Audit of USAID/Egypt"s agricultural production and credit project no. 263-0202

Audit covers the period 9/86-12/89. The project is well managed and proceeding on schedule. The GOE has made substantial progress towards policy reform goals, including a reduction in public sector controls over the production, marketing, and processing of certain crops, and a phasing out of farm input subsidies. However, many of the policy reform benchmarks, upon which $100 million in performance payments were based, were ineffective measures of progress and did not necessarily result in the desired reforms. For example, some benchmarks required that reform progress be studied but did not require that the results be positive. In other cases, the GOE was required simply to issue decrees or memoranda, which did not in and of themselves ensure that desired policy reforms were achieved. Reform efforts have also been hampered by resistance from certain GOE entities. The Ministry of Industry objects to price increases for cotton purchased by public sector textile industries; the Ministry of Finance and Central Bank of Egypt have declined to change their policies on foreign exchange allocations for imports; and the Ministry of Supply maintains restrictive policies on processing and marketing over-quota rice. The project has only minor deficiencies in regard to compliance. Project vehicle management needs to be improved by developing a maintenance plan, maintaining logbooks, and applying the A.I.D. emblem to all vehicles. The required GOE cash contribution is not being provided as planned, and the PBDAC is retaining 100% of earnings from project loans, even though such retention is not allowed under current GOE policies. Key recommendations are that USAID/E: (1) obtain the GOE"s agreement in establishing meaningful, quantifiable benchmarks; and (2) include in the proposed Project Paper amendment (which will increase A.I.D. funding by $150 million) an analysis of the cooperation expected of GOE entities in achieving policy reform and a plan for securing that cooperation.