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

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