Global Health: Global Fund to Fight AIDS, TB and Malaria Has Advanced in Key Areas, but Difficult Challenges Remain
Published: 2003-05-07T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: By the end of 2002, more than 40 million people worldwide were living with human immunodeficiency virus/acquired immunodeficiency syndrome (HIV/AIDS), with 5 million newly infected that year. HIV/AIDS, along with tuberculosis (TB) and malaria, causes nearly 6 million deaths per year and untold human suffering. Established in January 2002, the Global Fund (the Fund) aims to rapidly disburse grants to augment existing spending on the prevention and treatment of these three diseases while maintaining sufficient oversight of financial transactions and program effectiveness. As of April 1, 2003, the United States had pledged $1.65 billion to the Fund and is expected to remain its single largest donor. In this study, GAO was asked to assess (1) the Fund's progress in developing governance structures; (2) the systems that the Fund has developed for ensuring financial accountability, monitoring and evaluating grant projects, and procuring goods and services; (3) the Fund's efforts to raise money; and (4) its grant-making process. In responding to our draft report, the Fund, the Department of Health and Human Services, the Department of State, and the U.S. Agency for International Development agreed with our findings.
section_title: What GAO Found
paragraphs: The Fund has made noteworthy progress in establishing essential governance and other supporting structures and is responding to challenges that have impeded its ability to quickly disburse grants. A key challenge involves locally based governance structures, many of which are not currently performing in a manner envisioned by the Fund. The Fund has developed comprehensive oversight systems for monitoring and evaluating grant performance and ensuring financial accountability and has issued guidance for procurement; however, the oversight systems face challenges at the country level and some procurement issues have not been finalized. The Fund's ability to approve and finance additional grants is threatened by a lack of sufficient resources. Pledges made through the end of 2003 are insufficient to cover more than a small number of additional grants and without significant new pledges, the Fund will be unable to support all of the already approved grants beyond their initial 2-year agreements. Improvements in the Fund's grant-making processes have enhanced its ability to achieve its key objectives, but challenges remain. These challenges include ensuring that grants add to and complement existing spending on HIV/AIDS, TB, and malaria and that recipients have the capacity to effectively use grants.

section_title: Letter
paragraphs: By the end of 2002, more than 40 million people worldwide were living with  human immunodeficiency virus/acquired immunodeficiency syndrome  (HIV/AIDS), with 5 million newly infected that year. HIV/AIDS, along with  tuberculosis (TB) and malaria, causes nearly 6 million deaths per year and  untold human suffering. In addition, these diseases, if unchecked, are  increasingly seen as a threat to economic growth, with the potential to  worsen conflict and political instability in many parts of the world.  According to the United Nations (U.N.), about $10 billion will be needed in  2005, increasing to $15 billion in 2007, to fight AIDS alone; malaria and  tuberculosis will require billions more. In January 2002, the Global Fund to  Fight AIDS, Tuberculosis and Malaria (“the Fund”) was established in  Geneva, Switzerland. The Fund aims to rapidly disburse grants to augment  existing spending on the prevention and treatment of these three diseases  in developing countries while maintaining sufficient oversight of financial  transactions and program effectiveness.
As of April 1, 2003, the United States had pledged $1.65 billion to the Fund  and is the single largest donor. Because of this significant commitment of  U.S. resources, you requested that we report on the Fund’s progress during  its first full year of operation. This report assesses (1) the Fund’s progress  in developing governance structures; (2) the systems that the Fund has  developed for ensuring financial accountability, monitoring and evaluating  grant projects, and procuring goods and services; (3) the Fund’s efforts to  mobilize resources; and (4) the Fund’s grant-making processes.
As part of our review, we analyzed documents and interviewed key officials  from the Fund; the Joint U.N. Program on HIV/AIDS (UNAIDS); the World  Health Organization (WHO); the U.N. Development Program; and experts  on project implementation and procurement. We obtained perspectives on  the progress and evolution of the Fund from officials at the Department of  State, the U.S. Agency for International Development, and the Department  of Health and Human Services, as well as the directors of the Global  Business Coalition on HIV/AIDS, the Earth Institute of Columbia  University, the Gates Foundation HIV/AIDS and TB Program, and the  Global AIDS Alliance. We also conducted research and reviewed data on  global spending on HIV/AIDS, TB, and malaria. In addition, we visited Haiti,  Honduras, Ethiopia, and Tanzania to meet with principle recipients of Fund  grants and members of the country coordinating bodies that will be  implementing activities supported by Fund grants. In Haiti and Tanzania,  we also met with the private sector firms that have contracted to serve as  local agents for the Fund in these countries. (App. I provides a more  detailed description of our objectives, scope, and methodology.)
subsections: section_title: Background
paragraphs: HIV/AIDS, TB, and malaria, three of the world’s deadliest infectious  diseases, cause tremendous human suffering, economic loss, and political  instability. According to UNAIDS, in 2002 AIDS caused 3 million deaths,  and 5 million people became infected. More than 70 percent, or 28.5  million, of the 40 million people with HIV/AIDS worldwide live in sub- Saharan Africa. However, according to a report by the National Intelligence  Council, HIV infections in just five populous countries—China, India,  Nigeria, Russia, and Ethiopia—will surpass total infections in central and  southern Africa by the end of the decade. In addition, Thailand, a  developing country that had successfully countered the growth of AIDS in  the 1990s, is now facing a resurgent epidemic. According to WHO, after  HIV/AIDS, TB is the world’s leading infectious cause of adult mortality,  resulting in as many as 2 million deaths per year.  Like HIV/AIDS,  tuberculosis primarily affects the most economically active segment of the  population, with 75 percent of the annual deaths occurring in those  between the ages 15 and 54. Conversely, malaria, which causes more than 1  million deaths and at least 300 million cases of acute illness each year, is a  leading cause of death in young children. The disease exerts its heaviest  toll in Africa, where about 90 percent of malaria deaths occur.
The Fund was formally launched in January 2002.  The Fund is a grant- making organization with the purpose of attracting, managing, and  disbursing funds that will increase existing resources and make a  sustainable and significant contribution to the reduction of infections,  illness, and death. The Fund aims for an integrated and balanced approach,  covering prevention, treatment, care, and support, and seeks to establish  efficient and effective disbursement mechanisms. During its first full year  of operation, the Fund successfully completed two proposal rounds and  began distributing grant money.
Over the course of these two proposal rounds, the Fund approved grants to  153 proposals in 81 countries across the major regions of the world (see fig.  2).  These grants total nearly $3.7 billion ($1.5 billion over the first 2 years)  and cover all three diseases.
section_title: The Fund Has Established Key Governance Structures, but Implementation Challenges Impede Ability to Rapidly Disburse Funds
paragraphs: In its first year, the Fund developed and established key governance and  other supporting structures, including a board of directors, a permanent  secretariat, a grant review process, and country-level structures required to  develop, implement, and oversee grants. However, limited communication,  administrative complications, and the evolving nature of these new  structures, especially at the country level, led to a lack of clarity over roles  and responsibilities and slowed the Fund’s ability to sign the initial grant  agreements. The Fund has recognized these problems and is taking steps at  both the country and headquarters levels to address them.
subsections: section_title: Key Governance and Other Supporting Structures Established
paragraphs: The Fund has made noteworthy progress in establishing key headquarters  and country-level governance structures. Figure 3 illustrates the  governance structure of the Fund.
At the headquarters level, governance structures include a board of  directors, a permanent secretariat, a Technical Review Panel (TRP), and  the World Bank as its trustee.
The board is the governing body of the Fund, consisting of 18 voting  members and 5 nonvoting members. The voting members consist of  seven government representatives from developing countries, seven  government representatives from donor countries, and one  representative each from a developing country nongovernmental  organization (NGO), a developed country NGO, the private sector, and  private foundations. The five nonvoting members consist of a  representative from WHO, the World Bank (as trustee, see below),  UNAIDS, a person representing communities living with HIV/AIDS, TB,  or malaria, and one Swiss citizen appointed by the board. The board  makes all funding decisions; sets Fund policies, strategies, and  operational guidelines; and selects the executive director of the  secretariat. The board chair and vice chair rotate between beneficiary  and donor country representatives. In January 2003, the U.S. Secretary  of Health and Human Services was elected to serve as chairman,  replacing the outgoing chairman from Uganda. Figure 4 illustrates the  current structure of the Fund’s board.
The board plans to meet three times per year and strives to make decisions  by consensus. When consensus cannot be reached, any voting member can  call for a vote. Successful motions require approval from a two-thirds  majority of those present, representing both donor and recipient voting  groups, which means that the current voting structure may make it difficult  to reach a decision.  For example, the only time the board brought an issue  to a vote a decision was not reached because the members could not get a  sufficient number of affirmative votes.
The board has established four committees: (1) Governance and  Partnership, (2) Resource Mobilization and Communications, (3) Portfolio  Management and Procurement, and (4) Monitoring and Evaluation,  Finance, and Audit. The committees respond to issues raised by the board  and identify options for addressing them. For example, the Portfolio  Management and Procurement Committee has developed a proposal  appeals process. The United States has representatives on three of the four  committees (Governance and Partnership; Portfolio Management and  Procurement; and Monitoring and Evaluation, Finance, and Audit).
The secretariat has hired 63 staff as of April 1, 2003, to run the day-to-day  operations of the Fund. As the Fund’s only full-time body, the secretariat  receives and screens grant applications, studies and recommends  strategies to the board, communicates board decisions to stakeholders,  manages and oversees regional grant portfolios, receives and reviews  program and financial reports submitted by grant recipients through the  LFA, and performs all administrative functions for the Fund. The board  reviews and approves the secretariat’s business plan and budget. In  January 2003, the board approved a $38.7 million budget for 2003 for the  secretariat (see table 1).
The Technical Review Panel (TRP) reviews and evaluates eligible  proposals submitted to the Fund. It currently consists of 22 independent  experts: 7 members with cross-cutting expertise in development,  including health systems development, economics, public policy, and  finance; 7 members with expertise in HIV/AIDS; 4 members with  expertise in malaria; and 4 members with expertise in TB. There are  two U.S. members on the TRP, an expert on TB and an expert with  cross-cutting expertise in health and development issues. The TRP is  supported by a WHO/UNAIDS working group that reviews the accuracy  of baseline data on disease prevalence, poverty, and other indicators  provided in the proposals. The working group also reviews the accuracy  and relevance of the information provided by applicants on their ability  to effectively use additional funds. The TRP makes recommendations to  the board for final decisions on proposal selection. According to  officials at the Department of Health and Human Services, health and  development experts at the Centers for Disease Control and Prevention  and USAID conducted an informal review of approved proposals and  largely concurred with the TRP’s recommendations.
As the Fund’s trustee, the World Bank receives money from donors,  holds the money in an interest-bearing account, and disburses it  according to the Fund’s written instructions.
At the country level, governance and oversight structures include a  Country Coordinating Mechanism, a principal recipient, subrecipients, and  a Local Fund Agent.
The country coordinating mechanism (CCM) is meant to provide a  forum for stakeholders to work together to identify needs and develop  and submit proposals to the Fund and follow the progress of grant  projects during implementation. According to the Fund, CCM  membership should include high-level government representatives as  well as representatives of NGOs, civil society, multilateral and bilateral  agencies, and the private sector. Further, all eligible partners in the CCM  should be entitled to receive Fund money based on their stated role in  implementing the proposal.
The principal recipient, which is a member of the CCM, is responsible  for receiving and implementing the grant. A principal recipient can be a  government agency, an NGO, a private organization, or, if alternatives  are not available, a multilateral development organization. Of the 69  grant agreements resulting from the first round of proposals approved  by the Fund, 41 (59 percent) are with principal recipients that are  government agencies, 17 (25 percent) are with NGOs, and 9 (13 percent)  are with the U.N. Development Program.  (See app. II for more detailed  information.)  The principal recipient is responsible for making sure that  funds are properly accounted for as well as for monitoring and  evaluating the grant’s effectiveness in accordance with indicators  mutually agreed to by the Fund and the grantee. In some cases, there  may be multiple principal recipients for a single grant. The principal  recipient typically works with other entities, or subrecipients, to carry  out grant activities.
Subrecipients are entities, such as NGOs, with the expertise necessary  to perform the work and can be other CCM members. The principal  recipient is responsible for supervising any subrecipients and  distributing Fund money to them.
The local fund agent (LFA) is the Fund’s representative in each  recipient country and is responsible for financial and program oversight  of grant recipients. This oversight role includes an assessment of  recipients prior to their receiving money from the Fund. The assessment  covers recipients’ ability to maintain adequate financial controls,  procure goods and services, and carry out program activities. The Fund  selects one LFA in each country. As of April 1, 2003, the Fund has  contracted with four organizations to fill this role: two private sector  firms, KPMG and PricewaterhouseCoopers; one private foundation that  was formerly a public corporation, Crown Agents; and one multilateral  entity, the U.N. Office for Project Services (UNOPS).  The Fund may  contract with additional organizations as the need arises and expects to  receive bids from potential LFAs by August 2003.
section_title: Challenges at Country Level Slow Disbursement of Grants; Fund Taking Steps to Respond
subsections: section_title: Limited Communication, Lack of Clarity over Roles and Responsibilities at Country Level
paragraphs: As of late 2002, in three of the four countries we visited, country  coordinating mechanisms were not operating at levels envisioned by the  Fund, owing in part to insufficient communication between the Fund and  the CCM as well as between the CCM’s chair and members. This has  resulted in confusion over the intended structure and purpose of the CCM.  While our sample of only four countries is not necessarily representative of  all grant recipients, several NGOs reported similar observations to the  board. The Fund has posted general guidelines for CCMs on its Web site as  well as in its calls for proposals. These guidelines encourage CCMs to hold  regular meetings; engage all relevant participants, including  representatives of civil society, in substantive discussions; ensure that  information is disseminated to all interested parties; and be involved in the  implementation of projects after proposals are developed and submitted to  the Fund. However, many CCMs had difficulties following these guidelines.
The role of the CCM in developing proposals and participating in their  implementation after approval is not clear, according to a report by an  international HIV/AIDS organization that assessed the participation of  NGOs in the CCM process and according to CCM members in several  countries. For example, many NGOs are not aware that they can participate  in both the development and implementation of proposals. Furthermore,  they are demanding clearer information on the selection of CCM members  and the entities to which CCMs are accountable. An NGO participant told  us that after a meeting in March 2002, the CCM did not convene again for  about 6 months because it had received no guidance from the Fund on how  to proceed.  A number of members of another CCM said that they did not  get a chance to vet or, in some cases, read proposals before endorsing  them. In addition, after the proposals were submitted, members of this  CCM were not informed of important events in a timely manner. A donor  participating in this CCM stated that, with regard to a grant proposal for  more than $200 million that was submitted in the second round and has  since been approved, no one knows who will be responsible for  implementing it when the money arrives.
A number of the CCM members with whom we met were concerned over  the level of involvement of all relevant parties. According to information  compiled by the Fund’s Governance and Partnership Committee for the  board’s January 2003 meeting, all CCMs that submitted second-round  proposals are chaired by a government official (79 percent from the  health ministry). In addition, at least a quarter of the CCMs lack  representation from one or more of the following groups:  people living  with one of the three diseases, the private sector, academic institutions, or  religious organizations. In one country, for example, donors said that NGOs  need to develop a stronger and more active voice on the CCM. An update  on the Fund for nongovernmental organizations and civil society, prepared  by the International Council of AIDS Service Organizations, expressed  similar views regarding CCMs in countries that we did not visit. However,  the update also included evidence that CCMs are enhancing the  involvement of NGOs in national health policies in some countries. In  addition to members of civil society, key government ministries and donors  are often not included as members in current CCMs. The Governance and  Partnership Committee recognized this point in the document prepared for  the January 2003 board meeting, stating, “Of concern is the relatively low  participation from Ministries of Finance (37 percent), given the need to  ensure consistency with Global Fund grant processes and overall fiscal and  monetary policies of recipient countries.” The committee also noted that  although the World Bank is a significant source of resources for many  recipients, it is a member of only 14 percent of CCMs. In one country we  visited, for example, where neither the Ministry of Finance nor the World  Bank were members of the CCM, a dispute over where the Fund money  should be deposited delayed the signing of the country’s first grant  agreement.
Dissemination of information is also a problem, according to the  international HIV/AIDS organization report and CCM members with whom  we met. The report stated that many NGOs are not receiving essential  information from the Fund because the CCM chairs receiving this  information are not passing it on to all stakeholders. In one country, several  CCM members told us that the CCM is not functioning well because the  flow of information is tightly controlled by the chair. Many members of this  CCM, for example, were unaware that a nongovernmental organization had  also submitted a proposal to the Fund. As of April 1, 2003, more than 1  year after the proposal was submitted, the CCM had yet to review and  endorse or reject it, as required by the Fund. As a result, the Fund has  dropped this proposal from its list of those approved in the first round.
Of the four countries we visited, even the country with the most functional  CCM experienced some difficulties. This country had received substantial  support from a Fund staff member, who spent 6 weeks in the country  helping the CCM clarify the Fund’s principles regarding CCMs and how its  proposal will be implemented. This support, together with the active  leadership of the CCM chair, was widely credited with the relative success  of the CCM.  Members of this CCM said it had become a transparent,  multisectoral, participatory, and consensus-driven forum that has held  frequent meetings. However, CCM members were still unclear as to their  role after the grant is disbursed.
section_title: The Fund Is Taking Steps to Address Problems Associated with CCMs
paragraphs: According to the Fund, it does not have sufficient resources to provide the  same level of support for every country as it did in the country cited above.  Nevertheless, it is currently attempting to enhance communication with  and within country coordinating mechanisms in order to improve their  functioning. While trying to remain flexible and attentive to differing  situations in each country and avoid an overly prescriptive, “cookie- cutter”  approach, the Fund’s Governance and Partnership Committee proposed to  the board in January 2003 specific guidelines for CCMs that address many of the issues raised above. The committee also proposed that the  secretariat work with it to develop a handbook for CCMs that contains  these principles. Although the board did not reach a decision on this  proposal in January 2003, as of April 1, 2003, the agreements between the  Fund and grant recipients contained language describing the nature and  duties of CCMs. This language states that CCMs are to have a role in  monitoring the implementation of Fund grants; that they should promote  “participation of multiple constituencies, including Host Country  governmental entities, donors, nongovernmental organizations, faith-based  organizations and the private sector”; and that they should meet regularly  to develop plans and share information. According to U.S. government  officials who were involved in setting up the Fund and who attended the  January 2003 board meeting, the Fund may also consider other options to  enhance the functioning of CCMs, such as having those CCMs that have  been working relatively well share best practices with others or having a  member of the secretariat hold regional workshops for CCMs from several  countries. Starting in December 2002 through the spring of 2003, the Fund  held a series of regional workshops for CCM members and other  stakeholders in the Philippines, Myanmar, Senegal, and Cuba. Additional  workshops are scheduled to take place in South Africa, Ukraine, and Latin  America. According to the Fund, these workshops are providing a forum  for “open dialogue,” whereby the Fund can disseminate and clarify  information and receive feedback. In addition, the Fund is considering  expanding the secretariat to allow its staff to devote more time to advising  individual CCMs and to working with local partners, such as bilateral and  multilateral donors, that are assisting with grant implementation.
section_title: Administrative Arrangement with WHO Causing Delays; Fund Considering Alternate Arrangements
paragraphs: The Fund established an administrative services agreement with the WHO,  an agency of the United Nations, to benefit from some of the tax and  employment advantages of an international organization, but this  relationship is causing delays and other problems, and the Fund is  considering alternate arrangements. The agreement with WHO requires  that the Fund apply certain WHO regulations and systems governing  personnel and contractual issues. According to WHO and Fund staff, while  this agreement gives the staff of the secretariat important privileges in  Switzerland and allowed the Fund to begin operating quickly, it has  contributed to administrative delays, frustration, and uncertainties  concerning responsibility and accountability.
Regarding delays, once the Fund makes certain administrative decisions, it  must wait until it obtains clearance from officials at WHO before it can act.  According to secretariat officials and one of the local fund agents we met  with, this dual approval process has delayed the approval of LFA contracts  by up to 8 weeks. The officials stated that this is significant because it has  lengthened the time required to get grant agreements completed and signed  by recipient countries. The WHO official responsible for approving the  Fund’s administrative decisions said that it takes several weeks to vet key  actions, such as the LFA contracts, when they are added to his unit’s  existing workload.
In addition to creating delays, the relationship between the Fund and WHO  has led to frustration and uncertainties for Fund staff concerning the scope  of their responsibility and the authorities to whom they are accountable.  For example, although the board granted the executive director of the  Fund the authority to sign contracts with vendors and grantees, WHO must  be a party to all contracts since the executive director is technically a WHO  employee. According to officials from both the Fund and WHO, removing  the dual approval process would lessen delays and uncertainties over roles  and responsibilities.
The board asked the secretariat to look into pursuing enhanced legal  benefits for the Fund from Swiss authorities.  An important objective for  this change is to allow the Fund to withdraw from the administrative  services agreement with the WHO while retaining tax and other  advantages. However, according to the Fund, there are important  considerations to be resolved before the board would approve and the  Swiss government would authorize a change in recognition. The board  expects to address this issue at its next meeting in June 2003.
section_title: The Fund Developed Comprehensive Oversight Systems and Issued Procurement Guidance, but Systems Face Challenges, and Guidance Is Still Evolving
paragraphs: The Fund has developed systems for financial accountability and for  monitoring and evaluating grant activities and has issued guidance on  procurement. However, in the Fund’s first year of operation, these systems  faced challenges at the country level that the Fund is working to address,  and procurement guidance is still evolving.
subsections: section_title: Oversight Systems Established but Face Challenges
paragraphs: The Fund, through the local fund agent, has established a comprehensive  system for overseeing grant recipients, but the introduction of the LFA has  been marked by controversy and misconceptions regarding its role. These  problems may impede the implementation of grants. The Fund recognizes  these issues and is developing additional guidance for LFAs and principal  recipients.
subsections: section_title: The Fund Has Established a Comprehensive System for Ensuring Recipients’ Financial Accountability
paragraphs: The Fund has established a system for ensuring that principal recipients  rigorously account for the money they spend. This system requires them to  demonstrate adequate finance and management systems for disbursing  money, maintaining internal controls, recording information, managing and  organizing personnel, and undergoing periodic audits. The secretariat, the  LFA, and the principal recipient each has a role in this system. The  secretariat selects the LFAs, exercises quality control over their work, and  draws up grant agreements. Prior to selecting LFAs, the secretariat  considers their independence from principal recipients and other CCM  members in an effort to avoid potential conflicts of interest. It also  considers their expertise in overseeing financial management, disease  mitigation programs, and procurement, as well as their experience with  similar assignments. The LFAs, in turn, assess principal recipients for the  same capabilities. To ensure that the disbursement of funds will be  carefully controlled, the secretariat provides principal recipients with  limited amounts of money at a time, based on their documentation of  project results. In an effort to ensure clear definition of roles,  responsibilities and accountability, it developed guidelines for LFAs that  define their duties to assess and oversee principal recipients. For example,  the LFA’s financial assessment of the principal recipient is to be completed  before the grant agreement is signed, and the secretariat is to receive and  validate a preliminary assessment before the LFA proceeds with the full  assessment. To minimize inefficiency, the preliminary assessment is to  draw on existing records of the principal recipient’s performance with  other donors.
The Fund has established requirements for principal recipients in the grant  agreement. Specifically, the agreement requires principal recipients to  maintain records of all costs they incur, and these records must be in  accordance with generally accepted accounting standards in their country  or as agreed to by the Fund. Principal recipients are to have an independent  auditor separate from the LFA and acceptable to the Fund that conducts  annual financial audits of project expenditures. The principal recipient is  also to ensure that the expenditures of subrecipients are audited. The LFA  or another entity approved by the Fund is authorized to make site visits “at  all reasonable times” to inspect the principal recipient’s records, grant  activities, and utilization of goods and services financed by the grant. The  principal recipient is required to submit quarterly and annual reports to the  Fund through the LFA on its financial activity and progress in achieving  project results. For example, the annual financial reports are to include the  cost per unit of public health products procured and the portion of funds  supporting various activities such as prevention, treatment, care,  administering the project, and enhancing local skills and infrastructure  through training and other activities. The reports are also to specify the  portion of funds used by local NGOs, international NGOs, government  agencies and other public sector organizations (e.g., U.N. agencies), the  private sector, and educational institutions. Failure to abide by these and  other requirements in the grant agreement can result in the Fund  terminating the grant or requiring the principal recipient to refund selected  disbursements.
section_title: The Fund Has Established a Detailed System for Monitoring and Evaluating Grant Performance
paragraphs: The Fund has established a detailed system for monitoring, evaluating, and  reporting at regular intervals on the performance of grants that identifies  specific roles for the LFA, principal recipient, subrecipients, and CCM.  Prior to the signing of each grant agreement between the Fund and the  principal recipient, the LFA conducts an assessment of the principal  recipient that includes an evaluation of its capacity to monitor and evaluate  grant projects. Within 90 days after the agreement enters into force, the  principal recipient is required to submit a detailed plan for monitoring and  evaluation.  The principal recipient and the subrecipients are responsible  for selecting the appropriate indicators, establishing baselines, gathering  data, measuring progress, and preparing quarterly and annual reports. The  LFA is charged with making sure that the principal recipient monitors and  evaluates its projects and with reviewing the reports. If the LFA identifies  concerns, it is to discuss them with the principal recipient and the CCM and  may forward information to the Secretariat in Geneva. According to the  Fund, the CCM should work closely with the principal recipient in  establishing the monitoring and evaluation processes and should review  the reports along with the LFA.
Building on the existing body of knowledge and contributions of evaluation  specialists from organizations such as the U.S. Agency for International  Development (USAID), UNAIDS, WHO, and the Centers for Disease  Control and Prevention, the Fund has identified indicators for recipients to  use in tracking the progress of grant-supported projects. The indicators  that the principal recipient will use to track the progress of individual  grants are expected to measure processes, outcomes, and impact. During  the first 2 years of 5-year projects, the quarterly and annual reports  submitted by the principal recipient to the LFA track steps taken in the  project implementation process. For example, a process indicator for  HIV/AIDS prevention activities could measure the dissemination of  information, such as the number of prevention brochures developed and  distributed to teenagers or other at-risk groups. Starting in the third year,  the principal recipient is expected to report on program outcomes.
Following the HIV/AIDS prevention example, this would entail measuring  whether the information had any effect on the behavior of the targeted  population. In this example, the principal recipient would report on the  percentage of the young people or others receiving the brochures who  correctly identified ways of preventing HIV transmission and stated that  they had changed their behavior accordingly. Near the end of the project,  the principal recipient would report on its epidemiological impact by  measuring whether there has been a reduction in the incidence of disease  in the target group.
Funds will be released to the principal recipient at intervals based on its  performance according to these indicators. The exact amounts to be  released will be calculated using its anticipated expenditures. In cases  where repeated reports demonstrate that progress is not being made, the  Fund, after consultation with the LFA and CCM, may choose to make  adjustments, including replacing the principal recipient or nonperforming  subrecipients. The key evaluation for the majority of the grants comes  after 2 years, when the Fund expects to begin seeing evidence that grant- supported activities are leading to desired outcomes. At that point, the  Fund will decide whether to continue to disburse money to grant  recipients.
The board has agreed in principle that there should also be an independent  evaluation of the Fund’s overall progress in meeting its key objective of  reducing the impact of HIV/AIDS, TB, and malaria by mobilizing and  leveraging additional resources. According to the Fund, this evaluation will  include an assessment of the performance of the board and the secretariat.  The focus of the evaluation will be on the board’s and secretariat’s  performance in governing and implementing processes that enable Fund  grants to relieve the burden of disease, improve public heath, and  contribute to the achievement of the U.N.’s millennium goals.  As of April  1, 2003, the board had not made a final decision on what entity will conduct  the independent evaluation or how or when the evaluation will be  conducted. In addition, the board had not yet determined what portion of  its resources should be budgeted for this evaluation.
section_title: LFAs Face Several Challenges
paragraphs: In certain countries, the introduction of the local fund agent has been  marked by controversy and misconceptions, partly due to its newness, that  may delay the designation of LFAs and make it difficult for them to oversee  the implementation of grants. For example, the chair of the CCM in one of  the countries we visited, where the principal recipient is the Ministry of  Health, believed that another government ministry could serve as the LFA,  despite the Fund’s explicit instructions that the LFA must be independent  from the grant recipient. In another country, key government and some  donor officials were upset over the Fund’s decision to bypass existing  systems for handling donor funds. This situation contributed to resentment  of the LFA as the Fund’s local representative and oversight mechanism.  A  number of stakeholders with whom we met assumed incorrectly that the  LFA was charging an exorbitant fee and deducting it from the grant. In fact,  LFA fees are funded through the secretariat, not deducted from each grant.  Payment for LFA services constitutes the single largest item in the  secretariat’s budget, accounting for $16.4 million, or 42 percent of its  proposed 2003 budget. Overall, however, these fees represent only about 2  percent of estimated grant disbursements for the year, according to  secretariat officials.  Moreover, representatives from KPMG, one of the  entities designated by the Fund as an LFA, told us that they are charging the  Fund 50 percent less than they are charging other clients for similar  services.
The Fund is aware of these problems and is attempting to address them.  According to a January 2003 report of the board’s Monitoring, Evaluation,  Finance and Audit Committee, the oversight role of the LFA can create  resentment in a country if it is carried out without local participation in  problem analysis and resolution. The report cites the same example we  observed, stating that recent experience in that country showed that  existing local systems should be used as much as possible to avoid new and  unnecessary requirements that distract from, rather than support, the  Fund’s goal of helping countries improve their capacity to fight disease. On  January 12, 2003, the Fund drew up guidelines on financial management  arrangements for principal recipients that offer several options, including  the use of credible, existing local systems.
Finally, despite the Fund’s having designated independence as a key factor  in the selection of LFAs, the limited number of trained personnel and  organizations in many recipient countries may impair independence,  resulting in potential conflicts of interest. Given the small pool of qualified  disease experts available for hire in some poor countries, subrecipients  recruited to implement grant activities will be competing with  subcontractors to the LFA for monitoring these disease-mitigation projects.  It is unclear whether there is sufficient expertise available to provide staff  for both of these functions. For example, in one of the countries we visited,  the NGO the LFA had hired to assess the the principal recipient’s capacity  to carry out its grant activities will also be implementing a Fund project for  this principal recipient. Since effective evaluation assumes that the monitor  is independent of the implementer, achieving such independence may be a  challenge in such circumstances. Conceivably, there also may be situations  in which one U.N. organization, the U.N. Office for Project Services—one  of the entities contracted by the Fund to serve as an LFA—may be  overseeing another, the U.N. Development Program, serving as the  principal recipient. Fund officials have stated that they would try to avoid  this situation. The board’s Monitoring, Evaluation, Finance and Audit  Committee is developing a conflict of interest policy for LFAs.  In the  meantime, the Fund has required one LFA with a potential conflict of  interest to include in its contract conflict of interest mitigation policies and  procedures to minimize this possibility. The Fund has included conflict-of- interest and anticorruption provisions for principal recipients in the grant  agreement document.
section_title: Board Developed Procurement Requirements, but Certain Issues Have Not Been Finalized
paragraphs: The Fund, through the grant agreements, has developed detailed  procurement requirements for medical supplies and a brief list of  requirements for procuring nonmedical items, but certain issues have not  been finalized.  Establishing procurement requirements is important to  ensure that grant recipients use Fund money efficiently as they purchase  medicines, vehicles, office equipment, and other items; contract services;  and hire personnel.
subsections: section_title: Board Analyzed Issues and Developed Options for Procuring Drugs and Health-Related Items
paragraphs: The Fund’s procurement provisions have focused primarily on drugs and  health products because a significant amount of Fund money will be  spent on these items and because drug procurement is complex. For  example, the Fund anticipates that $194 million of grant money will be  spent on drugs in the first 2 years of second-round grants, based on the  proposals approved in that round. When other health products are  included, the total comes to $267 million, or almost half of anticipated  expenditures, for the first 2 years of round-1 grants, and $415 million,  representing a similar percentage of anticipated expenditures, for the first  2 years of round-2 grants (see fig. 5). Drugs and health products for round-2  grants are expected to grow to $1.17 billion over the full life of these  grants.
Drug procurement is complex, as it requires strict standards for ensuring  and monitoring quality, controlling transport and storage, and tracking how  the products are used. For example, many grant recipients have plans to  purchase antiretrovirals, which block the replication of HIV and are  indispensable for treating patients living with the disease. These drugs have  strict dosing regimens, and patients must be closely monitored to ensure  that they are adhering to these regimens and do not develop adverse  reactions or resistant strains of the virus. The Fund estimates that close to  200,000 people will be treated with antiretrovirals during the first 2 years of  grants resulting from the first 2 proposal rounds and that close to 500,000 will be treated over the life of these grants.  (See app. III for more detailed  information.)
In April 2002, the board established a procurement and supply management  task force, made up of technical experts from U.N. agencies, the private  sector, and civil society, to analyze issues related to procuring drugs and  health products and develop options and recommendations for grant  recipients on how to procure them. In October 2002, the task force  provided a list of issues to the board that included    drug selection and the use of preventive, diagnostic, and related health   monitoring drug quality and compliance with country drug registration  processes for marketing and distribution;  procurement principles and responsibilities, including supplier  performance, obtaining the lowest price for quality goods, compliance  with national laws and international obligations, and domestic  production;  managing and assessing the chain of supply, including forecasting  demand, ensuring proper shipping and storage, and preventing drug  diversion;  payment issues, including direct payment and exemption from duties,  tariffs and taxes; and   ensuring that patients adhere to treatment while monitoring drug  resistance and adverse drug reactions.
In the grant agreements, the Fund provides specific requirements for  principal recipients regarding many of these issues. The requirements are  meant to ensure the continuous availability of safe and effective drugs and  other health products at the lowest possible prices and to provide a  standard for the LFA to use in evaluating the procurement activities of the  principal recipient. For example, the requirements state that recipients  must comply with established quality standards when purchasing  medicines. The requirements also stipulate that no Fund money may be  used for procuring drugs or other health products until the Fund, through  the LFA, has verified that the principal recipient has the capacity to manage  (or oversee subrecipients’ management of) procurement tasks, such as  purchasing, storing, and distributing these products in accordance with  Fund guidance, unless the Fund agrees otherwise. In one country, the Fund  issued additional procurement requirements to complement the grant  agreement, based on an assessment of the principal recipient’s ability to  procure drugs and other goods. The Fund anticipates that all grant  recipients that have plans to purchase medicines with Fund money will be  assessed within 6 months after signing the grant agreement.
section_title: The Fund Provided General Requirements for Procuring Goods and Services
paragraphs: In addition to providing specific requirements for procuring drugs and  other health-related products, the grant agreement includes a brief list of  general requirements that also apply to services and nonmedical items such  as vehicles or office equipment. These requirements establish a series of  minimum standards that recipients must observe when purchasing goods  or executing contracts. For example, recipients are to award contracts on a  competitive basis to the extent possible and must clearly describe the  goods they are requesting when they ask for bids. They must pay no more  than a reasonable price for goods and services, keep records of all  transactions, and contract only with responsible suppliers who can  successfully deliver the goods and services and otherwise fulfill the  contract.
The Fund encourages recipients to use international and regional  procurement mechanisms if doing so results in lower prices for quality  products. For example, in one country, the U.N. Development Program will  purchase vehicles for subrecipients because it has extensive experience  with the import process. Similarly, the health ministry of another country— the entity that will implement the grant—may purchase antiretrovirals  through the Pan American Health Organization.  The Fund also encourages  recipients with procurement experience to use their existing procedures,  provided these procedures meet the requirements set forth in the grant  agreement. For example, a principal recipient in one country will use its  own procedures to purchase nonmedical items because these procedures  are familiar and are based on generally accepted management practices.
section_title: The Fund Has Not Finalized Some Procurement Issues
paragraphs: The Fund has not finalized certain procurement issues, including  (1) the  consequences of noncompliance with national laws regarding patent rights  and other intellectual property obligations, (2) the acceptance of waivers  that would permit recipients to pay higher prices for domestically  produced goods, and (3) solicitation and acceptance of in-kind donations.  The board amended its policy on a fourth issue, payment of taxes and  duties on products purchased with Fund money, and has asked the  secretariat to monitor the impact of this change.
Board documents and the Fund’s guidelines for submitting proposals  encourage grant recipients to comply with national laws and applicable  international obligations, including those pertaining to patents and other  intellectual property rights. This issue is significant because these laws and  obligations have rules and procedures that affect the procurement of  drugs. The board has yet to reach a decision regarding the consequences  of noncompliance, that is, whether failure to comply would automatically  be considered a breach of the grant agreement and cause for termination of  the grant. As of April 1, 2003, the Fund has not included any language  concerning compliance with national laws and international obligations in  the grant agreement.  In the interim, however, Fund officials stated that the  Fund retains the option of using the more general termination clause in the  grant agreement in the event that a recipient is found by the appropriate  authorities to be in violation of national law or international obligations.
Another issue on which no formal decision has been made is whether the  Fund, like the World Bank, should allow aid recipients to pay higher prices  for domestically produced medicines and other goods to develop local  manufacturing capacity. Documents prepared for the fourth board meeting  note that the benefits of paying higher prices for domestically produced  items are not clear and that it could be difficult for recipients to administer  such a pricing scheme. The documents also note that it may be beyond the  mandate of the Fund to support domestic efforts by approving higher  prices for them. This was the only issue that board members brought to a  vote, at the January 2003 meeting, and were unable to obtain the votes  necessary to reach a decision. According to the Fund, the fact that no  decision was reached means that the status quo—that recipients are  encouraged to pay the lowest possible price for products of assured  quality—remains. This policy is also likely to remain for the foreseeable  future, since, according to Fund officials, it is no longer on the agenda of  the Portfolio Management and Procurement Committee or the  Procurement and Supply Management Advisory Panel, the two bodies that  report to the board on issues pertaining to procurement.
The board deferred to its June 2003 meeting the question of whether the  Fund should solicit or accept in-kind donations such as drugs on behalf of  grant recipients. The Portfolio Management and Procurement Committee  cautioned that the Fund needs to consider methods for ensuring the quality  of these products.
While the Fund states in the grant agreements that Fund resources shall not  be used to pay taxes and duties on products purchased in the recipient  country, the Portfolio Management and Procurement Committee revisited  this issue in its report to the January 2003 board meeting.  Specifically, the  committee noted that this policy may be difficult for NGO recipients to  follow, as they have neither the authority to guarantee exemption nor the  cash reserves to cover costs when exemptions are not possible. The  committee implied that given these weaknesses, NGOs may be reluctant to  serve as principal recipients and indicated in its report that making sure  NGOs are included as principal recipients is more important than trying to  ensure that grant recipients don’t pay taxes and duties. The committee also  raised a practical issue, noting that the Fund’s current reporting  requirements do not provide it with the information necessary to determine  whether grantees are in fact using Fund money to pay these levies. At the  January 2003 board meeting, the Fund amended its policy on exempting  grant recipients from duties, tariffs, and taxes. The amended policy allows,  but does not encourage, Fund resources to be used to pay these costs. The  board asked the secretariat to monitor the impact of this revision and  report back when sufficient information is available.
section_title: Lack of Resources Threatens Fund’s Ability to Continue to Approve and Finance Grants
paragraphs: The Fund’s ability to approve and finance additional grants is threatened by  a lack of sufficient resources. The Fund does not currently have enough  pledges to allow it to approve more than a small number of additional  proposals in 2003. In addition, without significant new pledges, the Fund  will be unable to support all of the already approved grants beyond their  initial 2-year agreements.
subsections: section_title: The Fund Requires Additional Pledges to Continue Approving Grants
paragraphs: Because the Fund approves grant proposals on the basis of amounts that  have been pledged, it will require additional pledges if it is to continue  approving grants. According to the Fund, it will approve proposals on the  basis of actual contributions to the trustee or pledges that will be converted  to contributions soon after approval, so that proposals can be financed in a  timely manner.  As a result, the Fund has only a limited amount of money  available for its third proposal round, currently planned for late 2003. In  addition, the Fund will require significant additional pledges in order to  continue holding proposal rounds beyond the planned third round. The  Fund has less than $300 million available to support commitments in round  3, which would be significantly less than the $608 million in 2-year grants  approved in the first round and the $884 million approved in the second  round. These available resources are substantially less than the $1.6 billion  in eligible proposals that the Fund expects to be able to approve in round 3.  The Fund’s resource needs are based on expected increases in eligible  proposals over the next two rounds (rounds 3 and 4) due to a concerted  effort on the part of local partners to prepare significantly expanded  responses to AIDS, TB, and malaria (see fig. 6). Based on the number of  technically sound proposals it expects to receive and approve in future  rounds, and the amount pledged as of April 1, 2003, the Fund projects that  it will require $1.6 billion in new pledges in 2003 and $3.3 billion in 2004.
section_title: The Fund Requires Significantly Greater Contributions to Finance Approved Grants for Duration of Programs
paragraphs: The Fund will require significantly greater contributions to finance  approved grants beyond initial 2-year commitments of money. By January  2003, the Fund had made 2-year grant commitments equaling nearly $1.5  billion in the first two proposal rounds.  Among other things, these grants  seek to provide 500,000 people with AIDS medications and 500,000 AIDS  orphans and other vulnerable children with care and support. Although the  Fund approves grants that can be covered by pledges received, these  pledges need only be sufficient to finance the initial 2-year period of the  grant. Since the typical Fund-supported project lasts five years, this could  result in the Fund’s inability to fulfill its longer-term obligation to programs  that are deemed successful at the 2-year evaluation. If all currently  approved proposals demonstrate acceptable performance after 2 years, the  Fund will require $2.2 billion more to assist these programs for an  additional 1 to 3 years. Currently, the Fund has $3.4 billion in total pledges  and nearly $3.7 billion in potential obligations from the first two proposal  rounds (see fig. 7). The Fund will only sign grant agreements based on  money received by the trustee, as opposed to pledges received. Thus,  continued support beyond the 2-year point requires that a significant  amount of pledges be turned into actual contributions. However, not all  pledges are contributed in a timely manner. For example, as of January 15,  2003, more than $90 million pledged through 2002 had still not been  contributed, including $25 million pledged by the United States. The Fund  is providing numerous grants that will be used to procure antiretroviral  drugs for people living with HIV/AIDS. Interruption or early termination of  funding for such projects due to insufficient resources could have serious  health implications, although Board documents suggest that special  consideration for people undergoing treatment may be given during the  evaluation process. The Fund currently has potential obligations lasting at  least until 2007, and each additional proposal round will incur further long- term obligations for the Fund.
The Fund has estimated that it will need at least $6.3 billion in pledges for  2003–2004 to continue approving new proposals and finance the grants  already approved in rounds 1 and 2.  The Fund is looking to raise these  resources from both public and private sources, with $2.5 billion needed in  2003 alone. As of April 1, 2003, only $834 million had been pledged for 2003,  6 percent of which came from the private sector.
section_title: Improvements in Grant-Making Processes Enhance Fund’s Ability to Achieve Key Objectives, but Challenges Remain
paragraphs: The Fund has established detailed objectives, criteria and procedures for  its grant decision process and is making enhancements to the process in  response to concerns raised by participants and stakeholders. Several  improvements were made to the proposal review process between the first  and second proposal rounds, and the Fund has committed to further  improvement. These efforts will seek to address ongoing challenges,  including ensuring that the money from the Fund supplements existing  spending for HIV/AIDS, TB, and malaria and that recipients are able to use  the new aid effectively. The Fund has recognized these challenges, but its  efforts to address them are still evolving.
subsections: section_title: Improvements in Proposal Review and Grant-Making Process Support Key Objectives
paragraphs: The Fund has made improvements in its proposal review and grant-making  process to support key objectives, but assessment criteria and procedures  are still evolving. According to the Fund, criteria for successful proposals  include (1) technical soundness of approach, (2) functioning relationships  with local stakeholders, (3) feasible plans for implementation and  management, (4) potential for sustainability, and (5) appropriate plans for  monitoring and evaluation. In addition, the Fund states that successful  proposals will address the abilities of recipients to absorb the grant money.  Using these criteria, the Fund established a grant approval process, based  primarily on an independent evaluation of proposals by the TRP (see fig. 8).
Between the first and second proposal rounds, the Fund made several  improvements to the process, based on feedback from participants and the  work of one of the Board’s committees. These improvements included  revising the proposal forms and instructions to make them more  comprehensive and better support the criteria for successful proposals as  determined by the Fund. The Fund also added additional members with  cross-cutting expertise to the Technical Review Panel to allow it to better  evaluate nonmedical development–related aspects of the proposal, and  lengthened the proposal application period from 1 month in round 1 to 3  months in round 2 to give applicants more time to develop their proposals.  According to Fund and other officials, these improvements helped increase  the overall quality of grant proposals submitted in the second proposal  round. The Fund also made all successful proposals from the second round  publicly available on its Web site, increasing the amount of information  available to all interested parties regarding Fund-supported programs.
Some board members expressed concerns between the first and second  proposal rounds regarding the way the Fund was addressing its objective of  giving due priority to the countries with the greatest need. In particular, the  board members were concerned that countries with the greatest need, as  determined by poverty and disease burden, might be least able to submit  high-quality proposals, resulting in their systematic exclusion.  In the first  two proposal rounds, the Fund excluded only the highest income countries from grant eligibility.  However, the Fund stated that priority would be  given to proposals from the neediest countries.  Most of the grants  approved in rounds 1 and 2 did in fact go to recipients in countries defined  by the World Bank as low income, demonstrating that the poorest countries  were not being excluded. No money was awarded in countries defined as  high income, and only 3 percent of the money was awarded in countries  defined as upper-middle income (see fig. 9). Similarly, sub-Saharan Africa,  the region that suffers from the highest burden of disease for HIV/AIDS,  received 61 percent of the money for HIV/AIDS programs.  (See app. IV for  more detailed information.)
However, to further ensure that this key objective is supported, particularly  in the face of increasingly scarce resources, the Fund has altered its  eligibility criteria for round 3 to focus more clearly on need. All high- income countries are now excluded from eligibility for Fund money, and  upper-middle and lower-middle income countries must meet additional  criteria such as having cofinancing arrangements and a focus on poor or  vulnerable populations. Low-income countries remain fully eligible to  request support from the Fund. Beginning in the fourth round, WHO and  UNAIDS will be asked to provide matrices categorizing countries by  disease-related need and poverty.
section_title: Challenges to Grant-Making Process Remain
paragraphs: The Fund and other stakeholders note that meeting key grant-making  criteria will be a challenge, and the Fund’s efforts to address these criteria  are still evolving. According to Fund guidelines, proposals should  demonstrate how grants complement and augment existing programs and  how these additional resources can be effectively absorbed and used.
subsections: section_title: Ensuring that Grants Complement and Add to Existing Spending
paragraphs: The Fund’s policy is that both the pledges the Fund receives and the grants  it awards must complement and add to existing spending on the three  diseases. However, ensuring adherence to this policy is difficult. According  to the secretariat, it monitors the sources of new pledges to assess whether  the pledges represent additional spending. Monitoring pledges is  problematic, however, because it can be difficult to determine how much  money was spent by a donor or multilateral institution specifically on  AIDS, TB, or malaria-related programs. According to a UNAIDS report,  pledges to the Fund from most of the G-7 countries, as well as from eight of the Development Assistance Committee governments, have thus far  been determined to add to baseline HIV/AIDS funding. Nonetheless, despite  its monitoring efforts, the Fund can only encourage, rather than require,  donors to contribute new spending rather than simply transfer funds from  related programs.
It is also difficult for the Fund to ensure that the grants it awards will  augment existing spending at the country level. It has identified several  situations to be avoided, including allowing grants to replace budgetary  resources or other “official development assistance,” and it has taken  certain steps to ensure that the grants will in fact represent new and added  spending in the country. For example, the Fund has required all applicants  to include information in their proposals on how the funds requested would  complement and supplement existing spending and programs. In addition,  the Fund has reserved the right to terminate grants if it discovers that they  are substituting for, rather than supplementing, other resources. However,  the Fund does not have the ability to formally monitor whether grants  constitute additional spending once disbursed, and we anticipate that  doing so would be difficult. Even if the Fund succeeded in documenting  that all grant money was spent appropriately on the approved project and  that no previously allocated money for AIDS, TB, or malaria was  supplanted in the process, it still could not document the level of spending  on these diseases that would have occurred without the grant. Thus, it  could not show whether the grant in fact substituted for money that would  have been otherwise allocated. A report presented at the Fund’s October  2002 board meeting proposed the development of a policy for monitoring  additionality.
At present, lacking any formal system, the Fund may be unaware of, or  unprepared to address, situations in which its grants do not represent  additional, complementary spending. For example, an official from a  development agency that currently funds much of one country’s TB  program stated that he believes the country lacks the capacity to increase  its program for TB, despite having received a TB grant in the first round.  The development agency therefore planned to transfer its current TB  funding to other health assistance projects in response to the Fund’s TB  grant, raising questions of whether the grant will fulfill its purpose of  providing additional funding for TB. Similar concerns have been  expressed by other officials representing both Fund recipients and donors.
section_title: Ensuring that Recipients Have the Capacity to Absorb New Funding
paragraphs: Although the Fund has stated that proposals will be assessed based on  whether they have demonstrated how grants could be effectively absorbed  and used, Fund officials, donors, and others have raised concerns  regarding the actual capacity of recipients to absorb new aid.  While some  countries may have surplus labor and institutional capacity within their  health sectors, other countries may have difficulty rapidly expanding their  health sectors due to a shortage of skilled health workers or insufficient  infrastructure to deliver health services. While such capacity constraints  can be relieved over time with additional training and investment, in the  short run they could limit the effectiveness of expanded health spending.  For example, officials in one country told us that it has been slow in  disbursing its World Bank HIV/AIDS money because of difficulties in  establishing the necessary institutions to identify and distribute funds to  effective projects. In another country, government and NGO officials cited  a lack of administrative capacity in NGOs as a likely challenge to their  ability to absorb the Fund grant. The Fund is aware of these concerns and  is addressing them in a number of ways. Proposal applications must  describe the current national capacity—the state of systems and services— available to respond to HIV/AIDS, TB, and malaria. After the first round, the  Fund also added more members to the TRP to evaluate these issues in  proposals. In addition, the Fund requires LFAs to preassess principal  recipients to ensure that they are prepared to receive, disburse, and  monitor the money. On at least one occasion, the Fund decided to reduce  its initial grant disbursement to a recipient, based on concerns raised by  the LFA in the preassessment.
The LFA preassessment does not address all potential constraints on a  country’s ability to absorb new funds, notably across sectors or at the  macroeconomic level. While these capacity constraints could hinder the  effectiveness of the grant, they could also generate unintended side effects  beyond the scope of the funded project. Introducing more money into a  sector with insufficient capacity to utilize it could draw scarce resources  from other vital sectors, such as agriculture or education. For example, one  way to reduce temporary shortages of skilled health workers would be to  raise the salaries of those positions, relative to the rest of the economy.  Over time, this wage disparity will provide an incentive to increase the  number of graduates trained in the health field. However, in the short term,  it may encourage already skilled workers in other sectors to pursue higher  wages in the health sector, adversely affecting the sectors they leave. To the  extent that these other sectors are also priorities in economic  development, this could adversely affect a country’s pursuit of poverty  reduction. The country coordinating mechanism model of proposal  development is intended to help avoid such problems by ensuring that  those with the most knowledge of a country’s needs and capacities are  directly responsible for developing proposals. However, as discussed  earlier, many CCMs are facing challenges in operating effectively.
The provision of large amounts of new foreign aid to countries from all  sources, including the Global Fund and bilateral and multilateral initiatives,  may also have unintended, detrimental macroeconomic implications. Large  increases in development assistance are considered critical to the  successful fight of the three diseases, as well as the achievement of long- term poverty reduction goals. Moreover, increasing the number of healthy  people in a country, such as through successful treatment, may increase its  productive capacity. However, increasing spending beyond a country’s  productive capacity could result in problems, such as increased domestic inflation, that are not conducive to growth or poverty reduction.  While a  substantial share of Global Fund grant money is expected to fund imports  such as medicines–-which likely have no adverse macroeconomic  implications–-a significant amount will also be spent domestically on  nontraded items, such as salaries and construction expenses. Concerns  over potential macroeconomic difficulties prompted one government to  initially propose offsetting its Global Fund grant with reductions in other  health spending; however, upon further assessment the government  reconsidered and will not reduce other health spending. An International  Monetary Fund official stated that he believed that the Global Fund grants  are not generally large enough, as a share of a country’s Gross Domestic  Product, to cause significant macroeconomic effects.  He added, however,  that country authorities should nonetheless monitor these grants in case  they do become significant and possibly destabilizing. The Global Fund  expects that the amount of money that it disburses will rise substantially in  the future, which—along with large increases in other proposed   development assistance, such as through the U. S. Millennium Challenge  Account--–could substantially increase total aid flows to certain countries  in a relatively short period of time. Available research on the  macroeconomic effects of large increases in overall grant aid is thus far  inconclusive, providing little guidance on the magnitude of assistance that  may trigger these negative macroeconomic impacts.
section_title: Agency Comments and Our Evaluation
paragraphs: We requested comments on a draft of this report from the Executive  Director of the Fund, the Secretary of Health and Human Services, the  Secretary of State, and the Administrator of USAID, or their designees. We  received formal comments from the Fund as well as a combined formal  response from the Department of Health and Human Services, the  Department of State, and USAID (see apps. V and VI).  Both the Fund and  the U.S. agencies agreed with the information and analysis presented in this  report. The Fund’s Executive Director concluded that this report  accurately describes the challenges faced by the Fund in responding to the  three diseases. The Fund outlined measures it is taking to address these  challenges and identified several additional challenges. The U.S. agencies  stressed that they and other donor agencies should work with the Fund to  address the challenges. Both the Fund and the U.S. agencies also submitted  informal, technical comments, which we have incorporated into this report  as appropriate.
We are sending copies of this report to the Executive Director of the Fund,  the Secretary of Health and Human Services, the Secretary of State, the  Administrator of USAID, and interested congressional committees. Copies  of this report will also be made available to other interested parties on  request. In addition, this report will be made available at no charge on the  GAO Web site at http://www.gao.gov.
If you or your staff have any questions about this report, please contact me  at (202) 512-3149. Other GAO contacts and staff acknowledgments are  listed in appendix V.
section_title: Objectives, Scope, and Methodology
paragraphs: At the request of the Chairman of the House Committee on Appropriations,  Subcommittee on Foreign Operations, Export Financing and Related  Programs, we assessed (1) the Fund’s progress in developing governance  structures; (2) the systems that the Fund has developed for ensuring  financial accountability, monitoring and evaluating grant projects, and  procuring goods and services; (3) the Fund’s efforts to mobilize resources;  and (4) the Fund’s grant decision-making process.
To assess how the Fund has progressed in establishing structures needed  for governance, we reviewed Fund documents and reports from  nongovernmental organizations involved in the country coordinating  mechanism (CCM) process. We also interviewed Fund officials in Geneva  and U.S. government officials from the Departments of State and Health  and Human Services and the U.S. Agency for International Development. In  addition, we traveled to Haiti and Tanzania, two “fast-track” countries  where grant agreements were about to be signed, and two countries less far  along in the process, Ethiopia and Honduras. In these four countries, we  met with a wide variety of CCM members, including high-level and other  government officials, multilateral and bilateral donors, faith-based and  other nongovernmental organizations, professional associations, and  private sector groups. In all four countries, we met with organizations  designated as the principal recipient in grant proposals. We also met with a  Fund official who was working with the CCM in Haiti. To understand the  Fund’s administrative services agreement with the World Health  Organization (WHO) and its impact on the Fund’s ability to quickly disburse  grants, we reviewed Fund documents pertaining to the agreement, met  with WHO and Fund officials in Geneva and spoke with a U.S. government  legal expert in Washington, D.C. We also met with a WHO official while he  was traveling in San Francisco.
To assess the Fund’s development of oversight systems to ensure financial  and program accountability, we reviewed Fund documents prepared for the  second, third, and fourth board meetings; requirements contained in the  grant agreements; and Fund working papers prepared after the fourth  board meeting that propose further clarifications and guidelines for  principal recipients and Local Fund Agents (LFAs). We also reviewed the  U.S. Agency for International Development’s (USAID) Handbook of  indicators for programs on human immunodeficiency virus/acquired  immunodeficiency syndrome (HIV/AIDS) and sexually transmitted  infections, Joint United Nations HIV/AIDS Program publications for  monitoring and evaluating national AIDS programs, and WHO coordinates  for charting progress against HIV/AIDS, tuberculosis and malaria. We held  discussions with the secretariat in Geneva on fiduciary and financial  accountability and monitoring and evaluation of grant programs and  received presentations on these topics from the secretariat. In addition, we  discussed these issues with U.S. government officials from the  Departments of State and Health and Human Services and USAID, and with  officials from the World Bank. During our fieldwork in Haiti and Tanzania,  we met with representatives of the entities serving as local fund agents in  those countries (KPMG in Haiti and PricewaterhouseCoopers in Tanzania);  we also met with representatives from KPMG’s Global Grants Program in  San Francisco. To further our understanding of the Fund’s oversight  systems and the challenges to implementing them in recipient countries,  we met with the following groups in all four of the countries we visited:   government officials, multilateral and bilateral donors, nongovernmental  organizations, and others who will be involved in implementing Fund  grants or who had observations on the Fund’s oversight systems.
To assess the Fund's procurement guidelines, we reviewed the grant  agreements and data prepared by the Fund showing anticipated spending  on drugs and other items and met with Fund officials in Geneva. We also  interviewed a U.S. legal expert serving on the procurement and supply  management task force and reviewed documents prepared by taskforce  and the Portfolio Management and Procurement Committee at the request  of the board. To learn about the ability of grant recipients to procure goods  and services, we met with local fund agent representatives, a principal  recipient, and subrecipients.  We asked the principal recipient and  subrecipient representatives about their procurement practices, their  understanding of Fund guidance and their plans to procure medicines,  goods and services. In Washington, D.C., we met with staff from a public  health consulting firm who assessed one of the principal recipients. To  further our understanding of the procurement process, we also interviewed  representatives from several other consulting firms that assist developing  country governments and nongovernmental organizations with  procurement.
To assess Fund efforts to mobilize resources, we analyzed pledges made to  the Fund from public and private sources as well as the Fund’s  commitments to grants. We reviewed their expected future financial needs  to make new grants and finance already approved grants. In addition, we  contacted officials from the Fund to discuss their resource mobilization  efforts and strategies for dealing with a resource shortfall.
To assess the Fund’s grant-making process, we reviewed the objectives and  processes of their proposal review and approval processes. We reviewed  Fund documents, including proposal applications and guidelines from the  first and second proposal rounds. Additionally we tracked the Fund’s  efforts at improving the grant-making process by reviewing documents  prepared for the Fund’s first four board meetings. We also interviewed  representatives from the Fund and the technical review panel in Geneva  and Washington, D.C., and we asked government, donor, and  nongovernmental organization officials in the four recipient countries we  visited for their assessment of the proposal process and its challenges. To  assess the nature of the challenges identified and any efforts made by the  Fund to address them, we interviewed officials at the World Bank and  International Monetary Fund, and we conducted a review of relevant  economic literature. We also conducted research and reviewed data  available on global spending on HIV/AIDS, TB, and malaria.
For general background and additional perspectives on the Fund, we spoke  with representatives from the Gates Foundation, the Global AIDS Alliance,  and the Earth Institute at Columbia University.
We conducted our work in Washington, D.C.; San Francisco; Geneva,  Switzerland; Ethiopia; Haiti; Honduras; and Tanzania, from April 2002  through April 2003, in accordance with generally accepted government  auditing standards.
section_title: Drug Procurement Cycle
paragraphs: The drug procurement cycle includes most of the decisions and actions  that health officials and caregivers must take to determine the specific drug  quantities obtained, prices paid, and quality of drugs received. The process  generally requires that those responsible for procurement (1) decide which  drugs to procure; (2) determine what amount of each medicine can be  procured, given the funds available; (3) select the method they will use for  procuring, such as open or restricted tenders; (4) identify suppliers capable  of delivering medicines; (5) specify the conditions to be included in the  contract; (6) check the status of each order; (7) receive and inspect the  medicine once it arrives; (8) pay the suppliers; (9) distribute the drugs,  making sure they reach all patients; (10) collect information on how  patients use the medicine; and (11) review drug selections. Because these  steps are interrelated, those responsible for drug procurement need  reliable information to make informed decisions.
section_title: Indicators of Need for Recipient Countries
paragraphs: HIV/AIDS rate (%), Adults (15-49)
Malaria (Cases/ 100,000)
TB (Cases/ 100,000)
HIV/AIDS rate (%), Adults (15-49)
Malaria (Cases/ 100,000)
TB (Cases/ 100,000)
HIV/AIDS rate (%), Adults (15-49)
Malaria (Cases/ 100,000)
TB (Cases/ 100,000)
HIV/AIDS rate (%), Adults (15-49)
Malaria (Cases/ 100,000)
TB (Cases/ 100,000)
Gross National Income per capita (in U.S. dollars)
Although each country is listed only once, many countries received multiple grants. All grants received  have been accounted for when noting disease programs addressed and dollar amount requested by  approved programs. This table includes only grants for individual countries. Multicountry grants are not  included.
Purchasing Power Parity method.
section_title: Comments from the Global Fund to Fight AIDS, TB and Malaria
section_title: Joint Comments from the Departments of Health and Human Services and State, and the U.S. Agency for International Development
section_title: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the persons named above, Sharla Draemel, Stacy Edwards,  Kay Halpern, Reid Lowe, William McKelligott, Mary Moutsos, and Tom  Zingale made key contributions to this report.
section_title: GAO’s Mission
paragraphs: The General Accounting Office, the audit, evaluation and investigative arm of  Congress, exists to support Congress in meeting its constitutional responsibilities  and to help improve the performance and accountability of the federal government  for the American people. GAO examines the use of public funds; evaluates federal  programs and policies; and provides analyses, recommendations, and other  assistance to help Congress make informed oversight, policy, and funding  decisions. GAO’s commitment to good government is reflected in its core values of  accountability, integrity, and reliability.
section_title: Obtaining Copies of GAO Reports and Testimony
paragraphs: The fastest and easiest way to obtain copies of GAO documents at no cost is  through the Internet. GAO’s Web site (www.gao.gov) contains abstracts and full- text files of current reports and testimony and an expanding archive of older  products. The Web site features a search engine to help you locate documents  using key words and phrases. You can print these documents in their entirety,  including charts and other graphics.
Each day, GAO issues a list of newly released reports, testimony, and  correspondence. GAO posts this list, known as “Today’s Reports,” on its Web site  daily. The list contains links to the full-text document files. To have GAO e-mail this  list to you every afternoon, go to www.gao.gov and select “Subscribe to GAO  Mailing Lists” under “Order GAO Products” heading.
subsections: section_title: Order by Mail or Phone
section_title: To Report Fraud, Waste, and Abuse in Federal Programs
section_title: Public Affairs