Foreign Aid: USAID Has Taken Steps to Safeguard Government-to-Government Funding but Could Further Strengthen Accountability
Published: 2015-06-04T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: USAID's Local Solutions initiative, launched in 2010 as part of USAID Forward, seeks to reform how the agency administers development assistance and to increase funding implemented through partner-country systems, including partner governments. In fiscal years 2012 through 2014, average annual obligations to G2G activities were about $620 million. The Local Solutions initiative aims to strengthen local capacity and enhance country ownership and sustainability of development efforts. GAO was asked to review accountability under this initiative.
GAO assessed the extent to which USAID policies and practices related to (1) planning, (2) implementing, and (3) monitoring and evaluating G2G assistance provide reasonable assurance that this assistance is used as intended. GAO analyzed key USAID policy documents; interviewed USAID officials; reviewed planning documents from 14 USAID missions; and conducted fieldwork in Nepal, Peru, and Tanzania.
section_title: What GAO Found
paragraphs: For each key phase for government-to-government (G2G) assistance activities under its Local Solutions initiative, the U.S. Agency for International Development (USAID) has policies that generally reflect federal accountability standards to help ensure funds are used as intended. However, GAO identified several steps in implementing these policies that could further strengthen accountability.
Planning: This phase entails designing projects that link to USAID missions' country development strategies, assessing and mitigating risks, and preparing planning documents. GAO found that USAID missions completed detailed fiduciary risk assessments for G2G assistance activities when required but did not always include mitigation steps in planning documents, in part, because risk assessments were often done after planning had been completed. Also, project monitoring and evaluation (M&E) plans often did not incorporate steps USAID and partner governments agreed to take to mitigate risks and build capacity.
Implementation: In this phase, USAID implements G2G activities according to the terms and conditions established in assistance agreements with partner governments. USAID missions usually selected funding mechanisms in which USAID reimburses partner governments for costs related to completion of agreed-upon activities. In addition, consistent with USAID policy, missions employed assistance agreements and corresponding implementation letters to commit funds and set objectives, among other things.
M&E. This phase includes conducting audits of partner-government entities and assessing the results of G2G assistance activities. Annual audits GAO reviewed were often submitted late, which delays audit follow-up actions required by USAID policy and limits the audits' usefulness as a monitoring tool. In addition, project M&E plans GAO reviewed rarely included indicators or evaluation questions for assessing the degree to which G2G assistance activities are building capacity, increasing ownership, or ensuring sustainability—the three interrelated goals of the Local Solutions initiative.
section_title: What GAO Recommends
paragraphs: GAO recommends that USAID take steps to strengthen accountability for G2G assistance by, among other things, improving the timeliness of risk assessments; incorporating risk mitigation measures into M&E planning; improving on-time audit submission; and assessing the effects of G2G assistance on capacity, ownership, and sustainability. USAID agreed with all of GAO's recommendations and noted various actions it is taking to address them.

section_title: Letter
paragraphs: With its Local Solutions initiative, the U.S. Agency for International  Development (USAID) has sought to align its administration of  development assistance more closely with an international consensus on  how best to improve global development effectiveness and accountability.  Launched as part of USAID Forward in 2010, this shift has simultaneously  aimed to increase the funding USAID implements through partner-country  systems in order to achieve sustainable development outcomes, while  also overhauling how the agency plans, implements, and monitors and  evaluates assistance projects and activities, including those funded  through partner governments, known as government-to-government  (G2G) assistance.
According to USAID data made available in May 2015, USAID missions  obligated on average approximately $620 million, or about 7 percent of all  mission program funds, to partner governments in fiscal years 2012  through 2014. USAID has provided such assistance to partner-country  ministries of health to train community health workers, to ministries of  education to improve children’s reading skills, and to ministries of  agriculture to improve roads used to transport agricultural products,  among others. By channeling funding through partner-country systems,  including governments, USAID aims to achieve three interrelated goals:  strengthening capacity to achieve development results, enhancing and  promoting country ownership, and increasing sustainability.
You asked us to review USAID’s Local Solutions initiative. This, the  second of two reports responding to this request, focuses on G2G  assistance. For this report, we assessed the extent to which USAID  policies and practices related to (1) planning, (2) implementing, and (3)  monitoring and evaluating G2G assistance provide reasonable assurance  that this assistance is being used as intended.
To address these objectives, we reviewed USAID policies related to  planning, implementing, and monitoring and evaluating G2G assistance  activities effective at the time of our review. We also interviewed USAID  officials in Washington, D.C., about these policies. For the purposes of  our review, we compared the relevant USAID policies with standards in  GAO’s Standards for Internal Control in the Federal Government, which  we refer to as accountability standards in this report. To assess USAID  missions’ adherence to these policies, we reviewed planning documents  for 29 G2G assistance activities from 14 USAID missions with more than  $500,000 in G2G obligations in fiscal year 2012. These included risk  assessments, project or activity planning documents, assistance  agreements, and audits, among others. From those USAID missions, we  selected missions in Nepal, Peru, and Tanzania for in-depth case studies.  We chose these missions on the basis of fiscal year 2012 G2G funding  levels, progress in implementing projects and activities, and geographic  and sector diversity. Although the results of our case studies cannot be  projected across all USAID missions, we believe these missions provide  an illustrative mix of USAID’s G2G assistance activities. In our three  case-study countries, we conducted site visits and interviewed USAID  and partner-government officials as well as representatives of other donor  countries and civil society. Appendix I provides more information on our  objectives, scope, and methodology.
We conducted this performance audit from April 2014 to June 2015 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
subsections: section_title: U.S. Policy Commitments Related to G2G Assistance
paragraphs: Through its participation in a series of aid effectiveness forums beginning  in 2005, the U.S. government, along with other donor and partner  countries, has committed to improving the effectiveness of assistance  programs, in part through increased use of partner-country systems and  strengthening of local capacity to achieve development results. For  example, the 2011 Busan Partnership for Effective Development  Cooperation states that donor and partner countries will use country  systems as the default approach for implementing development  assistance, working with both donors’ and partner countries’ governance  structures. In keeping with these commitments, the 2010 Presidential  Policy Directive on Global Development, USAID’s 2011-2015 Policy  Framework, and USAID’s Local Systems Framework all stress the need  to build partner-country capacity to achieve shared development goals.
section_title: Local Solutions and G2G Assistance
paragraphs: USAID’s Local Solutions initiative aims to increase funding for partner- country systems, including partner governments, private sector, and  nongovernmental organizations, that have sufficient capacity—and to  help strengthen their capacity when needed—in order to achieve  sustainable development outcomes. In 2013, USAID created the senior  position of Local Solutions Coordinator in the agency’s Counselor’s  Office. The Local Solutions Coordinator is responsible for coordinating the  functions and activities of the various headquarters offices and missions  involved in carrying out the Local Solutions initiative.
According to data USAID made available in May 2015, although overall  obligations to partner-country systems increased in fiscal years 2010 to  2014, obligations to partner governments declined from about $929  million to $327 million during this period, as shown in figure 1.
Following the launch of USAID Forward in 2010, USAID began to revise  various policies related to planning, project design and implementation,  and monitoring and evaluation—often referred to as USAID’s program  cycle. While many of these policies apply broadly to all USAID  assistance, some apply specifically to G2G assistance. For the purposes  of this report, we identified the following key components of USAID’s  program cycle as they relate to G2G assistance:
Policy: USAID policy related to G2G assistance is documented  primarily in the agency’s Automated Directives System (ADS), which  contains the policies and procedures that guide the agency’s  operations. USAID first issued a policy chapter specifically related to  G2G assistance in 2011 and updated it in March 2012 and July  2014.
Planning: The initial phase of USAID’s program cycle entails  designing projects that are consistent with the mission’s country  development strategy, assessing and addressing risks associated  with implementing the projects, and preparing planning documents for  mission director approval.
Implementation: This phase entails selecting appropriate funding  mechanisms and implementing G2G assistance activities according to  the terms and conditions established in bilateral assistance  agreements and other legal documents.
Monitoring and evaluation (M&E): This phase entails conducting  audits of partner-government entities and assessing the progress and  results of G2G assistance activities.
Appendix II provides a detailed summary of these components.
section_title: Accountability Standards
paragraphs: Agencies should have in place appropriate mechanisms to help ensure  achievement of program results. GAO’s Standards for Internal Control in  the Federal Government, which we refer to as accountability standards,  emphasizes the importance of identifying goals and objectives, identifying  and mitigating risks, and establishing and tracking performance  indicators, among other things. As continuous, built-in components of  agencies’ operations, such measures help provide reasonable assurance  that funds are used as intended and help agencies meet their objectives.
section_title: Planning: USAID Missions Completed Detailed Fiduciary Risk Assessments but Did Not Always Address Risks and Mitigation Steps in Project Design and Missed Opportunities to Coordinate with Other Donors
paragraphs: USAID policy addresses accountability standards calling for identification,  analysis, and mitigation of risks, and we found that USAID missions  completed detailed risk assessments. However, missions did not always  integrate risk mitigation measures into project and M&E planning when  required by USAID policy. We found that risk assessments had often  been completed after planning documents had been finalized. In addition,  M&E plans we reviewed often did not incorporate steps USAID and  partner governments agreed upon to address risks and build capacity.  We also found that USAID missions missed opportunities to coordinate  risk assessment activities with other donors.
subsections: section_title: USAID Missions Conducted Detailed Fiduciary Risk Assessments and Identified Mitigation Steps but Did Not Always Incorporate Them into Project Planning
paragraphs: By requiring missions to conduct detailed fiduciary risk assessments and  incorporate them into project planning, USAID policy addresses  accountability standards calling for identification, analysis, and mitigation  of risk. According to USAID’s policy on G2G assistance, before providing  funds directly to a partner-government entity, the missions must complete  a fiduciary risk assessment of that entity. The goal of this assessment is  to establish risk mitigation measures that will be integrated into the design  of the project to help ensure that funds are managed appropriately.  Possible risk mitigation measures include technical assistance for  capacity building, disbursement of funds in tranches contingent on the  achievement of certain milestones, establishment of benchmarks for the  partner country to demonstrate progress in correcting financial  management weaknesses, and limits on cash advances under cost- reimbursable funding mechanisms. Missions are required to include the  findings of the risk assessments, as appropriate, in the planning  documents approved by the mission director. In addition, missions should  include provisions for ensuring partner-government compliance with risk  mitigation measures in the M&E plans for projects with G2G assistance  activities. Since fiscal year 2012, legislation governing the use of funds  for direct G2G assistance has placed conditions on such assistance,  including requiring the assessment of the partner-government entity that  will receive the assistance funds and determination regarding whether it  has the systems required to manage those funds. According to USAID,  the agency meets these assessment requirements by means of its  policies and procedures relating to G2G assistance.
On the basis of our review of 29 planning documents for G2G assistance  activities with fiscal year 2012 obligations, we found that missions  conducted risk assessments and formulated risk mitigation plans, as  required. Table 1 provides illustrative examples of risks and associated  recommendations identified in fiduciary risk assessment reports from our  three case-study countries—Nepal, Peru, and Tanzania.
The planning documents we reviewed showed that in some cases,  missions took concrete steps to avoid risk. In Tanzania, for example, the  mission identified four government organizations as potential recipients of  G2G funds for a governance project but proceeded with only three of  them, because the assessment identified significant risks that would have  required extensive mitigation measures.
However, for most planning documents we reviewed, missions did not  integrate risk mitigation measures into project design and M&E planning  when required. Of the 29 planning documents we reviewed, 20 included  no discussion of identified risks, and 17 of the planning documents did not  address measures for mitigating risks. Furthermore, 25 of the 29 M&E  plans did not integrate follow-up for ensuring partner government  compliance with agreed-upon risk mitigation measures.
In most cases, missions had not completed the fiduciary risk  assessments prior to finalizing project or activity planning: for 14 of the 20  planning documents that did not include risk mitigation information, we  found that the fiduciary risk assessment was either under way or not yet  initiated at the time of project planning. In some cases, our document  review enabled us to identify possible reasons missions completed  planning before the corresponding risk assessments were completed. In  one instance, the planning document included non-G2G activities for  which a fiduciary risk assessment was not required, according to the  document; to avoid delays in the approval of these non-G2G activities,  the mission approved the larger project and proceeded while the G2G- related risk assessment was under way. In another instance, the USAID  mission had a previous funding relationship with the partner-government  agency and thus may have decided to proceed because it was already  aware of potential risks.
USAID policy on G2G assistance clearly underscores the importance of  integrating risk mitigation measures into project and M&E planning. When  missions finalize project planning without having the information from  completed fiduciary risk assessments, they may not incorporate into the  design of the project appropriate safeguards or measures that would  strengthen partner-country systems. Furthermore, not integrating partner- government follow-up on risk mitigation measures into project M&E plans  weakens oversight and accountability and creates potential reporting  inefficiencies.
In some cases, missions documented risk mitigation measures and  compliance-monitoring plans in other project-related documents. For  example, in Tanzania, the mission sent implementation letters to the  government entities receiving G2G assistance outlining agreed-upon  action plans for mitigating risks and stating that the entities would report  progress to the mission on a regular basis.
section_title: USAID Missions Missed Opportunities to Coordinate Risk Assessments with Other Donors
paragraphs: On the basis of our fieldwork in Nepal, Peru, and Tanzania and our  review of 29 planning documents for projects with G2G assistance  funding obligated in fiscal year 2012, we found that missions missed key  opportunities to work with other donors. According to USAID policy on  G2G assistance, missions may consider various means of coordinating  with other donors, such as by conducting joint risk assessments, involving  other donors in USAID’s assessment, sharing the results of USAID’s  fiduciary risk assessments, or other measures. In the three countries we  visited, USAID mission and partner-government officials, as well as other  donor representatives, told us that USAID’s risk assessments provided  valuable opportunities for learning and relationship building, but they also  cited, in all three countries, opportunities for improved coordination.
In Nepal, representatives of bilateral and multilateral donor  organizations participating in a working group dedicated to improving  public financial management stated that each donor conducts its own  risk assessment and that they were not aware of the results of  USAID’s assessment. They also stated that there were opportunities  for donors to better coordinate their risk assessment efforts and share  information, thereby decreasing duplicative efforts and eliminating  unnecessary burdens on the government of Nepal.
In Peru, the Swiss Agency for Development Cooperation assessed  the management capacity of a subnational government partner that  also underwent a USAID fiduciary risk assessment. Swiss officials  stated they were not aware of the results of USAID’s assessments,  and USAID’s assessments made no reference to the Swiss  assessment.
In Tanzania, officials from a key recipient of G2G funds stated that the  government organization had previously undergone capacity  assessments and received technical assistance from the Swedish  International Development Agency, but the findings of these  assessments were not reflected in USAID’s risk assessment.
In addition, in our review of planning documents for 29 G2G assistance  projects, we found that 18 (about two-thirds) included general information  about the project’s relationship to other donors’ activities, but none of  these 18 described how USAID planned to work with other donors to  assess risks or follow up on mitigation plans and steps.
Although we did not find any examples of risk assessments conducted  jointly with other donors in the 29 planning documents we reviewed, in  2014, the USAID mission in Senegal conducted a risk assessment of the  Senegalese Ministry of Health and Social Welfare jointly with the World  Bank. USAID headquarters officials told us they consider this type of joint  assessment to be a best practice. In addition, USAID headquarters  officials noted that mission officials in Rwanda, Egypt, and Indonesia  worked with other donors, including the World Bank, on public financial  management capacity assessments. Nevertheless, mission officials in  the three countries we visited told us that donor coordination on risk  assessment can be difficult and cited several reasons, among them that  USAID has more rigorous risk assessment requirements, donor budget  and project planning cycles may not coincide with USAID’s time frames,  and donor working groups may be organized around pooled funding  arrangements in which USAID does not participate. In addition, two of the  USAID missions had yet to determine who should take the lead on donor  coordination focused on improving partner-government public financial  management.
Despite such difficulties, some USAID mission officials and donor  representatives we spoke with described potential benefits of coordination  on risk assessments. For example, they told us that since donors’ risk  assessments tend to produce similar results, a lack of coordination  among donors leads to duplication and increased costs associated with  conducting the assessments, costs borne by donors (including USAID)  and partner governments alike. Moreover, by not coordinating on risk  assessments, USAID misses opportunities to build relationships among  donors that can help strengthen implementation of partner countries’ risk  mitigation activities, including efforts to strengthen partner-government  capacity.
section_title: Implementation: Missions’ Disbursement of Assistance Funds Primarily on a Reimbursement Basis Reflects Accountability Standards and Adheres to USAID Policy
paragraphs: USAID policy on G2G assistance addresses accountability standards  related to mitigating risk and safeguarding funds by encouraging missions  to select one of three funding mechanisms for G2G assistance. We found  that missions frequently established funding mechanisms whereby USAID  reimburses partner governments for costs related to achievement of  results. In addition, consistent with USAID policy addressing  accountability standards related to the establishment of control activities,  missions employed G2G assistance agreements and corresponding  implementation letters with partner governments to commit funds and set  objectives and conditions for funding, among other things.
subsections: section_title: Missions Frequently Used Reimbursement Funding Mechanisms
paragraphs: USAID policy on G2G assistance addresses accountability standards  related to mitigating risk and safeguarding funds by encouraging missions  to select a funding mechanism that best achieves the purpose of the  project or activity, fosters and deepens the partner government’s public  financial management capacity, efficiently implements the project or  activity, guarantees accountability, and promotes sustainability. Missions  generally choose from among three possible funding mechanisms for  G2G assistance: cost reimbursement, fixed-amount reimbursement, and  resource transfer.
Cost reimbursement: USAID reimburses the partner-government  entity for actual costs and expenditures incurred in carrying out the  project activities, up to an estimated total cost specified in advance.
Fixed-amount reimbursement: USAID reimburses an amount  agreed to in advance based on unit of output, such as kilometers of  roads built, or on associated project milestones, after the mission has  verified that quality standards have been met.
Resource transfer: USAID provides a transfer of funds or  commodities to the partner government. Disbursement is generally  dependent on the completion of specific actions by the partner  government.
Since 2012, legislation governing the use of funds for direct G2G  assistance states that such assistance should be made on a cost- reimbursable basis.Our review of 29 planning documents for G2G  assistance activities with fiscal year 2012 obligations showed that, in  nearly all of these cases (26 of 29), USAID missions employed  reimbursement-based mechanisms. In 11 of the 26 cases, missions also  allowed funds to be advanced to the partner country. USAID policy allows  for cash advances for projects that have been approved outside of the  partner government’s budget cycle or when funding from the partner  government is not available. In such cases, the partner government is  required to provide documentation of the proper use of the funds. Finally,  in 3 cases, USAID missions provided resource transfers. In our three  case study countries, we noted the following examples of missions using  these three types of funding mechanisms:   In Nepal, the USAID mission used a resource transfer for a  democracy and governance project, contributing to a multidonor trust  fund managed by the government of Nepal; the mission also planned  to use a fixed-amount reimbursement agreement to fund an  accompanying capacity-building project with the Ministry of Peace and  Reconstruction.
In Peru, the mission specified cost reimbursement as the funding  mechanism in its planning document for a health, education, and  alternative development project implemented through the regional  government of San Martín. The planning document stated that this  mechanism was appropriate because it would provide the mission  flexibility to make adjustments during project implementation based on  the regional government’s performance or in the event of any  unforeseen circumstances.
In Tanzania, the USAID mission signed a fixed-amount  reimbursement agreement with the Tanzania National Roads Agency  for a rural roads rehabilitation project. However, to mitigate the  agency’s lack of resources to finance the project start-up, USAID  provided a 20 percent cash advance, conditional on the transportation  agency’s agreement to certain terms.
section_title: Consistent with USAID Policy, Assistance Agreements and Implementation Letters Document Terms of G2G Assistance
paragraphs: USAID policy related to use of assistance agreements and  implementation letters addresses accountability standards regarding  documentation of significant events and establishment of control  activities.
According to USAID policy on G2G assistance, assistance agreements  between USAID and partner governments commit U.S. funds; these  agreements also generally set forth agreed-upon terms regarding time  frames; expected results; means of measuring results; and resources,  responsibilities, and contributions of participating entities for achieving a  clearly defined objective. In addition, USAID policy on G2G assistance  states that missions can use implementation letters, which are formal  correspondence from USAID to another party, to commit funds, detail  project implementation procedures, specify the terms of an agreement,  record the completion of conditions precedent to disbursements, and  approve funding commitments and mutually agreed-upon modifications to  project descriptions. Since 2012, legislation governing the use of funds  for direct G2G assistance requires USAID to enter into formal agreements  with partner governments on the objectives of this assistance.
On the basis of our review of 29 planning documents for projects with  G2G assistance funding obligated in fiscal year 2012, we found that  USAID used one or more of four types of assistance agreements (see  table 2) and associated implementation letters. For example, the USAID  mission in Nepal has implemented G2G assistance through a broad  assistance agreement with the national government with specific  provisions spelled out in various implementation letters exchanged with  the Ministries of Health and Population and Education, among others.  Similarly, USAID Peru has implemented its G2G assistance through two  broad assistance agreements, the first signed in 2008 and the second in  2012. The mission used implementation letters to approve work plans and  establish funding amounts, among other things, with three government  entities. In addition, the USAID mission in Tanzania implemented some of  its G2G assistance through a strategic objective grant agreement with the  national government to improve accountability and oversight of public  resources through increased citizen engagement; the mission then used  implementation letters to establish funding amounts, work plans, and  reporting requirements with the National Audit Office, Public Procurement  Regulatory Authority, and Ethics Secretariat.
section_title: M&E: USAID Missions Collected Audits, but Those We Reviewed Were Often Late; Project-Level M&E Planning Did Not Always Address Local Solutions Objectives
paragraphs: Audit requirements that apply to USAID’s G2G assistance are a key  control for monitoring G2G assistance. Some of the USAID missions  included in our review provided audits of G2G assistance they had  collected when required. We found that these audits revealed  weaknesses in partner countries’ management of assistance funding.  However, the audits were often submitted late, limiting their usefulness as  a monitoring tool. In addition, we found that project-level plans for M&E  rarely included indicators or evaluation questions for assessing the  degree to which G2G assistance activities would build local systems  capacity, increase country ownership, or enhance sustainability—the  three interrelated goals of the Local Solutions initiative.
subsections: section_title: Audits Are a Key Monitoring Tool and Have Revealed Financial Management Weaknesses, but Late Submission Hampers Their Effectiveness
paragraphs: Audit requirements that apply to USAID’s G2G assistance are a key  control for monitoring G2G assistance and thus support proper  stewardship of U.S. government resources. According to USAID policy on  audits, when a financial audit is required, the completed audit is to be  submitted no later than 9 months after the end of the audit period. The  main determinant for conducting an audit is whether G2G assistance  recipients will expend more than $300,000 in the given fiscal year.  USAID’s Office of Inspector General (OIG) reviews submitted audits and  establishes recommendations for action. USAID policy on audits states  that missions receiving such recommendations should take whatever  steps are necessary to respond to the recommendations and provide  documentation of the actions it takes.
On the basis of our review of 18 audits provided by five USAID missions,  we found that these missions collected audits and used them to identify  weaknesses in the management of G2G assistance, but the frequently  late submission of these audits to USAID limited their usefulness as a  monitoring tool. In response to our request for audits of G2G assistance,  five USAID missions provided 18 financial audits. Six of the 18 audit  opinions were unqualified, meaning the auditors found no significant  problems. However, 12 of the audits received qualified audit opinions  because of questions about costs identified by the audits. Examples of  costs questioned by the audits included payment of value-added tax,  grants or advances to other organizations, and training- and travel-related  expenses. In addition, during reviews of the audits, OIG identified  additional questionable costs in 6 audits it believed did not comply with  the terms of the award agreement or lacked supporting documentation.  Finally, audits reported material weaknesses in internal controls in 14 of  the financial audits and a lack of compliance with agreements,  regulations, or laws in 17 of the 18 audits. The auditors’ negative findings  in these areas included payments to contractors for unverified work,  procurement from suppliers not on approved vendor lists, and improper  cash advances, among other things.
On the basis of its reviews of submitted audits, OIG made  recommendations to USAID missions in all of the 15 OIG audit reviews  we received from USAID missions. According to audit tracking data and  supporting documentation provided by USAID, missions have taken final  action on most of the recommendations in the OIG audit reviews we  received. For example, one OIG audit review included a recommendation  for USAID Nepal to correct deficiencies related to procurement and  internal controls; in response, the mission agreed to ensure that goods  and services are procured from authorized vendors only. In another  example, OIG instructed USAID Ethiopia to determine whether  questioned costs of about $28,000 were allowable or unallowable and, if  appropriate, to recover unallowable costs; the mission found the costs to  be unallowable and recovered the funds.
Nevertheless, on the basis of our review of these audits, we found that  two-thirds (12 of 18) were submitted late (see table 3); in one case, OIG  indicated it had received the audit report about a year late.
The late submission of audits delays subsequent audit follow-up activities  required by USAID policy, including OIG’s review as well as USAID  mission follow-up on OIG recommendations. For example, on the basis of  its review of an annual audit of a government entity in Nepal, OIG  recommended that the USAID mission ensure that the government entity  correct one internal control weakness and address certain questioned  costs, among other things. However, because the audit was submitted 1  year late—and near completion of the G2G assistance activity—the  mission notified OIG that it would not take further action on the  recommendations. The mission determined that although it did not plan to  provide additional assistance to the government entity at that time, it  would ensure corrective actions were taken prior to providing any future  assistance. Late audit submission reduces the audit’s usefulness for  selecting timely and appropriate responses to the audit findings—such as  recovering funds, putting in place additional safeguards, or identifying  ways to enhance financial management capacity. Moreover, by allowing  weaknesses to continue unaddressed, late audits of G2G assistance  activities increase the risk that those activities will not achieve their goals  as efficiently and effectively as possible.
section_title: Project-Level M&E Plans Frequently Lacked Key Indicators and Evaluation Questions for Measuring Capacity Building, Country Ownership, and Sustainability
paragraphs: USAID policy on M&E for G2G assistance incorporates accountability  standards through the identification of objectives and related performance  indicators. USAID policy on M&E requires missions to describe in their  project planning documents indicators and, when appropriate, evaluation  methods that will be used to assess achievement. Furthermore, project  planning documents, in describing the project’s M&E plan, must link to  missions’ country development strategies and mission-wide performance  management plans. In addition, USAID policy on G2G assistance states  that carefully defining M&E roles and responsibilities during project design  is critical for this type of assistance.
In our review of the M&E plans included in 29 planning documents for  G2G activities with funding obligated in fiscal year 2012, we found that  missions included general project-level M&E information, but often did not  specify how they would monitor or evaluate achievement of Local  Solutions goals the missions included in their mission-level strategies.  Although some missions have begun to develop ways to measure and  track progress in achieving these goals, at the time of our review, USAID  did not have agency-wide guidance on how to do so.
The country development strategies of 13 missions we reviewed that  obligated G2G funding in fiscal year 2012 included strengthening partner- government capacity, enhancing and promoting country ownership, and  increasing sustainability—the three goals of the Local Solutions  initiative—among their development objectives. For example, one of  USAID Nepal’s three development objectives is “more inclusive and  effective governance,” while one of USAID Peru’s three development  objectives is “management and quality of public services improved in the  Amazon Basin,” and one of USAID Tanzania’s three development  objectives is “effective democratic governance improved.”
However, we found relatively little information in the project-level planning  documents we reviewed about how missions would track progress toward  these goals. In our review of the M&E plans included in 29 planning  documents for G2G assistance activities with fiscal year 2012 obligations,  we found that nearly all of them included general M&E information—such  as periodic progress reporting, illustrative indicators, and general plans  for evaluating program results—as well as considerations related to  program sustainability. However, 18 of 29 planning documents we  reviewed made no mention of indicators for measuring capacity,  ownership, or sustainability, and 24 lacked evaluation plans or questions  addressing these goals.
Our previous report on Local Solutions noted specific weaknesses in  USAID’s proxy indicator for tracking Local Solutions progress—the  percentage of mission program funds obligated to partner-country  systems. In addition, we noted that a USAID-commissioned study, while it  concluded that increasing funding to partner governments was associated  with improved capacity of partner governments in some countries, also  highlighted the need for more evidence demonstrating the impact of this  approach on funding development assistance relative to other funding  approaches. At the time of our prior review, USAID officials told us that  other approaches existed within the agency for measuring progress  toward strengthening partner-country systems and promoting sustainable  development, particularly project-level indicators and evaluation data.
Some of the planning documents we reviewed did include indicators or  evaluation plans, suggesting that missions have begun to develop ways  to measure and track progress in achieving the three Local Solutions  goals of strengthening capacity to implement programs, enhancing and  promoting country ownership, and increasing sustainability. For  example, the planning document for a nutrition project in Ghana  envisioned conducting an impact evaluation to assess the relative  effectiveness in achieving results of direct G2G funding versus an indirect  funding model. The same planning document also included several  expected results related to local government capacity, such as  strengthening district assemblies’ capacity to manage direct donor  funding. In addition, the M&E plan for a USAID early-education project in  Nepal identified as an illustrative evaluation question prospects for scale- up and sustainability of the project as a regular activity of the local  Ministry of Education. Finally, the planning document for a democratic  governance and accountability project in Tanzania indicated that an  evaluation would identify the keys to sustainability of enhanced public  resource oversight, as well as constraints to wider adoption of  accountability practices. This planning document also stated that  indicators of citizen perceptions of governance and accountability would  be tracked through a survey in targeted districts.
The President’s Emergency Plan for AIDS Relief (PEPFAR), in which  USAID is heavily involved, and other USAID-specific initiatives and  programs have published guidance addressing how to measure and track  progress toward enhancing capacity, country ownership, and  sustainability. For example, PEPFAR’s guidance on capacity building  provides illustrative examples of indicators, such as percentage of  PEPFAR-supported government staff transferred to government salaries,  number of workers trained and percentage of trainees retained, and  percentage of partners with on-time reports and unqualified audits. With  regard to sustainability planning, PEPFAR’s guidance calls on PEPFAR  country teams to develop sustainability M&E plans. Similarly, the M&E  guidance for the U.S. government’s global hunger and food security  initiative (Feed the Future) states that it will measure public sector  capacity and program sustainability primarily by tracking partner- government budgets allocated to agriculture and nutrition. With regard  to measuring country ownership, the Global Health Initiative’s interagency  paper on country ownership cites increases in health spending in the  partner country and in direct funding to its government as possible  indicators. Finally, USAID’s strategic framework for democracy, human  rights, and governance cites improved governance and institutional  capacity as key expected results of USAID activities.
USAID’s July 2014 policy on G2G assistance allows missions to  collaborate with partner governments to identify indicators and select  evaluation questions that address capacity building and sustainability.  According to USAID headquarters officials, an internal discussion paper  on M&E for G2G assistance activities elaborates on these concepts, and  the agency is currently reviewing tools and methods used by missions to  measure performance of partner governments. In addition, according to  USAID, as of March 2015, the agency is in the process of developing  supplemental guidance on indicators that can be used to track results of  strengthening public financial management activities. Nevertheless, at the  time of our review, USAID did not have agency-wide guidance on how to  collect data or evaluate the development hypothesis that channeling  funds through partner-government systems helps to achieve Local  Solutions goals. Without integrating indicators or evaluations for  assessing progress toward Local Solutions goals into the plans for  ongoing and future projects that include G2G assistance activities, USAID  missions risk committing resources to unproven funding strategies as the  agency executes its plans to expand G2G assistance in scale and scope.  Moreover, USAID missions forgo an opportunity to contribute to empirical  knowledge about the effects of channeling funds through partner- government systems.
section_title: Conclusions
paragraphs: USAID’s policies guiding the processes that missions follow to plan,  implement, and monitor and evaluate G2G assistance generally reflect an  international consensus on how best to achieve development outcomes  as well as accepted accountability standards. As designed, these policies  permit USAID to work toward its goals of strengthening local system  capacity, country ownership, and sustainability while providing reasonable  assurance that U.S. resources are being used as intended. We found that  USAID policies require that missions incorporate safeguards throughout  the program cycle of planning, implementing, and monitoring and  evaluating G2G assistance; however, we also found that missions have  not yet fully applied these safeguards in all cases. In the cases we  reviewed, USAID had carried out required fiduciary risk assessments,  documented project planning, utilized assistance agreements and funding  mechanisms, conducted audits, and devised key elements of monitoring  and evaluation. However, missions in some cases had not completed the  risk assessments in a timely manner, hampering their efforts to integrate  assessment findings and mitigation measures into project planning and  M&E plans, when required. Missions also encountered difficulties  coordinating risk assessment and related activities with other donors,  potentially leading to inefficiencies and less effective oversight of partner  countries’ efforts to address financial management weaknesses. Because  required audits we reviewed often were submitted late, the subsequent  chain of OIG review and mission response also was delayed, decreasing  the likelihood of resolving important audit findings such as questioned  costs and other financial management weaknesses. Finally, though some  missions demonstrated that they had begun to envision how to monitor  and evaluate whether G2G assistance is achieving project goals while  also enhancing capacity, country ownership, and sustainability, the  agency as a whole has yet to identify indicators or evaluation approaches  that would support expansion of these efforts.
section_title: Recommendations for Executive Action
paragraphs: We recommend that the USAID Administrator take the following five  actions to improve accountability for G2G assistance:  1.  develop an action plan to improve the timeliness of risk assessments  so that these assessments can better inform project planning;   2.  develop an action plan to ensure that M&E plans for G2G assistance  activities incorporate risk mitigation measures;  3.  disseminate information to missions regarding best practices for  coordinating risk assessments with other donors;  4.  identify the factors contributing to late submission of required audits  and develop a strategy to improve on-time audit submission and  follow-up; and  5.  develop and disseminate guidance on assessing the effects of G2G  assistance on partner-country capacity, ownership, and sustainability,  including through the identification of indicators and evaluation  approaches.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to USAID for review and comment.  USAID provided technical comments on the draft, which we incorporated  as appropriate. USAID also provided written comments, which are  reprinted in appendix IV. In its written comments, USAID agreed with all  five of our recommendations and described steps taken, planned, or  under way that it believes respond to the recommendations. With regard  to the first two recommendations, given the actions it already has  completed or has scheduled for completion by the end of 2015, USAID  requested that we either remove the recommendations from our final  report or indicate that the recommended actions have been completed  and that we consider the recommendations implemented and closed. We  appreciate USAID’s detailed description of its reported actions—including  revised policy, training, and other guidance—aimed at improving the  timeliness of risk assessments and ensuring that monitoring plans for  G2G assistance incorporate risk mitigation measures. We will work  expeditiously with USAID to collect and review evidence documenting its  actions to address the first two recommendations. We also look forward  to following up with USAID to monitor and collect information on the steps  the agency noted it has already taken or planned to take in response to  our other three recommendations.
We are sending copies of this report to appropriate congressional  committees, the Administrator of USAID, and other interested parties. The  report is also available at no charge on the GAO website at  http://www.gao.gov.
If you or your staff have any questions about this report, please contact  me at (202) 512-3149 or gootnickd@gao.gov. Contact points for our  Office of Congressional Relations and Public Affairs may be found on the  last page of this report. GAO staff who made key contributions to this  report are listed in appendix V.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: Our objectives in this report were to assess the extent to which U.S.  Agency for International Development (USAID) policies and practices  related to (1) planning, (2) implementing, and (3) monitoring and  evaluating government-to-government (G2G) assistance provide  reasonable assurance that this assistance is used as intended.
To address these objectives, we reviewed USAID policy outlined in the  agency’s Automated Directives System (ADS) related to planning,  implementing, and monitoring and evaluating G2G assistance activities.  We also interviewed USAID officials in Washington, D.C., about the  policies we reviewed. Some of the policy documents we reviewed apply  broadly to all USAID assistance, while others were specific to G2G  assistance. Specifically, the chapters we reviewed were the following:
ADS Chapter 220: Use and Strengthening of Reliable Partner  Government Systems for Implementation of Direct Assistance (first  issued August 2011, revised in March 2012 and July 2014);
ADS Chapter 201: Planning (most recently revised in December
ADS Chapter 203: Assessing and Learning (most recent revisions in  January and November 2012 and January 2013).
In our summary of these policies, we drew from the most recent versions  available at the time of our review, but in conducting our analysis, we  used the versions that were in place at the time that we developed our  tools for analysis. We also reviewed other chapters referenced in these  policies, such as ADS 591: Financial Audits of USAID Contractors,  Recipients, and Host Government Entities and ADS 350: Grants to  Foreign Governments, as well as supplemental guidance (e.g., Public  Financial Management Risk Assessment Framework  Manual  and Key Bilateral Funding Mechanisms). To assess the degree to which  these policies reflect generally accepted accountability standards, we  compared the most recent versions of these policies with relevant  sections of GAO’s Standards for Internal Control in the Federal  Government, which we refer to as accountability standards. These  standards outline ways agencies can improve accountability, such as by  assessing and mitigating risk and carrying out defined policies and  procedures. We mapped the USAID policies listed above to relevant  sections of the accountability standards, noting ways in which USAID  policy addresses specific factors or elements that contribute to a  supportive environment for accountability.
To review mission planning for G2G assistance activities, we began by  identifying project appraisal documents (PAD) and activity approval  documents (AAD) as key sources of information for our review. Starting in  2012, USAID policy on planning required missions with approved country  development cooperation strategies (CDCS) to document planning for  projects (which consist of one or more activities) in PADs. Prior to 2012,  missions documented project and activity planning using AADs. We next  identified 22 USAID bilateral missions that had obligated more than  $500,000 in G2G assistance in fiscal year 2012 and had completed a  stage 1 rapid appraisal at the time of our review, according to USAID  Local Solutions data and other information provided by the agency. We  then requested planning, implementation, and monitoring and evaluation  documents—including risk assessments, activity approval documents,  project appraisal documents, assistance agreements, implementation  letters, and audits—from these 22 USAID missions.
During the course of this preliminary work and as we reviewed the  submitted documents, we removed 8 missions from the scope of our  review for the following reasons. First, according to USAID headquarters  and mission officials, all of the fiscal year 2012 G2G funds obligated by  missions in Egypt and Mali were deobligated after fiscal year 2012.
Second, mission officials in Indonesia and Georgia determined that all of  each mission’s respective fiscal year 2012 obligations had not, in fact,  been implemented through partner government entities and, as such,  were incorrectly characterized as G2G assistance. Third, project and  activity planning documents for G2G assistance activities with fiscal year  2012 obligations were not available for USAID missions in Ethiopia and  Rwanda. In response to our request for documents, these missions  provided assistance agreements and implementation letters; in the case  of Ethiopia, the mission stated that the agreements and letters  documented authorization of G2G assistance activities. Finally, because  GAO, the USAID Office of Inspector General (OIG), and the Special  Inspector General for Afghanistan Reconstruction had each reviewed  various aspects of USAID’s G2G assistance in Afghanistan and Pakistan,  we did not include those two countries in our document review. (App. III  provides a summary of other reviews of USAID’s G2G assistance in  Afghanistan and Pakistan.) As a result of this process, we reviewed all 29  project appraisal or activity approval documents provided by 14 USAID  missions: Armenia, Barbados, Ghana, Haiti, Honduras, India, Liberia,  Mozambique, Nepal, Peru, Senegal, South Africa, Tanzania, and Zambia.  Table 4 provides a list of the projects with G2G assistance activities for  which we reviewed planning documents, by USAID mission.
To conduct our review of these planning documents, we developed a data  collection instrument to gather information on the required elements of  PADs, as described in USAID policies on G2G assistance, planning, and  monitoring and evaluation (M&E). Table 5 provides information on the  data fields in our data collection instrument.
Because USAID requirements differed for PADs and AADs (the two types  of planning documents we reviewed), we tracked which of these  documents each mission used and took this into consideration as we  conducted our analysis of the information gathered. To determine the  extent to which these documents contained the required elements, we  reviewed each planning document and recorded any relevant information  we found for each of the elements in our data collection instrument. We  then analyzed this information and determined whether the information  provided met requirements outlined in the USAID policies described  above. With regard to project-level M&E plans, while we recognized that  USAID missions may refine project M&E plans after completing project  design, our interest was in the degree to which missions had integrated  M&E into planning for G2G assistance activities. Accordingly, we  reviewed the M&E information provided in the planning documents we  collected and identified cases where these documents (1) included  general M&E information and (2) specifically addressed sustainability,  country ownership, or capacity. Finally, we also reviewed assistance  agreements and implementation letters associated with the G2G activities  in our review for information we did not find in the planning documents,  including the funding mechanism used to implement the G2G activity and  partner-government compliance with risk mitigation measures.
To identify examples of types of risks identified in USAID risk  assessments, we selected illustrative examples from our case study  countries for inclusion in this report. We selected these examples to  demonstrate the type of information contained in these risk assessments,  including risks identified, the risk level (i.e., low, medium, high, or critical),  and the assessor’s recommendation for mitigating each risk.
To obtain insights into the use of financial audits as a key monitoring tool  for G2G assistance, we requested the most recent completed financial  audits from 22 missions with G2G assistance funds obligated in fiscal  year 2012. In response to this request, 5 USAID missions provided 18  financial audits: Ethiopia (1), India (2), Nepal (7), Peru (7), and Rwanda  (1). We reviewed audits submitted by these missions in response to our  request, but did not seek to validate that all required audits were  conducted or submitted. Accordingly, our findings are limited to the  audits provided. We also reviewed agency or OIG reviews, memos, and  related documentation provided by USAID headquarters and USAID  missions. We recorded the following information from these documents:  the type of auditor (third-party contractor, host country supreme audit  institution, mission, or OIG), audited entity, time frame for audit and  submission, audit findings, OIG recommendations, and status of  implementation of the recommendations for each audit. The analysis we  conducted is a reflection of the documentation provided by USAID,  including the documents’ limitations. For example, OIG recommendations  incorporate the findings and recommendations of the third-party  contractor, supreme audit institution, and USAID auditors. We considered  it reasonable to assume that if OIG had closed all its audit review  recommendations, then the underlying auditors’ findings and  recommendations for that audit could also be considered closed.
We also selected 3 USAID missions—Nepal, Peru, and Tanzania—for in- depth case studies. We chose these missions on the basis of fiscal year  2012 G2G funding levels; sector diversity (G2G assistance in at least two  sectors, such as education or health), their progress in implementing  projects and activities, and geographical diversity. While the results of our  case studies cannot be projected across all USAID missions, these 3  missions provide what we believe to be an illustrative mix of USAID’s  G2G assistance activities. While in these countries, we conducted site  visits and interviewed USAID and partner-government officials as well as  representatives of other donor countries and civil society.
We conducted this performance audit from April 2014 to June 2015 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.
section_title: Appendix II: Key Components of U.S. Agency for International Development Program Cycle Related to Government-to-Government Assistance
paragraphs: Following the launch of USAID Forward in 2010, USAID began to revise  various policies related to the agency’s planning, project design and  implementation, and monitoring and evaluation—often referred to as  USAID’s program cycle. These policies guide the agency’s assistance  program activities and operations. While many of these policies apply  broadly to all USAID assistance, some apply specifically to G2G  assistance. For the purposes of our report, we describe the program cycle  in three stages: planning, implementation, and monitoring and evaluation.  We summarize key components of USAID’s program cycle as they relate  to G2G assistance below and conceptualize these components in figure  2.
subsections: section_title: Planning
paragraphs: According to USAID’s Automated Directives System Chapter 201,  planning begins at the mission level, with the development of a country  development cooperation strategy (CDCS). The CDCS reflects the  agency’s development approach in each country and articulates how  USAID’s strategy reflects partner-country priorities. Regarding G2G  assistance, the policy states that missions should consider building local  capacity, including that of partner governments, to achieve sustainable  development results. According to USAID’s ADS Chapter 220: Use and  Strengthening of Reliable Partner Government Systems for  Implementation of Direct Assistance, planning for G2G assistance  activities also entails risk assessment and formulation of risk mitigation  plans; these assessments and plans are key elements of broader project  planning, which is summarized in a project appraisal document (PAD).
section_title: Country Development Cooperation Strategy
paragraphs: USAID policy on planning states that a CDCS must include goals, results,  and indicators, among other things, which help focus USAID investments  in key areas affecting partner countries’ overall stability and prosperity.  The policy states that missions should consider using partner-government  systems in order to develop their capacity and improve sustainability— two key Local Solutions goals—during development of their CDCS. We  found that these considerations were reflected in various parts of the  CDCS, notably in general discussions of how the mission is addressing  USAID initiatives as well as in the results framework, which identifies  objectives and expected results. Table 6 summarizes key elements of  CDCSs for USAID missions in our three country case studies: Nepal,  Peru, and Tanzania.
subsections: section_title: Risk Assessment and Risk Mitigation Plan
paragraphs: According to USAID policy on planning, while developing the CDCS,  missions considering the use of partner-government systems generally  must conduct a “stage 1 rapid appraisal,” which is a country-level  examination of the partner government’s public financial management  environment and associated risks. The stage 1 rapid appraisal is used to  determine whether G2G assistance is feasible—in other words, whether  to proceed to the next risk assessment stage—and informs development  of the CDCS. In addition, as of July 2014, USAID policy states that, when  appropriate, certain missions may be asked to undertake an expanded  democracy, human rights, and governance review for G2G assistance in  order to aid consideration of the reputational risk to the U.S. government  as well as the risk that U.S. government resources could be misused in a  way that damages political freedoms or human rights or benefits a central  government at the expense of its citizens. Following completion of the  stage 1 rapid appraisal, missions may decide to conduct one or more risk  assessments of partner-government organizations (e.g., ministries or  subnational agencies), known as “stage 2” risk assessments. Intended to  inform the larger project design process, stage 2 risk assessments  identify fiduciary risks and propose measures to address them.  According USAID’s policy on G2G assistance, USAID missions generally  must complete a fiduciary risk assessment as part of the overall project  design and authorization process before obligating funds to a partner  government for implementation of G2G assistance activities.
section_title: Project Planning Document
paragraphs: According to USAID policy on planning, the PAD is used by missions to  document the complete design of the project and serve as a reference  document for project authorization and subsequent implementation.  PADs must define the following:   the development problem to be addressed by the project and how it  links to the mission CDCS; a monitoring and evaluation (M&E) plan, including expected results  and indicators;  the financial plan and budget; and   the overall project implementation plan.
Table 7 describes projects with G2G activities in the three case-study  countries.
According to USAID policy on G2G assistance, PADs for projects with  G2G activities must incorporate the findings of stage 2 risk assessments  and a plan for mitigating risks identified in the fiduciary risk assessment.  Possible risk mitigation measures may include the following: disbursement of funds in tranches, technical assistance for capacity building,  inclusion of milestones and benchmarks for demonstrating progress in  correcting financial management weaknesses,
USAID “no objection” reviews of actions taken by partner-government  ministries or agencies receiving assistance before proceeding to the  next step, and  limits on advance of funds.
The policy also states that risk mitigation plans should be incorporated  into the project M&E plan, which is a required part of the PAD, and  include provisions for ensuring partner-government follow-up on any risk  mitigation measures through periodic progress reports or meetings with  partner-government officials as part of the project’s M&E plan. In addition,  the policy states that missions may consider various means of  coordinating with other donors, such as by conducting joint risk  assessments, involving other donors in USAID’s assessment, sharing the  results of USAID’s risk assessments, or other measures.
section_title: Implementation
paragraphs: USAID’s policy on G2G assistance outlines use of assistance agreements  and implementation letters as well as selection of funding mechanisms for  G2G assistance. The assistance agreements and implementation letters  specify the type of funding mechanism USAID will use for the G2G  assistance project or activity. USAID policy on G2G assistance also  describes factors missions should consider when selecting funding  mechanisms.
subsections: section_title: Assistance Agreements
paragraphs: According to USAID policy, assistance agreements between USAID and  partner governments set forth mutually agreed-upon terms regarding time  frames, results expected to be achieved, means of measuring those  results, resources, responsibilities, and contributions of participating  entities for achieving a clearly defined objective. In addition, because  missions obligate funds through assistance agreements, missions must  go through a set of preobligation requirements designed to ensure  adequate planning prior to committing funds. USAID implements G2G  assistance using one or more of four types of assistance agreements: development objective agreement: when obligating funds through  development objective agreements, under USAID, policy missions  must develop separate agreements for each development objective in  an approved CDCS; bilateral project agreement: used to implement specific projects; limited scope grant agreement: used to award a grant to a partner- government entity for project obligations of less than $500,000; and program assistance agreement: used to provide resource transfers in  the form of foreign exchange or commodities.
In addition, USAID missions use implementation letters, which are formal  correspondence from USAID to another party, and can serve several  functions, including detailing project implementation procedures,  specifying the terms of an agreement, recording the completion of  conditions precedent to disbursements, and approving funding  commitments and mutually agreed-upon modifications to project  descriptions. In some cases, missions use assistance agreements to  obligate funds to several projects or activities implemented by different  partners. For G2G assistance activities developed under some of these  types of agreements involving multiple partners, missions may  subobligate funds to partner-government entities—such as central  government ministries and regional and local governing authorities— through the use of implementation letters. USAID policy effective as of  July 2014 states that the assistance agreement or implementation letter  should incorporate risk mitigation measures.
section_title: Funding Mechanisms
paragraphs: USAID policy describes factors missions should consider when selecting  funding mechanisms for G2G assistance. The goal in each case is to  select the funding mechanism that will best achieve the purpose of the  project or activity, foster and deepen the partner government’s public  financial management capacity, efficiently implement the project or  activity, guarantee accountability, and promote sustainability. According  to USAID policy, selection of the appropriate funding mechanism is also  an important means of mitigating risk and safeguarding funds. USAID  policy outlines three funding mechanisms:
Cost reimbursement: USAID reimburses the partner-government  entity for actual costs and expenditures incurred in carrying out the  project activities, up to an estimated total cost specified in advance.  Cost reimbursements require missions to prepare a budget that  reasonably estimates the cost of implementing the project, with the  understanding that the final amounts may be further refined. Cost  reimbursements may be used when unit costs cannot be estimated  with sufficient accuracy at the beginning of the project because of  price fluctuations over the life of a project that are outside the control  of the partner-government. Because USAID reimburses actual costs  incurred based on these estimates, the mission is responsible for  closely monitoring project implementation to help ensure that it is on  schedule and to resolve problems as they arise. When the partner  government is ready to request a reimbursement for costs incurred  during project implementation, it submits the request according to  procedures specified in the assistance agreement or the  implementation letter, along with certified financial reports detailing  the amount of expenditures incurred and supporting documents, such  as contracts, invoices, and payments. The reports and supporting  documents are subject to USAID review and audit procedures  outlined in the agreement. Under this funding mechanism, USAID  may provide cash advances for projects that have been approved  outside of the government’s budget cycle or when funding from the  partner government is not available.
Fixed amount reimbursement: USAID reimburses an amount agreed  to in advance, per output or associated milestone, after the mission  has verified that quality standards have been met. This mechanism  requires that the mission and the partner government invest a  significant amount of time and resources to develop cost estimates for  outputs and associated milestones during the design phase of the  project. The partner-government entity implementing the project  submits design specifications and cost estimates for each output or  associated milestone for approval by the mission. The mission  independently verifies that the estimate is reasonable and negotiates  payment amounts with the partner government for each output or  milestone. The amount of the mission’s contribution to the project is  thereby fixed and the partner government bears the responsibility for  any unforeseen cost increases. Similarly, if actual costs are less than  estimated costs, the mission’s payment to the partner government is  not reduced. However, the mission may make periodic adjustments  for subsequent payment amounts in certain cases, such as  unforeseeable inflation or price increases. Once the cost estimate has  been established under this funding mechanism, the mission’s  monitoring and oversight of the project is significantly less than that  required for the cost reimbursement mechanism because the  mission’s primary role is to verify that the outputs or associated  milestones have been completed and meet the agreed-upon quality  standards. In addition, during project planning, the mission must also  determine that the partner-government entity has the qualified  management staff with sufficient technical skills and experience to  implement the project in a timely manner. As with the cost  reimbursement mechanism, USAID may also provide cash advances  under this funding mechanism, as long as these funds are then  liquidated based on successful completion of outputs or associated  milestones rather than actual costs incurred.
Resource transfer: USAID provides a generalized resource transfer in  the form of foreign exchange or commodities to the partner  government. According to USAID policy, resource transfer is used for  either (1) sector program assistance, which provides cash or in-kind  assistance used to carry out wide-ranging development plans in a  defined sector without restriction on the specific use of funds, or (2)  balance-of-payments or general budget support, commonly known as  cash transfers. The transfer of resources is generally dependent on  the completion of specific actions by the partner government. For  example, the provision of funds under sector program assistance  must be directly linked to the implementation of specific policies,  institutional reforms, or other partner-government actions necessary  to achieve agreed-upon development objectives. These actions must  be specified directly or by reference in the assistance agreement as  conditions that must be established before these funds are disbursed,  and the mission is required to document how it reached the decision  to disburse funds.
section_title: Monitoring and Evaluation
paragraphs: USAID’s general audit requirements outlined in ADS Chapter 591:  Financial Audits of USAID Contractors, Recipients, and Host Government  Entities apply to G2G assistance. The main determinant, in most cases,  for conducting an annual audit is whether G2G assistance recipients  expend more than $300,000 in G2G assistance funds in the given fiscal  year. In addition, both USAID’s ADS Chapter 203: Assessing and  Learning and its policy on G2G assistance establish M&E requirements.  According to these documents, missions should begin preparing for M&E  activities during the planning stage and must document M&E planning in  the planning document for each project or activity. Notably, USAID policy  on G2G assistance states that carefully defining M&E roles and  responsibilities during project design is critical for this type of assistance.
subsections: section_title: Audit
paragraphs: According to USAID policy on audits, non-U.S.-based organizations— including partner governments—expending $300,000 or more of USAID- funded awards must be audited annually. In addition, a closeout audit  must be performed for all awards in excess of $500,000. According to the  guidelines, audits may be performed by independent audit firms, or by a  government’s supreme audit institution, and must be in accordance with  auditing standards approved by the U.S. Comptroller General.  Completed financial audits are to be submitted to the USAID Office of  Inspector General (OIG) for review no later than 9 months after the end of  the audited period. Upon completing its review, OIG establishes  recommendations for action, if appropriate, and provides copies of the  audit reports to the responsible USAID management.
According to USAID policy, designated mission officials maintain each  mission’s annual audit inventory, decide when to conduct audits, and  coordinate with OIG to develop the annual audit plan. According to  USAID, in practice, the controller at each mission fulfills these duties and  liaises with the audit manager at USAID headquarters. Controllers track  audit requirements, timing, and completion, as well as audit  recommendations and implementation status. According to USAID, as of  March 2015, missions utilized two databases for tracking audits: the first  to track audit timing and the second to monitor audit recommendation  follow-up. According to USAID, the agency was in the process of  introducing a new agency-wide database for tracking audits of non-U.S.- based organizations, which, when fully operational, would maintain a  record of all non-U.S. vendors receiving USAID funds, as well as the  timeliness of audits of these organizations.
section_title: Monitoring and Evaluation
paragraphs: USAID policy on M&E requires missions to describe how they will collect  data and assess achievement during project planning in what is known as  the project M&E plan. Furthermore, project planning documents, in  describing the project’s M&E plan, must link to missions’ CDCS and  mission-wide performance management plans; they are to be used to  measure progress toward planned results and identify the cause of any  delays or impediments during project implementation. Moreover, the  policy states that defining the project M&E plan during project planning  aids in adapting implementation to achieve sustainable results and future  project planning. Notably, USAID policy on M&E for G2G assistance  activities states that carefully defining M&E roles and responsibilities  during project design is critical for G2G assistance.
section_title: Appendix III: Summary of Reviews of U.S. Agency for International Development Government-to- Government Assistance in Afghanistan and Pakistan, Fiscal Years 2010 through 2014
paragraphs: According to U.S. Agency for International Development (USAID) data, in  fiscal years 2010 through 2013, the agency obligated between about $44  million and $468 million per fiscal year in government-to-government  (G2G) assistance in Afghanistan and about $149 million and $461 million  in Pakistan. (See fig. 3.) Summarized below are key findings from reviews  of USAID’s G2G activities conducted by the USAID Office of Inspector  General (OIG) in Afghanistan, the OIG in Pakistan, the Special Inspector  General for Afghanistan Reconstruction (SIGAR), and GAO.
subsections: section_title: Afghanistan
paragraphs: In 2010, along with other donors, the United States pledged to provide at  least 50 percent of development assistance funds directly through the  Afghan budget by 2012. According to SIGAR, USAID and the  government of Afghanistan signed a memorandum of understanding in  December 2010 in support of the goals, objectives, and mechanisms for  effective assistance in Afghanistan. SIGAR also reported that the  memorandum of understanding focused on maximizing opportunities  presented by USAID-funded assistance to increase capacity, institutional  growth, and public ownership of the development process in Afghanistan.  The memorandum also laid out financial requirements to ensure that  direct assistance funds are used as intended, according to SIGAR.  USAID’s assistance provided directly through the Afghan budget includes  host-country contracts, G2G awards, and contributions to certain  multidonor trust funds. According to USAID data, in 2014, the agency  obligated funds for G2G assistance in the following sectors: agriculture,  education, health, governance, rule of law and human rights, and private  sector competitiveness.
subsections: section_title: Planning
paragraphs: While USAID Afghanistan does not have a country development  cooperation strategy, the mission has taken steps to conduct fiduciary risk  assessments of several Afghan government entities. In 2011, we reported  that USAID had not completed preaward risk assessments before  providing funds to two Afghan government entities. In 2014, SIGAR  reported that the mission had contracted with private firms to conduct  fiduciary risk assessments of 16 ministries and found that all 16 ministries  were unable to manage direct funds without taking risk mitigation  measures recommended in these assessments. The mission’s internal  review of 7 of these ministries also found that these ministries were  unable to manage funds without the implementation of significant risk  mitigation measures. In 2012, the USAID Administrator approved the  mission’s request to waive compliance with agency requirements for  assessing risks associated with using partner-government systems and  documenting any risk mitigation plans for funds appropriated through  fiscal year 2013. In spite of this waiver, SIGAR recommended that the  USAID Administrator require compliance with all USAID requirements for  the use of partner-government systems, with the exception of the country- wide stage 1 assessment. USAID responded that in spite of the approved  waiver, USAID Afghanistan continues to comply with all USAID  requirements for the use of partner-government systems.
In 2011, we reported that USAID had not consistently followed its own  policies for assessing risks associated with funds provided to a World  Bank–administered trust fund for Afghan reconstruction. The Afghanistan  Reconstruction Trust Fund was established in 2002 as a vehicle for  donors to pool resources and coordinate support for Afghanistan’s  reconstruction. We reported that for its initial $5 million contribution to the  trust fund in 2002, USAID could not provide documentation supporting  risk assessment procedures prior to disbursement, but determined  afterward that (1) the trust fund had a comprehensive system in place for  managing the funds and (2) the World Bank had a long history in  managing multidonor pooled funding mechanisms. Similarly, the mission  did not make preaward determinations for 16 of the 21 subsequent  modifications to its contribution amounts. USAID agreed with our  recommendation that the agency ensure adherence with its policies for  assessing risks associated with multilateral trust funds and revised its  guidance on awards to public international organizations in 2011.
section_title: Implementation
paragraphs: In their reviews of USAID Afghanistan’s implementation of G2G activities,  SIGAR and the OIG both identified issues related to the implementation  of G2G activities. According to SIGAR, while USAID had instituted  several controls to help protect its direct assistance funds, the mission  had not ensured full implementation of a key control activity—the  inclusion of corrective actions to be taken by the Afghan government  entity as conditions precedent to the disbursement of funds in USAID’s  agreements with the Afghan government. SIGAR noted that the mission  had incorporated a very small percentage of risk mitigation measures  identified in the fiduciary risk assessment into the assistance agreements  signed by the mission and the Afghan government and outlines the terms  of the agreement. SIGAR recommended that the mission develop a plan  for each ministry that has a complete risk assessment that defines how  each of the risks identified is being or will be mitigated, and suspend  disbursements until these plans are completed. USAID agreed with this  recommendation, and stated that the mission had prepared such plans for  six ministries receiving assistance. The mission further noted that the  agency’s use of conditions precedent is only one control activity for  mitigating risk in a suite of interventions used in its work with the Afghan  government.
Regarding funding mechanisms, an OIG review of USAID’s financial  management controls in G2G assistance found that most of  USAID/Afghanistan’s G2G activities may not count as G2G assistance as  described in USAID policy. According to USAID policy, to the extent  possible, missions must avoid funding the establishment of separate  donor-funded project management or implementation units that operate  outside the existing partner-government structures. USAID aims to  strengthen those government institutions already established by the  partner government rather than create or maintain separately operated  project management or implementation units that may be unsustainable  in the long run. Similarly, USAID policy states that while missions may  use host country contracts to engage with partner governments, this  funding mechanism is different from using partner-government systems  and therefore is not counted toward the agency’s 30 percent Local  Solutions target. OIG found that most of the mission’s G2G activities in  Afghanistan had been implemented through project implementation and  management units. For example, USAID provides funds for an education  program to a nongovernmental organization, which hires a team of  consultants to work in the Ministry of Education to manage and implement  the activities under this program. OIG considered the use of project  implementation and management units as a key risk mitigation measure  that helped safeguard funds and thus did not find issue with this finding or  make any recommendations. Similarly, a SIGAR review of USAID’s  health programs in Afghanistan also noted that the mission funds this  activity through a host country contract, which is managed by a separate  grants and contracts management unit.
In addition, SIGAR found that USAID Afghanistan’s use of cash advances  in one G2G activity made funds more vulnerable to waste, fraud, and  abuse because the activity is funded with monies paid in advance of costs  incurred. USAID disagreed, stating that the activity is funded on a  reimbursable basis through advances and liquidations.
The October 2014 OIG review of USAID’s G2G activities in Afghanistan  identified additional issues related to the mission’s implementation of  these activities. OIG found that USAID staff were not properly involved  with the Afghan ministries’ procurement procedures required to mitigate  risks; mission staff were not fully aware of their responsibilities for  overseeing G2G activities; the mission did not properly document  expectations concerning project objectives, results, resources, and  timelines so as to avoid misunderstandings with the Afghan government;  and transactions were often recorded late in the USAID accounting  system. The mission agreed with all OIG recommendations and reported  on steps it planned to take to address these issues.
In 2011, we reported on U.S. efforts to build public financial management  capacity in the Afghan government and provided information on USAID- funded projects that provide training, mentoring, coaching, and technical  assistance. We found that USAID had not consistently established  baselines and targets, or reported actual performance data, and  recommended that the agency establish targets and ensure that  implementing partners report performance data. USAID agreed with these  recommendation and noted steps it was taking to address them.
section_title: Monitoring and Evaluation
paragraphs: Regarding audits, 2014 OIG and SIGAR reports stated that the mission  was conducting audits for all G2G activities with expenditures over  $300,000 in a given fiscal year as called for in USAID policy. According  to SIGAR, USAID contracted with an accounting firm to perform audits of  all G2G activities in Afghanistan. Examples of audit objectives included  assessments of project internal controls, determination of validity and  reliability of information, and determination of whether the ministry was  complying with agreement terms and applicable laws and regulations  related to the USAID-funded program. However, according to the SIGAR  report, these audits had not been completed within the 9-month period  required by USAID policy. SIGAR stated that USAID’s lack of timely and  regular audit results makes it difficult for the agency to take action to  identify and reconcile ineligible expenditures and address other issues  with direct assistance implementation. USAID acknowledged the need for  timely third-party audits, stating that it has modified its audit requirements  and is now contracting and actively managing the required audits of the  ministries. In addition, OIG found that the mission did not fully adhere to  the audit requirements as described in project documents nor did the  mission ensure Afghan government adherence. As a result, contracts for  audits were not awarded annually and audits were not completed on time.
OIG recommended that the mission implement procedures to validate  that audits had been conducted prior to disbursing funds and modify the  audit requirements in its G2G activity documents to describe the  requirements for the audit process. The mission agreed with these  recommendations and explained steps it had taken and planned to take  to address these issues.
section_title: Pakistan
paragraphs: The Enhanced Partnership with Pakistan Act of 2009 authorized up to  $1.5 billion a year for development, economic, and democratic assistance  to Pakistan for fiscal years 2010 through 2014. The act authorized  civilian assistance for a wide range of activities, including projects to build  the capacity of government institutions, promote sustainable economic  development, and support investment in people through education and  health programs. The act also encouraged, as appropriate, the use of  Pakistani organizations, including Pakistani firms and community and  local nongovernmental organizations, to provide this assistance. In order  to increase the capacity of Pakistani organizations to manage U.S. funds  and to implement this strategy in accordance with international  commitments, USAID Pakistan launched the Assessment and  Strengthening Program (ASP) in October 2010. The goals of this  program are to assist potential Pakistani implementing partners, including  the government of Pakistan organizations: (1) increase capacity to  manage and account for U.S. government development assistance funds,  (2) reduce the vulnerability of the funds to waste and misuse, and (3)  increase speed and efficiency in getting USAID development resources to  the intended beneficiaries. According to USAID data, in 2014, the  agency obligated funds for G2G assistance in the following sectors:  agriculture, education, and infrastructure.
subsections: section_title: Planning
paragraphs: In 2011, we reported that USAID planned to shift its program  implementers from U.S.-based partners to Pakistani organizations,  including local, provincial, and federal government and nongovernmental  organizations. To mitigate risks associated with providing funds to  organizations with limited institutional capacity, USAID guidance directed  missions to conduct a preaward assessment of the organizations’ internal  controls and financial management systems. We found that USAID  guidance at the time did not contain information on whether weaknesses  identified in the preaward assessment must be addressed or whether the  assessment’s recommendations to enhance the accountability of U.S.  funds must be implemented. For Pakistani organizations that were  required to undergo a preaward assessment, we found that not all  contracts, grants, or agreements required these organizations to address  weaknesses identified in the preaward assessment. We recommended  that USAID assistance provided through Pakistani organizations identified  as high or medium risk be required to address weaknesses identified in  the risk assessment. USAID agreed with our recommendation and  provided examples of steps the agency had taken to address identified  weaknesses.
Furthermore, according to USAID policy, if a mission is planning to  increase the amount of total estimated funding for existing G2G activities  implemented by a previously approved government entity by more than  50 percent of the initially authorized amount, or authorizes an additional  amount of more than $20 million, an updated assessment must be  conducted and documented to ensure that the entity’s public financial  management systems are sufficient to bear the increased risk associated  with the increased funding levels. This updated assessment must also  include a revalidation of the risk mitigation plan for every approved  partner-government entity receiving the funding increase. In a 2013 OIG  review of USAID’s G2G assistance programs in Pakistan, OIG auditors  found that the mission had not reassessed the government of Pakistan  implementing entities as required by USAID policy. For example, the  mission increased its commitment to provide funds to the partner- government entity administering the Federally Administered Tribal Areas  to a ceiling of $611 million as of October 2012 from an initial commitment  of $55 million in 2010 without updating the fiduciary risk assessment.  USAID cited various reasons for not updating the assessments, including  conflicting agency and mission policies. While USAID agreed with the  OIG recommendations to reassess partner government implementing  entities and develop a plan for full compliance with USAID policy, at the  time of the release of the OIG report, the agency had not reached a  decision on how to address these issues. In response to this report, the  mission stated that it has submitted a waiver on compliance with agency  requirements for assessing risks associated with using partner- government systems, and, at the time of the review, was awaiting  approval from USAID headquarters.
section_title: Implementation
paragraphs: According to OIG, USAID Pakistan had been providing G2G assistance  under the Enhanced Partnership with Pakistan Act in 2009, prior to the  launch of the USAID Forward initiative in 2010 and the issuance of  agency-wide policy on the use of partner-country systems in 2011.  According to the OIG review, the mission developed and refined its own  procedures for implementing G2G assistance and documented these  procedures in mission orders. These mission orders incorporate lessons  learned by the mission while planning and implementing its G2G activities  and reflect the evolution of procedures during this period. As a result, OIG  found that several mission orders related to G2G activities conflicted with  agency-wide policy. For example, OIG found that while the mission order  required a risk assessment, the mission order did not include a  requirement for a Democracy, Human Rights, and Governance review as  part of its assessment, as specified in the agency-wide policy. OIG did not  specify whether the mission had neglected to conduct this governance  review as a result of the conflicting policies. OIG also found examples of  instances in which the mission was not following its own mission orders,  primarily concerning the lack of clarity over the designation of roles and  responsibilities.
section_title: Monitoring and Evaluation
paragraphs: According to OIG, USAID Pakistan launched the ASP in 2010, in part to  increase the capacity of Pakistani organizations, including the Pakistani  government, to manage U.S. funds, but found shortcomings in the  mission’s oversight of this program. Furthermore, according to OIG, the  agreement between USAID Pakistan and ASP implementers calls for  annual validations to ensure ongoing compliance with the standards and  procedures developed under the institutional capacity-building program  and to establish benchmarks to allow government implementers to reach  a point where annual validations are no longer necessary. According to  OIG, the mission did not validate whether the training had improved the  internal systems of these entities or increased ministry staff members’  ability to implement projects. According to mission officials, the mission  did not conduct any validations because of changing policy from USAID  headquarters. Two versions of USAID policy on the use of partner- country systems appeared over the course of 8 months, with a third  revision pending at the time of the review. Mission officials said they had  put off validations and reassessments so that they could form a Partner  Government System team that met requirements outlined in the USAID  agency-wide policy. The team would then help determine which  government implementing entities should be part of the validation  process, and which should be scheduled for reassessments. As a result  of this delay, the mission did not establish the Partner Government  System team until 3 years after ASP began. OIG recommended that the  mission take the appropriate steps to ensure that it can validate the  implementing partners’ capacity-building activities with the partner- government entities. The mission agreed with the OIG recommendations  and has taken some steps to address these issues.
In a separate review of the ASP, OIG also found that (1) the program had  not met first-year targets and had not completed all preaward  assessments and capacity-building programs planned and (2) program  planning was insufficient because the mission had not developed the  results framework—an outline of the mission’s goals, objectives, expected  results, and performance indicators—or the preliminary performance  management plan—a tool for planning and managing the process of  assessing and reporting progress toward achieving assistance  objectives—until a year after the start of the program. The mission  agreed with OIG’s recommendations and responded with steps it plans to  take to address these issues.
section_title: Appendix IV: Comments from the U.S. Agency for International Development
section_title: Appendix V: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Jim Michels (Assistant Director),  Todd M. Anderson, Martin De Alteriis, Jesse Elrod, W. Stephen Lowrey,  Grace Lui, Kim McGatlin, Shirley Min, and Nikole Solomon made key  contributions to this report. Additional technical assistance was provided  by Amanda Bartine, Tina Cheng, David Dayton, José Peña, and Cristina  Ruggiero.