United States General Accounting Office

GAO Report to Congressional Requesters

August 1995 FOREIGN

ASSISTANCE

Assessment of Selected

USAID Projects in

Russia

GAO/NSIAD-95-156

GAO United States

General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-260365 

August 3, 1995

The Honorable Benjamin Gilman

Chairman

The Honorable Lee Hamilton

Ranking Minority Member

Committee on International Relations

House of Representatives

The Honorable Sam Nunn

Ranking Minority Member

Permanent Subcommittee on Investigations

Committee on Governmental Affairs

United States Senate

This report responds to your request that we evaluate assistance projects

in Russia managed by the U.S. Agency for International Development

(USAID). Specifically, we determined whether (1) individual USAID projects

were meeting their objectives and contributing to systemic reforms,

(2) the projects had common characteristics that contributed to their

successful or unsuccessful outcomes, and (3) USAID was adequately

managing its projects in Russia. In conducting our study, we reviewed

10 judgmentally selected projects with obligations of $64.6 million as case

studies and used audits and evaluations performed by the USAID Inspector

General.

Background The United States began providing limited assistance to the Soviet Union

in December 1990 to support the reform effort and then increased

assistance after the Soviet Union dissolved in December 1991. In

October 1992, the Freedom for Russia and Emerging Eurasian

Democracies and Open Markets Support Act of 1992 (P.L. 102-511),

commonly known as the Freedom Support Act, was enacted. It further

increased assistance to the former Soviet Union and established a

multiagency approach for providing assistance. It also called for the

designation of a coordinator within the Department of State whose

responsibilities would include designing an assistance and economic

strategy and ensuring program and policy coordination among federal

agencies in carrying out the act’s policies.

The Freedom Support Act sets forth the broad policy outline for helping

former Soviet Union countries implement both political and economic

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reforms. It also authorized a bilateral assistance program that is being

implemented primarily by USAID. In January 1994, the State Department

Coordinator approved the first overall U.S. assistance strategy for the

former Soviet Union, and in May 1994, the Coordinator approved the

strategy specifically for Russia. This strategy has three core objectives:

(1) help the transition to a market economy, (2) support the transition to a

democratic political system, and (3) ease the human cost associated with

the transition. As of December 1994, USAID had obligated $1.4 billion and

spent $539 million for programs and projects in Russia since fiscal year

1990. (See app. I.)

USAID’s assistance to Russia has focused on 13 sectors, such as health care

and housing, that support the three U.S. objectives. Hundreds of U.S.

contractors and grantees are responsible for implementing individual

projects in the 13 sectors.

Results in Brief Projects have had mixed results in meeting their objectives. Some of the

USAID projects we reviewed fully met most or all of their objectives, were

contributing to systemic reform, and were sustainable. Others did not have

all or some of these attributes of success.

The more successful projects had several characteristics in common:

(1) all levels of the Russian government provided broad and strong

support, (2) U.S. contractors had a long-term physical presence in Russia,

and (3) these projects had a specific sustainability objective. Also,

successful projects generally complemented or supported ongoing Russian

initiatives. Projects that did not meet all their objectives lacked one or

more of these characteristics, were poorly designed and implemented, and

often had little or no impact on problems.

USAID did not adequately manage some projects it funded. The devolution

of management and monitoring responsibility from USAID’s Washington

office to its Moscow office delayed decision-making and created confusion

among contractors. Furthermore, USAID’s management information

systems were inadequate, and it did not adequately monitor or coordinate

some projects. USAID has taken steps to overcome these problems,

including terminating some unsuccessful projects, refining its assistance

strategy, and undertaking efforts to improve project monitoring and

evaluation.

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In commenting on this report, USAID said that the difficult operating

environment in which it worked during the first 2 years of the program in

Russia cannot be overstated. We agree that USAID faced numerous

operating obstacles in getting this program underway, and our

observations on how well the projects performed should be seen in that

context.

Project Results Have

Been Mixed

The 10 projects we reviewed showed mixed results in meeting their

objectives.

• Two projects—coal industry restructuring and housing sector

reform—met or exceeded their objectives.

• Five projects—voucher privatization, officer resettlement, small business

development, district heating, and agribusiness partnerships—met some

but not other objectives.

• Three projects—health care, commercial real estate, and environmental

policy1

—met few or none of their objectives.

Projects That Contributed

to Systemic Reform

Three of the 10 projects we examined were contributing significantly to

systemic reform2

—that is, they were making fundamental structural

changes. These projects were effecting change because they had

sustainability—benefits that extend beyond the project’s life span—built

into their design and they focused on issues on a national or regional

scale.

Housing Sector Project The housing sector project helped Russian ministries and agencies

implement 38 laws, regulations, and decrees to reform housing policies

and practices. The Urban Institute, which implemented the project, also

completed a series of pilot projects related to housing maintenance,

mortgage lending, rent reform, and property rights. Many of the activities

affect the entire country or could be replicated in additional cities. The

project helped create new institutions, strengthened existing ones, and

distributed procedural guides and manuals to local governments as a way

to sustain the reforms.

1

The environmental policy project we reviewed was still in the early implementation phase. USAID

awarded the initial contract in September 1993 to establish offices and technical support, but did not

sign the agreements to implement the actual project work until April and September 1994. The projects

will extend through September 1997.

2

A project can contribute to systemic reform without meeting all of its objectives. Two projects—coal

industry and housing sector reform—contributed to systemic reform and met their objectives. The

privatization project contributed to systemic reform but did not meet all its objectives.

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Privatization Project The contract for implementing the voucher privatization project called for

Deloitte & Touche to establish 35 voucher clearing centers in cities

throughout Russia. This project encountered some difficulty in meeting its

initial time frames and establishing all the centers, but overall the project

was successful. The active centers handled 70 million voucher

transactions as part of Russia’s unprecedented privatization program, and

over half the centers participate in ongoing capital market activities.

Coal Restructuring Project Partners in Economic Reform (PIER), which implemented the coal

restructuring project, has facilitated movement toward the transformation

of the entire coal sector. PIER helped build a consensus for reform among

the Russian government, mine labor unions, and mine management. It was

also instrumental in facilitating a World Bank review that could lead to a

restructuring loan. To sustain the project’s contribution to systemic

reform, PIER helped establish long-term business relations between the

Russian and U.S. coal industries, formed a consortium of U.S. coal-related

business, and is involved in social safety net and new job-creation

activities. Finally, PIER helped facilitate the sale of U.S. equipment in

Russia.

Projects With Relatively

Limited Contribution to

Systemic Reform

Seven projects we examined did not contribute significantly to systemic

reform because they either did not meet their objectives, were narrowly

focused, or lacked sustainability.

Small Business Development

Project

The University of Alaska sought to help develop small businesses by

establishing American Russian Centers in four cities across the Russian

Far East. The centers’ purpose was to help train entrepreneurs, help form

new businesses, and build lasting business ties between the region and the

United States. To become self-supporting after USAID stopped funding, the

centers planned to develop partnerships with counterpart institutions.

However, the centers have so far been unable to attract alternative

funding.

Environmental Policy and

Technology Project

CH2M Hill International Services, Inc., signed a contract in September

1993 for an environmental policy development and technology project.

The contractor had difficulty filling critical staff positions in Russia and

providing required work plans for the activities. Of the work plans due in

November 1994, one was approved in May 1995, while the other was still

being revised as of June 1995.

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Health Care Training Project The project to provide health care financing training in the United States

to Russian health professionals was implemented by Partners for

International Education and Training (PIET), several training institutions,

and USAID. Although PIET and the institutions provided the training as

required, the Russian participants did not have the authority, expertise, or

resources to make systemic changes. In addition, changes in Russia’s

health reform plans have made the training irrelevant.

Commercial Real Estate Project A commercial real estate project, implemented by International Business

& Technical Consultants, Inc. (IBTCI), was intended to create a standard

approach for increasing the availability of commercial real estate in six

Russian cities. The project design called for a pilot project/roll-out

concept, but IBTCI did not roll out the pilot in any of the cities and used a

different approach in each city. Also, Russian officials said the project had

little or no effect on the availability of commercial real estate in their

cities.

District Heating Project The district heating project, which USAID recommended we review, was

implemented by RCG/Haggler Bailly and met its objectives primarily by

conducting energy audits and training as well as providing energy

efficiency equipment to two Russian cities. However, as of February 1995,

some of the equipment in one of the cities had not been installed. Russian

officials said the equipment may never be installed because Russian

authorities never certified it. USAID had not monitored the use of the

equipment or followed up on the impact of the studies produced for the

project. Consequently, we found no indication that the project contributed

to systemic reform in the energy efficiency area.

Agribusiness Partnerships

Project

The agribusiness partnerships project, implemented by Tri Valley Growers,

helped two U.S. companies establish joint ventures in two Russian cities.

Although the involvement of U.S. companies increased the probability that

the business ventures would be sustained, the limited scope of the

partnerships makes it unlikely that they will have a significant effect on

reforming Russia’s agricultural sector. USAID has discontinued the entire

agribusiness partnerships project in Russia.

Officer Resettlement Pilot

Project

The Russian officer resettlement pilot project was not intended to be

sustainable after its completion, but instead was motivated by the United

States’ desire to encourage the withdrawal of Russian troops from the

Baltic countries.3

 The $6-million pilot project objective was to construct

3

The Baltic countries are Latvia, Lithuania, and Estonia. The United States never officially recognized

them as part of the former Soviet Union.

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450 housing units to resettle demobilized officers by July 1994. As of

February 1995, 422 units were either occupied or available for use, so in

that sense the project was successful.

Common Themes to

Successful Projects

Successful projects (1) had strong support and involvement at all levels of

the Russian government, (2) had a long-term physical presence by U.S.

contractors in Russia, and (3) were designed to achieve maximum results

by supporting Russian initiatives, having a broad scope, and including

elements that made them sustainable. A critical element to a project’s

success was the degree to which Russian officials were committed to

reform in the particular sector.

Strong Support and

Involvement at All Russian

Levels

Russians at both the federal and local levels demonstrated a strong

commitment to the projects that were contributing to systemic reform.

The Russian government also provided financial or in-kind support, and

Russian nationals held leadership roles in the projects. For example, PIER’s

approach to implementing the coal project included working with officials

in the Ministry of Fuel and Energy, Fund of Social Guarantees, and the

federal coal company; academic institutions; oblast’4

 and city officials in

the two targeted regions; local mine management; and representatives of

two labor unions. Russian nationals served as codirectors, and PIER staff

received free apartments and office space.

To accomplish the housing sector reform project, the Urban Institute

worked closely with officials in the Ministries of Finance and Economy

and the State Committee on Architecture and Construction at the federal

level, the Moscow city government, various maintenance firms, banks, and

grass-roots condominium associations. Although office space in Moscow

is expensive and scarce, the Institute received free office space. In

addition, Russian nationals played a key role on the Institute’s staff.

In contrast, many less successful projects lacked the buy-in of Russians at

either the local or federal level and had little Russian involvement or

contribution. For example, the State Committee of the Russian Federation

for the Management of State Property (GKI),5

 Russia’s federal agency

overseeing the privatization effort, was instrumental in designing the

voucher clearing and commercial real estate projects. However, in some

4

Oblasts, krays, and republics are regional administrative units similar to states in the United States.

5

GKI is a Russian acronym.

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cities, local officials were not involved in designing the projects and had

little interest in them; as a result, these projects were not fully successful.

The officer resettlement project established housing in several cities, but

not in Novosibirsk, where city officials reneged on a previous

administration’s commitment to provide needed infrastructure support.

Because officials at the federal and oblast’ levels were not involved in the

initial agreements, they had no authority to require the new city

administration to fulfill the contract, nor were they willing to provide

additional funding for the project.

The district heating project was not completed in Yekaterinburg because

local officials did not allow monitoring equipment to be installed. They

said the proper Russian authorities had not certified the equipment.

Long-term Presence by

U.S. Contractors in Russia

The successful projects usually had long-term advisers living in Russia,

which enabled the advisers to build trust, learn about local conditions and

plan accordingly, monitor progress closely, and correct problems as they

occurred. In addition, successful projects involved contractors that had

appropriate experience to carry out the project. For example, the Urban

Institute has had two long-term advisers living in Moscow since 1992 who

maintained close contact with Russians involved in housing reforms. PIER’s

project director had lived in Moscow for 3 years. Other members of its

American staff had lived in Kemerovo and Vorkuta, the key cities of the

major coal mining oblasts, since 1993 and 1994, respectively. The two field

staff have years of experience as coal mine engineers. Russian officials at

all levels (1) praised PIER’s staff; (2) described PIER’s assistance as timely,

well-targeted, and beneficial; and (3) wanted the project to continue and

expand.

Contractors implementing many of the less successful projects did not

have staff living in the Russian cities being assisted. For example, neither

IBTCI nor RCG/Haggler Bailly had permanently assigned American staff in

the cities being assisted. IBTCI’s consultants would fly in, make rapid

diagnoses, deal with problems quickly, and then leave. Many U.S. officials,

Russians, and contractors said that relying on “fly-through” consultants

rather than permanent staff was an ineffective approach.

Designed to Maximize

Results

Successful projects—the housing reform, voucher privatization, and coal

industry restructuring—were designed to be sustainable, have a

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widespread effect, and support existing initiatives. Each project supported

ongoing Russian efforts at widespread reform, considered local

conditions, and contained elements to sustain the effects of the project

beyond its life span.

In contrast, some projects were not designed to maximize their potential

impact. For example, the project design required RCG/Haggler Bailly to

provide energy efficiency equipment and audits but did not include

methods to replicate the project in other cities, or extend monitoring

efforts to determine how the equipment or studies were used. The USAID

Inspector General reported that other projects did not include any

follow-up steps to ensure that the assistance provided was used.6

 In

addition, projects focusing on health care training and commercial real

estate leasing did not consider local needs and conditions and thus had

limited impact.

Several projects did not adequately identify outcomes or measurable

results. For example, the Tri Valley Growers’ contract with USAID did not

stipulate how many agribusiness partnerships were to be established. The

design of the coal project also did not adequately identify outcomes or

measurable results, but PIER developed an effective project nonetheless.

The USAID Inspector General found similar problems when reviewing many

projects in the region.7

Russian Involvement and

Commitment

It is widely acknowledged that the Russian people themselves will

determine the ultimate success or failure of political and economic

reforms. Without their involvement and commitment to change, outside

assistance will have a limited effect. For example, the support and

involvement of Russian federal agencies, such as GKI in the privatization

effort and the ministries related to housing, ensure that projects in those

sectors are likely to have a wide and sustained effect. The coal project’s

impact depends on Russia’s commitment to restructure the coal industry.

6

Audit of the Bureau for Europe’s Technical Assistance Contracts (Report No. 8-180-93-05, June 30,

1993); Audit of the Distribution of Emergency Medical Supplies to the New Independent States Under

USAID Cooperative Agreement With the People-to-People Health Foundation “Project Hope” (Report

No. 8-110-94-006, Mar. 17, 1994); and Audit of Activities to Improve Crop Storage Systems in the New

Independent States (Report No. 8-110-94-014, Aug. 31, 1994).

7

Audit of the Bureau for Europe’s Technical Assistance Contracts (Report No. 8-180-93-05, June 30,

1993); Audit of the ENI Bureau’s Monitoring, Reporting and Evaluation System (Report No.

8-000-95-002, Nov. 28, 1994); and Audit of Selected Privatization and Restructuring Activities in Russia

(Report No. 8-118-95-007, Mar. 10, 1995).

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In several sectors, a Russian commitment to reform remains elusive.

Powerful factions in the Russian legislative branch strongly oppose land

reform, and the Ministry of Health has not demonstrated a commitment to

health care reform. This lack of commitment raises concerns that projects

in the agriculture and health sectors will not have widespread benefits.

USAID is now working with the Ministry of Environmental Protection and

Natural Resources, but the level of support from other important federal

ministries, including the Ministry of Finance, is still questionable.

Other domestic conditions will also influence a project’s success. Russia’s

commitment to breaking up monopolies and its ability to attract capital for

modernizing outdated equipment, restructuring existing state enterprises,

and starting new businesses will affect the pace and scope of Russia’s

transformation to a market economy. Moreover, projects such as

introducing mortgage lending will depend on macroeconomic policy and

land reforms. Russia is counting on foreign capital to help move the

transition process forward, but such factors as the unstable economic

situation, a poor and uncertain tax structure, an undeveloped financial

market infrastructure, and an increased crime rate make foreign investors

hesitant to invest.

USAID Management

Performance

USAID responded quickly to assist Russia in undertaking its political and

economic reforms, as called for in the Freedom Support Act. However, to

respond quickly, USAID made certain exceptions to its normal procedures

and processes. Although USAID provided a quick and flexible response to a

fluid, unpredictable situation,8

 we identified several management

problems in addition to design problems that occurred, in part, because of

the quick response. USAID officials agreed that management problems

occurred, but they said the risks associated with not responding quickly

were high.

Lack of Monitoring and

Evaluation

The large size of USAID’s program, the vast geographic area receiving

assistance, and staff limitations have prevented adequate monitoring in

some cases. We found that USAID officials were unaware of positive and

negative aspects of the projects implemented by IBTCI, RCG/Haggler Bailly,

and PIER. USAID officials had not visited some projects, and USAID did not

have representatives located outside Moscow. USAID expected its Russian

staff to conduct field monitoring, but the Russian nationals lacked the

8

Congress granted USAID special authority to provide a quick response. Section 201 of the Freedom

Support Act of 1992 amended the Foreign Assistance Act by adding chapter 11, section 498B, that

waived provisions of law in providing assistance to the former Soviet Union.

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necessary training. USAID officials said they considered but rejected the

idea of establishing field offices outside Moscow.

Without adequate staff, USAID relied mainly on contractors’ written and oral

reports to monitor the projects, but some contractors did not report all

problems. The USAID Inspector General also found shortcomings in the

reporting process: contractors were not required to report on their

progress toward specific objectives or indicators.9

 Moreover, USAID did not

enforce some of its reporting requirements. For example, Deloitte &

Touche did not provide the required lists of equipment purchased with

USAID funds and brought into the country, and USAID did not enforce the

requirement.

Although the State Department allowed USAID/Moscow to increase U.S.

direct-hire personnel and personal services contractors from 27 in fiscal

year 1993 to 66 in fiscal year 1995, USAID officials said even more staff were

needed to adequately monitor the program. However, State would not

allow the USAID mission to grow further because, among other reasons, the

USAID assistance program is scheduled to end by the end of the decade.

In some cases, USAID had not determined the relative success or failure of

projects so that it could apply lessons learned to other efforts. It did not

conduct the required periodic assessments/evaluations of the coal and

agribusiness projects. The omnibus contracts10 do not require an

evaluation of the individual tasks, but instead evaluations are to be done at

the end of the contracts, according to USAID officials. The omnibus

contracts for USAID’s private sector initiatives alone have obligated

approximately $200 million and are not scheduled to terminate until 1996,

too late to apply lessons learned. In addition, an evaluation that was

conducted was not accurate. A contractor evaluated the district heating

project in June 1993 and gave it high marks. Our 1995 review of the project

found major shortcomings, such as equipment still in boxes after being

delivered in 1993, even though the evaluation report said the equipment

9

Audit of Selected Privatization and Restructuring Activities in Russia (Report No. 8-118-95-007,

Mar. 10, 1995) and Audit of the Distribution of Emergency Medical Supplies to the New Independent

States Under USAID Cooperative Agreement With the People-to-People Health Foundation “Project

Hope” (Report No. 8-110-94-006, Mar. 17, 1994).

10USAID’s Europe and the New Independent States Bureau often procured U.S. technical assistance

through multipurpose contracts, commonly referred to as “omnibus” contracts. These contracts

provided for the performance of activities, many of which needed to be further defined. USAID used

the omnibus contracts to retain the services of U.S. companies to mobilize, either in-house or through

subcontractors, the resources and expertise needed to identify and implement project activities. The

description of work in these contracts was very general, but required subsequent development of “task

orders” and “work plans” to further define the activities the contractor was to perform.

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had been installed and was being used. The USAID Inspector General also

found that evaluations had not been conducted and that the quality and

impact of some project evaluations were questionable.11

Problems Associated With

Delegated Authority

The devolution of management and monitoring responsibility from USAID’s

Washington office to a rapidly growing Moscow office has not been

smooth, and several problems have developed as a result. First, as USAID’s

Moscow office assumed more management responsibility, contractors had

to begin dealing with another layer of management review. This caused

delays and confusion among some contractors. Second, there were

tensions between the Washington and Moscow offices because of

differences regarding program implementation. For example, the offices

disagreed about which reformers and Russian government agencies to

work with. Third, the USAID/Moscow office lacked some essential

documents to enable officials to carry out their duties. We found that key

contract and financial documents were not available in Moscow, a

problem also reported by the USAID Inspector General.12

The State Department Coordinator opposed giving greater authority to

USAID/Moscow because he believed USAID/Washington needed to maintain a

more prominent role. He said that because assistance to Russia is an

important foreign policy issue, key decisions should not be delegated to

the field. State and USAID/Washington officials said they needed quick

access to important project data for reporting purposes, but quick access

to data could not be ensured when projects were managed by the

USAID/Moscow office.

Lack of Adequate

Information Systems

USAID has not yet developed a good management information system for its

Russia program. The USAID Inspector General reported that USAID lacked an

information system with baseline data, targets, time frames, and

quantifiable indicators by which to measure program progress and

results.13 USAID’s Bureau for Europe and the New Independent States was

exempted from a new agencywide management system because the

11Audit of the ENI Bureau’s Cooperative Agreement With World Learning, Inc. for Support to

Non-Governmental Organizations in the New Independent States of the Former Soviet Union

(Report No. 8-110-95-008, Mar. 10, 1995).

12Audit of the Bureau of Europe’s Technical Assistance Contracts (Report No. 8-180-93-05, June 30,

1993) and Audit of the ENI Bureau’s Monitoring, Reporting and Evaluation System (Report 

No. 8-000-95-002, Nov. 28, 1994).

13Audit of the ENI Bureau’s Monitoring, Reporting and Evaluation System (Report No. 8-000-95-002,

Nov. 28, 1994).

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program was intended to be short term and regional rather than long term

and country-specific. USAID officials said the pressure to provide assistance

quickly meant forgoing the traditional project design process, which

included developing progress indicators.

Poor Field Coordination Part of USAID’s assistance strategies was to focus on areas where reformers

were willing to make changes. USAID believed this would help create a

synergy that could stimulate the overall impact of the projects.

Some contractors were not aware of each others’ activities. USAID’s

management information system did not list contractors by region, and

USAID sometimes did not tell new contractors about other contractors’

activities. In some cities, contractors contacted each other on their own

and started coordinating their efforts. However, this was being done on an

ad hoc basis. In Vladivostok and Yekaterinburg, U.S. Consuls General

facilitated contractor coordination. The USAID Inspector General found that

many projects with similar goals were not linked to one another.14 Poor

coordination reduced the opportunity to achieve synergy and targeted

impact and gave some Russians the impression U.S. assistance was

fragmented and uncoordinated.15

Recommendations We recommend that the USAID Administrator focus assistance efforts on

projects that (1) will contribute to systemic reforms; (2) are designed to be

sustainable; (3) are supported by all levels of Russian government; and

(4) whenever possible, use American contractors with an in-country

presence.

Agency Comments

and Our Evaluation

In commenting on a draft of this report, USAID said the three projects that

we had deemed to have not met their primary objectives did produce some

positive benefits or it was too early to tell the impact the projects would

have. USAID also said it was aware of the problems that have occurred and

has taken steps to correct them or terminate activities that could not be

fixed. USAID pointed to a new computerized monitoring system that is

expected to produce its first report in November 1995.

14Audit of ENI’s Strategy for Managing Its Privatization and Restructuring Activities in Russia (Report

No. 8-118-95-009, Mar. 17, 1995).

15The Russian government has no agency to coordinate assistance efforts within the country.

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USAID agreed with our recommendation regarding the focus of its

assistance projects and said it was taking steps to implement it. In

addition, USAID said it was taking corrective action to address the

management problems we identified. However, it stressed that its

assistance has had a positive impact and occurred in a difficult operating

environment. USAID indicated that it had made progress in setting up its

own monitoring, reporting, and evaluation system. It should be pointed

out, however, that in November 1994, the USAID Inspector General reported

that the system was still far from able to measure program results.16

USAID said that our report would have provided a more balanced and

accurate view of the systemic impact and sustainability of a project’s

activities if we had considered the activity in the context of the whole

program. USAID stated that, in nearly every case, the individual projects we

focused on were part of a larger project or program that would have

substantial impact on reforming Russia’s economy. USAID is correct that

the projects we examined were usually one component of a larger sector

program; however, USAID is incorrect in its assertion that we evaluated

projects in isolation and without considering the context of the whole

program. The overriding objective of USAID’s program in Russia is to

contribute to reforming both the political and economic systems. This is

also the objective of the assistance program for each sector and, with few

exceptions, of each project that supports a sector program. Our

examination focused on the individual building blocks that support sector

programs and ultimately support the reform effort in Russia. In some

cases, we found that the individual building blocks will not contribute to

systemic reform in the sector or in Russia overall. Even though this does

not mean that an entire program, of which a less-than-successful project is

a part, will fail in its systemic reform objective, it does mean that an

unsuccessful project is not contributing to a program’s success.

We also disagree with USAID’s assertion that significant systemic reform

has resulted from USAID activities in all sectors. For example, the

agribusiness partnerships project, including components reviewed by the

USAID Inspector General, comprises most of the USAID funding going to the

sector but is not expected to contribute significantly to systemic reforms.

Only a limited degree of systemic reform has occurred in other sectors as

well, including the health care and the environmental sectors. We believe

that a sector evaluation, although useful in its own right, would not have

16Audit of the ENI Bureau’s Monitoring, Reporting and Evaluation System (Report No. 8-000-95-002,

Nov. 28, 1994).

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allowed us to draw conclusions about the role and contribution of

individual projects.

USAID provided other comments that we incorporated into the report

where appropriate. The full text of USAID’s comments is reprinted in

appendix IV.

Scope and

Methodology

We judgmentally selected 10 individual projects from 6 sectors to review

as case studies. We selected projects based on their geographic

distribution, focusing on regions where several projects were

concentrated. We also considered the level of obligations and

expenditures; the type of assistance provided (e.g., training, technical

assistance, and product delivery); and the type of contracting vehicle (e.g.,

cooperative agreements, grants, and contracts). We generally did not

review projects examined by the USAID Inspector General, although we

analyzed its work to assess whether common themes emerged. (See app. II

for a list of the 10 projects we studied and USAID Inspector General reports

we reviewed.)

We analyzed USAID and project documents and interviewed USAID and other

U.S. government officials, U.S. contractors, Russian counterparts, and

beneficiaries. We visited project sites in Western Russia, Siberia, and the

Russian Far East in November 1994 and February 1995.

Appendix III provides a detailed analysis of the 10 projects in our case

study.

We conducted our work from September 1994 to April 1995 in accordance

with generally accepted government auditing standards.

As agreed with your offices, unless you publicly announce this report’s

contents earlier, we plan no further distribution of this report until 30 days

after its issue date. At that time, we will send copies to the Secretary of

State, the Administrator of USAID, and other interested congressional

committees. Copies will also be made available to others on request.

Page 14 GAO/NSIAD-95-156 USAID Projects in Russia
B-260365 

Please contact me at (202) 512-4128 if you or your staff have any questions

concerning this report. Major contributors to this report are listed in

appendix V.

Harold J. Johnson, Director

International Affairs Issues

Page 15 GAO/NSIAD-95-156 USAID Projects in Russia
Contents

Letter 1

Appendix I 

Obligations and

Expenditures for

Assistance to Russia

18

Appendix II 

Projects and USAID

Inspector General

Reports GAO

Reviewed

19

Appendix III 

Project Summaries

21

Housing Policy Reform—Urban Institute 21

Voucher Privatization—Deloitte & Touche 26

The Coal Project—Partners in Economic Reform 30

Small Business Development—University of Alaska 35

Environmental Policy and Technology—

CH2M Hill

39

District Heating—

RCG/Haggler Bailly

45

Health Care Training—Partners for International Education and

Training

49

Commercial Real Estate—International Business & Technical

Consultants, Inc.

53

Agribusiness Partnerships Project—Tri Valley Growers 58

Officer Resettlement Housing Pilot 63

Appendix IV 

Comments From the

U.S. Agency for

International

Development

71

Page 16 GAO/NSIAD-95-156 USAID Projects in Russia
Contents

Appendix V 

Major Contributors to

This Report

99

Tables Table I.1: Obligations and Expenditures for Assistance to Russia 18

Table II.1: Projects GAO Reviewed 19

Table III.1: Agribusiness Partnerships Established by Tri Valley

Growers in Russia

61

Table III.2: Status of Russian Officer Resettlement Pilot Project

as of February 15, 1995

66

Figures Figure III.1: Housing Units Built in Volgograd for Russian Officers 67

Figure III.2: Duplexes Built in Tula for Russian Officers 67

Abbreviations

ARC American Russian Center, University of Alaska-Anchorage

BCG Boston Consulting Group

CNFA Citizens Network for Foreign Affairs

GKI State Committee of the Russian Federation for the

Management of State Property

IBTCI International Business & Technical Consultants, Inc.

NIS New Independent States

PADCO Planning and Development Collaborative International

PIER Partners in Economic Reform

PIET Partners for International Education and Training

RCG/HB RCG/Haggler Bailly

RPC Russian Privatization Center

TVG Tri Valley Growers

USAID U.S. Agency for International Development

Page 17 GAO/NSIAD-95-156 USAID Projects in Russia
Appendix I 

Obligations and Expenditures for Assistance

to Russia

In his January 1995 annual report, the State Department Coordinator

reported about $2.9 billion in obligations and $1.8 billion in expenditures

for Russia through December 1994. (See table I.1.) Between fiscal years

1990 and 1994, the U.S. Agency for International Development (USAID)

allocated assistance to the New Independent States (NIS) as a region.

During that time, most projects spanned different countries and USAID did

not track how much money was obligated or expended by country. Thus,

USAID country attributions are estimates and should be treated as such. In

fiscal year 1995, USAID began keeping country accounts.

Table I.1: Obligations and

Expenditures for Assistance to Russia

(Fiscal Years 1990 Through 1994) 

Dollars in millions

Agency Obligations Expenditures

USAID direct $1,230.0 $440.4

USAID transfers and allocations to other

agencies 171.1 98.1

USAID subtotal 1,401.1 538.5

Department of Defense 291.0 72.9

Department of Agriculture 1,192.0 1,192.0

Total $2,884.1 $1,803.4

Source: Department of State.

Page 18 GAO/NSIAD-95-156 USAID Projects in Russia
Appendix II 

Projects and USAID Inspector General

Reports GAO Reviewed

We reviewed 10 projects in depth as part of our review. In addition, we

reviewed various reports that USAID’s Inspector General has issued on

management issues and projects in Central and East Europe and the

former Soviet Union. The 10 projects and the USAID Inspector General

reports we reviewed are listed in table II.1.

Table II.1: Projects GAO Reviewed

Dollars in millions

Project/implementing partner

Start

date

End

date Obligations

Housing policy reform/Urban Institute Sept. 92 Aug. 94 $5.8

Voucher privatization/Deloitte & Touche Feb. 93 June 94 4.1

Coal project/Partners in Economic Reform June 92 Aug. 95 8.0a

Small business development/American

Russian Center, University of Alaska

Apr. 93 May 95 5.1

Environmental policy & technology/

CH2M Hill International Services

Apr. 94 Sept. 97 26.4b

District heating/RCG Haggler Bailly Feb. 92 Dec. 93 1.3

Health care training/Partners for

International Education and Training

Fall 93 Fall 93 0.7

Commercial real estate/International

Business & Technical Consultants, Inc.

Oct. 93 Dec. 94 2.0

Agribusiness partnerships/Tri Valley Growers Feb. 93 Sept. 97c 5.2a

Russian officer resettlement/Planning and

Development Collaborative Internationald

July 93 July 94e 6.0

$64.6

Note: Obligations are as of March 1995.

aAmount could be applied to other countries in the NIS as well as Russia.

bTotal estimated amount of three contracts.

cUSAID stopped accepting proposals for partnerships in Russia in September 1994.

dPrimary implementing partner.

eProject had not been completed as of April 1995.

Page 19 GAO/NSIAD-95-156 USAID Projects in Russia
Appendix II 

Projects and USAID Inspector General

Reports GAO Reviewed

The following are the USAID Inspector General reports GAO reviewed.

• Audit of the Bureau for Europe’s Technical Assistance Contracts (Report

No. 8-180-93-05, June 30, 1993).

• Audit of the ENI Bureau’s Monitoring, Reporting and Evaluation System

(Report No. 8-000-95-002, Nov. 28, 1994).

• Audit of ENI’s Strategy for Managing Its Privatization and Restructuring

Activities in Russia (Report No. 8-118-95-009, Mar. 17, 1995).

• Audit of Selected Privatization and Restructuring Activities in Russia

(Report No. 8-118-95-007, Mar. 10, 1995).

• Audit of the Reestablishment of Vaccine Production Activity Under the

New Independent States Health Care Improvement Project No. 110-0004

(Report No. 8-110-94-004, Feb. 25, 1994).

• Audit of the Medical Partnerships in Russia and Health Information

Clearing House Activities Under the New Independent States Health Care

Improvement Project (Report No. 8-110-94-005, Feb. 28, 1994).

• Audit of the Distribution of Emergency Medical Supplies to the New

Independent States Under USAID Cooperative Agreement With the

People-to-People Health Foundation “Project Hope” (Report No.

8-110-94-006, Mar. 17, 1994).

• Audit of the Vulnerable Groups Assistance Program in Russia Under

Project No. 8-110-0001 (Report No. 8-110-93-08, Sept. 24, 1993).

• Audit of Activities to Improve Crop Storage Systems in the New

Independent States (Report No. 8-110-94-014, Aug. 31, 1994).

• Audit of the ENI Bureau’s Cooperative Agreement With World Learning,

Inc., for Support to Non-Governmental Organizations in the New

Independent States of the Former Soviet Union (Report No. 8-110-95-008,

Mar. 10, 1995).

• Audit of the Department of Commerce’s Special American Business

Internship Training Program in the New Independent States (Report No.

8-110-93-10, Sept. 24, 1993).

• Audit of the Department of Commerce’s Consortia of American Businesses

in the New Independent States Program (Report No. 8-110-93-11, Sept. 24,

1993).

• Audit of the Nuclear Regulatory Commission’s Technical Assistance

Activities in Russia (Report No. 8-118-94-012, June 28, 1994).

• Audit of the Department of Energy’s Nuclear Safety Technical Assistance

Activities in Russia and Ukraine (Report No. 8-110-95-001, Oct. 7, 1994).

Page 20 GAO/NSIAD-95-156 USAID Projects in Russia
Appendix III 

Project Summaries

The following provides a detailed analysis of each project that we

reviewed. We selected one project in each of the following areas:

(1) housing policy reform, (2) voucher privatization, (3) coal, (4) small

business development, (5) environmental policy and technology,

(6) heating, (7) health care, (8) commercial real estate, (9) agribusiness

partnerships, and (10) officer resettlement. Each summary contains

information on the problems in the sector, USAID’s project objectives for

the selected contract, and the project approach used by USAID or the

contractor. We also provide our assessment of the contractor’s

performance, the impact on systemic reform, and USAID’s management of

the contract. The projects are presented on the basis of their capacity to

contribute to systemic reform.

Housing Policy

Reform—Urban

Institute

The Urban Institute housing project was successful. It supported reforms

already underway, used an experienced contractor with staff in country,

installed local nationals in high-level positions, focused its efforts on both

the federal and local levels, and contained elements that made it

sustainable. Therefore, this project will likely have sustained benefits as

legislation is implemented and new Russian institutions expand the pilot

projects into other areas.

Sector Problem Russia’s housing sector 1

 has been beset by housing shortages, production

inefficiencies, maintenance problems, and deterioration. This situation

occurred primarily because the state had a monopoly on housing. For

example, it (1) used standardized apartment buildings constructed by

state-owned companies, (2) controlled apartment construction and

maintenance, (3) financed all state housing from state assets, (4) almost

totally subsidized housing and maintenance, (5) guaranteed low-cost

housing, and (6) distributed housing through waiting lists. In addition,

because the Soviet government had not raised rents since 1928, rents

covered less than 5 percent of the cost of operating the apartments in

1990. The problem was exacerbated when the Russian Federation

government stopped paying for maintenance cost of apartments and they

fell into disrepair. In addition, the Federation devolved the housing assets

and responsibilities to municipalities as a way of relieving itself of the

burdens associated with managing the apartments.

1

This information was obtained from (1) USAID’s Housing Sector Reform Project for the NIS and

(2) the Urban Institute’s report, The Russian Housing Market in Transition.

Page 21 GAO/NSIAD-95-156 USAID Projects in Russia
Appendix III 

Project Summaries

Russia initiated housing reforms in 1991 when it allowed its citizens to

privatize their apartments at little to no cost. This action set the stage for

establishing a private housing sector.

Project Objectives USAID signed its first contract for housing sector reform with the Urban

Institute in September 1992 for $5.8 million. This 2-year contract required

the Institute to provide draft legislative and financial advisers to help

Russia develop market-oriented housing programs and legislation. Other

Institute advisers were expected to conduct pilot projects on (1) rent

reforms and housing allowances for the poor, (2) privatized housing

maintenance, (3) condominium associations, and (4) mortgage lending. It

was also expected to provide targeted training to those implementing

reforms and develop local institutions to sustain and expand the reforms.

Specific objectives and milestones were incorporated into the project

design.

Project Approach A USAID team that included Institute representatives met with their

Russians counterparts in early 1992 to determine their reform priorities.

From 12 to 15 meetings at both the national and municipal levels in

Moscow were needed to clarify Russian reform priorities. To help focus

Russian priorities, the team used a “menu” of reforms based on experience

in housing reforms in Hungary and developing countries, and then focused

on one or two priorities to demonstrate results quickly and build

confidence.

The Russian priorities were formalized through agreements signed in

March 1992 with USAID, the City of Moscow, the State Committee on

Architecture and Construction, the Ministry of Finance, and the Ministry

of Economy. The team sought joint agreements with the three ministries

agencies to (1) ensure it would not become captive to any one ministry,

(2) ensure broad-based agreement on reform priorities, and (3) reduce

governmental impediments to reform. The Russian counterparts showed

their support for the project by providing the Institute with free office

space, which is highly unusual due to the scarcity of office space in

Moscow.

The team’s strategy was to work at the national level to help draft

legislation that would shape and codify reforms. In addition, it planned a

series of local demonstration projects to determine the effectiveness of the

designs in the Russian context. The team augmented these efforts by

Page 22 GAO/NSIAD-95-156 USAID Projects in Russia
Appendix III 

Project Summaries

providing training in Russia and the United States. A key strategy was to

take advantage of the Russian reforms already underway and try to create

“win-win” situations for the government and its citizens.

The Institute’s staffing policies were also important to its approach. It

provided two long-term resident advisers, including the Program Director,

who were located in Moscow. The Director said using advisers who were

permanently located in Russia rather than “fly-through” consultants helped

establish trust with their Russian counterparts and enabled them to

respond immediately. The Institute also employed five Russian housing

experts. Short-term U.S. advisers were used on an as-needed basis. The

Director said that using local Russians in key positions was critical to

establishing trust with the Institute’s Russian counterparts. The large

Russian staff also was less expensive than U.S. consultants.

Contractor Performance The Institute achieved its objectives of helping to develop housing

legislation. According to the Russian Federation Housing Director, the

Institute’s assistance was critical in drafting the 38 laws, decrees, and

regulations that have been implemented. These included laws and

regulations on property rights, housing finance, rent reform, housing

allowances for the poor, privatized maintenance, condominiums, and

mortgage lending. The Institute is now the government’s principal housing

adviser.

The Institute also achieved its objectives of establishing pilot projects in

four areas: rent reform and housing allowances for the poor, privatized

maintenance, condominiums, and mortgage lending.

Rent Reform and Housing

Allowances

The Institute helped the City of Moscow develop a program that would

raise rents over a 5-year period until they covered all the costs of operating

the apartments. To reduce resistance to rent increases, it tied maintenance

improvements to the increases so citizens would see an immediate

improvement in their housing conditions. In 1994, the Federation initiated

a national 5-year program to increase tenant payments to cover the full

operating costs. The Institute also helped the Federation structure a

program in which the municipalities began providing housing allowances

to the poor.

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Appendix III 

Project Summaries

Privatized Maintenance The Institute helped introduce competitive private maintenance for

municipal housing. It conducted training sessions, organized the

competition to select private firms, and conducted a study tour to the

United States so officials could see private maintenance activities. In

March 1993, three private maintenance firms assumed management of

2,000 apartments in Moscow, and in October 1993, Moscow’s mayor

extended the program to all areas of the city. By 1994, over 60,000

apartments were under privatized maintenance, far surpassing the

project’s goal of 2,000.

Condominium

Associations

The Institute’s goal for the condominium pilot was to lay the legal and

procedural groundwork by 1994. However, it surpassed this goal and

helped to create 24 functioning condominium associations in Ryazan’. The

regulations it helped develop were instrumental in registering the first

condominium association in Moscow.

Home Mortgages To address mortgage-lending problems, the Institute developed

mortgage-lending facilities at several banks; limited lending has begun. For

example, the Institute helped Mosbusinessbank, Russia’s third largest

commercial bank, to make home mortgage loans and provided assistance

in all phases of operations, including legal documentation, underwriting,

loan servicing, mortgage loan instrument development, and risk

management. The Institute then expanded its work to eight other banks

and provided the necessary materials to other banks to expand and sustain

mortgage lending. However, hyperinflation has precluded lending to most

Russians.

Results The Institute’s critical assistance helped transform Russian priorities into

workable legislation and pilot projects. Although the Russians are

responsible for the pace of reforms, the Institute has helped effect

systemic changes in Russia’s housing sector. It helped pass far-ranging

laws that have codified reforms. The program to raise rents and provide

subsidies for the poor, which is being implemented across the country, is a

fundamental change for the government and its citizens.

The project has a strong sustainability component. Over the next several

years, it plans to institutionalize the reforms by expanding the number of

demonstration projects and developing private maintenance organizations,

condominium associations, and mortgage banks. In addition, it created

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Appendix III 

Project Summaries

procedures manuals, explanatory guides, and other necessary

documentation on implementing rent increases, beginning privatized

maintenance, creating condominium associations, and developing

mortgage lending. The Institute has distributed more than 25,000 of these

documents, mostly to local governments.

The project has won high praise from USAID and Russian officials. The

USAID Mission Director in Moscow called the project one of the most

successful ones he had ever seen. A USAID official in Washington said that,

for the money, no USAID project has had more macroeconomic impact. The

Russian Federation Housing Director noted the Urban Institute’s

tremendous influence on the government, and Russian citizens working in

maintenance, condominium associations, and mortgage lending also

praised the project.

Despite the program’s progress, most Russians have yet to benefit from

the reforms. This is because the reforms are relatively recent, are

tremendously complex, and face opposition by antireformists; they are

also being implemented in a country with no tradition of market-based

decisions. Private land ownership rights are still generally uncertain,

housing and construction mortgages are generally unavailable, additional

laws and regulations are needed, and most apartment buildings are still

maintained by state organizations. In addition, factors beyond the housing

sector, such as macroeconomic and political instability, slow the

transformation to a fully developed privatized housing sector.

USAID Management USAID successfully managed the contract. It determined the Russians’

reform priorities, incorporated these into its reform plan, and listed these

in its contract. USAID selected a contractor with experience in both the

sector and region and is effectively monitoring the reforms through

regular contacts with the contractor and Russian counterparts. Both

USAID/Washington and USAID/Moscow agreed on the housing strategy. USAID

also had the contractor develop measurable goals in its annual work plan.

USAID then measured the contractor’s progress by comparing its task

orders to the deliverables.

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Appendix III 

Project Summaries

Voucher

Privatization—

Deloitte & Touche

As part of Russia’s privatization effort, Deloitte & Touche established a

national system of centers to process millions of vouchers that Russians

received and used in the privatization process.

Overall, the Deloitte & Touche voucher privatization project was

successful, with a few exceptions.

• The project focused on national reforms, but some areas had lower

Russian participation than expected.

• Deloitte & Touche kept USAID and the State Committee of the Russian

Federation for the Management of State Property (GKI) informed of project

progress but did not meet some of its reporting requirements.

• Deloitte & Touche met its amended objective of setting up 30 centers, but

many were underused.

Several factors contributed to the overall success of the project. The

Russian GKI helped focus assistance efforts and identified problems when

USAID had minimal field presence. Further, the omnibus contract system

allowed the contractor to institute a rapid roll-out as well as adjust the

scope of work when warranted. In addition, using existing Russian

agencies and using staff and equipment for follow-on activities increased

the project’s effects and sustainability.

Sector Problem Because the state controlled Russian enterprises, which were generally

large and monopolistic, the private sector was virtually nonexistent. The

legal and regulatory framework to create the new system was not in place;

few citizens had entrepreneurial experience or exposure to western

management, accounting, and marketing concepts; and no capital market

infrastructure existed.2

In August 1992, President Yeltsin announced plans to privatize Russia’s

large and medium-size state-owned enterprises. Within weeks, distribution

of privatization vouchers began, with each Russian citizen eligible to

receive one voucher. The sale of the enterprises was expected to reduce

the need for massive state subsidies, begin to reduce inefficiencies, and

eventually lead to higher productivity and innovation as shareholders

demand profits.

2

We obtained this information mainly from USAID’s project memorandum for private sector initiatives,

GKI’s annual report, and the World Bank document, Russia: Creating Private Enterprises and Efficient

Markets.

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Appendix III 

Project Summaries

Voucher privatization was the initial step in the overall privatization

process and was used to transfer ownership from the state to private

individuals. Unlike the approaches used in some Central European

countries, Russia chose to privatize enterprises before restructuring them.3

The process is therefore not complete: restructuring must still take place

before the enterprises can function in a market economy. This may be

difficult because management and workers received a majority of shares

and can resist taking the painful steps necessary for restructuring.

Project Objectives The voucher-clearing centers allowed individual Russians and investment

fund managers to more easily buy shares via electronic transfers in

enterprises located in remote areas. Without the centers, people would

have had to physically transport vouchers to other parts of the country.

There was also a fear that regions would not let outsiders, including

foreigners, buy shares in highly visible enterprises, thereby allowing

insiders and local bureaucrats to control the process.

The specific objectives of the project required Deloitte & Touche to

establish 35 functioning centers in various Russian cities to verify, process,

and cancel voucher receipts. The project was carried out under two

separate contracts at a total cost of $4.1 million. The initial contract (as

amended) required the contractor to establish 20 centers by the end of

1993, and a task order under the omnibus contract required 15 more

before March 1994. This would give citizens enough time to process their

vouchers before the privatization program ended in July 1994. USAID and

GKI, the Russian agency overseeing the national privatization effort, hoped

that many of the centers would develop into institutions, such as registrars

and depositories, in the capital market infrastructure. The number of

vouchers the centers were to process was not defined.

Project Approach USAID worked closely with GKI on project design, which called for Deloitte

& Touche to develop 4 pilot centers and then establish 16 more after

successfully setting up the pilot sites. To provide broader geographic

coverage, USAID and GKI decided to extend the project and have Deloitte &

Touche set up 15 more centers. Consultants from another USAID

contractor, the Harvard Institute for International Development, worked

with GKI to design and monitor the project.

3

Enterprise restructuring typically involves organization and management changes, choice of product

markets, development of marketing and distribution capabilities, and reductions in staff.

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Appendix III 

Project Summaries

Deloitte & Touche established a permanent office in Moscow in June 1990

and opened a separate office for this project in early 1993. It worked

closely with GKI in Moscow and GKI’s local offices in various Russian cities

to identify appropriate cities for the centers and suitable partners. Deloitte

& Touche then imported computer equipment, established accounting

systems, and installed the software and telecommunications systems

needed to facilitate voucher transactions. Teams of Deloitte & Touche

staff then traveled to the cities to train center staff, install and test the

equipment, and test the software and telecommunications systems. The

contractor hired Russians to assist with these efforts and usually

supplemented the work of Russian agencies, typically banks, already

working in related fields.

Contractor Performance Under the first contract, Deloitte established all 20 centers before its

deadline. Under the second contract, USAID and GKI reduced the number of

centers from 15 to 10 and extended the deadline by 3-1/2 months because

of implementation delays. The delays took place because of problems with

equipment procurement and Russian government customs clearance;

difficulties locating viable agencies to act as centers; and problems at the

local level. For example, some centers collapsed when their leadership

changed or chose not to participate on a national scale for local political

reasons. Both parts of the project were completed under budget.

Of the 30 centers Deloitte & Touche set up, only 23 were used, and many

of these experienced relatively little activity. The lack of use was

attributed to delays in setting up some centers; limited public awareness

(centers were not responsible for advertising their services); limited local

interest in voucher auctions in other areas; Russian reluctance to use

electronic transfers; and a lack of compatibility between the project goals

and individual center goals.

Deloitte & Touche was responsive to GKI requests for project changes. The

task order was revised once it became clear that all 15 centers would not

be needed. In some cases, Deloitte & Touche went beyond the required

tasks at GKI’s request.

Deloitte & Touche generally kept USAID and GKI informed with monthly

reports on progress and problems. However, some reports were not filed

as required, and Deloitte & Touche did not provide an adequate inventory

of the equipment it procured, which would have ensured the

accountability and tracking as required by the company’s contracts.

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Project Summaries

Results The project is considered a success although not cost-effective. A

functioning national system was created in a short time, and according to

GKI, it handled over 70 million vouchers, nearly half the vouchers

processed in the program. People were able to buy shares in enterprises

located in remote areas. GKI noted that over half of the centers have

evolved into institutions that are now active in capital market activities,

such as share registrars and depositories. Our visits to three centers

verified that center staff and equipment are being used in follow-on

activities. These centers intend to become self-financing on a

fee-for-service basis when USAID assistance ends.

The scope of voucher privatization in Russia was unprecedented in scale

and speed. According to Russian and U.S. officials, USAID’s support of GKI

and other Russian institutions involved in privatization activities was

crucial to this phase of the program. The Russian Privatization Center

estimated that 14,000 large and medium-sized enterprises were privatized

by July 1994; they employed over 60 percent of the industrial workforce.

Nevertheless, the overall effect of the privatization program on Russia has

yet to be determined. Enterprise restructuring has only begun, monopolies

still exist, and inadequate tax legislation makes foreigners reluctant to

provide badly needed capital investment.

USAID Management USAID used an omnibus contract to plan and implement projects quickly. It

allowed USAID to respond quickly to emerging needs through task orders

that included specific objectives for narrowly focused, short-term projects.

USAID officials said this gave them the flexibility to change directions

quickly, move money into areas and projects making rapid progress in

reform, and adjust projects to meet emerging needs. Omnibus contracts

also allowed USAID to obligate a large amount of funding. Deloitte &

Touche has an omnibus contract for $41.5 million, with subcontractors

performing some of the work. However, the individual task orders lacked

an evaluation requirement. USAID officials said an evaluation is planned

only at the end of the omnibus contract, which ends June 30, 1996.

We identified several USAID management problems. For example, USAID did

not design the project with quantifiable indicators to measure progress.

Although Deloitte & Touche set up 30 voucher clearing centers, the project

design did not specify the amount of activity expected at each center or on

a national scale. USAID/Moscow had limited information on the project,

such as key documents on Deloitte & Touche’s initial contract or task

order, and accurate financial data for the project. USAID officials said key

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Appendix III 

Project Summaries

documents had not been transferred to Moscow when management moved

to Moscow from Washington. Also, the physical distances involved, the

geographic distribution of project activities, and the lack of staff to visit

the sites left USAID uninformed about some Deloitte & Touche activities.

USAID officials said they relied heavily on GKI and Harvard consultants to

help monitor the project. Finally, USAID did not require Deloitte & Touche

to provide adequate inventory data on the $1.1-million worth of equipment

purchased with USAID funds. Not having this data hindered USAID from

using surplus equipment in other projects as planned.

The Coal

Project—Partners in

Economic Reform

The coal project is achieving its primary objective of facilitating the

restructuring of Russia’s coal industry and is opening the industry to

American technology and companies. The Russian beneficiaries expressed

appreciation for the assistance and found it useful. Due to the size and

cost of the restructuring, however, the Russian government must complete

the effort. If the World Bank approves a $500-million sector loan, this

project will have played a key role in restructuring the coal sector.

Although the project is meeting its objective, USAID did not provide

adequate oversight, did not fully understand the beneficiaries’ needs or

opinions about USAID assistance, and did not know the extent to which the

project was meeting its goals.

Sector Problem Coal is an important component of Russia’s economy. However, Russia’s

coal sector suffers from declines in production and serious environmental

and safety liabilities, in large part because of the centralized structures,

subsidized pricing, Soviet-style management, and state allocation system.

To solve these problems, the coal industry needs to be restructured.4

The process of restructuring is both a problem and a solution because it

creates new challenges. The major areas that need to be addressed in

restructuring Russia’s coal industry and transitioning from a centrally

planned to a market economy include reducing the numbers of mines and

miners as well as the amounts of coal produced and government subsidies.

In addition, the coal monopoly must be broken up, mines must be

privatized, and new relationships and agreements must be established

between management and labor. Efforts to restructure the coal industry

are complicated because the state-subsidized coal mines provide many

4

This information was obtained primarily from coal project documents and officials; PlanEcon reports;

the World Bank’s report, Russian Federation Restructuring the Coal Industry: Putting People First

(Dec. 1994); and the U.S. Department of the Interior’s report, A Cost Comparison of Selected U.S. and

Russian Coal Mines (Sept. 1994).

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Appendix III 

Project Summaries

social services and may be the only source of energy or employment in the

areas where they are located.

Coal industry restructuring will take a heavy toll on miners and their

families as the industry streamlines its operations, mines are closed, and

miners lose their jobs. These same miners, who could lose their jobs as a

result of the Yeltsin reform program, were instrumental in bringing Yeltsin

to power in 1991. The mining community in Russia is still considered a

politically powerful force.

President Yeltsin took a major step toward restructuring Russia’s coal

industry in July 1993 when he freed coal prices. Since that time, the

industry has made some progress. For example, approximately 72,000 of

the 914,000 coal miners and others employed by the coal sector in 1992 left

the industry between January 1993 and June 1994. In addition, coal

production decreased by approximately 41 percent from 1988 to 1994. The

government also reduced subsidies to the coal industry by approximately

20 percent in real terms (i.e., taking inflation into account) between 1993

and 1994. Finally, the Russian coal industry closed 2 of its approximately

273 mines, was in the process of closing 14 more mines in 1994, and is

preparing to close 40 more in the future.

Project Objective As part of USAID’s broader effort to assist Russia’s energy sector, USAID

signed a cooperative agreement with the Partners In Economic Reform

(PIER), a private, nonprofit organization established to assist the coal

industries in Russia, Ukraine, and Kazakstan.5 USAID signed the agreement

with PIER for $6.9 million in June 1992 and has increased funding since

then to $8 million. The project’s main objective is to facilitate the

transformation of the centrally planned and controlled coal mining

industry to an industry capable of operating in a market economy. The

cooperative agreement did not specify any measurable goals or

deliverables.

Project Approach In 1989, U.S. coal representatives visited some of the coal regions of the

Soviet Union where miners were starting to form independent unions, and

between 1989 and 1991, groups of independent miners met with leaders of

the U.S. coal industry labor and management in the United States. In

June 1991, a memorandum of understanding, pertaining to continued

assistance, was signed by U.S. and Russian coal industry representatives.

5

The scope of our evaluation is limited to PIER’s activities in Russia.

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During 1991, circumstances changed drastically. Boris Yeltsin was elected

President of Russia in June, the communists mounted a failed coup

attempt in August, and the Soviet Union dissolved in December. These

changes opened the door for a broad U.S. technical assistance program in

Russia. As part of this effort, the State Department announced the coal

project in a January 23, 1992, press release and signed a cooperative

agreement on June 25, 1992.

The coal project gained early acceptance because PIER targeted the project

at a problem (i.e., coal industry restructuring) that the Russians had

already identified and were struggling to address. In addition, PIER

established good working relationships. For example, PIER established a

coordinating office in Moscow and cooperation and development centers

in the Russian cities of Kemerovo and Vorkuta.6

 An American director

heads the coordination office, and an American director and a Russian

codirector head the cooperation and development centers. In addition,

because the American staff lived in Russia, they were able to develop and

maintain long-term relationships with the Russian government, coal

industry management, and labor unions. The Russians further

demonstrated their support by donating rare office space for the

coordination offices and cooperation and development centers and

donating apartments for the American directors in Kemerovo and Vorkuta.

PIER staff worked closely with representatives from the Russian

government, coal industry management, and labor to (1) reduce the

number of mines and miners, (2) develop new sources of employment in

coal-producing regions to absorb displaced laborers, and (3) develop a

social safety net for those miners left unemployed during and after the

transition. PIER has cultivated cooperative efforts between government,

management, and labor to address problems associated with coal industry

restructuring. In addition to these efforts, PIER staff has helped build

commercial links between the Russian and American coal and coal-related

industries.

Contractor Performance PIER made progress in facilitating the restructuring of Russia’s coal

industry and opening the Russian market to U.S. mining technology.

Specifically, PIER

6

PIER has implemented the coal project in three countries—Russia, Kazakstan, and Ukraine—under

one cooperative agreement. PIER also established coordinating offices and cooperation and

development centers in Ukraine and Kazakstan.

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• worked closely with the World Bank to evaluate Russia’s coal industry and

develop a restructuring plan;

• conducted detailed studies of employment, unemployment, and social

programs; government subsidies; labor demand; a social safety net, job

creation, and mine planning; and enterprise debt in the Russian coal

industry;

• established a coal-bed methane recovery center;

• mediated discussions between U.S. and Russian officials on equipment

certification in an effort to open the Russian market to U.S. high-tech

safety equipment;

• established a program to facilitate U.S. private sector investment;7

• hosted approximately 150 representatives of the Russian government and

coal industry in the United States where they participated in meetings and

negotiations with World Bank officials, training seminars, and meetings

with U.S. coal industry representatives;

• provided training material and conducted seminars in Russia concerning

mine safety, labor-management relations, mining and mine management in

a market economy, and small business development in Russia;

• implemented a transition assistance program focused on developing a

viable social safety net and creating new jobs; and

• provided $200,000 worth of U.S.-manufactured mine health and safety

equipment to Russian miners.

The Russian beneficiaries (i.e., government, labor, and management) we

contacted in Russia stated that the coal project was well-targeted, timely,

and beneficial. In addition, they all wanted the project to be continued and

expanded.

Results PIER has made several contributions to systemic reform. One of the

clearest contributions is its work in facilitating a $500-million World Bank

loan. By providing U.S. coal industry experts, PIER facilitated the World

Bank’s work in Russia; contributed extensive analysis of the coal

industry’s problems; built consensus among Russian government,

management, and labor representatives; and brought representative

Russian delegations to the United States to negotiate with the World Bank.

7

This program, the PIER-Coalition of American Business in the New Independent States in Coal

Extraction, Processing, Transportation, and Utilization, is intended to promote joint venture and

commercial activities between U.S. and NIS private sector counterparts in coal and related industries.

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The World Bank acknowledged PIER in its 1994 report for contributing to

the Bank’s work in Russia.8

PIER helped establish relationships between Russian and U.S. coal mining

and equipment-manufacturing firms. According to the beneficiaries, these

relationships will help Russia attract capital investors and gain greater

access to U.S. expertise and technology so that it can begin to produce

coal efficiently and compete in a market economy. PIER also facilitated the

sale of millions of dollars of non-USAID-funded U.S. mining equipment in

Russia. PIER formed a consortium of U.S. industry representatives to help

create a viable private coal industrial sector. The consortium is to assist

coal managers and technicians in operating in a market economy, identify

ways that private U.S. firms can participate in restructuring the coal

industry, establish NIS-U.S. joint ventures, and promote the consortium’s

services so it can become self-sustaining.

Finally, PIER worked with Russia’s Fund for Social Guarantees to

implement a transition assistance program focused on developing a viable

social safety net and creating new jobs. PIER also brought in U.S. experts to

provide small business education to miners and helped mining

communities develop business proposals that can be presented to the

Russian-American Enterprise Fund, Russian banks, and other sources for

eventual financing.

USAID Management USAID started to implement the coal project before it had established a

USAID mission in Moscow; consequently, the USAID project officer in

Washington managed the project. Since the coal project was established

through a cooperative agreement,9

 without quantifiable indicators, PIER

designed and implemented the project without direct oversight and

control by USAID. PIER provided the required monthly program performance

reports, annual work plans, and annual progress reports to USAID,

10 which

then reviewed them. PIER’s staff communicated regularly with USAID and

felt they had a good reciprocal working relationship.

8

According to a World Bank official, to receive a loan from the Bank, the Russian government must

meet the Bank’s conditions, one of which requires developing a restructuring plan. The Russian

government provided the Bank with an initial restructuring plan and is currently refining the plan to

address the Bank’s concerns.

9

Cooperative agreements, similar to grants, are awarded to nonprofit organizations whose activities

are consistent with USAID objectives. USAID is not expected to exercise a substantial degree of

operational control, but is responsible for approving the implementation plans, budgets, and subgrants

of the organizations’ programs.

10PIER also provided USAID with periodic financial reports, and an independent accounting firm

audited PIER’s financial statements in 1992, 1993, and 1994.

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Despite some success with the project, USAID did not meet its monitoring

and evaluation requirements. Although the USAID staff should have

regularly monitored the project, they visited the Russian project sites three

times between June 1992 and February 1995. Two of the visits occurred

after we began our review. USAID officials said a lack of staff prohibited

more frequent visits. In addition, USAID did not conduct the annual

assessments or midterm evaluation as required and thus lacked an

objective basis for evaluating PIER’s activities and accomplishments. This,

coupled with a lack of quantifiable indicators, hindered USAID’s ability to

independently determine the project’s impact on coal sector restructuring.

Small Business

Development—

University of Alaska

The University of Alaska met most of its project objectives while

encouraging systemic reform, but to date the project has not become

self-sustaining. The American staff live in Russia and have built trust with

Russian officials and institutions, and Russians support the project with

personnel and in-kind contributions.

Sector Problem New enterprises are a major source of new jobs for most economies.

However, the development of new enterprises in Russia has been

hampered by years of central control of the economy, excessive rules and

procedures for establishing a business, and the lack of entrepreneurial

skills.

Project Objective To help promote the growth of small, private businesses and alleviate

unemployment, the United States supported the creation of multipurpose

business development centers in several Russian cities. These centers

provided training and advisory services to small businesses and worked

with local governments to create a hospitable environment for private

business growth. USAID’s goal is that the centers eventually be operated by

trained Russians on a self-financing, fee-for-service basis.

The American Russian Center (ARC), established by the University of

Alaska in Anchorage through an USAID cooperative agreement, was one of

the first contractors in USAID’s program to establish new businesses. The

program’s two phases, conducted over 2 years, cost about $5.1 million.

The agreement called for ARC to provide small business training, develop

Russian business activities in specific geographic areas, and develop

business ties between the Russian Far East and the United States.

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ARC’s initial objectives were to establish a headquarters at the University of

Alaska and two field centers, as well as to train a specific number of

people. A subsequent work plan called for ARC to establish two more

centers while expanding its program in the two original centers. Specific

objectives included increasing (1) the number of Russians trained in

modern business methods, (2) the number of viable Russian small

businesses, (3) access to both U.S. and Russian technologies,

(4) U.S.-Russian business ties through ARC field and business information

centers, and (5) U.S. business activity in the Russian Far East. Creating

Russian institutions that would be sustainable after USAID assistance ended

was also an objective.

Project Approach From its headquarters at the University of Alaska, ARC worked closely with

Russian partners to establish business training centers in four Russian

cities. In each city, ARC had a local educational or academic institution as a

partner. This partnership was reflected in the American and Russian

codirectors and staff at each center and in-kind contributions such as free

office space from the institutions.

ARC’s American staff have had a long-term commitment to Russia.

Full-time staff spoke Russian fluently, lived in the cities where the centers

were located, and had business experience in the region. They were

complemented by short-term American teachers who taught a 1- or

2-month course as well as by itinerant teachers who taught a 1-week or

weekend course in one city and then moved to another city. These courses

were taught with interpreters.

ARC’s core program was an evening course that taught such skills as

accounting, marketing, and management that were necessary to write a

business plan. This course lasted 1 or 2 months, depending on the center,

the time of year, and the targeted clientele. It was supplemented by short

seminars in the host cities and extension seminars in outlying cities and

was targeted at specific business sectors, such as bankers lending to small

businesses. Russians and Americans, both resident and visiting, taught the

courses and seminars. The centers also provided business counseling for

Russians trying to set up their own small businesses. The training centers

charged a relatively low fee for its courses and seminars.

Participants who excelled in the training center programs were invited for

advanced training in Anchorage. They were selected, in large part, through

the business plans they wrote during their core course. In Anchorage, they

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attended a 5-week course that explored topics from the earlier training in

more depth, and toured stores, manufacturing facilities, and offices in the

Anchorage area. The 5-week course was followed by 2 weeks of either

internships in local small businesses or more extensive business tours

tailored to the participants’ interests.

Contractor Performance ARC successfully fulfilled its first year’s work plan targets, and then

received $3 million for a second year’s activities (fiscal year 1994) from

USAID after a March 1994 evaluation of the initial $2.1-million project. USAID

also stipulated that, in fiscal year 1995, ARC must match USAID’s funding.

ARC established business training centers in four Russian cities:

Yuzhno-Sakhalinsk, Yakutsk, Khabarovsk, and Magadan. It established the

Yuzhno-Sakhalinsk and Yakutsk centers in the fall of 1993 and Khabarovsk

and Magadan centers in the fall of 1994. In May 1995, USAID agreed to

provide ARC with an additional $1.5 million, even though ARC had not raised

any matching funds.

Between the fall of 1993 and January 1995, ARC’s Yuzhno-Sakhalinsk and

Yakutsk Business Training Centers offered four cycles of evening courses,

lasting 1 or 2 months, that trained 211 Russians—thereby exceeding the

first year’s work plan goal of 200 participants. The two centers also

provided individual business counseling to 300 Russians; the work plan’s

goal was 200. In addition, the two centers offered 7 extension seminars to

103 Russians in outlying cities. The training centers in Khabarovsk and

Magadan had only recently completed their first evening courses.

ARC sponsored 19 technical assistance seminars, meeting the first year’s

work plan goal of 15 to 20 seminars. Four seminars on banking drew 

180 Russian bankers, and 8 seminars on hair salon management drew 

250 women from throughout the Russian Far East. Forty construction

managers from Yakutsk participated in training on cold weather

construction methods. This seminar led to the government of Yakutsk

testing American-manufactured plastic piping to replace its existing steel

piping.

Between the fall of 1993 and January 1995, 71 Russians completed the

advanced business training courses at the University of Alaska. This

exceeded the first year’s work plan goal of 50. In total, ARC trained 1,646

Russians in its USAID-financed programs through January 1995.11

11ARC also has a U.S. Information Agency grant that it uses to sponsor exchanges.

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On a more systemic level, ARC developed a database of U.S. and Russian

businesses in the Russian Far East and provided assistance or information

to U.S. and Russian businesses working throughout the region.

ARC generally coordinated its activities with other U.S. government

programs located in cities of the Russian Far East, but there were a few

exceptions, particularly when contractors worked in separate sectors. For

example, in Khabarovsk, where ARC established a center in late 1994, the

local American codirector did not know the local environment project

director until we visited. ARC officials in Anchorage were, however,

working with CH2M Hill staff to link the projects.

Results The ARC project will contribute to systemic reform on a regional basis if it

can become financially self-supporting. USAID recognizes that creating

small businesses in the region will push the Russian government to be

more responsive and further develop the area’s nascent capitalist

economy.

The centers help Russians who come to Anchorage from their relatively

isolated cities12 to meet each other and develop business contacts with

other Russians as well as Americans. By drawing entrepreneurs from cities

throughout the Russian Far East, ARC has helped build a network of private

small businesses that can generate business for one another and for the

region.

Once the USAID funding ends, ARC’s partnerships with Russian institutions

will be the key ingredient to sustaining its work. The directors of the

Russian institutions plan to continue the program. For example, the

Rector of the Far Eastern State Transport Academy, ARC’s partner in

Khabarovsk, plans to establish a permanent school based on the activities

of the project. Kray and oblast’ government officials are also highly

supportive of ARC. However, despite the Russians’ desire to continue the

program, most of these institutions currently lack the means to support an

entire local ARC operation.

Further, in an April 1994 evaluation report, USAID questioned whether ARC

would be able to support itself. Other donors have not yet stepped forward

to replace USAID. According to ARC’s director, the problem lies in the

newness of the project and the project’s focus on Alaska and its

12Except for Khabarovsk, each of the cities was closed to foreigners before the collapse of the Soviet

Union.

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businesses. The ARC director said the project plans to include more

business internships and tours in the rest of the United States. The

director believes that this expanded scope will increase ARC funding

because large U.S. institutions and enterprises have the funds and business

interests in Russia to provide long-term support. If USAID assistance had

ended with fiscal year 1994 funds, the U.S. side of ARC would have been

curtailed and U.S. personnel in Russia would have been withdrawn.

USAID Management USAID officials played a significant role in designing the project. Because

the University of Alaska had no previous USAID contract experience, USAID

sent an official from Moscow to Anchorage to help with the project’s

design, which has proven to be effective.

Under a cooperative agreement, USAID has relatively limited management

and monitoring responsibility. ARC provided good progress reports to

USAID. USAID/Moscow has adequately managed and monitored the project.

USAID/Washington has maintained a duplicate document set so that it can

respond to U.S. inquiries.

When it was considering further funding for ARC, USAID sent an evaluation

team from Moscow to Yakutsk, Yuzhno-Sakhalinsk, Khabarovsk, and

Anchorage in March 1994. The team’s report became the basis for USAID’s

continued funding of ARC. Within the amendment that provided the fiscal

year 1994 funding, USAID included a clause stating that USAID would provide

$1.5 million in fiscal year 1995 if ARC raised $1.5 million in matching funds.

However, in May 1995, USAID agreed to provide the $1.5 million even

though ARC had not raised the matching funds.

Environmental Policy

and Technology—

CH2M Hill

CH2M Hill is an integral part of USAID’s $35-million environmental policy

and technology program. In September 1993, USAID awarded CH2M Hill a

contract to serve as the program’s core contractor and provide the

technical support for its environmental activities in Russia, Kazakstan, and

Ukraine. In April 1994, an initial delivery order was signed to provide

support for activities in Novokuznetsk and the Russian Far East. Detailed

delivery orders were signed for these activities in September 1994. CH2M

Hill also serves as the contractor or subcontractor on various components

of the program.

Although the environmental policy and technology project is still ongoing,

USAID officials said its progress so far has been disappointing. Progress has

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been slow because CH2M Hill did not fill critical staff positions in Russia

in a timely manner, and it relied on staff located in the United States to

manage the projects. The expanded scope of the Far East component

further contributed to the delay. Further, USAID field staff lacked authority

and information to expedite project implementation. The projects’

expected contributions to systemic reform and long-term benefits are not

likely to be significant.

Sector Problem Severe environmental degradation threatens the physical health and

socioeconomic well-being of people throughout Russia and deters

economic and political restructuring efforts. Environmental problems

range from nuclear safety issues; to pervasive mismanagement of natural

resources; to some of the worst air, water, and land pollution problems in

the world. The breadth and magnitude of the economic, health, and

ecological costs are difficult to quantify, although remediation activities

alone are expected to cost billions.13

Environmental problems are exacerbated by many factors, including

inattention to environmental consequences, a lack of economic and

political incentives to use resources efficiently, the inability of

nongovernmental agencies to participate in environmental

decision-making, and the inability of governmental institutions to

effectively regulate state-owned monopolies and curb illegal economic

activities.

Project Objectives Our analysis focused on CH2M Hill’s performance as the core contractor

and two projects where it serves as the primary contractor—the Multiple

Pollution Source Management project in Novokuznetsk and the

Sustainable Natural Resources Management and Biodiversity Protection

project in the Russian Far East. Both projects are to run from

September 1994 to September 1997.

The objectives of the $7.4-million core contract are to coordinate all

activities under the core contract, monitor and evaluate the activities and

deliverables, and provide support functions as needed.

The objectives of the Multiple Pollution Source Management project are to

reduce pollution-related health risks and promote environmentally

13This information was obtained primarily from USAID’s February 1993 Project Memorandum and the

U.S. Government’s Environmental Strategy for Russia, prepared by USAID.

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sustainable economic development; improve public health; reduce

pollutant emissions from industries and cities; assist industries in

restructuring in an environmentally sound and sustainable manner; and

strengthen institutions and train individuals to continue improvements

initiated during the project. The $13.4-million delivery order included

$6.3 million for the Novokuznetsk project along with two other projects.

The Sustainable Natural Resources Management project was expanded

from a narrowly focused $3-million, 3-year project focused on fire

prevention and control to a $16.7-million, 5-year project focused on

sustainable forest management and biodiversity protection. This

expansion responded to the Gore-Chernomyrdin Commission’s

recommendations.14 Specific project objectives are to promote sustainable

forest management in the Khabarovskiy and Primorskiy Territories and

protect endangered species and critical habitats in the Khrebet

Sikhote-Alin’ mountain region. To address these objectives, the contract

specifies 25 tasks for CH2M Hill and multiple subcontractors. USAID

approved a $9.4-million delivery order for CH2M Hill to implement and

coordinate these activities.

Project Approach CH2M Hill worked mainly with local and oblast’ government officials to

design and manage the programs. CH2M Hill consultants spent short

periods of time in Russia to design the project proposals and then returned

to the United States to complete the project design. Although USAID and

CH2M Hill established rapport with local and oblast’ authorities in the

affected cities, the Ministry of Environmental Protection and Natural

Resources was only involved in the initial selection of project activities

and their locations. Subcontractors, U.S. nongovernmental organizations,

and other federal agencies helped implement parts of the project.

The project approach includes providing technical assistance,

demonstration projects, training seminars, and limited commodities.

Several components in both projects continued efforts initiated by the U.S.

Environmental Protection Agency, World Bank, and the City of Pittsburgh.

CH2M Hill staff in Washington manage the project, and a regional director

and site managers in Russia handle the day-to-day activities and

coordinate with other implementers. CH2M Hill plans to hire and train

14The Gore-Chernomyrdin Commission was created in 1993 to overcome trade barriers in the energy

sector, but now includes business development, space, environment, science and technology, health,

and defense diversification.

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Russian employees who can eventually manage the activities without

assistance from its U.S. office.

Contractor Performance Project progress to date has been mixed. CH2M Hill met the requirements

of its core contract by establishing field offices, monitoring project

implementation, and providing support functions to its field staff. Even

though it has made some progress toward addressing the Novokuznetsk

project objectives, it has been slow to implement the Far East project.

CH2M Hill has missed critical milestones for both projects.

In Novokuznetsk, CH2M Hill established an air pollution database for the

180 heating plants in the city and developed a strategic plan to address

particulate pollution from the heating plants. It also upgraded the city’s air

pollution program, trained Russian counterparts in environmental

auditing, and completed environmental audits of two large steel mills.

CH2M Hill is currently assessing local water monitoring activities and has

recommended laboratory improvements to more accurately measure the

quality of drinking water. CH2M Hill is working with the Novokuznetsk

Development Fund and local government officials to develop a strategic

plan. However, CH2M Hill has not provided an acceptable work plan,

which was due on November 30, 1994. The current work is based on the

delivery order specifications.

In the Far East project, CH2M Hill has been even slower getting started

and, according to USAID and Russian officials, had produced almost no

quantifiable results as of February 1995. Several factors have hindered the

project’s implementation, including its increased complexity; the size of

the geographic area; and the large numbers of governmental officials, local

interest groups, and subcontractors involved. The project covers 2 large

regions and will involve at least 16 implementing organizations, including 2

U.S. federal agencies, subcontractors, and U.S. nongovernmental

organizations.

Several problems have delayed the effective implementation of both CH2M

Hill projects. One problem was that CH2M Hill experienced problems

filling critical staffing positions in Washington and Moscow and at the field

office level. Although the core contract was awarded in September 1993,

the regional director did not arrive in Moscow until February 1994. Other

positions in Moscow funded in September 1994 delivery orders were still

being filled as of January 1995. The contract to implement field support

functions in Novokuznetsk and the Far East was awarded in April 1994,

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but on-site managers did not arrive until September and October 1994,

respectively. The Far East project manager position was authorized in

September 1994, but the manager did not move to Russia until

February 1995. CH2M Hill officials had difficulty finding qualified staff

who were willing to relocate to these areas because of the acute

environmental problems and remote locations. USAID and CH2M Hill

officials agreed that the on-site presence is essential for making progress.

USAID/Moscow officials said staffing delays and delays in producing an

acceptable work plan have hurt the credibility of the program in the

region.

CH2M Hill also had difficulty developing acceptable work plans that define

how and when the scope of work will be implemented. CH2M Hill was

required to submit the work plans for both the Novokuznetsk and the Far

East projects within 60 days after signing the contract on September 30,

1994. USAID approved the work plan for the Far East project on May 8,

1995, but the work plan for the Novokuznetsk project was still being

revised as of June 1, 1995. According to an USAID official, the work plans

originally submitted were incomplete and lacked specific indicators or

other factors necessary to evaluate the activities.

Additionally, USAID officials said CH2M Hill had done a poor job of

providing them with the appropriate reporting documents for these

activities. USAID expressed concern over CH2M Hill’s failure to provide

timely delivery of tracking materials, such as monthly summaries of

financial status by project, monthly presentations of progress on select

tasks, and weekly briefings on overall project progress. According to USAID

officials, CH2M Hill addressed their concerns and has recently improved

its reporting.

Results As of February 1995, the CH2M Hill projects had contributed little to

systemic reforms, and they will not generally be sustainable without

outside funding support. This limited contribution is due largely to the vast

environmental needs in Russia and the massive amounts of capital

investment needed to modernize or purchase equipment for restructuring

Russia’s environmental sector. Also, USAID and CH2M Hill officials said that

Russian monitoring and enforcement procedures will be extremely

difficult to change and are not addressed in these projects. Finally, the

Ministry of Environmental Protection and Natural Resources was not

involved in designing the project, thus reducing the likelihood the project

could be duplicated on a wider scale. USAID officials said the project will

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attempt to address systemic reform through efforts to maintain and

restock the forestry base.

Some components of the Novokuznetsk project are likely to address

environmental sector restructuring. CH2M Hill expects to work with

Novokuznetsk’s industry, citizens, and local government to develop a

strategic plan and provide recommendations for creating an

environmentally safe city by 2010. However, these recommendations could

require large capital investments. For example, CH2M Hill recently

conducted industrial audits for two steel companies. After spending 

6 weeks and using 7 U.S. advisers and 25 Russian counterparts to conduct

the audits, company officials said the audits did not provide any new

information on major pollution sources. Further, the companies do not

have the funding to make the recommended improvements and will have

difficulty obtaining it. According to one steel mill executive, the

environmental audit allowed the mill to fulfill a condition for a World Bank

loan. The Novokuznetsk project places a considerable emphasis on the

contractor delivering studies and does not establish any indicators to

measure progress in reducing actual pollution.

Some components of the Far East project are designed to address the

region’s need to maintain and restock its important forestry base. Efforts

are planned to (1) strengthen polices and develop an adequate

environmental regulatory structure, (2) create economic and political

incentives to use resources efficiently, (3) increase the participation of

nongovernmental agencies in environmental decision-making, (4) promote

U.S.-Russian partnerships, (5) promote the export of timber products

made by Russian workers, and (6) conserve biodiversity.

USAID Management USAID’s decision to use a core contract and delivery orders has caused

delays and excessive paperwork reviews for both CH2M Hill and USAID

staff. Under this system, USAID must prepare delivery orders and CH2M Hill

must submit detailed work plans for each project component within 

60 days. The decision to expand the Far East program has also delayed

project design and implementation. The expansion covers a larger

geographic region and greatly increased the scope of work, including the

number of activities and subcontractors involved.

The division of responsibility between USAID/Washington and

USAID/Moscow has affected the agency’s ability to manage the project.

USAID/Washington maintains overall management authority, but has given

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USAID/Moscow increased monitoring and program responsibility. However,

USAID/Moscow officials said they still had minimal authority to manage the

project or make changes. USAID/Washington must approve all program

decisions, including minor ones, such as country clearances for visitors

and all purchases exceeding $500. In April 1995, USAID/Moscow submitted

an initial request, which remained under review as of June 1, 1995, for

delegation of authority to the field.

USAID has had difficulty monitoring the projects. USAID staff said they have

not regularly visited the project sites because of the difficulty of traveling

to the sites and the lack of adequate staff. The USAID/Moscow project

officer keeps apprised of the project activities primarily by talking to

project staff over the telephone or in informal meetings and by reviewing

reports by the contractor or visiting teams.

District Heating—

RCG/Haggler Bailly

The district heating project is one component of USAID’s Energy Efficiency

and Market Reform Project for the NIS. The project began in January 1992

and is considered the first economic development effort undertaken by the

United States in the region. With $5.3 million in funding, the project was

designed to improve district heating systems in six countries: Armenia,

Belarus, Kazakstan, Kyrgyzstan, Russia, and Ukraine.

Although the contractor, RCG/Haggler Bailly (RCG/HB),

15 met most of its

objectives, we found no indication that the project was having a significant

impact on the sector. Most of the Russian work was concentrated in two

Russian cities, Yekaterinburg and Kostroma, and the project was not

completed in Yekaterinburg. Because USAID did not adequately monitor the

project, it was unaware of (1) problems that prevented the completion of

the project and (2) any long-term benefits, if any, to the beneficiaries. An

evaluation conducted by a consultant did not identify obvious problems,

and USAID did not address the recommendations in this evaluation.

Sector Problem Fuel and energy are an important part of Russia’s economy. The subsidies

provided by the former Soviet government to Russian energy consumers,

both residential and industrial, created artificially low prices and

promoted the inefficient use of highly polluting energy. Since the

dissolution of the Soviet Union, Russia has implemented several policies,

including increasing or freeing coal, oil, and gas prices, to reform its

15RCG/Haggler Bailly, one of three contractors implementing the district heating project in the NIS, is

an international management consulting firm that specializes in energy and the environment.

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energy sector. Although still below world market levels, the cost of

domestic oil and oil products in Russia doubled in 1993 and 1994. Such

increases in energy prices have a significant influence on inflation and

social conditions. As energy prices increase, consumers must find ways to

use energy more efficiently. 16

Project Objectives In February 1992, RCG/HB was awarded a contract for $550,000 to complete

the project in Russia. The project was amended in August 1992, increasing

the total cost to $1.3 million. The project had five objectives: (1) foster

improved management of energy use in heating plants by identifying and

implementing cost-effective “low cost-no cost” energy efficiency

improvements; (2) transfer energy auditing and management techniques,

including financial and economic analysis techniques; (3) provide

equipment support to implement low-cost options, improve monitoring

and energy management, and identify additional energy efficiency

opportunities; (4) support the World Bank’s efforts to reform Russia’s

energy pricing policies; and (5) promote the emergence of an energy

efficiency industry in Russia.

Project Approach RCG/HB and USAID worked with representatives from the Russian Ministry of

Fuel and Power, the Commission for Humanitarian and Technical

Assistance of the Russian Federation, nongovernmental organizations

concerned with energy efficiency and conservation, municipal

governments, and industrial enterprises.

The two primary Russian cities selected for the project were

Yekaterinburg and Kostroma. In these cities, extensive energy audits were

conducted of the district heating facilities, and three sites (i.e., hospitals,

apartment buildings, and heating plants) in each city were selected as

demonstration sites for U.S. energy efficiency equipment, including flow

meters, temperature sensors, and thermostatic control valves. The value of

the equipment supplied to the demonstration sites was approximately

$172,000. The project sites were intended to demonstrate the savings in

using no-cost or low-cost technologies and also serve to promote

American-made equipment.

In addition, RCG/HB conducted energy audit training seminars and provided

energy audit equipment to technicians in Yekaterinburg, Kostroma,

16The information in this section was obtained primarily from papers presented at the International

Energy Agency’s October 1994 Symposium on Russia’s Energy Strategy and the Agency’s report,

Russian Energy Prices, Taxes, and Costs, 1993.

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Irkutsk, Moscow, Murmansk, and St. Petersburg. To complete its work,

RCG/HB contacted more than 250 U.S. equipment manufacturers to

determine their interest in conducting business in Russia. The 12

companies that responded participated (at their own expense) in

“wrap-up” seminars in four Russian cities when the project ended. The

information obtained at these seminars was published in a lessons learned

document.

Contractor Performance RCG/HB completed most of the objectives stipulated in its contract. The

products delivered to complete the objectives included energy audits in

two cities, energy audit training and distribution of energy audit

equipment, a study of natural gas pricing in Russia, and an energy

efficiency industry development effort. It also produced a video about the

project that was shown on Russian television.

RCG/HB was also required to identify, purchase, and install low-cost energy

efficiency equipment manufactured by U.S. companies. RCG/HB purchased

this equipment; however, due to problems with local conditions, some of

the equipment was not installed in Yekaterinburg. An RCG/HB official said

that in June 1993, a Russian subcontractor assured RCG/HB that it would

install the equipment in Yekaterinburg by the end of 1993. We visited three

sites in Yekaterinburg in February 1995 and found all the equipment at one

site was still in shipping containers. Russian officials said the equipment at

the other two sites only began operating in September 1994 and

January 1995, respectively. According to an RCG/HB official, the company

had not paid the subcontractor and would not pay until the installation

was completed. However, USAID had already paid for the equipment, valued

at $8,000.

Officials in Yekaterinburg stated that the equipment had not been installed

in 1993 for two reasons. First, in two cases, the sites (a hospital and an

apartment building) were under construction and the construction plans

had to be altered to accommodate the equipment. Second, at the other

installation site (a district heating facility), the equipment had not been

installed, and most likely will not be installed, because the proper Russian

authorities had not certified it. Officials in Yekaterinburg stated that it

would be illegal to install and operate the equipment before it was

certified. They explained that although the equipment can be used for

demonstration purposes at consumer locations (e.g., apartment buildings),

a public utility cannot use the equipment and the information (e.g., energy

consumption data) it produces as a basis for charging customers.

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Similar equipment was installed in Kostroma, according to USAID and

RCG/HB officials, even though it had not been certified. USAID officials told

us that city officials were willing to install the equipment because they

realized the potential benefits.

Results We found no indication that the project had contributed to systemic

reform in the area of energy efficiency. Most of the work was concentrated

in two cities, and the project was not completed in either city. In addition,

USAID did not adequately monitor the project and could not be certain of

any long-term benefits.

USAID Management USAID used an independent consultant, Management Systems International,

to evaluate the NIS district heating project, including RCG/HB’s work in

Russia.17 The evaluation, published in July 1993, reported no serious

problems and declared the project a success. Specifically, the study

indicated that total equipment costs for the four cities in Russia amounted

to $418,000 and would produce an annual savings of $1.4 million. It also

noted that the equipment would reduce pollution. Furthermore, as a result

of the energy efficiency industry development effort, 12 U.S. companies

had sent representatives to the various countries to participate in seminars

held at the end of the project.

We found that the consultant’s evaluation was deficient. The evaluation

did not mention the equipment installation problems in Yekaterinburg or

the need to have foreign equipment certified by the Russian government.

Instead, the evaluation stated that “by April 1993, all of the equipment was

installed and operating.” In addition, USAID did not specifically direct

Management Systems International to assess the products RCG/HB was

required to produce, such as the natural gas pricing study for Russia or the

lessons learned from the energy efficiency industry development effort.

The evaluation did not discuss the quality of either of these products. USAID

officials stated that the natural gas pricing study had been completed in a

collaborative effort with the World Bank, which used it in its work

pertaining to loans made to Russia’s natural gas sector. However, the

consultant’s report contradicted USAID’s statement by noting that the World

Bank did not make a serious attempt to involve RCG/HB in its work in

Russia.

17USAID paid $18,385 for this evaluation.

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Finally, the evaluation did not discuss the training seminars conducted by

RCG/HB in Irkutsk, Moscow, Murmansk, and St. Petersburg, or the energy

audit kit instrumentation supplied to technicians in these cities. The

continued use of these deliverables is an important factor to consider

when evaluating the success and sustained benefits of this project.

USAID officials were not aware of the problems we identified in

Yekaterinburg nor the shortcomings of the evaluation. They stated that in

June 1993, an official from USAID/Washington visited all the NIS sites except

Yekaterinburg. They stated that equipment had been installed at the sites

visited. A local national employee from the USAID mission in Moscow also

visited Yekaterinburg in June 1993 but did not report any problems at that

site. USAID officials discovered the problems we found when they

accompanied us to Yekaterinburg. USAID said it would take corrective

action.

Also, USAID has no mechanism to monitor various outcomes of the project,

including (1) the success of U.S. industry in entering the NIS market,

(2) policy reforms written into law, and (3) the rate of adoption of new

technologies. Although USAID said that the installed equipment would

produce annual savings at project sites, it did not record these savings

during the 1993 or 1994 heating seasons. Furthermore, USAID had not

determined the savings generated by either the energy audit kits provided

to technicians in six cities or the energy audits conducted in Yekaterinburg

or Kostroma.

Health Care

Training—Partners for

International

Education and

Training

USAID initiated the NIS Exchange and Training program in the spring of 1993

to train NIS leaders about free-market economies and democratic

governance. USAID hoped that training the participants in the United States

would provide them with the technical skills and attitudes required to

create similar policies, programs, and institutions in their own nations. We

reviewed the health care training provided to Russians in late 1993.

Our analysis indicated that the health care training had little likelihood of

contributing to systemic reform and that USAID now considers the training

to be irrelevant after Russia changed its direction for health care reform.

The training’s primary objective—to facilitate Russia’s transformation to a

democratic free-market system—was unrealistic for a 2-week training

course. USAID did not follow up with participants to determine the

training’s impact on systemic reforms. Although USAID officials said that

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most participants have been involved in follow-on projects, only

25 percent are slated for follow-on activities planned in 1995 and 1996.

Sector Problems According to USAID, Russia’s health care industry has a number of

problems. These problems include the virtual collapse of the

pharmaceutical and medical supply industry, poor quality of care due to

training and technical gaps, serious funding shortfalls, and a centralized

system devoid of incentives for efficiency and cost control. Although

Russian policies have produced an educated workforce with more doctors

per capita than the United States, the workforce lacks many of the basic

skills and institutions necessary to function in a democratic, free-market

context.

Project Objectives USAID contracted in June 1993 with its worldwide training support

contractor, Partners for International Education and Training (PIET), to

conduct training in the United States for 200 NIS leaders and professionals

at a cost of $2.6 million. The training objectives were to

• facilitate the region’s rapid and sustainable transformation from

authoritarian, centrally controlled regimes to pluralistic, democratic

countries with free-market economies;

• provide participants with new skills and knowledge to contribute to

economic and social development;

• promote the value of democratic decision-making;

• provide an understanding of U.S. programs; and

• lead to long-term relationships with U.S. institutions.

USAID also hoped that participants would share their new skills and

perceptions with their counterparts.

Project Approach Under the PIET contract, USAID missions identified the training topics and

selected the participants. USAID/Moscow selected the participants based on

their positions in oblast’ health care systems and their planned inclusion in

follow-on projects. According to USAID, participants went to the United

States before participating in follow-on projects so they would be more

receptive to reforms. The training project encouraged missions to link

training, if appropriate, to ongoing or planned developmental assistance by

USAID and others.

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After course topics and participants were selected, PIET was expected to

arrange training courses in the United States and provide administrative

and logistical support for international travel, living expenses, medical

insurance, tuition, books, and other needs. PIET was also expected to

(1) ensure that training programs at U.S. training institutions were

functioning properly, (2) monitor the participants’ progress, (3) provide

USAID status reports, and (4) evaluate each training program.

Contractor Performance PIET subcontracted with Management Sciences for Health to provide the

training in the United States; 42 Russians were trained in health finance

and 20 were trained in pharmaceutical management. USAID subsequently

contracted with the Academy for Educational Development to make

training arrangements.

PIET met its contractual requirements by providing training, transportation,

and logistics, according to USAID officials. The participants we spoke with

in Russia praised PIET’s support and assistance as well as the quality of the

training they received in the United States. Our review of sample course

assessments showed that other participants generally gave high marks to

the training. For example, in the evaluation conducted by the USAID

mission, most participants were satisfied with the course and believed it

was applicable to their work conditions.

PIET also met its monitoring and reporting requirements. PIET maintained

contact with the training institutions, called a random sample of

participants once a week, contacted the trainers on an as needed basis,

and helped participants with general adjustment problems. PIET also

provided all the required reports, including regular status reports and

course assessments. USAID/Washington officials were satisfied with the

quality of PIET’s support and monitoring during the training.

Results USAID was unable to provide any evidence that the training will help

Russia’s democratic or economic transformation. Although the training

may have met some secondary goals, without follow-on activities, fulfilling

these objectives will not likely result in systemic reform. USAID/Washington

officials agreed that the training could not meet all of the contract’s

objectives. They said that a 2-week training course could only “facilitate”

reaching these objectives but not actually attain them. Further, they

provided the training quickly as a political imperative to respond to the

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opening in the NIS, and they recognized training alone has limited

usefulness.

USAID was unable to substantiate that any of the 62 participants

contributed to any reforms, partly because the participants lacked the

authority, expertise, or resources to influence reforms. However, the

participants who had taken PIET health-related courses said the training

helped them understand U.S. programs and they had shared their training

with others.

USAID officials in Moscow and Washington said that training alone would

not influence systemic change and that subsequent training was better

integrated into follow-on activities. They said that the main purpose of the

PIET training was to make participants receptive to follow-on reform

projects, which USAID thought would occur. However, USAID later dropped

plans for follow-on activities in Central Russia because the oblasts were

not reform-minded and the contractor reported that only 25 percent of the

Siberian participants would participate in follow-on activities.

The Russians did not see health reform as a priority when the early

training took place, and Russia has only recently begun to consider the

direction of reforms, according to USAID/Washington officials. Further, this

early training is now irrelevant because it was based on Russian policy

directions that were later discarded as unworkable.

USAID Management The mission was forced to move much more quickly than it desired

because it was under extreme congressional pressure to quickly establish

the training program, according to USAID officials. As a result, the health

care training was initiated before it could be integrated into follow-on

projects more likely to facilitate systemic change. Further, because the

Russians were unclear about what reforms they wanted, the mission had

trouble targeting the training. The Russian officials began exploring

reform options with the mission in December 1994.

USAID/Moscow officials assessed the training after participants returned to

Moscow; however, they have had no contact with the participants since

then. They did not know which participants, if any, would be involved in

any of the follow-on activities planned in Siberia.

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Commercial Real

Estate—International

Business & Technical

Consultants, Inc.

The International Business & Technical Consultants, Inc. (IBTCI) project

did not achieve its goal to increase the availability of commercial real

estate to small enterprises, although it did provide potentially useful

technical assistance in three cities. The project did not contribute to

systemic reform and was not sustainable. IBTCI did not replicate the pilot

project—a project objective—in part because the roll-out cities were

poorly chosen. IBTCI was responsible for choosing appropriate cities, but

its short-term consultants lacked sufficient knowledge of Russia and local

conditions to determine what cities would have cooperative officials and

could benefit from the project.

Sector Problem Much of Russia’s commercial real estate is still owned by the government.

Rather than divesting its ownership rights, the central government has

decentralized those rights to local governments, both regional and

municipal. Although this practice is quite common among other countries

in transition, Russia is different because local governments (1) have a

virtual monopoly on commercial real estate and (2) have not moved

toward commercial real estate leasing using market mechanisms. Highly

inefficient users occupy valuable commercial space, contributing very

little to local budgets, while private sector development is blocked by the

unavailability of property.18

Project Objectives USAID and GKI recognized this problem and signed a task order with IBTCI to

develop a solution. The $2-million task order for the rapid diagnosis pilot

project and roll-out project was part of IBTCI’s $13.3-million omnibus

contract. The initial deadline of May 1994 was extended to December 1994,

but without any increase in the cost or level of effort required. The general

purpose of the task order was to significantly increase the availability of

commercial property in Russian cities.

The specific goals of the task order were to examine the causes of limited

access to retail space, implement a pilot project in a selected city, and then

replicate the pilot project in other oblasts. IBTCI was to (1) deliver a report

on the root causes of and solutions to the problem of commercial property

access for one city; (2) design an implementation plan to address these

issues, including procedural, legal, administrative, financial, policy, and

other measures; (3) replicate the pilot project in at least five other oblasts;

and (4) produce and nationally distribute publicity and instructional

18Harding, April L., Commercial Real Estate Market Development, The World Bank, Discussion Paper

Number 109 (May 10, 1995).

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materials for local state property committees, local authorities, and

entrepreneurs on how to increase the availability of retail property.

Project Approach IBTCI used a subcontractor, Boston Consulting Group (BCG), to perform the

rapid diagnosis phase and conduct the pilot project in the City of Perm’.19

The goals of the pilot project were to (1) design and test a method for

increasing the amount of commercial real estate available to small and

start-up businesses and (2) identify any constraints or impediments that

might exist. The pilot was intended to serve as a model for instituting the

program in five other Russian cities. IBTCI instituted the roll-out in Irkutsk,

Tver’, Novgorod, Yekaterinburg, and Vladivostok.

Because it had previously worked in Perm’, BCG used staff who already had

a relationship with municipal officials when it began the diagnosis and

pilot phases of the project. In contrast, IBTCI relied on consultants who

made short visits to the other cities to research, plan, and implement the

roll-out.

During the rapid diagnosis phase in Perm’, BCG identified three feasible

ways of improving access to commercial space: convert residential

premises to commercial use, develop a secondary real estate market, and

optimize the leasing process. BCG, IBTCI, USAID, and GKI selected the leasing

optimization method because they thought some concrete results were

possible during the study period, even though it was predicted that this

alternative would have limited support and low potential impact. Lease

optimization means, among other things, (1) moving toward

market-determined rents, (2) removing bureaucratic discretion in space

allocation, and (3) creating incentives to sublease unused space.

Contractor Performance BCG conducted the rapid diagnosis and pilot phase of the project from

November 1993 to March 1994 in Perm’. BCG devised a two-track auction

system for making municipality-controlled real estate available to private

businesses. The first track was an auction for the right to lease specific

commercial real estate properties (i.e., a one-time premium). The second

track was an auction for the rental rate at which a property would be

leased. The purpose of this system was to introduce market mechanisms

into the allocation and pricing of commercial real estate. Under this

19Perm’, with a population of 1.5 million, was selected for the pilot because of its intermediate size and

presumed representative nature of municipalities within the Russian Federation.

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system, bidding for the right to lease and the rent to be paid replaced

government bureaucrats with market mechanisms.

The results of the first auction, which occurred on March 1, 1994, were not

promising. In the first track auction, three properties were available. The

right to lease them was sold for each property. In the second track

auction, 15 properties, all basements, were available. Bids were made on

only 3 of the 15, and each received only one bid. The rental rate for the

three properties did not exceed the rent that started the bidding.

The results of a second round of auctions, which occurred in May 1994,

were also disappointing. In the first track auction, 10 properties were

available, but the right to lease was sold for only 4 properties, although

several parties bid on them. In the second track auction, three properties

were available, but only one received a bid, and that was the starting bid.

These results were not perceived to have significantly increased the

amount of commercial real estate available in Perm’.

IBTCI started work on the roll-out in mid-February, before the Perm’ pilot

was completed or its results evaluated. IBTCI soon found that none of the

five cities chosen for the roll-out had conditions that approximated, let

alone duplicated, those in Perm’. The roll-out cities seem to have been

chosen more for their geographic and population distributions than for

any existing economic, political, and regulatory conditions that might

make the Perm’ model replicable.20 Because of these differences, IBTCI had

to deviate from the Perm’ model and basically develop five new pilot

projects; nonetheless, it still experienced problems.

Irkutsk officials were not cooperative with IBTCI and declared the

information needed to assess the commercial real estate situation a state

secret. Local officials were not ready to participate in the project.

In Tver’, an auction system had been functioning between June 1992 and

December 1993. The original investment tender process used in the

auction was challenged in court and hopelessly compromised. IBTCI

introduced a new tender process in Tver’, but the new system’s

effectiveness has not yet been demonstrated.

20Novgorod and Tver’ were included because they are relatively small cities, under 250,000 in

population. Irkutsk and Vladivostok represented medium-sized cities, with populations between

250,000 and 750,000. Yekaterinburg was to represent large cities, population over 750,000, and be a

match for Perm’.

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The Novgorod officials opposed conducting right-to-lease auctions

because they feared losing future revenue and the city had experienced

poor results from a similar auction in November 1993. IBTCI focused on

establishing a market for municipal, oblast’, and private commercial space

by creating a real estate listing center, developing a secondary market, and

encouraging officials to allow increased and legalized subletting. The

listing center’s effectiveness has not yet been demonstrated.

In Yekaterinburg, an effective auction system has been in place since 1992.

City officials were not interested in IBTCI’s original task of increasing the

use of commercial leases. Instead, they wanted assistance in how to use

retail and commercial space efficiently and increase the city’s revenues

from property leases. Although IBTCI submitted some analyses and

recommendations addressing their concerns, city officials told us that IBTCI

came to town on different occasions, spent little time there, did not speak

to the appropriate local officials, and presented an academic report that

was of little use to them.

Vladivostok city officials were interested in privatizing commercial real

estate, but were unable to devise a method that would use mortgages to

provide substantial revenue for the city. IBTCI devised a mortgage

instrument that allowed the city to continue receiving income by holding

the mortgages and allowed small business owners to bid for a property

and provide as little as 5 percent of the final cost as a down payment. The

city auctioned one property in August 1994 for under $7,000, but local

officials doubted they would use an auction again because the city did not

not have any more excess property.

By the time IBTCI had completed its work in the five cities, none of the

cities had participated in any activities that remotely resembled the Perm’

model. As a result, the objective of replicating the pilot project in other

cities was not achieved.

There were various reasons for IBTCI’s inability to replicate the Perm’

model. First, tensions between IBTCI and BCG caused some problems. BCG

performed both the rapid diagnosis and the pilot phases, but IBTCI

determined that BCG’s approach was not adequate. Russian officials

monitoring the project were aware of tensions between IBTCI and BCG early

in the project, but IBTCI was obligated to fulfill the contract and replicate

the model. The tensions between IBTCI and BCG resulted in little continuity

of personnel from the pilot to the roll-out phases.

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Second, a provision of Russia’s 1994 State Privatization Program Act and

its implementing regulations caused problems in the Perm’ pilot. The

provision gave lessees who obtained their leases competitively (i.e., at an

auction) the right to buy the property at the end of the leases. The

implementing regulation set an extremely low selling price for such

privatized properties. IBTCI said that the act’s provision and the

implementing regulation stopped the Perm’ model because city officials

did not want to lose revenue from leases and did not want to be forced to

sell leased property for extremely low prices. Even though reports

identified the problem as early as January 1994, USAID, GKI, and the Russian

Privatization Center took no effective action to address the issue.

Third, although officials at the federal level agreed earlier that the project

should be done and that the Perm’ model was viable, local officials in the

roll-out cities did not agree with the Perm’ model or its usefulness in their

cities.

Fourth, although the consultants used by IBTCI for this project had some

experience in Russia and some spoke Russian, Russian authorities

questioned the level of some IBTCI consultants’ professional experience. In

addition, the consultants did not have enough knowledge of the Russian

localities and local politics to choose roll-out cities well. IBTCI staff did not

reside in the cities during the roll-out. Instead, they would fly in, do a few

days work, then leave. Thus, they were unable to identify what cities

would be the best candidates for replicating the Perm’ model. Even BCG

had problems carrying out a successful pilot, despite its knowledge of and

relationships in Perm’.

Results The project was not sustainable and did not contribute to systemic reform.

Although IBTCI’s final report provided solutions to specific problems, the

project did not implement the pilot or develop a method that could be

replicated in other cities. USAID officials and the Russians who were in

charge of disseminating the report did not know whether or where the

IBTCI “solutions” had been applied in any but the six cities. City officials we

interviewed in Yekaterinburg and Vladivostok were not using the concepts

of the project.

GKI and the Russian Privatization Center had originally proposed the

project, which suppported a federal initiative. However, an existing GKI act

and its implementing regulation potentially forced local governments to

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sell leased property at low prices to anyone who bought the lease at an

auction. This regulation contributed to the poor results of the project.

USAID Management USAID managed this project—from Washington with limited help from

USAID/Moscow—jointly with GKI and the Russian Privatization Center; it

relied on consultants from the Harvard Institute for International

Development and the Center to help monitor the project. Nonetheless,

USAID did not monitor the project adequately. Even though IBTCI filed the

required reports, these reports failed to describe how much the roll-out

deviated from the Perm’ model. Center officials said they first became

aware that the pilot was not being implemented in other cities in late

May 1994, long after the roll-out could be redirected to other cities.

When problems were known in some cases, USAID did not take any

corrective action. For example, a Harvard consultant who visited some

sites raised questions about the cities selected for the roll-out, but USAID

took no corrective action. Similarly, the problem with the State

Privatization Program Act and its implementing regulations was

mentioned in reports in January 1994, but no action was taken to resolve

it. Finally, USAID officials said they were aware of the tensions between BCG

and IBTCI, but simply told IBTCI to work the problem out themselves.

USAID/Moscow officials said they did not have enough staff to intervene

when problems arose, visit the project sites, and talk with beneficiaries

about how the project was progressing.

Agribusiness

Partnerships

Project—Tri Valley

Growers

The lack of quantifiable objectives or time frames in the Tri Valley

Growers’ (TVG)21 project design makes it difficult to measure the project’s

success. TVG helped to facilitate the work of two agribusiness partnerships

in Russia; nevertheless, USAID concluded that TVG did not perform

adequately. It is too early to determine the long-term economic viability of

the partnerships; however, the involvement of U.S. companies increases

the likelihood the partnerships will be maintained. The partnerships will

probably not have any measurable effect on Russia’s agricultural sector

because of their limited size and number.

Sector Problem Agriculture plays an important role in the Russian economy. Although

estimates vary, Russia has approximately 27,000 large state and collective

21Tri Valley Growers is an agribusiness association based in California. Its members are involved in

value-added fruit and vegetable preserving, processing, packaging, distribution, and marketing.

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Project Summaries

farms, which cultivate approximately 90 percent of Russia’s arable land.

Approximately 270,000 private farms cultivate 5 percent of the arable land.

The remaining 5 percent is made up of private garden plots. The total

farming population comprises about 26 percent of the country’s

population. Subsidies and income transfers to the agricultural sector

represent 25 percent of Russia’s public expenditures. Some of these

subsides could be expected to be eliminated if the agricultural sector were

privatized.22

Russian agriculture is a low-productivity sector. For example, milk cows

and potato and grain crops yield about half of western levels, and labor

productivity is probably as low as one-tenth. In addition to low

productivity, Russia has been plagued by losses of up to 50 percent in its

storage and handling systems. Finally, Russia’s food processing system

suffers from poor management and a lack of quality produce, additives,

ingredients, and packaging materials.

Although the Russian government has begun reforming the agricultural

sector, the actual transformation of farms and agribusiness enterprises

into market-oriented, productive entities is moving slowly. In 1992, it

reorganized state and collective farms and agricultural input and output

distribution enterprises into joint stock companies. However, most farms

have not altered their operations to increase productivity and

competitiveness.

Project Objectives In August 1992, USAID developed the agribusiness partnerships project as

the cornerstone of its Food System Restructuring Project. The

agribusiness partnerships project was designed to create efficient systems

for providing inputs to agriculture and for processing and distributing

agricultural products. USAID intended to catalyze NIS private sector activity

by facilitating the involvement of private U.S. agribusinesses. Between

January and May 1993, USAID signed cooperative agreements with three

agribusiness cooperatives: Citizens Network for Foreign Affairs (CNFA),

TVG, and Agricultural Cooperative Development International. We

22This information was obtained primarily from the Rural Development Institute’s report, Agrarian

Reform In Russia (May 1993); a report produced by Chemonics International for USAID, Agriculture

Post-Privatization In Russia (Jan. 1994); and USAID project documents.

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reviewed USAID’s cooperative agreement with TVG,

23 which had obligated

$5.2 million for the region.24

To achieve the project’s objective, TVG was to facilitate partnerships

between American and NIS private agribusiness-related enterprises.

However, the agreement did not specify the number of partnerships or the

related time frames.

Project Approach TVG established an office in Moscow staffed by one American director and

three Russian nationals. This office was supported by several TVG

headquarters staff in California. The American director did not have an

agribusiness background but was responsible for managing the office,

identifying potential Russian and American agribusiness partners,

reviewing partnership proposals, and submitting the proposals to USAID for

final subgrant approval.

According to TVG officials, TVG identified potential Russian agribusiness

partners through a network of contacts at the Ministry of Agriculture,

Association of Individual Farms and Agricultural Cooperatives of Russia,

World Bank, European Bank for Reconstruction and Development, Peace

Corps, investment funds, and regional and local administrations. To

identify American partners, TVG canvassed its members in the United

States, advertised in agricultural publications, contacted agribusinesses

via telephone, and looked for firms already operating in Russia.

Once identified, TVG worked with the American and Russian partners to

develop proposals for USAID’s approval. After receiving USAID approval, TVG

awarded subgrants to U.S. agribusinesses working in Russia primarily to

provide technical assistance and agricultural training to help create

efficient food systems. The American agribusiness partner was required to

provide at least 2.5 times the level of funding provided by USAID, to ensure

its commitment to the partnership and the long-term economic viability

and sustainability of the joint venture.

The items purchased with the USAID subgrants are referred to as

“additionality” components, or those components that might otherwise not

be included in the joint venture without USAID funding. Additionality

components include additional training and facility expansion.

23At the time of our review, USAID’s Inspector General was reviewing the cooperative agreement with

CNFA.

24The combined budget for the three cooperative agreements under the agribusiness partnerships

project was $59.3 million. As of February 1995, $52.5 million had been obligated.

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Contractor Performance TVG established six partnerships in five NIS countries, with two in Russia.

As of March 1995, one additional partnership in Russia was awaiting USAID

approval. The first partnership established in Russia was with Petoseed

Company, Inc., and is located in Krasnodar.25 Petoseed produces vegetable

seeds that will be sold in the NIS and internationally. During the 1994

growing season, Petoseed produced 11,000 pounds of seed in Russia. The

second TVG Russian partnership involves CTC Foods Company, which is

building a potato processing facility in Pushchino. If finished, the facility

will produce dried potato flakes that will be sold primarily to hospitals and

schools.

The two American agribusiness partners exceeded the required level of

partnership funding in both partnerships. Contributions by USAID, U.S.

agribusiness partners, and Russian beneficiaries to the TVG partnerships in

Russia are shown in table III.1.

Table III.1: Agribusiness Partnerships Established by Tri Valley Growers in Russia

Subgrantee Total partnership USAID grant U.S. firm share

Russian firm

sharea Grant expended

U.S. firm

expended

Petoseed $1,085,975 $309,250 $776,725 0 $44,054 $181,338

CTC Foods 4,300,000 800,000 2,200,000 $1,300,000 428,249 1,624,789

Total $5,385,975 $1,109,250 $2,976,725 $1,300,000 $472,303 $1,806,127

aThe Russian partners’ contributions are generally in-kind contributions.

Source: TVG statistics as of May 25, 1995.

TVG had difficulty identifying partnerships. TVG staff had difficulty

beginning work in Russia because of poor telecommunication and office

facilities, the chaotic Russian business environment, the limited number of

American firms willing to invest in Russia, limited funding, and a small

staff. According to a TVG official, Petoseed and CTC Foods contacted TVG

to participate in the project. However, both companies were already

working in Russia before USAID had established the agribusiness project

and located Russian partners on their own. He said they would have

invested in Russia without USAID involvement. An official at the

Association of Individual Farms and Agricultural Cooperatives of Russia

told us that the Association tried to work with TVG to identify Russian

partners but received only “empty promises.”

25Petoseed also established seed production facilities in Ukraine and Moldova through TVG.

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Although USAID never specified the number of partnerships that it wanted

to establish within a given time frame, it concluded that TVG had not

performed adequately. Between May and December 1993, USAID expressed

concern about the number of partnership proposals TVG was submitting

and the quality of the proposals. A February 1995 USAID review of the

agribusiness project stated that TVG required more support by USAID staff

and was less committed to the project than CNFA. TVG closed its office in

Moscow in August 1994 and has stopped the Russia part of its program

because USAID terminated the agribusiness partnerships project in Russia.

Nevertheless, USAID’s review noted that the partnerships to which TVG had

made subgrants were doing well. However, a TVG official told us in

May 1995 that because of financial problems, CTC Foods may not be able

to continue its work in Russia. Consequently, the processing facility in

Pushchino may never be constructed. According to a USAID official, TVG’s

Moldova office now monitors the Russian subgrants.

Results The agribusiness partnerships developed by TVG in Russia have not been

operating long enough to adequately judge their impact. However, due to

their limited scope, it is unlikely that the partnerships will have a

significant effect on reforming Russia’s agricultural sector.

USAID Management USAID/Washington designed the agribusiness partnerships project in 1992,

before the USAID/Moscow mission was opened. USAID/Washington and

USAID/Moscow split the oversight responsibilities: Washington was

primarily responsible for TVG’s compliance with the cooperative agreement

and Moscow was responsible for subgrant proposal evaluation. Final grant

approval was a joint Moscow/Washington effort.

Although USAID/Moscow raised continued concerns about the agribusiness

partnerships project’s ability to influence systemic reform, the project

proceeded. USAID/Moscow officials called for a review of the project as

early as November 1993, and they developed a statement of work for an

evaluation team. However, USAID/Washington told USAID/Moscow to “forget

the assessment and get on with the job.” Consequently, no assessment was

conducted. According to USAID officials, an evaluation is planned for

June 1995.

According to USAID officials, the agency wanted to implement the project

quickly and demonstrate results. TVG’s Moscow director stated she was

pressured to submit proposals quickly because USAID was being pressured

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Project Summaries

by Congress. However, both CNFA and TVG officials complained that USAID’s

subgrant approval process was arduous and lengthy. They said it took

several months for USAID to accept or reject a proposal and added that

USAID/Washington caused most of the delay. USAID/Washington officials

said the delays were caused by the time required to research legal issues,

conduct environmental audits, and work through the Washington

bureaucracy.

The cooperative agreement with TVG called for quarterly program

performance reports and annual progress reports. An independent

accounting firm was to audit TVG’s financial statements. Although USAID

officials said that TVG met all of its reporting requirements, our review

indicated that TVG had not submitted annual reports. According to USAID

officials responsible for the project in Russia, USAID staff visited only half

the project sites established by TVG, CNFA, and Agricultural Cooperative

Development International between May 1993 and November 1994.

USAID was required to annually assess the performance and program

direction of the cooperative agreement and contract for an independent

external evaluation. As of March 1995, it had done neither. However, CNFA

completed an evaluation of the agribusiness partnerships project in August

1994 at USAID/Moscow’s request. It reported that the project had not started

agribusiness partnerships quickly, had not made a significant contribution

to sectoral reform, and had little to show for the “additionality” purchased

with USAID funds. CNFA’s internal evaluation did not address TVG’s

performance. USAID completed an internal review in February 1995, but the

review did not cover the additionality components. The review stated that

it was unrealistic to expect the overall project to have a significant,

measurable impact on the food system in the NIS.

USAID has discontinued the agribusiness partnerships project in Russia and,

as of September 1994, stopped accepting proposals for Russian

agribusiness partnerships. In addition, USAID has decided not to obligate

any additional funds for the project. Agency officials stated that the

project itself cannot adequately address the obstacles of reforming the

agricultural sector and indicated that other projects, such as the

Russian-American Enterprise Fund, were better vehicles for financing

joint ventures.

Officer Resettlement

Housing Pilot

The Russian officer resettlement pilot project has been successful in

providing the required housing units, although not within the original time

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frames. The project’s secondary objectives—to provide job skills training

for demobilized officers and to help facilitate housing sector

reform—were only partially met. By implementing a pilot program, USAID

was able to test the viability of a housing construction project and apply

lessons learned to the $160-million follow-on project.

Planning and Development Collaborative International (PADCO), the

contractor tasked to provide construction management services, was

successful in part because it (1) had experience in working on housing

sector reform in Russia, (2) established a physical presence in Moscow

and in the field, (3) obtained at least some buy-in and involvement from

the local Russian government, and (4) employed Russian staff to oversee

construction activities.

Sector Problem The Russian Ministry of Defense has traditionally provided qualifying

retired and demobilized military officers with a dwelling unit or plot of

land and some job skills training. After the Soviet Union dissolved,

between 200,000 and 350,000 officers needed housing; approximately

42,000 were located in the Baltic Republics of Estonia, Latvia, and

Lithuania. However, since the dissolution, the Russian government has

lacked the housing stock to resettle all the demobilized military officers.

Further, Russia’s severe economic problems, housing shortages, and lack

of “social guarantees” for these retired officers has delayed troop

withdrawals.

Project Objective President Clinton announced the Russian officer resettlement program at

the Vancouver Summit in April 1993. Later, in July 1993, he stated at the

G-7 Heads of State meeting in Tokyo that the program should encourage

rapid withdrawal of demobilized Russian officers from the Baltic

Republics. The Russian Officer Resettlement Initiative is being conducted

in two phases—a $6-million pilot and a $160-million follow-on project. The

pilot’s primary objective was to construct 450 housing units by July 1994

for the resettlement of demobilized Russian military officers. The

follow-on project was to provide up to 5,000 units (2,500 constructed and

2,500 voucher certificates) by November 30, 1996, for officers demobilized

in the Baltics or other countries outside Russia. The pilot project’s

secondary objectives were to provide job skills training, experiment with

new housing technologies, assist private firms in housing development and

construction, and expand the scope of housing choices.

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Project Approach To implement the pilot project, USAID contracted with PADCO for

construction management services. It also awarded fixed-price contracts

to five Russian builders and one private voluntary agency to construct

housing units in five cities. Finally, it provided a grant to the International

Catholic Migration Commission for training.

According to project officials, PADCO assisted the project design team that

included officials from USAID/Washington and USAID/Moscow. This team

visited potential project sites, evaluated projects, and negotiated

construction contracts. PADCO was responsible for managing the

construction activities and monitoring contractor performance. U.S.

officials said the design team created the pilot with only minimal input

from the Ministry of Defense or the Ministry of Construction. USAID

officials added that the design team conducted its own field assessment to

select participating cities and worked almost exclusively with the local

authorities in these cities. The local authorities were to provide

infrastructure services such as heating, water, and road access for the

housing units.

USAID relied on the Russian Ministry of Defense to select the officers to

receive the housing. The initial design for the pilot program did not

stipulate where the officers should come from, but as a result of the Tokyo

G-7 meetings in July 1993, USAID established criteria that gave priority to

demobilized officers living in the Baltics.

The criteria also included housing for officers from other areas outside

Russia because two cities were reluctant to provide infrastructure for

officers exclusively from the Baltics. Under this criteria, officers

demobilized in other areas would be included. USAID’s compromise with

these cities allowed some demobilized officers from their own

jurisdictions to receive housing. In Nizhniy Novgorod, half the officers

could come from its jurisdiction, while in Volgograd, 40 percent of the

officers could come from its jurisdiction. USAID and PADCO officials said

beneficiary composition would also be an issue in the follow-on project.

PADCO’s project staff established a long-term presence in Moscow and

traveled regularly to the various building sites. It also hired and trained

Russian construction specialists to supervise the construction in each city.

USAID officials said PADCO’s experience in Russian housing issues helped

facilitate this project.

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Contractor Performance PADCO and Russian contractors generally met the program’s primary

objective of providing housing units, although not within established time

frames. As of July 1994, only 94 (21 percent) of the 452 units were

completed, although as of February 15, 1995, the project had provided 422

units (93 percent) through a combination of construction and voucher

certificate activities. (See table III.2 and figs. III.1 and III.2.)

Table III.2: Status of Russian Officer Resettlement Pilot Project as of February 15, 1995

Location

Originally

planned Terminated

Added/

allotted

Completed/

issued

Pending

completion/

approval

Transferred to

owner

Construction

Lipetsk 40 40

Nizhniy Novgorod 1 128 128 45

Nizhniy Novgorod 2 50 50 0

Novosibirsk 180 180 0

Tula 1 14 14 12

Tula 2 16 16 9

Tula 3 30 30 0

Volgograd 1 32 32 29

Volgograd 2 80 80 75

Volgograd 3 72 72 0

Subtotal 460 270 182 342 30 170

Voucher certificates

Novgorod 40 40 2 38

Pskov 40 40 2 38

Subtotal 80 80 4 76

Total 460 270 262 422 34 246

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Figure III.1: Housing Units Built in

Volgograd for Russian Officers

Figure III.2: Duplexes Built in Tula for

Russian Officers

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Of the 10 project sites in 5 cities, USAID terminated 3: one because newly

elected local officials refused to meet the previous administration’s

commitments to provide infrastructure support to the housing units and 2

because contractors defaulted on their building commitments.

In Novosibirsk, USAID and PADCO officials said federal and oblast’ officials

were not involved in the initial agreements. Therefore, they had no

authority to require the local administration to abide by the contract, and

they would not allocate additional funds for the infrastructure.

In Lipetsk, the contractor was a private voluntary agency that

subcontracted with a local Russian construction firm to execute the work.

When the subcontractor defaulted, the agency was unable to find a

replacement to complete the work. At the Nizhniy Novgorod 50-unit

project site, project officials said the Russian contractor ran into financial

problems and stopped work, claiming that the $8,500 per unit allowed in

the contract was not enough to cover costs. Although the city offered

several incentives, including a $300,000 letter of credit and land for

additional construction, USAID and PADCO officials said the contractor was

unwilling to spend his own funds and the contract was terminated by

USAID.

USAID officials said the contractor at the 128-unit Nizhniy Novgorod site

was concerned that $8,500 per unit was not enough to cover the cost of

construction. The contractor had completed almost 70 percent of

construction when increased construction costs, caused by rapidly rising

inflation (9 percent a month) and the devaluation of the ruble, forced him

to stop work. According to USAID officials, because the contractor had

done a good job, used his own funds from other projects, and was

well-connected with city and oblast’ officials, he negotiated an agreement

so that the oblast’ and USAID would cover the increased costs of the 128

units. To ensure the project’s completion, USAID and the oblast’

administration each provided an additional $700,000, thus increasing the

per unit price to $19,500.

Because contracts were terminated months after they were awarded, USAID

developed a method to meet the housing requirements quickly. It awarded

a contract to the Urban Institute to implement a voucher certificate

program, which allowed officers to purchase existing local housing in a

participating area or housing under construction. Because of increased

construction costs, the inclusion of land, and infrastructure costs, the

vouchers were increased from the $8,500 per unit in the construction

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program to a maximum of $25,000 per unit. According to USAID officials,

using voucher certificates allowed the pilot program to provide housing

units much quicker than through direct construction. As of January 30,

1995, 80 vouchers had been disseminated to the officers, and 76

(95 percent) of the them had been used to purchase units, which were

turned over to the officers.

The International Catholic Migration Commission’s efforts to address one

of the project’s secondary goals of job skills training has shown limited

results, according to USAID housing officials. As of December 1994, it had

arranged training for 46 beneficiaries who attended business courses in

Pskov, Novgorod, and Volgograd. The USAID official said construction

delays and the subsequent delays in officers relocating to their respective

cities affected start-up activities. Further, the official said the Commission

did not adequately identify the officers’ training needs and failed to

recognize that many of them were not interested in training.

Project officials said only minimal progress was made in addressing other

secondary goals, such as demonstrating new housing technologies,

expanding customer choices, and implementing more stringent quality

control standards. For example, in Tula, contractors constructed 14-, 16-,

and 30-unit duplexes, which took as long or longer to build than traditional

high rise structures. (See fig. III.2.) PADCO field representatives worked

with local builders to ensure that quality control measures were

introduced and achieved.

Results The officer resettlement pilot project accomplished its objective of

providing housing to demobilized officers. The project was not designed to

address systemic reform or to be sustainable, and it did not do so. PADCO

officials said the attempts to sustain the effects of the project’s secondary

objectives were short-lived, although the lessons imparted by PADCO—new

housing technologies, housing choices, and quality control measures—

may have some positive effect on the building industry and contractors.

USAID and Urban Institute officials said the lessons learned from

implementing the voucher certificate activity by the banks, realtors, and

local governments may be used to facilitate the local governments’

transition to a private housing market.

As a result of the pilot project, USAID incorporated the lessons learned as it

designed the $160-million follow-on initiative to provide 5,000 units to

officers from the Baltics. The primary changes included (1) obtaining total

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support, involvement, and buy-in from all three levels of Russian

government; (2) using the voucher certificate program to expedite the

relocation of 2,500 officers; (3) stipulating that a maximum of 10 percent

of the demobilized officers could come from local jurisdictions; (4) using a

U.S. construction management firm as the prime construction contractor

and subcontract to the individual builders; (5) using only experienced,

well-connected Russian builders; (6) selecting partially completed

buildings and sites with existing infrastructure; (7) using a traditional

Russian housing design; and (8) providing a more realistic per unit cost

($25,000 versus $8,500). According to USAID officials, these changes are

expected to allow the follow-on project to proceed more quickly and

efficiently than the pilot.

USAID Management USAID/Moscow had management responsibility for the project and

generally did a good job of managing, monitoring, and overseeing it and

coordinating with USAID/Washington. PADCO officials said USAID/Moscow

actively assisted the contractors in reaching acceptable compromises with

government officials and contractors. The USAID/Moscow project team

reviewed project status reports, visited project sites, and held regular

meetings with contractors. Finally, AID terminated work when problems

could not be overcome.

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Comments From the U.S. Agency for

International Development

Note: GAO comments

supplementing those in the

report text appear at the

end of this appendix.

Now on pp. 1-15.

Now on p. 12.

See comment 1.

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Now on p. 12.

See p. 12.

See comment 2.

See comment 3.

See comment 4.

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See comment 5.

See comment 6.

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See comment 7.

See comment 7.

See comment 7.

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See comment 7.

See comment 8.

Now on pp. 21-25.

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Now on p. 22.

See comment 6.

Now on p. 22.

See comment 6.

See comment 6.

See comment 6.

Now on pp. 26-30.

Now on p. 28.

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See comment 9.

Now on pp. 30-35.

See comment 8.

See comment 10.

See comment 11.

See comment 6.

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See comment 12.

Now on pp. 35-39.

Now on pp. 39-45.

See comment 6.

See comment 6.

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See comment 6.

See comment 6.

See comment 6.

See comment 13.

See comment 14.

See comment 6.

See comment 15.

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See comment 6.

See comment 16.

See comment 17.

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Now on pp. 45-49.

See comment 18.

See comment 19.

See comment 20.

See comment 21.

See comment 22.

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See comment 6.

Now on pp. 49-52.

See comment 6.

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See comment 23.

See comment 24.

See comment 25.

See comment 26.

Now on pp. 53-58.

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See comment 27.

See comment 28.

Now on pp. 58-63.

See comment 29.

See comment 30.

See comment 31.

See comment 32.

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See comment 33.

See comment 34.

Now on pp. 63-70.

See comment 35.

See comment 6.

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See comment 36.

See comment 6.

See comment 6.

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The following are GAO’s comments on USAID’s letter dated June 1, 1995.

GAO’s Comments 1. We have incorporated these comments into the report where

appropriate.

2. Although we noted project shortcomings, we also recognized the

contribution Deloitte & Touche made toward the privatization process and

considered the project a success. Moreover, we recognized USAID’s positive

contribution to the overall privatization effort.

3. We conducted a detailed review of Tri Valley Growers’ performance,

one of the three contractors responsible for implementing the agribusiness

partnerships project, to determine whether this expenditure of funds had

any sustainable impact. We concluded that it did not. Although we did not

draw any conclusions about the agribusiness partnerships project as a

whole, our analysis casts doubt on whether the project can have a

systemic impact if the individual partnerships are not having an impact.

(See comments 29 and 30 for additional discussion.)

4. It is too early to know whether USAID’s prediction concerning the

outcome of ongoing activities in the energy sector will result in significant

sector reform. Many of these projects are just starting and must overcome

many obstacles. For example, in our September 1994 report on nuclear

safety, we reported that there are no guarantees that the international

assistance effort will result in safer reactors or expedite the closure of the

riskiest reactors.1

 In fact, in the absence of a commitment to close down

the reactors, the assistance may encourage their continued operation. We

noted that donor countries face formidable challenges in promoting the

closure of the Soviet-designed reactors because the countries operating

them depend on the nuclear power to meet their needs for domestic

energy and export income.

5. We agree that the new evaluation system is promising in that it should

provide an improved basis to evaluate USAID’s programs in the NIS.

However, since the first report is not due until November 1995, it is too

early to know whether the system will fulfill its promise. The value of the

system will depend on the indicators selected, the reliability of the data,

and the subjective judgments of USAID officials preparing the reports. For

1

Nuclear Safety: International Assistance Efforts to Make Soviet-Designed Reactors Safer

(GAO/RCED-94-234, Sept. 29, 1994).

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Comments From the U.S. Agency for

International Development

the system to have credibility, USAID will have to be able to identify

shortcomings as well as successes.

6. We have modified the report to reflect this information.

7. We were able to reconcile obligations and expenditures in the USAID

financial report with other USAID documentation. Accordingly, we have

deleted the examples from the report.

8. Our draft report included information on the work of the Consuls

General. We have modified our report to update the information on

increased site visits.

9. Although market forces played a role in the limited use of some of the

centers, the lack of local support as well as other factors also caused the

low activity levels at some centers. More importantly, it is questionable

whether USAID should spend funds on activities without a market unless it

has a strategy to create demand for the product it is financing.

10. We visited only one site (in Siberia during February) because of the

limited amount of time we had in country. Vorkuta can be reached by

plane in the winter. USAID can visit the sites at other times during the year.

We believe that three site visits—two occurred after we began our

audit—in 31 months is inadequate for monitoring purposes. Day-to-day

contacts with PIER staff are important; however, they do not substitute for

site monitoring or provide USAID with an objective basis for evaluating the

project’s success.

11. The accomplishments noted in our report are those that have had the

greatest impact. PIER did not provide us with any statistics that indicated

increased mine safety or productivity. Moveover, a September 1994 study

produced by the U.S. Department of the Interior indicates that mine safety

in Russia is actually getting worse. The beneficiaries we spoke with

indicated that they were implementing new mining methods introduced by

PIER; however, they did not mention any measurable increases in

productivity. In addition, although productivity and efficiency are

important, overall production for the coal sector is still too high. Finally,

PIER’s Moscow director stated that this project has had the greatest impact

in the areas of restructuring, private sector involvement, and social safety

net development.

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Comments From the U.S. Agency for

International Development

12. Our report does not state that an interim evaluation is imminent and

may lead to activities being redirected. Our report states that “USAID

management admitted that no annual assessments or midterm evaluations

were conducted,” even when required by the cooperative agreement.

13. USAID’s new procedures did not affect the program during the time

frames we reviewed. Also, the work plan example should be taken in the

context that several iterations of the plan have been submitted and revised

since November 1994.

14. Our draft report did not recommend that more authority be delegated.

15. Our report was modified to show that the Ministry of Environmental

Protection and Natural Resources was involved in the initial selection of

project activities. However, the Ministry did not participate in designing

the projects as USAID suggests. USAID acknowledges the almost immediate

shift of its relationship from the central to the local government once the

projects were selected. We remain concerned over the lack of federal

involvement, especially regarding the provision of resources and the

limited potential for replicability. We believe that without outside funding

or support from the federal level, sustainability and replication will be

difficult.

16. As indicated in the report, we found that as of February 1995, the Far

East project had contributed little to systemic reform and is unsustainable

without outside funding. The report discusses the project’s attempt to

address systemic reform through efforts to maintain and restock the

forestry base.

17. As indicated in the report, the deliverables identified in the delivery

orders generally cited reports and studies as the results. We are unable to

verify USAID’s statements regarding the project’s results.

18. Although we recognize that this project was only one of many in the

energy sector, we found that the project is unlikely to contribute to

systemic reform because of its design and the lack of monitoring and

follow-up by USAID.

19. USAID suggested that we select this project in part because USAID

represented it as a success, based on an independent evaluation. We

visited only Yekaterinburg for two primary reasons: USAID suggested that it

was a good site to visit and it was one of only two cities where equipment

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Comments From the U.S. Agency for

International Development

was installed and extensive energy audits and training were provided.

However, as we reported, the equipment had not been installed. USAID’s

assertion that our conclusion is based almost entirely on the site visit is

wrong. Our conclusion is also based on discussions with representatives

from RCG/Haggler Bailly, Joseph Technology, Honeywell, and USAID

officials responsible for the project and our review of numerous

documents on the entire project.

20. We did not make statements or draw conclusions about other projects

in the program or about the overall program. We noted that there was no

indication that the project we reviewed had contributed to systemic

reform. The energy efficiency audits and demonstration sites can only

have an impact on systemic reform if USAID ensures that (1) equipment is

installed; (2) equipment and training is used; (3) the recommendations in

the energy audits are implemented; (4) the results of the project are

monitored, recorded, and publicized; (5) appropriate personnel have

access to the demonstration sites; and (6) problems such as lack of

equipment certification are corrected. At the time we conducted our

fieldwork, USAID was not ensuring any of these elements because the

project did not include any mechanisms for long-term monitoring or

replicating the project. USAID, in its comments, acknowledged that the

project alone is unlikely to have an impact on systemic reform.

21. We agree that the dollar value of the uninstalled equipment constitutes

a relatively small percentage of all the equipment purchased. The fact that

USAID was unaware of the problems in Yekaterinburg and had not

monitored whether any cost savings had been achieved and did not know

whether any systemic improvements had resulted from the equipment,

energy audits, and training provided is the issue.

22. The consultant’s evaluation indicated that all of the equipment was

installed in April 1993. The documents we reviewed indicate that the

equipment was provided in April and May 1993. If the equipment did not

arrive until June 1993 as USAID suggests, USAID should have known the

evaluation had problems when it indicated that all the equipment was

installed 1 or 2 months before the equipment ever arrived.

23. We contacted individuals who were identified as participants by

USAID/Moscow.

24. Our conclusion that the training was irrelevant was not based on our

discussions with the participants of the PIET training courses. It was based

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Comments From the U.S. Agency for

International Development

on statements by various USAID officials, including the USAID/Moscow

Mission Director and the Chief of USAID/Washington’s Europe and the

Newly Independent States/Health and Population Office. For example,

USAID officials told us that a 2-week training course without follow-on

activities could not be expected to result in any systemic reform. In

addition, as we also noted in the report, because USAID had not conducted

any long-term monitoring of the participants, it had no evidence that any

of the participants instituted systemic changes based on the training. The

opinions and views of the participants we interviewed were used to

provide insight as to why no systemic changes had occurred.

25. Contrary to USAID’s comments, we referred to the course evaluations in

our draft report. We stated that “. . . most participants were satisfied with

the course and believed it was applicable to their work conditions.”

However, our assessment was not concerned with whether the

participants were satisfied with the course but with whether the goals of

the PIET contract and the Freedom Support Act were fulfilled.

26. We question USAID’s assertion about the actual positive impact of the

training and follow-on assistance. First, at the time of our review,

follow-on assistance was not planned to begin for another 6 months and

no assessment had been completed to confirm or deny USAID’s assertion.

Second, despite repeated USAID statements that the Siberian participants

were involved in follow-on projects, USAID project officials did not know

how many were actually involved. When the contractor compiled this data

for us, the USAID project official in charge of the program was surprised

that 75 percent of the participants in Siberia were not involved with the

planned follow-on activities. Finally, USAID health officials we spoke with

were unanimous in their assessment that the follow-on project’s progress

to date has been a disappointment.

27. Contrary to USAID’s assertion, we met with the Russian Privatization

Center (RPC) official responsible for the project. This official questioned

the competence of some of the consultants.

We also believe that the characterization of this project as a qualified

success is an overstatement. Project task orders were never modified, thus

the focus of the project remained to increase the availability of

commercial real estate. However, after project completion, large amounts

of commercial real estate continued to be leased in the selected cities

under conditions that encouraged inefficient use, and the municipalities

failed to maximize revenues.

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Appendix IV 

Comments From the U.S. Agency for

International Development

Furthermore, we noted that the Center, in one of the memorandums

quoted by USAID, questioned the reliability of IBTCI representations and

indicated that USAID and the Center believed that the Perm’ model was

being rolled out to the other cities. The memorandum stated the following:

At our most recent meeting, on June 2, Jay Kalotra [the project director] presented a

preliminary draft of the wrap-up memo for the project. At that time, I reminded Jay several

times that deviations from the Perm’ model would have to be rigorously defended to both

USAID and the senior management of the RPC. Jay’s response was that IBTCI deviated from the

Perm’ model in large part because the model was ill-suited to the chosen roll-out cities. To

a considerable extent, this may be true. However, this obviously does not exonerate IBTCI,

since their task was to find cities where a pure roll-out could be performed. [underscoring

supplied]

In its most recent memos, IBTCI suggests that they told us at the outset they would adopt a

broader approach than BCG took in Perm’. While it is true that IBTCI states some very

ambitious goals, it is disingenuous to suggest that we agreed to replace the Perm’ model

with something else. . . . [underscoring supplied]

. . . However, as noted above, even three weeks ago IBTCI was maintaining the pretense of

Perm’-style results. And it was only when we actually visited the project sites that we could

see the extent to which deviations had occurred. [underscoring supplied]

IBTCI was clearly responsible for selecting the cities. GKI relied on the

contractor, but GKI’s approval did not relieve the contractor of this

responsibility. Because the contractor did not attempt to use the Perm’

model during the roll-out phase, it is impossible to determine if the Perm’

model could be applicable to the other cities.

28. Our report draft specifically stated that the IBTCI team spoke Russian

and had meaningful business experience. The issue was IBTCI’s awareness

of local conditions in order to replicate the Perm’ model. Although the

project manager on the roll-out was also the comanager for the pilot, none

of the city team leaders had worked on the Perm’ pilot.

29. Our analysis casts doubt on whether the entire project can have a

systemic impact if the individual partnerships are not having an impact.

30. We did not assess the activities of CNFA because the USAID Inspector

General was evaluating CNFA’s work. Discussions with the USAID Inspector

General’s office indicate that some of CNFA partnerships are experiencing

problems and consequently are not contributing to systemic reform. In

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Appendix IV 

Comments From the U.S. Agency for

International Development

addition, CNFA’s August 1994 evaluation of the agribusiness partnerships

project indicates that the overall project had not achieved the desired

results. Also, USAID’s February 1995 review of the agribusiness partnerships

states the following:

It is not realistic to expect the agribusiness partnerships program to have a significant,

measurable impact on overall food systems in the NIS. The limited number of partnerships

being supported suggests such national level impacts are unlikely during the life of the

activity, if ever.

USAID/Moscow staff stated that the agribusiness partnerships project could

not by itself influence systemic reform.

31. Although TVG has established three partnerships in Russia, only one

(Petoseed) is functioning. According to TVG staff, CTC Foods has run into

financial problems; consequently, its potato processing facility may never

be constructed. Finally, the third partnership (Big Sky Foods Trading, Inc.)

has only recently been approved, and it is too early to determine whether

this project will be successful.

32. USAID staff in Moscow and Washington characterized the project as

discontinued because no more partnerships can be introduced and no

more funds will be obligated.

33. USAID/Moscow staff said TVG had not performed adequately and had not

identified appropriate partnerships. The documents we reviewed also

indicated that TVG was not performing well.

34. Our report includes examples of the causes for delays in the approval

process, including the need to deal with legal issues.

35. We modified the report to reflect this foreign policy goal. However, the

primary objective for the pilot project announced in April 1993 did not

focus on relocating officers from the Baltics. The announcement made in

July 1993 focused the program on the removal of officers from the Baltics.

36. USAID is incorrect in stating that the oblast’ was involved in signing the

memorandum for Novosibirsk. It was only signed by USAID and the

municipality of Novosibirsk.

Page 98 GAO/NSIAD-95-156 USAID Projects in Russia
Appendix V 

Major Contributors to This Report

National Security and

International Affairs

Division, Washington,

D.C.

Louis H. Zanardi

Eugene D. Beye

Edward J. George, Jr.

European Office Peter J. Bylsma

David M. Bruno

Jodi McDade Prosser

(711095) Page 99 GAO/NSIAD-95-156 USAID Projects in Russia
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