Mr. BERGSTEN. The IDB has done considerable lending directly to the poor. In agriculture and fishing, for example, over $2.3 billion or more than 23 percent of IDB lending to date has been primarily related to projects designed to help Latin America's low income rural sector. Agriculture and fishing comprised over 28 percent ($428 million) of IDB lending in 1976. As much as one third of the Bank's total commitment for agriculture has benefitted small farmer cooperatives, credit unions and similar institutions, while fishing loans represented 34 percent ($146 million). It is estimated that almost 2 million individuals have benefitted from IDB loans to that sector. IDB-supported agricultural research centers will provide appropriate technology that can help the poorest farmers increase production and income. IDB has also helped improve living conditions of low income areas through almost $1.2 billion in loans for water and sewerage loans totaling $63.3 million. It is estimated that these projects will benefit will benefit 890,000 persons.

Mr. LONG. Provide the following data first for the ordinary capital account and then for the Fund for Special Operations:

(a) Lending terms and interest rates;

(b) Total undisbursed commitments;

(c) Total outstanding loans;

(d) Bad debt experience since the inception of the Bank. Mr. BERGSTEN. Yes, sir.

1 Argentina, Brazil, Mexico, Venezuela.

Chile, Colombia, Peru.

23% for social projects and 4% for economic projects.

Barbados, Costa Rica, Jamaica, Panama, Trinidad and Tobago, Uruguay.

5 Bolivia, Dominican Republic, Ecuador, El Salvador, Guatemala, Haiti, Hondoras, Nicaragua, Paraguay. • 1% during grace period and 2% thereafter.

Mr. LONG. How did IDB's calendar 1976 administrative budget compare with lending operations of its ordinary capital window and the fund (percentages)? How did the projections for 1977 compare?

Mr. BERGSTEN. In 1976, the IDB administrative budget of $57.7 million was 3.8 percent of the $1,530 million Bank lending from ordinary capital, fund for special operations and other small trust funds. The administrative budget was charged against the net income of ordinary capital and fund for special operations in a 47-51-percent split, with 4 percent charged against other funds. During 1976, 50 percent of loans were made from ordinary capital, 43 percent from the fund for special operations, and 7 percent from other funds.

In 1977, it is projected that the $63.7 million administrative budget will be 3.5 percent of the $1,800 million lending from ordinary capital, fund for special operations, and other sources. The budget will be charged against the net income of ordinary and interregional capital, and the fund for special operations in a 46-49-percent split, with 5 percent charged against other funds. The lending program is projected to be split between ordinary and interregional capital, fund for special operations, and other funds in a 46-, 39-, 15-percent manner.

INTEREST RATES ON LOANS

Mr. CONTE. Would you explain how the interest rate on capital loans is more closely tied now to the IDB's cost of capital?

Mr. BERGSTEN. The IDB has adopted a procedure on a trial basis similar to that of the other banks for automatically adjusting the interest rate charged on loans in accordance with changes in the average cost of its borrowed funds. The interest rates on ordinary and interregional capital loans are to be set in July of each year on the basis of the average cost of funds for the previous year plus a margin of about 0.5 percent to cover the Bank's other costs. The procedure also calls for a periodic review, so that if by January the average cost of borrowed funds has changed by at least 0.15 percent than that prevailing in previous July, a new lending rate is to be set accordingly.

LOAN CRITERIA

Mr. ROYBAL. Mr. Bergsten, I am told that the Bank is the single most important source for social and economic loans in Latin America.

I am concerned about the effect that the Bank's loans have on the social and political fabric of various Latin American countries. Specifically, it has been stated that the Bank's loans have the effect of aiding political institutions and people currently in power to the detriment of other political forces. Also, it has been alleged that most of the loans go to favored social classes rather than aiding the very poor.

As one example, the Bank recently made a loan in Jamaica for educational purposes where you set the qualifications for income of the applicant at $6,000. I am told that a second loan that has been approved now has an $8,000 limit. (a) How did you decide on the target population that these loans should benefit?

(b) Please supply the committee with a breakdown by annual income levels to show the level of income of families whose loan applications were approved.

87-000 - 77 - 34

Mr. BERGSTEN. In 1971, the IDB approved a student credit loan to Jamaica in which the income ceiling for eligible student borrowers was set at $7,200. In 1973, the income ceiling was raised to $8,210 to compensate for inflation. A second student credit, approved in March 1976, set the income ceiling at $12,000 which would amount to about $7,000 in 1971 dollars. Though $12,000 is the upper income limit, the loan contract stipulates that no more than 40 percent of the programs' resources or 30 percent of the total number of beneficiaries will have incomes greater than $9,000. Based on the experience of the 1971 student credit loan, it is expected that the majority of the beneficiaries under the 1976 loan will have incomes less than $6,600.

These eligibility requirements were established by the government of Jamaica with IDB staff concurrence.

FINANCIAL INTERMEDIARIES

Mr. ROYAL. I am told that many of the Bank's loans are made through financial intermediaries, including various agencies of foreign governments. In some cases, the government will subsidize these loans to gain a favorable political advantage over its opposition.

Have you questioned or considered whether you should be using various government agencies as financial intermediaries in light of the tremendous political implications that are involved?

Mr. BERGSTEN. It is true that many of the IDB's "global" credit loans are administered through government-owned financial intermediaries. One reason is that IDB wishes to see the "little man" directly benefit from its credits, but IDB is not capable of handling credits to so many different individuals. For a potential subborrower to receive a loan, certain eligibility requirements such as size of assets and income level which differ between country and sector must be met. In many loans, the operation of subborrowers must meet minimum financial and economic rates of return. IDB requires various reports and financial statements to insure that terms of the loans are met, but it does not inquire into the political leanings of potential subborrowers. Therefore, it is possible that supporters of the existing regime, if they meet IDB requirements, could be favored by the local financial intermediary.

As far as the subsidy issue is concerned, it should be mentioned that the U.S. Government is recommending a policy of higher interest rates on subloans. The primary reason for this position is to strengthen the financial position of the intermediary so that it can continue to foster economic growth with IDB assistance and to avoid subsidizing increasing uses of capital which can result when interest rates are below comparable levels in the local market.

AUDIT ACTIVITY

Mr. ROYAL. I am told that your audit division has turned up instances where loans have gone to people or groups who did not qualify under your loan specifications. Further, I am told that certain improprieties existed with respect to the Jamaican educational loan I mentioned a few minutes earlier.

(a) First, supply all the details with respect to your audit of the Jamaican educational loan.

(b) Second, supply a summary of every audit done in fiscal year 1976 which showed an impropriety in the way the lending process was accomplished.

Mr. BERGSTEN. The Treasury Department does not audit these loans, but the U.S. Executive Director at the IDB will ask for the detailed information you request.

[The information follows:]

INTER-AMERICAN DEVELOPMENT BANK,

March 2, 1977.

Memorandum to: U.S. Executive Director.
From: Executive Vice President.

Subject: Inquiry from Congressman Roybal, House Appropriations Subcommittee.

In response to the inquires from Congressman Roybal contained in your memorandum of February 25, 1977, we are pleased to submit the following information:

A. With regard to the Jamaican education credit loan, in one of its periodic reports on review of loans, projects and field office supervision which was carried out in that country, the Bank auditors in their February 1976 report did not find any instances of improprieties in the sense of wrongdoing, fraud, or misuse of funds in the way the lending process was accomplished. They did call attention, however, to the fact that supervision and inspections of this project were not being conducted by the field office with the scope and frequency called for in the IDB field office manual in order to assure appropriate compliance of various conditions of the loan contract. Subsequently, steps were taken to strengthen the field office staff, training was given and supervision by the staff was intensified. In addition, a supervision mission from headquarters subsequently carried out an indepth evaluation of the execution of the project and found that some 4.6 percent of the 4,628 subloans granted to students under the program, did not appear to meet the family income eligibility criteria established in the loan contract. On fuller investigation it was discovered that confusion existed regarding the interpretation of how the income eligibility formula was to be determined, a situation which was aggravated by the unclear instructions given by the field office project specialist, who is no longer with the Bank. More precise instructions were given and, in the recently approved second stage loan-466/SF-JA-the language of the loan contract and the letter of instructions to the borrower clearly defined the concept to be applied toward the family income eligibility criteria.

B. With regard to the second question of Congressman Roybal, the following information is provided:

1. Internal auditing.-The IDB has an internal audit office that makes continuing reviews of the field offices and the adequacy of the system used by each field office in managing and executing the surveillance over IDB financed projects.

The internal auditors did in 1976 make certain recommendations for improving the surveillance exercised by the field office in Jamaica, as indicated above. Recommendations were designed to improve the staffing, training, and supervision of the field office in Jamaica.

In addition to the review of the field office in Jamaica the internal auditors also made recommendations in 1976 based on its program of periodic reviews in IDB offices located in five other member countries. In all cases, areas of improvement in the system of surveillance in each office were detected and pertinent recommendations were made on ways in which management and execution of the system of surveillance might be improved. Management has reviewed these recommendations and acted to implement them. This is a normal review and followup activity that IDB uses to maintain control over its lending project execution.

2. Control devices used by IDB for credit loans to financial institutions.— In cases where IDB makes loans to borrowers who in turn relend the funds through subloans, IDB provides the following types of controls and surveillance: a. Reviews and approves the borrower's credit regulations prior to the granting of the loan.

b. Establishes limits for subloans, whereby any requests for subloans in excess of such limits must be submitted to IDB for review before approval.

c. Studies borrower capacity to provide adequate review of loan applications and adequate control over the lending operations. Provides technical cooperation funds to finance the use of consultants where improvement in borrower procedures and controls regarding the approval, disbursement and collection of subloans is deemed necessary.

d. Carries out testing on a day-to-day basis through the IDB field office specialists to insure that the borrower is maintaining adequate controls and compliance over loan approval, disbursement and collection of subloans throughout the period of the IDB loan including the period involving the reuse of collections on subloans.

3. Supervision missions from headquarters.—Periodically, supervision missions are sent from Headquarters for the specific purpose of reviewing and evaluating the performance of the field offices in carrying out their function as well as the manner in which the borrowers and executors are executing the projects financed by IDB loans. Such missions normally include visits to project sites and executors' offices, review of specific problem areas in contractual compliance by bor

rowers and executors and efforts to correct or solve issues in the lending activities that the field office may have been unable to solve.

4. Independent public accounts.-IDB as a loan contract condition, requires that borrowers or executors have annual audits of their financial statements by independent public accountants or government audit entities acceptable to IDB. IDB receives and reviews such audit reports including the accompanying supplemental financial information with regard to the project. IDB follows up with the borrowers or executors when the independent public accountant makes recommendations for improvements in the system of internal control.

5. The group of controllers of the 1DB review and evaluation system.-In addition, the IDB Board of Executive Directors in 1968, based on a provision in Public Law 90-88 of September 22, 1967 (known as the Selden Amendment) and with guidelines provided by the General Accounting Office, created a Group of Controllers to provide a continuing review and evaluation function overall IDB operations. This group consists of 3 Controllers, one from the U.S., a former Inspector General of the U.S. Treasury, a Colombian economist and a Costa Rican financial expert, plus a staff of 13 people. The group, which is completely independent of management, issues relevant reports containing recommendations directly to the Board of Executive Directors, who are the governmental representatives of the IDB member countries. Management provides periodic reports to the Board on the status of implementation of recommendations made by the Group of Controllers. This group has access to all information and reports within IDB. (For additional questions, see page 1085.)

Mr. LONG. This concludes our hearings on the IDB.

WEDNESDAY, MARCH 2, 1977.

DEPARTMENT OF STATE

WITNESSES

HON. CYRUS R. VANCE, SECRETARY OF STATE

JOHN GILLIGAN, GOVERNOR

JOHN E. MURPHY, ACTING ADMINISTRATOR FOR AID
LUCY WILSON BENSON, UNDER

SECURITY ASSISTANCE

SECRETARY-DESIGNATE

Mr. LONG. The hearing shall come to order.

FOR

It is indeed a pleasure and a privilege to have before us Secretary of State Cyrus R. Vance. I first came to Congress about 15 years ago, and Secretary Vance was then with the Defense Department. At that time, I served on the Armed Services Committee. I learned to have a great deal of respect for and confidence in him.

I want to tell you, Mr. Vance, that I have seen a great many Secretaries of State and I like your style. I have confidence in you, and I think it is very heartening that we have you in charge of the foreign policy of this country.

Secretary VANCE. Thank you very much, Mr. Chairman.

Mr. LONG. We are delighted that you are able to come before us today.

Would you like to deliver your full statement, Mr. Secretary.

Secretary VANCE. I think I might deliver the full statement, Mr. Chairman, if that is all right.

Mr. LONG. Very well. Proceed.

Secretary VANCE. Thank you, Mr. Chairman.