Global Health: Global Fund to Fight AIDS, TB and Malaria Has	 
Advanced in Key Areas, but Difficult Challenges Remain		 
(07-MAY-03, GAO-03-601).					 
                                                                 
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.		 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-601 					        
    ACCNO:   A06843						        
  TITLE:     Global Health: Global Fund to Fight AIDS, TB and Malaria 
Has Advanced in Key Areas, but Difficult Challenges Remain	 
     DATE:   05/07/2003 
  SUBJECT:   Disease detection or diagnosis			 
	     Federal funds					 
	     Federal grants					 
	     Financial management				 
	     Funds management					 
	     Grant award procedures				 
	     Grant monitoring					 
	     Infectious diseases				 
	     International relations				 
	     Tuberculosis					 
	     Global Fund to Fight AIDS, Tuberculosis,		 
	     and Malaria					 
                                                                 
	     HIV/AIDS						 
	     Malaria						 

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GAO-03-601

                                       A

Report to the Honorable Jim Kolbe Chairman, Subcommittee on Foreign
Operations, Export Financing, and Related Programs, Committee on
Appropriations, House of Representatives

May 2003 GLOBAL HEALTH Global Fund to Fight AIDS, TB and Malaria Has
Advanced in Key Areas, but Difficult Challenges Remain

GAO- 03- 601

Letter 1 Results in Brief 2 Background 5 The Fund Has Established Key
Governance Structures, but

Implementation Challenges Impede Ability to Rapidly Disburse Funds 7 The
Fund Developed Comprehensive Oversight Systems and Issued

Procurement Guidance, but Systems Face Challenges, and Guidance Is Still
Evolving 20 Lack of Resources Threatens Fund*s Ability to Continue to
Approve

and Finance Grants 32 Improvements in Grant- Making Processes Enhance
Fund*s Ability to

Achieve Key Objectives, but Challenges Remain 36 Agency Comments and Our
Evaluation 44

Appendixes

Appendix I: Objectives, Scope, and Methodology 45

Appendix II: Status of Round 1 Grants 48

Appendix III: Drug Procurement Cycle 54

Appendix IV: Indicators of Need for Recipient Countries 56

Appendix V: Comments from the Global Fund to Fight AIDS, TB and Malaria 60

Appendix VI: Joint Comments from the Departments of Health and Human
Services and State, and the U. S. Agency for International Development 67

Appendix VII: GAO Contact and Staff Acknowledgments 69 GAO Contact 69
Staff Acknowledgments 69

Tables Table 1: The Secretariat*s Budget for 2003 12 Table 2: Signed Grant
Agreements* Funds Committed and

Disbursed 48 Table 3: Grant Agreements in the Pipeline 52 Table 4: Grant
Agreements Pending, but Less Far Along in the

Process 53

Figures Figure 1: Timeline of the Fund*s First Year 6 Figure 2: Approved
Grants, by Disease and by Region 7

Figure 3: Governance Structure of the Fund as of April 1, 2003 8 Figure 4:
The Structure of the Fund*s Board as of April 1, 2003 10 Figure 5:
Anticipated Grant Expenditures for Drugs and Health

Products 27 Figure 6: Anticipated Expansion in Approved Proposal Dollars

through 2004 (actual and estimated 2- year commitments) 33 Figure 7:
Pledges Made, Amount Received, and Grant Proposals

Approved 35 Figure 8: Global Fund Proposal Review Process 37 Figure 9:
Grant Money by Country Income Level 38

Abbreviations

CCM Country Coordinating Mechanism HIV/ AIDS Human immunodeficiency virus/
acquired immunodeficiency

syndrome LFA Local Fund Agent NGO Nongovernmental organization OECD
Organization for Economic Cooperation and Development TB Tuberculosis TRP
Technical Review Panel UN United Nations UNAIDS Joint U. N. Program on
HIV/ AIDS UNDP U. N. Development Program UNOPS U. N. Office for Project
Services USAID U. S. Agency for International Development WHO World Health
Organization

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Letter

May 7, 2003 The Honorable Jim Kolbe Chairman, Subcommittee on Foreign
Operations,

Export Financing, and Related Programs Committee on Appropriations House
of Representatives Dear Mr. Chairman:

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. In addition, these diseases, if unchecked, are
increasingly seen as a threat to economic growth, with the potential to
worsen conflict and political instability in many parts of the world.

According to the United Nations (U. N.), about $10 billion will be needed
in 2005, increasing to $15 billion in 2007, to fight AIDS alone; malaria
and tuberculosis will require billions more. In January 2002, the Global
Fund to Fight AIDS, Tuberculosis and Malaria (* the Fund*) was established
in Geneva, Switzerland. The Fund aims to rapidly disburse grants to
augment

existing spending on the prevention and treatment of these three diseases
in developing countries 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 1 and is the single
largest donor. Because of this significant commitment of

U. S. resources, you requested that we report on the Fund*s progress
during its first full year of operation. This report assesses (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- making
processes. 1 Through fiscal year 2003 the United States had appropriated
up to $650 million to the Fund

and has pledged an additional $1 billion over 5 years, beginning in 2004.

As part of our review, we analyzed documents and interviewed key officials
from the Fund; the Joint U. N. Program on HIV/ AIDS (UNAIDS); the World
Health Organization (WHO); the U. N. Development Program; and experts on
project implementation and procurement. We obtained perspectives on the
progress and evolution of the Fund from officials at the Department of
State, the U. S. Agency for International Development, and the Department
of Health and Human Services, as well as the directors of the Global

Business Coalition on HIV/ AIDS, the Earth Institute of Columbia
University, the Gates Foundation HIV/ AIDS and TB Program, and the Global
AIDS Alliance. We also conducted research and reviewed data on global
spending on HIV/ AIDS, TB, and malaria. In addition, we visited Haiti,
Honduras, Ethiopia, and Tanzania to meet with principle recipients of Fund
grants and members of the country coordinating bodies that will be
implementing activities supported by Fund grants. 2 In Haiti and Tanzania,
we also met with the private sector firms that have contracted to serve as
local agents for the Fund in these countries. (App. I provides a more
detailed description of our objectives, scope, and methodology.)

Results in Brief 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. In
its first year of operation, the Fund successfully established a board of
directors, a permanent secretariat, and a grant review process. It called
on countries to establish governance structures to develop, implement, and
oversee grants. The principal country- level governance structure, the
Country Coordinating Mechanism (CCM), is designed to provide a forum for
all stakeholders to (1) review and submit proposals and (2) follow the
progress of Fund- supported programs. However, as of late 2002, in three
of the four countries we visited there was limited communication between
the secretariat and the CCM and between CCM leadership and other members.
These communication problems and the evolving nature of the countrylevel

structures resulted in key participants being unsure of their roles in the
proposal process and unprepared to support grant implementation. In 2 We
do not name individual countries in the text of this report, given the
early stages of Fund

activities in these countries. Of these four countries, Haiti and Tanzania
were selected as two of the *fast track* countries that were close to
having signed grant agreements during our field visits. Ethiopia and
Honduras were less far along in the process and therefore represent most
of the remaining countries that had proposals approved in the first round
vetted by the Fund.

one country, the CCM was better prepared largely because it had received a
high level of support from Fund staff and strong leadership from the CCM
chair; however, the Fund does not have sufficient resources to provide
this level of support to all CCMs. The Fund has acknowledged the
difficulties experienced by CCMs and is addressing them by clarifying its
guidance to CCMs through regional workshops and working with local
partners such as bilateral and multilateral donors. At the headquarters
level, to benefit from some of the tax and employment advantages of an
international organization, the secretariat of the Fund has relied on the
regulations and systems governing the U. N. WHO. However, this
administrative relationship has contributed to delays in disbursing grants
and

uncertainties for Fund staff concerning responsibility and accountability.
The Fund is exploring the possibility of gaining additional concessions
from Swiss authorities that would eliminate the need for this
relationship. 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 has recognized these challenges and is working to
address them. The Fund*s principal oversight entity at the country level,
the Local Fund Agent (LFA), is a Fund contractor that is responsible for
ensuring that grant recipients account for the money they spend and
measure progress they make in fighting disease. The LFA is also
responsible for assessing recipients* ability to procure goods and
services. However, the introduction of this new mechanism has been marked
by controversy and misconceptions regarding its oversight role. These

problems have delayed the designation of LFAs in some countries, slowing
the implementation of grants. For example, several government officials in
one of the countries we visited believed, incorrectly, that a government
ministry would be permitted to perform the LFA functions. Moreover, in
countries with a limited number of qualified personnel and organizations,
LFAs will face the challenge of maintaining the independence necessary to
avoid real or perceived conflicts of interest. Regarding procurement, the
Fund has provided requirements in the agreements that each grant recipient
must sign. These requirements are focused primarily on procurement of
drugs and public health products in an effort to ensure quality, safety,
and the lowest possible prices. The agreements also contain general but
less extensive requirements on procuring goods and services, including
nonmedical items such as vehicles and office equipment. The

Fund encourages recipients to abide by national laws and international

obligations but does not explicitly address this issue in the grant
agreements.

A lack of sufficient resources threatens the Fund*s ability to approve and
finance additional grants. Although the Fund has announced plans to award
new grants in its third round of proposals in October 2003, pledges made
through this year as of April 1, 2003, are insufficient to cover more than
a small number of additional grants. The Fund has less than $300 million
to support commitments in round 3* significantly less than the $608
million in 2- year grants approved by the board of directors in the first
round and the $884 million approved in the second round. On the basis of
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. In addition, without significant new pledges,
the Fund will be unable to support all of the already approved grants
beyond the initial 2- year agreements. If all currently approved grants
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.
These grants seek to provide, among other things, AIDS medications to
500,000 people and care and support to 500,000 AIDS orphans and other
vulnerable children.

Improvements in the Fund's grant- making processes have enhanced its
ability to achieve its key objectives, but challenges remain. Grant
decisions are made by the board, based primarily on a technical evaluation
of submitted proposals. Between the first and second proposal rounds, the
Fund made several improvements and adjustments to its proposal review and
decision- making process. These include revising the application
materials, altering eligibility criteria to focus on the most needy
countries, and adding additional members to the technical evaluation panel
to increase its overall knowledge base and better prepare it to evaluate
nonmedical, development- related issues. However, ongoing challenges to
the grant decision process have been identified by the Fund and
stakeholders, including ensuring that grants augment existing spending on
HIV/ AIDS, TB, and malaria and that recipients have sufficient capacity to
effectively use the grants. The Fund has recognized these challenges, but

its efforts to address them are still evolving. 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
(USAID) agreed with our findings. The Fund

discussed steps it is taking to address the challenges identified in our
report and identified several additional challenges.

Background 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
subSaharan 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 grantmaking
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.

Figure 1: Timeline of the Fund*s First Year

Global Fund launched First round of grants approved

First grant Second round of

from Geneva agreements signed

grants approved Dr. Richard Feachem appointed as Executive Director of the
Fund

1/ 02 4/ 02 11/ 02 1/ 03 Source: GAO analysis of Fund documents.

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). 3 These grants total nearly $3.7 billion ($ 1.5 billion over the
first 2 years) and cover all three diseases.

3 This country total does not include one global grant and grants to two
regions.

Figure 2: Approved Grants, by Disease and by Region a Grant dollars by
disease Grant dollars by region

1%

Middle East and

1%

North Africa All

6%

South Asia 

3%



7%

TB/ AIDS Europe and

13% 

 Central Asia

TB 

10%

Latin America and

18% 

the Caribbean

65% 61% 

15%  

East Asia and the Pacific

Malaria Sub- Saharan

AIDS Africa

Source: GAO analysis of Fund data. a Based on maximum allowable grant
money for the full length of board- approved programs.

The Fund Has In its first year, the Fund developed and established key
governance and

Established Key other supporting structures, including a board of
directors, a permanent

secretariat, a grant review process, and country- level structures
required to Governance

develop, implement, and oversee grants. However, limited communication,
Structures, but

administrative complications, and the evolving nature of these new
Implementation

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

Challenges Impede agreements. The Fund has recognized these problems and
is taking steps at Ability to Rapidly

both the country and headquarters levels to address them. Disburse Funds

Key Governance and Other The Fund has made noteworthy progress in
establishing key headquarters

Supporting Structures and country- level governance structures. Figure 3
illustrates the

Established governance structure of the Fund.

Figure 3: Governance Structure of the Fund as of April 1, 2003
Headquarters Level

Board Technical Review

Secretariat Trustee Panel

(World Bank) Country Level

Country Coordinating Mechanism (CCM)

Government Private sector

Civil society Donors

Local Fund (e. g., Ministry

(e. g., Chamber of (e. g., faith- based

(multilateral and Agent

of Health) Commerce)

groups) bilateral)

Principal recipient( s) Subrecipient( s) Source: GAO analysis of Fund
documents. Notes: WHO and UNAIDS assist the technical review panel with
data and other expertise. The Fund has entered into an agreement with WHO
for the provision of administrative services at the headquarters level.

The arrows denote relationships but do not specify their nature, e. g.,
information or money flow vs. accountability. The relationships among the
components of this governance structure are detailed below in the
paragraphs on each component.

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. 4 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.

4 According to the Fund, Swiss authorities generally require that a Swiss
citizen with his or her domicile in Switzerland sit on the board of
directors of a foundation registered in Switzerland. The Fund is a
foundation registered in Switzerland.

Figure 4: The Structure of the Fund*s Board as of April 1, 2003 Chair

U. S. Secretary of Health and Human Services

Vice Chair

Deputy Permanent Secretary, Ministry of Public Health, Thailand

Voting members Donor voting group

Beneficiary voting group

7 Government representatives 7 Government representatives

European Commission (Belgium, Austria) Ukraine (Eastern Europe)

France (Germany, Luxembourg, Spain) Pakistan (Eastern Mediterranean
Region)

Italy Uganda (Eastern & Southern Africa)

Japan Brazil (Latin America and the Caribbean)

Sweden (Denmark, Ireland, Netherlands, Thailand (South East Asia)

Norway) Nigeria (West and Central Africa)

United Kingdom (Canada, Switzerland) China (Western Pacific Region)

USA

2 NGO representatives 2 Private sector representatives

Health Rights Action Group (developing country) McKinsey & Company

French NGO AIDES (developed country) Bill & Melinda Gates Foundation

Nonvoting members

1 Representative of communities affected by the diseases 1 WHO
representative 1 World Bank representative 1 UNAIDS representative 1 Swiss
citizen appointed by the board

Source: GAO analysis of Fund documents. Note: Board members from
beneficiary countries represent a region, which is identified after each
country listed. Membership on the board as a donor is based on
contributions, and members can represent an individual country or a group
of countries. (Countries may be grouped on the basis of common interests
or geographic proximity.)

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. 5 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).

5 About half of these staff have been hired for 2- year terms; five have
been seconded from other organizations; and the rest have been hired for
shorter lengths of time. The secretariat has budgeted for 73 full- time
staff.

Table 1: The Secretariat*s Budget for 2003

Dollars in millons

Percentage Item Description Cost of budget

Local Fund Based on estimates for the $16. 4 42%

Agent fees assessment of principal recipients and annual oversight work
per grant Staff Includes salaries and benefits 11. 0 28 Professional

Includes $2 million in fees to the World 5.0 13

services Bank as trustee and $725,000 to WHO for administrative services

Travel Includes secretariat and board travel 2. 1 5 Other Includes
facilities, communication

4.3 11 materials, information technology infrastructure, meetings, fixed
assets,

and other items

Tot al $38. 7 a 100% a

Source: GAO analysis of Fund documents. a Figures may not add up due to
rounding

 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. 6 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 7 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

6 TRP members generally agree to serve for 2 years; members rotate at
different times to ensure continuity. 7 UNAIDS consists of eight
cosponsors: U. N. Children*s Fund, U. N. Development Program, U. N.
Population Fund, U. N. International Drug Control Program, International
Labor Organization, U. N. Educational, Scientific, and Cultural
Organization, WHO, and the World Bank.

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. 8  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.

8 An additional component of the governance structure, the Partnership
Forum, will be made up of stakeholders concerned about the prevention,
care, treatment and eventual eradication of HIV/ AIDS, tuberculosis and
malaria. It will meet every 2 years to provide views on the Fund's
policies and strategies.

 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. 9 (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). 10 The Fund may

contract with additional organizations as the need arises and expects to
receive bids from potential LFAs by August 2003.

9 In addition, one grant agreement is with a private sector entity and the
principal recipient for another has yet to be determined. 10 According to
World Bank and Fund officials, the Bank is serving as the local fund agent
for a TB project in India due to unique circumstances pertaining to this
project.

Challenges at Country Level Slow Disbursement of Grants; Fund Taking Steps
to Respond

Limited Communication, Lack of As of late 2002, in three of the four
countries we visited, country

Clarity over Roles and coordinating mechanisms were not operating at
levels envisioned by the

Responsibilities at Country Level 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 11 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

11 NGO Participation in the Global Fund, a Review Paper, International
HIV/ AIDS Alliance, October 2002.

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 12 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, 13 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.

12 The Fund notes that the information provided by CCMs during the first
proposal round was not detailed enough to extract this data and that most
CCMs from round one resubmitted proposals in the second round. Two CCMs
from areas experiencing longrunning conflict were excluded from this
analysis.

13 Global Fund Update for NGOs and Civil Society, June 2002.

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. 14 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.

The Fund Is Taking Steps to According to the Fund, it does not have
sufficient resources to provide the

Address Problems Associated same level of support for every country as it
did in the country cited above.

with CCMs 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

14 The Fund has approved a few proposals from NGOs that were submitted
outside the CCM process. According to Fund guidance, NGOs are currently
allowed to apply outside the CCM process in exceptional circumstances, for
example, in countries or regions where conflict has incapacitated local
government and other structures or where no CCM existed.

of the issues raised above. 15 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. 16 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.

15 These guidelines include, among others, making sure that certain
sectors and institutions are represented on the CCM, including the
ministry of finance, multilateral development banks, religious
organizations, academic entities, and the private sector. In addition, no
more than half the CCM*s membership should consist of members of public
sector institutions (e. g., host country government officials and
officials from bilateral or multilateral agencies). The guidelines also
specify that the chair and other key posts should

alternate between public sector officials and representatives of civil
society or the private sector; that participating entities should choose
their own representatives; that correspondence between the Fund and the
CCM should be copied to all members; and that fiduciary arrangements as
grants are implemented should include the monitoring of CCM performance as
one of the indicators of proposal sustainability. 16 The Cuba meeting was
convened at a larger forum on HIV/ AIDS and sexually transmitted

diseases in Latin America and the Caribbean.

Administrative Arrangement The Fund established an administrative services
agreement with the WHO,

with WHO Causing Delays; an agency of the United Nations, to benefit from
some of the tax and

employment advantages of an international organization, 17 but this Fund
Considering Alternate

relationship is causing delays and other problems, and the Fund is
Arrangements

considering alternate arrangements. 18 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.

17 The Fund, established as a foundation under Swiss law, is a private
entity in Switzerland. As such, it lacks the privileges and immunities
granted to international organizations. 18 This administrative services
agreement also enabled the Fund to begin operating without having to
create its own administrative and management structure. Members of the
board recognized the expediency of this solution and its risks, and
directed the Fund to explore alternatives.

The board asked the secretariat to look into pursuing enhanced legal
benefits for the Fund from Swiss authorities. 19 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 Developed The Fund has developed systems for financial
accountability and for

Comprehensive monitoring and evaluating grant activities and has issued
guidance on

procurement. However, in the Fund*s first year of operation, these systems
Oversight Systems and

faced challenges at the country level that the Fund is working to address,
Issued Procurement

and procurement guidance is still evolving. Guidance, but Systems Face
Challenges, and Guidance Is Still Evolving

Oversight Systems The Fund, through the local fund agent, has established
a comprehensive

Established but Face system for overseeing grant recipients, but the
introduction of the LFA has

Challenges 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.

19 The Fund has discussed with the Swiss government the possibility of
receiving the benefits of quasi- intergovernmental status, such as certain
tax benefits, and is also discussing the possibility of gaining a more
enhanced package of privileges and immunities comparable to those given to
international organizations. Private organizations that have received such
privileges and immunities from the Swiss government include the
International Federation of Red Cross and Red Crescent Societies.

The Fund Has Established a The Fund has established a system for ensuring
that principal recipients

Comprehensive System for rigorously account for the money they spend. This
system requires them to

Ensuring Recipients* Financial demonstrate adequate finance and management
systems for disbursing

Accountability 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 The Fund has established a detailed system for
monitoring, evaluating, and

Detailed System for Monitoring reporting at regular intervals on the
performance of grants that identifies and Evaluating Grant

specific roles for the LFA, principal recipient, subrecipients, and CCM.
Performance 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 20 comes
after 2 years, when the Fund expects to begin seeing evidence that
grantsupported

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. 21 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.

20 Most grants last for 5 years. 21 In September 2000, world leaders at
the U. N. Millennium Summit agreed to a set of timebound, measurable goals
for combating poverty, hunger, disease, illiteracy, environmental
degradation, and discrimination against women.

LFAs Face Several Challenges 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. 22
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. 23 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

22 Representatives from one LFA, however, stated that it was their
understanding that the principal recipient, along with the CCM, chooses
the LFA in each country. According to Fund documents, the Fund makes this
decision, taking into consideration input from the CCM.

23 These officials said that they expect to disburse about $750 million in
2003 but cautioned that this figure is not certain.

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- ofinterest and anticorruption provisions for
principal recipients in the grant agreement document. Board Developed

The Fund, through the grant agreements, has developed detailed Procurement
Requirements, procurement requirements for medical supplies and a brief
list of but Certain Issues Have Not

requirements for procuring nonmedical items, but certain issues have not
Been Finalized

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.

Board Analyzed Issues and The Fund*s procurement provisions have focused
primarily on drugs and

Developed Options for Procuring health products 24 because a significant
amount of Fund money will be

Drugs and Health- Related Items 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. 25 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. 26 24 The term *health products,* as defined by the
Fund in the grant agreement, includes

pharmaceutical products; diagnostic technologies and supplies (e. g., HIV
test kits); bed nets; insecticides; aerial sprays against mosquitoes;
other products for prevention (e. g., condoms); and laboratory equipment
and supportive products (e. g., microscopes and reagents).

25 Data on anticipated expenditures for drugs are not available for first-
round proposals. 26 The Fund has not provided a breakdown of anticipated
expenditures for the full life of grants approved in the first round.

Figure 5: Anticipated Grant Expenditures for Drugs and Health Products
Round 1 (April 2002) a Round 2 (January 2003) a

44%  Drugs and

47%  Drugs and

56% health products b 53% health products b  $267 million 

$415 million

Other c Other c

$340 million $468 million

Source: GAO analysis of Fund data. a The totals for each round are board-
approved ceilings for approved proposals; actual grant totals may be less.
b Drugs and health products include educational materials and possibly
other items, based on

information provided in the proposals for this category. c Other includes
expenses associated with infrastructure and equipment (e. g., vehicles),
training,

human resources, information systems, administrative costs, and monitoring
and evaluation.

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. 27 (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
products;

 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

27 The Fund cautions that the actual number of patients treated may vary
depending on prices, recipients* ability to procure and deliver the drugs,
and other factors related to the implementation of the grants.

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.

The Fund Provided General In addition to providing specific requirements
for procuring drugs and

Requirements for Procuring other health- related products, the grant
agreement includes a brief list of

Goods and Services 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 The Fund has not finalized certain procurement
issues, including (1) the

Some Procurement Issues 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. 28 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 28 As
of April 1, 2003, the World Trade Organization has not been able to
resolve a dispute concerning a clarification of its Trade Related
Intellectual Property Agreement that would allow the importation of
generic drugs under patent by developing countries that do not have the
capacity to manufacture them domestically. The dispute concerns which
drugs, diseases, and countries will be covered. The United States has
pushed for limited coverage, whereas other countries favor broader
coverage. The World Trade Organization was established in 1995 to
administer rules for international trade and provide a forum for resolving
trade disputes and conducting trade negotiations. Based in Geneva,
Switzerland, it is composed of 145 member states.

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. 29 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.

29 While USAID generally does not finance customs duties associated with
procurement of imported items, it will finance duties under certain
circumstances. For example, it will finance duties for NGOs that do not
have tax exempt status.

Lack of Resources The Fund*s ability to approve and finance additional
grants is threatened by

Threatens Fund*s 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

Ability to Continue to proposals in 2003. In addition, without significant
new pledges, the Fund

Approve and Finance will be unable to support all of the already approved
grants beyond their

Grants initial 2- year agreements.

The Fund Requires Because the Fund approves grant proposals on the basis
of amounts that

Additional Pledges to have been pledged, it will require additional
pledges if it is to continue

Continue Approving Grants 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. 30 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 31 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.

30 Pledges to the Fund may be multiyear, and thus some pledged money may
not be contributed to the trustee in the same year the pledge was made. 31
The Board originally granted up to $613 million over 2 years to 58
proposals. Three of these

proposals have since been dropped due to their inability to address a
follow- up request by the Fund. The maximum approved by the Board is thus
$608 million for round 1.

Figure 6: Anticipated Expansion in Approved Proposal Dollars through 2004
(actual and estimated 2- year commitments)

Dollars in millions 2,000

1,900 1,900 1,800

1,600 1,600

1,400 1,200 1,000

884 800

608 600

400 200

0 Round 1 a Round 2 a Round 3 b Round 4 b Round 5 b 2003

2004 2004 (October) (March)

(October)

Source: Adapted by GAO from Fund documents. Note: Round 3 has been
announced and decisions will be made in October 2003. Dates for rounds 4
and 5 are tentative. a Actual data from receipt and approval of proposals
(2- year grant commitments).

b Global Fund estimate of expected 2- year grant commitments.

The Fund Requires The Fund will require significantly greater
contributions to finance

Significantly Greater approved grants beyond initial 2- year commitments
of money. By January

Contributions to Finance 2003, the Fund had made 2- year grant commitments
equaling nearly $1. 5

billion in the first two proposal rounds. 32 Among other things, these
grants Approved Grants for

seek to provide 500,000 people with AIDS medications and 500,000 AIDS
Duration of Programs orphans and other vulnerable children with care and
support. Although the Fund approves grants that can be covered by pledges
received, these

32 The board approves grant proposals based on budgets submitted, but
recipients are not guaranteed this amount. The amount approved is a
ceiling, and the Fund may slightly decrease the grant amount on closer
inspection of the recipient*s needs.

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
longterm obligations for the Fund.

Figure 7: Pledges Made, Amount Received, and Grant Proposals Approved
Dollars in millions 4,000

3,677

3,500

2, 082 3,374

3,000 2,500 2,000

1, 780 1,492

1,500

1, 595 884

1,000

935

500

608

0 ges a

03 2- yr.

5- yr. pled

2008 through 2003

received 3/ 31/ s of of Total through P

ledge the end Amount as co

mmitmentsb co

mmitmentsb

Grant proposals approved - round 2 Grant proposals approved - round 1
Pledges/ amount received

Source: GAO analysis of Fund documents. Note: A shortfall in the funding
of already approved grants is evident when one compares 5- year
commitments with total pledges over this time frame. The small amount of
resources available for funding new grants is evident when comparing 2-
year commitments with pledges through 2003. a The pledges expected through
2008 include $173 million that has no specified arrival date.

b These numbers represent the maximum amount approved by the board. Final
budgets may be reduced during grant agreement negotiations. Five- year
figures are potential, rather than guaranteed, commitments.

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. 33 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. 34 Improvements in The
Fund has established detailed objectives, criteria and procedures for
Grant- Making

its grant decision process and is making enhancements to the process in
response to concerns raised by participants and stakeholders. Several
Processes Enhance

improvements were made to the proposal review process between the first
Fund*s Ability to

and second proposal rounds, and the Fund has committed to further Achieve
Key

improvement. These efforts will seek to address ongoing challenges,
including ensuring that the money from the Fund supplements existing
Objectives, but

spending for HIV/ AIDS, TB, and malaria and that recipients are able to
use Challenges Remain

the new aid effectively. The Fund has recognized these challenges, but its
efforts to address them are still evolving.

Improvements in Proposal The Fund has made improvements in its proposal
review and grant- making Review and Grant- Making

process to support key objectives, but assessment criteria and procedures
Process Support Key

are still evolving. According to the Fund, criteria for successful
proposals Objectives

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). 33 This resource needs estimate is reduced from an earlier one made at
the October 2002 board meeting, which called for three proposal rounds in
2003 (rather than the currently planned two rounds), and projected a need
of $7. 9 billion through 2004.

34 In addition to seeking direct monetary contributions, the Fund is also
trying to encourage in- kind contributions, such as equipment or drugs, as
well as skills and services, directly to recipients. While some in- kind
donations have been made at the country level, the Fund itself cannot
accept them directly at a global level since it is only a financing
mechanism.

Figure 8: Global Fund Proposal Review Process

Call for Proposal in- flow

Technical review Board meeting/

Additional proposals

and screening panel evaluation

grant decisions clarifications Final approval by secretariat

Technical Review Panel selection

Source: Adapted by GAO from Fund documents.

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. 35 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.)

Figure 9: Grant Money by Country Income Level a 3%

Upper middle income 

27%  Lower middle income

70%  Low income Source: GAO analysis of Fund data. a Based on maximum
allowable grant money for full length of Board approved programs.

35 Members of the Organization for Economic Cooperation and Development*s
(OECD) Development Assistance Committee are ineligible. These countries
are Australia, Austria, Belgium, Canada, Denmark, Finland, France,
Germany, Greece, Ireland, Italy, Japan, Luxembourg, Netherlands, New
Zealand, Norway, Portugal, Spain, Sweden, Switzerland, the United Kingdom,
the United States, and the Commission of the European Communities.

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 highincome countries are now excluded from eligibility for Fund
money, 36 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 37 and poverty.

Challenges to Grant- Making The Fund and other stakeholders note that
meeting key grant- making

Process Remain 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. 38

Ensuring that Grants The Fund*s policy is that both the pledges the Fund
receives and the grants

Complement and Add to Existing it awards must complement and add to
existing spending on the three

Spending 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, 39 as well as from
eight 36 Previously, only high- income countries included in the OECD*s
Development Assistance Committee were excluded. See footnote 35 for
membership. Country income categories are based on World Bank documents.
37 According to Fund documents, disease- related need encompasses both
current and potential burden of disease. 38 The capacity to absorb new aid
hinges on a country*s ability to effectively combine its domestic
resources, such as labor and managerial capacity, with the additional
foreign assistance.

39 The United States, Canada, Japan, France, Germany, Italy, and the
United Kingdom.

of the Development Assistance Committee 40 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. 41 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

40 See footnote 35 for Development Assistance Committee membership. 41
Grant Agreement, Article 9: *In accordance with the criteria governing the
selection and award of this Grant, the Global Fund has awarded the Grant
to the Principal Recipient on the condition that the Grant is in addition
to the normal and expected resources that the Host Country usually
receives or budgets from external or domestic sources. In the event such
other resources are reduced to an extent that it appears, in the sole
judgment of the Global Fund, that the Grant is being used to substitute
for such other resources, the Global

Fund may terminate this Agreement in whole or in part under Article 21 of
this Agreement.*

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.

Ensuring that Recipients Have Although the Fund has stated that proposals
will be assessed based on

the Capacity to Absorb New whether they have demonstrated how grants could
be effectively absorbed

Funding and used, Fund officials, donors, and others have raised concerns

regarding the actual capacity of recipients to absorb new aid. 42 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.

42 In this report, *absorptive capacity* refers to the ability of a
country to effectively use development assistance. Absorptive capacity is
affected by resource constraints at various levels, including
institutional capacity within the health sector and the capacity of the
larger economy to absorb an influx of foreign exchange.

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 longterm 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. 43 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 44 --* 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.

43 Increases in grant assistance contribute to a rising domestic money
supply as the government exchanges the hard currency grant assistance for
local currency at the central bank. The resulting rise in the domestic
money supply increases aggregate demand, contributing to higher inflation
if the economy is at or near its short- run productive capacity. The
increase in foreign exchange is also likely to lead to an appreciation of
the real

exchange rate under a fixed exchange rate regime, which is common in poor
countries. Under a fixed system, maintenance of the nominal rate in the
presence of inflation results in real currency appreciation. Real currency
appreciation increases a country*s export prices, rendering it less
competitive internationally, reducing its export earnings and weakening
its trade balance.

44 On March 14, 2002, President Bush announced that the United States
planned to increase its core assistance to developing countries by 50
percent over the next 3 years, resulting in a $5 billion annual increase
over current levels by fiscal year 2006. The Millennium Challenge Account
will receive the increased aid to fund initiatives to improve the
economies and standards of living in qualified developing countries. The
President submitted his plan for

the Millennium Challenge Account to Congress in February 2003.

Agency Comments and We requested comments on a draft of this report from
the Executive

Our Evaluation 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. Sincerely yours,

David Gootnick, Director International Affairs and Trade

Appendi Appendi xes x I

Objectives, Scope, and Methodology 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.

Appendi x II

Status of Round 1 Grants Table 2: Signed Grant Agreements* Funds Committed
and Disbursed Total funds disbursed as Total funds

of April 22, Date of

committed Latest

2003 Principal

Local Fund signed (in U. S.

disbursement (in U. S.

No Country Program recipient Agent agreement

dollars) a date b

dollars)

1 Argentina HIV/ AIDS U. N. Development Pricewaterhouse

29- Jan- 03 $12,177,200 21- Mar- 03 $1, 500,000 Program (UNDP) Coopers
(PWC) 2 Benin Malaria UNDP PWC 20- Mar- 03 2, 389, 185 14- Apr- 03 341,021

3 Burundi HIV/ AIDS Minsitry of Health PWC 04- Apr- 03 4, 877, 000 17-
Apr- 03 554,100 4 Cambodia HIV/ AIDS Ministry of Health,

KPMG 27- Jan- 03 11,242,538 17- Apr- 03 95,919 Kingdom of Cambodia

5 China TB Chinese Center U. N. Office for

30- Jan- 03 25,370,000 10- Apr- 03 1, 200,000 for Disease

Project Services Control and (UNOPS) Prevention, Ministry of Health

6 China Malaria Chinese Center UNOPS 30- Jan- 03 3, 523, 662 10- Apr- 03
542,800

for Disease Control and Prevention,

Ministry of Health 7 Ethiopia TB Ministry of Health KPMG 18- Mar- 03
10,962,600 8 Ghana HIV/ AIDS The Ministry of

PWC 12- Dec- 02 4,965,478 18- Dec- 02 429,599 Health of the Republic of
Ghana

9 Ghana TB The Ministry of PWC 12- Dec- 02 2,336,940 18- Dec- 02 468,270

Health of the Republic of Ghana

10 Haiti HIV/ AIDS Fondation Merove- Pierre -

12- Dec- 02 17,945,067 10- Feb- 03 2, 690,782 SOGEBANK Cabinet

d'Experts Comptables c

11 Haiti HIV/ AIDS UNDP Merove- Pierre - 12- Dec- 02 6, 754, 697 10- Feb-
03 926,762

Cabinet d'Experts Comptables c

12 Honduras HIV/ AIDS UNDP Pricewaterhouse 29- Jan- 03 12,583,466 2- Apr-
03 685,735

Coopers Interamerica S. de R. L.

(Continued From Previous Page)

Total funds disbursed as Total funds

of April 22, Date of

committed Latest

2003 Principal

Local Fund signed (in U. S.

disbursement (in U. S.

No Country Program recipient Agent agreement

dollars) a date b

dollars)

13 Honduras TB UNDP Pricewaterhouse 29- Jan- 03 3, 790, 500 2- Apr- 03
514,731

Coopers Interamerica S. de R. L.

14 Honduras Malaria UNDP Pricewaterhouse 29- Jan- 03 4, 096, 050 2- Apr-
03 379,889

Coopers Interamerica S. de R. L.

15 India TB Ministry of Health World Bank (in 30- Jan- 03 5, 650, 999

process of being finalized)

16 Indonesia TB Ministry of Health PWC 27- Jan- 03 21,612,265 13- Mar- 03
750,000 17 Kenya HIV/ AIDS Sanaa Art

PWC 30- Mar- 03 2, 650, 813 15- Apr- 03 137,270 Promotions 18 Kenya HIV/
AIDS KENWA PWC 30- Mar- 03 220, 875 15- Apr- 03 8,500

19 Lao HIV/ AIDS Ministry of Health,

KPMG 05- Feb- 03 1,307,664 People's

Department of Democratic Hygiene & Republic

Prevention 20 Lao

Malaria Ministry of Health, KPMG 05- Feb- 03 3,155,152

People's Department of Democratic

Hygiene & Republic

Prevention 21 Madagascar Malaria Population PWC 05- Feb- 03 1,482,576 12-
Mar- 03 591,931

Services International

22 Malawi HIV/ AIDS National Aids PWC 10- Feb- 03 41,751,500

Committee 23 Moldova HIV/ AIDS Ministry of Health PWC 20- Mar- 03 5, 257,
941 22- Apr- 03 880,000 -TB 24 Mongolia TB Ministry of Health UNOPS 05-
Feb- 03 644,000 9- Apr- 03 42,960

25 Morocco HIV/ AIDS Ministry of Health PWC 29- Jan- 03 4,738,806 21- Feb-
03 420,000 26 Panama TB UNDP PWC 10- Feb- 03 440,000 20- Mar- 03 112,000
27 Rwanda HIV/ AIDS

Ministry of Health Crown Agents 10- Apr- 03 8, 409, 268 17- Apr- 03 790,
854 -TB 28 Senegal HIV/ AIDS National AIDS

KPMG 10- Feb- 03 6,000,000 28- Feb- 03 600,000 Council of Senegal

(Continued From Previous Page)

Total funds disbursed as Total funds

of April 22, Date of

committed Latest

2003 Principal

Local Fund signed (in U. S.

disbursement (in U. S.

No Country Program recipient Agent agreement

dollars) a date b

dollars)

29 Senegal Malaria National Strategic KPMG 10- Feb- 03 4,285,714 28- Feb-
03 350,000

Plan to Fight Malaria, Ministry of Health

30 Serbia HIV/ AIDS Economics UNOPS 16- Apr- 03 2, 718,714

Institute 31 Sri Lanka Malaria Ministry of Health PWC 19- Dec- 02 730,140
11- Feb- 03 176,573 of Sri Lanka 32 Sri Lanka Malaria Lanka Jatika

PWC 19- Dec- 02 4,467,480 11- Feb- 03 752,893 Sarvodaya Shramadana
Sangamaya

33 Sri Lanka TB Ministry of Health PWC 19- Dec- 02 2,384,980 11- Feb- 03
478,073

of Sri Lanka 34 Sri Lanka TB Lanka Jatika PWC 19- Dec- 02 475,020 11- Feb-
03 75,260 Sarvodaya Shramadana Sangamaya

35 Tajikistan HIV/ AIDS UNDP PWC 31- Mar- 03 1, 474, 520 22- Apr- 03
206,702 36 Tanzania Malaria The Ministry of

Pricewaterhouse 11- Dec- 02 11,959,076 4- Feb- 03 489,478

Health of the Coopers Limited Government of the

United Republic of Tanzania

37 Uganda HIV/ AIDS Ministry Of PWC 06- Mar- 03 36,314,892

Finance, Planning And Economic Development Of The Government Of Uganda

38 Ukraine HIV/ AIDS National AIDS PWC 19- Mar- 03 6, 150,000

Foundation 39 Ukraine HIV/ AIDS Ministry of Health PWC 29- Jan- 03
16,925,200 17- Apr- 03 481,926 40 Ukraine HIV/ AIDS UNDP PWC 17- Feb- 03
1,895,011 41 Worldwide

HIV/ AIDS World Lutheran KPMG- Geneva 29- Jan- 03 485, 000 regions
Federation 42 Zambia HIV/ AIDS Central Board of

PWC 30- Mar- 03 21,214,271 Health 43 Zambia TB Central Board of

PWC 30- Mar- 03 12,447,294 Health

(Continued From Previous Page)

Total funds disbursed as Total funds

of April 22, Date of

committed Latest

2003 Principal

Local Fund signed (in U. S.

disbursement (in U. S.

No Country Program recipient Agent agreement

dollars) a date b

dollars)

44 Zambia HIV/ AIDS Churches Health PWC 30- Mar- 03 6, 614,958

Association 45 Zambia TB Churches Health PWC 30- Mar- 03 2, 307,962
Association 46 Zanzibar Malaria Ministry of Health PWC 06- Mar- 03 781,
220

47 Zimbabwe Malaria Ministry of Health PWC 05- Feb- 03 6,716,250

Total signed agreements as of April 22, 2003 $366,683,944 $17, 674,028

Source: The Fund. Note: blank cells indicate that no disbursement had been
made as of April 22, 2003. a Amounts may differ from grant ceilings
approved by the board because budgets may be reduced during grant
agreement negotiations.

b Date disbursement request was sent from the Fund to the World Bank. c
Affiliated with KPMG.

Table 3: Grant Agreements in the Pipeline Total funds

Total funds Local

Date of committed

Latest disbursed as of

Fund signed (in U. S. disbursement

April 22, 2003 No Country Program Principal recipient

Agent agreement

dollars) a date b

(in U. S. dollars)

48 South HIV/ AIDS

National Treasury PWC Not yet signed $2,354,000 Africa -TB (Soul City) 49
South

HIV/ AIDS National Treasury PWC Not yet signed 12,000,000

Africa -TB (Love Life) 50 South HIV/ AIDS

National Treasury PWC Not yet signed 26,741,529 Africa -TB (Kwazulu Natal
Sub- CCM)

51 Tanzania HIV/ AIDS President's Office of PWC Not yet signed 5, 400,000
Regional Administration &

Local Government (PORALG) 52 Zambia Malaria Central Board of

PWC Not yet signed 17,892,000 Health c 53 Zambia Malaria Churches Health

PWC Not yet signed Association c 54 Zambia HIV/ AIDS Minsitry of Finance

PWC Not yet signed 14,468,771 & National Planning c

55 Zambia HIV/ AIDS Zambia National PWC Not yet signed

AIDS Network c 56 Zambia TB Zambia National PWC Not yet signed 1, 644,744
AIDS Network 57 Zimbabwe HIV/ AIDS National Aids

PWC Not yet signed 10,300,000 Council Total agreements in the pipeline as
of April 22, 2003 $90,801,044

Source: The Fund. Note: blank cells indicate that no disbursement had been
made as of April 22, 2003. a Amounts may differ from grant ceilings
approved by the board because budgets may be reduced during grant
agreement negotiations.

b Date disbursement request was sent from the Fund to the World Bank. c
the exact amounts to be disbursed to principal recipients have not yet
been decided.

Table 4: Grant Agreements Pending, but Less Far Along in the Process Date

Total funds Total funds

agreement committed

Latest disbursed as of

Principal Local Fund expected to (in U. S.

disbursement April 22, 2003

No Country Program recipient Agent be signed

dollars) a date b

(in U. S. dollars)

58 Chile HIV/ AIDS nongovernmental To be

$13, 574, 098 organization determined (specifics to be

determined) 59 Democratic

TB To be determined Global Fund 2, 294,000

People's secretariat Republic of

Korea 60 Indonesia HIV/ AIDS Ministry of Health PWC Being

6, 924,971 negotiated 61 Indonesia Malaria Ministry of Health PWC Being

16, 018, 800 negotiated 62 Mali Malaria Ministry of Health KPMG 2, 023,
424

63 Nigeria HIV/ AIDS Yakubu Gown KPMG Being

17, 722, 103 Center negotiated 64 Nigeria HIV/ AIDS Yakubu Gown

KPMG Being 8, 708,684

Center negotiated 65 Nigeria HIV/ AIDS Yakubu Gown KPMG Being

1, 687,599 Center negotiated 66 Thailand TB Ministry of Health PWC Being

6, 999,350 negotiated 67 Thailand HIV/ AIDS Ministry of Health PWC Being

30, 933, 204 negotiated 68 Vietnam HIV/ AIDS Ministry of Health KPMG 7,
500,00

69 Vietnam TB Ministry of Health KPMG 2, 500, 000

Total pending agreements as of April 22, 2003 $109, 386, 233 Total
agreements (signed, in pipeline, and pending) as of April 22, 2003 $566,
871, 221

Source: The Fund. Note: blank cells indicate that no disbursement had been
made as of April 22, 2003, or that negotiations for signing the grant
agreement had not yet begun as of that date. a Amounts may differ from
grant ceilings approved by the board because budgets may be reduced during
grant agreement negotiations.

b Date disbursement request was sent from the Fund to the World Bank.

Appendi x III

Drug Procurement Cycle 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.

Note: the adaptation is from Managing Drug Supply, 2 nd edition, revised
and expanded, Hartford, CT, Kumarian Press, 1997.

Appendi x IV

Indicators of Need for Recipient Countries Amount requested by

HIV/ AIDS Diseases being

approved grants rate (%),

Malaria Human

Gross National addressed by for full length of

Adults (Cases/

TB (Cases/ Development

Income per capita Country a

Fund grants programs

(15- 49) 100,000) 100,000)

Index b (in U. S. dollars) c

Low Income

Afghanistan HIV/ AIDS, $3,125, 605 NA 1,825 325 NA NA

Malaria, TB Armenia HIV/ AIDS 7, 249, 981 0.2 NA 58 76 $2, 580 Bangladesh
HIV/ AIDS 19,961, 030 <. 1 47 241 145 1, 590 Benin HIV/ AIDS, TB,

23,803, 254 3.6 11,845 266 158 980 Malaria Burkina Faso HIV/ AIDS,

26,776, 825 6.5 5, 852 319 169 970 Malaria Burundi HIV/ AIDS, 26,423, 125
8.3 28,031 382 171 580

Malaria Cambodia HIV/ AIDS, TB, 47,460, 470 2.7 473 560 130 1, 440 Malaria
Central African

HIV/ AIDS 25,090, 588 12.9 2, 485 415 165 1, 160 Republic Chad TB 3,039,
327 3.6 190 270 166 870

Comores Malaria 2,485, 878 NA 2,286 NA 137 1, 590 Congo, TB 7,973, 002 4.9
2, 963 301 155 680 (Democratic Republic of)

Cote d'Ivoire HIV/ AIDS 91,203, 150 9.7 6, 874 375 156 1, 500 East Timor
Malaria 2,963, 723 NA NA NA NA NA Eritrea Malaria 7,911, 425 2.8 7, 405
272 157 960 Ethiopia HIV/ AIDS, TB,

237,568, 925 6.4 618 373 168 660 Malaria Georgia HIV/ AIDS 12,125, 644 <.
1 NA 72 81 2, 680

Ghana HIV/ AIDS, TB, 29,214, 210 3 8, 874 281 129 1, 910

Malaria Guinea HIV/ AIDS, 22,029, 110 NA 6,469 255 159 1, 930 Malaria
Haiti HIV/ AIDS 66,905, 477 6.1 12 361 146 1, 470

India HIV/ AIDS, TB 137,975, 999 0.8 226 185 124 2, 340 Indonesia HIV/
AIDS, TB,

130,574, 740 0.1 82 282 110 2, 830 Malaria

(Continued From Previous Page)

Amount requested by

HIV/ AIDS Diseases being

approved grants rate (%),

Malaria Human

Gross National addressed by for full length of

Adults (Cases/

TB (Cases/ Development

Income per capita Country a

Fund grants programs

(15- 49) 100,000) 100,000)

Index b (in U. S. dollars) c

Kenya HIV/ AIDS, TB, 176,745, 326 15 1,000 417 134 1, 010

Malaria Korea, TB 4,891, 000 NA 448 176 NA NA (Democratic Republic of)

Kyrgyz Republic HIV/ AIDS, TB 19,844, 373 <. 1 NA 130 102 2, 540 Lao
People*s HIV/ AIDS, TB,

19,507, 845 <. 1 755 171 143 1, 540 Democratic

Malaria Republic Lesotho HIV/ AIDS, TB 34,312, 000 31 NA 542 132 2, 590
Liberia HIV/ AIDS, TB 12,192, 274 NA 26,828 271 NA NA Madagascar HIV/
AIDS, 8,335, 149 0.3 2, 360 236 147 820

Malaria Malawi HIV/ AIDS, 323,798, 722 15 58,139 443 163 600 Malaria Mali
Malaria 2, 592, 991 1.7 4, 213 261 164 780

Mauritania TB, Malaria 5, 627, 299 NA 11,000 241 152 1, 630 Moldova HIV/
AIDS, TB 11,719, 047 0.2 NA 130 105 2, 230 Mongolia HIV/ AIDS, TB 4,727,
103 <. 1 NA 205 113 1, 760 Mozambique HIV/ AIDS, TB,

155,735, 362 13 4,120 407 170 800 Malaria Myanmar TB 17,121, 370 NA 254
169 127 NA

Nepal HIV/ AIDS, 18,840, 210 0.5 39 209 142 1, 370 Malaria Nicaragua HIV/
AIDS, TB,

18,865, 903 0.2 392 88 118 2, 080 Malaria Nigeria HIV/ AIDS, TB,

137,655, 309 5.8 541 301 148 800 Malaria Pakistan HIV/ AIDS, TB,

21,619, 750 0.1 74 177 138 1, 860 Malaria Rwanda HIV/ AIDS, TB 14,641, 046
8.9 13,237 381 162 930

Senegal HIV/ AIDS, 18,857, 142 0.5 553 258 154 1, 480

Malaria Sierra Leone TB 5, 698, 557 7 9, 318 274 173 480 Somalia Malaria
12,886, 413 1 102 365 NA NA Sudan TB, Malaria 76,319, 734 2.6 13,553 195
139 1, 520 Tajikistan HIV 2,425, 245 <. 1 295 105 112 1, 090

(Continued From Previous Page)

Amount requested by

HIV/ AIDS Diseases being

approved grants rate (%),

Malaria Human

Gross National addressed by for full length of

Adults (Cases/

TB (Cases/ Development

Income per capita Country a

Fund grants programs

(15- 49) 100,000) 100,000)

Index b (in U. S. dollars) c

Tanzania HIV/ AIDS, 28,683, 718 7.8 1, 293 340 151 520 Malaria Togo HIV/
AIDS 19,882, 903 6 8, 512 313 141 1, 410

Uganda HIV/ AIDS, TB, 96,719, 638 5 9, 305 343 150 1, 210

Malaria Ukraine HIV/ AIDS 92,152, 744 1 NA 73 80 3, 700 Vietnam HIV/ AIDS,
TB 22,000, 000 0.3 95 189 109 2, 000 Yemen Malaria 11,878, 206 0.1 15,202
NA 144 770 Zambia HIV/ AIDS, TB,

191,967, 000 21.5 26,260 495 153 750 Malaria Zimbabwe HIV/ AIDS, 22,977,
500 33.7 9, 429 562 128 2, 550

Malaria Lower middle income

Bulgaria HIV/ AIDS 15,711, 885 <. 1 NA 46 62 5, 560 China TB, Malaria
54,476, 659 0.1 1 103 96 3, 920 Cuba HIV/ AIDS 26,152, 827 <. 1 NA 15 55
NA Dominican

HIV/ AIDS 48,484, 482 2.5 12 135 94 5, 710 Republic Ecuador HIV/ AIDS
14,104, 108 0.3 683 172 93 2, 910

Egypt, (Arab TB 4,032, 014 <. 1 NA 39 115 3, 670

Republic of) El Salvador HIV/ AIDS, TB 26,912, 923 0.6 NA 67 104 4, 410
Honduras ALL 41,119, 903 1.6 547 92 116 2, 400 Iran, (Islamic HIV/ AIDS
15,922, 855 <. 1 33 54 98 5, 910 Republic of) Jordan HIV/ AIDS 2,483, 900
<. 1 NA 11 99 3, 950

Kazakhstan HIV/ AIDS 22,360, 000 0.1 NA 130 79 5, 490 Morocco HIV/ AIDS
9,238, 754 0.1 NA 119 123 3, 450 Namibia HIV/ AIDS, TB,

113,157, 021 22.5 2, 556 490 122 6, 410 Malaria Peru HIV/ AIDS, TB 50,177,
054 0.4 257 228 82 4, 660

Philippines TB, Malaria 23,267, 609 <. 1 15 314 77 4, 220 Romania HIV/
AIDS, TB 48,360, 586 <. 1 NA 130 63 6, 360 Serbia

HIV 3, 575, 512 NA NA NA NA NA (Yugoslavia) South Africa HIV/ AIDS, TB
190,388, 018 20.1 83 495 107 9, 160

(Continued From Previous Page)

Amount requested by

HIV/ AIDS Diseases being

approved grants rate (%),

Malaria Human

Gross National addressed by for full length of

Adults (Cases/

TB (Cases/ Development

Income per capita Country a

Fund grants programs

(15- 49) 100,000) 100,000)

Index b (in U. S. dollars) c

Sri Lanka TB, Malaria 14,505, 200 <. 1 1, 402 59 89 3, 460 Swaziland HIV/
AIDS,

56,736, 900 33.4 300 564 125 4, 600 Malaria Thailand HIV/ AIDS, TB,

209,635, 201 1.8 199 141 70 6, 320 Malaria Upper middle income

Argentina HIV/ AIDS 28,756, 200 0.7 NA 55 34 12, 050 Botswana HIV/ AIDS
18,580, 414 38.8 4, 467 702 126 7, 170 Chile HIV/ AIDS 38,151, 562 0.3 NA
26 38 9, 100 Costa Rica HIV/ AIDS 4, 202, 362 0.6 50 17 43 7, 980 Croatia
HIV/ AIDS 4,945, 192 <. 1 NA 61 48 7, 960 Estonia HIV/ AIDS 10,246, 580 1
NA 61 42 9, 340 Panama TB 570, 000 1.5 34 54 57 5, 680 Sources: the Fund;
Joint U. N. Program on HIV/ AIDS, Report of the Global HIV/ AIDS Epidemic,
2002; World Health Organization data on malaria cases (data from varying
years, based on latest year for which information available); World Bank,
World Development Indicators, 2002; U. N. Development Program, Human
Development Report, 2002.

Note: *NA* indicates that the information is not available. a 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. b The Human
Development Index is reported by the U. N. Development Program. It
measures a

country*s achievements in terms of life expectancy, education level
attained and adjusted real income. c Purchasing Power Parity method.

Comments from the Global Fund to Fight

Appendi x V AIDS, TB and Malaria

Joint Comments from the Departments of Health and Human Services and
State, and the

Appendi x VI U. S. Agency for International Development

Appendi x VII

GAO Contact and Staff Acknowledgments GAO Contact Thomas Melito, (202)
512- 9601 Staff In addition to the persons named above, Sharla Draemel,
Stacy Edwards, Acknowledgments

Kay Halpern, Reid Lowe, William McKelligott, Mary Moutsos, and Tom Zingale
made key contributions to this report.

(320120)

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C. 20548

a

GAO United States General Accounting Office

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. Pledges Made, Amount Received, and Grant Proposals Approved

a The pledges expected through 2008 include $173 million that has no
specified arrival date. b These numbers represent the maximum amount
approved by the board. Final budgets may be reduced during grant
negotiations. Five- year figures are potential, rather than guaranteed,
commitments.

Note: A shortfall in the funding of already approved grants is evident
when 5- year commitments are compared with total pledges over this time
frame. The small amount of resources available for funding new grants is
evident when comparing 2- year commitments with pledges through 2003.
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. 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. www. gao. gov/ cgi- bin/ getrpt? GAO- 03- 601. To view the full
report, including the scope

and methodology, click on the link above. For more information, contact
David Gootnick at (202) 512- 3149 or gootnickd@ gao. gov. Highlights of
GAO- 03- 601, a report to the

Chairman, Subcommittee on Foreign Operations, Export Financing, and
Related Programs, House Committee on Appropriations

May 2003

GLOBAL HEALTH

Global Fund to Fight AIDS, TB and Malaria Has Advanced in Key Areas, but
Difficult Challenges Remain

Page i GAO- 03- 601 Global Health

Contents

Contents

Page ii GAO- 03- 601 Global Health

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Appendix I

Appendix I Objectives, Scope, and Methodology

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Appendix I Objectives, Scope, and Methodology

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Appendix II

Appendix II Status of Round 1 Grants

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Appendix II Status of Round 1 Grants

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Appendix II Status of Round 1 Grants

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Appendix II Status of Round 1 Grants

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Appendix II Status of Round 1 Grants

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Appendix III

Appendix III Drug Procurement Cycle

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Appendix IV

Appendix IV Indicators of Need for Recipient Countries

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Appendix IV Indicators of Need for Recipient Countries

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Appendix IV Indicators of Need for Recipient Countries

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Appendix V

Appendix V Comments from the Global Fund to Fight AIDS, TB and Malaria

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Appendix V Comments from the Global Fund to Fight AIDS, TB and Malaria

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Appendix V Comments from the Global Fund to Fight AIDS, TB and Malaria

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Appendix V Comments from the Global Fund to Fight AIDS, TB and Malaria

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Appendix V Comments from the Global Fund to Fight AIDS, TB and Malaria

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Appendix V Comments from the Global Fund to Fight AIDS, TB and Malaria

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Appendix VI

Appendix VI Joint Comments from the Departments of Health and Human
Services and State, and the U. S. Agency for International Development

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Appendix VII

United States General Accounting Office Washington, D. C. 20548- 0001
Official Business Penalty for Private Use $300 Address Service Requested

Presorted Standard Postage & Fees Paid

GAO Permit No. GI00
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