to the study that GAO was commissioned to analyze.



Because it is responsible for managing overall U.S. tied aid policy, 

Treasury must strategically balance all three objectives. Therefore, if 

it is to be successful in pursuing the first two objectives aimed at 

the systemic opening of foreign markets to U.S. exporters, Treasury is 

necessarily accountable to our OECD partners/competitors for USG 

decisions with regard to the third objective - involving the use of 

U.S. tied aid matching subsidies. Therefore, Treasury believes that 

this matching must be compatible with the fundamental tied aid 

compromise in the OECD agreement. It must focus on countering trade 

distortions and not undermine development assistance programs. 

Otherwise, the U.S. will not be seen as a reliable negotiating partner 

and will not be in a position to protect the existing OECD agreement on 

tied aid. Aid Ministries in other governments are politically powerful 

and will not allow the U.S. to maintain tied aid rules that 

dramatically reduce the scope for tied aid financing and then, for 

short-term commercial benefit, attempt to displace anticipated sales 

related to the development projects that remain.



This strategic approach is also critical because the expansion of OECD 

rules to include untied aid, as mandated by Congress in Ex-Im Bank’s 

reauthorization legislation, will require the strong support of 

existing tied aid donors. Treasury is actively working to build support 

in the OECD for untied aid rules and, therefore, it is critical that 

U.S. decisions on matching tied aid be fully defensible within both the 

letter and spirit of the tied aid agreement.



It is thus for multilateral negotiating credibility to open foreign 

markets, and for domestic budget discipline that Treasury seeks to 

ensure that War Chest matching is focused on tied aid that is likely to 

provide foreign firms with competitive advantages in future commercial 

competitions. Such foreign tied aid offers can be viewed as trade 

distorting and therefore outside of the intent of the tied aid rules. 

In these cases, matching can be fully justified within the OECD 

agreement. This necessarily means that Treasury cannot support matching 

tied aid offers that have little not after it. Treasury took no further 

action after the Board approved the tied aid cases. It should be made 

clear that Exim wrote to the company and declined to support their 

application because Ex-Im Bank’s General Counsel at that time 
recognized 

that the Board’s action to approve the cases was ultra vires, having 
been 

taken in violation of Section I0(b)(2)(A) of Ex-Im Bank’s charter. 
These 

facts are in sharp contrast to the characterization of Treasury having 
used 

its statutory authority to overturn two Ex-Im Bank Board decisions. 

Furthermore, when follow-sales potential for one of these projects was 

confirmed, Treasury withdrew its objection to that project, thereby 

ratifying the action of the Ex-Im Board with respect to that project.



The third issue is that, in the context of a report about disagreements 

between Treasury and Ex-Im Bank over the use of tied aid, it is also 

perhaps misleading to state that half of the eight cases examined by 

GAO were denied tied aid. This may give the impression that Treasury 

alone denied tied aid in all four of those cases, over the objection of 

Ex-Im Bank.However, this is not the case. Of the four cases where tied 

aid was denied, Ex-Im Bank staff, based on its own analysis, actually 

recommended against approval independently of Treasury. We suggest that 

you clearly indicate that in three of these four sample cases, as well 

as in vast majority of all cases, Exim agreed with Treasury’s 

positions.



In conclusion, Treasury can support the report as a whole but would 

prefer a more detailed discussion of the whole range of policy issues 

described earlier. Specifically, the trade-offs between the three 

policy objectives described above need to be assessed in evaluating any 

use of the War Chest. In this vein, such a study should incorporate not 

only the major successes achieved by the Administration in reducing 

tied aid export subsidies (thereby opening new markets to U.S. 

exporters without the ongoing need for taxpayer-financed subsidies), 

but also the risk that the OECD disciplines could be undermined if 

other countries perceive any one country taking advantage of the OECD 

agreement. Thank you again for the opportunity to share our views.



Sincerely,



Joseph L. Engelhard Deputy Assistant Secretary (Trade and Investment 

Policy):



Signed by Joseph L. Engelhard:



[End of section]



Appendix VI: GAO Contacts and Staff Acknowledgments:



GAO Contacts:



Virginia Hughes, (202) 512-5481:



Leyla Kazaz, (202) 512-9638:



Acknowledgments:



In addition to those listed above, Jose Martinez-Fabre, Ernie Jackson, 

Martin De Alteriis, Lynn Cothern, and Reid Lowe made key contributions 

to this report.



FOOTNOTES:



[1] The Tied Aid Capital Projects Fund had an available budget of $288 

million, as of February 2002.



[2] Treasury provided its recommendation against the two cases in 

advance of the Ex-Im Bank Board meeting. 



[3] The House Financial Services Subcommittee on International Monetary 

Policy and Trade held hearings on May 2 and 8, 2001. The Senate Banking 

Subcommittee on International Trade and Finance held hearings on May 

17, and June 19, 2001. 



[4] This legislation, codified at 12 U.S.C. 635i-3, was amended by the 

Export-Import Bank Reauthorization Act of 2002, enacted June 14, 2002. 

The reauthorization act deletes from 12 U.S.C. 635i-3 the language 

requiring Ex-Im Bank to administer the tied aid program in accordance 

with the Treasury Secretary’s recommendations. Also, it requires that 

Ex-Im Bank and Treasury develop the process, principles, and standards 

for governing use of War Chest funds; that Ex-Im Bank make final case-

by-case decisions on use of the funds; and that Ex-Im Bank’s approval 

of use of funds in any case be subject to a presidential determination 

based on consultation with Ex-Im Bank and Treasury. Throughout this 

report, we refer to the tied aid program legislation in 12 U.S.C. 635i-

3 before its amendment by the 2002 reauthorization act.



[5] Reauthorization of the Export-Import Bank, Hearing Before the 

Subcommittee on International Monetary Policy and Trade of the 

Committee on Financial Services, House of Representatives, 107TH Cong., 

1ST Sess. 28 (May 28, 2001).



[6] House Conference Report No. 99-956, 99TH Cong., 2ND Sess. 7 (1986).



[7] This principle is meant to encourage the withdrawal of existing 

tied aid offers.



[8] In 2001, notifications to OECD of tied aid offers amounted to about 

$3.4 billion. However, not all offers become actual deals.



[9] 12 U.S.C. 635i-3(b)(1)(A)(ii).



[10] The term “credible privatization process” refers to the 

privatization of government-owned plants or private investment taking 

place in new enterprises in the sector.



[11] According to a Treasury official, understanding the historical 

context of the tied aid debate is important. Tied aid became a problem 

when the United States unilaterally cut aid (foreign assistance) for 

capital projects and refocused it on human development needs. Having 

done so, it found that U.S. exporters were disadvantaged because they 

could not compete for capital projects against foreign competitors with 

subsidized loans from their national aid programs. As a result, the 

United States negotiated the Helsinki Package, which was a compromise 

with those who see capital projects as legitimate aid. The Helsinki 

compromise was that if a project is commercially viable, its financing 

should come from market term financial resources, while if it is not 

commercially viable, but has a high social value, then it is normally 

considered an aid project, and subsidized tied aid financing is 

acceptable.



[12] Although use of tied aid was approved, this case was never 

finalized, and Ex-Im Bank cancelled its offer in 2001.



[13] We did not verify the accuracy of Ex-Im Bank’s tied aid data, 
which 

was the best available information.



[14] In addition, there were 4 cases that went to the Ex-Im Bank Board 

of Directors and were denied approval. 



[15] Of the 26 final commitments that were issued, 1 (Turkey, in 1998) 

was deferred.



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