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

Letter

Background

We interviewed staff from USAID and its implementing partners in Nairobi who had responsibility for oversight of the EFSP-funded operations in both Kenya and Somalia. including some countries with areas considered high security risk. Obligations for cash-based EFSP projects grew from $75.8 million in fiscal year 2010 to $409.5 million in fiscal year 2014—an increase of 440 percent over the 5-year period, the majority of which was in response to a large and sustained humanitarian crisis in Syria, including cash-based food assistance to Syrian refugees in the Syria region. Of the $991 million in total grant funding obligated in fiscal years 2010 to 2014, $330.6 million was for cash interventions and $660.3 million was for voucher interventions. The majority of the funding—$621.7 million (or 63 percent)—was awarded to WFP, and $369.3 million (or 37 percent) was awarded to other implementing partners.

To deliver cash-based food assistance, USAID’s implementing partners employ a variety of mechanisms ranging from direct distribution of cash in envelopes to the use of information technologies such as cell phones and smart cards to redeem electronic vouchers or access accounts established at banks or other financial institutions (see fig. 1). The value of cash and voucher transfers is generally based on a formula that attempts to bridge the gap between people’s food needs and their capacity to cover them. internal control framework that, according to COSO, has gained broad acceptance and is widely used around the world. Both frameworks include the five components of internal control: control environment, risk assessment, control activities, information and communication, and monitoring. Internal control generally serves as a first line of defense in safeguarding assets, such as cash and vouchers. In implementing internal control standards, management is responsible for developing the detailed policies, procedures, and practices to fit the entity’s operations and to ensure they are built into and are an integral part of operations.

USAID Had Developed Processes for Awarding EFSP Funds but Lacked Guidance on Modifying Awards and Responding to Changing Market Conditions

In our March 2015 report, we found that USAID had developed processes for awarding cash-based food assistance grants; however, it lacked formal internal guidance for its process to approve award modifications and provided no guidance for partners on responding to changing market conditions that might warrant an award modification.

USAID’s process for awarding EFSP funds. USAID outlined its process for reviewing and deciding to fund proposals for cash-based food assistance projects in the Annual Program Statement (APS) for International Emergency Food Assistance. According to USAID, the APS functions as guidance on cash-based programming by describing design and evaluation criteria for selecting project proposals and explaining the basic steps in the proposal review process. The APS also serves as a primary source of information for prospective applicants that apply for emergency food assistance awards using EFSP resources. Under the terms of the APS, USAID awards new cash-based food assistance grants through either a competitive proposal review or an expedited noncompetitive process. For our March 2015 report, we reviewed 22 proposals for new cash-based food assistance projects that were awarded and active as of June 1, 2014; we found that USAID made 13 of these awards through its competitive process, 7 through an abbreviated noncompetitive review, and 2 under authorities allowing an expedited emergency response.

USAID lacked guidance for staff on modifying awards. In our March 2015 report, we found that although the APS outlined the review process for new award proposals, neither the current 2013 APS nor the two previous versions provide clear guidance on the process for submission, review, and approval of modifications to existing awards. According to USAID officials, USAID follows a similar process in reviewing requests to modify ongoing awards, which implementing partners may propose for a variety of reasons, such as an increase in the number of beneficiaries within areas covered by an award or a delay in completing cash distributions. Two main types of modifications may be made to a grant agreement—no-cost modifications and cost modifications. For the four case study countries, in our March 2015 report, we reviewed 13 grant agreements made from January 2012 to June 2014 that had 41 modifications during that period. Twenty of these cost modifications resulted in an increase in total funding for the 13 grants from about $91 million to about $626 million, a 591 percent increase. Ten of these cost modifications were made to 1 award, the Syria regional award, whose funding increased from $8 million to $449 million (see fig. 2). The Syria regional award modifications amounted to about 82 percent of the total increase in funding for the cost modifications we reviewed.

We concluded that without formal guidance, USAID cannot hold its staff and its partners accountable for taking all necessary steps to justify and document the modification of awards. At the time of our study, USAID noted that its draft internal guidance for modifying awards was under review. In our March 2015 report, we recommended that USAID expedite its efforts to establish formal guidance for staff reviewing modifications of cash-based food assistance grant awards. USAID concurred with our recommendation. In June 2015, USAID reported that it issued written guidance that addresses the review and approval of grant modifications. We have yet to verify this information to determine whether it addresses the issues we identified.

USAID lacked guidance for implementing partners. Additionally, in our March 2015 report we found that, although USAID required partners implementing cash-based food assistance to monitor market conditions, USAID did not provide clear guidance about how to respond when market conditions change—for example, when and how partners might adjust levels of assistance that beneficiaries receive. We analyzed data on the prices of key staple commodities in selected markets for our case study countries from fiscal years 2010 through 2014. We found that the prices of key cereal commodities in Niger and Somalia changed significantly without corresponding adjustments to all implementing partners’ cash- based projects. We did not find similar food price changes in Jordan and Kenya.

According to USAID officials, USAID does not have a standard for identifying significant price changes, since the definition of significance is specific to each country and region. In addition, we did not find guidance addressing modifications in response to changing market conditions in the APS. We found that this lack of guidance had resulted in inconsistent responses to changing market conditions among different cash and voucher projects funded by USAID. For example, an implementing partner, whose project we reviewed in Kenya, predetermined, as part of its project design, when adjustments to cash transfer amounts would be triggered by food price changes, while an implementing partner whose project we reviewed in Niger relied on an ad hoc response. The implementing partner in Kenya established the cash and voucher transfer rate based on the value of the standard food basket; it reviewed prices every month but would change cash and voucher transfer amounts only in response to price fluctuations, in either direction, of more than 10 percent.

We concluded that without clear guidance about when and how implementing partners should modify cash-based food assistance projects in response to changing market conditions, USAID ran the risk of beneficiaries’ benefits eroding through price increases or inefficient use of scarce project funding when prices decrease. We recommended in our March 2015 report that USAID develop formal guidance to implementing partners for modifying cash-based food assistance projects in response to changes in market conditions. USAID concurred with this recommendation. In June 2015, USAID reported entering into an agreement with the Cash Learning Partnership (CaLP), an organization that is working to improve the use of cash and vouchers, to help develop guidance to implementing partners on adapting programs to changing market conditions. USAID plans to complete this guidance by April 2016. We have yet to verify this information to determine whether it addresses the issues we identified.

USAID’s Partners Had Generally Implemented Financial Controls in Projects We Reviewed; We Found Weaknesses in Risk Planning, Implementation, and Guidance

In our March 2015 report, we found that USAID relied on its implementing partners to implement financial oversight of EFSP projects, but it did not require them to conduct comprehensive risk assessments to plan financial oversight activities—two key components of an internal control framework. In addition, we found that USAID provided little or no guidance to partners and its own staff on carrying out these components.

Risk assessments were lacking. Our March 2015 report found that for case study projects we reviewed in four countries, neither USAID nor its implementing partners conducted comprehensive risk assessments that address financial vulnerabilities that may affect cash-based food assistance projects, such as counterfeiting, diversion, and losses. USAID officials told us that they conduct a risk assessment for all USAID’s programs within a country rather than separate risk assessments for cash-based food assistance projects. According to USAID, its country-based risk assessments focus primarily on the risks that U.S. government funds may be used for terrorist activities and on the security threat levels that could affect aid workers and beneficiaries; these risk assessments do not address financial vulnerabilities that may affect cash-based food assistance projects, such as counterfeiting, diversion, and losses. A USAID official provided us with internal EFSP guidance to staff on the grant proposal and award process stating that an award would not be delayed if a risk-based assessment has not been conducted.

According to USAID officials, its partners have established records of effective performance in implementing cash and voucher projects and they understand the context of operating in these high-risk environments. As a result, USAID expects that its partners will conduct comprehensive risk assessments, including financial risk assessments, and develop appropriate risk mitigation measures for their cash-based food assistance projects. However, none of the partners implementing EFSP- funded projects in our four case study countries had conducted a comprehensive risk assessment based on their guidance or widely accepted standards during the period covered by our March 2015 review. We found that USAID did not require its implementing partners to develop and submit comprehensive risk assessments with mitigation plans as part of the initial grant proposals and award process or as periodic updates, including when grants are modified.EFSP grant proposals and agreements do not contain risk assessments and mitigation plans. In addition, the implementing partners we reviewed had not consistently prioritized the identification or the development of financial risks that address vulnerabilities such as counterfeiting, diversion, and losses.

USAID officials stated that most We concluded that without comprehensive risk assessments of its projects, USAID staff would be hampered in developing financial oversight plans to help ensure that partners are implementing the appropriate controls, including financial controls over cash and vouchers to mitigate fraud and misuse of EFSP funds. In our March 2015 report, we recommended that USAID require implementing partners of cash-based food assistance projects to conduct comprehensive risk assessments and submit the results to USAID along with mitigation plans that address financial vulnerabilities such as counterfeiting, diversion, and losses. USAID concurred with our recommendation. In June 2015, USAID noted that the Fiscal Year 2015 APS includes a requirement for applicants to provide an assessment of risk of fraud or diversion and controls in place to prevent any diversion or counterfeiting. We have yet to verify this information to determine whether it addresses the issues we identified.

Control activities had weaknesses. In our March 2015 report, we found that USAID’s partners had generally implemented financial controls over cash and voucher distributions but the partners’ financial oversight guidance had weaknesses. We reviewed selected distribution documents for three implementing partners with projects that began around 2012 in our four case study countries (Jordan, Kenya, Niger, and Somalia). Our review found that the three implementing partners had generally implemented financial controls over their cash and voucher distribution processes. For example, in Niger, we verified that there were completed and signed beneficiary payment distribution lists with thumb prints; field cash payment reconciliation reports that were signed by the partner, the financial service provider, and the village chief; and payment reconciliation reports prepared, signed, and stamped by the financial service provider. Additionally, we determined that these three implementing partners generally had proper segregation of financial activities between their finance and program teams. Nonetheless, in Kenya, our review showed that in some instances, significant events affecting the cash distribution process were not explained in the supporting documentation.

Our review also found that in most instances the implementing partners had submitted reports required by their grant awards, and generally within the required time frames; in addition, we found that these reports contained the key reporting elements required by the grant award. However, in some instances, we were unable to determine whether quarterly reports were submitted on time because USAID was unable to provide us with the dates when it received these reports from the implementing partner. According to USAID officials, USAID does not have a uniform system for recording the date of receipt for quarterly progress reports and relies on FFP officers to provide this information; however, individual FFP officers have different methods for keeping track of the reports and the dates on which they were received.

Financial oversight guidance had gaps. In our March 2015 report, we found that implementing partners in the four case study countries we reviewed had developed some financial oversight guidance for their cash and voucher projects, but we found gaps in the guidance that could hinder effective implementation of financial control activities. For example, one implementing partner developed a financial procedures directive in 2013 that requires, among other things, risk assessments, reconciliations, and disbursement controls. However, the directive lacked guidance on how to estimate and report losses. Another implementing partner had developed field financial guidance in 2013 that provides standardized policies and procedures for financial management and accounting in the partner’s field offices. However, the implementing partner acknowledged that the field manual does not address financial procedures specifically for voucher projects. In addition, we found that USAID’s guidance to partners on financial control activities is limited. For example, USAID lacked guidance to aid implementing partners in estimating and reporting losses.

We concluded that when implementing partners for EFSP projects have gaps in financial guidance and limitations with regard to oversight of cash- based food assistance projects, the partners may not put in place appropriate controls for areas that are most vulnerable to fraud, diversion and misuse of EFSP funding. In our March 2015 report, we recommended that USAID develop a policy and comprehensive guidance for USAID staff and implementing partners for financial oversight of cash- based food assistance projects. USAID concurred with our recommendation and in June 2015 reported that CalP is expected, as part of its award, to work on the development and dissemination of policy and guidance related to cash-based food assistance. USAID plans to complete this effort by April 2016. We have not yet verified this information to determine whether it addresses the issues we identified.

Limitations in USAID’s field financial oversight. As we reported in March 2015, according to USAID officials, Washington-based country backstop officers (CBO) perform desk reviews of implementing partners’ financial reports and quarterly and final program reports and share this information with FFP officers in the field; in addition, both the Washington- based CBOs and FFP officers in-country conduct field visits. However, we found that the ability of the CBOs and FFP officers to consistently perform financial oversight in the field may be constrained by limited staff resources, security-related travel restrictions and requirements, and a lack of specific guidance on conducting oversight of cash transfer and food voucher programs. Field visits are an integral part of financial oversight and a key control to help ensure management’s objectives are carried out. They allow CBOs and FFP officers to physically verify the project’s implementation, observe cash disbursements, and conduct meetings with beneficiaries and implementing partners to determine whether the project is being implemented in accordance with the grant award.

According to the CBOs and FFP officers, the frequency of field visits for financial oversight depends on staff availability and security access. In our four case study countries, the FFP officers told us that because of their large portfolios and conflicting priorities, they performed limited site visits for the projects that we reviewed. In Kenya, the FFP officer told us that her portfolio covered 14 counties, and the cash-based food assistance project we reviewed was just one component. Owing to the demands of all her projects, she had been able to perform limited site visits for the projects we reviewed. We also found that USAID had two staff members in the field to oversee its Syria regional cash-based projects spread over five countries that had received approximately $450 million in EFSP funding from July 2012 through December 2014.

Because of staff limitations, FFP officers primarily rely on implementing partners’ reports from the field and regular meetings with them to determine whether a project is being executed as intended. However, USAID’s guidance to its FFP officers and its implementing partners on financial oversight and reporting is limited. For example, FFP staff in Niger stated that they have had insufficient guidance and training on financial oversight of cash-based food assistance projects. Furthermore, the FFP officers told us that USAID is not prescriptive in the financial oversight procedures it expects from its implementing partners. Additionally, they noted that USAID has not set a quantitative target for site visits by FFP officers. FFP officers in our four case study countries told us that they use a risk-based approach to select which sites to visit.

We concluded that without systematic financial oversight of the distribution of cash and voucher activities in the field, USAID is hampered in providing reasonable assurance that is EFSP funds and are being used for their intended purposes. In our March 2015 report, we recommended that USAID require its staff to conduct systematic financial oversight of USAID’s cash-based food assistance projects in the field. USAID concurred with this recommendation. As of June 2015, USAID reported that it is working to develop training for its staff and will continue to explore using third-party monitors where security constraints may be an issue. USAID plans to complete these actions by April 2016. We have not yet verified this information to determine whether it addresses the issues we identified.

Chairman Rouzer, Ranking Member Costa, and Members of the Subcommittee, this completes my prepared statement. I would be pleased to respond to any questions that you may have at this time.

Appendix I: GAO Contact and Staff Acknowledgments

GAO Contact

If you or your staff have questions about this testimony, please contact Thomas Melito, Director, International Affairs and Trade at (202) 512- 9601 or melitot@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement.

Staff Acknowledgments

GAO staff who made key contributions to this testimony are Joy Labez (Assistant Director), Rathi Bose, Ming Chen, Beryl H. Davis, David Dayton, Martin De Alteriis, Fang He, Teresa Abruzzo Heger, Dainia Lawes, Kimberly McGatlin, Diane Morris, Shannon Roe, Barbara Shields, Sushmita Srikanth, and Dan Will.