REPORT ON BALANCE-OF-PAYMENTS ASPECTS OF BARTER CONTRACTS FOR THE ACQUISITION OF INDUSTRIAL DIAMONDS FOR THE STOCKPILE DEPARTMENT OF AGRICULTURE DEPARTMENT OF STATE INTRODUCTION The General Accounting Office has examined into the balanceof-payments aspects of a package of barter contracts entered into during fiscal year 1966 for the acquisition of industrial diamonds for the supplemental stockpile, the conversion of a dollar contract for uranium purchases from South Africa, and the offshore procurement of military supplies and services. Our review was directed primarily toward examining into policies developed for the acquisition of stockpile material under the barter program, the application of these policies to the diamond acquisition, and the consideration given by management officials to the effect of their decisions on the balance-of-payments position of the United States. We undertook this review because a prior review1 had disclosed an instance where a barter transaction with a potentially favorable balance-of-payments effect was not given any consideration, due in part to the belief of executive branch agencies that the overall 1Review of Policies and Procedures Applied in Evaluating Foreign Source Components and Barter Bids for an Undersea Cable Communication System (B-152980, January 6, 1966). level of barter was at an appropriate level and that any increase could result in a displacement of United States dollar sales of agricultural commodities. This viewpoint led us to conclude that maximum efforts should be made to barter for supplies and services that otherwise would be acquired for dollars under applicable balance-of-payments directives. We selected the industrial diamond procurement for review because of indications that there was no need for diamonds to meet any known requirement. The diamond procurement, amounting to $27.7 million, made up about 10 percent of the value of all barter transactions entered into in fiscal year 1966. We do not in this report make an attempt to evaluate the overall benefits being derived from the barter program. Also, although this report touches on matters involving the Atomic Energy Commission, the Office of Emergency Planning, the General Services Administration, the Department of Justice, and the Department of Defense, we did not review determinations made by these agencies. Where such information is included in this report, it was done only as a means of explaining the barter aspects of the transaction we reviewed, which in this case are the primary responsibility of the Departments of Agriculture and State. Our review was made pursuant to the Budget and Accounting Act, 1921 (31 U.S. C. 53), and the Accounting and Auditing Act of 1950 (31 U.S.C. 67). The scope of our review is described on page 19. BACKGROUND Procurement under barter arrangements is authorized in conformance with congressional policy as set forth in the Agricultural Trade Development and Assistance Act of 1954 (7 U.S.C. 1961) and the Commodity Credit Corporation Charter Act (15 U.S.C. 714). These acts authorize the barter of agricultural commodities outside the United States and its possessions. a Provided that the agricultural commodities bartered do not interfere with export dollar sales of the same commodities which would otherwise take place, barter procurements are more favorable to the balance-of-payments position than cash procurements abroad. Barter arrangements also reduce Government dollar expenditures, since proceeds obtained from the sale of bartered agricultural commodities abroad provide the funds needed to pay for the supplies and services being procured and the procuring agency transfers appropriated funds to the Department of Agriculture to pay for the agricultural commodities rather than to a contractor for his supplies and services. In the early days of the barter program, the United States bought many strategic materials abroad to stockpile in the event of war emergency requirements. The dominant concept of barter was to use our agricultural surpluses to pay for needed strategic materials instead of paying dollars for them. However, since 1963 the emphasis of the barter program has shifted away from the acquisition of strategic materials for stockpiling toward transactions that use proceeds from agricultural exports to pay for offshore procurements by United States agencies--mainly the Agency for In-ternational Development and the Department of Defense. These agencies pay the Commodity Credit Corporation (CCC) for the agricultural commodities so that dollars that would otherwise be spent abroad are kept in the United States. Most transactions under the barter program only partly conform to the classical definition of barter. They conform in the sense that the Government starts a transaction with agricultural commodities and ends it with supplies or services. However, the intermediate steps in the transaction often involve the sale of agricultural commodities abroad to obtain proceeds needed to buy the supplies or services needed by the Government. In many respects, therefore, a barter transaction is little more than a commercial sale. Barter transactions are carried out through contracts between CCC and private United States companies. The CCC makes agricultural commodities available to the private companies for export to approved countries. The companies in turn either (1) use proceeds from the sale to buy specified materials for delivery to the Government agencies or (2) provide funds directly to the Government agencies for their use in making procurements abroad. Although barter transactions now are entered into primarily to pay for supplies and services obtained and used abroad, barter transactions still are used to some extent to obtain materials for stockpiling in this country. The stockpile materials are included in a supplemental stockpile established by the Agricultural Trade Development and Assistance Act of 1954 (7 U.S.C. 1704), which is administered jointly by the General Services Administration and the Office of Emergency Planning. These agencies also administer two other stockpiles. Materials acquired under barter for the supplemental stockpile either are used to satisfy the few unfilled stockpile objectives or are considered to be excess to requirements. The size and composition of the barter program, by year, is shown in appendix I, page 23. FINDING AND RECOMMENDATION QUESTIONABLE ASPECTS OF BARTER TRANSACTIONS INVOLVING THE Under existing policies and procedures, the barter program makes substantial contributions to the improvement of our balanceof-payments position. The principal benefit is achieved by using proceeds realized by the exportation of bartered agricultural commodities to finance needed overseas procurements of Government agencies, rather than by paying dollars for these procurements. We identified an instance, however, where $27.7 million worth of proceeds were used to acquire industrial diamonds not needed in the United States. In our opinion, this transaction deprived the United States of an opportunity to favorably affect its balance-ofpayments position in an equivalent amount. In examining into this transaction, we observed that foreign policy considerations also were involved to some extent in the transaction, since it was believed that the purchase of diamonds would bolster the economy of the Republic of the Congo. These matters are discussed in detail below. Background of transactions reviewed As In 1961 efforts were initiated to alleviate the dollar drain caused by a long-standing Atomic Energy Commission contract for procurement of uranium from South Africa. These purchases had begun in 1953, at a time when the United States was heavily dependent upon overseas sources of uranium to meet military requirements. a result of long-term domestic uranium development programs, large reserves were developed in this country, and by 1962 the United States no longer needed uranium being procured abroad. In fact, by 1962 the United States had become the free world's largest uranium producer. |