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Foreign Military Financing Program for Egypt Achieves U.S. Foreign 
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United States Government Accountability Office: 

GAO:

Report to the Committee on International Relations, House of 
Representatives:

April 2006:

Security Assistance:

State and DOD Need to Assess How the Foreign Military Financing Program 
for Egypt Achieves U.S. Foreign Policy and Security Goals:

GAO-06-437:

GAO Highlights: 

Highlights of GAO-06-437, a report to the Committee on International 
Relations, House of Representatives.

Why GAO Did This Study: 

Since 1979, Egypt has received about $60 billion in military and 
economic assistance with about $34 billion in the form of foreign 
military financing (FMF) grants that enable Egypt to purchase U.S.-
manufactured military goods and services. In this report, GAO (1) 
describes the types and amounts of FMF assistance provided to Egypt; 
(2) assesses the financing arrangements used to provide FMF assistance 
to Egypt; and (3) evaluates how the U.S. assesses the program’s 
contribution to U.S. foreign policy and security goals.

What GAO Found: 

Egypt is currently among the largest recipients of U.S. foreign 
assistance, along with Israel, Afghanistan, and Iraq. Egypt has 
received about $1.3 billion annually in U.S. foreign military financing 
(FMF) assistance and has purchased a variety of U.S.-manufactured 
military goods and services such as Apache helicopters, F-16 aircraft, 
and M1A1 tanks, as well as the training and maintenance to support 
these systems. 

The United States has provided Egypt with FMF assistance through a 
statutory cash flow financing arrangement that permits flexibility in 
how Egypt acquires defense goods and services from the United States. 
In the past, the Defense Security Cooperation Agency (DSCA) accumulated 
large undisbursed balances in this program. Because the flexibilities 
of cash flow financing permit Egypt to pay for its purchases over time, 
Egypt currently has agreements for U.S. defense articles and services 
worth over $2 billion—some of which are not due for full payment until 
2011. The Departments of State (State) and Defense (DOD) have not 
conducted an assessment to identify the risks and impacts of a 
potential shift in FMF funding.

Officials and many experts assert that the FMF program to Egypt 
supports U.S. foreign policy and security goals; however, State and DOD 
do not assess how the program specifically contributes to these goals. 
U.S. and Egyptian officials cited examples of Egypt’s support for U.S. 
interests, such as maintaining Egyptian-Israeli peace and providing 
access to the Suez Canal and Egyptian airspace. DOD has not determined 
how it will measure progress in achieving key goals such as 
interoperability and modernizing Egypt’s military.  For example, the 
U.S. Central Command, the responsible military authority, defines 
modernization as the ratio of U.S.-to-Soviet equipment in Egypt’s 
inventory and does not include other potentially relevant factors, such 
as readiness or military capabilities. Achieving interoperability in 
Egypt is complicated by the lack of a common definition of 
interoperability and limitations on some types of sensitive equipment 
transfers. Given the longevity and magnitude of FMF assistance to 
Egypt, evaluating the degree to which the program meets its goals would 
be important information for congressional oversight, particularly as 
Congress assesses the balance between economic and military assistance 
to Egypt as well as the impact on U.S. foreign policy interests.

Image: Egypt FMF Funds Are Used to Purchase Items Such as F-16 
Aircraft, Apache Helicopters, and M1A1 Tanks: 

[See PDF for Image] 

Source: DOD. 

[End of image]

What GAO Recommends: 

We recommend that the Secretaries of State and Defense conduct: (1) an 
assessment of the impact of potential shifts in appropriations on the 
Egypt FMF program; and (2) periodic program-level evaluations of the 
program. Specifically, the agencies should define the current and 
desired levels of modernization and interoperability the U.S. would 
like to achieve.
  
DOD concurred with our recommendations.  State said that steps to 
mitigate risks are in place. GAO responded that additional factors 
should be included. State agreed to try to measure Egypt’s 
modernization goals but defining interoperability would be speculative. 
Some level of capabilities, such as contributions to peacekeeping, can 
be measured.

[Hyperlink, www.gao.gov/cgi-bin/getrpt?GAO-06-437].

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

[End of section]

Contents:

Letter:

Results in Brief:

Background:

The United States Has Provided $1.3 Billion in Military Assistance to 
Egypt Annually to Purchase Defense Articles and Services:

Cash Flow Financing Flexibility Allows Egypt to Pay for Defense Goods 
over Multiple Years:

Officials Assert that FMF Assistance to Egypt Supports U.S. Goals, but 
State and DOD Do Not Evaluate the Program's Contributions to Key Goals:

Conclusion:

Recommendations for Executive Action:

Agency Comments and our Evaluation:

Appendixes:

Appendix I: Objectives, Scope, and Methodology:

Appendix II: Letter of Request and Letter of Offer and Acceptance 
Process:

Appendix III: Agency and Organizational Roles and Responsibilities:

Appendix IV: Example of an Evaluation Framework:

Appendix V: Comments from the Department of State:

Appendix VI: Comments from the Department of Defense:

Appendix VII: GAO Contact and Staff Acknowledgments:

Table:

Table 1: Agency and Organizational Roles and Responsibilities:

Figures:

Figure 1: Key FMF-Financed Systems Purchased by Egypt Include F-16 
Aircraft, Apache Helicopters, and M1A1 Tanks:

Figure 2: FMF Purchases for Egypt Total $7.8 billion (1999-2005):

Figure 3: DSCA Plan to Disburse Egypt's Accumulated FMF Funds:

Figure 4: Value of Egypt's Future FMF Commitments at the End of Each 
Fiscal Year:

Figure 5: Letter of Request and Letter of Offer and Acceptance Review 
Process:

Figure 6: Using a Logic Model to Link Inputs, Activities, and Outputs 
to Outcomes:

Abbreviations:

CENTCOM: U.S. Central Command:

DSCA: Defense Security Cooperation Agency:

FMF: Foreign Military Financing:

GPRA: The Government Performance and Results Act:

LOA: Letter of Offer and Acceptance:

LOR: Letter of Request:

OMC: Office of Military Cooperation:

PART: Performance Assessment Rating Tool: 

United States Government Accountability Office: 
Washington, DC 20548:

April 11, 2006:

The Honorable Henry J. Hyde: 
Chairman: 
The Honorable Tom Lantos: 
Ranking Minority Member: 
Committee on International Relations: 
House of Representatives:

After signing the Camp David Peace Accords, Egypt emerged as the second 
largest recipient of U.S. military aid in the world. Since 1979, Egypt 
has received about $60 billion in military and economic assistance 
overall with about $34 billion in the form of foreign military 
financing (FMF) grants and loans that enable Egypt to purchase U.S.- 
manufactured military goods and services. To fund this program, 
approximately $1.3 billion has been appropriated annually and disbursed 
through a cash flow financing arrangement that allows Egypt to spread 
the payments over several years. Specifically, the United States uses 
FMF funds set aside for Egypt to purchase military equipment, services, 
and training from U.S. contractors on Egypt's behalf. These defense 
articles and services are to modernize Egypt's armed forces and enhance 
Egypt's military interoperability with the United States. According to 
Department of State (State) and Department of Defense (DOD) officials, 
FMF funds also contribute to the U.S. goal of maintaining regional 
stability and supporting Egypt as a partner in the Middle East. 
Recently, congressional committees have sought to alter the balance of 
economic and military assistance provided to Egypt and to review the 
results of the assistance.

At your request, we reviewed selected aspects of the FMF program for 
Egypt including the composition and funding of the program and the U.S. 
government's assessment of its contributions. Specifically, we (1) 
describe the types and amounts of FMF assistance provided to Egypt, (2) 
assess the financing arrangements used to provide FMF assistance to 
Egypt, and (3) evaluate how the United States assesses FMF assistance 
to Egypt and its contribution to the advancement of U.S. foreign policy 
and security goals.

To meet these objectives, we reviewed documentation and interviewed 
officials from State, DOD, and the Defense Security Cooperation Agency 
(DSCA.) We traveled to Cairo, Egypt, to meet with Egyptian officials at 
the Ministry of Defense and U.S. officials at the U.S. Embassy and at 
the Office of Military Cooperation (OMC). We also interviewed officials 
at U.S. Central Command (CENTCOM) in Tampa, Florida, to discuss their 
roles and responsibilities in the FMF program for Egypt. In addition, 
we interviewed senior Egyptian officials in Washington, D.C., and 
several political and military experts from academic and policy 
institutions in Washington, D.C. We examined DOD data collected from 
1999 to 2005 to determine the composition of foreign military financing 
assistance provided to Egypt. This report examines FMF for Egypt and 
does not assess economic assistance to Egypt. We performed our work 
from June 2005 through March 2006 in accordance with generally accepted 
government auditing standards. A detailed description of our scope and 
methodology is included in appendix I of this report.

Results in Brief:

Since 1979, Egypt received more than $60 billion in military and 
economic assistance from the United States and is currently among the 
largest recipients of U.S. assistance worldwide, along with Israel, 
Afghanistan and Iraq. In fiscal year 2005, Egypt received nearly $1.3 
billion in FMF grants, which comprises about 80 percent of Egypt's 
military procurement budget and more than 25 percent of the total 
amount of FMF assistance provided worldwide. Over the life of the 
program, Egypt has acquired 36 Apache helicopters, 220 F-16 aircraft, 
and 880 M1A1 tanks--among other items--as well as the training and 
maintenance to support these systems. According to DOD, the FMF program 
has helped Egypt replace its Soviet-era equipment with modern weaponry 
and equipment. In the past 6 years, almost $8 billion has been provided 
in the form of FMF grants that enable Egypt to acquire U.S.- 
manufactured military goods and services.

The United States has provided Egypt with FMF assistance through a 
statutory cash flow financing arrangement that gives Egypt the 
flexibility to plan for and acquire defense goods and services that can 
be paid for over time, similar to installment payments. The arrangement 
allows for flexibility in the management of payments and significant 
commitments that will need to be paid for in the future. As of 2005, 
Israel and Egypt are the only countries permitted to use cash flow 
financing. According to DSCA officials, from 1986 to 1998, DSCA managed 
the cash flow financing program by limiting new commitments, and by 
1998, the Egyptian program accumulated large undisbursed 
balances[Footnote 1]of about $2 billion. DSCA and Egyptian military 
officials then began planning to eliminate these balances by 2007. 
Because the flexibility of cash flow financing permits Egypt to pay for 
its purchases over time, some purchases are not due for full payment 
until 2011. Egypt currently has letters of offer and 
acceptance[Footnote 2] (LOA) agreements for U.S. defense articles and 
services that are worth about $2 billion more than available FMF 
appropriations to date. Egypt is financially liable to the U.S. 
government under the LOAs. However, the U.S. government awards the 
contracts that procure the defense articles and services to be 
delivered to Egypt and is liable for the payments due on those 
contracts.[Footnote 3] DSCA officials stated that, if there were a 
reduction in anticipated appropriations, the United States would first 
look to Egypt to provide funding consistent with its promise to pay 
under the LOAs; however if Egyptian funding were not forthcoming, the 
U.S. government would have to continue to meet its contractual 
obligations and make payments as they become due. DSCA officials stated 
that a reduction in funding would require reducing the scope of 
existing contracts, among other things. This may affect the achievement 
of FMF program goals in Egypt and some aspects of U.S. relations with 
Egypt.

Although officials and several experts assert that the FMF program to 
Egypt supports U.S. foreign policy and security goals, State and DOD do 
not assess how the program specifically contributes to these goals. 
U.S. and Egyptian officials cited examples of Egypt's support for U.S. 
interests, such as maintaining Egyptian-Israeli peace and providing 
access to the Suez Canal and Egyptian airspace. However, DOD has not 
determined how it will measure progress in achieving key goals such as 
interoperability and modernizing Egypt's military. For example, 
CENTCOM, the responsible military command, measures modernization as 
the ratio of U.S. to Soviet-era equipment in Egypt's inventory and does 
not include other potentially relevant factors, such as readiness or 
military capability. Achieving interoperability with Egypt is 
complicated by both the lack of a common definition of interoperability 
and limitations on some types of equipment transfers. Although it may 
be difficult to measure how FMF assistance to Egypt achieves strategic 
goals such as maintaining peace, operational goals such as 
modernization and interoperability lend themselves to measurement. 
Given the longevity and magnitude of the FMF assistance to Egypt, 
assessing the degree to which the program meets its goals would provide 
objective and useful performance information for executive decision 
makers and overseers. Legislation such as the Government Performance 
and Results Act (GPRA)[Footnote 4] and administration initiatives such 
as the Office of Management and Budget Performance Assessment Rating 
Tool (PART) establish the expectation that federal programs will be 
evaluated to provide such important information.[Footnote 5]

To help Congress assess the balance of economic and military assistance 
to Egypt, we recommend that the Secretaries of State and Defense 
conduct (1) an assessment of the impact of potential shifts in future 
appropriations on the Egypt FMF program and (2) periodic program-level 
evaluations of the program. The latter would require the United States 
to define specific objectives for the goals and identify appropriate 
indicators to demonstrate progress toward achieving those objectives. 
Specifically, we recommend that the agencies define the current and 
desired levels of modernization and interoperability with Egypt, 
including the establishment of benchmarks and targets for these and 
other goals.

DOD concurred with our recommendations but stated that we should direct 
the recommendations primarily to the Secretary of State. However, DOD 
and State are joint partners in the FMF program for Egypt--State sets 
the broad goals for the program while DOD works closely with Egypt's 
military to implement the program. Therefore, the recommendations are 
appropriately addressed to both State and DOD. State did not indicate 
whether it concurred with our recommendations. In regard to our first 
recommendation, State emphasized that steps to mitigate risks are 
already in place, such as maintaining reserves to pay costs associated 
with terminating contracts. However, contract termination reserves are 
last-resort measures that do not represent a comprehensive assessment 
for reducing risk associated with possible fluctuations in Egypt's FMF 
resources. A risk assessment should include other measures such as 
reducing the scope of existing contracts, stopping new orders, or 
selling undelivered defense goods.

On our second recommendation, State noted that it would work with DOD 
to better define measures for assessing Egypt's modernization goals, 
but stated that defining a level of interoperability would be 
speculative. However, improving Egypt's ability to operate with the 
U.S. and coalition partners has been a critical, yet unmeasured goal of 
the program. At a minimum, DOD and State can begin to measure Egyptian 
forces' capabilities to operate with allied countries in military 
exercises or peacekeeping operations. DOD and State provided technical 
comments that we incorporated as appropriate. Comments on a draft of 
this report are provided in appendixes V and VI.

Background:

Egypt is currently among the largest recipients of U.S. foreign 
assistance, along with Israel, Afghanistan, and Iraq. Since 1979, Egypt 
has received an annual average of more than $2 billion in economic and 
military aid. Egypt has generally received about $1.3 billion each year 
in foreign military financing assistance in the form of grants and 
loans. From 1982 to 1988, the United States forgave Egypt's FMF debt to 
the United States and began providing military assistance in 1989 
solely in the form of grants with no repayment requirement.[Footnote 6]

State and DOD planning documents describe FMF as one of several U.S. 
security assistance programs[Footnote 7] which are a subset of U.S. 
security cooperation efforts designed to build relationships that 
support specified U.S. government interests. These interests include 
building friendly nations' capabilities for self-defense and coalition 
operations, strengthening military support for containing transnational 
threats, protecting democratically elected governments, and fostering 
closer military ties between U.S. and recipient nations.[Footnote 
8]According to State, the objectives of the FMF program worldwide 
include:

* assisting friendly foreign militaries in procuring U.S. defense 
articles and services for their countries' self defense and other 
security needs;

* promoting coalition efforts in regional conflicts and the global war 
on terrorism;

* improving capabilities of friendly foreign militaries to assist in 
international crisis response operations;

* contributing to the professionalism of military forces;

* enhancing rationalization, standardization, and interoperability of 
friendly foreign military forces;

* maintaining support for democratically elected governments; and:

* supporting the U.S. industrial base by promoting the export of U.S. 
defense-related goods and services.

Generally, FMF provides financial assistance in the form of credits or 
guarantees to U.S. allies to purchase military equipment, services, and 
training from the United States. Recipient countries can use the 
assistance to purchase items from the U.S. military departments through 
the Foreign Military Sales (FMS) process or directly from private U.S. 
companies through direct commercial sales. State is responsible for the 
continuous supervision and general direction of security assistance 
programs, including FMF, in coordination with DOD. DSCA leads the day- 
to-day program implementation for each FMF recipient country in 
coordination with other DOD entities at the unified combatant 
commands[Footnote 9] and in the recipient countries. CENTCOM's 
responsibilities include developing and implementing security 
cooperation plans for Egypt and other countries in the Middle East, as 
well as coordinating with other government entities on major Egyptian 
equipment requests. (See appendix II for a description of the FMS 
process for purchasing FMF-funded cases and appendix III for a 
description of the roles and responsibilities of the entities involved 
in the program.)

Members of Congress have periodically sought to alter the balance of 
economic and military assistance to Egypt. In 1998, the United States 
and Egypt agreed to a 10-year assistance phase-down in conjunction with 
a similar package for Israel. The package for Egypt reduced economic 
assistance by $40 million each year but did not increase FMF assistance 
to Egypt. U.S. economic assistance to Israel was reduced by $120 
million each year, and the amount of U.S. military assistance was 
increased by $60 million per year. In 2004 and 2005, amendments to the 
Consolidated Appropriations bill[Footnote 10] for fiscal year 2005 and 
the Foreign Relations Authorization bill[Footnote 11]for fiscal years 
2006 and 2007 proposed converting some military assistance to economic 
assistance to Egypt. The 2004 amendment was not adopted and did not 
become law. Furthermore, as of March 2006, the 2005 amendment has not 
been enacted. Additionally, a conference report attached to the fiscal 
year 2006 Foreign Operations Appropriations bill requires State to 
report to Congress on the balance between economic and military 
assistance provided to Egypt, including whether maintaining the current 
level of military assistance in relation to economic assistance is 
appropriate in light of the political and economic conditions in Egypt 
and in the region.[Footnote 12] Although this requirement was not 
stipulated in law, it conveys congressional intent to have this 
information provided to the Congress.

Over the past decade, Congress and the executive branch laid out a 
statutory and managerial framework that provides the foundation for 
strengthening government performance and accountability, with GPRA as 
its centerpiece.[Footnote 13] GPRA is designed to inform congressional 
and executive decision making by providing objective information on the 
relative effectiveness and efficiency of federal programs and spending. 
A key purpose of the act is to create closer and clearer links between 
the process of allocating resources and the results expected to be 
achieved with those resources. Program evaluations are objective 
studies that answer questions about program performance and results, 
and explore ways to improve them. In 2002, OMB implemented the 
Performance Assessment Rating Tool (PART) method of assessing federal 
programs. PART assesses federal programs in four areas: purpose and 
design, strategic planning, management, and results and accountability. 
Another assessment tool, which we have discussed in previous reports, 
is a logic model.[Footnote 14] This tool can be used to describe a 
program's components and desired results, while explaining the strategy 
by which the program is expected to achieve its goals. A logic model is 
a representation of the relationship between the various components of 
a program, typically including at a minimum, inputs, activities, 
outputs and outcomes. By specifying the program's theory of what is 
expected at each step, a logic model can help evaluators define 
measures of the program's progress toward its ultimate goals. (See 
appendix IV for details on the logic model.)

The United States Has Provided $1.3 Billion in Military Assistance to 
Egypt Annually to Purchase Defense Articles and Services:

Since 1979, Egypt has received about $34 billion in FMF assistance 
which the United States has generally appropriated in annual amounts of 
approximately $1.3 billion. In fiscal year 2005, Egypt received nearly 
$1.3 billion in FMF grants, more than 25 percent of the total amount of 
FMF assistance provided worldwide. FMF assistance to Egypt accounts for 
80 percent of Egypt's military procurement budget and has served to 
replace some of Egypt's Soviet-supplied equipment with modern U.S. 
equipment. Egyptian officials stated that 52 percent of their military 
inventory is U.S. equipment as of August 2005.

Over the life of the FMF program, Egypt has purchased 36 Apache 
helicopters, 220 F-16 aircraft, 880 M1A1 tanks, and the accompanying 
training and maintenance to support these systems, among other items 
(see fig. 1). According to U.S. and Egyptian officials, the Egyptian 
military is better equipped to defend its territory and participate in 
operations in the region. For example, the Egyptian military has 
participated in peacekeeping missions in East Timor, Bosnia, and 
Somalia. In addition, the Egyptian military participates with the 
United States in Operation Bright Star, a biannual military exercise 
involving forces from other coalition countries, including Germany, 
Jordan, Kuwait, and the United Kingdom. The purpose of the exercise is 
to conduct field training to enhance military cooperation among U.S. 
and coalition partners and strengthen relationships between the United 
States and Egypt, as well as other participating partners.

Figure 1: Key FMF-Financed Systems Purchased by Egypt Include F-16 
Aircraft, Apache Helicopters, and M1A1 Tanks:

[See PDF for image] 

Source: DOD.

[End of figure] 

From 1999 to 2005, the United States provided a total of about $7.8 
billion to Egypt in FMF funds. Egypt spent almost half of its FMF funds 
from 1999 to 2005 (about $3.8 billion) on major equipment such as 
aircraft, missiles, ships, and vehicles (see fig. 2). For example, 
Egypt spent 8 percent of its FMF funds on missiles, including 822 
ground-launched Stinger missiles, 459 air-launched Hellfire missiles, 
and 33 sea-launched Harpoon missiles. Egypt also spent 14 percent on 
aircraft, including 3 cargo airplanes; 10 percent on communications and 
support equipment, including 42 radar systems and 8 switchboards; and 9 
percent on supplies and supply operations, including 1,452 masks to 
protect against chemical and biological agents.

Figure 2: FMF Purchases for Egypt Total $7.8 billion (1999-2005):

[See PDF for image] 

Source: DOD; GAO 

Note: Numbers may not add due to rounding.

[End of figure] 

Egypt spent the remaining amount of its FMF funds--about $2.5 billion-
-on maintenance, weapons and ammunition, and other requirements. DSCA 
adheres to a total package approach when working with Egypt to procure 
items through the FMF program, which ensures that the costs of support 
articles and services for new equipment are included in the total price 
of the item. In addition to the equipment, support items include 
training, technical assistance, initial support, and follow-on support. 
Egyptian officials stated that approximately one-third of their FMF 
funds are dedicated to follow-on support; one-third to upgrade U.S.- 
supplied equipment; and nearly one-third to new procurements.

Cash Flow Financing Flexibility Allows Egypt to Pay for Defense Goods 
over Multiple Years:

The United States permits Egypt to finance its military purchases using 
a statutory cash flow financing arrangement that allows Egypt to make 
purchases in one year and pay for them over succeeding years using 
grants made from future FMF appropriations. The arrangement allows the 
United States to enter into contracts in advance of--and in excess of-
-current FMF appropriations for Egypt. Specifically, Egypt is not 
required to pay the full amount of the LOA[Footnote 15] up front. Cash 
flow financing allows Egypt to pay only the amount that signed LOAs 
require in a given year for specified defense articles and services. 
The cash flow financing arrangement benefits Egypt in that it can 
receive more defense goods and services than it can under other 
financing arrangements. However, the program accumulated undisbursed 
funds because the agency refrained from making as many new commitments 
for goods and services as the annual appropriation would have allowed, 
according to DSCA officials. The cash flow financing arrangement allows 
for significant commitments to be made based on anticipated 
appropriations.

Cash Flow Financing Allows for Flexibility:

Unlike other countries that receive FMF assistance, Egypt and Israel 
are currently the only countries that may receive defense goods worth 
more than the annual FMF appropriation and pay for them over multiple 
years. Cash flow financing enables Egypt to purchase more defense goods 
and services than under other financing arrangements and to better plan 
its military purchases over a number of years. For example, Egypt may 
begin the process of purchasing an F-16 in one year and make 
installment payments for the item over the life of the contract. 
Traditional financing options for FMF programs permit countries to make 
purchases equal to the amount of the particular appropriation in any 
given year or save appropriations over multiple years. For example, a 
country using traditional financing would have to plan its purchases by 
saving its FMF funds over a period of years to accumulate sufficient 
funds to make the full payment for the item. All other countries that 
receive FMF assistance, except Israel and Egypt, are required to make 
their FMF purchases in this manner.

In the Past, DSCA Limited the Number of New Commitments to Less than 
the Appropriated Amounts, Allowing Funds to Accumulate:

By 1998, more than $2 billion in undisbursed funds accumulated in 
Egypt's FMF account because DSCA did not have a high enough level of 
commitments to require disbursements in an amount equal to Egypt's 
entire annual FMF appropriation. DSCA officials stated that previous 
FMF program managers did not have adequate tools to track Egypt's FMF 
current commitments against future FMF disbursement requirements. In 
August 1998, DSCA established a system to project estimated commitments 
and payments by fiscal year to obtain better control over the cash flow 
financing process.

DSCA developed and is now implementing a plan to disburse the 
accumulated funds by fiscal year 2007. According to DSCA, OMB 
officials, and congressional staff, in 1998, members of Congress and 
OMB became concerned about the large balance in Egypt's FMF account and 
consulted with DSCA to eliminate it.[Footnote 16] As a result, DSCA 
coordinated with OMB and subsequently developed and implemented a plan 
in 2002, to disburse $300 million of the undisbursed balances every 
year, in addition to the amounts appropriated annually for Egypt's FMF 
program, until the undisbursed balances are eliminated in 2007 (see 
fig. 3).[Footnote 17]

Figure 3: DSCA Plan to Disburse Egypt's Accumulated FMF Funds:

[See PDF for image] 

Source: DCSA; GAO.

[End of figure] 

According to DSCA officials, because tracking mechanisms were not in 
place before 1998, program managers did not adequately track FMF 
commitments against disbursement requirements and available 
appropriations. As a result, DSCA's commitments for Egypt's FMF program 
were held at a low enough level such that disbursements were less than 
the yearly appropriations. This ensured sufficient funds were available 
to cover future payments to contractors, according to DSCA.

DSCA developed three databases to track Egypt's FMF expenditures that, 
according to DOD officials, address the undisbursed balance problem. 
First, one database tracks the amount of FMF funds required for each 
project for which an LOA was signed and the amount of funds needed in 
each year to make the annual payments. Second, another tracking 
database determines the length of time between the U.S. military's 
receipt of a signed request to undertake a project for Egypt and its 
receipt of a signed LOA to implement the project. This database also 
tracks the total amount of funds committed to LOAs in each fiscal year. 
Finally, DSCA and the Egyptian Ministry of Defense maintain a 
spreadsheet known as the Five Year Defense Plan that lists the items 
Egypt plans to buy in the next 5 years, their expected prices, the year 
in which Egypt plans to purchase each item, and the total amount of 
money available each year for purchases. When an LOA is signed for an 
item listed in the Five Year Defense plan, it is entered into the 
database and the funds needed to purchase it are subtracted from the 
total amount of funds available.

Cash Flow Financing Allows for Significant Commitments that Anticipate 
Future Appropriations:

Cash flow financing also permits Egypt to order defense articles and 
services that may be paid for with future appropriations or country 
funds. As of March 22, 2006, the value of LOAs anticipating future 
funding totaled approximately $2 billion, some of which are not due for 
full payment until 2011. Due to the nature of cash flow financing, this 
number can vary daily because contracts are signed, completed, or 
modified daily. For example, from 1997 to 2005, the dollar value of 
these commitments at the end of each fiscal year has varied from $1.3 
billion to $3.6 billion, whereas the average amount was $2.6 billion 
(see fig. 4). These commitments are expected to be paid for with future 
appropriations. If future appropriations are not available, Egypt will 
be responsible under the LOA to pay these commitments with other 
sources.

DSCA officials stated that, if there were a change in the anticipated 
appropriations, the United States would seek funding from Egypt to 
satisfy the LOAs. If Egypt is unable to pay for the LOAs with its own 
funds, the U.S. government would be liable for the payments due on the 
underlying contracts executed on Egypt's behalf. To manage payment if 
expected funding is reduced, DSCA officials stated that DOD would 
consider a range of steps including reducing the scope of the existing 
contracts, and stopping new orders, among other things. Additionally, 
defense articles and services that have not been delivered would not be 
provided to Egypt, if payment had not been received. As a result, DOD 
also may use FMF funds held in reserve to pay companies' costs 
associated with closing down their production lines and terminating the 
contracts.[Footnote 18]However, DSCA officials stated that contract 
termination would be considered as a last resort.

Absent the availability of U.S. funds to pay the entire balance of 
existing contracts, important implications for the achievement of the 
program goals and U.S. relations with Egypt may arise. For example, if 
the United States had to terminate multiple contracts on Egypt's behalf 
because of a reduction in FMF program funding and Egypt's inability to 
provide funding, the U.S. ability to achieve FMF goals such as military 
modernization would be affected. In addition, U.S. and Egyptian 
officials stated that a shift in funding may affect some elements of 
the U.S.-Egyptian relationship.

Figure 4: Value of Egypt's Future FMF Commitments at the End of Each 
Fiscal Year:

[See PDF for image] 

Source: DSCA; GAO.

[End of figure] 

State and DOD have not conducted an assessment to identify the impacts 
of a potential reduction in FMF funding below the levels that are 
planned to be requested. According to applicable internal control 
standards for the federal government, an organization should identify 
risks--such as a reduction in funding--and decide upon the internal 
control activities required to mitigate those risks and achieve 
efficient and effective operations, reliable financial reporting, and 
compliance with laws and regulations.[Footnote 19]Management should 
then plan a course of action for mitigating risks, developing 
mechanisms to anticipate, identify, and react to change.

Officials Assert that FMF Assistance to Egypt Supports U.S. Goals, but 
State and DOD Do Not Evaluate the Program's Contributions to Key Goals:

U.S. officials and several experts we consulted assert that FMF 
assistance to Egypt has supported U.S. strategic goals such as regional 
stability, the war on terrorism, and Egyptian-Israeli peace. 
Furthermore, U.S. and Egyptian officials state that FMF has promoted a 
modern Egyptian military by replacing 52 percent of its aging Soviet- 
era military equipment with U.S. equipment, and improved U.S.-Egyptian 
interoperability through joint military exercises. U.S. officials also 
stated that the U.S.-Egyptian relationship resulted in expedited access 
through the Suez Canal and the right to fly over Egyptian territory. 
Although DOD and State can describe the qualitative benefits the United 
States receives from Egypt, the departments have conducted no 
systematic, outcome-based assessment of how the FMF program furthers 
U.S. goals. GPRA and PART establish the expectation that federal 
programs determine whether they are meeting agency and program goals-- 
annual and long-term--and how performance can be improved to achieve 
better results.

Officials and Experts Cite Examples of Egypt's Support for U.S. Goals:

Officials and several experts assert that Egypt supports the U.S. goals 
of the FMF program, which are found in State's annual Mission 
Performance Plan for Egypt and its Congressional Budget Justification. 
Specific goals include (1) modernizing and training Egypt's military; 
(2) facilitating Egypt's participation as a coalition partner; (3) 
providing force protection to the U.S. military in the region; and (4) 
helping guarantee U.S. access to the Suez Canal and overflight routes. 
Another key goal of the program is to enhance Egypt's interoperability 
with U.S. forces. DOD officials stated that broader security 
cooperation and assistance goals found in DOD's regional Theater 
Security Cooperation Plan also apply to Egypt's FMF program, which we 
found to be consistent with State's goals for the program.

Egyptian and U.S. officials cited several examples of Egypt's support 
for U.S. goals. For example, Egypt:

* deployed about 800 military personnel to the Darfur region of the 
Sudan in 2004;

* trained 250 Iraqi police and 25 Iraqi diplomats in 2004;

* deployed a military hospital and medical staff to Bagram Air Base in 
Afghanistan from 2003 to 2005, where nearly 100,000 patients received 
treatment;

* provided over-flight permission to 36,553 U.S. military aircraft 
through Egyptian airspace from 2001 to 2005; and:

* granted expedited transit of 861 U.S. naval ships through the Suez 
Canal during the same period and provided all security support for 
those ship transits.

State and DOD Do Not Evaluate How FMF Assistance to Egypt Achieves U.S. 
Goals:

State and DOD have not systematically evaluated how the FMF program 
specifically contributes to achieving U.S. goals, particularly 
modernization and interoperability. DOD currently conducts assessments 
of security assistance activities in the region and regularly reviews 
selected FMF-funded purchases at the country level. However, these 
assessments do not provide information on specific FMF goals for Egypt 
or progress made in achieving them.

DOD rates the collective effectiveness of a mix of programs on a 
regional basis,[Footnote 20] including FMF, International Military 
Education and Training, military-to-military contacts, and others. At 
the country level, DOD and Egyptian officials regularly review the 
status of selected FMF-funded purchases through financial management, 
program management, and in-progress reviews. In addition, a Military 
Coordination Committee, comprised of senior DOD and Egyptian military 
officials, meets annually to discuss specific FMF purchases and types 
of equipment that have been or may be procured. These efforts reflect 
DOD's attention to assessing broad activities and certain financial and 
management aspects of FMF to Egypt, but they do not provide a 
comprehensive assessment of how FMF contributes to achieving U.S. goals.

We have reported that, although it can be difficult to isolate one 
program's effect from another's or to assess a program's impact or 
benefit, such assessments can help decision makers make more informed 
choices when faced with limited resources and competing 
priorities.[Footnote 21] While some U.S. foreign policy and security 
goals, such as regional stability or maintaining a strong U.S.-Egyptian 
relationship, may be difficult to measure quantitatively, key FMF 
program goals--such as interoperability and modernization--better lend 
themselves to measurement.

* DOD has not defined the degree of interoperability that it seeks to 
achieve with the Egyptian military, nor has it determined how to 
measure progress towards this goal. According to DOD doctrine,[Footnote 
22] interoperability is the ability of communications and other 
systems, units, or forces to provide services to each other so that 
forces can operate effectively together and information can be 
exchanged directly and satisfactorily. The doctrine also states that 
the degree of interoperability should be defined in specific cases.

Achieving interoperability in Egypt is complicated by both the lack of 
a common definition of interoperability and limitations on some types 
of sensitive equipment transfers. CENTCOM officials also stated that 
they would prefer to operate with Egyptian forces according to the 
interoperability standard used by the United States. They noted, 
however, that the Egyptian military's definition of interoperability is 
limited to participation in joint exercises, such as Operation Bright 
Star. Additionally, Egypt and the U.S. use interim short-term solutions 
to minimize limitations with respect to interoperability. For example, 
U.S. officials stated they have established temporary communications 
installations on certain equipment and have flown alongside Egyptian C- 
130s to facilitate Egypt's participation in a joint exercise. Egypt 
lacks specific equipment that limits its interoperability with U.S. 
forces, but DOD has not formally assessed this limitation and its 
implications on interoperability.

According to DOD policy,[Footnote 23] the desired level of 
interoperability cannot be ascertained within a general statement of 
policy but is dependent on factors unique to certain areas--such as 
compatible doctrine, tactics, techniques, and procedures. U.S. CENTCOM 
officials acknowledged that measuring interoperability in Egypt would 
vary greatly depending on the operation conducted, the type and size of 
systems used, and the timing of events. State officials acknowledged 
that it is possible to measure levels of interoperability through 
specific capabilities demonstrated by Egyptian forces participating in 
specific operations. For example, it would be possible to measure the 
capabilities of Egyptian forces participating in peacekeeping 
operations.

* DOD has similarly not defined how it will determine the extent to 
which FMF assistance contributes to the modernization of Egypt's armed 
forces. Currently, the Egyptian benchmark is based on a percentage of 
U.S.-versus-Soviet equipment in Egypt's inventory, as reported by the 
Egyptian military. According to Egyptian military officials, 52 percent 
of its current military inventory is U.S. equipment. By 2020, Egypt's 
goal is to increase this amount to 66 percent. DOD officials stated 
that they believe Egypt's ratio of U.S.-to-Soviet equipment is accurate 
but acknowledged that they do not maintain their own data to support 
the statistics.

Nonetheless, other factors may be useful indicators to measure progress 
toward modernization, such as the technical sophistication of Egypt's 
units, weapons systems, and equipment to provide humanitarian 
assistance; the readiness of Egyptian troops to deploy to a 
peacekeeping mission; or the degree to which Egypt's troops are capable 
of maintaining a desired level of operational activity during Operation 
Bright Star. Developing these and other indicators would help DOD 
measure the degree of modernization and, in turn, be better positioned 
to determine whether Egypt's goals are reasonable.

While measuring goals in these areas presents some difficulties, 
legislation and administration initiatives have recognized the need to 
do so. GPRA emphasized the importance of evaluating federal programs. 
Program evaluations help policy makers address whether program 
activities contributed to their stated goals and can help improve 
programs and target resources more effectively.

In addition, OMB recently implemented PART to assess and improve 
program performance so that federal agencies can achieve better 
results. A PART review is intended to assess aspects of the program in 
order to form conclusions about program benefits by looking at the 
program's purpose and design, strategic planning, management, and 
results--that is, whether the program is meeting its annual and long- 
term goals. To date, OMB has not conducted a review of the FMF program 
in the Middle East region.

Conclusion:

For the past 27 years, the United States has provided Egypt with more 
than $34 billion in FMF assistance to support U.S. strategic goals in 
the Middle East. Most of the FMF assistance has been in the form of 
cash grants that Egypt has used to purchase U.S. military goods and 
services. Like Israel, and unlike all other recipients of U.S. FMF 
assistance, Egypt can use the prospects of future congressional 
appropriations to contract for defense goods and services that it wants 
to procure in a given year through the FMF program. Until 1998, DSCA 
limited the number of new commitments to less than the annual 
appropriation thereby allowing more than $2 billion in undisbursed 
funds to accumulate. If the plan to eliminate the undisbursed funds for 
the Egypt FMF program is realized, these funds will be depleted by the 
end of fiscal year 2007. As Congress debates the appropriate mix 
between military and economic assistance to Egypt, the inherent risks 
of such flexible financing warrant careful attention and assessment by 
State and DOD.

Similarly, both State and DOD could do a better job assessing and 
documenting the achievement of goals as a result of the $34 billion in 
past U.S. FMF assistance and the $1.3 billion in annual appropriations 
planned to be requested. Periodic program assessments that are 
documented and based on established benchmarks and targets for goals 
would help Congress and key decision makers make informed decisions. We 
agree that expedited transit in the Suez Canal; support for 
humanitarian efforts in Darfur, Sudan, and elsewhere; and continuing 
offers to train Iraqi security forces are important benefits that the 
United States derives from its strategic relationship with Egypt. 
However, without a common definition of interoperability for systems, 
units, or forces, it is difficult to measure the extent of current and 
desired levels of interoperability, nor is it clear how the Egyptian 
military has been or could be transformed into the modern, 
interoperable force articulated in the U.S. goals for the Egypt FMF 
program.

Recommendations for Executive Action:

Given the longevity of the FMF program, its relatively high 
appropriation levels, the strategic importance of Egypt in the Middle 
East, and congressional interest in assessing the balance between 
economic and military assistance provided to Egypt, we recommend that 
the Secretaries of State and Defense take the following two actions:

* conduct an assessment of the impact of potential shifts in future 
appropriations on the Egypt FMF program. This would include identifying 
risks, planning a course of action for mitigating those risks, and 
developing mechanisms to anticipate, identify, and react to change; and:

* conduct periodic program-level evaluations of the FMF program to 
Egypt. The United States should define specific objectives for the 
goals, and identify appropriate indicators that would demonstrate 
progress toward achieving those objectives. Specifically, we recommend 
that the agencies define the current and desired levels of 
modernization and interoperability the United States would like to 
achieve. This should include establishing benchmarks and targets for 
these and other goals.

Agency Comments and our Evaluation:

We provided a draft of this report to the Secretaries of Defense and 
State for their review and comment. DOD and State provided written 
responses that are reprinted in appendixes V and VI. Both departments 
also provided us with technical comments which we incorporated in the 
report as appropriate.

In commenting on our draft report, DOD concurred with our 
recommendations but stated that we should direct the recommendations 
primarily to the Secretary of State. DOD and State are joint partners 
in the FMF program for Egypt--State sets the broad goals for the 
program while DOD works closely with Egypt's military to implement the 
program. Therefore, the recommendations are appropriately addressed to 
both departments.

State did not indicate whether it concurred with our recommendations. 
With regard to our first recommendation, State emphasized that steps to 
mitigate risks are already in place, such as maintaining reserves to 
pay costs associated with terminating FMF contracts. However, contract 
termination reserves are last-resort measures that do not represent a 
comprehensive assessment for reducing risk associated with possible 
fluctuations in the resources of the FMF program for Egypt. As we 
specify in the report, a risk assessment should include other measures 
such as reducing the scope of existing contracts, stopping new orders, 
or selling undelivered defense goods. An assessment that identifies the 
risks, including a plan to mitigate and anticipate these risks, would 
be appropriate and consistent with federal government internal control 
standards.

On our second recommendation, State noted that it will work with DOD to 
better define measures for assessing Egypt's modernization goals but 
stated that defining a level of interoperability would be speculative. 
Improving Egypt's ability to operate with the U.S. and coalition 
partners has been a critical, yet unmeasured goal of the program. At a 
minimum, DOD and State can begin to measure Egyptian forces' 
capabilities to operate with allied countries in military exercises or 
peacekeeping operations. Evaluating the degree to which the program 
meets its goals would be important information for congressional 
oversight, particularly as Congress assesses the balance between 
economic and military assistance to Egypt, as well as the impact on 
U.S. foreign policy interests.

State commented that our report found that cash flow financing caused 
the accumulation of undisbursed balances in the FMF program for Egypt. 
DOD made the same comment in their technical comments. We modified the 
language in our report to clarify that the flexibilities of cash flow 
financing as managed by DSCA in the past allowed for the accumulation 
of large undisbursed balances.

As agreed with your office, unless you publicly announce the contents 
of this report earlier, we plan no further distribution until 30 days 
from the report date. At that time, we will send copies of this report 
to the appropriate congressional committees, and to the Secretaries of 
Defense and State and other interested parties. 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, 
[Hyperlink, http:// www.gao.gov].

If you or your staff have questions about this report, please contact 
me at (202) 512-8979 or christoffj@gao.gov. Contact points for our 
offices of Congressional Relations and Public Affairs may be found on 
the last page of this report. Key contributors to this report are 
listed in appendix VII.

Signed By:

Joseph A. Christoff: 
Director: 
International Affairs and Trade:

[End of section]

Appendix I: Objectives, Scope, and Methodology:

To describe the types and amounts of Foreign Military Financing (FMF) 
assistance to Egypt, we examined government and private sector 
documents, databases, and reports; we also interviewed U.S. government 
officials. Specifically, we interviewed U.S. Department of Defense 
(DOD), and Defense Security Cooperation Agency (DSCA) officials. We 
examined DSCA data from the Defense Security Assistance Management 
System (DSAMS) database for the period 1999 to 2005. We sorted and 
categorized this data by type of procurement, year, military service, 
and cost to determine the composition of purchases made by funds 
provided under the Egypt FMF program. The broad categories of equipment 
and services were then examined for specific content and type of 
equipment, training, support, or service. In addition, we conducted 
multiple interviews with database administrators and information 
technology specialists to assess the reliability of the data in this 
system. We determined that the DSAMS database is reliable for the 
purposes of this report. We also interviewed officials and reviewed 
documentation from the U.S. Office of Military Cooperation in Cairo 
(OMC), along with U.S. Embassy officials, to better understand the 
nature of the program and the types of equipment and services procured 
through this program. In addition, we interviewed Egyptian military 
officials in Cairo and Ministry of Foreign Affairs officials at the 
Egyptian embassy in Washington, D.C.

To assess the financing arrangements used to provide FMF assistance to 
Egypt, and determine how undisbursed balances accumulated in the Egypt 
FMF program accounts, we examined data from DSCA's Credit System 
Database and interviewed officials from the DSCA Middle East and South 
Asia Division and Comptroller's Office, as well as the Defense Finance 
and Accounting Service. To identify the amounts of accumulated 
undisbursed balances, we examined fiscal data by annual appropriation, 
total amount of accumulated undisbursed balances, and amount of funds 
that had been disbursed by fiscal year. We analyzed this data by fiscal 
year and interviewed the database administrator and information 
technology specialists responsible for this database. We determined 
that the Credit System Database is reliable for the purposes of this 
report. To assess the manner in which the undisbursed balances were 
being eliminated, we also examined three DSCA databases used to manage 
the financing arrangement for the Egypt FMF program: (1) a cash-flow 
tracking database that monitors letters of offer and acceptance (LOA) 
and the amount of funds needed in each fiscal year, (2) a fiscal year 
data base that monitors the time needed to execute a procurement 
request, and (3) Egypt's Five Year Defense Plan. We interviewed the 
custodians of these databases in DSCA's Middle East and South Asia 
Division to develop an understanding of how they are used to manage the 
cash flow financing arrangement and the program more generally. We also 
met with the Office of Management and Budget (OMB) to gain an 
understanding of the plan to eliminate the accumulated undisbursed 
balances. We did not examine or assess U.S. economic assistance to 
Egypt.

To evaluate how the United States assesses FMF assistance to Egypt and 
its contribution to the advancement of U.S. foreign policy and security 
goals, we examined multiple U.S. and Egyptian government documents, and 
interviewed U.S. and Egyptian government officials and foreign policy 
specialists. Specifically, we obtained and analyzed the State 
Department's mission and bureau performance plans to understand U.S. 
foreign policy and security goals and priorities, and how the executive 
branch evaluates those goals. Similarly, we obtained DOD theater and 
country security cooperation plans and compared their goals and 
priorities to understand how DOD would measure results against them. We 
then examined U.S. Central Command's (CENTCOM) evaluation tools to 
understand what metrics it used to evaluate program results. In 
addition to U.S. and Egyptian government officials, we spoke with 
foreign policy experts from the Center for Strategic and International 
Studies, Georgetown University, the Council on Foreign Relations, the 
Heritage Foundation, the U.S. Institute for Peace, the Middle East 
Institute, the National Defense University, the Carnegie Endowment for 
International Peace and the Brookings Institute. To assess DOD's 
evaluations of security assistance goals, we reviewed various 
assessments and identified key components that are inherent in all of 
these assessments. We also researched other potential models that may 
assist in program evaluation. We interviewed officials from State and 
DOD in Washington, D.C., who are responsible for administering and 
implementing the FMF program to Egypt. We also met with Egyptian 
government officials in Washington, D.C. We traveled to Cairo and met 
with State and DOD officials at the U.S. Embassy and the OMC. In 
addition, we interviewed CENTCOM officials responsible for the FMF 
program to Egypt as well as Egyptian Ministry of Defense officials in 
Cairo.

We performed our work from May 2005 through March 2006 in accordance 
with generally accepted government auditing standards.

[End of section]

Appendix II: Letter of Request and Letter of Offer and Acceptance 
Process:

The review and approval process for FMF-funded purchases begins with 
the Egyptian military requesting the purchase of certain defense 
articles or services, and ends with a signed letter of offer and 
acceptance for those goods or services. Figure 5 depicts the review and 
approval process below.

Figure 5: Letter of Request and Letter of Offer and Acceptance Review 
Process:

[See PDF for image] 

Source: GAO.

[End of figure] 

The relevant Egyptian military department sends a letter of request 
(LOR) to the Egyptian Armament Authority, which then forwards it to the 
U.S. OMC in Cairo to be processed. If approved, the LOR is sent back to 
the Egyptian Armament Authority and then to the Egyptian Procurement 
Office, which forwards it to the DSCA and the appropriate U.S. military 
department.

The relevant U.S. military department and agencies--including the Army, 
Navy, Air Force, the National Security Agency, and the Defense 
Logistics Agency--generate a Letter of Offer and Acceptance (LOA) and 
send it to DSCA to coordinate with the State Department and notify 
Congress, if required. Once endorsed by DSCA or the relevant military 
department or agency, the LOA is sent to Egypt for acceptance and 
signature. After acceptance, LOAs are sent to DSCA, DFAS, and the 
relevant military department or agency. The country program director 
for Egypt registers the LOA into various databases that track the 
program.

[End of section]

Appendix III: Agency and Organizational Roles and Responsibilities:

The principal U.S. entities responsible for administering and 
implementing the FMF program are State and DOD. The table below further 
describes their roles and responsibilities.

Table 1: Agency and Organizational Roles and Responsibilities:

Department or organization: State; 
Department or organization: Pol-Mil; 
Roles and responsibilities: Supervises and directs security assistance 
programs.

Department or organization: DOD; 
Department or organization: OSD; 
Roles and responsibilities: Supervises security assistance programs and 
integrates departmental plans and policies with overall national 
security objectives.

Department or organization: DOD; 
Department or organization: CENTCOM;  
Roles and responsibilities: Responsible for: 
* exercising all unified command responsibilities for security 
cooperation programs; 
* developing and implementing security cooperation plan for Egypt and 
other countries in the Middle East area of responsibility; 
* commenting on major Egyptian equipment requests; and: 
* coordinating with the Secretary of Defense, Joint Chiefs of Staff, 
military departments, and U.S. embassy officials in Cairo.

Department or organization: DOD; 
Department or organization: DSCA; 
Roles and responsibilities: Administers and supervises FMF planning and 
programs, develops FMF guidance, and approves requests for the 
financing of individual projects and contracts.

Department or organization: DOD; 
Department or organization: OMC; 
Roles and responsibilities: Plans and manages in-country aspects of the 
FMF program to Egypt and reports directly to CENTCOM and to the U.S. 
ambassador to Egypt. OMC assists in: 
* managing foreign military sales (FMS) case management;
* training and other support for specific FMS cases;
* monitoring end- use of equipment and training; 
* advising on disposal and transfer of weapons and equipment; and: 
* evaluating Egyptian strategic and operational capabilities and 
requirements.

Department or organization: DOD; 
Department or organization: MILDEPS and other agencies; 
Roles and responsibilities: Responsible for: 
* preparing, executing, and managing individual FMF-funded cases; 
* developing letters of offer and acceptance; 
* soliciting bids and negotiating and awarding contracts; and: 
* overseeing delivery of defense articles and services.

Department or organization: DOD; 
Department or organization: DFAS; 
Roles and responsibilities: Ensures sufficient funds are available in 
Egypt's FMF account and provides spending authority approvals to the 
U.S. military departments to pay for goods and services on Egypt's 
behalf.

Department or organization: Egyptian Ministry of Defense; 
Department or organization: EAA; 
Roles and responsibilities: Egyptian entity that manages the FMF 
program.

Department or organization: Egyptian Procurement Office; [Empty]; Roles 
and responsibilities: Directorate of the EAA responsible for reviewing 
and approving procurement of military goods and services through the 
FMF program. 

Legend:

CENTCOM - U.S. Central Command: 
DFAS - Defense Finance and Accounting Service: 
DOD - Department of Defense: 
DSCA - Defense Security Cooperation Agency: 
EAA - Egyptian Armament Authority: 
EPO - Egyptian Procurement Office: 
MILDEPS and other agencies - Military Departments (Army, Navy, Air 
Force, and Marines), Defense Logistics Agency, National Security 
Agency: 
OMC - Office of Military Cooperation (Cairo, Egypt): 
OSD - Office of the Secretary of Defense: 
POL-MIL - Bureau of Political-Military Affairs State - U.S. Department 
of State:

Source: GAO analysis of agency data.

[End of table]

[End of section]

Appendix IV: Example of an Evaluation Framework:

The logic model we provide below is a foundation and first step for 
organizing the elements of a program. It is a tool that may help 
program managers identify the necessary elements for an evaluation--but 
it is not a complete evaluation itself. This model can also be used to 
communicate how program funds are used to achieve program goals. Figure 
5 depicts how FMF dollars (inputs), training and procurement 
(activities), and the resulting equipped and trained military (outputs) 
can be linked to enhanced modernization and interoperability 
(outcomes). We are not prescribing this or any other specific model, 
and the figure below provides a high-level example in aggregate that is 
meant to be illustrative and does not define all of the exact inputs, 
activities, and outputs of the FMF program for Egypt. A program 
evaluation would typically include a breakdown of these aggregated 
elements in further detail and would include definitions of standards, 
benchmarks, and targets for each program goal.

Figure 6: Using a Logic Model to Link Inputs, Activities, and Outputs 
to Outcomes:

[See PDF for image] 

Source: GAO. 

[A] DOD will need to define standards and desired levels for these 
terms.

[End of figure] 

[End of section]

Appendix V: Comments from the Department of State:

United States Department of State: 
Assistant Secretary and Chief Financial Officer: 
Washington, D.C. 20520:

Ms. Jacquelyn Williams-Bridgers: 
Managing Director:
International Affairs and Trade: 
Government Accountability Office: 
441 G Street, N. W.
Washington, D.C. 20548-0001:

Dear Ms. Williams-Bridgers:

We appreciate the opportunity to review your draft report, "Security 
Assistance: State and DoD Need to Assess How the Foreign Military 
Financing Program for Egypt Achieves U.S. Foreign Policy and Security 
Goals," GAO Job Code 320342.

The enclosed Department of State comments are provided for 
incorporation with this letter as an appendix to the final report.

If you have any questions concerning this response, please contact Amy 
Coletta, Program Analyst, Bureau of Political and Military Affairs, at 
(202) 736-4266.

Sincerely, 

Signed By: 

Bradford R. Higgins:

cc: GAO - Muriel Forster: 
PM - Michael Coulter: 
State/OIG - Mark Duda:

Department of State Comments on GAO Draft Report:

Security Assistance: State and DoD Need to Assess How the Foreign 
Military Financing Program for Egypt Achieves U.S. Foreign Policy and 
Security Goals:

(GAO-06-437 GAO Code 320342):

The State Department appreciates the opportunity to review and comment 
on the draft Report "Security Assistance: State and DoD Need to Assess 
How the Foreign Military Financing Program for Egypt Achieves U.S. 
Foreign Policy and Security Goals." The Foreign Military Financing 
(FMF) program for Egypt is a key foreign assistance program. The 
Department is committed to executing the program in an efficient manner 
that complies with the law and enhances U.S. national security and 
foreign policy goals.

As the report indicates, the FMF program for Egypt is a critical tool 
in maintaining regional stability and supporting Egypt, an important 
partner in the Middle East. The Department confirms the accuracy of the 
GAO's description of the types and amounts of FMF assistance provided 
to Egypt.

With regard to the assessment of the financial arrangements used to 
provide FMF assistance to Egypt, the Department would like to note that 
the large reserves of unspent balances accumulated in the Egyptian FMF 
program by 1998 were not a result of the cash-flow financing process. 
As the report itself notes, countries not accorded access to cash flow 
financing have also accumulated reserves, in their case often in 
anticipation of large purchases. As far as Egypt in concerned, FMF is 
reserved in the year in which it will be used for a payment. Currently, 
the accumulated balances have been reduced to almost zero. The 
Department recommends correcting this inaccuracy and hopes the final 
report will note that the accumulated balances have been nearly 
eliminated.

Recommendation #1 - Assessment of the impact of potential shifts in 
future appropriations on the Egypt FMF program:

The Department agrees that any shift in future appropriations of the 
Egypt FMF program will have a significant impact on Egypt and our 
bilateral relationship - financially, militarily, and strategically. 
For this reason, the Department has consistently advocated full 
appropriation of the FMF request for Egypt in annual appropriations' 
acts. We note in this context that the Department is currently 
compiling the report recommended in the conference report attached to 
the FY 2006 Foreign Operations, Export Financing, and Related Programs 
Appropriation, (P.L. 109-102) (FOAA), to address the question of the 
balance between economic and military assistance for Egypt. We expect 
that report will reflect the continuing importance of maintaining the 
current balance.

The Department would like to emphasize that steps to mitigate the risk 
noted in the GAO report relating to out-year purchases are already are 
in place. Sufficient termination liability reserves are maintained to 
pay costs associated with terminating contracts, should Egypt's FMF 
level be decreased in the future.

Recommendation #2 - Periodic program-level evaluations of the FMF 
program to Egypt:

With regard to the recommendation for periodic program-level 
evaluations of the FMF program to Egypt based on benchmarks for certain 
defined goals, such as modernization or interoperability, the 
Department notes, as does the report, the difficulty of using 
quantifiable benchmarks to evaluate the success or effectiveness of the 
FMF program in light of its broader strategic aspects.

Trying to define and measure interoperability is a case in point. 
Interoperability definitions will vary by "operation," for 
example.Moreover, any definition would need to take into consideration 
a range of associated factors, including the experience of the 
participation, the scale of the operation, and the political dynamics 
that may affect the Government of Egypt's willingness and ability to 
interoperate effectively. Defining a desired level of interoperability 
would be speculative and may suggest goals that are not attainable 
politically or financially.

Regarding modernization, the Department will work with our colleagues 
at the Department of Defense to examine ways "modernization" can be 
better measured, including looking at factors suggested in the report, 
such as readiness and capabilities.Indeed, it may be more useful and 
meaningful to focus on specific capabilities we would like the Egyptian 
military to develop using FMF grant funds rather than try to measure 
broad concepts like modernization or interoperability.For example, 
certain capabilities are required prior to participation in such 
peacekeeping operations as Sudan, East Timor, Bosnia and Somalia, in 
which Egypt has participated. By measuring the capabilities of Egyptian 
forces participating in specific operations (vice measuring the level 
of interoperability which would theoretically allow Egypt to 
participate in an operation), it may be possible to isolate some of the 
more strategic and political aspects.

While quantitative measurements are important to consider, the 
qualitative benefits of the FMF program are perhaps more critical. 
Ultimately, the program has a number of regional and national security- 
related goals, many of which cannot be reduced to a simple qualitative 
measurement as a definition of "success". The Department notes that, at 
combatant command's theater security cooperation conferences, State and 
DoD policy makers specifically focus on the way FMF is used to achieve 
U.S. national security goals. This is just one way that the U.S. 
Government strives to ensure that Egypt's FMF program is integrated 
with and makes a contribution towards achieving broader goals.

The draft report recommends using OMB's Performance Assessment Rating 
Tool (PART) in order to conduct such an evaluation. The NEA bureau, 
which includes Egypt's FMF program, is scheduled in fact for a PART 
review in August 2006.

[End of section]

Appendix VI: Comments from the Department of Defense: 

Defense Security Cooperation Agency:
Washington, DC 20301-2800:

In rely refer to: I-0603157-MSA:

Mr. Joseph A. Christoff:
Director: 
International Affairs and Trade: 
U.S. Government Accountability Office: 
441 G Street, N.W.:
Washington, D.C. 20548:

Dear Mr. Christoff:

Attached is the Department of Defense (DoD) response to the GAO Draft 
Report, GAO 06-437, "Security Assistance: State and DOD Need to Assess 
How the Foreign Military Financing Program for Egypt Achieves U.S. 
Foreign Policy and Security Goals, February 24, 2006 (GAO Code 320342)."

Representatives from the Defense Security Cooperation Agency (DSCA) and 
GAO met March 21, 2006, to review technical changes identified by DSCA, 
which the GAO agreed to incorporate in its draft report. The attachment 
provides a response to the recommendations, which DSCA concurs with 
comment.

My POC for this action is Bill Ellis, 703-604-6627.

Sincerely, 

Signed By: 

Jeffrey B. Kohler: 
Lieutenant General: 
USAF Director: 

Attachment, as stated:

GAO Draft Report Dated February 24, 2006 GAO-06-437 (GAO CODES 320342):

"Security Assistance: State And Dod Need To Assess How The Foreign 
Military Financing Program For Egypt Achieves U.S. Foreign Policy And 
Security Goals"

Department Of Defense Comments To The Gao Recommendation:

Recommendation 1: The GAO recommended that the Secretary of Defense 
conduct an assessment of the impact of potential shifts in future 
appropriations on the Egypt foreign military financing program, 
including identifying risks, planning a course of action for mitigating 
those risks, and developing mechanisms to anticipate, identify, and 
react to change. (p. 21 /GAO Draft Report):

DOD Response: Concur. We agree that a shift in future appropriation of 
the Egyptian FMF program would have significant impacts some of which 
can be quantified and some of which perhaps cannot. DOD consistently 
advocates full appropriation of the $1.313 annual FMF request for 
Egypt. The FMF budget request is prepared by the Department of State, 
and submitted to the President by the Secretary of State. Therefore, 
the recommendation should be to the Secretary of State, with assistance 
by the Secretary of Defense.

Recommendation 2: The GAO recommended that the Secretary of Defense 
conduct periodic program-level evaluations of the foreign military 
financing program to Egypt by defining the specific objectives for each 
goal, including defining current and desired levels of modernization 
and interoperability, and identifying appropriate indicators that would 
demonstrate progress toward achieving those objectives. (p. 21/GAO 
Draft Report):

DOD Response: Concur with comment. Under the Arms Export Control Act, 
the Secretary of State is responsible for the continuous supervision 
and general direction of sales, financing and exports (22 U.S.C. § 
2752). Thus, the recommendation should be to the Secretary of State, 
with the assistance of the Secretary of Defense. The DOD, specifically 
Defense Security Cooperation Agency implements policies through the 
security assistance program for Egypt.

[End of section]

Appendix VII: GAO Contact and Staff Acknowledgments:

GAO Contact:

Mr. Joseph A. Christoff, Director, (202) 512-8979:

Staff Acknowledgments:

Ms. Muriel Forster, Assistant Director. In addition, Nanette J. Barton, 
Stephanie Robinson, Ann M. Ulrich, Lynn Cothern, Martin De Alteriis, 
Grace Lui, and Christine Bonham made significant contributions to this 
report.

(320342):

FOOTNOTES

[1] Undisbursed balances, as defined by DSCA, are funds that are 
apportioned, obligated to the FMF program for Egypt, and committed 
against LOAs that have not yet been paid to a contractor or U.S. 
government activity for defense articles and services being provided to 
Egypt.

[2] In this context, Letters of Offer and Acceptance (LOAs) are 
agreements signed between foreign governments and the United States 
governing the terms and conditions of the procurement of U.S. defense 
articles and services. 

[3] 22 U.S.C. § 2762 provides authority to the President to enter into 
a contract for the procurement of defense articles and services for 
sale to any foreign country or international organization in advance of 
or in excess of an appropriation as long as the foreign country 
provides assurances to pay the full amount of the contract and any 
costs or damages due to cancellation. 

[4] Pub. L. No. 103-62, 107 Stat. 285 (1993).

[5] GPRA instituted a governmentwide requirement for agencies to, among 
other things, report on their results in achieving their agency and 
program goals. According to OMB, the PART initiative builds on GPRA by 
providing more credible outcome-based performance information to foster 
debate among decision makers. To date, OMB has not conducted a review 
of the FMF program in the Middle East region. State officials expect a 
PART review of security assistance to the Middle East and North African 
countries in August 2006.

[6] FMF is authorized under Sections 23 and 24 of the Arms Export 
Control Act.

[7] According to DSCA, the five major U.S. security assistance programs 
are: direct commercial contracts, peacekeeping operations, foreign 
military sales, foreign military financing, and international military 
education and training. DSCA has also identified excess defense 
articles, draw-downs, and other programs as security assistance.

[8] Other State and DOD classified or sensitive planning documents 
describe the global, regional and country-level goals and objectives 
for security cooperation and assistance programs. 

[9] A unified combatant command has operational control of U.S. combat 
forces from two or more military departments and is normally organized 
on a geographic basis.

[10] H.R. 4818, 108TH Cong. (2004).

[11] H.R. 2601, 109tTHCong. (2005).

[12] H.R. Rep. No. 109-265, at 88 (2005). 

[13] Pub. L. No. 103-62, 107 Stat. 285 (1993).

[14] GAO, Program Evaluation: Strategies for Assessing How Information 
Dissemination Contributes to Agency Goals, GAO-02-923 (Washington, 
D.C.: Sept. 2002); and Federal Motor Carrier Safety Administration: 
Education and Outreach Programs Target Safety and Consumer Issues, but 
Gaps in Planning and Evaluation Remain, GAO-06-103 (Washington, D.C.: 
Dec. 2005).

[15] In this context, letters of offer and acceptance (LOA) are 
agreements signed between foreign governments and the United States 
governing the terms and conditions of the procurement of U.S. defense 
articles and services.

[16] According to DSCA officials, this balance is committed to specific 
LOAs.

[17] According to DSCA, an estimated $130 million of the undisbursed 
balances will be held in reserve to cover unexpected costs. 

[18] DOD officials stated that contracts signed by DSCA on Egypt's 
behalf for the FMF program include termination liability fees that they 
hold in reserve if Egypt needs to terminate a contract for any reason. 

[19] Internal control standards also include: (1) control environment, 
(2) control activities, (3) information and communication, and (4) 
monitoring. See GAO, Standards for Internal Control in the Federal 
Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: Nov. 1999); and 
Internal Control Management and Evaluation Tool, GAO-01-1008G 
(Washington, D.C.: Aug. 2001).

[20] U.S. Central Command's region--or theater--includes Egypt and 27 
countries in the Horn of Africa, South Asia, and the Middle East.

[21] GAO, Program Evaluation: Strategies for Assessing How Information 
Dissemination Contributes to Agency Goals, GAO-02-923 (Washington, 
D.C.: Sept. 2002); and GAO, Performance Budgeting: Opportunities and 
Challenges, GAO-02-1106T (Washington, D.C.: Sept. 19, 2002).

[22] Department of Defense, Dictionary of Military and Associated 
Terms, April 12, 2001, amended August 31, 2005.

[23] Chairman of the Joint Chiefs of Staff Instruction, CJCSI 2700.01B, 
January 12, 2006.

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