ANNUAL REPORT

OF THE

DIRECTOR GENERAL

MULTINATIONAL FORCE & OBSERVERS

FEBRUARY 2003

The following Annual Report is drawn primarily from the report of the Director General delivered to the Trilateral Meeting 28 October, 2002, which brought together MFO Management with the two Treaty Parties, the other primary Funds-Contributing State, and other States supporting the MFO. Appended are the audited financial statements for MFO Fiscal Year 2002.

INDEX Director General’s Cover Letter…………………………Page 3 Director General’s Report ………………………………Page 5 Audited Financial Statements …………………………...Page 58

For further information contact: Office of Publications Multinational Force & Observers

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www.mfo.org

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February 6, 2003

To Friends and Supporters of the MFO:

I am pleased to submit herewith the Multinational Force and Observers’ Annual Report for its Fiscal Year 2002, ending on September 30, 2002. This Report is based upon my report to the MFO’s annual Trilateral Meeting in Rome of October 28, 2002.

As this Report shows, this has been a year of both challenges and

accomplishments for the MFO. I want to bring you up to date on some events since the close of the Fiscal Year.

As the Report explains, during 2002 the United States Department of

Defense sought very sizeable reductions in U.S. Army particpation in the MFO to help meet increased world-wide challenges. Working together, the Governments of Egypt and Israel assisted by the MFO developed a proposal providing substantial relief for the U.S. Army while maintaining a strong MFO. The goal was to offer relief to the U.S. Army and also to maintain MFO operational effectiveness based on its longstanding Concept of Operations, and to ensure that the MFO can maintain its political weight, perform its mission and fulfill its mandate under the Protocol to the Egyptian-Israeli Peace Treaty of 1979.

I am pleased to report that United States Government accepted the joint Egyptian-Israeli proposal. Implementation has begun, and will continue throughout 2003. The precise timetable for implementation is still being refined.

After full implementation of this arrangement, the United States will

remain the MFO’s strongest participant and supporter. U.S. support involves four elements: substantial financial support as a primary fund contributor alongside Egypt and Israel; key officers and non-commissioned officers for the Force Commander’s staff; a light infantry battalion; and a support battalion. The first two components are not affected. The others remain with reduced numbers: a U.S. infantry battalion of around 375 (still the largest of the MFO’s three infantry battalions) and around 90 uniformed personnel in medical, EOD, administrative and logistical support functions. With the U.S.

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personnel serving in the Force Commander’s staff, U.S. Army participation should total a little under 500.

The United States under this arrangement will provide about one third

of the Force, remaining by far the largest contingent and continuing to provide health and other services important to the well-being, safety and force protection of all MFO soldiers. A modest number of specialized replacements will be required; the MFO is contacting the current participating states best positioned to provide them.

In a separate but related matter, discussions continue between the MFO and the U.S. Army regarding the replacement of the ten U.S. UH-1 helicopters serving in the MFO. As stated in our Report for FY 2001, the U.S. Army is retiring its entire fleet of UH-1 helicopters worldwide by FY 2004.

The MFO deeply appreciates the continuing commitment, participation and support of all of its partners. We are confident that the MFO will continue its important work with uninterrupted effectiveness.

Sincerely,

Arthur H. Hughes Director General

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MFO FY 2002: AN OVERVIEW This constitutes my report to the Treaty Parties and to the States supporting the Multinational Force and Observers (MFO), covering MFO Fiscal Year 2002 (FY 02, 1 October 2001-30 September 2002). I am pleased to report that the MFO successfully executed its mission again this year, our twentieth year of service to the Arab Republic of Egypt and the State of Israel in support of their Treaty of Peace. This could not have been possible without the continued strong support of the two Treaty Parties and of our family of Participating and Donor States. Our heartfelt thanks to all. Our successful mission execution reflects the determination of Israel and Egypt to insulate their mutual security commitments under the Treaty of Peace and the positive work of the liaison system from the political uncertainties of the region. This model liaison system linking the Parties and the MFO continues to do its job well. I cannot acknowledge often enough my great respect for the dedicated work and professionalism of both liaison organizations: the Egyptian Liaison Agency With International Organizations (LAWIO) headed by Brig. Hussein Ghobashi; and the Israel Defense Forces Liaison and Foreign Relations Division (IDFLFRD) headed by BG Ehud Dekel. Both began their tours as Chief of their respective liaison organizations this past spring. I want to give a special welcome to them on the occasion of their first Trilateral meeting. My report covers an active year of significant challenges and events: •

•

•

Violence in areas close to the International Boundary between Rafah and the Mediterranean Sea continues to affect the safety and operational tempo of the MFO.

Violations have occurred this past FY, and while any violation is a source of concern, none in my opinion has threatened the fabric of the peace or called into question the fundamental commitments of the Parties. The MFO never discusses violations publicly; they remain in confidential channels between the MFO and the Parties. Particular cases are the subject of direct dialogue as required.

The U.S. Department of Defense (DOD) has asked for relief in the numbers of U.S. Army personnel participating in the MFO, who currently constitute 47% of our total military strength. This DOD request has engendered a process of review between the Parties, with the support of the MFO. Discussion continues and no decisions have yet been made.

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•

•

•

•

•

•

•

•

Independently, the U.S. Army has determined to completely phase out its UH-1 helicopter fleet worldwide by 2004. As reported last year, the U.S. Army and MFO are studying options to continue MFO helicopter lift capability to support our mission. Many important practical, operational and financial issues are involved.

Beginning in January 2002, the U.S. Battalion (USBATT) has been drawn from the Reserve Component (National Guard) of the U.S. Army. From January until July 2002, a battalion from the Arkansas National Guard completed an extremely successful deployment. A battalion from the Oregon National Guard replaced them in July, and will serve until January 2003 when they will be replaced in turn by a National Guard battalion from Oklahoma. These units are trained and certified by the Active Army and bring unique experience and skills well suited to the mission. The organization, rank structure, and personnel strength of USBATT have not been changed, nor have the concept of operations and mission.

Following the tragic events of September 11, 2001 and the worldwide efforts to strike back at terrorism, we have continued to emphasize force protection and the safety of personnel both on duty and off. This has impacted on operations, off duty travel and morale.

We have successfully implemented an Enterprise Resource Planning (ERP) system—SAP—and are fine-tuning our skills to exploit this powerful new information management tool. ERP is already providing us with cost savings and pointing towards efficiencies in the way we manage and support the MFO. We are implementing complementary technologies, such as a smart ID card with several practical applications.

We are on the verge of achieving the independent and redundant communications links we have been pursuing over several years, taking advantage of the current buyers’ market for information technology.

The MFO continues to manage its resources closely. Current areas of emphasis include exploitation of ERP management tools, renegotiation of our important Support Services Contract (almost 13% of our budget, where cost control of overheads is essential), and review of transportation costs and missions.

Our tight management of logistics helped us to finish the FY under budget despite the cost of some new initiatives. We lived within a $51 million budget for the eighth straight year.

We held celebrations of the MFO’s 20th year of service in Egypt and Israel, and also here in Rome. These ceremonies were marked by expressions of the Parties’ continuing satisfaction with the MFO’s service to them.

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• Over the past year, I was able to convey directly in capitals of most of the Participating and Donor States the great appreciation of the Parties and the MFO for their dedicated support. Nine of the current eleven troop-contributing countries were part of the MFO at its beginning.

I will expand on these subjects in this report. I believe the report confirms that the MFO continues to meet the Treaty Parties’ requirements and to respond positively and successfully to the changes and challenges that confront us. We work hard to make all our MFO partners in peace proud to be associated with this unique and successful organization, and to provide a source of optimism and a model of cooperation in a troubled region and time.

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PARTICIPATION AND FINANCIAL SUPPORT

PARTICIPANTS AND DONORS

Participation and donor relationships remained stable in FY 02.

•

•

•

•

•

I want to gratefully acknowledge that Germany, Japan and Switzerland maintained their donor support in FY 02. Switzerland has already contributed its support for the MFO FY 03, which began 1 October. I hope very much that Germany and Japan will be able to continue their support as well. We have ever-smaller financial margins so these contributions are critical to our fiscal planning. I visited both Germany and Switzerland during the past year and plan a similar visit to Tokyo in November to express our thanks.

This year the Italian participation agreement was renewed. This underscored Italy’s strong commitment to the MFO’s work for peace. Italy’s Esploratore Class ships, purpose-designed with the MFO mission in mind, tangibly demonstrate Italy’s support both as contributor of the CPU and staff to the Force and as the Headquarters State.

The military personnel strength of the MFO remained unchanged at 1836.

The most important participation issue facing the MFO in FY 03 relates to the United States.

The Bush Administration came to office publicly committed to review U.S. military deployments around the world. The review has been accelerated by the terrorist attacks of September 11, 2001 and the increasing commitments and operational tempo of the U.S. military. The Department of Defense initiated a consultative process with the Treaty Parties this past spring to discuss reductions in the 865 U.S. Army personnel serving in the MFO.

By way of background, it is useful to recall that the U.S. participation in the MFO is composed of three elements:

an infantry battalion of 529 personnel (USBATT) responsible for the

southern sector of the demilitarized Zone C in the Sinai, which is deployed adjacent to the Gulf of Aqaba;

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a support battalion (SPTBATT) composed of 309 personnel who provide helicopter lift, transportation, medical care, explosive ordnance disposal, U.S. military mail and other logistics support to the entire MFO; and

an element of 27 personnel who serve in a variety of positions on the Force Commander’s staff, most notably in the colonel-level positions of Chief of Staff and Chief of Support.

•

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The Parties and the MFO were invited to a meeting in Washington on 1 August chaired by Undersecretary of Defense Douglas J. Feith. A Joint Statement issued after the talks is at Annex A. In summary, the joint statement contained the following:

It referred to the “vital role played by the MFO.”

The United States reaffirmed “its commitment to continued support for

Egyptian-Israeli peace, and for the MFO as a force contributing to the broad objectives of enhancing and sustaining regional peace and stability.”

The three delegations agreed “on the need to ensure that the MFO

continues to carry out its mission in the most efficient manner possible.”

Egypt and Israel acknowledged the “competing requirements faced by United States forces around the world, especially in light of the war on terror.”

The three delegations agreed to expert-level consultations “to determine how best to maintain the effectiveness of the MFO, while rationalizing the participation of United States forces.”

Expert-level meetings between the Parties, in some cases with MFO participation, took place in MFO’s North Camp and in Cairo in August, September and October. Drawing on information provided by the MFO, the Parties have indicated that they are readying a proposal to the U.S. Government intended to offer the U.S. Army material relief, without negative impact on the MFO’s operational concept, budget, or the quality of support provided at the force. This is being developed and will be delivered outside the context of this Trilateral Meeting.

At this time there is no decision by any of the three governments

concerned regarding the nature or timing of any reduction of U.S. Army personnel in the MFO.

U.S. DOD Undersecretary Feith, in a press briefing on 2 August,

emphasized a goal of “reconfiguring” the U.S. participation, not ending

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it. He stated “we’re going to continue to participate. We’re not talking about ending U.S. participation in the mission; we’re talking about looking at the whole MFO, how it can reconfigure itself, how it can continue to fulfill its mission more efficiently.”

Similarly, Egyptian Foreign Minister Ahmed Maher publicly commented

on 4 August that “the U.S. had stressed that this step had no political implication and that it was just a measure related to re-structuring the American armed forces operating abroad and had nothing to do with its commitment to backing the Egyptian-Israeli peace.”

I am personally and firmly convinced that while change once again will

come, as it has throughout the life of the MFO, the MFO will retain the credibility and capability to execute its mission and properly support the personnel entrusted to us for that purpose. The commitments that the three governments have made to the MFO, and the resulting benefits, are substantial and long-term. The goals of relief for the U.S. Army, and of maintaining a strong MFO and a strong continued American role in the MFO, are not mutually exclusive. These goals are shared by all three governments.

The U.S. participation in the MFO, like that of other contingents, has not been static over the years. MFO military strength now is about two-thirds of its original size. The significant changes in U.S. participation include progressive reductions in numbers (see Table One below), closure of several remote sites, and the shift to Reserve Component infantry units previously mentioned. This shift has provided a measure of relief for the U.S. Army, as would the possible contracting out of the helicopter support currently provided by the SPTBATT Aviation Company (discussed later in this report).

•

MFO CONTINGENT STRENGTH FROM 1982/PRESENT

102 138

502 500

42 41 92 36 476

1200

25 29 358 338 15 41 75 26 4 60

865

0200400600800

10001200

Aus

tral

ia

Can

ada

Col

ombi

a

Fiji

Fran

ce

Hun

gary

Ital

y

New

Zea

land

Nor

way

Uru

guay

Uni

ted

Stat

es

Present day strength Inception strength 1982

Table One.

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The MFO has initiated and successfully managed change throughout its history, and I am confident that we will just as effectively manage any changes resulting from decisions on the U.S. participation without jeopardizing the MFO mission. I have an obligation to ensure a capable, professional and credible MFO. Whatever eventual decisions are made on the size of the U.S. Contingent, the Parties have indicated their full agreement that the high standards by which the MFO conducts its mission and its logistical support must be maintained.

•

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Table Two below reflects the current Force personnel authorizations. CONTINGENT MAIN DUTIES STRENGTH AT NOV 02 AUSTRALIA Staff 25 CANADA Staff, Air Traffic Control 29 COLOMBIA Infantry Battalion 358 FIJI Infantry Battalion 338 FRANCE Fixed Wing Aircraft 15 HUNGARY Military Police 41 ITALY Coastal Patrol Unit 75 NEW ZEALAND Training 26 NORWAY Staff 4 URUGUAY Engineering, Transportation 60 UNITED STATES Infantry Battalion 529 Composite Logistics Battalion 309 865 Staff 27 TOTAL 1836

Table Two.

VISITS

The MFO takes pride in its accomplishments over the past twenty years. We do not seek out publicity and news coverage, and we do not issue press releases. At the same time, though, we do want all contributors to understand the value of what they support. Accordingly we put considerable effort into a visitor program focused on officials and hometown press coverage from Participating and Donor States. Seeing our work being done on the ground, these visitors can personally assess the value of the MFO in maintaining peace in this volatile region. Soldiers are motivated by visits from home that demonstrate that their service is supported and appreciated. As always, the outstanding continuing support of the two liaison systems – LAWIO and IDFLFRD – remains vital to the success of our visitor program. I thank the liaison systems for their strong commitment to this important and necessary activity.

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Our most senior civilian and military visitors from Supporting States this year included:

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From Australia, MG Peter Abigail, Commander Australian Land Forces.

From France, MG François Beck, Commander French Air Mobility Command.

From Hungary, Dr. Tividar Farkas, Deputy Secretary of State of the Ministry of Defense.

From Italy, Hon. Claudio Scaiola, Minister of the Interior, and Hon. Mirko Tremaglia, Minister of Italians Abroad.

From the Republic of the Fiji Islands, Hon. Joketani Cokanasiga, Minister for Home Affairs and Immigration and Commodore Josaia Bainimarama, Commander Republic of Fiji Military Forces.

From the United States, Hon. Richard Cheney, Vice President of the United States; Dr. Dov Zakheim, Comptroller, U.S. Department of Defense; Hon. Thomas White, Secretary of the Army; Hon. Charles Abell, Assistant Secretary of Defense for Force Management Policy; Mr. John Molino, Deputy Assistant Secretary of Defense for Military Community and Family Policy; GEN Eric Shinseki, Army Chief of Staff; LTG Michael DeLong, Deputy Commander in Chief of Central Command; and LTG Russell Davis, Chief Army National Guard Bureau.

Supporting State diplomatic missions in Egypt and Israel were welcome visitors:

Visitors included the Ambassadors accredited to Egypt from Australia, Colombia, the United States and Uruguay; and Ambassadors accredited to Israel from Australia, Colombia, Hungary, Italy, Switzerland and Uruguay. Additionally, the Force welcomed the Fijian Ambassador accredited to the EU and Italy and the Acting High Commissioner of Fiji in the United Kingdom.

We hosted the Australian and Colombian Consuls in Egypt and the Australian and New Zealand Consuls in Israel.

The Colombian Military Attaché in Israel as well as the French and United States Military Attachés in both Israel and Egypt conducted visits to the Force.

This year we had an active reverse flow of visits to capitals of many Participating and Donor States to convey directly the MFO’s appreciation for sustained support. I visited two Donor States in the past year, Germany and Switzerland, and expect to visit Japan in November. I also visited Australia,

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Colombia, Fiji, New Zealand, Uruguay and the United States. I was determined during this 20th anniversary year to visit several capitals, including some that had never been visited by the MFO Director General, to underscore our appreciation and the importance of the MFO mission. I was able to reinforce the MFO relationship at the highest levels of Government and senior-most military commands. The Force Commander has just returned from a visit to Hungary that had similar goals. Here in Rome, I have held periodic consultations with Italian Foreign Ministry and Naval officials. While this is an atypical MFO travel schedule, I believe these calls have been informative and beneficial.

Visits from both Receiving States strengthen our cooperative relationships: •

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These visits included most notably Brig. Ghobashi and BG Dekel, and their predecessors MG El Hakim and BG Arditi, who made use of our facilities to conduct talks and maintain their close coordination.

We also welcomed groups of Egyptian officers and cadets from the 2nd Army, the Air Defense College, the Military Academy, the Naval Academy, and the Military Technical Institute. These visits provided our guests the opportunity to learn more about the MFO and our mission. A visit to South Camp on 30 September by a group from the Nasser Military Academy included officers from Algeria, Jordan, Kuwait, Morocco, Pakistan, Saudi Arabia, Sudan, Syria and the U.A.E. as well as Egypt.

Maintaining MFO contacts with fellow professional peacekeepers, the MFO participated in the IDFLFRD-sponsored Liaison Officers Course on 28 April in Tel Aviv. The Force Commander and the MFO Chief of Liaison briefed course participants from China, Czech Republic, Denmark, France, Hungary, India, Poland, Russia, South Korea, the Ukraine, the U.K., and from regional peacekeeping organizations (UNIFIL, UNTSO and the MFO). We welcomed at North Camp a visit by CAPT(N) Tim Lesikivatukoula, UNIFIL Chief of Staff, in his capacity of senior Fijian military officer in the Middle East.

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OPERATIONS

OPERATIONS: KEY ISSUES

Let me turn now to our most significant current operational issues: Impact on Operations of Regional Unrest. While the Egyptian-Israeli Peace Treaty remains a stable and fundamental building block for any future expansion of the peace process, the deterioration of the regional situation has had its impact on us. Part of our mission is conducted along the International Boundary between Rafah and the Mediterranean Sea, adjacent to the Gaza Strip where there have been repeated instances of violence; the bulk of this mission falls on the capable shoulders of FIJIBATT. The volatile situations in this area raise significant force protection and operational tempo issues affecting our mission to observe and report the facts on the ground. The Force Commander continually reviews and refines operational measures to ensure the protection of MFO personnel while executing the mission. We closely coordinate with Israel and Egypt through the liaison systems; I am grateful for their cooperation in promoting the safety of our personnel. The MFO continues to use a border crossing for logistics and personnel movements at el Awga/Nizzana, well removed from possible areas of conflict, and has enjoyed excellent cooperation on both sides to ensure the mission continues without degradation. Helicopter Replacement. As we discussed at the Trilateral Meeting last year, the U.S. Army intends to retire its aging fleet of UH-1 helicopters worldwide in 2004. Our own maintenance and operational readiness record confirms the need for replacement. However, decisions regarding replacement involve significant issues for the U.S. Government and for the MFO. First and foremost is the decision by the U.S. Government whether it intends to continue to provide us with U.S. Army aviation or to contract this function to a commercial company.

The U.S. Army has no utility helicopter similar to the UH-1 in its fleet, so the choice of an Army-provided lift capability would fall on the Blackhawk UH-60. This is an excellent aircraft but its capabilities exceed MFO mission needs, it is expensive to operate and it is not compatible with some current MFO landing sites. Further, retaining uniformed U.S. military aviation support would seem to run counter to the stated U.S. Defense Department desire to reduce the size of the U.S. Army participation in the MFO.

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• Contracting would raise some novel issues for the MFO and would be expensive, with the source of funding not yet clear. I do not doubt it could be

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made to work with the cooperation of the Parties. The U.S. Army reportedly has contracted helicopter lift successfully in other missions, and the MFO has no objection to this option.

We provided at last year’s Trilateral Meeting a summary of requirements to assist the U.S. Army in exploring contracted helicopter support. The U.S. Army prepared a draft statement of work (SOW) for possible contracting and the MFO has commented on it. U.S. Army and MFO staffs recently met at MFO HQ for productive discussions on this issue, and subsequently a U.S. Army team visited the MFO in the Sinai. As a result, the summary of requirements has been slightly modified (Annex B).

The U.S. Congress has provided the U.S. Army with authority to contract in support of the MFO, but the issue of funding new costs associated with contracting is not resolved. MFO comments have assumed that no net cost increase would result for the MFO and that the U.S. Government will view a contracted operation as just a continuation of its undertaking to provide the MFO helicopter lift capability in another form. Any other result would require the MFO to seek additional funding from the Funds Contributing States, since our current budget cannot accommodate the estimated costs, up to $25 million annually, for contracted helicopter support to meet our requirements. However, for the U.S. Government to agree to assume the substantial costs of contracting, there will have to be both a Presidential determination and identification of the U.S. agency to cover the cost. This is a very important matter, yet to be decided. It is difficult for MFO and U.S. Army staff to accomplish any further substantive work until it is. Once there is a U.S. decision on funding, work can proceed on the SOW and resolution of a number of technical but important implementation issues.

While the MFO cannot afford such a helicopter contract within its current budget, we are prepared to provide valuable in-kind support for a contractor operation akin to that now provided to Aviation Company personnel. We have experience with our own support services contractor and established standards of contractor support at the camps. MFO has strongly recommended open competition of any contract as a means to help refine options and control costs.

Conversion of MFO’s helicopter operations under either option will be a major challenge and expense in the year ahead. We are ready to tackle the planning required for a smooth transition once key decisions are made defining the way ahead. Impact of Helicopter Maintenance Issues. Operations were materially affected by maintenance challenges. The helicopter lift provided by the SPTBATT Aviation Company with its 97 soldiers is critical to the MFO mission, with over

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400 kilometers of harsh terrain between our camps, and lift requirements out of both camps for Observer, remote site resupply, command and control, quick reaction, and medical evacuation (medevac) missions. Availability has fluctuated significantly throughout the year, and for several weeks the operational readiness rate was less than 50%. We routinely shifted missions and training to meet the number of aircraft available. In some instances we were forced to utilize dedicated medevac aircraft to meet mission requirements, delicately balancing mission need against evacuation response time. We flew 36% fewer hours than programmed. Our Aviation Company leaders and soldiers, with strong backup from the U.S. Army in the States, have done a terrific job of keeping us flying safely. Their accomplishments are particularly impressive when one considers that the U.S. Army is no longer training mechanics for the UH-1s, and that most of our 10 UH-1 aircraft are older than the soldiers who maintain and fly them. Major maintenance challenges included tailboom and engine deficiencies. Last spring, the UH-1 fleet underwent a complete airframe inspection and certification. An inspection team from the United States came in May and found deficiencies in four aircraft, resulting in their immediate grounding. A maintenance team from the United States was required to repair them. While they were grounded, other aircraft were worked harder towards their own overhaul time limits. To assist the MFO in maintaining aircraft availability and in accessing some increasingly hard to procure parts, the U.S. Army has generously made available three replacement UH-1 aircraft that previously served as VIP aircraft in the Washington D.C. area. After limited modifications needed for MFO service, we expect to add these aircraft to our fleet in December and to develop a plan to decommission three of our older aircraft to use as spare parts sources. MFO will pay certain costs of modification and sea freight to the region. I am very grateful to the U.S. Army for making these three helicopters available, which will help us maintain a more acceptable operational readiness rate for as long as the aircraft remain in MFO service. Force Protection. Force protection has taken on even greater relevance in the past year. The Force Commander and I are keenly aware of the obligation to balance execution of the mission with our responsibility for the safety of the soldiers entrusted to us and of our civilian component. We have well-developed, practiced procedures to react in a graduated way to changes in the security situation around us. Measures can be initiated sequentially or independently based on perceived or real threat indicators. They relate both to our operations in the Zones and travel for duty or recreation outside our area of operations. The recurring violence in the region has necessitated constant review of travel restrictions. Over the past year, much of Israel has remained inaccessible to Force personnel for non-duty, non-essential travel. Duty missions into Israel, including logistics movements, have continued unabated.

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The Force Commander, in coordination with me and my Representatives in Cairo and Tel Aviv, reviews all available information to make decisions to adjust travel restrictions. With my strong support, the Force Commander adopts a conservative policy, appropriate for the protection of our MFO population. Unfortunately many world class tourist destinations in the region are, at times, off limits for security reasons, and off duty options for our personnel are inevitably constrained. I do not see it as likely that this situation will be altered in the immediate future. I will describe later some of the measures we are taking to provide alternative leave options for our personnel. The Force Commander has placed an increased emphasis on enforcing force protection measures across all levels of the Force. MFO personnel are continually kept informed through their contingent chain of command of threat levels and travel restrictions. The Force developed an electronic, interactive weekly Security and Travel Advisory. Contingent Commanders have full authority to increase force protection measures for their own contingents but may not be less restrictive than the Force Commander’s directed measures.

While the Sinai continues to be considered a low risk environment, the post September 11 world has required review of our continuing program of force protection enhancements. To have the benefit of expertise from outside the MFO and to underscore our commitment to force protection, we once again welcomed a U.S. Vulnerability Assessment Team in September. The team surveyed both base camps and several remote sites throughout Zone C and provided comprehensive feedback in the form of observations; as of this date, the team has not indicated any vulnerabilities. We are grateful to the United States for this expert assistance. We continue our efforts to improve security and observation at remote sites. Work this past year included construction of four 10-meter observation towers and the relocation of Force Military Police Unit (FMPU) buildings inside the perimeters of MFO border crossing Checkpoints at both el Awga/Nizzana and Taba. I would like to thank both the Israeli and Egyptian liaison organizations for their essential and continued assistance in our force protection. Their efforts help ensure that force protection decisions are well supported by timely and accurate information. FY 02 OPERATIONS SUMMARY:

INTRODUCTION

As mandated by the 1979 Treaty of Peace between Egypt and Israel and its 1981 Protocol, the MFO continues to:

Use best efforts to prevent any violation of the terms of Annex I of the Treaty; •

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Operate Checkpoints (CPs), Observation Posts (OPs) and reconnaissance patrols along the International Boundary and Line B and within Zone C;

•

•

•

•

•

•

•

Periodically verify the implementation of Annex I of the Treaty not less than twice a month;

Perform additional verifications within 48 hours of the request of either Party; and

Ensure freedom of navigation through the Strait of Tiran.

We have an organizational structure that has met the tests of time, experience and functionality in fulfilling this mandate. The MFO consists of five major components: the Headquarters in Rome; the two Director General’s Representatives’ Offices in Cairo and Tel Aviv; the Force; and the Civilian Observer Unit.

The Headquarters in Rome provides direction and supports the Force and Observers through its operations, logistical, information systems, legal, personnel, financial and other specialist staff. Several key programs and activities are centrally managed in Rome, including international civilian staff recruitment, troop rotations, accounting and external audits, participation and donor agreements and related financial arrangements, litigation and claims, and commercial insurance. The HQ staff supports the Director General in his responsibility for direction of the MFO and for determining the MFO’s policies, programs and budgets.

The Director General’s Representatives (DGRs), Mr. Joseph Englehardt in Cairo and Mr. Michael Sternberg in Tel Aviv, supported by their experienced staffs, represent the Director General to their respective host governments on policy matters and maintain liaison with the embassies of the MFO’s Participating and Donor States. Their offices support the Force in procurement, shipping and transportation, liaison, personnel movements and disbursements. They also provide other significant services such as dealing with press interest in the MFO, and coordinating with customs, police, airport and other authorities on routine, day-to-day business.

The Force deployed in the Sinai is a joint and combined operation with support elements. Its mission is to impartially verify compliance with the security arrangements of the Treaty of Peace and use its best efforts to prevent any violation of them, combining static and mobile means of observation by air, land and sea to execute its mission. The Force’s joint organization comprises army, air and naval components. It is comprised of military men and women from eleven countries: Australia, Canada, Colombia, Republic of the Fiji Islands, France, Hungary, Italy, New Zealand, Norway, United States, and Uruguay. Under the Force Commander, MG Robert Meating of Canada, its organizational elements consist of:

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A Headquarters with branches for Operations & Training, Liaison, Support, Engineering, Communications and Information Systems, and Personnel;

Three infantry battalions;

A Support Battalion including a multinational Transportation Section and a Rotary Wing Aviation Unit;

A Coastal Patrol Unit;

A Fixed Wing Aviation Unit;

An Engineering Unit;

A Force Military Police Unit;

A Flight Following Section; and

Other multinational civilian and military staff of the Force Commander.

In addition to maintaining coverage of Zone C, Force units conduct regular training in the military skills that are essential to operational effectiveness, including training across contingents to improve inter-operability.

The 15-person Civilian Observer Unit (COU) is based at North Camp. •

The COU, the only element of the MFO operating in all four Treaty Zones, conducts impartial periodic verifications of the implementation of the Treaty’s security arrangements.

Approximately half of the observers are seconded from the United States Department of State, including the Chief of the Unit. Other COU personnel are retired military officers recruited directly by the MFO. By agreement with the Parties, all COU members are U.S. nationals.

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Table Three.

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OBSERVER OPERATIONS

This year the COU completed its 521st reconnaissance mission and 490th verification mission. COU members possess a wealth of military and diplomatic expertise. The professionalism and impartiality that the members of this unit display as they travel throughout the four Zones are important in developing and maintaining the confidence and trust that both Parties must have in the MFO. Their interactions with both Parties’ liaison units continue to be excellent. I thank both Parties for this solid support. The recurring violence affecting the northern part of Zone D in the vicinity of the International Boundary requires the COU to maintain the modified flight patterns implemented last year at a higher altitude for safety. This mission is facilitated by use of stabilized binoculars.

LAND OPERATIONS: THE INFANTRY BATTALIONS

The MFO mans thirteen Checkpoints (CPs) and seventeen Observation Posts (OPs) in demilitarized Treaty Zone C. Checkpoints monitor traffic into and out of Zone C on all main roadways. OPs observe and report activity in, or near, Zone C. Static CPs and OPs are supplemented by Temporary Observation Posts (TOPs) manned by small detachments at remote locations. During FY 02 on average, 60 TOPs were sent out per week. In addition, an average of 70 weekly motorized patrols (MOTs) helped to maintain high MFO visibility in Zone C. NORTHERN SECTOR The Second Battalion, Fijian Infantry Regiment, monitors the Northern Sector of Zone C. The Battalion is organized into three rifle companies and a Battalion HQ to fulfill its mission at six CPs, five OPs and at North Camp. The fixed sites are augmented by at least two daily MOTs and day and night TOPs. In particular, TOP F1-03 has remained a critical observation post due to its location near the International Boundary adjoining areas under Palestinian administration in Gaza. Since September 2000 it has been manned on a 24-hour basis. FIJIBATT monitors maritime and naval activity from its sites on the Mediterranean Sea. On the southern boundary of its sector, FIJIBATT conducts patrols in cooperation with COLBATT. At North Camp, FIJIBATT maintains a Quick Reaction Force,

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comprised of an infantry squad and a headquarters element, for use in emergencies. FIJIBATT rotates approximately 85 soldiers every 3 months in maintaining its total strength of 338. FIJIBATT’s solid performance reflects many years of national and individual peacekeeping experience. FIJIBATT has continuously served with the MFO since 1982, and most members of the Battalion have served multiple tours in the Sinai and in the United Nations Interim Force in Lebanon (UNIFIL). CENTRAL SECTOR The Colombian Infantry Battalion Number 3 (COLBATT), composed of two rifle companies and a headquarters company, monitors the Central Sector of Zone C. COLBATT mans two CPs and five OPs. COLBATT also mounts MOTs and day and night TOPs, and provides a guard force for the security of North Camp’s gates and perimeter. Twenty-one personnel augment Force staff sections in various positions. COLBATT rotates approximately 90 personnel every 3 months in maintaining its total strength of 358. Personnel selected by the Colombian military to serve in COLBATT are well trained and many have combat experience. The level of professionalism of the battalion is confirmed by the high marks achieved during routine Operational Readiness Inspections and unannounced inspections during the FY. COLBATT, in MFO service since its inception, remains a vital element of the Force. In June 2002, Repeater Station 2-3, in the vicinity of OP 2-1 in the COLBATT sector was dismantled, as its communications-only function ended. SOUTHERN SECTOR Like Colombia and Fiji, the United States has provided an infantry battalion to the MFO since 1982. The MFO mission in the Southern Sector of Zone C is performed by a U.S. Light Infantry Battalion (USBATT), based at South Camp. USBATT operates five CPs and seven OPs supplemented by vehicle patrols and day and night TOPs. The USBATT rotates all 529 soldiers as a unit every six months. The Fiscal Year started with the 2nd Battalion, 87th Infantry Regiment from the 10th Mountain Division, in place until January 2002. Following the events of September 11, 2001, the U.S. Army began to assign National Guard units to fill the mission. The 2nd Battalion, 153rd Infantry Regiment of the Arkansas National Guard mobilized, trained, and deployed to the Sinai in half the time normally allotted to regular U.S. Army units and in January 2002 assumed the MFO mission, becoming the first pure National Guard unit to do so. In July 2002, the 1st Battalion, 186th Infantry Regiment, Oregon National Guard, assumed responsibility and will serve until January 2003.

Successive USBATTs have fully exploited the opportunities in the Sinai to

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validate their junior officer and NCO leadership skills, both by executing the MFO mission with its remote site operations and by conducting small unit and individual training including the Expert Infantry Badge, Combat Lifesaver and Advanced Marksmanship programs. With its location adjacent to the Gulf of Aqaba, the USBATT also is able to conduct combined training and operations with the Italian Coastal Patrol Unit to the benefit of both organizations. The remarkable continued growth of tourism and economic development in the Southern Sector requires active MFO and LAWIO cooperation to maintain mission requirements including force protection and security stand-off zones. Physical encroachment towards MFO remote sites is monitored by both the MFO and LAWIO. Continuing MFO use of two practice firing ranges, one located outside of South Camp, and both so critical for the USBATT training program, is a key example of this close coordination.

SEA AND AIR OPERATIONS

COASTAL PATROL The Coastal Patrol Unit (CPU) consists of three coastal patrol vessels purpose-designed for the MFO mission, currently ITS Esploratore, ITS Sentinella and ITS Vedetta; a shore support element; and a marine detachment to enhance security at the CPU compound. In addition to CPU’s eight naval officers and 64 petty officers, sailors and marines, the Italian Contingent includes a Senior Staff Officer serving as the Force Commander’s naval advisor and Italian Contingent Representative in North Camp, and two officers who serve as liaison and medical officers in South Camp. During FY 02, the CPU conducted 158 missions and 4098 hours on patrol to ensure freedom of navigation through the Strait of Tiran. Total patrol hours are significantly higher than the previous two years. This is attributable to the high reliability of the new vessels and reduced maintenance requirements. Each vessel patrols for a total of 120 hours monthly, making a unit total of 360 hours. More than 30% of all patrol time is conducted during the hours of darkness. Besides its primary mission, CPU undertook joint/combined exercises with USBATT on maritime triangulation, observation and tracking, OP 3-11 re-supply, remote site evacuation, maritime search and rescue drills and ship orientation tours. During the year, all three of the patrol vessels were successfully dry-docked in Suez for routine periodic maintenance.

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In March 2002, while conducting a routine patrol, ITS Esploratore identified a large floating platform drifting in rough seas and creating a hazard in shipping lanes. The Esploratore’s captain secured and towed the platform to safe waters inside Sharm el Sheikh harbor, a difficult operation that earned the appreciation of the Egyptian authorities. Repair of the pier used by CPU, damaged on 24 March 2001 by the Panamanian-registered cruise ship Arion, remains unresolved. Interim mooring arrangements remain in effect. Both Egypt and MFO asserted claims against the vessel owners and insurers for damages and costs associated with this incident. We continue to hope that repair will be undertaken by the Egyptian authorities in the near future. As a result of damage to the pier and the subsequent realignment of the CPU compound perimeter, additional force protection measures were implemented on a temporary basis. These included the construction of protective bunkers and concrete vehicle barriers. FIXED WING AVIATION The French Fixed Wing Aviation Unit (FWAU) flew 698.7 accident-free hours with its Twin Otter (DHC-6) aircraft. The Twin Otter is a critical asset and continues to be our primary platform for bi-weekly COU aerial reconnaissance of our large mission area. It is our principal means for transporting senior visitors, staff members and other passengers between North and South Camps, and senior MFO and liaison system leaders to meetings. This aircraft is also available for medevacs. The Twin Otter is extremely reliable and superbly maintained, with a near perfect 99.7% availability rate throughout the year. This operational readiness rate is a direct reflection of the professionalism and dedication of all members of the French FWAU and the commitment demonstrated by the French Government. The FWAU provided support to seven bi-lateral and tri-lateral meetings in North Camp, Cairo, and Tel Aviv, as well as several additional visits by CLAWIO to North Camp. Such flights in and out of Cairo follow a more circuitous flight path than applies for other MFO flights, and we continue to seek clearance from the Egyptian authorities for a more direct routing in order to conserve valuable flying hours. ROTARY WING AVIATION The Rotary Wing Aviation Unit (RWAU), provided by the Aviation Company of the U.S. Support Battalion (SPTBATT), continues to be a significant workhorse for the Force. It performs COU reconnaissance and verification flights, command and control flights, visitor transportation, medevac, and re-supply and personnel rotation flights to remote locations within the Sinai.

The RWAU flew 1829 accident-free hours in FY 02, but personnel and spare

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parts shortages impacted on our ability to fully support the mission and meet training goals. While hard work by the Aviation Company’s maintenance personnel resulted in an acceptable overall operational readiness rate, I have previously noted the negative impact in certain periods due to maintenance problems. A key contingency mission of the RWAU is medevac support to MFO personnel. The MFO also provides medevac support when there is a threat to life, limb or eyesight to the local population and tourists. The RWAU performed 20 medevac missions consuming 58 flying hours during the past year, all involving MFO personnel. Another critical mission is the aerial resupply of OP 3-11 on Tiran Island in the Strait of Tiran, the only viable method of support for this isolated OP. An average mission delivers seven to eight 1,000 lb. loads of food, water, equipment and fuel to the island and backhauls one or two slingloads to the staging area at either OP 3-9 or 3-10. FLIGHT FOLLOWING As the Sinai develops, coordination of our aviation operations becomes increasingly complex and important. The Canadian Flight Following Section at North Camp continues to support MFO and authorized visiting aviators. Close contact is maintained through the liaison systems with Israeli and Egyptian civilian and military aviation authorities. There are direct daily contacts and periodic meetings with local civilian air traffic controllers at the el Arish and Sharm el Sheikh airports, and periodic meetings with the Civil Aviation Authority in Cairo. We similarly conduct periodic meetings on air traffic control in Israel. The Flight Following Section is responsible for providing 24/7 air operations and meteorology services to all MFO aircraft operating within the MFO area of responsibility and to all aircraft inbound and outbound at el Gorah/North Camp. Daily runway inspections are conducted; runways are cleaned as required for aircraft arrivals and departures. Approximately 2000 flights were provided MFO Flight Following services over the past year. These included VIP, operational, training and visiting flights.

TRAINING

Training is critical in an organization like the MFO with constant personnel rotation. The Training Section consists of the Staff Officer Training (Canadian Major), the Training and Development Warrant Officer (Australian WO1), and the

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New Zealand Training and Advisory Team. The Section is the principal element within the Force responsible for the training and operational evaluation program.

MFO training remains focused on “training the trainers” to develop common operational standards among the units and contingents in the MFO. During the past year, the Training Section conducted 16 Remote Site Commanders’ Courses, 14 Range Conducting Officers’ Courses, ten Duty Investigator Courses, six Operational Readiness Checks, 19 unannounced inspections, two Force Skills Competitions, three Site Assistance Visits, and a number of exercises and assistance visits. Over 1,480 drivers were trained and tested to operate MFO vehicles, while ten Driver Trainer Courses and five Defensive Driver Trainer Courses were conducted for the contingents. As a result of fatal vehicle accidents experienced during the year, greater emphasis has been placed on the training of drivers and supervisors by the U.S. Support Battalion and the New Zealand Training and Advisory Team. Emphasis is placed on preparing and sustaining individual and unit skills directly related to operational performance, mission accomplishment, force protection and safety. We seek a high, common operational standard across all elements of the Force. Training is designed in three broad areas:

pre-deployment, the period prior to arrival in the Sinai; •

•

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task specific and orientation training in the period immediately upon arrival in the Sinai; and

skill maintenance and continuation training while operationally deployed.

The strong training emphasis seeks to offset the effects of frequent rotations of units and personnel on dissimilar tour lengths.

Operational Readiness Checks and short notice inspections are critical tools. They cover all facets of remote site operations but concentrate on areas requiring improvement previously identified during the inspection process or through routine monitoring of unit operations. To assist pre-deployment preparations in troop-contributing countries, the MFO provides a Pre-Deployment Training Package that is constantly reviewed and updated. The package is available in a CD ROM format, in English and Spanish.

A significant Force training event is the biannual Force Skills competition, an integral part of the Force training program since 1982. This spirited competition brings the Force family together with the common purpose of competing in soldierly skills critical to the effective accomplishment of the Force mission. Competition occurs in areas such as detection and marking of land mines, map reading, marksmanship, first aid, recognition and reporting, and physical fitness. A separate but similarly important event is the Force Drivers’ Skill Competition

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conducted biannually. It includes all aspects of driving, safety, and basic vehicular repairs. This year the Second Battalion, Fijian Infantry Regiment took top honors in the Force Skills competition as well as the Force Drivers’ Skill Competition.

Finally, the Force training staff plays a major role coordinating such key events as the Force Safety Days, Force Protection Days and Casualty Evacuation exercises.

SAFETY

In the past FY we suffered three different fatal vehicle accidents resulting in the death of eight people: four non-MFO Egyptian nationals, and four MFO members, two Fijian and two U.S. All of us are greatly saddened by these unnecessary and terrible losses. Once again vehicle accidents constitute the single biggest risk to our personnel. The MFO has never lost any MFO member to hostile action. We have worked hard to promote safe driving and understanding of the serious road hazards in our area of operations. We are disappointed and frustrated by the persistence of tragic road accidents. To ensure that we did not miss anything in assessing the causes of these fatal accidents, we solicited the assistance and recommendations of professional accident investigators in two cases where mechanical deficiencies conceivably might have been the cause. The investigators confirmed speed too fast for conditions as the main cause of the two accidents and offered useful recommendations, as did our own internal Boards of Inquiry convened in all three cases. We are working to ensure that corrective measures remain effective through rotations of personnel and over time. Lessons learned must become engrained in our practice and SOP so they are not lost. The root cause of almost all our serious accidents remains excessive speed for conditions. Other contributing factors include under-estimation of road dangers; complacency; failure to use seat belts; failure to perform operator level maintenance and load checks; and failures to follow prescribed procedures. In addition to our on-going safety education, use of “Drive Right” vehicle monitoring equipment and training efforts have been reinforced. Other measures include:

A review of transportation missions and the support they provide to look systemically for opportunities to do things differently and thereby reduce the frequency and size of deliveries.

•

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Improved inspections including comprehensive pre-mission vehicle checks.

•

•

•

•

•

•

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Increased FMPU highway patrols and speed checks of MFO traffic.

A more focused role for our leaders in safety awareness.

Timely driver notification of road hazards and provision of updated route maps.

Monthly Force Safety Council meetings to gain feedback from unit representatives on safety concerns and publicize safety information.

A more comprehensive licensing system for heavy vehicle operators.

Biannual Safety Days. On these occasions, vehicle operations are suspended to focus on vehicle operator refresher training and safe vehicle operations. Classes emphasize the hazardous driving environment in the Sinai, proper safety techniques for reversing vehicles, vehicle preventive maintenance and defensive driving techniques. In addition to vehicle safety, Safety Days also educate leaders and soldiers on fire safety, mine awareness, and general workplace safety.

Through such measures we did achieve a 50% decrease in the total number of severe accidents in the past FY. I ask all the leadership at the Force to keep road safety ‘up front’ to save lives.

MILITARY POLICE

The Force Military Police Unit (FMPU) consists of Hungarian military and police personnel assigned at both North and South Camps. The FMPU are augmented in their duties by a platoon of 24 U.S. military police at South Camp and Fijian and Colombian military police personnel at North Camp. They investigate incidents and traffic accidents involving Force personnel and establish their cause. They also investigate allegations of criminal misconduct or breaches of discipline or good order by MFO personnel. As noted previously, FMPU patrols and speed checks are an important deterrent in our campaign against serious road accidents. The MFO continues to benefit from the FMPU’s thorough and conscientious discharge of its duties.

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LIAISON The close cooperation between the Parties’ liaison organizations and the MFO remains a key component of the confidence-building intended by the Treaty drafters and is central to the success of the MFO mission. The security annex to the Treaty (Annex I) created the liaison system and gave it the responsibilities to:

Assess implementation of the Annex. •

•

•

•

Resolve any problem that may arise in the course of implementation.

Prevent situations resulting from errors or misinterpretations, and

Refer to higher authorities any matters it cannot resolve.

In light of the continuing violence and tension in the region, the work of the liaison system is more critical than ever before. There has been an increased pace of meetings at senior levels, usually facilitated or hosted by the MFO. These are complemented by daily interaction of liaison personnel in the field. The liaison system is the focal point for violation reporting and discussion, and is the mechanism by which the Parties adapt Treaty limitations to special circumstances such as emergencies or special activities like mine clearing or medical team visits. The MFO’s Liaison Branch is the primary interface with and between LAWIO and IDFLFRD. The Branch is led by a Canadian Colonel based at North Camp. His deputy, a French Lieutenant Colonel, is responsible for the six Field Liaison Officer (FLO) positions at North Camp, senior Majors from Colombia, Fiji, Hungary, New Zealand and Norway (2). A French Lieutenant Colonel heads our liaison effort at South Camp, assisted by an Italian officer, an American officer and several American translators. Liaison staff in Cairo and Tel Aviv, one U.S. military and three local national civilians, further extend the reach of the Branch and maintain links with liaison system head offices, police, airport and other local authorities. Liaison Officers (including the command element) are posted to the MFO for a twelve-month period, a tour length linked to developing and fostering the relationships essential to the mission's success. These are coveted positions, and many of our FLOs have prior regional, peacekeeping or observer experience. The MFO Liaison Branch is ready to act on a zero-notice 24/7 basis. It plays significant roles during medevacs and in the aftermath of accidents, including short notice air clearance for medevac flights, on-site coordination with LAWIO in

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accident site control and liaison with local authorities such as civilian police and medical examiners. It maintains a regular daily presence at the el Awga/Nizzana crossing to ensure smooth operations and good communication with customs and immigration authorities on both sides of the border. Both LAWIO and IDFLFRD have conducted a seamless change of commanders during the reporting period. The fact that the MFO is a uniquely structured organization working directly for the two Treaty Parties, and that both have an operational and financial stake in us, positively shapes all of our relationships, fostering good will, trust, a “can-do” problem-solving approach and a shared belief in the mission.

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COMMUNICATIONS AND INFORMATION SYSTEMS (CIS) The MFO is making great strides in ensuring that all MFO elements have appropriate, reliable communications and information technology to do their jobs. We have a positive synergy between our Director of Information Systems in HQ and the Chief of the Communications and Information Systems Branch, one of our key civilian appointments at the Force. Without question the FY 02 CIS priority was the successful roll out of our new ERP system, an integrated database for financial, logistics and human resources management. We worked on catching up on training needs, ensuring the quality of data in the system, and exploring the system’s functionality for report-writing and management information. In FY 03, we will be perfecting our database, providing more targeted and specialized training, expanding use of reporting tools, and exploring possible application of ERP modules not yet implemented, such as funds management and workflow processing. Many larger organizations have spent far more money and suffered heartache to arrive at failed ERP implementations. The MFO implemented ERP on a comparatively modest budget, a fast schedule, and contained the inevitable adjustment problems. This is a tribute to the hard work of many key users and MFO project participants at all MFO locations. The transition was not without sweat and some tears, but it is now a known, working and powerful tool. Six months after going live with ERP we were able to dispense with the services of outside consultants and rely on internal MFO resources to manage and enhance the system. As described later in this report, we have seen early savings and efficiencies from ERP. Our challenge ahead lies in maximizing our return on this investment. Other FY 02 computer-related projects included:

Replacement of the MFO identity card with a new card containing printed and magnetic strip information. An automated system will give us the internal capability to flexibly design and produce MFO-unique cards. The card will have security features including a hologram and a digital signature making it extremely difficult to replicate, complementing other force protection measures. The new card also gives us the possibility and flexibility to proceed with other projects linked to our ERP system such as personnel tracking, vehicle operation and tracking, authority for controlled item issue, and detailed counts of personnel using facilities. While I hope for many positive benefits, to spike any rumors before they start, I will not use this technology to implement portion control at the dining facilities.

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•

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•

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A study to move away from the mix of systems which currently provide tools for email, information sharing and document dissemination. We believe we can provide a more structured and efficient environment that will facilitate information sharing within the MFO and externally.

The Signals Section of the CIS Branch installed a new Flight Following VHF radio network which became fully operational this year. This network allows the MFO air traffic controllers to reliably communicate with aircraft, fixed wing and rotary, throughout the MFO area of operations. The network consists of base stations housed within MFO North and South Camps and four repeaters located at MFO remote sites. The MFO VHF ground repeater network was also updated. In the process, a repeater was relocated from Repeater Station 2-3 in the COLBATT sector and the site was closed.

Other FY 02 communication projects included:

Installation of a leased 1MB fiber circuit between the MFO Cairo office and South Camp for voice and data communications. A similar link was already in place between North Camp and Cairo;

Working with the Dutch telecommunications company Xantic, procurement of advanced communications upgrades based on satellite links. Together with key leased lines from Egypt’s ECC and Bezeq in Israel, implementation of these upgrades, currently under way, will provide us with reliable and redundant voice and data communications between all main MFO locations at reduced overall cost;

Procurement of Thuraya phones for COU and other selected missions. These phones allow users in the field to communicate using either any available cellular service or, if unavailable, a satellite link.

The CIS branch was reorganized and new recruitment focused on updating skill sets to keep pace with technological changes and changes in the hardware and software utilized by the MFO. The on-going standardization of our systems and communications environment will facilitate cross-training staff in necessary skills and focus requirements in recruiting new CIS personnel.

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PERSONNEL SERVICES

The Personnel Services Branch provides administrative and personnel services for military personnel, MFO Direct-Hire Civilian (DHC) employees, and MFO Contract Hire Civilians (CHC). The Branch oversees the Force Exchanges, the MFO Club System, the Force Libraries, the Morale Support Program and Force postal operations. Over time, the MFO has increasingly relied on civilian employees in key positions to maintain continuity of program and effort amidst a transient military peacekeeping force and to provide commercial and specialized expertise in areas that support MFO operations. In FY 03, this long-term process will continue, and we will civilianize the position of Chief of Personnel Services. This reflects the evolution of the work of the Branch and the need for continuity. There is a significant civilian and commercial component to the work of the Branch, including oversight of DHC and CHC staff, the successful operation of the Force Exchanges and other morale support activities, and exploitation of the new ERP human resources module. This key position has been staffed by Norway, whose officers will continue MFO service in the important role of Chief of Operations and in two liaison system positions. I have emphasized to Norway our appreciation for their longstanding, dedicated and excellent support, and our desire that it be continued in these significant positions. As just noted, the Branch is responsible at the Force for administration of the ERP human resource module. This module is the basis for personnel management and the several smart-card related applications I have mentioned. Use of this commercial module in a rotational military Force presents special challenges in managing constant data change and continual training for new personnel. The Force is conducting an Organizational Development Efficiency Review that will examine the rank, trade, skill, and experience required for each position on the Force Commander’s staff and suggest realignment where necessary. The focus of this study is “best use” of our assigned personnel resources. The study is to identify areas undermanned for their tasks and make recommendations on redirection of other assets to balance the workload. In keeping with MFO policy, there will be no net increase in the number of personnel assigned to the Force. The Personnel Services Branch is overseeing the production and dissemination of the new security-enhanced MFO ID card mentioned previously, for all MFO locations and all categories of ID card holders. The CHC Program was implemented just over two years ago to expand the traditional military and expatriate resources available to the MFO through

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recruitment in Egypt of selective white collar professional and technical personnel. We currently have thirteen CHC’s employed in the Sinai.

MORALE SUPPORT PROGRAM (MSP)

The Morale Support Program (MSP) continues to provide quality support, particularly important under current circumstances when several popular destinations outside the area of operations regrettably remain off limits at most times. Profits from the Force Exchange and Club Systems in North and South Camps help to fund the MSP program. Tours continue to be popular, to destinations in Egypt and currently permitted Israeli destinations like Masada, the Dead Sea, Beersheva and Eilat. We are also fortunate that the Sinai has close-by major tourist destinations such as Mt. Sinai and the resort development along the Gulf of Aqaba. We are rehabilitating several closed barracks at South Camp to accommodate more soldiers on leave; many soldiers cannot afford even the attractive discounted rates offered by local hotels to MFO personnel. Sports programs at both MFO camps remain a key part of the MSP program. Sports competitions take place in basketball, floor hockey, soccer, volleyball, softball, touch rugby, tennis, swimming and touch football. The 20th Anniversary program included a truck pull, triathlon, and a closest-to-the-pin golf competition. The MSP is funding the acquisition and replacement of gym equipment for North and South Camps and the remote sites. In addition, plans are in place to improve the existing workout facilities in North and South Camps by providing designated rooms specifically for cardiovascular enhancement. The MSP pays particular attention to providing a spirited end of year holiday program to entertain members separated from their families. The program caters to the many varied interests and traditions of the nations represented in the MFO. In the holiday season and at other times, some Participating States, including Canada, Colombia, the United States and Uruguay, have provided entertainers and groups to perform at the Force at no cost to the MFO, and open to all our personnel. We greatly appreciate this support. In North Camp a smoke-free and alcohol-free club was opened using existing facilities. This successful club provides an Internet Café, a wide-screen TV and showings of popular movies, pool tables, and a take-out counter where members can order a wide variety of foods. The interior of the theatre was renovated, including floor repairs and new floor lighting and electronic equipment. The Libraries in North and South Camps continue to provide not only a wide range of books and magazines but also educational tapes for learning a new language and popular movies in both DVD and VHS format.

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SUPPORT

Feeding, housing, equipping and supplying the Force and Observers at our two camps and 30 remote sites in the Sinai remains demanding. This support requires a combined effort of all our MFO locations. At the Force, under the Chief of Support (a U.S. Colonel), a team of civilian and military professionals oversees logistics. The team includes the U.S. Army First Support Battalion, Direct Hire and Contract Hire Civilians, and the expatriate and Egyptian national personnel furnished by our support services contractor. The DGR offices in Cairo and Tel Aviv support the Force in their respective markets with procurement, customs, transportation, disbursement and other logistics services. MFO Headquarters handles troop rotation contracting and insurance, and offers specialized staff support and program direction for the logistics effort.

The key logistics event in FY 02 was embracing our ERP system and putting it to work. ERP integrates procurement, receipt, invoice verification, inventory management, related budgeting, property accountability and work order management. It is in the area of supply that we anticipate the greatest material payback from the ERP’s information and management tools. Specifically we are focusing these tools on achievement of key performance indicators throughout the logistics system, based on MFO customer satisfaction. Long-term areas of savings opportunities have been identified (inventory, equipment, consumption, and the support services contract), linked to improved reporting. ERP data has already helped us to identify potential savings from better management of air, ocean and land transportation of goods. As a result, we are recompeting our freight forwarding contract and hope to see improved service and lower costs; we are decentralizing decision making and fiscal responsibility for shipment choices; and we are looking for efficiencies in internal MFO movements of supplies between our camps and remote sites. Immediate benefits were a reduction of $200K in spending on facilities and engineering supplies and materially reduced cycle times for requisitions. We expect to reap similar benefits over time as our exploitation and experience with the system and its tools expand. The plant maintenance module within the ERP system has been used to streamline our procedures for equipment management. Equipment is now monitored at every stage from purchase, through receipt and issue to end-use. We can more readily see where a piece of equipment is, who is using it and how much we spend on its maintenance. We intend to develop more reliable life cycle costs for equipment and more accurate equipment replacement plans.

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SUPPORT BATTALION ROLES

The U.S. Army First Support Battalion (SPTBATT), part of the U.S. Contingent, plays a central logistics role, providing a wide range of services to the Force. SPTBATT is one of the most diverse and logistically capable units in the U.S. Army, with 65 different Military Occupational Specialties among its 309 personnel. It is organized into a Headquarters and Supply Company, a Supply and Transportation Company, an Aviation Company (previously discussed), a Medical Company and an Explosive Ordnance Disposal Detachment. Its support to the Force encompasses preventive medicine services, food inspection, mortuary affairs, remote site re-supply, medical evacuation, ammunition storage and management, and postal services. SPTBATT aviators and drivers are part of the Force’s daily presence in Zone C for observing and reporting any matters of Treaty significance. Headquarters and Supply Company (HSC). The HSC provides command and control, administrative and logistical support to SPTBATT, as well as a senior MFO chaplain. The chaplain is augmented by two Colombian and Fijian contingent chaplains and a USBATT chaplain at South Camp. In addition, HSC provides an U.S. Army post office that handles official MFO mail and official and personal mail for the U.S. military personnel, other U.S. citizens and the Canadian contingent, processing some 32,000 pieces of incoming and outgoing mail yearly. The Supply and Transportation Company provides ground transportation of all classes of supply from ports and supply points in Israel and Egypt to the camps and remote sites. Driving missions at North Camp are shared with two other contingents, New Zealand and Uruguay. The Company completed 5,847 transportation missions, traveled more than 2.5 million kilometers, and delivered 27,000,000 liters of potable water and 1,630,680 liters of fuel during the past year. On average, each vehicle operator in the Company will drive 45,000 kilometers during a one-year tour in the Sinai under very difficult conditions, significantly more mileage than they would accumulate at home. The Explosive Ordnance Disposal (EOD) Detachment rapidly responds to unexploded ordnance (UXO) and improvised explosive device hazards. In FY 02, EOD recorded over 120 incidents involving over 500 UXO’s ranging from 20mm anti-aircraft rounds and landmines to a 750lb bomb. The detachment instructs new personnel on the hazards of explosives, with special attention to site commanders, gate guards and members of the COU. EOD continually updates a Hazard Area Map, providing the MFO with data on known or suspected minefields and other UXO locations in Zone C. The Medical Company provides medical treatment facilities at both North and South Camps for emergency and routine medical and dental care to all Force

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personnel, and refers or evacuates patients as required to higher levels of medical care. Specialties include community health counseling, physical therapy, orthopedics, laboratory, pharmacy, X-ray, preventive medicine, dental and veterinary services. The Company’s medical logistics section handles medical supply and equipment repair. Doctors and dentists from five other contingents (Colombia, Fiji, Hungary, Italy, and Uruguay) join with the Medical Company to make up the Force medical staff. The availability of on-site professional, quality care provided by our medical personnel is critical to the morale of contingents participating in the MFO.

SUPPLY & PURCHASING

This FY was one of significant change for procurement and inventory management, in particular with the challenges and opportunities of the new ERP system. The ERP system has allowed, for the first time since the MFO’s inception, real time visibility of stock, goods in movement, issues and transactions at all MFO locations. This gives us greatly increased visibility of consumption and demand, allowing us to better plan, budget and forecast requirements. Reorganization in the CSP Branch and new recruitment were focused on strengthening skills to maximize our benefits from ERP and enhance material planning. We continued in FY 02 to find new local vendors and products, improving choice and quality while reducing costs and reliance on off-shore vendors with longer order-ship times. The Cairo and Tel Aviv buyers again demonstrated their initiative by securing alternative competitive sources for meat products when vendor sources had to be changed due to incidents of BSE and Hoof and Mouth disease. Their swift action contained increases in the food budget. Most key Blanket Purchase Agreements were extended at stable, FY 01 prices. In FY 03 we anticipate that re-tendering of many of these BPAs will continue to contain inflationary costs. Our continued focus on procurement in the two Receiving States reduces customer-wait time from offshore vendors and implements as much as possible a kind of “just in time” supply chain that keeps inventory on vendor shelves rather than on ours. In FY 02, based on unaudited data, MFO disbursements amounted to approximately $13.5 million in Israel and $14.2 million in Egypt. This continues to represent a significant percentage compared to each Party’s FY 02 financial contribution of $16,015,346. These amounts include MFO, Force Exchange (FX) and Morale Support Program spending, but exclude the considerable personal spending by MFO members in both countries on travel, tourism and other personal purchases.

37

MFO spending reached many Participating and Donor States including Australia, Canada, Germany, France, Hungary, Japan, Switzerland and Uruguay, as well as Italy, both a Participating and the Headquarters State. Vehicle purchases, the net cost of aviation related procurement via the U.S. DOD, the support services contract and our U.S. national payroll continue to drive a significant level of net disbursements to U.S. sources, amounting to approximately $10.7 million in FY 02 (unaudited).

Table Four.

We are pleased that we continue to return a great deal of money to the economies of both Parties. In all cases, procurement is based on open competition of MFO-specified requirements. The dynamics of market forces—not political quotas—guide our specific decisions. Inevitably, changes in economic and marketplace conditions produce shifts of business back and forth over time.

AVIATION SUPPLY AND MAINTENANCE

I have already reported on the success of our skilled and hard-working aviation supply and maintenance personnel in maintaining an acceptable overall rate of readiness of the UH-1 fleet despite serious challenges. I am also very pleased to report that we continued our accident-free aviation safety record. Our excellent professional relationship with the U.S. Army’s Aviation and Missile Command (AMCOM) facilitated management of safety of flight and aviation maintenance information messages, and helped the MFO acquire critical parts for aircraft

MFO DISBURSEMENTS - FY93 TO FY02 (UNAUDITED)

5.0

10.0

15.0

20.0

Fiscal Years

USD Millions

In Egypt 10.6 11.0 11.7 12.2 12.4 14.2 14.2 14.4 13.6 14.2

In Israel 10.7 11.0 10.1 10.3 10.6 12.4 12.1 12.5 12.3 13.5

Egypt & Israel Contribution 17.2 16.7 16.1 15.4 15.4 15.4 15.6 15.9 15.9 16.0

93 94 95 96 97 98 99 00 01 02

38

readiness. Last year AMCOM positioned three demilitarized UH-1 airframes at Fort Bragg, North Carolina, for use by the MFO. The serviceable components and repair parts from these aircraft have saved the MFO over $60,000 this FY. The MFO pays only for transportation of needed parts. DOD also decided to pre-position 24 lines of repair parts at North Camp at no MFO cost until they are needed. This has given the MFO access to hard to come by items with no waiting time for issue. Needless to say, we are very grateful for this sustained U.S. Army support. During FY 02 we were assisted by two depot-level maintenance teams from Fort Bragg. They undertook repair tasks that are beyond our internal capabilities, trained mechanics on UH-1 maintenance skills and performed regularly scheduled helicopter services. When required, we also make use of Israeli Aircraft Industries for a variety of DOD-approved maintenance services. Over the past six months the Aviation Supply and Maintenance Manager has established a test measurement and diagnostic program for calibrated equipment through a U.S. Army facility in Germany that has a 75% faster turn-around rate than continuing to use Fort Bragg. Items in this program are cost-effectively shipped via the U.S. military postal system, weight permitting. Pilot simulator training in Hanau, Germany, saved the Force over 104 helicopter flight hours. An Aircraft Condition Evaluation (ACE) Team from Germany inspected the Force Aviation Fleet in July identifying cracks in the tail boom mounts of four aircraft. A U.S. Army team deployed to the Sinai and repaired the aircraft on site at a minimal cost to the MFO. Through measures like these, based on firm support from the U.S. Army and the professionalism and accomplishments of our own talented maintenance personnel, we have been able to support the venerable UH-1 “Huey” in continuing to meet the MFO’s rotary wing requirements. VEHICLE MAINTENANCE AND

FLEET MANAGEMENT For the fifth straight year the Force maintained a 97% in-commission rate for the vehicle fleet. This accomplishment was a direct result of many maintenance initiatives including diagnostic procedural improvements, manufacturer training with follow-on in-shop training, and increased parts availability from local vendors. Closely working with Headquarters U.S. Air Force Europe (USAFE) we managed to acquire a crane, loader, and excavator under their excess property program at no cost except for transportation. This was an excellent initiative of our prior vehicle maintenance manager.

39

We continue to review user requirements and mission needs to ensure we buy the right vehicles. As an example of right-sizing to requirements, this past FY the Force replaced small SUV type Jimmy’s with more suitable sedans. A policy that rotates high-mileage vehicles with low-mileage ones evenly distributes use, thereby increasing the fleet’s resale and warranty value. We continue to sell four-year old vehicles in the Israeli re-sale market at a reasonable rate of return, with proceeds used to reduce each FY’s expenditure on new vehicles.

TRANSPORTATION

The Force Transportation Office (FTO) plans and co-ordinates the Sinai arrival and departure of all personnel, and delivers and forwards unaccompanied baggage. FTO serves as the Contracting Officer’s Technical Representative for commercial travel and bus services contracts. FTO also organizes the regular food, fuel and water supply missions to support each of the remote sites. The coordination of changeover or rotation of military personnel, as summarized in the table below, requires considerable effort and involves the troop contributing nations, Headquarters staff in Rome, the DGR staffs in either Cairo or Tel Aviv, and, of course, the FTO and transportation staff on the ground. Rotations Section. The Rotations Section ensures the unimpeded flow of contingent personnel, baggage, and equipment into and out of the Sinai. Rotations large and small are constant, the most complex being the rotations of the three infantry battalions. The last USBATT rotation in July involved 4 container shipments by sea and over 1000 personnel deploying in and out of Ras Nas Rani Airfield and Cairo International Airport. Additionally, the FTO is looking at new travel agents and itineraries in an effort to lower individual rotation costs.

ROTATIONS

1582

101265

180

600

74

1289

69

699

90 60 600

200

400

600

800

1,000

1,200

1,400

1,600

1,800

Jan-02 Feb-02 Mar-02 Apr-02 May-02 Jun-02 Jul-02 Aug-02 Sep-02 Oct-02 Nov-02 Dec-02

PER

SON

NEL

Table Five.

40

Surface Section. The Surface Section manages ground vehicle assets and operators to meet the needs of the base camps and remote sites. On average, the Section coordinates transportation for 79 missions per week from North Camp and South Camp combined. The FTO is participating in a water production and analysis study to improve the current Force water distribution plan and to reduce driving missions.

SURFACE MISSIONS

0

100

200

300

400

500

600

700

800

900

1,000

Jan-02 Feb-02 Mar-02 Apr-02 May-02 Jun-02 Jul-02 Aug-02 Sep-02

MIS

SIO

NS

TREU NZ CON TotalSupport Bn

Table Six. Travel Section. The Travel Section arranges individual travel itineraries for temporary duty, emergency leave, repatriations, and individual rotations. The section also oversees contracted bus services and handles Twin Otter aircraft reservations. When HQ-contracted rates are not available for individual travel, the section uses a competitive bidding process with Egyptian and Israeli travel agencies to reduce MFO costs and increase responsiveness. Unaccompanied Baggage (UB) Section. The UB section coordinates and tracks inbound and outbound personal effects and UB shipments including reception, delivery, pack outs, and claims processing. The section manages an average of 15 pack outs and deliveries per week and works closely with liaison and host nation customs authorities to reduce the customs clearing time for UB shipments.

UNACCOMPANIED BAGGAGE

0

10,000

20,000

30,000

40,000

50,000

60,000

Jan-02 Feb-02 Mar-02 Apr-02 May-02 Jun-02 Jul-02 Aug-02 Sep-02

KIL

OG

RA

MS

Table Seven.

41

CONTRACTS

The MFO invests a significant proportion of its budget for contracted services that directly support the Force. At the close of FY 02, the Force Contracts Manager was supervising 19 contracts representing a combined annual not-to-exceed value of over $8,500,000. Rome HQ supervises an additional 15 contracts with an annual expenditure of over $3,800,000. The most significant contract is our long-term support services contract with United States-based Holmes and Narver Services Inc. (HNSI). HNSI and its Cairo-based subcontractor Care Services continue to provide us excellent service. Because HNSI has been so forthcoming and cooperative in joining with us to more closely identify and reduce costs, I have decided to continue our relationship. We are currently engaged in negotiations on a three-year extension of the contract. We have successfully contained and reduced contract costs in the past, and continuing to do so is critical to my budget strategy. While I am confident the negotiations will conclude satisfactorily, some key issues remain on the table, including overheads that relate to the labor services subcontract. The new contract will contain more extensive provisions for effective monitoring and reporting of all aspects of contractor performance. These will help to ensure that we continue to get the services we pay for and remain focused on continuous process improvement. “Most Efficient Organization,” bottom-up reviews of contractor and subcontractor manning are planned in FY 03 in vehicle maintenance, dining services and engineering and facilities (the latter two were deferred from FY 02). The reviews will include MFO staffing and the division of labor with the contractor in each of these areas. Conclusions resulting from such studies, after review by MFO and HNSI, will be reflected as needed in subsequent modifications to the contract. Previous reviews have resulted in net savings. I continue to welcome the cooperative approach of HNSI and Care Services’ managements in providing quality support for our personnel and in controlling costs. The other Force contracts provide for a variety of services, including bulk fuel supply, facilities repair, bus services and dry dock maintenance for Coastal Patrol Unit vessels. One of the repair and maintenance contracts this FY was for refurbishment of the North Camp kitchen, a major project that involved a coordinated effort between a commercial contractor and HNSI to ensure continued dining services during the work. Other contracted work included rewiring the South Camp Education Center and Library, repainting a 1000 cubic meter potable-water storage tank, and re-roofing four buildings including the hangar at NC.

42

Our performance-based approach to contracting continues to be effective, encouraging a better and more consistent standard of service. Performance-based contracting includes result-oriented statements of work, incentives for good performance, and penalties for below-standard performance. We are developing a formal Quality Assurance Surveillance Plan for all contracts to detail and standardize how MFO officers supporting the Force Contracts Manager are to inspect, evaluate and report on contractor performance in their areas. Troop rotation contracts are managed at the HQ in Rome. The situation of the aviation industry post-September 11, 2001 has facilitated cost control and securing improved services, such as greatly increased baggage allowances for our Colombian and Uruguayan soldiers at no additional cost. Through recompetition and prudent negotiations, we are continuing to drive down our support costs while identifying new opportunities to better support our troops in transit to and from the region.

FOOD SERVICES

The MFO has a long tradition of providing our personnel with a wide choice of well-prepared food. The Food Services Section oversees food services to meet the diverse needs and tastes of the eleven contingent nations in the MFO. Selection, variety, quality and consistency are important aspects of keeping diners satisfied. Meals must be well balanced, nutritional and eye appealing. The current contractor, HNSI, continues to supply exceptional service. Continuous training, observation, and coordinated inspections of all food service operations are essential to the operation of the dining facilities at both camps and, even more importantly, at remote sites. Training is provided to remote site commanders to assist them in maintaining proper sanitation and health practices. HNSI provides on-the-job training for members of units to familiarize them with proper remote site kitchen procedures. Accomplishments during the past year include: •

•

Maintaining an outstanding level of food service throughout the disruptions of the North Camp Dining Facility renovation.

The installation of a new dishwasher, dryer, disposal and ventilation system at the South Camp Dining Facility, resulting in a higher standard of sanitation and vast improvement in the working environment.

43

•

•

•

The planning and menu revisions necessary following the disruption of planned meat supply due to BSE.

Adaptation to ERP including the automation of ordering and inventory control processes.

Support during the 20th anniversary of the MFO that included coordination of a food fair highlighting the national dishes of the countries represented in the MFO.

The good work of the Food Services Section has well supported the mission and materially contributes to the high level of morale and health of our personnel in the Sinai.

MEDICAL

Overall, the health of the Force during FY 02 has been very good. Both North and South Camp Clinics continue to deliver excellent quality routine and emergency medical care. Any health needs outside of the local scope of care continue to be referred to host nation hospitals for evaluation and treatment. Referral rates have remained consistent over the past several years. Force Medical personnel continue to provide excellent and invaluable care through a variety of services and specialties.

Medical Treatment Facilities. The two Camp Medical Clinics saw a combined total of almost 10,0000 outpatient visits this year. These ranged from routine sick call and minor illnesses to acute trauma management and stabilization. Care of our military and civilians was additionally supported by nearly 2,200 physical therapy appointments. The Force Surgeon continues to assist in arranging all needed medical evacuations and to screen and approve all outpatient referrals. Medical Training. Both North and South Camp Clinics offer training for contingent medics, including an Emergency Medical Technician course and the Combat Lifesaver and First Responder courses (in both English and Spanish). It is our continuing policy to ensure that each medic receives at least one week of dedicated medical training every six months. Two casualty evacuation exercises were completed this year to ensure our continued readiness to appropriately respond to this type of event. Joint training exercises in vehicular extraction and search and rescue were conducted with personnel from the Fire Department, Aviation Company, and CPU. Preventive Medicine. The Force Preventive Medicine Service is our first line of defense against diseases from food, water, or pests. This very busy service performed over 2040 samplings and inspections of our water systems at both

44

camps and all remote sites, and continuous inspection and monitoring of our dining facilities and food preparation practices. In conjunction with the U. S. Naval Medical Research Unit-3 we cooperate and participate in screening and research programs such as the West Nile Virus vector surveillance program.

Veterinary Medicine. Our Veterinary Section inspects all of our inbound food supplies and our regional food vendors to ensure that health standards are met. During the year, 47 vendor inspections were completed in Egypt and Israel. Mental Health. The Mental Heath Section has continued to provide exceptional support to our soldiers this year in this sometimes stressful environment. The Section provides routine assessment and outpatient counseling, and conducts a substance and alcohol abuse prevention and treatment program.

45

FORCE ENGINEERING OFFICE

The Force Engineering Branch (FEO), under a civilian Force Engineering Officer, is responsible for real property maintenance and construction at North and South Camps and the remote sites. The Branch is made up of military and civilian personnel from Australia, Canada, the Republic of the Fiji Islands, New Zealand, the United Kingdom, the United States, Uruguay and contractor personnel. The FEO mandate includes water, power, facilities and road work. Daily Branch taskings include: water production, supply and distribution; electrical power production and distribution; facilities maintenance; wastewater treatment; physical force protection measures; unpaved road maintenance; fire protection and prevention; and the management of all the accommodations and furnishings of the Force. By policy, our facilities effort is aimed at conservation, maintenance and refurbishment, not expansion or new construction. Water •

•

•

•

Early in FY 02 an environmental milestone was reached when the North Camp Waste-Water Treatment Plant operation became completely self-contained within the confines of the Camp. All North Camp generated waste- water is now processed and fully recycled to irrigate the Camp. The reverse osmosis (RO) desalinization plant at South Camp was renovated in FY 02 with the installation of new filtering membranes and a new high-pressure pump. We negotiated an agreement with the South Sinai Water Company to be a contingency supplier of water during routine RO plant shutdowns for maintenance and any unexpected failures of the plant. To deliver this back-up source of water, the local water distribution network was linked by pipeline to South Camp. We are in the final stages of arranging to purchase potable water from commercial RO plants at Taba and Nuweiba, connecting CP 3-E directly to the plant at Nuweiba in the process. As a result, we expect to be able to eliminate or reduce using large, heavy water tankers for long runs over winding and hilly roads to re-supply remote sites. This should enable us to substitute smaller tankers and shorter runs to increase efficiency and avoid accidents. We remain alert to opportunities to become a customer of developing local infrastructure when it is cost-effective. Work commenced in FY 02 on the installation of a small RO plant to process brackish pipeline water received at North Camp into potable water for the

46

main dining facility (MDF) and for distribution to northern remote sites. This action will significantly reduce the driving distances and time required for water haulage missions.

Power •

•

Early in FY 02, OP 1-1 was reconnected to the local power grid with a new transformer. In addition to South Camp and the Coastal Patrol Unit, eight of the MFO remote sites are now customers of the local power grid. In FY 03 we plan to connect CPs 3-A and 3-D to the grid. When this work is complete in FY03 it will bring one third of the remote sites on line with commercial power. While we retain an autonomous back-up generation capability at these sites, connecting to local power is a less expensive alternative to generating our own power with its related requirements for generator maintenance and repair. Further, it greatly reduces fuel consumption and thus fuel transport missions. The aging, 1960s-vintage generator units at North Camp confront us with increasing operational costs and other problems. Extensive overhaul or replacement of the generators will be necessary to assure reliable long-term power supplies at the camp. As a result, we continue to examine the possibility of commercial power at North Camp. This would entail MFO payment of one-time connection costs to bring power from el Arish to the camp. The trade-offs would be, as at other sites we have converted, reduced fuel consumption, reduced generator manning and maintenance costs, and avoidance of future expense to replace the current aging and hard working generator sets. It would be difficult to fund the connection costs from within the regular operating budget, however quick the pay-back period of the investment might be. The MFO may have to consider use of the Capital Asset Replacement Fund if continued development work on a project plan is positive.

Facilities •

•

•

Four ten-meter guard towers were fabricated and installed by a local contractor at CP 1-A, OPs 3-8 and 3-9, and South Camp. Jersey barriers were installed at the CPU front gate, a drop arm barrier was installed at Road Camp Alpha and the vehicle access gates were replaced at OPs 1-4 and 1-8. All of these measures help to contribute to our mission accomplishment and force protection posture.

With the implementation of the ERP Plant Maintenance module, the efficiency of planning and organizing engineering work has improved, and the volume of work orders has been reduced by approximately 20%. A major renovation of the Main Dining Facility kitchen this FY included a new tile floor, a new industrial kitchen exhaust hood system and replacement of

47

much of the plumbing and drain piping.

•

•

•

Metal roof overlays for building moisture protection were completed on the North Camp aviation hanger, the North and South Camp vehicle maintenance facilities, and the support services contractor administration building at North Camp. A section of the interior of the flight operations building at the aviation hangar area was rebuilt due to the deterioration of several interior walls. The South Camp Education Center was electrically rewired. South and North Camp barracks bathroom showers were renovated. Water tank #4 on North Camp was repainted to stop corrosion and extend the service life of this critical facility.

Road Work •

•

The Uruguayan Force Engineer Unit (FEU) continued to perform road maintenance and repair on unimproved roadways, and contributed to safety of the mission by clearing sand off numerous hard surfaced roads in the northern sector. Significant FEU projects included the establishment of a bypass road around el Gorah town to points south, improvement of the access road to OP 3-5 and other road work in the southern area of operations.

48

FINANCE

FISCAL YEAR 2002

For the eighth successive fiscal year, the MFO met a budget of $51 million. Due to the earlier than usual scheduling of this year’s Trilateral Meeting, the MFO’s FY 02 year end accounts are now being audited by Reconta Ernst & Young and audited financial statements have not yet been published. However, I fully expect the financial year to close within budget. The audited financial statements for FY 02 will be sent to the Funds Contributing States as soon as available and our financial report will be posted on our website, www.mfo.org. Last year at this time, I pointed to the volatility of external factors such as world fuel prices, inflation and currency exchange rates. Such volatility is difficult to predict. It demands vigilance as we progress through the year and requires a high degree of organizational flexibility to contain any financial impact within our budget. While external movements in world fuel prices and currency exchange rates overall were to our advantage during FY 02, they did give rise to variations between actual and budgeted expenditure for some cost categories. I will review these in greater detail later. FY 02 inflation remained within budgeted levels but continues to cause concern as its cumulative effects over a sustained period will put increased pressure on our budget.

MFO SOURCES OF REVENUEFY02 (UNAUDITED)

EGYPT32,1%

ISRAEL32,1%

UNITED STATES32,1%

JAPAN1,6%

GERMANY0,5%

SWITZERLAND0,3%

INVESTMENT INCOME - SIF

0,8%

INTEREST - OTHER

0,2%

INVESTMENT INCOME - CARF

0,4%

Table Eight.

49

Revenue. Income for FY 02 was budgeted at $51 million. Actual income is expected to be slightly less than originally planned due to a modest reduction in Japan’s contribution. As requested, the Japanese contribution continues to be earmarked for food and civilian employee salaries. Contributions from Germany and Switzerland were maintained at the same level as last year.

The principle of equal contributions by the Funds Contributing States has been maintained during FY 02 by modifying distribution of the FY 01 surplus to reflect late payments in that year.

As in previous years, the Funds Contributing States established financial instruments at the start of the financial year, enabling us to draw funds when required to effect payments to our suppliers, on a “pay as we go” basis.

Expenditure. FY 02 expenditure is expected to be within the annual budget of $51 million. However, because revenue is slightly less than expected, surplus will be less than in prior years. As usual, this will be applied against the gross value of our FY 03 requests for funding from the three Funds Contributing States.

FY02 EXPENDITURE (UNAUDITED)

Rents1%Transport

3%

Comms2%

Petroleum, Oil, Lubricants

5%

Equipment & Furnishings

4%Troop Rotation

10% Contractual Services

12%

Buildings & Facilities

2%

Travel1%

Utilities1%

Personnel36%

Supplies, Materials &

Services23%

Table Nine. Inflation. During FY 02, inflation in Egypt, Israel, the United States, and Italy was modest, ranging from 2.4% in the United States to 2.8% in Egypt. In dollar terms, its cost to the MFO over the year was nonetheless in excess of $1 million. Over the past five years, cumulative inflation in these four countries has been between 9% and 11%, representing an additional cost of approximately $5 million in our current budget compared to FY 98 without any corresponding increase in revenue. Currency Exchange Rates. The majority of our revenue and expenditure is denominated in U.S. dollars. However, significant payments are also made in Egyptian pounds, Israeli shekels and the Euro. The relative strength of the U.S.

50

dollar against these currencies therefore has an impact on our costs. During the past year, the U.S. dollar has fallen by 7% against the Euro and increased by 9% against the Egyptian pound and 11% against the Israeli shekel. The net effect of these currency movements was one of benefit to the MFO budget. Key Expenditure Variables Against Budget. Although our total FY 02 expenditure is expected to be just under budget, we anticipate some differences between actual and budgeted financial performance in several categories of expenditure. The expected differences, and reasons for these differences, are detailed below:

Support Services Contract. The contract for support services and subcontract for the provision of local national support staff to the Force together comprise the third largest item of expenditure in our budget, representing almost 13% of total. While paid in U.S. dollars, the support services subcontract is denominated in Egyptian pounds. The relative strength of the U.S. dollar and continuing cost reductions in the contract are expected to result in savings of approximately 10% of total contract value this year.

•

•

•

•

•

Equipment. Due to prudent buying in previous years, we have not needed to purchase as many vehicles as originally planned for this financial year. Savings have been used to offset other unplanned expenditure.

Troop Rotations. Payments for the transportation of military personnel to and from the Force form a substantial part of our annual budget. For reasons discussed previously, costs during FY 02 are expected to be lower than in the previous year.

Petroleum Prices. The prices we pay for Egyptian gasoil and Jet A-1 have fallen from the high levels experienced last year. The price we pay for gasoline remains unchanged. The net effect of favorable local fuel prices on our FY 02 expenditure will be significant. Although we are currently gaining benefit from the reduced cost of bulk fuels in Egypt, the world oil price has recently increased sharply and remains unpredictable due to regional instability. In our FY 03 budget, we have provided for current market prices but would have difficulty absorbing significant increases beyond budgeted levels.

New Initiatives. We have used savings achieved during the year to fund our ID card initiative, provide new X-ray machines for the Force medical clinics, develop the reverse osmosis water treatment installation at North Camp and improve our communications facilities.

51

BULK FUEL PRICES - FY97 TO FY02

10.00

15.00

20.00

25.00

30.00

Gas Oil - cents/ltr 20.18 15.05 13.09 19.99 23.44 17.26

Jet A-1 - cents/ltr 20.72 16.86 16.44 23.46 24.93 21.80

World Crude $/brl 16.26 10.20 15.90 25.56 20.12 27.55

FY97 FY98 FY99 FY00 FY01 FY02

Table Ten.

ERP. The two-year project to introduce our ERP system was completed on time and nearly 10% under budget (two-year total of $1.58 million). After all of ERP went on line at the beginning of the FY, spending was directed to consultancy and training. Last year, I noted we were able to utilize regular operating funds to meet some ERP project costs before drawing down the Capital Asset Replacement Fund (CARF). This FY, all ERP project costs were funded from our normal operating budget. From a finance perspective, the new ERP system integrates finances with logistical and support functions of the MFO, providing real-time visibility of essential information and bringing best practice to our business processes. The system’s cost tracking facility has been configured to closely reflect the MFO’s organization structure, enabling us to quickly determine the cost of our various operational and support activities, something not possible using our previous systems. This information will assist us greatly in our efforts to further reduce costs. It will also expedite FY-end closings and the audit process. Special Funds. The MFO maintains two special funds, the Self Insurance Fund (SIF) and the Capital Asset Replacement Fund (CARF). The SIF target amount remains $6.15 million. Any excess funds comprise interest and unrealized gains earned during the FY. Realized amounts above $6.15 million will be returned to the principal Funds Contributing States next year. In FY 00, before we started the ERP project, the CARF target was $4.19 million. As I have indicated, we were able to fund some ERP project costs from our operating budget, so the impact on the CARF was reduced. Both of these funds play an important role in stabilizing risks to a small budget by providing a capacity to respond to contingencies within the purposes of the two funds. I mentioned one such contingency in the engineering section of this report (linking North Camp to the el Arish power grid). Last year, I indicated my intention to seek to build the CARF balance back up towards its pre-FY 01 level of $4.19 million as future circumstances permitted. I am pleased to report that we have been able to do

52

this in FY 02 from available funds. FY 02 Audit. Our external auditor, Reconta Ernst & Young, is currently auditing the MFO’s FY 02 financial statements in accordance with generally accepted auditing standards, as they have since FY 96. Due to the introduction of our new ERP system, they are also conducting a systems audit to ensure that new computer applications comply with appropriate standards for internal control. Because they are not expected to complete their audit before the end of October, I have been unable to include audited numbers in my presentation. As noted above, these will be forwarded as soon as available. FISCAL YEAR 2003

The FY 03 budget is set at $51 million, subject to the material contingencies I have discussed regarding U.S. participation and helicopter issues. This would be the ninth successive year without increase. The relative strength of the U.S. dollar has been of benefit in recent years but it has been under pressure. It has required determined effort from our gifted staff to contain the effects of inflation, unpredictable helicopter maintenance costs and fuel prices. In the face of these and other contingencies noted later, it is unclear how long we can continue to sustain this budget level.

MFO BUDGET - FY83 TO FY02

25.0

50.0

75.0

100.0

125.0

83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03

Fiscal Year

USD 000s

Table Eleven.

Long-term Trends. Levels of surplus have been diminishing to levels that leave us with significantly less margin to meet unbudgeted contingencies. This FY will

53

not reverse that trend. In terms of internal business processes and controls, we are better placed to react to changing circumstances than at any time in the past. However, fiscally, we are becoming less adaptable. More than ever, I am thankful for contributions from Japan, Germany and Switzerland in addition to core contributions from the three Funds Contributing States. Without these additional funds we would be unable to execute our mission as it stands today.

MFO SURPLUS TREND - FY97 TO FY03 (UNAUDITED)

49,000

50,000

51,000

52,000

USD 000s

250

500

750

1,000

1,250

1,500

1,750

2,000

Expenses (L/H Axis) 49,141 49,023 49,419 50,073 50,554 50,600

Surplus (R/H Axis) 1,949 1,568 1,412 1,200 702 400

FY97 Actual

FY98 Actual

FY99 Actual

FY00 Actual

FY01 Actual

FY02 Forecast

Table Twelve. Contingencies. The proposed FY 03 budget of $51 million is very much conditional on resolution of two material and unbudgeted contingencies in a cost-neutral manner to the MFO:

Helicopter Replacement. I have previously referred to ongoing discussions with the United States Army on the replacement of our aging helicopter fleet. We have not yet reached resolution and I approach this issue with the position and anticipation that changes in this essential facility are cost neutral for the MFO budget. However, until further key decisions are made, I cannot be certain that this will be the case. Whatever the replacement modality, there is potential for additional costs in a magnitude that our current budget cannot sustain.

•

•

Military Participation. This coming year may see changes to the U.S. military participation in the MFO. We do not yet know what these may be but any change and replacement in the composition of the Force carries potential for increased costs.

54

Our proposed budget takes into account but cannot insulate us from negative impacts due to economic factors beyond our control such as:

World Oil Prices. We have not yet felt the effect of recent increases in the world price of bulk fuels but expect they will negatively impact our FY 03 budget. I expect the pattern of lags to continue (see table 8). Crude oil prices are already above the OPEC target maximum of $28 a barrel as we head into winter in the Northern Hemisphere and possibly face increased regional instability. From a practical perspective, every cent per liter price increase in fuel costs the MFO an additional $90,000 annually.

•

•

•

•

Inflation. The cumulative effect of inflation over many years constantly erodes our best efforts to reduce costs.

Currency Exchange Rates. The relative strength of the U.S. dollar in recent years has contributed to our cost containment and has offset some inflationary pressure. Some commentators believe the U.S. dollar to be over-valued and pressure on the dollar is likely to continue. We can budget within limits for this eventuality but cannot sustain any great or sudden upward adjustment in currency exchange rates (relative to the U.S. dollar) of the countries in which we conduct much of our procurement. Any significant shift of sentiment against the U.S. dollar will serve as a sharp reminder that a constant $51 million budget level may not be sustainable.

Staff Recruitment. I commented last year on the likelihood of regional problems negatively influencing our ability to recruit and retain quality staff. During the past year, we have noted a higher than usual international staff turnover and experienced increased recruitment costs as a result. We cannot be sure of all the reasons for this situation but believe regional instability to be one.

FY 2003 Funding Request. My funding request for FY 03 will be forwarded to the three principal Funds Contributing States with our final, audited accounts, when complete.

I thank them in advance for this contribution.

55

_____________________________________________________________________________________

ANNEX A: JOINT STATEMENT ON MULTINATIONAL FORCE AND OBSERVERS

_____________________________________________________________________________________

United States Department of Defense

News Release On the web: http//www.defenselink.mil/news/Aug2002/b08012002 bt403-02 html Media contact: media@defenselink.mil or +1 (703) 697 5131 Public contact: public@defenselink.mil or +1 (703) 428 0711 No. 403-02

August 1, 2002 IMMEDIATE RELEASE ______________________________________________________________________________ JOINT STATEMENT ON MULTINATIONAL FORCE AND OBSERVERS At the invitation of the United States, representatives of the governments of Israel and Egypt, and with the participation of the director general of the Multinational Force & Observers (MFO), conducted trilateral consultations on the structure and composition of the MFO. The delegations were headed by Undersecretary of Defense Douglas J. Feith, Maj. Gen. Abou Bakr of Egypt, and retired Maj. Gen. Amos Yaron of Israel. The three sides agree upon the historic and vita1 role played by the MFO since the establishment of peace between Egypt and Israel and express appreciation for the contributions made by al1 participants in the MFO, especial1y the U.S. Army. The United States reaffirms -and Egypt and Israel acknowledge -its commitment to continued support for Egyptian-Israeli peace, and for the MFO as a force contributing to the broad objectives of enhancing and sustaining regional security and stability. Al1 sides agree upon the need to ensure that the MFO continues to carry out its mission in the most efficient manner possible. In this regard, the sides agree to conduct further, expert-level discussions to determine how best to maintain the effectiveness of the MFO, while rationalizing the participation of United States forces. Both Egypt and Israel express their understanding of the competing requirements faced by United States forces around the world, especially in light of the war on terror. The governments of Egypt and Israel express their appreciation to the United States for the opportunity to conduct these highly constructive consultations. http:llwww .defensel ink. mil/newsl Aug2002/bO80 12002-bt403-02 .html

56

ANNEX B: MFO HELICOPTER REQUIREMENTS

The UH-1 is the only medium utility helicopter in the U.S. Army inventory and it has been a superb aircraft for MFO’s requirements. We have depended on the UH-1 to perform the following missions:

Day and night medevac readiness Remote site support COU recon and verification Search and rescue Command and control Support to the Egyptian and Israeli Liaison systems and senior visitors

Additionally, the UH-1 provides the only night flying capability in the MFO and the only practical way to resupply OP 3-11 on Tiran Island. Based on analysis of mission needs and historical data, any replacement option must meet the following requirements:

1600 operational hours annually (excluding training and maintenance hours) Maximum demand of six operational aircraft at any one time 24/7 capability at both North & South Camp Split operations—North Camp and South Camp All Sinai terrain and conditions Affordable within current MFO budget

The selected replacement aircraft must possess these minimum capabilities and characteristics:

Range: 300 nautical miles Endurance: 2 hours or greater Speed: baseline 110 knots Capacity:

1600 lbs. of cargo internally or externally at +48 ° Centigrade Six passengers

Navigation: GPS capability and a redundant, straight-line navigation capability (ADF or VOR) Avionics: HF, UHF, and VHF/FM communications Medevac: capable of carrying 4 litters

57

MULTINATIONAL FORCE AND OBSERVERS

Rome, Italy

REPORT OF INDEPENDENT ACCOUNTANTS SEPTEMBER 30, 2002 and 2001

58

REPORT OF INDEPENDENT ACCOUNTANTS Director General Multinational Force and Observers Rome, Italy We have audited the accompanying statement of financial position of the Multinational Force and Observers (MFO) as of September 30, 2002 and 2001 and the related statements of revenues, expenses and changes in net assets and of cash flows for the years then ended. These financial statements are the responsibility of the MFO’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the MFO as of September 30, 2002 and 2001 and the related statements of revenues, expenses and changes in net assets and of cash flows for the years then ended in conformity with generally accepted accounting principles as set forth by the organization in Note 2 accompanying the financial statements. November 8, 2002

59

MULTINATIONAL FORCE & OBSERVERS STATEMENT OF FINANCIAL POSITION as at September 30 (in thousands of U.S. dollars) ASSETS 2002 2001 Non-current Assets Marketable Securities (Notes 2 & 3) 6,438 8,729 Fixed Assets (Notes 2 & 4) 1,947 2,025 Total Non-current Assets 8,385 10,754 Current Assets Cash and Cash Equivalents 3,993 5,346 Marketable Securities (Notes 2 & 3) 5,247 2,226 Pledges (Notes 2 & 6) 8,667 8,761 Prepaid Expenses and Other Receivables (Note 5) 2,264 2,665 Total Current Assets 20,171 18,998 TOTAL ASSETS 28,556 29,752 LIABILITIES & NET ASSETS Current Liabilities Accounts Payable and Accrued Expenses (Note 8) 16,361 15,997 Unearned Support Contribution 166 0 Total Current Liabilities 16,527 15,997 Net Assets Unrestricted: Reserve For Encumbrances (Note 2) 0 2,679 General 425 702 Unrealized Gain on Marketable Securities (Notes 2 and 3) 616 649 Total Unrestricted 1,041 4,030 Temporarily Restricted: Self Insurance Fund (Note 11) 6,150 6,151 Capital Asset Replacement Fund (Note 12) 4,838 3,574 Total Restricted 10,988 9,725 Total Net Assets 12,029 13,755 TOTAL LIABILITIES & NET ASSETS 28,556 29,752 The accompanying notes are an integral part of these financial statements

60

MULTINATIONAL FORCE & OBSERVERS STATEMENT OF FUNCTIONAL EXPENSES for the years ended September 30 (in thousands of U.S. dollars) 2002 Unrestricted Temporarily Unrealized General Encumbrance Gains (Losses) Restricted Total 2001 Revenue: Support : (Notes 1 & 2) Egypt 16,250 0 0 0 16,250 16,323 Israel 16,249 0 0 0 16,249 16,317 United States 16,249 0 0 0 16,249 16,348 Germany 273 0 0 0 273 255 Japan (Note 7) 0 0 0 800 800 1,000 Switzerland 151 0 0 0 151 138 Other Income (Note 2) 698 0 0 0 698 875 Release of Temporarily Restricted Reserve (Note 7) 800 0 0 (800) 0 0 Total Support 50,670 0 0 0 50,670 51,256 Expenses Program Services: Peacekeeping Mission (Note 10) 48,630 0 0 0 48,630 47,911 Support Services: Management & General (Note 10) 3,644 0 0 0 3,644 3,101 Total Support Services 3,644 0 0 0 3,644 3,101 Total Expenses 52,274 0 0 0 52,274 51,012 Excess/(Deficit) of Revenue Over Expenses (1,604) 0 0 0 (1,604) 244 Reclassifications 2,679 (2,679) 0 0 0 0 Net Assets at Beginning of Year 702 2,679 649 9,725 13,755 14,678 ERP Project 0 0 0 613 613 (614) Allocation to CARF (Note 12) (650) 0 0 650 0 0 Unrealized Gains (Losses) on Marketable Securities (Note 3) 0 0 (33) 0 (33) 646 Allocation of Prior Year Surplus to Funds Contributing States (702) 0 0 0 (702) (1,200)

Net Assets at End of Year 425 0 616 10,988 12,029 13,755 The accompanying notes are an integral part of these financial statements

61

MULTINATIONAL FORCE & OBSERVERS STATEMENT OF FUNCTIONAL EXPENSES for the years ended September 30 (in thousands of U.S. dollars) 2002 Total Peacekeeping Management Total Expenses Services & General Support Personnel (Note 9) 17,287 15,255 2,032 2,032 Supplies, net of vehicle and miscellaneous sales proceeds of $603,168 (Note 2) 12,953 12,232 721 721 Contractual Services 5,781 5,781 0 0 Troop Rotation 4,821 4,821 0 0 Equipment & Furnishings (Notes 2 & 4) 3,834 3,755 79 79 Petroleum, Oil, Lubricants 2,299 2,290 9 9 Transportation 1,491 1,484 7 7 Communications 577 433 144 144 Rents 743 454 289 289 Buildings & Facilities (Notes 2 & 4) 1,366 1,180 186 186 Travel 656 523 133 133 Utilities 466 422 44 44 Total Expenses 52,274 48,630 3,644 3,644 93% 7% 2001 Total Peacekeeping Management Total Expenses Services & General Support Personnel (Note 9) 16,522 14,838 1,684 1,684 Supplies, net of vehicle and miscellaneous sales proceeds of $416,000 (Note 2) 10,195 9,645 550 550 Contractual Services 6,224 6,224 0 0 Troop Rotation 5,385 5,385 0 0 Equipment & Furnishings (Notes 2 and 3) 4,233 4,200 33 33 Petroleum, Oil, Lubricants 2,762 2,754 8 8 Transportation 506 506 0 0 Communications 326 151 175 175 Rents 682 440 242 242 Buildings & Facilities (Note 2) 2,604 2,417 187 187 Travel 612 443 169 169 Utilities 961 908 53 53 Total Expenses 51,012 47,911 3,101 3,101 94% 6% The accompanying notes are an integral part of these financial statements

62

MULTINATIONAL FORCE & OBSERVERS STATEMENT OF CASH FLOWS for the years ended September 30 (in thousands of U.S. dollars)

2002 2001 Cash Provided by Operating Activities Excess of Revenue Over Expenses (1,604) 244 Depreciation of Fixed Assets 78 78 Unrealized Gains on Marketable Securities (33) 646 Allocation of Prior Year Surplus to Funds Contributing States (702) (1,200)

ERP Project 613 (613) Change in Current Assets & Liabilities: Decrease in Pledges 94 1,262 Decrease in Prepaid Expenses and Other Receivables 401 646 Increase in Accounts Payable and Accrued Expenses 364 1,145 Increase in Advances of Funding 166 0 Net Cash Provided/(Used) by Operating Activities (623) 2,208 Cash Provided/(Used) by Investing Activities Purchases of Available for Sale Securities (3,410) (2,703) Sale of Available for Sale Securities 454 386 Maturities of Available for Sale Securities 2,226 2,960 Net Cash Provided/(Used) by Investing Activities (730) 643 Cash & Cash Equivalents at Beginning of Year 5,346 2,495 Cash & Cash Equivalents at End of Year 3,993 5,346 Supplemental Data: Cash Received – Interest 697 875

The accompanying notes are an integral part of these financial statements

63

MULTINATIONAL FORCE & OBSERVERS NOTES TO FINANCIAL STATEMENTS for the years ended September 30, 2002 and 2001 NOTE 1 - THE ORGANISATION The Multinational Force & Observers (MFO) is an international organisation established by the Protocol signed by the Governments of Egypt and Israel (the Receiving States) and witnessed by the United States on August 3, 1981. The MFO's function is to supervise the implementation of key security provisions of the Treaty of Peace between Egypt and Israel dated March 26, 1979. The MFO received its initial funding on September 9, 1981. Each of the Receiving States and, subject to annual appropriations, the United States, agreed to contribute equally to the annual operating expenses of the MFO. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The financial statements of the MFO are prepared on the accrual basis. The accounting principles consistently applied by the organization are in accordance with Chapter III of the MFO’s Administrative and Financial Regulations which are based on United States generally accepted accounting principles for commercial and governmental organizations. For matters not regulated by the organization’s Administrative and Financial regulations the organization employs generally accepted accounting principles as defined by the American Institute of Certified Public Accountants, specifically SOP 78-10 (as amended by SOP 94-3) and SFAS 116 and 117. Use of Estimates The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Revenue Recognition Apart from interest, dividends and realized gains/losses on the disposal of marketable securities which are recognised on an accrual basis and unrealized gains/losses on marketable securities which are recorded in unrestricted net assets, all of the MFO's revenues are derived from support contributions by the Receiving States and the United States plus the Governments of Japan, Germany and Switzerland. Support is recognised from amounts pledged to the MFO. The principle of equal contributions by the three Funds Contributing States (Note 1) pursuant to the Protocol to the Treaty and related side letters was maintained in fiscal years 2002 and 2001 through MFO’s policy of distribution of unrestricted net assets.

63

MULTINATIONAL FORCE & OBSERVERS NOTES TO FINANCIAL STATEMENTS for the years ended September 30, 2002 and 2001 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(CONTINUED) Pledges The conditional pledge of the Government of Japan and the unconditional pledges of the Funds Contributing States and of the Governments of Germany and Switzerland have been shown in the financial statements as revenue in accordance with SFAS 116. Conditional pledges have been recognised as revenue upon receipt and unconditional pledges have been recognised as revenue upon notification. Encumbrances Encumbrances consist of commitments in the form of orders and contracts for supplies, materials, equipment and services, except for personnel compensation and allowances that will be delivered or rendered during the following year. Buildings, Equipment & Furnishings The HQ office space owned by the MFO is recorded as a fixed asset on the balance sheet at its historic cost, net of the accumulated depreciation. It is being depreciated over thirty years using the straight-line method. The cost of equipment and furnishings is charged to expense as incurred because it is improbable that equipment and furnishings can be economically removed from the Sinai once delivered. The MFO does not capitalize, with the exception of the Rome HQ offices, any of its fixed assets because total fixed assets with any net recoverable value are immaterial to the balance sheet, because the recognition of depreciation expense against write-off would not have a material effect on the income statement or net assets and because the recognition of depreciation expense would create a funding problem for the MFO, as Funds Contributing States provide funding based on the level of annual expenditure and not based on the level of "use" of the longer term assets. Supplies & Stores Inventory Costs of supplies and stores items are charged to expense as they are received, net of proceeds from vehicle and miscellaneous sales.

64

MULTINATIONAL FORCE & OBSERVERS NOTES TO FINANCIAL STATEMENTS for the years ended September 30, 2002 and 2001 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(CONTINUED) Foreign Exchange Exchange adjustments arising from the translation of foreign currencies are included in the results of current operations. Marketable Securities Marketable securities, which are available for sale relate to funds deposited in a fixed income portfolio management account and are stated at market value. NOTE 3 - MARKETABLE SECURITIES A breakdown of the cost of marketable securities, which are available for sale by maturity is as follows (in thousands of U.S. dollars): 2002 2001 Maturing within 1 year 5,247 2,226 Maturing between 1-5 years 5,325 7,274 Maturing beyond 5 years 1,113 1,455 Non current portion 6,438 8,729 Total 11,685 10,955 Realized gains and losses on sales of marketable securities during the year ended September 30, 2002 were $7,293 and $14,813 respectively. Realized gains and losses on sales of marketable securities during the year ended September 30, 2001 were $14,099 and $24,523 respectively. Realized gains and losses are included in other income. At September 30, 2002 marketable securities, which are available for sale are summarized below (in thousands of U.S. dollars):

65

MULTINATIONAL FORCE & OBSERVERS NOTES TO FINANCIAL STATEMENTS for the years ended September 30, 2002 and 2001 NOTE 3 - MARKETABLE SECURITIES (CONTINUED) Amortized Unrealized Unrealized Fair Cost Gains Losses Value Floating rate notes maturing within 1 year - - - U.S. Government securities maturing:

within 1 year between 1-5 years Sub-total

2,7272,054

4,781

12 96

108

2,7392,1504,889

U.S. Agency securities maturing:

within 1 year between 1-5 years Sub-total

2,476 9833,459

32 99

131

2,5081,0823,590

U.S. Corporations maturing:

within 1 year beyond 5 years Sub-total

- -

-

- -

-

- -

-

Eurodollar bonds Maturing between 1-5 years

1,938 155 2,093 Asset backed securities maturing:

between 1-5 years beyond 5 years Sub-total

891 891

222 222

1,113 1,113

Total 11,069 616 11,685

66

MULTINATIONAL FORCE & OBSERVERS NOTES TO FINANCIAL STATEMENTS for the years ended September 30, 2002 and 2001 NOTE 3 - MARKETABLE SECURITIES (CONTINUED) At September 30, 2001 marketable securities, which are available for sale are summarized below (in thousands of U.S. dollars): Amortized Unrealized Unrealized Fair Cost Gains Losses Value Floating rate notes maturing within 1 year - -

-

-

U.S. Government securities maturing:

within 1 year between 1-5 years Sub-total

1,338 1,4052,743

35 85120

- -

-

1,373 1,490 2,863

U.S. Agency securities maturing:

within 1 year between 1-5 years Sub-total

567 3,4604,027

31 216

247

- -

-

598 3,676 4,274

U.S. Corporations maturing:

within 1 year beyond 5 years Sub-total

257 1,1981,455

- 143143

(2) - (2)

255 1,341 1,596

Eurodollar bonds Maturing between 1-5 years 1,938 141

-

2,079 Asset backed securities maturing:

between 1-5 years beyond 5 years Sub-total

29 114 143

- - -

- - -

29 114 143

Total 10,306 651 (2) 10,955

67

MULTINATIONAL FORCE & OBSERVERS NOTES TO FINANCIAL STATEMENTS for the years ended September 30, 2002 and 2001 NOTE 4 - BUILDINGS, EQUIPMENT AND FURNISHINGS The MFO acquired part of a building in Rome, Italy, for use as the headquarters of the organisation for $2,337,000 on September 16, 1997. The depreciation expense for the year ended September 30, 2002 is $78,000 (2001 - $78,000). The building and accumulated depreciation are composed as follows as of September 30 (in thousands of U.S. dollars): 2002 2001 Cost 2,337 2,337 Accumulated depreciation (390) (312) Net book value 1,947 2,025 The expenditures for equipment and furnishings are included in the statement of functional expenses.

NOTE 5 - PREPAID EXPENSES AND OTHER RECEIVABLES The schedule below provides an analysis of the prepaid expenses and other receivables balance as at September 30 (in thousands of U.S. dollars):

2002 2001

Force Exchange 155 394Prepaid insurance 1,216 1,198Other prepaids 363 452Prepaid morale support 146 111Other receivables and advances 384 510

Total 2,264 2,665 The MFO operates, on a not-for-profit basis, a Force Exchange in the Sinai for the benefit of participating troops and civilian personnel. Force Exchange surpluses are used to fund morale support expenditure. Force Exchange operations, for which working capital is provided by the MFO, have not been incorporated into the MFO financial statements as they are distinct and autonomous from those of the MFO and such inclusion is deemed immaterial. The Force Exchange operates using its own bank accounts and financial accounting records. Should Force Exchange operations significantly increase it may be consolidated into the MFO financial statements. Such an increase in operations is not envisioned in the foreseeable future.

68

MULTINATIONAL FORCE & OBSERVERS NOTES TO FINANCIAL STATEMENTS for the years ended September 30, 2002 and 2001 NOTE 6 - PLEDGES The amounts of budgeted contributions that have not been drawn upon or made available are shown in the financial statements as pledges, which are partly supported by letters of credit and are partly unsecured, as at September 30, are as follows (in thousand of U.S. dollars):

2002 2001 Pledges supported by letters of credit 5,221 5,150Unsecured pledges 3,446 3,611 Total 8,667 8,761

NOTE 7 - CONTRIBUTIONS MADE BY THE GOVERNMENTS OF JAPAN,

GERMANY AND SWITZERLAND Since 1988 the Government of Japan has made annual contributions to the MFO and in 2002 contributions amounted to $800,000 (2001 - $1,000,000). As specified by the Government of Japan these contributions have been applied exclusively, and conditionally, to pay for food costs and civilian personnel salaries and therefore appear as “Temporarily Restricted Revenue” in the statement of Revenues Expenses and Changes in Net Assets. Net assets were released from donor restrictions by incurring expenses thus satisfying those restrictions and have been entirely absorbed by the food and civilian personnel salary accounts. The MFO has also received unrestricted contributions from the Government of Germany since 1994 and from the Government of Switzerland since 1995. The contributions received which have been included in the accompanying financial statements are summarised as follows (in U.S. dollars):

2002 2001 Germany 273,373 255,000 Switzerland 151,094 138,000

69

MULTINATIONAL FORCE & OBSERVERS NOTES TO FINANCIAL STATEMENTS for the years ended September 30, 2002 and 2001 NOTE 8 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES The schedule below provides an analysis by cost allocation of accounts payable and accrued expenses as at September 30 (in thousands of U.S. dollars): 2002 2001 Personnel 9,288 8,650Supplies 2,424 2,265Troop Rotation 2,798 3,627Other 1,851 1,455 16,361 15,997 NOTE 9 - CONTRIBUTED SERVICES & FACILITIES Contributed Services For troop contingents provided by developed nations, the MFO reimburses the cost of special pay and allowances required by applicable national legislation for troops serving abroad. The MFO does not pay fixed base pay and salaries, and receives a credit for certain costs that troop contributors would have incurred had their troops remained at home. These credits are not separately identified within the financial statements, and the stated expense for these personnel is net of these credits. The value of the contributed services of soldiers is not included in the financial statements as such services are not obtainable from the general market place. In the case of the United States, France and Italy, the MFO is furnished at no cost with capital equipment for the mission, with agreed maintenance and support arrangements that effectively allocate such costs between the MFO and the contributing country. Stated expenses for equipment and supplies are net of agreed credits relating to maintenance and support arrangements. A precise valuation of these capital contributions themselves, either in terms of cost to contributors and not reimbursed by the MFO and/or in avoided costs of potentially more costly alternate sourcing of such assets, while obviously substantial and

70

MULTINATIONAL FORCE & OBSERVERS NOTES TO FINANCIAL STATEMENTS for the years ended September 30, 2002 and 2001 NOTE 9 - CONTRIBUTED SERVICES & FACILITIES (CONTINUED) appreciated by the MFO, would be very speculative based on the limited information available to the MFO. In accordance with SFAS 116, the MFO has not recognised as a contribution such equipment as the MFO, as stated above, has no reasonable basis for the determination of value. For fiscal years 2002 and 2001, the total value of credits from the United States Department of Army totalled $5,508,000 and $5,298,000 respectively. These amounts are offset against amounts otherwise due to the Department of Army from the MFO for special pay and various allowances, helicopter parts, and goods and services ordered by the MFO. Credits are based on the 1982 MFO-United States Participation Agreement and are calculated on the understandings reached in the signed Memorandum of Understanding (MOU) between the MFO and the United States Government, dated November 10, 1994. The MFO wishes to note its appreciation for donations of excess equipment and material from Participating States, notably in recent years from the United States; the value of such donations net of any handling and transportation costs incurred by the MFO are properly not herein reflected, but such donations are duly notified to the three Funds Contributing States. Contributed Facilities The MFO does not have title to the buildings and facilities that are located in the Sinai. The MFO receives the use of the North and South Camps in the Sinai rent free. These sites and related facilities are provided by the Government of Egypt; all improvements to the facilities have been made possible through the contributions of the Funds Contributing States. NOTE 10 - ALLOCATION OF EXPENSES MFO Management have determined, in compliance with SFAS 116, that all costs relating to the Rome Headquarters will be regarded as support costs. All costs relating to the MFO field offices in Tel Aviv and Cairo and the Force deployed in the Sinai have been reported as program costs as defined in the SFAS 116. It should be noted that some HQ costs are truly program specific, whilst some Tel Aviv and Cairo office costs could be regarded as support costs. The cost of tracking and reallocating these costs separately would not provide the user of the account with greater understanding of them. Management thus determined the most cost-effective way of complying with the standard is as per the method of cost allocation adopted. However, it should be noted that all costs are related to the purposes for which the MFO has received contributions, i.e., the conduct and support of its peacekeeping mission.

71

MULTINATIONAL FORCE & OBSERVERS NOTES TO FINANCIAL STATEMENTS for the years ended September 30, 2002 and 2001

72

NOTE 11 - SELF INSURANCE FUND At the Trilateral Conference held on November 27, 1989, it was agreed that a self-insurance fund would be created. During FY 2002 and FY 2001 the MFO did not allocate any further funds to the Self Insurance Fund. The authorized amount of the fund is set at $6.15 million. The interest earned on the Self Insurance Fund investments is part of the following years surplus allocation to the Funds Contributing States. In accordance with SFAS 117, the Self Insurance Fund is considered "Temporarily Restricted" because the Funds Contributing States have approved its use for specific objectives and the Fund can only be utilised for such objectives. NOTE 12 - CAPITAL ASSET REPLACEMENT FUND At the Trilateral Conference held on November 26, 1990, it was agreed that a Capital Asset Replacement Fund (CARF) would be created to finance projects of a non-routine, non-recurring nature (within 5 years) with a projected cost in excess of $250,000. During FY 2001 $613,000 from the CARF was utilized to partially finance the new ERP system. In FY 2002 this amount was restored to the CARF. $650,000 was allocated to the CARF in 2002 towards the financing of the connection of the MFO North Camp to the Egyptian commercial power grid. The allocation is a temporary measure and the CARF will be returned to the authorized amount of $ 4.19 million as circumstances permit. In accordance with SFAS 117, the Capital Asset Replacement Fund is considered "Temporarily Restricted" because the Funds Contributing States have approved its use for specific objectives and the Fund can only be utilised for such objectives.