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Audit Report U.S. Department of the Interior Office of Inspector General AUDIT REPORT MANAGEMENT AND OVERSIGHT OF SELECTED CONSTRUCTION CONTRACTS, REPUBLIC OF PALAU REPORT NO. 00-I-537 JULY 2000 N-IN-PAL-002-99-R United States Department of the Interior OFFICE OF INSPECTOR GENERAL Washington, DC 20240 July 12, 2000 Honorable Kuniwo Nakamura President Republic of Palau P.O. Box 100 Koror, PW 96940 Subject: Audit Report on Management and Oversight of Selected Construction Projects, Republic of Palau (No. 00-I-537) Dear President Nakamura: This report presents the results of our audit of the Republic of Palau’s management and oversight of selected construction projects. Section S(a) of the Inspector General Act (5 U.S.C. app. 3) requires the Office of Inspector General to list this report in its semiannual report to the U.S. Congress. In addition, the Office of Inspector General provides audit reports to the Congress. Please provide a response to this report by September 15, 2000. The response should provide the information requested in Appendix 6 and should be addressed to our Pacific Field Office, 415 Chalan San Antonio - Suite 306, Tamuning, Guam 96911. Sincerely, Earl E. Devaney Inspector General U.S. Department of the Interior Office of Inspector General EXECUTIVE SUMWARY Management and Oversight of Selected Construction Projects, Republic of Palau Report No. 00-I-537 July 2000 BACKGROUND The Compact of Free Association between the United States and the Republic of Palau became effective on October 1, 1994. Under Title 2, Section 212(b), of the Compact, the Republic of Palau received funding to promote economic development through capital improvement projects. As of September 30, 1998, Palau had received Compact Section 212(b) funds of $36 million and related Section 215 funds of S 16.5 million.’ Palau invested these funds in various securities and earned an additional $17.9 million in investment income (net of investment expenses), which the Compact requires to be used for economic development. For the 4-year period ending September 30, 1998, Palau received Compact funds totaling $70.4 million ($36 million plus $16.5 million plus $17.9 million), had 277 approved projects totaling $53.4 million, and had expended $34.4 million. Prior to implementation of the Compact, Palau was part of the Trust Territory of the Pacific Islands and had received capital improvement funds through the Office of Insular Affairs, U.S. Department of the Interior. As of September 30, 1998, 11 Trust Territory capital improvement projects totaling $48.3 million were still active. OBJECTIVE The objective of the audit was to determine whether the Republic ofPalau provided adequate management and oversight of construction projects funded by either the Trust Territory of the Pacific Islands or Section 212(b) of the Compact of Free Association. The scope of the audit included a review ofthe project management activities related to a sample (53 projects, totaling $6.7 million) of the 277 Compact-funded capital improvement projects that were active during the period of October 1994 to May 1999 and a sample (3 projects, totaling $17.5 million) of the 11 Trust Territory projects that were active as of September 1998. ‘Under the Compact of Free Association, the Republic of Palau was to receive all Section 212(b) funding ($36 million) during the first year of the Compact. However, the Compact, which was actually signed by the United States and the Republic of Palau in January 1986, did not become effective until October 1, 1994 because the citizens of Palau did not ratify the agreement until November 1993. As a result of the delay, an inflation adjustment provision contained in Compact Section 2 15 provided for $16~5 million in addition to the $36 million specified in Section 2 12(b). RESULTS IN BRIEF We found that the Republic of Palau did not adequately manage National Government capital improvement projects funded by the Trust Territory of the Pacific Islands and the Compact of Free Association and did not ensure that Compact funds appropriated for state capital improvement projects were used efficiently and effectively as follows: - The National Government did not (1) ensure that cost estimates were prepared prior to procuring construction services, (2) perform or adequately document inspections made at project construction sites, (3) provide clear bidding instructions to potential bidders, and (4) adequately document administrative charges to projects. These conditions existed because Palau’s Division of Design Engineering did not have an adequate number of properly trained staff to effectively perform the construction procurement and project management functions. As a result, capital improvement project funds totaling more than $2 million were not used efficiently, and 11 Trust Territory-funded projects valued at $48.3 million were not completed for periods ranging from 5 to 25 years after the funds were made available for the projects. - The $5.15 million Malakal sewage treatment plant expansion project funded under a fiscal year 1993 Trust Territory capital project has not been started, and as a result. the existing sewage treatment plant continued operating beyond its design capacity and was discharging pollutants into the coastal waters adjacent to the plant, potentially having an adverse impact on Palau’s environment and the health and safety of its residents. - The National Government (1) used Section 212(b) funds to finance state capital improvement projects that were short-term in nature and did not meet the long-term economic development needs of the states and (2) allowed the states to procure construction services and manage construction projects without the skilled personnel needed to effectively perform these functions. These conditions occurred because the National Government’s policy was to allow each state to manage its own economic development projects. In addition, although the National Government had identified problems with the states’ administration of their projects, corrective actions were not implemented as a condition for future appropriations of Compact Section 2 12(b) funds. As a result, the National Government lacked assurance that $4.3 million appropriated to the 16 states during fiscal years 1995 through 1999 would result in long-term economic development improvements and that costs of $250,000 incurred on two state-administered construction projects were reasonable for the services provided. In addition, we identified problems related to road construction and land use on Babeldaob Island that could significantly hamper future economic growth if corrective action is not taken. RECOMMENDATIONS We made 13 recommendations to the President of the Republic of Palau to address the deficiencies disclosed by our review. Specifically, we recommended that the National Government request a technical assistance grant to assist in strengthening the Division of Engineering, establish professional requirements for engineering positions and fill those 2 positions, develop a methodology for distributing the fringe benefit costs of inspectors among all pertinent projects, and take action to expedite the completion of the blalakal sewage treatment plant expansion project. We also recommended, with regard to state projects, that the National Government prohibit the use ofcompact Section 2 12(b) f&ds for such short-term purposes as the repair and maintenance of roads, equipment, and structures; develop a plan to consolidate the road maintenance resources of the states on Babeldaob Island and integrate the National and state road systems; assist the states in developing master land use plans; enforce the National zoning laws and assist the states in developing local zoning laws; require the Bureau of Public Works to procure construction and project management services for Compact-funded state projects; and require the establishment of a uniform building code. AUDITEE COMMENTS AND OIG EVALUATION The President of the Republic of Palau’s response to the draft report agreed with 11 of the 13 recommendations. The response disagreed with and provided additional information on two recommendations concerning Babeldaob Island roads and National zoning laws. Based on information provided in the response, we revised the remaining two recommendations and requested an additional reply. 3 CONTENTS Page EXECUTIVE SUMMARY . , . _ . 1 INTRODUCTION . 7 BACKGROUND ............................................... 7 OBJECTIVE AND SCOPE ....................................... 8 PRIOR AUDIT COVERAGE ..................................... 9 FINDINGS AND RECOMMENDATIONS . 10 A. NATIONAL GOVERNMENT PROJECTS . 10 B. STATE PROJECTS . .20 APPENDICES 1. CLASSIFICATION OF MONETARY AMOUNTS . , . 35 2. COMPACT SECTION 212(b) AND RELATED FUNDING PROVIDED TO THE REPUBLIC OF PALAU . _ . _ . 36 3. CAPITAL IMPROVEMENT PROJECTS FUNDED BY THE TRUST TERRITORY OF THE PACIFIC ISLANDS . 37 4. COMPACT SECTION 2 12(b) FUNDS APPROPRIATED TO THE STATES OF THE REPUBLIC OF PALAU . 38 5. OFFICE OF THE PRESIDENT RESPONSE . , . , . 39 6. STATUS OF AUDIT REPORT RECOMMENDATIONS . 48 5 -- INTRODUCTION BACKGROUND The Compact of Free Association between the United States and the Republic of Palau became effective on October 1, 1994. Under Title 2, Section 2 12(b), of the Compact, the Republic of Palau received funding to promote economic development through capital improvement projects. The types of projects for which the Section 212(b) funds could be used and annual reporting requirements were contained in a supplemental
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