Rebuilding Iraq: Improved Management Controls and Iraqi Commitment Needed for Key State and USAID Capacity-Building Programs
Released: 2009-06-03T00:00:00

Letter

Background

To help Iraq assume responsibility for sustaining U.S. reconstruction efforts, U.S. agencies are implementing programs to build the capacity of Iraq’s central and provincial governments, including State’s PRDC program to strengthen the capacity of Iraqi provincial governments to deliver essential services such as water and electricity and USAID’s NCD program to assist the Iraqi government in improving the administrative capacity of several ministries and executive offices through training.

Provincial Reconstruction Development Committee Program

In 2005, the United States created PRDCs to give the provinces a voice in deciding how to spend U.S. reconstruction funds for Iraq. The PRDCs comprise members of Iraq’s Provincial Councils, representatives of the governor, and the Director Generals of Iraq’s Central Ministries. The PRDC role is to identify needs within their province, prioritize the needs, and develop a list of projects to address those needs. The primary U.S. objective of the PRDC program is not reconstruction but strengthening the capacity of Iraqi provincial governments to develop and implement essential service projects, according to State.

Congress appropriates funds to State, which are used, for the PRDC program to State, and the USACE’s Gulf Regional Division (GRD) implements the program. ITAO coordinates and oversees the selection process for specific projects and according to State provides overall program management, and GRD provides project management. The Office of Provincial Affairs within the U.S. Embassy Baghdad provides policy guidance and support to the Provincial Reconstruction Teams (PRT) program. The PRTs serve as the coordinating body for this funding, assisting PRDCs with identifying, prioritizing, and developing project request packages. Each PRDC creates a prioritized list of reconstruction projects that address provincial needs; these are then discussed in a public forum. The project list is submitted to the Provincial Council for review and approval. Approved projects are forwarded to the PRT provincial program manager who reviews them to ensure they meet U.S. government policies and legal requirements. The PRT provincial program manager forwards the list to ITAO for review and approval. The National Embassy Team reviews and approves projects. The Gulf Region Division (GRD) scopes, estimates, bids, and awards project contracts. As the implementer, GRD assists ITAO by providing program and project oversight, which includes awarding contracts and providing quality assurance and quality control. The PRT engineer provides teaching, mentoring, training, guidance, and support for the PRDCs in preparing scopes of work, bills of quantities, estimates, and project nomination forms. The program funds small-scale projects proposed by the PRDCs, including water and electric plants, roads, bridges, schools, health clinics, airports, and fire stations. For fiscal year 2007 funds, the PRDC program shifted focus to provide funds to help provincial governments sustain and plan essential service projects. Figure 1 is an example of a PRDC project we visited in Iraq in November 2008.

Through three interagency agreements between State and USACE, State obligated $700 million for fiscal years 2006 and 2007 to reimburse the USACE for costs incurred and awards made for the PRDC program. Specifically, State obligated $315 million and $385 million for fiscal years 2006 and 2007, respectively, under the agreements.

As table 1 shows, for fiscal year 2006, USACE had entered into contracts to implement the program totaling about $259 million and about 135 out of 213 projects had been completed by April 2009, according to GRD. For fiscal year 2007, USACE had entered into contracts amounting to about $207 million and about 40 out of 185 projects had been completed by April 2009, according to GRD.

National Capacity Development Program

In July 2006, USAID created the National Capacity Development (NCD) program to build the capacity of Iraq’s central government. The program focuses on building the skills and capabilities of several Iraqi government executive offices, such as the Prime Minister’s Office, and 10 key Iraqi ministries, such as the Ministries of Electricity, Oil, and Water. Key tasks include (1) raising the skill levels of Iraqi public managers in project management, fiscal management, human resources, budgeting, and information technology; (2) advising key ministries in strategy development, program planning, and capacity building; and (3) expanding the Iraqi government’s training capacity at its national training center and in the provinces. Additional activities for the program included providing equipment, furniture, and support to develop Iraq’s training centers, and providing overseas scholarships to Iraqi civil servants. To help reform the Iraqi government’s procurement system, USAID purchased equipment for administrative tribunal courtrooms at the Ministry of Planning and Development Cooperation, which rules on disputes over Iraqi government contract awards (see figure 2).

USAID is responsible for the NCD program and has hired a contractor, Management Systems International, to implement the program. The initial contract was for $165 million for a 3-year period. Various modifications increased the program funding, changed the scope of work, and extended the completion date to January 31, 2011. A modification made in September 2008 increased the total contract amount to $339 million. According to the USAID’s financial management system, as of April 2009, the program has obligated $259 million, and of that amount about $152 million has been disbursed.

State Cannot Ensure That the PRDC Program Is Achieving Its Objective to Build Capacity

State’s PRDC program has management control weaknesses in organization, monitoring, and communication that hinder the achievement of its goal of building provincial government capacity. First, State’s organization of the program does not clearly define who is responsible for the overall management of the program, and the multistep process for implementing the program adds to this ambiguity. Second, State lacks a performance monitoring system that measures progress toward building the capacity of provincial governments. Third, State’s guidelines and policies have changed frequently, as has the direction of the program, but State did not fully communicate or consult with program implementers about these changes. Finally, USACE labor costs for the program are not always supported by adequate documentation, increasing the risk that USACE’ requests to State for reimbursement of labor costs may be overstated or understated.

PRDC’s Organization Does Not Clearly Delineate Responsibility, and the Program Has Experienced Staffing Challenges

Management control standards require a well-managed and properly structured organization that clearly delineates authority and responsibility. In addition, management control standards call for qualified staff in place without excessive personnel turnover in key functions, such as program management, to implement proper management controls.

State’s PRDC Program Lacked a Manager to Oversee Program Challenges

State’s PRDC program has multiple entities responsible for managing parts of its complicated, multistep process to approve and implement projects. However, no single program manager was clearly responsible for overall management of the program until May 2009, when State designated one in response to GAO’s findings. The PRDC process for approving and implementing projects includes at least 7 entities and 7 steps involving project development, project management, and project execution. Figure 3 illustrates the PRDC’s complex organizational structure and process as reported by State.

Until May 2009, no single entity was accountable for the program in its entirety or responsible for ensuring that the program’s objectives were met. For instance, although ITAO has a PRDC program manager, in response to an October 2008 report on ESF in Iraq, State indicated that ITAO coordinates and oversees project selection. The other entities also do not have responsibility for managing and ensuring that the overall program objectives are met. For instance, the Provincial Reconstruction Teams (PRT), through the PRT provincial program manager and PRT engineer, focus on helping the PRDC identify, prioritize, and develop project proposals. The PRDCs create prioritized lists of reconstruction projects that are submitted to the Provincial Council for review and approval. According to a State document, the PRT provincial program manager guides the process; however, a PRT provincial program manager is located at each PRT and therefore guides the process for that individual PRT and does not manage the entire process. ITAO and the National Embassy Team review and approve projects and then forward these to the program implementer, the USACE Gulf Regional Division (GRD). GRD focuses on scoping projects, estimating their costs, receiving bids, awarding projects, and providing quality assurance and quality control. As a result, no entity was responsible for managing the overall program and ensuring the program’s goals are achieved.

Without an overall program manager, no one oversees the entire program process and has overall responsibility for addressing systemic problems such as coordination issues. For instance, although coordination between U.S. and Iraqi officials is essential to building provincial capacity, it remains one of the program’s key challenges. In our sample of 40 PRDC projects, we found that about 16 projects had problems coordinating with local Iraqi authorities. For example, determining and verifying land ownership is a major challenge in Iraq and is one of the most common causes for delays in awarding project contracts. In another instance, a $1.5 million potable water network to service Baghdad’s Mansour district lost nearly 7 months waiting for the necessary building permits and test results. Other coordination challenges have also resulted in delays, cost increases, and project terminations. For example, on a $1.4 million Baghdad water network project, a local government office did not follow established guidance in requiring certain technical tests to be performed and rejected subsequent test results because they were conducted by an independent laboratory. The municipality suspended all work at the site and threatened to arrest personnel who continued to work. With about $400,000 already spent, the project is in the process of being terminated. In May 2009, State designated ITAO as the program manager in response to one report finding.

PRDC Has Experienced Staffing Changes and Shortages

Both ITAO and GRD have staffing challenges. Our review of ITAO documents found that ITAO’s PRDC point of contact, who coordinates and oversees the selection process for specific projects, changed six times since December 2006. Specifically, from January 2008 to September 2008, ITAO had three different PRDC managers. According to GRD, these frequent changes in ITAO’s PRDC managers contributed to inconsistent information about program direction. For example, in January 2008, when the PRDC program shifted from building infrastructure to helping provincial governments in sustaining and planning essential services, ITAO failed to consult GRD about developing a new program management plan until September 2008.

Gulf Region South officials stated that they have had difficulty obtaining staff with the skills and training to manage reconstruction projects. To address staffing shortages, Gulf Region South hired Iraqi associates to inspect projects in the field. In addition, Iraqi associates have been hired to contribute to a trained local work force, build local infrastructure, and ensure continued project sustainability, according to USACE officials. During our site visits, we observed that the Iraqi engineers were able to visit the sites more frequently, and because they spoke Arabic, they could interact with the Iraqi contractors. Senior GRD management stated that Iraqi workers have been essential, particularly when security conditions deteriorated.

PRDC Program Lacks a Monitoring System to Track Performance Toward Building Provincial Capacity

Standards for management control require performance measures and indicators to monitor progress in achieving program objectives.

The PRDC program has no performance measurement system to assess whether the program is achieving its objective of helping build provincial government capacity to deliver essential services, according to State officials. According to an October 2008 State report, PRDC program accomplishments are measured by the number of projects completed and awarded and amount of funds disbursed. However, this is a measure of State’s ability to obtain and use U.S. funds. The indicator does not provide information about the extent to which U.S. efforts build the capacity of provincial governments to deliver essential services, particularly since only U.S. funds are involved in program funding. Further guidance for PRDC states that the program’s capacity building will be demonstrated when operations and maintenance services and provincial planning projects are identified and programmed into the provincial budgets for 2008. However, at the time our review, ITAO and the Office of Provincial Affairs (OPA) could not provide us with this information.

PRT engineers are responsible for assisting PRDC officials by teaching, mentoring, training, guiding, and supporting the preparation of all project scopes of work, bills of quantities, estimates, and project nomination forms. During site visits, we found that PRT engineers conducted training through the local GRD district offices to help Iraqi contractors prepare technical contract proposals. Similarly, OPA provided anecdotal examples to show how PRT engineers are building capacity in two provinces. However, these examples cannot be reliably used to track progress and outcomes in building capacity.

Although there is no system to monitor program outcomes, GRD tracks project implementation through the Resident Management System. For example, based on a random sample of 40 projects, we found that 16 projects had missed their milestones; 9 projects were on or ahead of schedule; 6 projects had construction cancelled or terminated; and 6 projects had been completed and accepted by the U.S. government for transferring to the Iraqi government. The most common challenges cited in these projects were contractor inefficiency, poor security, and coordination with local Iraqi authorities. Over two-thirds of the 40 projects we analyzed described numerous problems with contractors’ work. The challenges of conducting reconstruction work in a conflict environment hindered PRDC project execution in nearly half of the projects in our sample. For example, according to officials, dangerous security conditions in Maysan province prevented regional office U.S. personnel from visiting any projects in that province for an 18-month period ending in September 2008. In December 2008, a senior official at the U.S. embassy in Baghdad said the embassy was creating an official process for obtaining the status of all U.S.-funded reconstruction projects with problems that would include a review of the project schedule, budget, project status, and project quality. However, these indicators will not monitor or assess U.S. efforts to build the capacity of provincial government officials to deliver essential services.

In commenting on a draft of the report, State agreed with the need to develop outcome measures of effectiveness. State proposed measures to track the length of project development, procurement, contracting, execution, and oversight process to see if it improves over time, as well as the quality of the projects completed. Other possible measures included the degree of constituent input in the project selection process, the degree of transparency and anti-corruption measures in the contracting process, the separation of powers between the executive and legislative, and the rate of Ministries, to follow-through to budget for and sustain the projects.

Frequent Changes in PRDC Guidelines Were Not Adequately Communicated

Effective management controls call for the design and implementation of policies and procedures to ensure that management directives are carried out and that information is communicated clearly and in a timely fashion.

ITAO issued PRDC program guidelines through action memorandums that specified funding allocations, types of projects that would be approved, priorities, and the general process for project approval. However, the guidelines were revised or clarified six times between August 2006 and July 2008. The program implementer—GRD—expressed concern about these frequent changes, particularly the lack of communication and consultation. In addition, according to a senior GRD official, ITAO had not communicated adequately and consistently about the guidelines and changes. For example, in January 2008, State shifted the focus of the PRDC program from building infrastructure to maintaining and sustaining projects. According to ITAO officials, State emphasized sustaining local operations and maintenance services of U.S.-procured infrastructure, strategic planning for the infrastructure projects, and capacity building for provincial governments’ professional staff. However, according to GRD officials, ITAO waited until September 2008 to consult with GRD on developing a new management plan to implement these changes. As a result, according to GRD documents, in 2008, the GRD district offices developed 109 project proposals with a value of $158 million. According to a senior GRD official, staff wasted resources developing these infrastructure project proposals because these projects were no longer the focus of the program.

In commenting on a draft of this report, State indicated that GRD was involved in planning at an early date and that GRD received copies of all changes to the PRDC program via memos. However, according to GRD officials, in July 2008, ITAO directed the National Embassy Team to approve projects for award without any GRD involvement in the approval process. As of May 2009, GRD officials stated that the limited involvement of GRD in the strategic planning process for the PRDC program has hindered the ability of GRD to understand the shifts in program focus and realign resources in an efficient and effective manner to meet the needs of State Department and the program.

PRDC Labor Cost Could Be Overstated or Understated

Standards for internal control call for federal agencies to retain evidence that transactions and events are appropriately classified and promptly recorded throughout the life cycle of each transaction, including final classification in summary records from which reports are prepared.

Our tests of USACE’s established controls to help ensure financial accountability for the PRDC program identified deficiencies in the maintenance of adequate documentation to support labor costs that USACE charged to PRDC projects. Inadequate documentation highlights a control weakness that may cause the USACE reported cost for specific PRDC projects to be inaccurate. Further, USACE’s requests to State for reimbursement of labor costs may be overstated or understated. Our review of time and attendance records for 152 USACE employees, totaling about $2.5 million in net labor charges to 36 PRDC projects, disclosed that about 26 percent of these charges did not have adequate supporting documentation.

Our review disclosed that APPO timekeepers’ files did not contain complete time and attendance records. USACE procedures require timekeepers in Iraq to send time and attendance documentation to the Administrative Personnel Processing Office (APPO) in Winchester, Virginia, for data entry into the USACE financial management system and retention in APPO files. We also found instances where the hours on the time and attendance records that were located did not agree with the hours entered into the USACE financial management system. However, neither we nor the APPO staff could readily determine the reason for these inconsistencies. Furthermore, a November 2008 APPO review of time and attendance practices in Iraq also identified problems regarding the accuracy of labor hour charges to PRDC projects. For example, the review disclosed that employee supervisors did not routinely verify that hours entered into the financial management system agreed with hours on original time and attendance records. USACE officials also stated that, although certain managers were authorized to correct labor charges that were incorrectly charged to a project in a prior pay period, evidence of the correction was not required to be maintained in the APPO timekeepers’ files because APPO timekeepers were not responsible for recording these corrections in the financial management system. Additionally, an APPO official stated that, in 2006 and 2007, APPO timekeepers sometimes discarded original time and attendance records when corrected time and attendance records were subsequently received to avoid having two or more time and attendance records for the same pay period. Although the official explained that the current procedure is to attach corrected copies of time and attendance documentation to the original documentation, these procedures have not been formally documented. Discarding original time and attendance records precludes the ability to determine why corrections were made to the original entry.

GRD program managers use financial reports derived, in part, from time and attendance records and adjustments to monitor a project’s financial status and labor resources expended. In addition, USACE uses time and attendance data to bill State for reimbursement of PRDC labor costs in accordance with an interagency agreement between the USACE and State that provides funding to USACE to implement the PRDC program. The APPO November 2008 review noted that some steps were being initiated to help improve the documentation of time and attendance transactions, which, if successfully implemented, should help improve time and attendance internal controls.

However, as of January 2009, APPO informed us that time and attendance reporting problems continue to be identified. To help improve timekeeping, in April 2009, the GRD Finance and Accounting Officer informed us that the timekeeping function would be moved from APPO to the GRD office in Winchester, Virginia, by May 2009. According to the GRD Finance and Accounting Officer, the intent is to hire a team of three people to work exclusively on timekeeping matters with personnel in Iraq to increase timekeeping accuracy. APPO had been tasked with preparing personnel for deployment and travel in addition to timekeeping. We were also informed that the timekeepers are being trained on labor costing and the importance of proper labor charging. In addition, the GRD timekeepers will be responsible for documenting timekeeping problems and informing personnel in Iraq about needed improvements.

NCD Management Controls Support the Goal of Building the Capacity of Iraqi Ministries but Do Not Adequately Verify Expenditures

The goal of USAID’s NCD program is to build the planning and administrative capacity of Iraqi ministers and officials. The organization of the program clearly lays out roles and responsibilities of key players in training and consulting with Iraqi ministries and identifies the reporting chain up to the individual responsible for the overall program. In response to a 2008 USAID Inspector General report, USAID scaled back the NCD program objective of improving ministry service delivery to more achievable objectives such as improving the ministries’ administrative systems and budget execution. For 2008, NCD monitors and tracks both outputs and outcomes for its new objectives and provides regular reporting on the results. USAID’s polices and procedures provide guidance for implementing the program by laying out explicit expectations for contract modifications and task orders in USAID’s automated directive system. Nevertheless, we found that the controls for documenting program expenditures are weak; we found invoices totaling about $17 million that did not have confirmation of receipt.

NCD’s Organization Provides Clear Lines of Accountability and Authority and Is Increasingly Relying on Iraqis to Execute the Program

The organization and structure of the NCD program is clearly laid out, and related guidance details the roles of the key players. The units responsible for training Iraqi officials and working with the ministries are clearly identified, and the chain of command is unambiguous. Figure 4 shows the organization of the NCD program.

As the figure shows, the director of the Capacity Building Office (CBO) in Iraq has overall responsibility for the program. The deputy director coordinates the program and acts as the liaison with the Iraqi government and the U.S. agencies in Iraq, according to NCD guidance. The deputy director directs and coordinates NCD activities through the contractor chief of party, who is responsible for training Iraqi civil servants, consulting at the ministries, developing Iraqi training centers, and completing progress reports as requested by USAID.

To carry out these activities, the program relies on Arabic-speaking employees for all aspects of its operations. As of February 2009, NCD program staff comprised 278 contract staff, of which about 70 percent are Iraqi nationals and the rest are expatriates from the United States and third countries. These staff work within Iraqi ministries, including the Ministries of Planning, Health, Agriculture, Oil, and Electricity. The staff also conducts training at three U.S. compounds in Baghdad and assists in developing the training programs at Iraqi provincial training centers in Basra, Ramadi, and Hilla. According to USAID, early in its implementation, the program faced the challenge of recruiting qualified Arabic-speaking instructors and training advisors who would reside in Baghdad under the security conditions present in Iraq in early 2007. To address this challenge, the program emphasized hiring qualified Iraqis to teach these courses, such as at the Karada compound we visited in October 2008 (see figure 5). By the end of its second year, the NCD program trained more than 25,000 Iraqi civil servants in project management, accounting, and risk analysis, according to a USAID report.

USAID Monitors NCD Program Impacts but Had to Revise Overall Objectives

USAID uses a results framework with indicators that measure program outputs and outcomes to monitor progress toward program objectives. Through this framework, USAID reviews program activities, makes corrections to identified problems, and responds to audit reports. During the second year of the NCD program, USAID revised its indicators in response to a November 2008 USAID Inspector General’s report stating that the NCD program did not have indicators to measure the program’s impact in improving key ministries’ delivery of core services. For example, USAID measured many of its output goals such as training Iraqi employees, establishing regional training centers, and awarding scholarships. However, there were no outcome indicators to measure the achievement of USAID’s goal to build the capacity of key Iraqi ministries to deliver core services. As a result, USAID narrowed its overall program indicators and stated it would begin to track the budget execution rates of Iraqi ministries such as the percentage of ministries’ approved budget that is spent. For example, USAID will now monitor the value of capital projects approved, the number of capital projects approved by the Ministry of Planning, and the rate of capital projects implemented.

In 2007, 3 out of the 20 NCD program accomplishment indicators were output—or numeric—goals, such as number of civil servants trained or the number of scholarships awarded. However, in 2008, the NCD program emphasized the measurement of results and included additional outcome indicators in its accomplishment reporting. For instance, 14 out of the 24 indicators measured outcomes, or actual improvements. Some of the outcome indicators for 2008 included the extent to which trainees were using their new skills at work and saw related improvements at their office; whether the ministries were implementing improved fiscal information technology systems, based on USAID contractor’s recommendations; and the extent to which ministries and the Iraqi government’s public administration training center, the National Center for Consultation and Management Development, were initiating their own training. Table 2 provides examples of these indicators and our reason for considering these to be outcome indicators.

USAID has been compiling data on the 2008 overall results for (1) strengthening public management skills, (2) establishing more effective administrative systems, and (3) expanding the Iraqi government’s training capacity. In October 2008, USAID reported that some target measures were exceeded, some were not achieved, and several were on track. For instance, the program did not achieve its target for significant improvement reported by graduates within their ministry or unit. We observed and participants told us during our site visits in October 2008 that many of the trainees were lower-level employees who lacked the authority to implement their new skills within the units to which they returned after training. USAID reported that ministries were either on track to meet or had exceeded other results to establish more effective administrative systems for 6 of 7 indicators. USAID stated it had achieved or exceeded targeted results for 8 out of 10 indicators to expand the Iraqi government’s capacity to train its own officials. However, the results were not complete at the time of our review so we could not independently assess them.

NCD Policies and Guidance Provide Direction for Implementing the Program

Polices and procedures for the NCD program are documented and accessible. USAID programs are required to follow the mandatory guidance in the automated directives system (ADS), which includes USAID internal policy and required procedures as well as external regulations. Agency employees must adhere to these policy directives and required procedures. For example, ADS chapter 596 gives management responsibility for internal controls and provides the policy and required procedures to improve the accountability and effectiveness of USAID programs by establishing, assessing, and reporting on internal controls. In addition, ADS chapter 253 provides guidance for designing and implementing training and capacity building programs. The chapter includes guidance on assigning primary responsibility for the program; host country responsibilities for the program; and requirements for data collection, reporting, and monitoring of the program and participants.

The NCD contract and its contract modifications provide specific guidance and expectations for implementing the program. For example, the first task order implementing the contract called for six major tasks, a list of responsibilities assigned to each major task and deadlines from within 30 days to 24 months for these assignments. The assignments included assisting the Iraqi government in developing its own capacity-building strategy, training government of Iraq employees at specific ministries, introducing standard training modules for regional training centers, and sending at least 50 Iraqis abroad to work on degrees or certificates related to public administration. Subsequent modifications added tasks based on the capacity-building needs of the ministries and Iraqi government. For example, a September 2007 modification expanded ministerial capacity development teams and placed project management units in key ministries and institutions.

Communication of the results occurred regularly and the contractor was required to provide weekly, monthly, quarterly, and annual reports on program implementation. We reviewed annual, quarterly, and monthly reports for 2006 through 2008 and some of the weekly reports. These reports documented program statistics on training, consulting with ministries, provision of equipment, and other activities. The reports also reported on challenges to implementing the program. For example, in 2007, the security situation in Iraq, including the inability to visit ministries and send Iraqis to training, was a major challenge to implementing the program. Other challenges included high staff turnover and the difficulties in acquiring skilled staff fluent in Arabic, which USAID has addressed by hiring local Iraqis. Longer-term challenges included dealing with extensive capacity needs at the ministries, while identifying ministries and individuals willing to implement reforms.

Weaknesses Identified in NCD Financial Controls Over Contract Payment Process

Under USAID policy, an approving officer, usually the cognizant technical officer, performs administrative approval, which provides written evidence that USAID received the services or goods specified on the contractor’s invoice prior to payment, and fills out a checklist to support administrative approval. The checklist is on the USAID Administrative Approval Form and Checklist and includes six different options for supporting administrative approval. Between April 2007 and June 2008, USAID received 18 invoices from the NCD contractor totaling about $79 million. We found that the cognizant technical officer did not check off the option indicating receipt of contractor services on the form for administrative approval for 6 of these 18 invoices, totaling about $17 of the $79 million. Instead, the cognizant technical officer indicated that acceptance of the contractor’s services was based on meeting(s) between the officer and contractor personnel during which the contractor’s performance was discussed. Thus, the cognizant technical officer appeared to rely on the contractor’s statements that the billed services were provided to authorize payment of the bill. Although the Administrative Approval Form and Checklist provides an option for an officer to confirm the receipt of goods or services by marking the appropriate place, instructions do not require confirmation of receipt. For example, the instructions direct the officer to mark as many reasons on the form as possible to justify acceptance of the contractor’s services, and that at least one reason on the checklist must be checked for administrative approval of the contractor’s invoice. Not requiring the confirmation of receipt invalidates this internal control and could circumvent the regulatory and GAO internal control standards that require confirmation of receipt prior to payment.

The instructions for the form do not require an explanation if confirmation of receipt is not possible. According to USAID officials, there is a reasonable likelihood that security risks may arise that make confirming the receipt of services impossible due to prohibitive personal danger or security protection costs. If these conditions are not documented, USAID managers cannot readily monitor the extent to which invoices were paid without confirmation of receipt or take other measures to ensure that the government’s interest is protected.

USAID policy also requires verification of the pricing and computations on a contractor’s invoice and assigns this responsibility to the financial voucher examiner. We found that USAID did not have reasonable assurance that the voucher examiner completed this function because many of the contractor’s invoices showed no indication that the examiner had performed any verifications, causing a lapse in the internal control to detect any errors in contractor billings. Furthermore, USAID policy did not specifically address the documentation that voucher examiners should use to support their analysis of contractor invoices. However, the USAID Deputy Controller in Iraq stated that, as of November 2008, voucher examiners began using a form to document their analysis of contractor invoices. It is too early to determine whether this form has been an effective control to prevent improper payments to the contractor.

We observed that the complexity of these invoices and the process of verifying pricing and computations against the terms of the contract are unwieldy. This increases the risk that the voucher examiner’s review may not prevent improper payments. For example, two of the contractor’s invoices were more than 100 pages and listed numerous labor-hour costs and other direct costs, including a variety of footnotes and adjustments. Invoices listed the number of hours that specific individuals worked on the NCD program and numerous labor hours for administration. In addition, the cost of equipment purchases was not easily identifiable, if at all. Furthermore, the Defense Contract Audit Agency identified problems with certain NCD contractor costs billed to USAID.

Iraq Has Agreed to Sustain the Programs and Is Providing Some Support for NCD, but Budget Expenditures Are Unclear

Iraq committed to sustaining U.S.-funded projects and programs and sharing in their costs in several official documents and the International Compact for Iraq. For example, we found that Iraqi government officials had signed letters agreeing to sustain many of the PRDC projects in our sample. The documents, however, do not specify dollar amounts or other resources to do this. For the NCD program, two Iraqi ministries signed memorandums of understanding for support of the program and eight other ministries developed capacity-building strategies that incorporated NCD materials. Iraq also demonstrated its commitment to U.S. efforts by expanding the NCD training program and starting its own training programs in some ministries. Several ministries also made 2009 budget commitments to continue the NCD training and provide equipment for training centers, among other efforts. These amounts are due to be expended during 2009. However, our past work has found that, although Iraq budgets for investment and sustainment activities, it may not spend the budgeted funds.

The Iraqi Government Has Committed to Operate and Maintain PRDC Projects and Is Supporting NCD Efforts

For the PRDC program, 16 of the 40 projects we reviewed had indications that the Iraqi government agreed to sustain the projects; however, none of the records we examined included specific funding or resource commitments that would allow a check against actual Iraqi budgets and expenditures. For fiscal year 2007 project funds, U.S. guidance required that all PRDC project proposals include a letter of sustainment from the appropriate Iraqi government office. However, in response to our request, ITAO provided only 10 of the 12 letters of sustainment for fiscal year 2007 projects in our sample. For fiscal year 2006, 6 of the 28 projects in our sample had evidence of Iraqi government commitment to sustain the projects. Letters of sustainment indicate Iraqi government approval for the design and construction of the project and an agreement to accept staff, operate, and maintain the project. For example, on a 2007 PRDC project to convert river water to drinking water, the Director General of the Wasit Water Directorate signed a letter agreeing to staff, operate, and maintain the water plant, once completed. For a 2007 PRDC project to build four electrical feeders, the Director General of Electricity agreed to prepare and submit an annual budget to the Ministry of Electricity to operate and maintain the project.

The Iraqi government has agreed to support some NCD efforts. For example, the Ministry of Electricity pledged to provide ongoing support for NCD efforts; sustain projects funded in whole or part by NCD; and provide staff to NCD, including finance and accounting specialists, power generation engineers, maintenance engineers, and others. Commitments from other ministries have been demonstrated by their actions to develop capacity-building plans with NCD assistance. In October 2007, we reported that not all U.S. capacity development efforts were clearly linked to the needs and priorities identified by the Iraqis, which may reduce the sustainability of U.S.-funded efforts. USAID has attempted to identify Iraqi government needs and obtain official government commitments by helping the ministries develop their own capacity-building plans. As of January 2009, eight ministries, plus the Prime Minister’s Office and the Council of Ministers’ Secretariat, had developed capacity development plans with NCD assistance. Based on ministry self-assessments that identify Iraqi needs and priorities, the plans emphasized the Iraqi ministries partnering with the U.S. government on budget execution, training in project management, strategic planning, human resources, and fiscal management. For example, the Prime Minister’s Office, as result of developing its capacity development plan in 2007, developed a new organization structure, job descriptions, and a strategy for the office.

Iraqi ministries have also demonstrated commitment to NCD’s train-the- trainers program, and five ministries have started their own training programs. USAID stated that the Iraqi government is increasingly taking over USAID’s training. For example, according to USAID’s contractor, as of May 2008, Iraqi government staff who had graduated from USAID’s courses and received additional train-the-trainer courses taught more than half of all monthly courses. Iraqi government staff trained by USAID contractors taught 14,720 (over 54 percent) of 27,127 course participants trained through September 2008. Moreover, as of September 2008, the Iraqi government’s National Center for Consultancy and Management Development delivers all train-the-trainer and core public administration courses in project management, budgeting, procurement, and strategic planning. The center has developed a tool to assess trainers and established a monitoring and evaluation unit to assess the impact of its training programs.

Iraqi Budget Expenditures for PRDC and NCD Programs Are Unclear

State’s PRDC 2006 guidance states that U.S. assistance will be matching in nature to ensure commitment and investment from the provincial government. PRDC program guidelines for fiscal year 2007 ESF funds further state that the development of capacity building would be demonstrated when projects are identified and programmed into Iraq’s 2008 provincial budgets. In its 2007 International Compact, Iraq stated that any new development programs should be co-financed by Iraq to leverage Iraq’s own resources and provide a framework for mutual accountability.

ITAO officials could not provide support that specific PRDC projects have been co-financed or that the Iraqi government budgets contained operating and maintenance funds for these projects. In August 2008, GRD officials stated that Iraq had not provided any cost-share funds for implementing fiscal year 2006 and fiscal year 2007 PRDC projects to date. Moreover, according to a GRD official, the Iraqis have been unable to meet their commitments to sustain PRDC projects because the central ministries have not budgeted sufficient funds to sustain projects. For example, according to this GRD official, the Director General for roads in the Ministry of Construction and Housing budgeted only $100 million in fiscal year 2008 for building and maintaining all roads in Iraq—an inadequate amount for road construction and maintenance.

Iraq’s past inability to spend its investment budget also raises concerns about whether Iraq is providing funds to sustain PRDC projects. In March 2009, we reported that Iraq’s inability to spend its resources, particularly on investment activities, limits the government’s efforts to further economic development and deliver essential services to the Iraqi people. Although Iraq’s total expenditures grew from 2005 through 2007, Iraq was unable to spend all of its budgeted funds, especially for investment activities such as maintenance of roads, bridges, vehicles, buildings, water and electricity installations, and weapons. In 2007, Iraq spent 28 percent of its $12 billion total investment budget. In 2008, it spent 39 percent of its $24 billion investment budget. In 2008, the Iraqi government spent $949 million, or about 2 percent of its total 2008 expenditures, for the maintenance of Iraqi- and U.S.-funded investments. In 2008, the provinces spent $2,054 million, or 22 percent of total investment expenditures of $9,167 million. The 2008 investment budget for the provinces, including the supplemental budget, was $6,470 million. The provinces spent 32 percent of their investment budget. There were sufficient unspent budget funds for the provinces to provide matching funds.

The spending limits imposed by the central ministries in Baghdad also limit the ability of Iraq’s provincial governments to sustain projects. According to a PRT official, the Director General for water in Basra has a $2,500 per item requisition limit. For items higher than that amount, he needs approval from the Ministry of Water in Baghdad. Most items cost more than $2,500; a filter for the Garma water purification facility, for example, costs $25,000. Obtaining approval from the central ministry in Baghdad takes time, and often that ministry will approve some parts but not others, which severely limits the Director General’s ability to live up to his commitment to sustain U.S.-funded water projects in Basra.

For the NCD program, Iraq government ministries and executive offices have pledged about $95 million in cost sharing for specific NCD-related activities and procurements, according to USAID. Some of these commitments are included in Iraqi government budgets, according to a USAID report. For example, the Ministry of Agriculture budgeted $5.8 million to construct a strategic planning center for training and capacity building and allocated $5.1 million in its operating budget to run the center. The report also states that the Iraqi Ministry of Planning and Development Cooperation allocated $6 million in its 2009 operational budget to fund postgraduate studies. Moreover, the Council of Ministers Secretariat allocated $1 million to create an executive training department and dedicated office space to a full-time training center. USAID also reported that various ministries and executive offices have agreed to contribute about 41 percent (an estimated $2.2 million) of the total cost of funding equipment, facilities, and training at four geographic information system centers and 16 training centers.

Conclusion

A successful U.S. transition from Iraq depends on the Iraqi government’s commitments to programs that build government capacity, such as the PRDC and NCD programs. However, given the management weaknesses in State’s PRDC program, including a lack of an overall program manager, measures of effectiveness, and a lack of a focus on capacity building, it is unclear if the program is achieving its objectives. Although the Iraqi government has agreed to maintain PRDC projects, based on prior experience, the Iraqi government’s commitment to spend resources on U.S.-funded reconstruction projects may not be realized. Also, USACE financial controls for the timekeeping process did not ensure adequate documentation, although USACE introduced initiatives to correct this. The management controls of USAID’s NCD program support the objective of capacity building,and the program, including its outcome indicators and guidance, is focused on this objective. However, the program has weaknesses in the financial controls for confirming the receipt of goods and services and review of contractor invoices. In addition, USAID will need to ensure that the Iraqi government follows through on commitments to sustain USAID NCD programs.

Recommendations for Executive Action

To help these programs achieve their objectives of building the capacity of the provincial governments and central ministries, We recommend that, for the PRDC program (1) the Secretary of State ensure that management control weaknesses are addressed in the PRDC program by designating an overall program manager; developing outcome measures of effectiveness; and documenting actual Iraqi government budget allocations and expenditures for fiscal year 2007 PRDC projects; and (2) the Secretary of the Army ensure that USACE initiatives to improve the financial controls for the timekeeping process correct the deficiencies discussed in this report.

We recommend that, for the NCD program, the USAID Administrator (1) revise USAID policy and procedures for confirming receipt of goods or services applicable to the NCD program in Iraq to include (a) clarifying that confirmation of receipt of goods/or services must be noted separately from the administrative approval or (b) documenting reasons precluding actual confirmation such as prohibitive personal danger or security protection costs; (2) ensure that USAID/Iraq initiatives to improve the documentation of the voucher examiner’s required review of contractor invoices correct the deficiencies discussed in this report; and (3) document actual Iraqi government budget allocations and expenditures to ensure funds committed to support NCD activities are expended.

Agency Comments and Our Evaluation

State, USACE, and USAID provided written comments on a draft of this report, which we have reprinted in appendixes II, III, and IV. The USACE also provided technical comments, which we have incorporated where appropriate.

State agreed with our recommendation to address management control weaknesses in the PRDC program. State commented that it had clarified and confirmed ITAO’s overall responsibility for the PRDC program and that a program manager has now been designated. State also accepted our recommendation to develop outcome measures of effectiveness for PRDC and clarified that its reporting of projects approved and funds dispersed in the 2207 report to Congress was not intended to be a measure of PRDC’s success. State further agreed to report on Iraqi government contributions to PRDC projects in its next cost matching report to Congress.

USACE agreed with our draft recommendation to strengthen its financial controls for payroll and provided additional information about its initiatives to improve its timekeeping process. We subsequently refined our recommendation to state that the Secretary of the Army ensure that USACE initiatives improve the timekeeping process correct the deficiencies discussed in the report. USACE agreed to this recommendation. In technical comments, USACE noted substantial discrepancies—amounting to millions of dollars and over 100 projects— between its financial and project data and ITAO’s data that we included in our draft report. In reconciling the conflicting data, ITAO agreed to revise its April 3, 2009, Essential Indicators Report to reflect the corrected data.

USAID commented that it is taking under advisement our recommendation to require confirmation of receipt of goods and services and that it has already implemented our recommendation to document the voucher examiner’s review of contract invoices. The agency agreed to implement our recommendation to document the government of Iraq’s commitments and expenditures associated with the NCD program.

We are sending copies of this report to interested congressional committees and the Secretary of State, the Secretary of Defense, the Secretary of the Army, and the Administrator for USAID. We will also make copies available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-8979 or christoffj@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix V.

Appendix I: Scope and Methodology

To assess whether the management controls of the Provincial Reconstruction Development Committee (PRDC) program and the National Capacity Development (NCD) program support the achievement of the programs’ objectives, we interviewed agency officials and analyzed project contracts, program files, agency reports, guidelines, financial and programmatic databases, and assessments for both the PRDC and NCD programs. We examined key management controls, including (1) a clear organizational structure with adequate managerial capacity and financial systems that establish an effective control environment; (2) policies and procedures that ensure management directives are carried out and communication of those policies and procedures; and (3) monitoring systems that track progress toward desired outcomes. We interviewed officials at the Department of State (State), U.S. Agency for International Development (USAID), and the U.S. Army Corps of Engineers (USACE) in Washington, D.C., and Iraq. In Iraq, we also met with officials at State’s Iraq Transition Assistance Office (ITAO), which oversees and coordinates aspects of the PRDC program, the Office of Provincial Affairs, and Gulf Regional Division (GRD) and its district offices. We reviewed a sample of 40 PRDC construction projects using Economic Support Funds (ESF) from fiscal years 2006 and 2007and examined all activities in the NCD program. We conducted field visits to several PRDC projects and to a training center, where we observed Iraqi officials in NCD training activities. We used information from the USACE’s Resident Management System database to identify the status of projects and specific challenges. We assessed the reliability of this system database by (1) interviewing agency officials and contractors about data quality control procedures, and (2) checking the data by visiting sites. We determined that the data were sufficiently reliable for the purposes of this report.

To develop the sample of 45 PRDC projects, we used the population of 290 PRDC projects as of June 30, 2008, that were initiated with fiscal year 2006 and 2007 ESF. We selected a dollar unit sample to test financial controls over PRDC project data in the USACE’s Financial Management System. We used a 90-percent confidence level, an expected error of 0, and tolerable error of 5 percent, for the sample plan. Given the parameters of the sample test (e.g., sample size, expected errors) any control testing error would indicate the control is not operating as designed.

To review the financial management controls over the PRDC and NCD program, we reviewed documents supporting obligation and disbursement transactions for 40 PRDC construction and 5 nonconstruction projects, and all NCD obligation and disbursement transactions. We interviewed USAID officials in Washington, D.C., and Iraq; and USACE officials in Washington, D.C.; Millington, Tennessee; Winchester, Virginia; and Iraq. Our review of PRDC and NCD transactions covered the period October 1, 2005, through June 30, 2008. To determine whether the financial data provided to us were reliable, we interviewed agency officials and performed testing regarding the accuracy and completeness of information.

To evaluate U.S. efforts to ensure Iraqi government commitment to sustaining U.S. program efforts, we examined U.S. guidance in obtaining commitments from the Iraqi government and interviewed State and USAID officials and their program implementers, GRD and Tatweer. We then focused on two elements of commitment—letters or other evidence that the Iraqi government committed to sustain or maintain the programs and projects and evidence that the Iraqi government is sharing the cost of U.S. efforts. PRDC program guidelines for 2006 state that the projects will be matching in nature to ensure buy-in and investment from the government and the 2007 guidelines require an Iraqi government letter of sustainment for the projects. Moreover, Iraq has budget surpluses, and in the Annual Review of the International Compact with Iraq, the Iraqi government committed to co-finance any new development programs to leverage its resources and provide a framework for mutual accountability.

We conducted this performance audit from March 2008 to June 2009 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: Comments from the Department of State

GAO Comments

1. State implies that this GAO report calls for the elimination of steps or partners in the process. Instead, we believe the program’s multistep complexity illustrates the importance of implementing our recommendation to designate a program manager. 2. We added State’s additional information. However, in their technical comments, Gulf Region Division officials stated that communication and coordination remain problems as of May 2009. 3. We have changed program “success” to program “accomplishment” in the final report. However, the larger issue, as State acknowledges, is that the Provincial Reconstruction Development Committee program does not have outcome measures of effectiveness to assess how the program has enhanced the capacity of local Iraqi councils to identify, plan, and deliver essential services. 4. Our past work indicates that although the Iraqi government budgets for investment activities, its actual spending for these investments, including maintenance of projects, is limited. For instance, in 2008, the Iraqi government spent $949 million, or about 2 percent of its total 2008 expenditures, for the maintenance of Iraqi- and U.S.-funded investments. In 2008, the provinces spent $2. 054 billion or 22 percent of budgeted investment expenditures of $9.167 billion. The 2008 investment budget for the provinces, including the supplemental budget, was $6.47 billion. The provinces spent 32 percent.

Appendix III: Comments from the U.S. Army Corps of Engineers

The following are GAO’s comments on the U.S. Army Corps of Engineers letter dated May 22, 2009.

GAO Comment

1. We modified our recommendation in response to the additional information USACE provided about its initiatives to strengthen the timekeeping process. In follow up discussions, USACE agreed to our recommendation that the Secretary of the Army ensure the initiatives to improve the financial controls for the timekeeping process correct the deficiencies discussed in the report.

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

Appendix V: GAO Contacts and Staff Acknowledgments

GAO Contacts

Staff Acknowledgments

Tetsuo Miyabara, Assistant Director; Mary Ellen Chervenic, Assistant Director; Jessica Butchko; Richard Cambosos; Lynn Cothern; K. Eric Essig; Dennis Fauber; Wilfred Holloway; Rhonda Horried; Grace Lui; Jason Pogacnik; and Eddie Uyekawa made key contributions to this report.