International Cash-Based Food Assistance: USAID Has Processes for Initial Project Approval but Needs to Strengthen Award Modification and Financial Oversight
Published: 2015-07-09T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: For over 60 years, the United States has provided assistance to food-insecure countries primarily in the form of food commodities procured in the United States and transported overseas. In recent years, the United States has joined other major donors in increasingly providing food assistance in the form of cash or vouchers. In fiscal year 2014, U.S.-funded cash and voucher projects in 28 countries totaled about $410 million, the majority of which was for the Syria crisis, making the United States the largest single donor of cash-based food assistance.
This testimony summarizes GAO's March 2015 report (GAO-15-328) that (1) reviewed USAID's processes for awarding and modifying cash-based food assistance projects and (2) assessed the extent to which USAID and its implementing partners have implemented financial controls to help ensure appropriate oversight of such projects. GAO analyzed program data and documents for selected projects in Jordan, Kenya, Niger, and Somalia; interviewed relevant officials; and conducted fieldwork in Jordan, Kenya, and Niger.
section_title: What GAO Found
paragraphs: The U.S. Agency for International Development (USAID) awards new cash-based food assistance grants under its Emergency Food Security Program (EFSP) through a competitive proposal review or an expedited noncompetitive process; however, USAID lacks formal internal guidance for modifying awards. In its March 2015 review of 22 grant awards, GAO found that USAID made 13 through its competitive process, 7 through an abbreviated noncompetitive review, and 2 under authorities allowing an expedited emergency response. According to USAID, the agency follows a similar process for modification requests. Partners may propose cost or no-cost modifications for a variety of reasons, such as an increase in the number of beneficiaries or changing market conditions affecting food prices. In its review of 13 grant awards that had been modified, GAO found that cost modifications for 8 awards resulted in an increase in funding for the 13 awards from about $91 million to $626 million. According to USAID, procedures for modifying awards have been updated but GAO has yet to verify this information. GAO also found that though USAID requires partners to monitor market conditions—a key factor that may trigger an award modification—it did not provide guidance on when and how to respond to changing market conditions. GAO concluded that, until USAID institutes formal guidance, it cannot hold its staff and implementing partners accountable for taking all necessary steps to justify and document the medication of awards.
USAID relies on implementing partners for financial oversight of EFSP projects but did not require them to conduct comprehensive risk assessments to plan financial oversight activities, and it provided little related procedural guidance to partners and its own staff. For projects in four case study countries reviewed in its March 2015 report, GAO found that neither USAID nor its implementing partners conducted comprehensive risk assessments to identify and mitigate financial vulnerabilities. Additionally, although USAID's partners had generally implemented financial controls over cash and voucher distributions that GAO reviewed, some partners' guidance for financial oversight had weaknesses, such as a lack of information on how to estimate and report losses. In addition, GAO found that USAID had limited guidance on financial control activities and provided no information to aid partners in estimating and reporting losses. As a result, partners may neglect to implement appropriate financial controls in areas that are most vulnerable to fraud, diversion, and misuse of EFSP funding.
section_title: What GAO Recommends
paragraphs: GAO's March 2015 report included recommendations to strengthen USAID's guidance for staff on approving award modifications and guidance for partners on responding to changing market conditions. GAO also made recommendations to strengthen financial oversight of cash-based food assistance projects by addressing gaps in USAID's guidance on risk assessments and mitigation plans and on financial control activities. USAID concurred with the recommendations.

section_title: Letter
paragraphs: Thank you for this opportunity to discuss our recent work reviewing  international food assistance delivered through cash transfers or voucher  programs funded and overseen by the U.S. Agency for International  Development (USAID). For over 60 years, the United States has provided  assistance to food-insecure countries primarily in the form of food  commodities procured in the United States and transported overseas. In  recent years, the United States has joined other major donors in  increasingly providing food assistance in the form of cash or vouchers. In  addressing humanitarian crises around the world, USAID currently  implements a cash-based program—the Emergency Food Security  Program (EFSP)—through its Office of Food for Peace (FFP), with  funding from the International Disaster Assistance account. In fiscal year  2014, FFP’s funding of targeted cash transfer and food voucher programs  amounted to about $410 million, the majority of which was for the Syria  crisis; in fiscal years 2010 through 2014, it totaled about $991 million. In  addition, FFP manages the majority of U.S. international food  assistance—primarily in-kind food aid commodities—authorized by Title II  of the Food for Peace Act, which in fiscal year 2015 totaled about $1.47  billion.
My testimony summarizes the findings from our report issued in March of  this year,  which had two objectives: (1) to review USAID’s processes for  awarding and modifying cash-based food assistance projects and (2) to  assess the extent to which USAID and its implementing partners have  implemented financial controls to help ensure appropriate oversight of  such projects. To address these objectives, we analyzed data and  reviewed program documents provided by USAID and its implementing  partners, including the United Nations (UN) Food and Agriculture  Organization (FAO), the UN World Food Programme (WFP), and selected  nongovernmental organizations (NGO). To review USAID’s processes  for awarding and modifying cash-based food assistance projects, we  reviewed USAID’s program guidance and relevant directives, as well as  grant proposals and agreements. Given that FFP’s cash-based projects  are to monitor market conditions to detect significant changes that may  warrant project modifications, we also analyzed price data for key staple  commodities in selected markets in four case study countries: Jordan,   To assess the extent to which USAID and  Kenya, Niger, and Somalia.the implementing partners implemented financial controls, we reviewed  documentation and reports related to the cash and voucher distributions  in our case study countries, and assessed the controls they have  designed and implemented against their policies, procedures, guidance;  federal internal control standards; and international principles and  guidelines.
In Washington, D.C., we interviewed officials from the Department of  State (State), the U.S. Department of Agriculture (USDA), and USAID.  We also met with officials representing NGOs that were awarded EFSP  grants to serve as implementing partners in carrying out U.S. food  assistance programs overseas or were sub-awardees for USAID grants  awarded to WFP (and in some cases were both). In Rome, we met with  officials from the U.S. Mission to the United Nations, FAO, and WFP. We  also met with the UN permanent representatives for three major donors— Canada, the European Union, and the United Kingdom. In addition, we  conducted fieldwork in three countries (Jordan, for Syrian refugees;  Kenya; and Niger) where we met with officials from the U.S. missions,  implementing partners, vendors, financial institutions, and beneficiaries,  among others. found in our March 2015 report. In June 2015, USAID provided GAO with  information on its progress in addressing the recommendations from our  March 2015 report. The work upon which this testimony was based was  conducted in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: We interviewed staff from USAID and its implementing partners in Nairobi who had  responsibility for oversight of the EFSP-funded operations in both Kenya and Somalia. including some countries with areas considered high security risk.  Obligations for cash-based EFSP projects grew from $75.8 million in  fiscal year 2010 to $409.5 million in fiscal year 2014—an increase of 440  percent over the 5-year period, the majority of which was in response to a  large and sustained humanitarian crisis in Syria, including cash-based  food assistance to Syrian refugees in the Syria region. Of the $991  million in total grant funding obligated in fiscal years 2010 to 2014, $330.6  million was for cash interventions and $660.3 million was for voucher  interventions. The majority of the funding—$621.7 million (or 63  percent)—was awarded to WFP, and $369.3 million (or 37 percent) was  awarded to other implementing partners.
To deliver cash-based food assistance, USAID’s implementing partners  employ a variety of mechanisms ranging from direct distribution of cash in  envelopes to the use of information technologies such as cell phones and  smart cards to redeem electronic vouchers or access accounts  established at banks or other financial institutions (see fig. 1). The value  of cash and voucher transfers is generally based on a formula that  attempts to bridge the gap between people’s food needs and their  capacity to cover them. internal control framework that, according to COSO, has gained broad  acceptance and is widely used around the world. Both frameworks  include the five components of internal control: control environment, risk  assessment, control activities, information and communication, and  monitoring. Internal control generally serves as a first line of defense in  safeguarding assets, such as cash and vouchers. In implementing  internal control standards, management is responsible for developing the  detailed policies, procedures, and practices to fit the entity’s operations  and to ensure they are built into and are an integral part of operations.
section_title: USAID Had Developed Processes for Awarding EFSP Funds but Lacked Guidance on Modifying Awards and Responding to Changing Market Conditions
paragraphs: In our March 2015 report, we found that USAID had developed processes  for awarding cash-based food assistance grants; however, it lacked  formal internal guidance for its process to approve award modifications  and provided no guidance for partners on responding to changing market  conditions that might warrant an award modification.
USAID’s process for awarding EFSP funds. USAID outlined its process  for reviewing and deciding to fund proposals for cash-based food  assistance projects in the Annual Program Statement (APS) for  International Emergency Food Assistance. According to USAID, the  APS functions as guidance on cash-based programming by describing  design and evaluation criteria for selecting project proposals and  explaining the basic steps in the proposal review process. The APS also  serves as a primary source of information for prospective applicants that  apply for emergency food assistance awards using EFSP resources.  Under the terms of the APS, USAID awards new cash-based food  assistance grants through either a competitive proposal review or an  expedited noncompetitive process. For our March 2015 report, we  reviewed 22 proposals for new cash-based food assistance projects that  were awarded and active as of June 1, 2014; we found that USAID made  13 of these awards through its competitive process, 7 through an  abbreviated noncompetitive review, and 2 under authorities allowing an  expedited emergency response.
USAID lacked guidance for staff on modifying awards. In our March  2015 report, we found that although the APS outlined the review process  for new award proposals, neither the current 2013 APS nor the two  previous versions provide clear guidance on the process for submission,  review, and approval of modifications to existing awards. According to  USAID officials, USAID follows a similar process in reviewing requests to  modify ongoing awards, which implementing partners may propose for a  variety of reasons, such as an increase in the number of beneficiaries  within areas covered by an award or a delay in completing cash  distributions. Two main types of modifications may be made to a grant  agreement—no-cost modifications and cost modifications. For the four  case study countries, in our March 2015 report, we reviewed 13 grant  agreements made from January 2012 to June 2014 that had 41  modifications during that period. Twenty of these cost modifications  resulted in an increase in total funding for the 13 grants from about $91  million to about $626 million, a 591 percent increase. Ten of these cost  modifications were made to 1 award, the Syria regional award, whose  funding increased from $8 million to $449 million (see fig. 2). The Syria  regional award modifications amounted to about 82 percent of the total  increase in funding for the cost modifications we reviewed.
We concluded that without formal guidance, USAID cannot hold its staff  and its partners accountable for taking all necessary steps to justify and  document the modification of awards. At the time of our study, USAID  noted that its draft internal guidance for modifying awards was under  review. In our March 2015 report, we recommended that USAID expedite  its efforts to establish formal guidance for staff reviewing modifications of  cash-based food assistance grant awards. USAID concurred with our  recommendation. In June 2015, USAID reported that it issued written  guidance that addresses the review and approval of grant modifications.  We have yet to verify this information to determine whether it addresses  the issues we identified.
USAID lacked guidance for implementing partners. Additionally, in our  March 2015 report we found that, although USAID required partners  implementing cash-based food assistance to monitor market conditions,  USAID did not provide clear guidance about how to respond when market  conditions change—for example, when and how partners might adjust  levels of assistance that beneficiaries receive. We analyzed data on the  prices of key staple commodities in selected markets for our case study  countries from fiscal years 2010 through 2014. We found that the prices  of key cereal commodities in Niger and Somalia changed significantly  without corresponding adjustments to all implementing partners’ cash- based projects. We did not find similar food price changes in Jordan and  Kenya.
According to USAID officials, USAID does not have a standard for  identifying significant price changes, since the definition of significance is  specific to each country and region. In addition, we did not find guidance  addressing modifications in response to changing market conditions in  the APS. We found that this lack of guidance had resulted in inconsistent  responses to changing market conditions among different cash and  voucher projects funded by USAID. For example, an implementing  partner, whose project we reviewed in Kenya, predetermined, as part of  its project design, when adjustments to cash transfer amounts would be  triggered by food price changes, while an implementing partner whose  project we reviewed in Niger relied on an ad hoc response. The  implementing partner in Kenya established the cash and voucher transfer  rate based on the value of the standard food basket; it reviewed prices  every month but would change cash and voucher transfer amounts only  in response to price fluctuations, in either direction, of more than 10  percent.
We concluded that without clear guidance about when and how  implementing partners should modify cash-based food assistance  projects in response to changing market conditions, USAID ran the risk of  beneficiaries’ benefits eroding through price increases or inefficient use of  scarce project funding when prices decrease. We recommended in our  March 2015 report that USAID develop formal guidance to implementing  partners for modifying cash-based food assistance projects in response to  changes in market conditions. USAID concurred with this  recommendation. In June 2015, USAID reported entering into an  agreement with the Cash Learning Partnership (CaLP), an organization  that is working to improve the use of cash and vouchers, to help develop  guidance to implementing partners on adapting programs to changing  market conditions. USAID plans to complete this guidance by April 2016.  We have yet to verify this information to determine whether it addresses  the issues we identified.
section_title: USAID’s Partners Had Generally Implemented Financial Controls in Projects We Reviewed; We Found Weaknesses in Risk Planning, Implementation, and Guidance
paragraphs: In our March 2015 report, we found that USAID relied on its implementing  partners to implement financial oversight of EFSP projects, but it did not  require them to conduct comprehensive risk assessments to plan  financial oversight activities—two key components of an internal control  framework. In addition, we found that USAID provided little or no  guidance to partners and its own staff on carrying out these components.
Risk assessments were lacking. Our March 2015 report found that for  case study projects we reviewed in four countries, neither USAID nor its  implementing partners conducted comprehensive risk assessments that  address financial vulnerabilities that may affect cash-based food  assistance projects, such as counterfeiting, diversion, and losses.  USAID officials told us that they conduct a risk assessment for all  USAID’s programs within a country rather than separate risk  assessments for cash-based food assistance projects. According to  USAID, its country-based risk assessments focus primarily on the risks  that U.S. government funds may be used for terrorist activities and on the  security threat levels that could affect aid workers and beneficiaries;  these risk assessments do not address financial vulnerabilities that may  affect cash-based food assistance projects, such as counterfeiting,  diversion, and losses. A USAID official provided us with internal EFSP  guidance to staff on the grant proposal and award process stating that an  award would not be delayed if a risk-based assessment has not been  conducted.
According to USAID officials, its partners have established records of  effective performance in implementing cash and voucher projects and  they understand the context of operating in these high-risk environments.  As a result, USAID expects that its partners will conduct comprehensive  risk assessments, including financial risk assessments, and develop  appropriate risk mitigation measures for their cash-based food  assistance projects. However, none of the partners implementing EFSP- funded projects in our four case study countries had conducted a  comprehensive risk assessment based on their guidance or widely  accepted standards during the period covered by our March 2015 review.  We found that USAID did not require its implementing partners to develop  and submit comprehensive risk assessments with mitigation plans as part  of the initial grant proposals and award process or as periodic updates,  including when grants are modified.EFSP grant proposals and agreements do not contain risk assessments  and mitigation plans. In addition, the implementing partners we reviewed  had not consistently prioritized the identification or the development of  financial risks that address vulnerabilities such as counterfeiting,  diversion, and losses.
USAID officials stated that most  We concluded that without comprehensive risk assessments of its  projects, USAID staff would be hampered in developing financial  oversight plans to help ensure that partners are implementing the  appropriate controls, including financial controls over cash and vouchers  to mitigate fraud and misuse of EFSP funds. In our March 2015 report, we  recommended that USAID require implementing partners of cash-based  food assistance projects to conduct comprehensive risk assessments and  submit the results to USAID along with mitigation plans that address  financial vulnerabilities such as counterfeiting, diversion, and losses.  USAID concurred with our recommendation. In June 2015, USAID noted  that the Fiscal Year 2015 APS includes a requirement for applicants to  provide an assessment of risk of fraud or diversion and controls in place  to prevent any diversion or counterfeiting. We have yet to verify this  information to determine whether it addresses the issues we identified.
Control activities had weaknesses. In our March 2015 report, we found  that USAID’s partners had generally implemented financial controls over  cash and voucher distributions but the partners’ financial oversight  guidance had weaknesses. We reviewed selected distribution documents  for three implementing partners with projects that began around 2012 in  our four case study countries (Jordan, Kenya, Niger, and Somalia). Our  review found that the three implementing partners had generally  implemented financial controls over their cash and voucher distribution  processes. For example, in Niger, we verified that there were completed  and signed beneficiary payment distribution lists with thumb prints; field  cash payment reconciliation reports that were signed by the partner, the  financial service provider, and the village chief; and payment  reconciliation reports prepared, signed, and stamped by the financial  service provider. Additionally, we determined that these three  implementing partners generally had proper segregation of financial  activities between their finance and program teams. Nonetheless, in  Kenya, our review showed that in some instances, significant events  affecting the cash distribution process were not explained in the  supporting documentation.
Our review also found that in most instances the implementing partners  had submitted reports required by their grant awards, and generally within  the required time frames; in addition, we found that these reports  contained the key reporting elements required by the grant award.  However, in some instances, we were unable to determine whether  quarterly reports were submitted on time because USAID was unable to  provide us with the dates when it received these reports from the  implementing partner. According to USAID officials, USAID does not have  a uniform system for recording the date of receipt for quarterly progress  reports and relies on FFP officers to provide this information; however,  individual FFP officers have different methods for keeping track of the  reports and the dates on which they were received.
Financial oversight guidance had gaps. In our March 2015 report, we  found that implementing partners in the four case study countries we  reviewed had developed some financial oversight guidance for their cash  and voucher projects, but we found gaps in the guidance that could  hinder effective implementation of financial control activities. For example,  one implementing partner developed a financial procedures directive in  2013 that requires, among other things, risk assessments, reconciliations,  and disbursement controls. However, the directive lacked guidance on  how to estimate and report losses. Another implementing partner had  developed field financial guidance in 2013 that provides standardized  policies and procedures for financial management and accounting in the  partner’s field offices. However, the implementing partner acknowledged  that the field manual does not address financial procedures specifically  for voucher projects. In addition, we found that USAID’s guidance to  partners on financial control activities is limited. For example, USAID  lacked guidance to aid implementing partners in estimating and reporting  losses.
We concluded that when implementing partners for EFSP projects have  gaps in financial guidance and limitations with regard to oversight of cash- based food assistance projects, the partners may not put in place  appropriate controls for areas that are most vulnerable to fraud, diversion  and misuse of EFSP funding. In our March 2015 report, we  recommended that USAID develop a policy and comprehensive guidance  for USAID staff and implementing partners for financial oversight of cash- based food assistance projects. USAID concurred with our  recommendation and in June 2015 reported that CalP is expected, as  part of its award, to work on the development and dissemination of policy  and guidance related to cash-based food assistance. USAID plans to  complete this effort by April 2016. We have not yet verified this  information to determine whether it addresses the issues we identified.
Limitations in USAID’s field financial oversight. As we reported in  March 2015, according to USAID officials, Washington-based country  backstop officers (CBO) perform desk reviews of implementing partners’  financial reports and quarterly and final program reports and share this  information with FFP officers in the field; in addition, both the Washington- based CBOs and FFP officers in-country conduct field visits. However, we  found that the ability of the CBOs and FFP officers to consistently perform  financial oversight in the field may be constrained by limited staff  resources, security-related travel restrictions and requirements, and a  lack of specific guidance on conducting oversight of cash transfer and  food voucher programs. Field visits are an integral part of financial  oversight and a key control to help ensure management’s objectives are  carried out. They allow CBOs and FFP officers to physically verify the  project’s implementation, observe cash disbursements, and conduct  meetings with beneficiaries and implementing partners to determine  whether the project is being implemented in accordance with the grant  award.
According to the CBOs and FFP officers, the frequency of field visits for  financial oversight depends on staff availability and security access. In  our four case study countries, the FFP officers told us that because of  their large portfolios and conflicting priorities, they performed limited site  visits for the projects that we reviewed. In Kenya, the FFP officer told us  that her portfolio covered 14 counties, and the cash-based food  assistance project we reviewed was just one component. Owing to the  demands of all her projects, she had been able to perform limited site  visits for the projects we reviewed. We also found that USAID had two  staff members in the field to oversee its Syria regional cash-based  projects spread over five countries that had received approximately $450  million in EFSP funding from July 2012 through December 2014.
Because of staff limitations, FFP officers primarily rely on implementing  partners’ reports from the field and regular meetings with them to  determine whether a project is being executed as intended. However,  USAID’s guidance to its FFP officers and its implementing partners on  financial oversight and reporting is limited. For example, FFP staff in  Niger stated that they have had insufficient guidance and training on  financial oversight of cash-based food assistance projects. Furthermore,  the FFP officers told us that USAID is not prescriptive in the financial  oversight procedures it expects from its implementing partners.  Additionally, they noted that USAID has not set a quantitative target for  site visits by FFP officers. FFP officers in our four case study countries  told us that they use a risk-based approach to select which sites to visit.
We concluded that without systematic financial oversight of the  distribution of cash and voucher activities in the field, USAID is hampered  in providing reasonable assurance that is EFSP funds and are being used  for their intended purposes. In our March 2015 report, we recommended  that USAID require its staff to conduct systematic financial oversight of  USAID’s cash-based food assistance projects in the field. USAID  concurred with this recommendation. As of June 2015, USAID reported  that it is working to develop training for its staff and will continue to  explore using third-party monitors where security constraints may be an  issue. USAID plans to complete these actions by April 2016. We have not  yet verified this information to determine whether it addresses the issues  we identified.
Chairman Rouzer, Ranking Member Costa, and Members of the  Subcommittee, this completes my prepared statement. I would be  pleased to respond to any questions that you may have at this time.
section_title: Appendix I: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
paragraphs: If you or your staff have questions about this testimony, please contact  Thomas Melito, Director, International Affairs and Trade at (202) 512- 9601 or melitot@gao.gov. Contact points for our Offices of Congressional  Relations and Public Affairs may be found on the last   page of this statement.
section_title: Staff Acknowledgments
paragraphs: GAO staff who made key contributions to this testimony are Joy Labez  (Assistant Director), Rathi Bose, Ming Chen, Beryl H. Davis, David  Dayton, Martin De Alteriis, Fang He, Teresa Abruzzo Heger, Dainia  Lawes, Kimberly McGatlin, Diane Morris, Shannon Roe, Barbara Shields,  Sushmita Srikanth, and Dan Will.