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

Letter

Background

U.S. Policy Commitments Related to G2G Assistance

Through its participation in a series of aid effectiveness forums beginning in 2005, the U.S. government, along with other donor and partner countries, has committed to improving the effectiveness of assistance programs, in part through increased use of partner-country systems and strengthening of local capacity to achieve development results. For example, the 2011 Busan Partnership for Effective Development Cooperation states that donor and partner countries will use country systems as the default approach for implementing development assistance, working with both donors’ and partner countries’ governance structures. In keeping with these commitments, the 2010 Presidential Policy Directive on Global Development, USAID’s 2011-2015 Policy Framework, and USAID’s Local Systems Framework all stress the need to build partner-country capacity to achieve shared development goals.

Local Solutions and G2G Assistance

USAID’s Local Solutions initiative aims to increase funding for partner- country systems, including partner governments, private sector, and nongovernmental organizations, that have sufficient capacity—and to help strengthen their capacity when needed—in order to achieve sustainable development outcomes. In 2013, USAID created the senior position of Local Solutions Coordinator in the agency’s Counselor’s Office. The Local Solutions Coordinator is responsible for coordinating the functions and activities of the various headquarters offices and missions involved in carrying out the Local Solutions initiative.

According to data USAID made available in May 2015, although overall obligations to partner-country systems increased in fiscal years 2010 to 2014, obligations to partner governments declined from about $929 million to $327 million during this period, as shown in figure 1.

Following the launch of USAID Forward in 2010, USAID began to revise various policies related to planning, project design and implementation, and monitoring and evaluation—often referred to as USAID’s program cycle. While many of these policies apply broadly to all USAID assistance, some apply specifically to G2G assistance. For the purposes of this report, we identified the following key components of USAID’s program cycle as they relate to G2G assistance:

Policy: USAID policy related to G2G assistance is documented primarily in the agency’s Automated Directives System (ADS), which contains the policies and procedures that guide the agency’s operations. USAID first issued a policy chapter specifically related to G2G assistance in 2011 and updated it in March 2012 and July 2014.

Planning: The initial phase of USAID’s program cycle entails designing projects that are consistent with the mission’s country development strategy, assessing and addressing risks associated with implementing the projects, and preparing planning documents for mission director approval.

Implementation: This phase entails selecting appropriate funding mechanisms and implementing G2G assistance activities according to the terms and conditions established in bilateral assistance agreements and other legal documents.

Monitoring and evaluation (M&E): This phase entails conducting audits of partner-government entities and assessing the progress and results of G2G assistance activities.

Appendix II provides a detailed summary of these components.

Accountability Standards

Agencies should have in place appropriate mechanisms to help ensure achievement of program results. GAO’s Standards for Internal Control in the Federal Government, which we refer to as accountability standards, emphasizes the importance of identifying goals and objectives, identifying and mitigating risks, and establishing and tracking performance indicators, among other things. As continuous, built-in components of agencies’ operations, such measures help provide reasonable assurance that funds are used as intended and help agencies meet their objectives.

Planning: USAID Missions Completed Detailed Fiduciary Risk Assessments but Did Not Always Address Risks and Mitigation Steps in Project Design and Missed Opportunities to Coordinate with Other Donors

USAID policy addresses accountability standards calling for identification, analysis, and mitigation of risks, and we found that USAID missions completed detailed risk assessments. However, missions did not always integrate risk mitigation measures into project and M&E planning when required by USAID policy. We found that risk assessments had often been completed after planning documents had been finalized. In addition, M&E plans we reviewed often did not incorporate steps USAID and partner governments agreed upon to address risks and build capacity. We also found that USAID missions missed opportunities to coordinate risk assessment activities with other donors.

USAID Missions Conducted Detailed Fiduciary Risk Assessments and Identified Mitigation Steps but Did Not Always Incorporate Them into Project Planning

By requiring missions to conduct detailed fiduciary risk assessments and incorporate them into project planning, USAID policy addresses accountability standards calling for identification, analysis, and mitigation of risk. According to USAID’s policy on G2G assistance, before providing funds directly to a partner-government entity, the missions must complete a fiduciary risk assessment of that entity. The goal of this assessment is to establish risk mitigation measures that will be integrated into the design of the project to help ensure that funds are managed appropriately. Possible risk mitigation measures include technical assistance for capacity building, disbursement of funds in tranches contingent on the achievement of certain milestones, establishment of benchmarks for the partner country to demonstrate progress in correcting financial management weaknesses, and limits on cash advances under cost- reimbursable funding mechanisms. Missions are required to include the findings of the risk assessments, as appropriate, in the planning documents approved by the mission director. In addition, missions should include provisions for ensuring partner-government compliance with risk mitigation measures in the M&E plans for projects with G2G assistance activities. Since fiscal year 2012, legislation governing the use of funds for direct G2G assistance has placed conditions on such assistance, including requiring the assessment of the partner-government entity that will receive the assistance funds and determination regarding whether it has the systems required to manage those funds. According to USAID, the agency meets these assessment requirements by means of its policies and procedures relating to G2G assistance.

On the basis of our review of 29 planning documents for G2G assistance activities with fiscal year 2012 obligations, we found that missions conducted risk assessments and formulated risk mitigation plans, as required. Table 1 provides illustrative examples of risks and associated recommendations identified in fiduciary risk assessment reports from our three case-study countries—Nepal, Peru, and Tanzania.

The planning documents we reviewed showed that in some cases, missions took concrete steps to avoid risk. In Tanzania, for example, the mission identified four government organizations as potential recipients of G2G funds for a governance project but proceeded with only three of them, because the assessment identified significant risks that would have required extensive mitigation measures.

However, for most planning documents we reviewed, missions did not integrate risk mitigation measures into project design and M&E planning when required. Of the 29 planning documents we reviewed, 20 included no discussion of identified risks, and 17 of the planning documents did not address measures for mitigating risks. Furthermore, 25 of the 29 M&E plans did not integrate follow-up for ensuring partner government compliance with agreed-upon risk mitigation measures.

In most cases, missions had not completed the fiduciary risk assessments prior to finalizing project or activity planning: for 14 of the 20 planning documents that did not include risk mitigation information, we found that the fiduciary risk assessment was either under way or not yet initiated at the time of project planning. In some cases, our document review enabled us to identify possible reasons missions completed planning before the corresponding risk assessments were completed. In one instance, the planning document included non-G2G activities for which a fiduciary risk assessment was not required, according to the document; to avoid delays in the approval of these non-G2G activities, the mission approved the larger project and proceeded while the G2G- related risk assessment was under way. In another instance, the USAID mission had a previous funding relationship with the partner-government agency and thus may have decided to proceed because it was already aware of potential risks.

USAID policy on G2G assistance clearly underscores the importance of integrating risk mitigation measures into project and M&E planning. When missions finalize project planning without having the information from completed fiduciary risk assessments, they may not incorporate into the design of the project appropriate safeguards or measures that would strengthen partner-country systems. Furthermore, not integrating partner- government follow-up on risk mitigation measures into project M&E plans weakens oversight and accountability and creates potential reporting inefficiencies.

In some cases, missions documented risk mitigation measures and compliance-monitoring plans in other project-related documents. For example, in Tanzania, the mission sent implementation letters to the government entities receiving G2G assistance outlining agreed-upon action plans for mitigating risks and stating that the entities would report progress to the mission on a regular basis.

USAID Missions Missed Opportunities to Coordinate Risk Assessments with Other Donors

On the basis of our fieldwork in Nepal, Peru, and Tanzania and our review of 29 planning documents for projects with G2G assistance funding obligated in fiscal year 2012, we found that missions missed key opportunities to work with other donors. According to USAID policy on G2G assistance, missions may consider various means of coordinating with other donors, such as by conducting joint risk assessments, involving other donors in USAID’s assessment, sharing the results of USAID’s fiduciary risk assessments, or other measures. In the three countries we visited, USAID mission and partner-government officials, as well as other donor representatives, told us that USAID’s risk assessments provided valuable opportunities for learning and relationship building, but they also cited, in all three countries, opportunities for improved coordination.

In Nepal, representatives of bilateral and multilateral donor organizations participating in a working group dedicated to improving public financial management stated that each donor conducts its own risk assessment and that they were not aware of the results of USAID’s assessment. They also stated that there were opportunities for donors to better coordinate their risk assessment efforts and share information, thereby decreasing duplicative efforts and eliminating unnecessary burdens on the government of Nepal.

In Peru, the Swiss Agency for Development Cooperation assessed the management capacity of a subnational government partner that also underwent a USAID fiduciary risk assessment. Swiss officials stated they were not aware of the results of USAID’s assessments, and USAID’s assessments made no reference to the Swiss assessment.

In Tanzania, officials from a key recipient of G2G funds stated that the government organization had previously undergone capacity assessments and received technical assistance from the Swedish International Development Agency, but the findings of these assessments were not reflected in USAID’s risk assessment.

In addition, in our review of planning documents for 29 G2G assistance projects, we found that 18 (about two-thirds) included general information about the project’s relationship to other donors’ activities, but none of these 18 described how USAID planned to work with other donors to assess risks or follow up on mitigation plans and steps.

Although we did not find any examples of risk assessments conducted jointly with other donors in the 29 planning documents we reviewed, in 2014, the USAID mission in Senegal conducted a risk assessment of the Senegalese Ministry of Health and Social Welfare jointly with the World Bank. USAID headquarters officials told us they consider this type of joint assessment to be a best practice. In addition, USAID headquarters officials noted that mission officials in Rwanda, Egypt, and Indonesia worked with other donors, including the World Bank, on public financial management capacity assessments. Nevertheless, mission officials in the three countries we visited told us that donor coordination on risk assessment can be difficult and cited several reasons, among them that USAID has more rigorous risk assessment requirements, donor budget and project planning cycles may not coincide with USAID’s time frames, and donor working groups may be organized around pooled funding arrangements in which USAID does not participate. In addition, two of the USAID missions had yet to determine who should take the lead on donor coordination focused on improving partner-government public financial management.

Despite such difficulties, some USAID mission officials and donor representatives we spoke with described potential benefits of coordination on risk assessments. For example, they told us that since donors’ risk assessments tend to produce similar results, a lack of coordination among donors leads to duplication and increased costs associated with conducting the assessments, costs borne by donors (including USAID) and partner governments alike. Moreover, by not coordinating on risk assessments, USAID misses opportunities to build relationships among donors that can help strengthen implementation of partner countries’ risk mitigation activities, including efforts to strengthen partner-government capacity.

Implementation: Missions’ Disbursement of Assistance Funds Primarily on a Reimbursement Basis Reflects Accountability Standards and Adheres to USAID Policy

USAID policy on G2G assistance addresses accountability standards related to mitigating risk and safeguarding funds by encouraging missions to select one of three funding mechanisms for G2G assistance. We found that missions frequently established funding mechanisms whereby USAID reimburses partner governments for costs related to achievement of results. In addition, consistent with USAID policy addressing accountability standards related to the establishment of control activities, missions employed G2G assistance agreements and corresponding implementation letters with partner governments to commit funds and set objectives and conditions for funding, among other things.

Missions Frequently Used Reimbursement Funding Mechanisms

USAID policy on G2G assistance addresses accountability standards related to mitigating risk and safeguarding funds by encouraging missions to select a funding mechanism that best achieves the purpose of the project or activity, fosters and deepens the partner government’s public financial management capacity, efficiently implements the project or activity, guarantees accountability, and promotes sustainability. Missions generally choose from among three possible funding mechanisms for G2G assistance: cost reimbursement, fixed-amount reimbursement, and resource transfer.

Cost reimbursement: USAID reimburses the partner-government entity for actual costs and expenditures incurred in carrying out the project activities, up to an estimated total cost specified in advance.

Fixed-amount reimbursement: USAID reimburses an amount agreed to in advance based on unit of output, such as kilometers of roads built, or on associated project milestones, after the mission has verified that quality standards have been met.

Resource transfer: USAID provides a transfer of funds or commodities to the partner government. Disbursement is generally dependent on the completion of specific actions by the partner government.

Since 2012, legislation governing the use of funds for direct G2G assistance states that such assistance should be made on a cost- reimbursable basis.Our review of 29 planning documents for G2G assistance activities with fiscal year 2012 obligations showed that, in nearly all of these cases (26 of 29), USAID missions employed reimbursement-based mechanisms. In 11 of the 26 cases, missions also allowed funds to be advanced to the partner country. USAID policy allows for cash advances for projects that have been approved outside of the partner government’s budget cycle or when funding from the partner government is not available. In such cases, the partner government is required to provide documentation of the proper use of the funds. Finally, in 3 cases, USAID missions provided resource transfers. In our three case study countries, we noted the following examples of missions using these three types of funding mechanisms: In Nepal, the USAID mission used a resource transfer for a democracy and governance project, contributing to a multidonor trust fund managed by the government of Nepal; the mission also planned to use a fixed-amount reimbursement agreement to fund an accompanying capacity-building project with the Ministry of Peace and Reconstruction.

In Peru, the mission specified cost reimbursement as the funding mechanism in its planning document for a health, education, and alternative development project implemented through the regional government of San Martín. The planning document stated that this mechanism was appropriate because it would provide the mission flexibility to make adjustments during project implementation based on the regional government’s performance or in the event of any unforeseen circumstances.

In Tanzania, the USAID mission signed a fixed-amount reimbursement agreement with the Tanzania National Roads Agency for a rural roads rehabilitation project. However, to mitigate the agency’s lack of resources to finance the project start-up, USAID provided a 20 percent cash advance, conditional on the transportation agency’s agreement to certain terms.

Consistent with USAID Policy, Assistance Agreements and Implementation Letters Document Terms of G2G Assistance

USAID policy related to use of assistance agreements and implementation letters addresses accountability standards regarding documentation of significant events and establishment of control activities.

According to USAID policy on G2G assistance, assistance agreements between USAID and partner governments commit U.S. funds; these agreements also generally set forth agreed-upon terms regarding time frames; expected results; means of measuring results; and resources, responsibilities, and contributions of participating entities for achieving a clearly defined objective. In addition, USAID policy on G2G assistance states that missions can use implementation letters, which are formal correspondence from USAID to another party, to commit funds, detail project implementation procedures, specify the terms of an agreement, record the completion of conditions precedent to disbursements, and approve funding commitments and mutually agreed-upon modifications to project descriptions. Since 2012, legislation governing the use of funds for direct G2G assistance requires USAID to enter into formal agreements with partner governments on the objectives of this assistance.

On the basis of our review of 29 planning documents for projects with G2G assistance funding obligated in fiscal year 2012, we found that USAID used one or more of four types of assistance agreements (see table 2) and associated implementation letters. For example, the USAID mission in Nepal has implemented G2G assistance through a broad assistance agreement with the national government with specific provisions spelled out in various implementation letters exchanged with the Ministries of Health and Population and Education, among others. Similarly, USAID Peru has implemented its G2G assistance through two broad assistance agreements, the first signed in 2008 and the second in 2012. The mission used implementation letters to approve work plans and establish funding amounts, among other things, with three government entities. In addition, the USAID mission in Tanzania implemented some of its G2G assistance through a strategic objective grant agreement with the national government to improve accountability and oversight of public resources through increased citizen engagement; the mission then used implementation letters to establish funding amounts, work plans, and reporting requirements with the National Audit Office, Public Procurement Regulatory Authority, and Ethics Secretariat.

M&E: USAID Missions Collected Audits, but Those We Reviewed Were Often Late; Project-Level M&E Planning Did Not Always Address Local Solutions Objectives

Audit requirements that apply to USAID’s G2G assistance are a key control for monitoring G2G assistance. Some of the USAID missions included in our review provided audits of G2G assistance they had collected when required. We found that these audits revealed weaknesses in partner countries’ management of assistance funding. However, the audits were often submitted late, limiting their usefulness as a monitoring tool. In addition, we found that project-level plans for M&E rarely included indicators or evaluation questions for assessing the degree to which G2G assistance activities would build local systems capacity, increase country ownership, or enhance sustainability—the three interrelated goals of the Local Solutions initiative.

Audits Are a Key Monitoring Tool and Have Revealed Financial Management Weaknesses, but Late Submission Hampers Their Effectiveness

Audit requirements that apply to USAID’s G2G assistance are a key control for monitoring G2G assistance and thus support proper stewardship of U.S. government resources. According to USAID policy on audits, when a financial audit is required, the completed audit is to be submitted no later than 9 months after the end of the audit period. The main determinant for conducting an audit is whether G2G assistance recipients will expend more than $300,000 in the given fiscal year. USAID’s Office of Inspector General (OIG) reviews submitted audits and establishes recommendations for action. USAID policy on audits states that missions receiving such recommendations should take whatever steps are necessary to respond to the recommendations and provide documentation of the actions it takes.

On the basis of our review of 18 audits provided by five USAID missions, we found that these missions collected audits and used them to identify weaknesses in the management of G2G assistance, but the frequently late submission of these audits to USAID limited their usefulness as a monitoring tool. In response to our request for audits of G2G assistance, five USAID missions provided 18 financial audits. Six of the 18 audit opinions were unqualified, meaning the auditors found no significant problems. However, 12 of the audits received qualified audit opinions because of questions about costs identified by the audits. Examples of costs questioned by the audits included payment of value-added tax, grants or advances to other organizations, and training- and travel-related expenses. In addition, during reviews of the audits, OIG identified additional questionable costs in 6 audits it believed did not comply with the terms of the award agreement or lacked supporting documentation. Finally, audits reported material weaknesses in internal controls in 14 of the financial audits and a lack of compliance with agreements, regulations, or laws in 17 of the 18 audits. The auditors’ negative findings in these areas included payments to contractors for unverified work, procurement from suppliers not on approved vendor lists, and improper cash advances, among other things.

On the basis of its reviews of submitted audits, OIG made recommendations to USAID missions in all of the 15 OIG audit reviews we received from USAID missions. According to audit tracking data and supporting documentation provided by USAID, missions have taken final action on most of the recommendations in the OIG audit reviews we received. For example, one OIG audit review included a recommendation for USAID Nepal to correct deficiencies related to procurement and internal controls; in response, the mission agreed to ensure that goods and services are procured from authorized vendors only. In another example, OIG instructed USAID Ethiopia to determine whether questioned costs of about $28,000 were allowable or unallowable and, if appropriate, to recover unallowable costs; the mission found the costs to be unallowable and recovered the funds.

Nevertheless, on the basis of our review of these audits, we found that two-thirds (12 of 18) were submitted late (see table 3); in one case, OIG indicated it had received the audit report about a year late.

The late submission of audits delays subsequent audit follow-up activities required by USAID policy, including OIG’s review as well as USAID mission follow-up on OIG recommendations. For example, on the basis of its review of an annual audit of a government entity in Nepal, OIG recommended that the USAID mission ensure that the government entity correct one internal control weakness and address certain questioned costs, among other things. However, because the audit was submitted 1 year late—and near completion of the G2G assistance activity—the mission notified OIG that it would not take further action on the recommendations. The mission determined that although it did not plan to provide additional assistance to the government entity at that time, it would ensure corrective actions were taken prior to providing any future assistance. Late audit submission reduces the audit’s usefulness for selecting timely and appropriate responses to the audit findings—such as recovering funds, putting in place additional safeguards, or identifying ways to enhance financial management capacity. Moreover, by allowing weaknesses to continue unaddressed, late audits of G2G assistance activities increase the risk that those activities will not achieve their goals as efficiently and effectively as possible.

Project-Level M&E Plans Frequently Lacked Key Indicators and Evaluation Questions for Measuring Capacity Building, Country Ownership, and Sustainability

USAID policy on M&E for G2G assistance incorporates accountability standards through the identification of objectives and related performance indicators. USAID policy on M&E requires missions to describe in their project planning documents indicators and, when appropriate, evaluation methods that will be used to assess achievement. Furthermore, project planning documents, in describing the project’s M&E plan, must link to missions’ country development strategies and mission-wide performance management plans. In addition, USAID policy on G2G assistance states that carefully defining M&E roles and responsibilities during project design is critical for this type of assistance.

In our review of the M&E plans included in 29 planning documents for G2G activities with funding obligated in fiscal year 2012, we found that missions included general project-level M&E information, but often did not specify how they would monitor or evaluate achievement of Local Solutions goals the missions included in their mission-level strategies. Although some missions have begun to develop ways to measure and track progress in achieving these goals, at the time of our review, USAID did not have agency-wide guidance on how to do so.

The country development strategies of 13 missions we reviewed that obligated G2G funding in fiscal year 2012 included strengthening partner- government capacity, enhancing and promoting country ownership, and increasing sustainability—the three goals of the Local Solutions initiative—among their development objectives. For example, one of USAID Nepal’s three development objectives is “more inclusive and effective governance,” while one of USAID Peru’s three development objectives is “management and quality of public services improved in the Amazon Basin,” and one of USAID Tanzania’s three development objectives is “effective democratic governance improved.”

However, we found relatively little information in the project-level planning documents we reviewed about how missions would track progress toward these goals. In our review of the M&E plans included in 29 planning documents for G2G assistance activities with fiscal year 2012 obligations, we found that nearly all of them included general M&E information—such as periodic progress reporting, illustrative indicators, and general plans for evaluating program results—as well as considerations related to program sustainability. However, 18 of 29 planning documents we reviewed made no mention of indicators for measuring capacity, ownership, or sustainability, and 24 lacked evaluation plans or questions addressing these goals.

Our previous report on Local Solutions noted specific weaknesses in USAID’s proxy indicator for tracking Local Solutions progress—the percentage of mission program funds obligated to partner-country systems. In addition, we noted that a USAID-commissioned study, while it concluded that increasing funding to partner governments was associated with improved capacity of partner governments in some countries, also highlighted the need for more evidence demonstrating the impact of this approach on funding development assistance relative to other funding approaches. At the time of our prior review, USAID officials told us that other approaches existed within the agency for measuring progress toward strengthening partner-country systems and promoting sustainable development, particularly project-level indicators and evaluation data.

Some of the planning documents we reviewed did include indicators or evaluation plans, suggesting that missions have begun to develop ways to measure and track progress in achieving the three Local Solutions goals of strengthening capacity to implement programs, enhancing and promoting country ownership, and increasing sustainability. For example, the planning document for a nutrition project in Ghana envisioned conducting an impact evaluation to assess the relative effectiveness in achieving results of direct G2G funding versus an indirect funding model. The same planning document also included several expected results related to local government capacity, such as strengthening district assemblies’ capacity to manage direct donor funding. In addition, the M&E plan for a USAID early-education project in Nepal identified as an illustrative evaluation question prospects for scale- up and sustainability of the project as a regular activity of the local Ministry of Education. Finally, the planning document for a democratic governance and accountability project in Tanzania indicated that an evaluation would identify the keys to sustainability of enhanced public resource oversight, as well as constraints to wider adoption of accountability practices. This planning document also stated that indicators of citizen perceptions of governance and accountability would be tracked through a survey in targeted districts.

The President’s Emergency Plan for AIDS Relief (PEPFAR), in which USAID is heavily involved, and other USAID-specific initiatives and programs have published guidance addressing how to measure and track progress toward enhancing capacity, country ownership, and sustainability. For example, PEPFAR’s guidance on capacity building provides illustrative examples of indicators, such as percentage of PEPFAR-supported government staff transferred to government salaries, number of workers trained and percentage of trainees retained, and percentage of partners with on-time reports and unqualified audits. With regard to sustainability planning, PEPFAR’s guidance calls on PEPFAR country teams to develop sustainability M&E plans. Similarly, the M&E guidance for the U.S. government’s global hunger and food security initiative (Feed the Future) states that it will measure public sector capacity and program sustainability primarily by tracking partner- government budgets allocated to agriculture and nutrition. With regard to measuring country ownership, the Global Health Initiative’s interagency paper on country ownership cites increases in health spending in the partner country and in direct funding to its government as possible indicators. Finally, USAID’s strategic framework for democracy, human rights, and governance cites improved governance and institutional capacity as key expected results of USAID activities.

USAID’s July 2014 policy on G2G assistance allows missions to collaborate with partner governments to identify indicators and select evaluation questions that address capacity building and sustainability. According to USAID headquarters officials, an internal discussion paper on M&E for G2G assistance activities elaborates on these concepts, and the agency is currently reviewing tools and methods used by missions to measure performance of partner governments. In addition, according to USAID, as of March 2015, the agency is in the process of developing supplemental guidance on indicators that can be used to track results of strengthening public financial management activities. Nevertheless, at the time of our review, USAID did not have agency-wide guidance on how to collect data or evaluate the development hypothesis that channeling funds through partner-government systems helps to achieve Local Solutions goals. Without integrating indicators or evaluations for assessing progress toward Local Solutions goals into the plans for ongoing and future projects that include G2G assistance activities, USAID missions risk committing resources to unproven funding strategies as the agency executes its plans to expand G2G assistance in scale and scope. Moreover, USAID missions forgo an opportunity to contribute to empirical knowledge about the effects of channeling funds through partner- government systems.

Conclusions

USAID’s policies guiding the processes that missions follow to plan, implement, and monitor and evaluate G2G assistance generally reflect an international consensus on how best to achieve development outcomes as well as accepted accountability standards. As designed, these policies permit USAID to work toward its goals of strengthening local system capacity, country ownership, and sustainability while providing reasonable assurance that U.S. resources are being used as intended. We found that USAID policies require that missions incorporate safeguards throughout the program cycle of planning, implementing, and monitoring and evaluating G2G assistance; however, we also found that missions have not yet fully applied these safeguards in all cases. In the cases we reviewed, USAID had carried out required fiduciary risk assessments, documented project planning, utilized assistance agreements and funding mechanisms, conducted audits, and devised key elements of monitoring and evaluation. However, missions in some cases had not completed the risk assessments in a timely manner, hampering their efforts to integrate assessment findings and mitigation measures into project planning and M&E plans, when required. Missions also encountered difficulties coordinating risk assessment and related activities with other donors, potentially leading to inefficiencies and less effective oversight of partner countries’ efforts to address financial management weaknesses. Because required audits we reviewed often were submitted late, the subsequent chain of OIG review and mission response also was delayed, decreasing the likelihood of resolving important audit findings such as questioned costs and other financial management weaknesses. Finally, though some missions demonstrated that they had begun to envision how to monitor and evaluate whether G2G assistance is achieving project goals while also enhancing capacity, country ownership, and sustainability, the agency as a whole has yet to identify indicators or evaluation approaches that would support expansion of these efforts.

Recommendations for Executive Action

We recommend that the USAID Administrator take the following five actions to improve accountability for G2G assistance: 1. develop an action plan to improve the timeliness of risk assessments so that these assessments can better inform project planning; 2. develop an action plan to ensure that M&E plans for G2G assistance activities incorporate risk mitigation measures; 3. disseminate information to missions regarding best practices for coordinating risk assessments with other donors; 4. identify the factors contributing to late submission of required audits and develop a strategy to improve on-time audit submission and follow-up; and 5. develop and disseminate guidance on assessing the effects of G2G assistance on partner-country capacity, ownership, and sustainability, including through the identification of indicators and evaluation approaches.

Agency Comments and Our Evaluation

We provided a draft of this report to USAID for review and comment. USAID provided technical comments on the draft, which we incorporated as appropriate. USAID also provided written comments, which are reprinted in appendix IV. In its written comments, USAID agreed with all five of our recommendations and described steps taken, planned, or under way that it believes respond to the recommendations. With regard to the first two recommendations, given the actions it already has completed or has scheduled for completion by the end of 2015, USAID requested that we either remove the recommendations from our final report or indicate that the recommended actions have been completed and that we consider the recommendations implemented and closed. We appreciate USAID’s detailed description of its reported actions—including revised policy, training, and other guidance—aimed at improving the timeliness of risk assessments and ensuring that monitoring plans for G2G assistance incorporate risk mitigation measures. We will work expeditiously with USAID to collect and review evidence documenting its actions to address the first two recommendations. We also look forward to following up with USAID to monitor and collect information on the steps the agency noted it has already taken or planned to take in response to our other three recommendations.

We are sending copies of this report to appropriate congressional committees, the Administrator of USAID, and other interested parties. The report is also available at no charge on the GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact me at (202) 512-3149 or gootnickd@gao.gov. Contact points for our Office of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix V.

Appendix I: Objectives, Scope, and Methodology

Our objectives in this report were to assess the extent to which U.S. Agency for International Development (USAID) policies and practices related to (1) planning, (2) implementing, and (3) monitoring and evaluating government-to-government (G2G) assistance provide reasonable assurance that this assistance is used as intended.

To address these objectives, we reviewed USAID policy outlined in the agency’s Automated Directives System (ADS) related to planning, implementing, and monitoring and evaluating G2G assistance activities. We also interviewed USAID officials in Washington, D.C., about the policies we reviewed. Some of the policy documents we reviewed apply broadly to all USAID assistance, while others were specific to G2G assistance. Specifically, the chapters we reviewed were the following:

ADS Chapter 220: Use and Strengthening of Reliable Partner Government Systems for Implementation of Direct Assistance (first issued August 2011, revised in March 2012 and July 2014);

ADS Chapter 201: Planning (most recently revised in December

ADS Chapter 203: Assessing and Learning (most recent revisions in January and November 2012 and January 2013).

In our summary of these policies, we drew from the most recent versions available at the time of our review, but in conducting our analysis, we used the versions that were in place at the time that we developed our tools for analysis. We also reviewed other chapters referenced in these policies, such as ADS 591: Financial Audits of USAID Contractors, Recipients, and Host Government Entities and ADS 350: Grants to Foreign Governments, as well as supplemental guidance (e.g., Public Financial Management Risk Assessment Framework Manual and Key Bilateral Funding Mechanisms). To assess the degree to which these policies reflect generally accepted accountability standards, we compared the most recent versions of these policies with relevant sections of GAO’s Standards for Internal Control in the Federal Government, which we refer to as accountability standards. These standards outline ways agencies can improve accountability, such as by assessing and mitigating risk and carrying out defined policies and procedures. We mapped the USAID policies listed above to relevant sections of the accountability standards, noting ways in which USAID policy addresses specific factors or elements that contribute to a supportive environment for accountability.

To review mission planning for G2G assistance activities, we began by identifying project appraisal documents (PAD) and activity approval documents (AAD) as key sources of information for our review. Starting in 2012, USAID policy on planning required missions with approved country development cooperation strategies (CDCS) to document planning for projects (which consist of one or more activities) in PADs. Prior to 2012, missions documented project and activity planning using AADs. We next identified 22 USAID bilateral missions that had obligated more than $500,000 in G2G assistance in fiscal year 2012 and had completed a stage 1 rapid appraisal at the time of our review, according to USAID Local Solutions data and other information provided by the agency. We then requested planning, implementation, and monitoring and evaluation documents—including risk assessments, activity approval documents, project appraisal documents, assistance agreements, implementation letters, and audits—from these 22 USAID missions.

During the course of this preliminary work and as we reviewed the submitted documents, we removed 8 missions from the scope of our review for the following reasons. First, according to USAID headquarters and mission officials, all of the fiscal year 2012 G2G funds obligated by missions in Egypt and Mali were deobligated after fiscal year 2012.

Second, mission officials in Indonesia and Georgia determined that all of each mission’s respective fiscal year 2012 obligations had not, in fact, been implemented through partner government entities and, as such, were incorrectly characterized as G2G assistance. Third, project and activity planning documents for G2G assistance activities with fiscal year 2012 obligations were not available for USAID missions in Ethiopia and Rwanda. In response to our request for documents, these missions provided assistance agreements and implementation letters; in the case of Ethiopia, the mission stated that the agreements and letters documented authorization of G2G assistance activities. Finally, because GAO, the USAID Office of Inspector General (OIG), and the Special Inspector General for Afghanistan Reconstruction had each reviewed various aspects of USAID’s G2G assistance in Afghanistan and Pakistan, we did not include those two countries in our document review. (App. III provides a summary of other reviews of USAID’s G2G assistance in Afghanistan and Pakistan.) As a result of this process, we reviewed all 29 project appraisal or activity approval documents provided by 14 USAID missions: Armenia, Barbados, Ghana, Haiti, Honduras, India, Liberia, Mozambique, Nepal, Peru, Senegal, South Africa, Tanzania, and Zambia. Table 4 provides a list of the projects with G2G assistance activities for which we reviewed planning documents, by USAID mission.

To conduct our review of these planning documents, we developed a data collection instrument to gather information on the required elements of PADs, as described in USAID policies on G2G assistance, planning, and monitoring and evaluation (M&E). Table 5 provides information on the data fields in our data collection instrument.

Because USAID requirements differed for PADs and AADs (the two types of planning documents we reviewed), we tracked which of these documents each mission used and took this into consideration as we conducted our analysis of the information gathered. To determine the extent to which these documents contained the required elements, we reviewed each planning document and recorded any relevant information we found for each of the elements in our data collection instrument. We then analyzed this information and determined whether the information provided met requirements outlined in the USAID policies described above. With regard to project-level M&E plans, while we recognized that USAID missions may refine project M&E plans after completing project design, our interest was in the degree to which missions had integrated M&E into planning for G2G assistance activities. Accordingly, we reviewed the M&E information provided in the planning documents we collected and identified cases where these documents (1) included general M&E information and (2) specifically addressed sustainability, country ownership, or capacity. Finally, we also reviewed assistance agreements and implementation letters associated with the G2G activities in our review for information we did not find in the planning documents, including the funding mechanism used to implement the G2G activity and partner-government compliance with risk mitigation measures.

To identify examples of types of risks identified in USAID risk assessments, we selected illustrative examples from our case study countries for inclusion in this report. We selected these examples to demonstrate the type of information contained in these risk assessments, including risks identified, the risk level (i.e., low, medium, high, or critical), and the assessor’s recommendation for mitigating each risk.

To obtain insights into the use of financial audits as a key monitoring tool for G2G assistance, we requested the most recent completed financial audits from 22 missions with G2G assistance funds obligated in fiscal year 2012. In response to this request, 5 USAID missions provided 18 financial audits: Ethiopia (1), India (2), Nepal (7), Peru (7), and Rwanda (1). We reviewed audits submitted by these missions in response to our request, but did not seek to validate that all required audits were conducted or submitted. Accordingly, our findings are limited to the audits provided. We also reviewed agency or OIG reviews, memos, and related documentation provided by USAID headquarters and USAID missions. We recorded the following information from these documents: the type of auditor (third-party contractor, host country supreme audit institution, mission, or OIG), audited entity, time frame for audit and submission, audit findings, OIG recommendations, and status of implementation of the recommendations for each audit. The analysis we conducted is a reflection of the documentation provided by USAID, including the documents’ limitations. For example, OIG recommendations incorporate the findings and recommendations of the third-party contractor, supreme audit institution, and USAID auditors. We considered it reasonable to assume that if OIG had closed all its audit review recommendations, then the underlying auditors’ findings and recommendations for that audit could also be considered closed.

We also selected 3 USAID missions—Nepal, Peru, and Tanzania—for in- depth case studies. We chose these missions on the basis of fiscal year 2012 G2G funding levels; sector diversity (G2G assistance in at least two sectors, such as education or health), their progress in implementing projects and activities, and geographical diversity. While the results of our case studies cannot be projected across all USAID missions, these 3 missions provide what we believe to be an illustrative mix of USAID’s G2G assistance activities. While in these countries, we conducted site visits and interviewed USAID and partner-government officials as well as representatives of other donor countries and civil society.

We conducted this performance audit from April 2014 to June 2015 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

Appendix II: Key Components of U.S. Agency for International Development Program Cycle Related to Government-to-Government Assistance

Following the launch of USAID Forward in 2010, USAID began to revise various policies related to the agency’s planning, project design and implementation, and monitoring and evaluation—often referred to as USAID’s program cycle. These policies guide the agency’s assistance program activities and operations. While many of these policies apply broadly to all USAID assistance, some apply specifically to G2G assistance. For the purposes of our report, we describe the program cycle in three stages: planning, implementation, and monitoring and evaluation. We summarize key components of USAID’s program cycle as they relate to G2G assistance below and conceptualize these components in figure 2.

Planning

According to USAID’s Automated Directives System Chapter 201, planning begins at the mission level, with the development of a country development cooperation strategy (CDCS). The CDCS reflects the agency’s development approach in each country and articulates how USAID’s strategy reflects partner-country priorities. Regarding G2G assistance, the policy states that missions should consider building local capacity, including that of partner governments, to achieve sustainable development results. According to USAID’s ADS Chapter 220: Use and Strengthening of Reliable Partner Government Systems for Implementation of Direct Assistance, planning for G2G assistance activities also entails risk assessment and formulation of risk mitigation plans; these assessments and plans are key elements of broader project planning, which is summarized in a project appraisal document (PAD).

Country Development Cooperation Strategy

USAID policy on planning states that a CDCS must include goals, results, and indicators, among other things, which help focus USAID investments in key areas affecting partner countries’ overall stability and prosperity. The policy states that missions should consider using partner-government systems in order to develop their capacity and improve sustainability— two key Local Solutions goals—during development of their CDCS. We found that these considerations were reflected in various parts of the CDCS, notably in general discussions of how the mission is addressing USAID initiatives as well as in the results framework, which identifies objectives and expected results. Table 6 summarizes key elements of CDCSs for USAID missions in our three country case studies: Nepal, Peru, and Tanzania.

Risk Assessment and Risk Mitigation Plan

According to USAID policy on planning, while developing the CDCS, missions considering the use of partner-government systems generally must conduct a “stage 1 rapid appraisal,” which is a country-level examination of the partner government’s public financial management environment and associated risks. The stage 1 rapid appraisal is used to determine whether G2G assistance is feasible—in other words, whether to proceed to the next risk assessment stage—and informs development of the CDCS. In addition, as of July 2014, USAID policy states that, when appropriate, certain missions may be asked to undertake an expanded democracy, human rights, and governance review for G2G assistance in order to aid consideration of the reputational risk to the U.S. government as well as the risk that U.S. government resources could be misused in a way that damages political freedoms or human rights or benefits a central government at the expense of its citizens. Following completion of the stage 1 rapid appraisal, missions may decide to conduct one or more risk assessments of partner-government organizations (e.g., ministries or subnational agencies), known as “stage 2” risk assessments. Intended to inform the larger project design process, stage 2 risk assessments identify fiduciary risks and propose measures to address them. According USAID’s policy on G2G assistance, USAID missions generally must complete a fiduciary risk assessment as part of the overall project design and authorization process before obligating funds to a partner government for implementation of G2G assistance activities.

Project Planning Document

According to USAID policy on planning, the PAD is used by missions to document the complete design of the project and serve as a reference document for project authorization and subsequent implementation. PADs must define the following: the development problem to be addressed by the project and how it links to the mission CDCS; a monitoring and evaluation (M&E) plan, including expected results and indicators; the financial plan and budget; and the overall project implementation plan.

Table 7 describes projects with G2G activities in the three case-study countries.

According to USAID policy on G2G assistance, PADs for projects with G2G activities must incorporate the findings of stage 2 risk assessments and a plan for mitigating risks identified in the fiduciary risk assessment. Possible risk mitigation measures may include the following: disbursement of funds in tranches, technical assistance for capacity building, inclusion of milestones and benchmarks for demonstrating progress in correcting financial management weaknesses,

USAID “no objection” reviews of actions taken by partner-government ministries or agencies receiving assistance before proceeding to the next step, and limits on advance of funds.

The policy also states that risk mitigation plans should be incorporated into the project M&E plan, which is a required part of the PAD, and include provisions for ensuring partner-government follow-up on any risk mitigation measures through periodic progress reports or meetings with partner-government officials as part of the project’s M&E plan. In addition, the policy states that missions may consider various means of coordinating with other donors, such as by conducting joint risk assessments, involving other donors in USAID’s assessment, sharing the results of USAID’s risk assessments, or other measures.

Implementation

USAID’s policy on G2G assistance outlines use of assistance agreements and implementation letters as well as selection of funding mechanisms for G2G assistance. The assistance agreements and implementation letters specify the type of funding mechanism USAID will use for the G2G assistance project or activity. USAID policy on G2G assistance also describes factors missions should consider when selecting funding mechanisms.

Assistance Agreements

According to USAID policy, assistance agreements between USAID and partner governments set forth mutually agreed-upon terms regarding time frames, results expected to be achieved, means of measuring those results, resources, responsibilities, and contributions of participating entities for achieving a clearly defined objective. In addition, because missions obligate funds through assistance agreements, missions must go through a set of preobligation requirements designed to ensure adequate planning prior to committing funds. USAID implements G2G assistance using one or more of four types of assistance agreements: development objective agreement: when obligating funds through development objective agreements, under USAID, policy missions must develop separate agreements for each development objective in an approved CDCS; bilateral project agreement: used to implement specific projects; limited scope grant agreement: used to award a grant to a partner- government entity for project obligations of less than $500,000; and program assistance agreement: used to provide resource transfers in the form of foreign exchange or commodities.

In addition, USAID missions use implementation letters, which are formal correspondence from USAID to another party, and can serve several functions, including detailing project implementation procedures, specifying the terms of an agreement, recording the completion of conditions precedent to disbursements, and approving funding commitments and mutually agreed-upon modifications to project descriptions. In some cases, missions use assistance agreements to obligate funds to several projects or activities implemented by different partners. For G2G assistance activities developed under some of these types of agreements involving multiple partners, missions may subobligate funds to partner-government entities—such as central government ministries and regional and local governing authorities— through the use of implementation letters. USAID policy effective as of July 2014 states that the assistance agreement or implementation letter should incorporate risk mitigation measures.

Funding Mechanisms

USAID policy describes factors missions should consider when selecting funding mechanisms for G2G assistance. The goal in each case is to select the funding mechanism that will best achieve the purpose of the project or activity, foster and deepen the partner government’s public financial management capacity, efficiently implement the project or activity, guarantee accountability, and promote sustainability. According to USAID policy, selection of the appropriate funding mechanism is also an important means of mitigating risk and safeguarding funds. USAID policy outlines three funding mechanisms:

Cost reimbursement: USAID reimburses the partner-government entity for actual costs and expenditures incurred in carrying out the project activities, up to an estimated total cost specified in advance. Cost reimbursements require missions to prepare a budget that reasonably estimates the cost of implementing the project, with the understanding that the final amounts may be further refined. Cost reimbursements may be used when unit costs cannot be estimated with sufficient accuracy at the beginning of the project because of price fluctuations over the life of a project that are outside the control of the partner-government. Because USAID reimburses actual costs incurred based on these estimates, the mission is responsible for closely monitoring project implementation to help ensure that it is on schedule and to resolve problems as they arise. When the partner government is ready to request a reimbursement for costs incurred during project implementation, it submits the request according to procedures specified in the assistance agreement or the implementation letter, along with certified financial reports detailing the amount of expenditures incurred and supporting documents, such as contracts, invoices, and payments. The reports and supporting documents are subject to USAID review and audit procedures outlined in the agreement. Under this funding mechanism, USAID may provide cash advances for projects that have been approved outside of the government’s budget cycle or when funding from the partner government is not available.

Fixed amount reimbursement: USAID reimburses an amount agreed to in advance, per output or associated milestone, after the mission has verified that quality standards have been met. This mechanism requires that the mission and the partner government invest a significant amount of time and resources to develop cost estimates for outputs and associated milestones during the design phase of the project. The partner-government entity implementing the project submits design specifications and cost estimates for each output or associated milestone for approval by the mission. The mission independently verifies that the estimate is reasonable and negotiates payment amounts with the partner government for each output or milestone. The amount of the mission’s contribution to the project is thereby fixed and the partner government bears the responsibility for any unforeseen cost increases. Similarly, if actual costs are less than estimated costs, the mission’s payment to the partner government is not reduced. However, the mission may make periodic adjustments for subsequent payment amounts in certain cases, such as unforeseeable inflation or price increases. Once the cost estimate has been established under this funding mechanism, the mission’s monitoring and oversight of the project is significantly less than that required for the cost reimbursement mechanism because the mission’s primary role is to verify that the outputs or associated milestones have been completed and meet the agreed-upon quality standards. In addition, during project planning, the mission must also determine that the partner-government entity has the qualified management staff with sufficient technical skills and experience to implement the project in a timely manner. As with the cost reimbursement mechanism, USAID may also provide cash advances under this funding mechanism, as long as these funds are then liquidated based on successful completion of outputs or associated milestones rather than actual costs incurred.

Resource transfer: USAID provides a generalized resource transfer in the form of foreign exchange or commodities to the partner government. According to USAID policy, resource transfer is used for either (1) sector program assistance, which provides cash or in-kind assistance used to carry out wide-ranging development plans in a defined sector without restriction on the specific use of funds, or (2) balance-of-payments or general budget support, commonly known as cash transfers. The transfer of resources is generally dependent on the completion of specific actions by the partner government. For example, the provision of funds under sector program assistance must be directly linked to the implementation of specific policies, institutional reforms, or other partner-government actions necessary to achieve agreed-upon development objectives. These actions must be specified directly or by reference in the assistance agreement as conditions that must be established before these funds are disbursed, and the mission is required to document how it reached the decision to disburse funds.

Monitoring and Evaluation

USAID’s general audit requirements outlined in ADS Chapter 591: Financial Audits of USAID Contractors, Recipients, and Host Government Entities apply to G2G assistance. The main determinant, in most cases, for conducting an annual audit is whether G2G assistance recipients expend more than $300,000 in G2G assistance funds in the given fiscal year. In addition, both USAID’s ADS Chapter 203: Assessing and Learning and its policy on G2G assistance establish M&E requirements. According to these documents, missions should begin preparing for M&E activities during the planning stage and must document M&E planning in the planning document for each project or activity. Notably, USAID policy on G2G assistance states that carefully defining M&E roles and responsibilities during project design is critical for this type of assistance.

Audit

According to USAID policy on audits, non-U.S.-based organizations— including partner governments—expending $300,000 or more of USAID- funded awards must be audited annually. In addition, a closeout audit must be performed for all awards in excess of $500,000. According to the guidelines, audits may be performed by independent audit firms, or by a government’s supreme audit institution, and must be in accordance with auditing standards approved by the U.S. Comptroller General. Completed financial audits are to be submitted to the USAID Office of Inspector General (OIG) for review no later than 9 months after the end of the audited period. Upon completing its review, OIG establishes recommendations for action, if appropriate, and provides copies of the audit reports to the responsible USAID management.

According to USAID policy, designated mission officials maintain each mission’s annual audit inventory, decide when to conduct audits, and coordinate with OIG to develop the annual audit plan. According to USAID, in practice, the controller at each mission fulfills these duties and liaises with the audit manager at USAID headquarters. Controllers track audit requirements, timing, and completion, as well as audit recommendations and implementation status. According to USAID, as of March 2015, missions utilized two databases for tracking audits: the first to track audit timing and the second to monitor audit recommendation follow-up. According to USAID, the agency was in the process of introducing a new agency-wide database for tracking audits of non-U.S.- based organizations, which, when fully operational, would maintain a record of all non-U.S. vendors receiving USAID funds, as well as the timeliness of audits of these organizations.

Monitoring and Evaluation

USAID policy on M&E requires missions to describe how they will collect data and assess achievement during project planning in what is known as the project M&E plan. Furthermore, project planning documents, in describing the project’s M&E plan, must link to missions’ CDCS and mission-wide performance management plans; they are to be used to measure progress toward planned results and identify the cause of any delays or impediments during project implementation. Moreover, the policy states that defining the project M&E plan during project planning aids in adapting implementation to achieve sustainable results and future project planning. Notably, USAID policy on M&E for G2G assistance activities states that carefully defining M&E roles and responsibilities during project design is critical for G2G assistance.

Appendix III: Summary of Reviews of U.S. Agency for International Development Government-to- Government Assistance in Afghanistan and Pakistan, Fiscal Years 2010 through 2014

According to U.S. Agency for International Development (USAID) data, in fiscal years 2010 through 2013, the agency obligated between about $44 million and $468 million per fiscal year in government-to-government (G2G) assistance in Afghanistan and about $149 million and $461 million in Pakistan. (See fig. 3.) Summarized below are key findings from reviews of USAID’s G2G activities conducted by the USAID Office of Inspector General (OIG) in Afghanistan, the OIG in Pakistan, the Special Inspector General for Afghanistan Reconstruction (SIGAR), and GAO.

Afghanistan

In 2010, along with other donors, the United States pledged to provide at least 50 percent of development assistance funds directly through the Afghan budget by 2012. According to SIGAR, USAID and the government of Afghanistan signed a memorandum of understanding in December 2010 in support of the goals, objectives, and mechanisms for effective assistance in Afghanistan. SIGAR also reported that the memorandum of understanding focused on maximizing opportunities presented by USAID-funded assistance to increase capacity, institutional growth, and public ownership of the development process in Afghanistan. The memorandum also laid out financial requirements to ensure that direct assistance funds are used as intended, according to SIGAR. USAID’s assistance provided directly through the Afghan budget includes host-country contracts, G2G awards, and contributions to certain multidonor trust funds. According to USAID data, in 2014, the agency obligated funds for G2G assistance in the following sectors: agriculture, education, health, governance, rule of law and human rights, and private sector competitiveness.

Planning

While USAID Afghanistan does not have a country development cooperation strategy, the mission has taken steps to conduct fiduciary risk assessments of several Afghan government entities. In 2011, we reported that USAID had not completed preaward risk assessments before providing funds to two Afghan government entities. In 2014, SIGAR reported that the mission had contracted with private firms to conduct fiduciary risk assessments of 16 ministries and found that all 16 ministries were unable to manage direct funds without taking risk mitigation measures recommended in these assessments. The mission’s internal review of 7 of these ministries also found that these ministries were unable to manage funds without the implementation of significant risk mitigation measures. In 2012, the USAID Administrator approved the mission’s request to waive compliance with agency requirements for assessing risks associated with using partner-government systems and documenting any risk mitigation plans for funds appropriated through fiscal year 2013. In spite of this waiver, SIGAR recommended that the USAID Administrator require compliance with all USAID requirements for the use of partner-government systems, with the exception of the country- wide stage 1 assessment. USAID responded that in spite of the approved waiver, USAID Afghanistan continues to comply with all USAID requirements for the use of partner-government systems.

In 2011, we reported that USAID had not consistently followed its own policies for assessing risks associated with funds provided to a World Bank–administered trust fund for Afghan reconstruction. The Afghanistan Reconstruction Trust Fund was established in 2002 as a vehicle for donors to pool resources and coordinate support for Afghanistan’s reconstruction. We reported that for its initial $5 million contribution to the trust fund in 2002, USAID could not provide documentation supporting risk assessment procedures prior to disbursement, but determined afterward that (1) the trust fund had a comprehensive system in place for managing the funds and (2) the World Bank had a long history in managing multidonor pooled funding mechanisms. Similarly, the mission did not make preaward determinations for 16 of the 21 subsequent modifications to its contribution amounts. USAID agreed with our recommendation that the agency ensure adherence with its policies for assessing risks associated with multilateral trust funds and revised its guidance on awards to public international organizations in 2011.

Implementation

In their reviews of USAID Afghanistan’s implementation of G2G activities, SIGAR and the OIG both identified issues related to the implementation of G2G activities. According to SIGAR, while USAID had instituted several controls to help protect its direct assistance funds, the mission had not ensured full implementation of a key control activity—the inclusion of corrective actions to be taken by the Afghan government entity as conditions precedent to the disbursement of funds in USAID’s agreements with the Afghan government. SIGAR noted that the mission had incorporated a very small percentage of risk mitigation measures identified in the fiduciary risk assessment into the assistance agreements signed by the mission and the Afghan government and outlines the terms of the agreement. SIGAR recommended that the mission develop a plan for each ministry that has a complete risk assessment that defines how each of the risks identified is being or will be mitigated, and suspend disbursements until these plans are completed. USAID agreed with this recommendation, and stated that the mission had prepared such plans for six ministries receiving assistance. The mission further noted that the agency’s use of conditions precedent is only one control activity for mitigating risk in a suite of interventions used in its work with the Afghan government.

Regarding funding mechanisms, an OIG review of USAID’s financial management controls in G2G assistance found that most of USAID/Afghanistan’s G2G activities may not count as G2G assistance as described in USAID policy. According to USAID policy, to the extent possible, missions must avoid funding the establishment of separate donor-funded project management or implementation units that operate outside the existing partner-government structures. USAID aims to strengthen those government institutions already established by the partner government rather than create or maintain separately operated project management or implementation units that may be unsustainable in the long run. Similarly, USAID policy states that while missions may use host country contracts to engage with partner governments, this funding mechanism is different from using partner-government systems and therefore is not counted toward the agency’s 30 percent Local Solutions target. OIG found that most of the mission’s G2G activities in Afghanistan had been implemented through project implementation and management units. For example, USAID provides funds for an education program to a nongovernmental organization, which hires a team of consultants to work in the Ministry of Education to manage and implement the activities under this program. OIG considered the use of project implementation and management units as a key risk mitigation measure that helped safeguard funds and thus did not find issue with this finding or make any recommendations. Similarly, a SIGAR review of USAID’s health programs in Afghanistan also noted that the mission funds this activity through a host country contract, which is managed by a separate grants and contracts management unit.

In addition, SIGAR found that USAID Afghanistan’s use of cash advances in one G2G activity made funds more vulnerable to waste, fraud, and abuse because the activity is funded with monies paid in advance of costs incurred. USAID disagreed, stating that the activity is funded on a reimbursable basis through advances and liquidations.

The October 2014 OIG review of USAID’s G2G activities in Afghanistan identified additional issues related to the mission’s implementation of these activities. OIG found that USAID staff were not properly involved with the Afghan ministries’ procurement procedures required to mitigate risks; mission staff were not fully aware of their responsibilities for overseeing G2G activities; the mission did not properly document expectations concerning project objectives, results, resources, and timelines so as to avoid misunderstandings with the Afghan government; and transactions were often recorded late in the USAID accounting system. The mission agreed with all OIG recommendations and reported on steps it planned to take to address these issues.

In 2011, we reported on U.S. efforts to build public financial management capacity in the Afghan government and provided information on USAID- funded projects that provide training, mentoring, coaching, and technical assistance. We found that USAID had not consistently established baselines and targets, or reported actual performance data, and recommended that the agency establish targets and ensure that implementing partners report performance data. USAID agreed with these recommendation and noted steps it was taking to address them.

Monitoring and Evaluation

Regarding audits, 2014 OIG and SIGAR reports stated that the mission was conducting audits for all G2G activities with expenditures over $300,000 in a given fiscal year as called for in USAID policy. According to SIGAR, USAID contracted with an accounting firm to perform audits of all G2G activities in Afghanistan. Examples of audit objectives included assessments of project internal controls, determination of validity and reliability of information, and determination of whether the ministry was complying with agreement terms and applicable laws and regulations related to the USAID-funded program. However, according to the SIGAR report, these audits had not been completed within the 9-month period required by USAID policy. SIGAR stated that USAID’s lack of timely and regular audit results makes it difficult for the agency to take action to identify and reconcile ineligible expenditures and address other issues with direct assistance implementation. USAID acknowledged the need for timely third-party audits, stating that it has modified its audit requirements and is now contracting and actively managing the required audits of the ministries. In addition, OIG found that the mission did not fully adhere to the audit requirements as described in project documents nor did the mission ensure Afghan government adherence. As a result, contracts for audits were not awarded annually and audits were not completed on time.

OIG recommended that the mission implement procedures to validate that audits had been conducted prior to disbursing funds and modify the audit requirements in its G2G activity documents to describe the requirements for the audit process. The mission agreed with these recommendations and explained steps it had taken and planned to take to address these issues.

Pakistan

The Enhanced Partnership with Pakistan Act of 2009 authorized up to $1.5 billion a year for development, economic, and democratic assistance to Pakistan for fiscal years 2010 through 2014. The act authorized civilian assistance for a wide range of activities, including projects to build the capacity of government institutions, promote sustainable economic development, and support investment in people through education and health programs. The act also encouraged, as appropriate, the use of Pakistani organizations, including Pakistani firms and community and local nongovernmental organizations, to provide this assistance. In order to increase the capacity of Pakistani organizations to manage U.S. funds and to implement this strategy in accordance with international commitments, USAID Pakistan launched the Assessment and Strengthening Program (ASP) in October 2010. The goals of this program are to assist potential Pakistani implementing partners, including the government of Pakistan organizations: (1) increase capacity to manage and account for U.S. government development assistance funds, (2) reduce the vulnerability of the funds to waste and misuse, and (3) increase speed and efficiency in getting USAID development resources to the intended beneficiaries. According to USAID data, in 2014, the agency obligated funds for G2G assistance in the following sectors: agriculture, education, and infrastructure.

Planning

In 2011, we reported that USAID planned to shift its program implementers from U.S.-based partners to Pakistani organizations, including local, provincial, and federal government and nongovernmental organizations. To mitigate risks associated with providing funds to organizations with limited institutional capacity, USAID guidance directed missions to conduct a preaward assessment of the organizations’ internal controls and financial management systems. We found that USAID guidance at the time did not contain information on whether weaknesses identified in the preaward assessment must be addressed or whether the assessment’s recommendations to enhance the accountability of U.S. funds must be implemented. For Pakistani organizations that were required to undergo a preaward assessment, we found that not all contracts, grants, or agreements required these organizations to address weaknesses identified in the preaward assessment. We recommended that USAID assistance provided through Pakistani organizations identified as high or medium risk be required to address weaknesses identified in the risk assessment. USAID agreed with our recommendation and provided examples of steps the agency had taken to address identified weaknesses.

Furthermore, according to USAID policy, if a mission is planning to increase the amount of total estimated funding for existing G2G activities implemented by a previously approved government entity by more than 50 percent of the initially authorized amount, or authorizes an additional amount of more than $20 million, an updated assessment must be conducted and documented to ensure that the entity’s public financial management systems are sufficient to bear the increased risk associated with the increased funding levels. This updated assessment must also include a revalidation of the risk mitigation plan for every approved partner-government entity receiving the funding increase. In a 2013 OIG review of USAID’s G2G assistance programs in Pakistan, OIG auditors found that the mission had not reassessed the government of Pakistan implementing entities as required by USAID policy. For example, the mission increased its commitment to provide funds to the partner- government entity administering the Federally Administered Tribal Areas to a ceiling of $611 million as of October 2012 from an initial commitment of $55 million in 2010 without updating the fiduciary risk assessment. USAID cited various reasons for not updating the assessments, including conflicting agency and mission policies. While USAID agreed with the OIG recommendations to reassess partner government implementing entities and develop a plan for full compliance with USAID policy, at the time of the release of the OIG report, the agency had not reached a decision on how to address these issues. In response to this report, the mission stated that it has submitted a waiver on compliance with agency requirements for assessing risks associated with using partner- government systems, and, at the time of the review, was awaiting approval from USAID headquarters.

Implementation

According to OIG, USAID Pakistan had been providing G2G assistance under the Enhanced Partnership with Pakistan Act in 2009, prior to the launch of the USAID Forward initiative in 2010 and the issuance of agency-wide policy on the use of partner-country systems in 2011. According to the OIG review, the mission developed and refined its own procedures for implementing G2G assistance and documented these procedures in mission orders. These mission orders incorporate lessons learned by the mission while planning and implementing its G2G activities and reflect the evolution of procedures during this period. As a result, OIG found that several mission orders related to G2G activities conflicted with agency-wide policy. For example, OIG found that while the mission order required a risk assessment, the mission order did not include a requirement for a Democracy, Human Rights, and Governance review as part of its assessment, as specified in the agency-wide policy. OIG did not specify whether the mission had neglected to conduct this governance review as a result of the conflicting policies. OIG also found examples of instances in which the mission was not following its own mission orders, primarily concerning the lack of clarity over the designation of roles and responsibilities.

Monitoring and Evaluation

According to OIG, USAID Pakistan launched the ASP in 2010, in part to increase the capacity of Pakistani organizations, including the Pakistani government, to manage U.S. funds, but found shortcomings in the mission’s oversight of this program. Furthermore, according to OIG, the agreement between USAID Pakistan and ASP implementers calls for annual validations to ensure ongoing compliance with the standards and procedures developed under the institutional capacity-building program and to establish benchmarks to allow government implementers to reach a point where annual validations are no longer necessary. According to OIG, the mission did not validate whether the training had improved the internal systems of these entities or increased ministry staff members’ ability to implement projects. According to mission officials, the mission did not conduct any validations because of changing policy from USAID headquarters. Two versions of USAID policy on the use of partner- country systems appeared over the course of 8 months, with a third revision pending at the time of the review. Mission officials said they had put off validations and reassessments so that they could form a Partner Government System team that met requirements outlined in the USAID agency-wide policy. The team would then help determine which government implementing entities should be part of the validation process, and which should be scheduled for reassessments. As a result of this delay, the mission did not establish the Partner Government System team until 3 years after ASP began. OIG recommended that the mission take the appropriate steps to ensure that it can validate the implementing partners’ capacity-building activities with the partner- government entities. The mission agreed with the OIG recommendations and has taken some steps to address these issues.

In a separate review of the ASP, OIG also found that (1) the program had not met first-year targets and had not completed all preaward assessments and capacity-building programs planned and (2) program planning was insufficient because the mission had not developed the results framework—an outline of the mission’s goals, objectives, expected results, and performance indicators—or the preliminary performance management plan—a tool for planning and managing the process of assessing and reporting progress toward achieving assistance objectives—until a year after the start of the program. The mission agreed with OIG’s recommendations and responded with steps it plans to take to address these issues.

Appendix IV: Comments from the U.S. Agency for International Development

Appendix V: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the contact named above, Jim Michels (Assistant Director), Todd M. Anderson, Martin De Alteriis, Jesse Elrod, W. Stephen Lowrey, Grace Lui, Kim McGatlin, Shirley Min, and Nikole Solomon made key contributions to this report. Additional technical assistance was provided by Amanda Bartine, Tina Cheng, David Dayton, José Peña, and Cristina Ruggiero.