    Foreign Assistance: USAID Has Begun Tsunami Reconstruction in
    Indonesia and Sri Lanka, but Key Projects May Exceed Initial Cost
    and Schedule Estimates (14-APR-06, GAO-06-488).

    In December 2004, an earthquake off the coast of Indonesia caused
    a tsunami that left more than 230,000 people killed or missing
    and presumed dead and an estimated $10 billion in damage in 12
    countries. In May 2005, Congress appropriated $908 million for
    relief and reconstruction. U.S. emergency relief efforts budgeted
    at $327 million were nearly completed in December 2005. The U.S.
    Agency for International Development (USAID) plans to spend $496
    million on longer-term reconstruction, focusing on Indonesia and
    Sri Lanka, with the remaining $85 million allocated to other U.S.
    agencies. GAO has been mandated to monitor USAID's reconstruction
    efforts. In this report, GAO describes USAID's (1) progress in
    Indonesia and Sri Lanka, (2) financial and technical oversight
    measures, and (3) implementation challenges.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-06-488
        ACCNO:   A51618
      TITLE:     Foreign Assistance: USAID Has Begun Tsunami
    Reconstruction in Indonesia and Sri Lanka, but Key Projects May
    Exceed Initial Cost and Schedule Estimates
         DATE:   04/14/2006
      SUBJECT:   Appropriated funds
    	     Budget obligations
    	     Disaster recovery
    	     Disaster relief aid
    	     Federal aid to foreign countries
    	     Foreign economic assistance
    	     Funds management
    	     Natural disasters
    	     Tsunamis
    	     Program implementation
    	     Indonesia
    	     Sri Lanka

    ******************************************************************
    ** This file contains an ASCII representation of the text of a  **
    ** GAO Product.                                                 **
    **                                                              **
    ** No attempt has been made to display graphic images, although **
    ** figure captions are reproduced.  Tables are included, but    **
    ** may not resemble those in the printed version.               **
    **                                                              **
    ** Please see the PDF (Portable Document Format) file, when     **
    ** available, for a complete electronic file of the printed     **
    ** document's contents.                                         **
    **                                                              **
    ******************************************************************
    GAO-06-488

         * Report to Congressional Committees
              * April 2006
         * FOREIGN ASSISTANCE
              * USAID Has Begun Tsunami Reconstruction in Indonesia and Sri
                Lanka, but Key Projects May Exceed Initial Cost and Schedule
                Estimates
         * Contents
              * Results in Brief
              * Background
                   * International Funding and Implementing Entities for Tsunami
                     Relief and Reconstruction
                   * USAID and Military Agencies' Emergency Relief Efforts
                   * U.S. Supplemental Funding Budgeted for Reconstruction in
                     Tsunami-Affected Countries
                   * USAID Reconstruction Programs in Indonesia and Sri Lanka
              * USAID Reconstruction Programs in Indonesia and Sri Lanka Have
                Begun, but Some Project Costs and Schedules May Exceed Initial
                Projections
                   * USAID Has Begun Reconstruction Efforts in Indonesia, but
                     Several Factors May Increase Costs and Delay Schedules
                        * USAID Has Obligated about One-third and Expended a
                          Small Percentage of Reconstruction Funds in Indonesia
                        * USAID Has Started Indonesian Signature Road Project but
                          May Encounter Cost and Time Overruns
                        * Other USAID Reconstruction Activities in Indonesia May
                          Also Exceed Cost and Schedule Projections
                        * USAID's Sri Lankan Construction Activities May Face
                          Cost and Time Overruns, but Other Programs Are on
                          Schedule
                        * USAID Has Obligated All and Expended a Small Percentage
                          of Reconstruction Funds in Sri Lanka
                        * USAID Has Started Sri Lankan Signature Project but
                          Faces Rising Costs and Labor Shortages
                        * Other USAID Tsunami Reconstruction Projects in Sri
                          Lanka Are Under Way and Most Are Currently on Schedule
              * USAID Established Financial and Technical Oversight Measures but
                Has Not Filled Some Needed Technical Oversight Positions
                   * USAID Has Established Financial Oversight Mechanisms in
                     Indonesia and Sri Lanka
                        * USAID Plans Internal and External Audits
                        * USAID Intends to Strengthen Indonesian and Sri Lankan
                          Audit Capacities
                   * USAID Has Taken Steps to Establish Technical Oversight but
                     Has Not Filled Some Needed Positions
              * Several Challenges Confront Indonesian and Sri Lankan
                Reconstruction Programs
                   * Civil Conflicts Threaten Reconstruction Efforts
                        * Indonesian Factions Have Signed Peace Accord, and Some
                          USAID Projects Are Supporting Reconciliation
                        * Deteriorating Sri Lankan Security May Affect Some
                          Programs, but USAID Is Working to Promote
                          Reconciliation
                   * Coordination with Governments and Nongovernmental
                     Organizations Has Been Difficult, but USAID Is Taking Steps
                     to Improve Coordination
                        * Indonesian Government's Coordination Difficulties Have
                          Challenged USAID
                        * Sri Lanka's Organizational Problems and Policy Changes
                          Have Created Challenges for USAID
                        * Poor Coordination with Nongovernmental Organizations
                          Has Caused Problems
                   * USAID's Tsunami Response Has Created Challenges for
                     Non-Tsunami-Related Programs
              * Conclusions
              * Recommendation for Executive Action
              * Agency Comments and Our Evaluation
         * Objectives, Scope, and Methodology
         * Debt Relief to Indonesia and Sri Lanka
              * Debt Relief Provided by the United States
              * Debt Relief Provided by International Creditors
         * USAID's Three-Phase Signature Road Project in Aceh Province, Indonesia
         * Comments from the Department of State
         * Comments from the U.S. Agency for International Development
              * GAO Comments
         * GAO Contact and Staff Acknowledgments

    Report to Congressional Committees

    April 2006

    FOREIGN ASSISTANCE

    USAID Has Begun Tsunami Reconstruction in Indonesia and Sri Lanka, but Key
    Projects May Exceed Initial Cost and Schedule Estimates

    Contents

    Tables

    Figures

    April 14, 2006Letter

    The Honorable Mitch McConnell Chairman The Honorable Patrick J. Leahy
    Ranking Minority Member Subcommittee on State, Foreign Operations, and
    Related Programs  Committee on Appropriations United States Senate

    The Honorable Jim Kolbe Chairman The Honorable Nita M. Lowey Ranking
    Minority Member Subcommittee on Foreign Operations, Export Financing, and
    Related Programs Committee on Appropriations House of Representatives

    On December 26, 2004, a severe earthquake in the Indian Ocean off the
    coast of Indonesia created a major tsunami that struck 12 countries in
    Asia and East Africa.1 As a result of the tsunami, more than 230,000
    people were either killed or are missing and presumed dead, more than 1.7
    million people were displaced, and an estimated $10 billion in damage was
    caused to infrastructure, houses, and other property. Following initial
    emergency response efforts by the United States and other donors,
    individuals, national governments, and others around the world pledged
    more than $13 billion to assist in rebuilding tsunami-affected areas
    throughout the region.2 In May 2005, Congress appropriated approximately
    $908 million in assistance for tsunami relief, reconstruction, and related
    programs. Beyond $327 million that was budgeted for survivors' immediate
    needs for medicine, food, and shelter, approximately $496 million is
    budgeted for longer-term reconstruction and related programs to be
    administered by the U.S. Agency for International Development (USAID).
    This amount includes $349 million for Indonesia and $85 million for Sri
    Lanka, the two countries with the greatest estimated needs, and $62
    million for other countries and regional programs. The remaining $85
    million was budgeted to other U.S. agencies. USAID began most of its
    activities by September 2005, including "signature" projects intended to
    generate greater visibility for overall U.S. assistance. Initial USAID
    plans call for completing its nonsignature activities in both countries by
    September 2007 and its signature projects in Indonesia and Sri Lanka by
    September 2009 and March 2008, respectively.

    We were directed to monitor the delivery of U.S. assistance to the
    tsunami-affected countries.3 For this report, we examined (1) USAID's
    progress in providing longer-term reconstruction assistance in Indonesia
    and Sri Lanka; (2) the extent to which USAID has established financial and
    technical oversight; and (3) any challenges USAID faces and any steps the
    agency has taken to address these challenges.

    To address these matters, we reviewed USAID's expenditures through January
    2006, and analyzed USAID's program objectives and oversight. We also
    traveled twice to Indonesia and once to Sri Lanka between July and
    December 2005. On our trips, we visited numerous project sites in the
    tsunami-affected areas, meeting with survivors and monitoring the progress
    of USAID's portfolio of projects. We determined that USAID's funding and
    expenditure data were sufficiently reliable for our analysis. In addition,
    we considered previous GAO work on U.S. disaster assistance efforts. We
    conducted our work from May 2005 through March 2006 in accordance with
    generally accepted government auditing standards. (For details of our
    scope and methodology, see app. I.)

    Results in Brief

    USAID has recently initiated reconstruction programs in Indonesia and Sri
    Lanka, but, primarily because of rising costs and scarcity of materials
    and labor, it appears that some projects may exceed USAID's initial cost
    and schedule estimates.

    o USAID has started many of its planned reconstruction activities in
    Indonesia.4 As of January 31, 2006, the agency had obligated $111 million
    (32 percent) and expended $9 million (3 percent) of the $349 million
    budgeted for reconstruction.5 USAID has awarded contracts for preliminary
    work on a 150-mile signature road construction project in Aceh Province,
    which, at a projected cost of $245 million, represents roughly two-thirds
    of U.S. reconstruction funding in Indonesia. However, completing the road
    within projected cost estimates and time frames may be difficult for the
    following reasons:

    o USAID's initial cost estimate was based on building the new road over
    large portions of undamaged sections of the existing road and over the
    temporary road built by the Indonesian army. Since the initial estimate,
    however, plans for routing the road have changed. According to the U.S.
    Army Corps of Engineers (USACE), large segments of the road are now
    planned along new undeveloped routes that require more extensive
    construction activities than originally anticipated and, as a result,
    higher costs. Because of uncertainty about site conditions, USACE included
    a 20 percent contingency in its initial cost estimate. USAID expects to
    have updated cost estimates in June 2006.

    o Demand for, and costs of, construction materials and labor have
    increased substantially. For example, according to USAID officials, the
    price of fuel oil in Indonesia had risen by more than 250 percent between
    February and December 2005. In addition, as regional reconstruction
    continues over the next several years, construction spending is expected
    to increase fortyfold from pretsunami levels, rising from $50 million to
    $2 billion annually, and 200,000 additional workers will be needed to meet
    construction demands.

    o The Indonesian government faces difficulties in acquiring the land and
    establishing the right-of-way needed for the road.

    USAID has also initiated several other reconstruction and related projects
    in Indonesia, including

    o constructing schools, clinics, and water distribution and port
    facilities;

    o providing technical assistance for good governance and supporting the
    Indonesian government's coordination and audit organizations; and

    o providing housing and small loans.

    However, some of these projects also face increasing costs and potential
    delays. For example, soon after agreeing to build 1,000 houses for $4,500
    per house, a USAID implementing partner informed the agency that
    escalating prices had increased the unit cost to $7,000. According to
    USAID officials, the nongovernmental organization implementing the program
    will reduce its budget for other USAID-funded projects and will attempt to
    solicit private donations to meet its commitment.

    USAID has initiated many of the reconstruction activities planned for Sri
    Lanka.6 As of January 31, 2006, the agency had obligated all $85 million
    (100 percent) and expended $2 million (2 percent) of the amount budgeted
    for reconstruction. USAID has begun its signature project, which comprises

    o building infrastructure, including a bridge and water treatment
    facility, and repairing damaged fishing facilities;

    o providing construction and tourism-related training; and

    o constructing new and repairing tsunami-damaged vocational education
    facilities.

    However, as in Indonesia, several factors may limit USAID's ability to
    complete its signature project activities in Sri Lanka within projected
    costs and schedules.

    o Limited availability and rising costs of materials and labor may
    increase the costs and time required to complete some projects. For
    example, one of USAID's implementing partners reported that, during 2005,
    the cost of brick had doubled and that similar increases had occurred for
    cement and lumber. USAID has acknowledged that, to address increases in
    costs or difficulty in obtaining materials or expertise, the USAID mission
    in Sri Lanka is considering moving funds from other tsunami reconstruction
    activities to complete some construction projects.

    o Although currently projected by USAID to be completed in January 2008,
    an extended design and planning phase for the signature bridge
    construction project may make it difficult for USAID to finish the project
    by March 2008, the initial projected completion date.

    USAID has begun other projects in Sri Lanka, most of which it expects to
    complete by September 2007, including

    o construction of playgrounds and rehabilitation of community markets,

    o promoting transparent local governance, and

    o providing loans to small businesses and vocational training.

    Although USAID has established financial and technical oversight measures
    for its tsunami reconstruction programs in Indonesia and Sri Lanka and
    hired some staff, it has not staffed several positions that it considers
    critical to essential technical oversight. For financial oversight, USAID
    has implemented its standard financial controls, such as conducting
    preaward surveys of prospective award recipients and establishing a
    schedule of independent financial audits. USAID also plans to establish
    measures that augment these controls, including contracting for an
    additional concurrent audit of the Indonesia signature road project by the
    Defense Contract Audit Agency. USAID's Office of the Inspector General
    (IG) is currently conducting audits to address concerns about potential
    corruption and misuse of funds and plans to conduct additional audits. For
    technical oversight, USAID added staff in both Indonesia and Sri Lanka
    with expertise to oversee large-scale projects such as roads and bridges
    and it entered into successive interagency agreements with USACE for
    technical services.7 As of March 2006, USAID transferred three persons
    with engineering and management experience and hired an engineer to
    oversee the signature road construction project in Indonesia, but the
    engineer is not expected to begin working until May 2006. In Sri Lanka,
    USAID added two engineers to its staff in late 2005 to oversee
    infrastructure construction activities, but as of March 2006, one
    engineering-related position has not been filled.

    USAID faces three broad challenges in implementing its tsunami recovery
    program in Indonesia and Sri Lanka, but it has taken some steps to address
    them.

    o Working in regions with long-standing civil conflicts. Civil conflict in
    both Indonesia and Sri Lanka could affect USAID's ability to complete
    reconstruction projects within projected time frames. Conflict has
    subsided in Indonesia following the August 2005 signing of a peace accord
    between the Indonesian government and an Indonesian separatist group, but
    in Sri Lanka, USAID's ability to provide assistance in some regions has
    been limited by recent increases in violent incidents. To strengthen the
    peace process in both countries, USAID designed and is implementing some
    projects, such as building infrastructure in Indonesian communities, to
    facilitate former combatants' participation.

    o Coordinating with host governments and nongovernmental organizations
    (NGO). USAID has encountered difficulties in coordinating its
    reconstruction efforts with the governments of Indonesia and Sri Lanka and
    with NGOs operating in those countries. Although both governments
    established entities to coordinate donor support following the tsunami,
    neither entity has been able to fully ensure that projects do not overlap.
    In addition, the Sri Lankan government has inconsistently enforced a ban
    on rebuilding in coastal areas since the tsunami, making it difficult for
    USAID to proceed with some nonconstruction projects. Also, USAID has
    encountered challenges in coordinating with NGOs operating in the two
    countries, which in some instances has led to duplication of efforts. To
    avert potential future overlap with NGO programs in Sri Lanka, USAID has
    participated in weekly meetings with the Sri Lankan government
    coordinating entity and NGOs, among others, to designate responsibility
    for different geographic areas.

    o Ensuring that the tsunami focus does not hamper nontsunami development
    assistance. Recognizing that the urgency to respond to the tsunami could
    hamper the management of some ongoing development projects in Indonesia
    and Sri Lanka, USAID has taken several steps. In Indonesia, three key
    positions were created to provide needed oversight in Aceh, and USAID
    plans to add positions for oversight of both regular and tsunami project
    activities. In Sri Lanka, after temporarily suspending some
    non-tsunami-related community development projects, USAID plans to add an
    additional specialist during fiscal year 2006 to ensure coverage of
    tsunami assistance projects.

    Based on our review of USAID's planning and design efforts for its
    reconstruction program, especially with regard to the signature road
    project in Indonesia and bridge project in Sri Lanka, we are recommending
    that the Secretary of State, in the department's required semiannual
    report to Congress due in June 2006, provide updated cost estimates and
    schedules obtained from USAID. If the updated information differs
    substantially from initial projections, the report should also include
    alternative cost estimates, schedules, project scopes and, if necessary,
    the need for additional funding sources. In commenting on a draft of this
    report, the Department of State agreed to fully implement our
    recommendation and USAID stated that the report's findings accurately
    describe the tsunami program situation and the potential broad challenges
    for achieving its reconstruction goals. USAID also provided information on
    additional steps the agency intends to take to mitigate the potential for
    increased costs and schedule delays, as well as an explanation of how it
    obligates funds.

    Background

    Although the tsunami's effects were concentrated in the countries closest
    to the earthquake's epicenter in the Indian Ocean, about 100 miles off the
    coast of Sumatra, it also destroyed communities along some coastlines
    thousands of miles away. A year later, in December 2005, more than 40,000
    persons were still listed as missing and tens of thousands remained in
    temporary housing. Figure 1 shows the most-affected countries, the numbers
    of people dead, missing, and displaced, and the estimated damage as a
    result of the tsunami.

    Figure 1: Tsunami-Affected Countries; Numbers of Dead, Missing, and
    Displaced Persons; and Estimated Damage, as of November 2005

    International Funding and Implementing Entities for Tsunami Relief and
    Reconstruction

    Responding to the magnitude of the disaster, the international donor
    community, including the United States, pledged approximately $13.6
    billion to assist with tsunami relief and reconstruction efforts in all of
    the affected countries. National governments and the European Union
    pledged $6.2 billion of this amount (45 percent), private individuals and
    companies pledged $5.1 billion (38 percent), and international financial
    institutions pledged $2.3 billion (17 percent). These funds are being
    provided to a wide range of entities involved in implementing relief and
    reconstruction efforts (see fig. 2).

    Figure 2: Entities Implementing International Tsunami Relief and
    Reconstruction Assistance

    USAID and Military Agencies' Emergency Relief Efforts

    USAID and the U.S. Department of Defense (DOD) and its component services
    provided immediate assistance to tsunami survivors and to the governments
    of many of the affected countries, largely completing these

    efforts by the end of 2005.8 USAID's Office of U.S. Foreign Disaster
    Assistance (OFDA), Office of Transition Initiatives (OTI), and other USAID
    offices assisted survivors by providing food, water, temporary shelter,
    and other critical needs. Soon afterward, USAID initiated economic
    reactivation projects, such as paying people to remove debris in many
    affected areas. USAID's emergency relief budget totaled approximately $101
    million, including $32 million in Indonesia and $47 million in Sri Lanka.

    In addition, several DOD component services, including the U.S. Air Force
    and Navy, provided important emergency relief. For example, the Air Force
    rescued survivors and airlifted supplies, and a Navy hospital ship
    provided medical support. The supplemental tsunami appropriations law
    provided up to $226 million to reimburse DOD for its emergency relief
    activities. As of January 2006, DOD expended approximately $125 million
    (55 percent), including nearly $79 million for airlift and other flying
    costs and slightly more than $7 million for health- and medical-related
    services. Of the remaining $101 million, DOD had not completed a final
    reconciliation of $47 million, $40 million had been reprogrammed to help
    cover DOD's costs in other disaster assistance efforts, and $14 million
    had lapsed. Table 1 shows U.S. tsunami emergency relief funds budgeted and
    expended.

    Table 1: U.S. Tsunami Emergency Relief Funds Budgeted and Expended, as of
    January 2006

         Dollars in
          millions
           Purpose        Funds  Funds expended              Comments
                       budgeted
                                 (percentage of
                                funds budgeted)
    DOD emergency       $226       $125 (55)  Of the unexpended $101 million,
    relief effortsa
                                                 o $47 million was obligated, but
                                                 because some cost data are not
                                                 yet available, DOD has not
                                                 determined the amount expended;

                                                 o $40 million was reprogrammed
                                                 for disaster assistance efforts
                                                 in Guatemala and Pakistan; and

                                                 o $14 million lapsed.
    USAID emergency      101         70 (69)  Of the unexpended $31 million,
    relief effortsa                           the entire amount was obligated
                                                 but not expended because some
                                                 projects were intended to
                                                 purposely transition into the
                                                 reconstruction phase.
    Total               $327       $195 (60)

    Sources: DOD and USAID.

    aDOD data are through January 26, 2006, and USAID data are through January
    2006.

    U.S. Supplemental Funding Budgeted for Reconstruction in Tsunami-Affected
    Countries

    Of the $908 million appropriated for tsunami relief and reconstruction
    assistance, $581 million, or 64 percent, was budgeted for reconstruction
    and other postemergency relief activities. Of this amount, USAID was
    budgeted $496 million for reconstruction, and other U.S. agencies were
    budgeted $85 million for various other activities. (See table 2.)

    Table 2: Funding Budgeted to USAID and Other U.S. Departments and Agencies
    for Reconstruction and Other Postemergency Activities, as of January 31,
    2006

                          Dollars in millions
                         Department or agency                    Funding budgeted
    USAID reconstruction
    Indonesia                                                             $349
    Sri Lanka                                                               85
    Other countries, regional programs, operating costs, and                62
    other expenses
    Subtotal                                                              $496
    Other U.S. departments and agencies
    Centers for Disease Control and Prevention:                             15

    Avian flu prevention and control
    U.S. Departments of Commerce and the Interior:                          25

    Regional early warning systems and disaster preparation
    U.S. Department of the Treasury:a                                       20

    Debt relief to the government of Indonesia                               3

    Debt relief to the government of Sri Lanka
    State Department:                                                       11

    Reconstruction efforts in the Maldives                                   5

    Assisting U.S. families in searching for persons, and
    monitoring

    human trafficking
    U.S. Trade and Development Agency                                        6

    Technical assistance and project planning for
    reconstruction
    Subtotal                                                               $85
    Total                                                                 $581

    Sources: USAID and P.L. 109-13, May 11, 2005, Title IV, Chap. 1-5.

    aFunds were initially budgeted to USAID; Treasury is involved in
    oversight.

    USAID Reconstruction Programs in Indonesia and Sri Lanka

    USAID's planned reconstruction efforts in Indonesia and Sri Lanka include
    its signature projects, such as road and bridge construction; small-scale
    infrastructure projects, such as rebuilding schools and clinics; technical
    assistance for good governance; and transition assistance to improve
    survivors' livelihoods and, in Indonesia, to build houses. In addition,
    USAID, through a transfer of funds to the Department of the Treasury, is
    funding debt relief to the governments of Indonesia and Sri Lanka; in
    exchange for deferral of a portion of their debt, both governments agreed
    to use the resources freed by debt deferral for relief and
    reconstruction-related programs (see app. II for a more detailed
    description of this aspect of the program). Table 3 shows the funds
    budgeted for ongoing and planned U.S. reconstruction assistance in
    Indonesia and Sri Lanka.

    Table 3: USAID Funds Budgeted for Tsunami Reconstruction Projects in
    Indonesia and Sri Lanka

                    Dollars in millions
                    Project description                   Indonesia     Sri Lanka
    Signature infrastructure                                $245           $35
    Transition assistance                                     59            17
    Small-scale infrastructure                                29            15
    Technical assistance for good governance                  10             8
    Other projects and operating expenses                      6            10
    Total                                                   $349           $85

    Source: USAID.

    Initial USAID plans call for completing its nonsignature activities in
    both countries by September 2007 and its signature projects in Indonesia
    and Sri Lanka by September 2009 and March 2008, respectively. Section 4102
    of the supplemental appropriations act requires that, beginning in
    December 2005, the Secretary of State report to Congress every 6 months on
    tsunami-related progress, expenditures, and schedules. The report due in
    December 2005 was provided to Congress on March 22, 2006. Figure 3 shows
    USAID's projected timeline for completing its tsunami reconstruction
    programs in Indonesia and Sri Lanka.

    Figure 3: Projected Timeline for USAID Tsunami Reconstruction Programs in
    Indonesia and Sri Lanka

    USAID Reconstruction Programs in Indonesia and Sri Lanka Have Begun, but
    Some Project Costs and Schedules May Exceed Initial Projections

    USAID has obligated some, and expended small percentages, of its
    reconstruction funding in both countries and has initiated some of its
    planned activities. However, USAID may have difficulty completing its
    reconstruction projects-particularly its large-scale signature
    projects-within initial cost estimates and schedules because of, among
    other factors, increased demand and higher costs for construction
    materials and labor in both Indonesia and Sri Lanka.

    USAID Has Begun Reconstruction Efforts in Indonesia, but Several Factors
    May Increase Costs and Delay Schedules

    In Indonesia, USAID has begun many of the reconstruction projects that it
    plans to complete by September 2007. USAID has obligated about one-third,
    and expended a small percentage, of the funding budgeted for
    reconstruction in that country. In addition, USAID has begun to design,
    and performed preliminary site work on, a 3-mile segment of its
    large-scale signature infrastructure project, a 150-mile paved road;
    however, because of a variety of factors, the overall road construction
    project may overrun cost and time estimates. Similarly, USAID is currently
    planning and designing its small-scale infrastructure projects and has
    begun its transition assistance projects, both of which may also exceed
    cost and schedule projections.

    USAID Has Obligated about One-third and Expended a Small Percentage of
    Reconstruction Funds in Indonesia

    As of January 31, 2006, USAID had obligated $111 million (32 percent) and
    expended $9 million (3 percent) of the $349 million budgeted for its
    reconstruction projects in Indonesia (see table 4).9 These activities
    include the signature road construction, small-scale infrastructure
    construction, technical assistance for good governance, and transition
    assistance.

    Table 4: USAID's Indonesian Reconstruction Activities and Funding, as of
    January 31, 2006

           Dollars in
            millions
            Project          Funds     Funds obligated Funds expended  Projected
          description     budgeted      (percentage of (percentage of  completion
                                      funds budgeted)a          funds     date
                                                           budgeted)b
    Signature road         $245            $35 (14)        $1c (0)  September
    construction                                                    2009
    Transition               59             49 (83)         6 (10)  September
    assistance                                                      2007
    Small-scale              29             15 (52)          0 (0)  September
    infrastructure                                                  2007
    construction
    Technical                10            10 (100)         1 (10)  September
    assistance for                                                  2007
    good governance
    Other projects and        6              2 (33)         1 (17)  September
    operating expenses                                              2007
    Total                  $349           $111 (32)         $9 (3)

    Source: GAO analysis of USAID data.

    aGenerally, an obligation is a definite commitment that creates a legal
    liability of the U.S. government for the payment of goods and services
    ordered or received ( GAO-05-734SP , p. 70). Consistent with 31 U.S.C.
    1501 defining when an agency can record an obligation, USAID policy is to
    treat as an obligation the bilateral agreements it makes with other
    countries to deliver assistance. However, for purposes of this report,
    obligations are defined as amounts of orders placed, contracts awarded,
    services received, and similar transactions during a given period that
    will require payments during the same or future period. USAID labels these
    actions subobligations.

    bExpenditures are defined as the issuance of checks, disbursement of cash,
    or electronic transfer of funds to liquidate a federal obligation.

    cUSAID plans to award the signature road construction contract by
    September 2006 and expects construction to take 3 years. As is normal
    practice in administering construction contracts, funds will be expended
    incrementally over this period as segments of work are completed.

    USAID Has Started Indonesian Signature Road Project but May Encounter Cost
    and Time Overruns

    USAID awarded an initial contract and began work on a segment of its
    signature road construction project in Indonesia in August 2005, but,
    owing to various factors, the project may overrun initial cost estimates
    and schedules. The proposed project, budgeted at $245 million, consists of
    building a 150-mile paved two-lane road and more than 100 bridges and
    culverts along the western coast of Aceh Province on the island of
    Sumatra, from the provincial capital of Banda Aceh to the city of
    Meulaboh. The tsunami's impact destroyed or badly damaged much of the
    original road, a vital transportation route for the region. USAID agreed
    to reconstruct the road to support the Indonesian government's overall
    reconstruction strategy, with the goal of helping to restore the economic
    strength of the area and promoting the redevelopment of the affected
    communities. According to an Indonesian government report, the road is key
    to revitalizing the economy of Aceh Province and to successfully
    initiating other reconstruction efforts. Figure 4 shows the approximate
    route of the planned road and photos of damage caused by the tsunami.

    Figure 4: Approximate Route of Planned USAID Signature Road Project in
    Aceh Province, Indonesia

    USAID plans to design and construct the signature road in three distinct
    phases, with separate contracts for each phase. USAID also entered into
    interagency agreements with USACE for technical support. In early 2005,
    USACE and USAID conducted a preliminary assessment of site conditions and
    prepared the cost estimate that USAID submitted to Congress. The three
    phases for the signature road project are as follows (see app. III for
    more details):

    1.Maintain a rehabilitated 50-mile temporary segment and construct a short
    segment. In August 2005, an Indonesian firm began maintaining a temporary
    50-mile road segment, from Banda Aceh to Lamno, and designing and
    constructing a new 3-mile segment. This maintenance work is intended to
    ensure that the temporary segment, recently rehabilitated by the
    Indonesian army, remains passable until permanent construction is
    completed.

    2.Design the signature road and supervise its construction. The second
    contract, for designing most of the 150-mile road and supervising
    construction work, was awarded to a U.S. firm in November 2005. The firm
    will supervise construction of the 3-mile segment, develop plans and
    specifications for the remaining 147 miles, and assist USAID in awarding
    and supervising construction of the signature road.

    3.Construct the signature road. USAID plans to award a third contract by
    September 2006 to construct the 147-mile segment of the signature road.

    However, several factors-limited site information, rising materials and
    labor costs, and land acquisition issues-may increase the signature road
    project's total costs and the difficulties of completing it within the
    intended time frame.

    o Limited site information. A joint USAID-USACE team initially assessed
    conditions and developed a cost estimate for building the road.10 The
    estimate was based on using undamaged sections of the existing road and
    large segments of the temporary road placed by the Indonesian Army. A 20
    percent contingency was included in the cost estimate because much of the
    road's planned route was inaccessible, resulting in the team approximating
    site conditions and developing plans based on their assumptions.11
    However, actual costs may still exceed the estimate because plans for
    routing the road have changed. According to USACE, current plans show that
    large segments of the road are now planned to be placed along new
    undeveloped routes-not along existing routes as initially planned. This
    change is expected to result in the need for more earthwork and related
    construction activities than originally anticipated.

    o Rising costs. Increasing costs for materials and labor will also likely
    affect the road construction project's overall cost. Demand for
    construction labor and materials has risen dramatically in Aceh Province
    and, according to USAID officials, will likely continue to rise. For
    example, a USAID official reported that the price of fuel oil used for
    construction equipment had risen more than 250 percent, from $0.17 per
    liter in February 2005 to $0.60 per liter in December 2005. According to
    the United Nations Development Program, posttsunami construction spending
    in and around Aceh is expected to increase fortyfold from pretsunami
    levels, from $50 million to $2 billion per year, and 200,000 additional
    workers will be needed to meet construction demands.12 Because the demand
    for skilled workers is greater than the number available, labor costs for
    reconstruction projects requiring skilled workers may rise.

    o Land acquisition. Awarding the signature road construction contract by
    September 2006 may be difficult because of uncertainties regarding the
    road alignment and acquiring the needed right-of-way. The alignment of the
    new road will differ from the former road because, in some locations, the
    former roadbed is either submerged or was rendered otherwise inaccessible
    by the tsunami's impact. According to a USAID official, the design
    contractor intends to propose a final road alignment to Indonesian
    authorities by mid-May 2006. Once the alignment is approved, the
    Indonesian government must coordinate with multiple jurisdictions to
    obtain land. USAID helped establish a technical steering committee with
    Indonesian government entities to facilitate land acquisition issues.
    However, progress depends on the Indonesian government's timeliness in
    acquiring the land and establishing right-of-way.

    USAID expects to have more comprehensive cost estimates and schedule
    projections for the signature road project in June 2006.

    Other USAID Reconstruction Activities in Indonesia May Also Exceed Cost
    and Schedule Projections

    USAID has initiated other projects in Indonesia, some of which may exceed
    initial cost and time estimates. These projects encompass small-scale
    infrastructure, technical assistance for good governance, and transitional
    assistance aimed at restoring livelihoods.

    o Small-scale infrastructure. USAID has begun reconstructing schools,
    clinics, water distribution systems, and small port facilities. Other
    projects will assist communities in preparing solid waste management
    plans, helping rebuild business districts, and constructing markets. Two
    planned projects include helping to build a teacher-training facility in
    Banda Aceh and rehabilitate the fishing industry by constructing port
    facilities, fishing vessels, and ice-making facilities. According to the
    USAID official responsible for overseeing the project, the
    teacher-training facility project is unlikely to begin as initially
    scheduled because of the time it has taken to plan and assess site
    conditions. He added that, even if the project does begin on time, the
    schedule is unlikely to be achieved, and because of rapidly escalating
    costs for materials and labor, the project is at risk of exceeding its
    budget.

    o Technical assistance for good governance. USAID technical assistance and
    good governance projects in Indonesia are aimed at enhancing
    reconstruction efforts by facilitating the peace process. The projects
    include paying consultants to work with the Indonesian government's
    Rehabilitation and Reconstruction Agency (BRR), the Audit Board of the
    Republic of Indonesia (BPK), the supreme audit institution, and local
    communities.

    o Transition assistance. USAID has begun its transition assistance,
    including rebuilding shelters and helping restore livelihoods through
    microenterprise support. However, USAID may face difficulties meeting its
    shelter construction cost and schedule estimates. For example, 2 months
    after agreeing to build 1,000 houses for $4,500 each, the NGO implementing
    the project informed USAID that, because of escalating prices for fuel,
    building materials, and labor, the unit cost had risen more than 60
    percent, to $7,000. The NGO has tentatively agreed to reduce its budget
    for other USAID-funded activities, such as upgrading an ice-making
    facility to assist the fishing industry, and will attempt to solicit
    private donations to meet its housing commitment.

    USAID's Sri Lankan Construction Activities May Face Cost and Time
    Overruns, but Other Programs Are on Schedule

    USAID has begun many of its longer term reconstruction efforts in Sri
    Lanka. By the end of 2005, the agency had obligated 100 percent of its
    funds and expended approximately 2 percent of reconstruction funding.
    USAID has started its signature project, which includes building a bridge
    and other infrastructure, addressing coastal management issues, and
    constructing vocational education facilities. However, primarily because
    of shortages of labor and materials, the project faces potential cost and
    schedule overruns even though it is currently slightly ahead of schedule.
    USAID has also begun its small-scale infrastructure, governance, and
    transition assistance projects.

    USAID Has Obligated All and Expended a Small Percentage of Reconstruction
    Funds in Sri Lanka

    As of January 31, 2006, USAID had obligated all $85 million (100 percent)
    and expended about $2 million (2 percent) of the funds budgeted for
    longer-term reconstruction efforts in Sri Lanka (see table 5).

    Table 5: USAID's Sri Lankan Reconstruction Activities and Funding, as of
    January 31, 2006

           Dollars in
            millions
            Project          Funds     Funds obligated Funds expended  Projected
          description     budgeted      (percentage of (percentage of  completion
                                      funds budgeted)a          funds     date
                                                           budgeted)b
    Signature project       $35           $35 (100)         $1 (3)  March 2008
    Small-scale              15            15 (100)          1 (7)  September
    infrastructure                                                  2007
    Technical                 8             8 (100)          0 (0)  September
    assistance for                                                  2007
    good governance
    Transition               17            17 (100)          0 (0)  September
    assistance                                                      2007
    Other projects and       10            10 (100)          0 (0)  September
    operating expenses                                              2007
    Total                   $85           $85 (100)         $2 (2)

    Source: GAO analysis of USAID data.

    aGenerally, an obligation is a definite commitment that creates a legal
    liability of the U.S. government for the payment of goods and services
    ordered or received ( GAO-05-734SP , p. 70). Consistent with 31 U.S.C.
    1501 defining when an agency can record an obligation, USAID policy is to
    treat as an obligation the bilateral agreements it makes with other
    countries to deliver assistance. However, for purposes of this report,
    obligations are defined as amounts of orders placed, contracts awarded,
    services received, and similar transactions during a given period that
    will require payments during the same or future period. USAID labels these
    actions subobligations.

    bExpenditures are defined as the issuance of checks, disbursement of cash,
    or electronic transfer of funds to liquidate a federal obligation.

    USAID Has Started Sri Lankan Signature Project but Faces Rising Costs and
    Labor Shortages

    USAID's signature project in Sri Lanka began in September 2005, when the
    agency signed a contract with a major U.S. design and construction
    management firm. All components of the project-particularly the
    construction of a bridge at Arugam Bay in eastern Sri Lanka, where tourism
    is a vital component of the local economy-are consistent with the
    government of Sri Lanka's strategic reconstruction plan.13 The signature
    project has three components (see fig. 5 for the planned locations).

    1.Construction of a bridge and other infrastructure. These activities,
    largely focused on the Arugam Bay area of eastern Sri Lanka, include
    rebuilding a bridge spanning the bay and constructing a water treatment
    facility for nearby towns. Three ports in southern Sri Lanka will also be
    rehabilitated.

    2.Provision of coastal management training. A management organization will
    provide training in construction and tourism-related skills that USAID
    considers essential to rebuilding and reactivating the economy in the
    Arugam Bay area. As of December 31, 2005, the contractor had completed
    some assessments and plans, but construction work had not yet begun.

    3.Construction of vocational education facilities. This component of the
    project includes constructing two schools and reconstructing approximately
    eight others.

    Figure 5: Planned Locations of USAID's Sri Lankan Signature Project

    As in Indonesia, several factors may hamper the completion of USAID's
    signature project in Sri Lanka.

    o Limited availability and rising costs of materials and skilled labor.
    During our visit to Sri Lanka in July 2005, we learned that, as in
    Indonesia, the increase in construction had led to limited availability of
    materials and labor and resulted in higher costs. For example, one USAID
    report noted that the cost of a brick had doubled and similar increases
    had occurred for cement and lumber. USAID included $2.2 million in the
    project budget to cover possible materials and labor increases, but USAID
    officials acknowledged this extra funding may be insufficient to cover
    costs.

    o Lengthy planning and design of Arugam Bay bridge and other
    infrastructure. Although USAID signed the contract for the planning and
    design of the bridge in September 2005, construction of the bridge is not
    expected to begin until August 2006. Although USAID is slightly ahead of
    schedule, the length of time required to correctly plan and design the
    signature bridge project at Arugam Bay may challenge the agency's efforts
    to complete the bridge by March 2008, the projected deadline. Also,
    construction of a water treatment facility experienced delays due to
    technical issues that arose during the preliminary assessment.

    Other USAID Tsunami Reconstruction Projects in Sri Lanka Are Under Way and
    Most Are Currently on Schedule

    USAID has made some progress in its other projects in Sri Lanka and
    expects to complete them by September 2007. These projects include
    small-scale infrastructure, technical assistance and good governance, and
    transition assistance aimed at encouraging economic activity.

    o Small-scale infrastructure. USAID has leveraged other donors' funds to
    increase the scope of some small-scale infrastructure projects, which
    include the following:

    o USAID entered into a public-private alliance to build playgrounds, some
    of which include accessibility for the disabled. USAID contributed $0.5
    million and attracted $1.5 million from two private organizations,
    increasing the number of playgrounds planned from 20 to 85.

    o Another project involves rehabilitating community markets and restoring
    access to potable water. These activities are projected to be completed by
    mid-2006.

    o Technical assistance and good governance. USAID will provide technical
    assistance and promote good governance in Sri Lanka. USAID has also
    budgeted funds to strengthen the Sri Lankan government's audit capacity.
    In addition, USAID is providing funds to promote accountable local
    governance in tsunami-affected regions.

    o Transition assistance. USAID is providing assistance to help tsunami
    survivors transition from camps to permanent communities.  Activities
    under way include providing businesses with credit and vocational
    training. We visited a vocational school that USAID was rehabilitating and
    equipping with computers and found many students who were learning new
    skills; the principal reported that enrollment had also increased
    dramatically.

    USAID Established Financial and Technical Oversight Measures but Has Not
    Filled Some Needed Technical Oversight Positions

    To establish financial oversight of its reconstruction programs in
    Indonesia and Sri Lanka, USAID has augmented its standard financial
    controls with external and internal audits and efforts to strengthen local
    accountability. To establish technical oversight, USAID has reassigned and
    hired experienced staff, such as engineers, and acquired additional
    technical expertise through interagency agreements. However, USAID has not
    filled some positions that it considers critical to technical oversight.

    USAID Has Established Financial Oversight Mechanisms in Indonesia and Sri
    Lanka

    For its reconstruction programs in Indonesia and Sri Lanka, USAID plans to
    augment its standard financial controls for development assistance
    programs through additional internal and external audits. USAID also plans
    to strengthen Indonesia's and Sri Lanka's auditing capacities.

    USAID Plans Internal and External Audits

    In addition to its required financial controls, which include preaward
    surveys of prospective award recipients and financial audits, USAID plans
    to arrange for additional audits.14 According to agency officials, USAID
    intends to sign an agreement with the Defense Contract Audit Agency to
    concurrently audit funding for USAID's signature road construction project
    in Aceh, Indonesia. USAID officials told us the agency is undertaking this
    work because of the additional risk inherent in large construction
    projects.

    USAID's IG is also providing oversight of reconstruction programs. The IG
    is currently auditing the signature road construction project in Indonesia
    and plans to conduct three additional audits, two in Indonesia and one in
    Sri Lanka.15 The IG is undertaking this work with funding included in the
    May 2005 emergency supplemental legislation.

    USAID Intends to Strengthen Indonesian and Sri Lankan Audit Capacities

    USAID plans to strengthen the capacities of the BPK, the Indonesian
    government's supreme audit institution. USAID will provide funding for
    technical assistance and training to the BPK to enhance its ability to
    audit donor funds administered by Indonesian government ministries.

    In Sri Lanka, USAID plans to strengthen the capacities of Sri Lankan
    government organizations. USAID has hired a consulting firm to work with
    the Sri Lankan Office of the Auditor General. USAID will also support Sri
    Lanka's Commission to Investigate Allegations of Bribery and Corruption.
    This work will focus on training and capacity development and is intended
    to reduce corruption and ensure the proper use of reconstruction funds.

    Also, in April 2005, USAID participated in an international conference in
    Jakarta on the importance of managing tsunami assistance funds. The
    conference, funded by the Asian Development Bank and hosted by the BPK,
    was intended to highlight the importance of accounting for the large
    amounts of tsunami reconstruction funds. The conference was attended by
    representatives of donor countries' supreme audit institutions, including
    GAO, and representatives of recipient countries, including Indonesia and
    Sri Lanka.

    USAID Has Taken Steps to Establish Technical Oversight but Has Not Filled
    Some Needed Positions

    To establish technical oversight for its reconstruction programs in
    Indonesia and Sri Lanka, USAID has relocated experienced staff, plans to
    hire other staff locally, and has acquired additional expertise through
    agreements with other U.S. agencies. However, it has not filled all needed
    technical oversight positions.

    In Indonesia, USAID reassigned two experienced engineers to share
    responsibilities as the cognizant technical officers and an experienced
    project manager to assist with the signature road project. A USAID
    engineer was reassigned and another hired to work in Sri Lanka to oversee
    the signature infrastructure projects. USAID also plans to hire an
    additional engineer locally when construction in Sri Lanka commences.

    In addition, USAID has acquired expertise through three interagency
    agreements with USACE, totaling $2.9 million, to provide technical
    assistance for its signature projects, develop scopes of work and cost
    estimates, and conduct environmental reviews in Indonesia and Sri Lanka.
    USACE efforts to date include assembling a team that assessed the existing
    conditions, developed cost estimates, prepared acquisition plans, and
    performed short-term on-site project management in planning the signature
    projects. Under the most recent interagency agreement, USACE is to provide
    technical assistance to USAID in Indonesia through the award of the road
    construction contract, expected in September 2006.

    As of March 2006, USAID had not filled several positions critical to
    implementing its construction activities in Indonesia and Sri Lanka.
    Although USAID hired an engineer to oversee the signature road
    construction project in Indonesia, the engineer was not expected to begin
    work until May 2006. In addition, USAID had added two of the three
    engineers needed to oversee infrastructure construction activities in Sri
    Lanka.16

    Several Challenges Confront Indonesian and Sri Lankan Reconstruction
    Programs

    In implementing its tsunami reconstruction programs in Indonesia and Sri
    Lanka, USAID faces several key challenges, some of which it has taken
    steps to address. These include working in regions with long-standing
    civil conflicts, coordinating with host governments and NGOs, and ensuring
    adequate management of regular programs.

    Civil Conflicts Threaten Reconstruction Efforts

    Long-standing civil conflicts could affect USAID's ability to complete
    reconstruction projects within projected time frames in Indonesia, despite
    recent advances in a peace process, and have limited USAID's ability to
    provide assistance in some tsunami-affected regions in Sri Lanka.

    Indonesian Factions Have Signed Peace Accord, and Some USAID Projects Are
    Supporting Reconciliation

    Owing to a 30-year conflict between a separatist group and the Indonesian
    government, the entire province of Aceh, Indonesia, was under a state of
    emergency prior to the tsunami and access by outsiders was limited.
    However, within days of the disaster, the Indonesian government lifted the
    state of emergency to allow access by donors and relief organizations. In
    August 2005, the separatists signed a peace accord, which both sides
    appear committed to honoring. However, an NGO monitoring the accord has
    cautioned that the difficulties of ending the 30-year-old conflict should
    not be underestimated.17

    To address this challenge, USAID is implementing peace-building
    initiatives in Aceh Province. For example, according to USAID officials,
    former combatants are working on construction crews rebuilding community
    water systems.18 USAID's aim is to provide income-generating opportunities
    to former rebel soldiers, thereby strengthening the peace accord.

    Deteriorating Sri Lankan Security May Affect Some Programs, but USAID Is
    Working to Promote Reconciliation

    A conflict between the Sri Lankan government and a separatist group, which
    began in 1983, has increased since the tsunami and could impact
    implementation of some USAID reconstruction programs. Since the tsunami,
    the number of violent incidents has risen dramatically, primarily in
    northern and northeastern Sri Lanka, which are largely under separatist
    control. USAID was not directly implementing development activities in
    these areas prior to the tsunami, and it is not planning any
    tsunami-related projects in these areas at present.19 USAID officials
    stated that they expect little disruption to most of its reconstruction
    efforts in other parts of the country. However, in the eastern Sri Lankan
    region near the separatist-controlled area, several USAID activities
    involving construction of small-scale infrastructure have been delayed
    because of increased violence. USAID officials stated that the signature
    construction project could also experience delays due to the conflict.

    As in Indonesia, USAID has incorporated peace-building initiatives into
    some of its Sri Lankan tsunami reconstruction efforts. One such project,
    implemented by USAID's Office of Transition Initiatives (OTI), promotes
    participation by people of different ethnicities and religions by
    requiring that they work together toward a shared goal, such as
    rehabilitating a school. USAID has also dedicated $2.5 million for a
    reconciliation program in which community members will be trained in
    mediation skills.

    Coordination with Governments and Nongovernmental Organizations Has Been
    Difficult, but USAID Is Taking Steps to Improve Coordination

    USAID has encountered challenges in coordinating its reconstruction
    efforts with the governments of both countries. In addition, USAID has
    faced coordination problems with NGOs. To address these challenges, USAID
    has taken steps to improve coordination, avoid duplication of efforts, and
    minimize gaps in providing assistance to survivors.

    Indonesian Government's Coordination Difficulties Have Challenged USAID

    USAID has faced challenges coordinating its reconstruction activities with
    the Indonesian government. In April 2005, the Indonesian government
    established the BRR to coordinate the international response to the
    tsunami. Since its creation, BRR has used the Indonesian government's
    master plan for reconstruction to attempt to control and track
    organizations involved in reconstruction and has created a publicly
    accessible database that, according to USAID, is expected to be fully
    operational by mid-2006. However, according to USAID officials, BRR lacks
    the capacity for effectively registering donors and coordinating projects.

    The lack of coordination has resulted in the overlapping of USAID projects
    with other donors' projects and in gaps in aid to survivors. A USAID
    official told us that, in one instance, BRR approved similar water and
    sanitation project proposals submitted by USAID and an international NGO.
    USAID negotiated directly with the NGO over which agency would carry out
    the project and eventually resolved the differences without BRR
    involvement. In addition, a United Nations official told us that many
    donor organizations are providing assistance to communities along the
    coastal road near the capital city of Banda Aceh but that survivors in
    numerous harder-to-reach areas down the coast and on nearby islands have
    received little or no aid.

    To strengthen BRR's capacity to coordinate and oversee reconstruction
    efforts, USAID is providing technical assistance and training. However,
    according to USAID officials, until BRR is able to fully develop its
    capacities, USAID and other donor organizations will face difficulty in
    coordinating projects and outreach.

    Sri Lanka's Organizational Problems and Policy Changes Have Created
    Challenges for USAID

    Organizational inefficiency and policy shifts in Sri Lanka have led to
    coordination problems for USAID. In January 2005, the Sri Lankan
    government created a Task Force for Rebuilding the Nation (TAFREN),
    charging it with assessing needs and donor coordination. The organization
    was expected to operate for 3 to 5 years. In its first months of
    operation, TAFREN developed a needs assessment that drew on World Bank,
    Asian Development Bank, and other organizations' information and analyses.
    TAFREN used the assessment to attempt to avoid duplication but lacked the
    capacity to ensure that donors registered and coordinated with TAFREN. In
    addition, with donor support, TAFREN began work on a publicly accessible
    database to track reconstruction projects that is expected to be
    functional by mid-2006. In November 2005, the newly elected Sri Lankan
    president disbanded TAFREN and announced the creation of a new
    coordination mechanism, further increasing potential coordination
    challenges; however, development of the database is continuing.

    When we visited Sri Lanka in July 2005, USAID officials told us that
    TAFREN had taken little action to coordinate donor efforts. They added
    that TAFREN had been slow to react and lacked decision-making authority.
    Nonetheless, USAID moved forward with some projects and kept TAFREN aware
    of its activities. In addition, the Sri Lankan government's inconsistent
    policies on rebuilding in coastal areas have affected the progress of some
    USAID reconstruction programs. Soon after the tsunami, the President of
    Sri Lanka announced that the Sri Lankan government would begin to enforce
    a valid, but previously unenforced, law that banned construction within a
    100- to 200-meter coastal "buffer zone." This policy has affected the
    progress of some USAID projects, such as rehabilitating community markets
    and building schools. In late 2005, the Sri Lankan government began
    allowing construction in certain coastal areas, but as of late 2005, many
    survivors were still awaiting approval to rebuild their homes.

    Poor Coordination with Nongovernmental Organizations Has Caused Problems

    In both Indonesia and Sri Lanka, USAID has encountered challenges in
    coordinating with some of the scores of NGOs operating in the countries
    since the tsunami. After the disaster, many NGOs received large amounts of
    private donations, enabling them to conduct their work without funding
    from bilateral and multilateral organizations. As a result, some NGOs
    began implementing reconstruction projects with minimal coordination with
    such organizations or with the host governments.

    In Indonesia, coordination with NGOs was particularly difficult during the
    emergency relief phase but has generally improved since the establishment
    of BRR, which currently permits only approved NGOs to participate in
    reconstruction projects. However, with limited resources, BRR cannot be
    sure it is aware of all NGOs activities. For example, according to UN
    officials, an international NGO constructed new houses and water and
    sanitation systems near the Indonesian coastline without coordinating with
    the Indonesian government or other donors to ensure that the housing could
    be connected to local water and sanitation infrastructure. Because of
    tsunami-altered water tables and topography in some areas, those
    communities' sanitation systems overflowed during certain tidal
    conditions, inundating the area with untreated sewage.

    Coordination with NGOs in Sri Lanka has also been problematic, despite
    TAFREN's efforts. For example, several NGOs and private donor
    organizations provided new fishing boats to fishermen. However, according
    to a bilateral donor official, several communities received too many
    fishing boats, and as a result, some coastal areas were depleted of large
    numbers of fish. On the other hand, coordination in southern Sri Lanka has
    been more effective than in other parts of the country. There, USAID,
    NGOs, and other donors agreed that certain organizations would have
    responsibility for different districts or for different types of
    assistance, such as housing. Coordination meetings are normally held
    weekly and TAFREN officials periodically attended.

    USAID's Tsunami Response Has Created Challenges for Non-Tsunami-Related
    Programs

    The urgency to quickly plan and implement USAID's tsunami-related program
    activities in Indonesia and Sri Lanka may affect the management of some of
    non-tsunami-related projects. In Indonesia, USAID officials are concerned
    that the focus on tsunami reconstruction activities in Aceh could limit
    oversight of regular programs, leading them to rely more heavily on
    information provided by implementing partners. To mitigate this potential
    challenge, USAID added two direct-hire U.S. staff to fill two key
    positions in Aceh.

    In Sri Lanka, USAID is experiencing similar challenges. For example, a
    USAID activity to reconstruct small-scale infrastructure was suspended so
    that staff could focus on the tsunami relief. Later, the program was
    reactivated, although USAID did not add staff. As a result, USAID's
    monitoring of some of regular program activities diminished. USAID
    reported that it reduced its efforts to involve the community in the
    program, resulting in repeated additional visits to ensure the program's
    successful completion. To address this issue, USAID hired additional staff
    to ensure that ongoing programs are not neglected.

    Conclusions

    The U.S. government has played an important role in helping Indonesia and
    Sri Lanka recover from the devastating 2004 tsunami. USAID and other
    agencies provided immediate assistance to survivors and work has begun on
    several high-profile infrastructure projects. However, since USAID made
    its initial projections in the spring of 2005, materials, labor, and fuel
    costs have increased substantially in both countries. In addition, changes
    to project scope and ongoing design work for key construction efforts may
    reveal actual conditions that differ from initial assessments, potentially
    leading to higher than planned costs. This information suggests that the
    cost contingencies included in the initial estimates may be insufficient.
    Congress needs current information on projected costs and schedules to
    provide appropriate oversight.

    Recommendation for Executive Action

    On the basis of our initial review of USAID's design and implementation of
    its tsunami reconstruction programs in Indonesia and Sri Lanka, especially
    regarding its signature road project in Indonesia and bridge project in
    Sri Lanka, we recommend that the Secretary of State, in the department's
    required semiannual report to Congress due in June 2006, provide updated
    cost estimates and schedules obtained from USAID. If the updated
    information differs substantially from initial projections, the report
    should also include alternative cost estimates, schedules, and project
    scopes and the need for additional sources of funding, if necessary.

    Agency Comments and Our Evaluation

    At our request, USAID and the Department of State provided written
    comments and technical suggestions and clarifications on a draft of this
    report. (See app. IV for State's written comments and app. V for USAID's
    written comments.) USAID stated that the report findings accurately
    describe the tsunami program situation and the potential broad challenges
    for achieving its reconstruction goals. USAID also provided information on
    additional steps the agency intends to take to mitigate the potential for
    increased costs and schedule delays, as well as an explanation of how it
    obligates funds, which we incorporated into the report. The Department of
    State agreed to fully implement our recommendation. We have also
    incorporated technical suggestions and clarifications from USAID and
    State, as appropriate.

    We also requested comments from the U.S. Army Corps of Engineers and the
    Department of the Treasury. Although neither provided written comments,
    both provided technical suggestions and clarifications that we have
    incorporated, as appropriate.

    We are sending copies of this report to interested congressional
    committees as well as the Administrator, USAID; Commander, U.S. Army Corps
    of Engineers; and the Secretaries of State and the Treasury. We will also
    make copies available to others upon request. In addition, this report
    will be 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) 512-4128 or gootnickd@gao.gov . Contact points for our Offices
    of Congressional Relations and Public Affairs may be found on the last
    page of this report. GAO staff who made major contributions to this report
    are listed in appendix VI.

    David Gootnick, Director International Affairs and Trade

    Objectives, Scope, and Methodology Appendix I

    We were directed to monitor the delivery of U.S. reconstruction assistance
    to the tsunami-affected countries through periodic visits. In this report,
    we review (1) USAID's progress in providing longer-term reconstruction
    assistance in Indonesia and Sri Lanka, (2) the extent to which the U.S.
    Agency for International Development (USAID) has established financial and
    technical oversight for its tsunami reconstruction programs in those
    countries, and (3) any challenges that USAID faces in implementing the
    Indonesian and Sri Lankan programs and any steps the agency has taken to
    address these challenges.

    To determine the progress of USAID's reconstruction programs in Indonesia
    and Sri Lanka, we met with officials of USAID's Bureau for Asia and the
    Near East and Office of Foreign Disaster Assistance and with the U.S. Army
    Corps of Engineers (USACE). In addition, to examine issues involving the
    U.S. debt relief component of the assistance to Indonesia and Sri Lanka,
    we conducted work at the headquarters offices of U.S. Departments of State
    and the Treasury. We traveled to Indonesia in August and December 2005 and
    Sri Lanka in July 2005. In Jakarta and Banda Aceh, Indonesia, and in
    Colombo, Sri Lanka, we reviewed USAID's strategies, work plans, and
    applicable contracts, grants, and cooperative agreements and discussed
    with USAID and other U.S. officials how their respective programs
    addressed reconstruction needs. During our visits to Indonesia, we
    reviewed USAID's activities in tsunami-affected areas, including the $245
    million, 150-mile signature road construction project in Banda Aceh. In
    many instances, we visited and photographed sites before the projects
    began, at locations where USAID-funded maintenance work was ongoing, or
    where USAID-funded construction had begun. During these trips, we
    interviewed representatives of contractors, nongovernmental organizations
    (NGO), government ministries, and other entities responsible for
    day-to-day project implementation. We also interviewed many of the
    intended recipients of U.S. assistance, asking about the tsunami's impact
    on their homes, livelihoods, and communities and about the effectiveness
    of U.S.-funded projects in helping them rebuild infrastructure, restore
    their livelihoods, and obtain basic services. Finally, we reviewed prior
    GAO reports on USAID disaster assistance efforts.

    To assess USAID's financial and technical oversight, we reviewed USAID's
    financial procedures and discussed the procedures with cognizant USAID
    officials. In Indonesia, a licensed GAO professional engineer met with
    USAID and USACE engineers and other technical staff to discuss the level
    of technical oversight and planning. We also coordinated with USAID's
    Office of the Inspector General in Washington, D.C., and the Philippines
    to minimize duplication of efforts and to share information.

    To determine the challenges that USAID faces in implementing its program,
    we discussed oversight procedures and financial systems with officials of
    host governments, multilateral and bilateral donors, and NGOs involved in
    reconstruction efforts. We also met with host government officials,
    including national and local officials, to discuss their procedures for
    ensuring that donor activities did not conflict or overlap and their views
    on donor coordination.

    We assessed the reliability of funding and expenditure data compiled and
    generated by USAID's Office of the Controller in Washington, D.C., and by
    the USAID missions in Indonesia and Sri Lanka. We met with USAID officials
    to review the internal controls for the collection and review of data,
    comparing the consolidated reports with mission-specific reports, and
    discussed relevant data reliability issues with cognizant agency
    officials. In addition, we interviewed knowledgeable USAID officials about
    the systems and methodology they use to verify the completeness and
    accuracy of the data. Finally, we reviewed relevant reports from the USAID
    Office of the Inspector General and several GAO reports of USAID disaster
    reconstruction program funding since 1999. None of these sources noted any
    significant discrepancies or concerns about the reliability of USAID's
    data. Based on our comparison of data generated from different USAID
    sources at USAID headquarters and mission, we found that the sources
    generally corroborated each other, increasing our confidence that the data
    were reliable. We determined that USAID's funding and expenditure data
    were sufficiently reliable for our analysis.

    Debt Relief to Indonesia and Sri Lanka Appendix II

    To make resources available for the Indonesian and Sri Lanka governments
    to address humanitarian and reconstruction needs after the tsunami, and at
    the request of these governments, the United States and other
    international donors agreed to defer the payment of some eligible debt the
    Indonesian and Sri Lankan governments were due to pay in 2005.1 Both
    countries agreed to use the debt relief to help recover from the tsunami's
    extensive damage, estimated at $4.5 billion in Indonesia and $1.5 billion
    in Sri Lanka.2

    Debt Relief Provided by the United States

    With funding appropriated in the emergency supplemental legislation
    enacted in May 2005, the United States provided $20.1 million and $3.2
    million to cover the U.S. budget costs of debt deferral for Indonesia and
    Sri Lanka, respectively. Using these funds, the United States rescheduled
    about $190 million in 2005 debt payments from Indonesia and about $40
    million in 2005 debt payments from Sri Lanka.

    The U.S. debt relief agreements with Indonesia and Sri Lanka require
    independent outside evaluations to ensure that the countries comply with
    the terms of the agreements that the resources freed by the Paris Club
    debt consolidation and deferral will benefit directly the people affected
    by the tsunami. According to the Department of the Treasury, the benefit
    from the international debt rescheduling is $236 million for Indonesia and
    $34 million for Sri Lanka.3 According to our analysis, the net benefit of
    the debt rescheduling for Indonesia and Sri Lanka is about 9 percent and
    11 percent, respectively, of the amount of the debts rescheduled. The
    United States will rely on periodic reports from each country's regular
    consultations with the International Monetary Fund, the World Bank, and
    the Asian Development Bank to measure compliance with the agreements,
    according to Department of State officials. The officials stated that both
    countries are likely to meet their commitments to use the resources freed
    by the Paris Club debt consolidation and deferral to benefit directly the
    people affected by the tsunami.

    Debt Relief Provided by International Creditors

    The total amounts of bilateral international debt rescheduled in 2005 for
    Indonesia and Sri Lanka were approximately $2.703 billion and $323
    million, respectively.4 Indonesia did not seek or receive any debt
    deferral from multilateral creditors. Sri Lanka sought a debt deferral
    from the International Monetary Fund, which granted a 1-year extension for
    debt repayments of about $106 million for its repayment expectations due
    in 2005. Multilateral debt service in 2005 was $4.3 billion and $294
    million, accounting for 55 percent and 48 percent of total debt service,
    before the debt reschedulings for Indonesia and Sri Lanka, respectively.

    Rescheduling international debt provided immediate budgetary savings for
    both countries in 2005, but both countries' debt burden will increase when
    payments restart in 2006. Both countries agreed to repay the rescheduled
    debt in seven equal semiannual installments, starting December 1, 2006,
    and ending December 1, 2009. Table 6 shows the impacts of rescheduling all
    bilateral debt on the budgets of the governments of Indonesia and Sri
    Lanka for fiscal years 2005 through 2009.

    USAID's Three-Phase Signature Road Project in Aceh Province,
    Indonesia Appendix III

    USAID developed plans to implement its signature project in three phases
    (see table 7).

    Table 7: Scope and Status of Indonesian Signature Road Project, as of
    December 31, 2005

           Contract                 Scope                        Status
    Phase 1:         o Repair and maintain existing o Contract was awarded to
                        50-mile segment from Banda     an Indonesian firm (PT
    Repair,          Aceh to Lamno.                 Wijaya Karya) on August
    maintenance, and                                23, 2005.
    priority         o Design and construct a short
    construction     priority (3-mile) segment      o Contract cost is $12.8
                        between Banda Aceh and Lamno.  million.

                        o Perform the design work on a o Maintenance and repair
                        cost-plus-fixed-fee basis.     work is ongoing; route is
                                                       passable.
                        o Perform the maintenance and
                        construction work on a         o Design of the new 3-mile
                        fixed-price basis.             road segment is under way.

                                                       o Construction of new
                                                       3-mile road segment is
                                                       expected to be completed
                                                       by August 2006.
    Phase 2:         o Design the new road (except  o Contract was awarded to
                        for the 3-mile priority        a U.S. firm (Parsons
    Design and       segment).                      Global Services Inc.) on
    construction                                    November 10, 2005.
    supervision      o Supervise construction.
                                                       o Estimated contract cost
                        o Perform services on a        is up to $34.9 million;
                        cost-plus-fixed-fee basis.     current obligation is $20
                                                       million.

                                                       o Design work is ongoing
                                                       and scheduled to be
                                                       completed in June 2006.

                                                       o Contractor is required
                                                       to prepare an updated
                                                       estimate of construction
                                                       costs.

                                                       o Construction management
                                                       services are being
                                                       provided on the priority
                                                       road segment and will
                                                       continue in September
                                                       2006, when the contract
                                                       for construction of Banda
                                                       Aceh to Meulaboh road is
                                                       awarded.
    Phase 3:         o Placement of new road along  o Construction contract is
                        a 150-mile route from Banda    expected to be awarded in
    Construction     Aceh to Meulaboh (except for   September 2006, and
                        the portion covered under the  construction is to be
                        priority segment).             completed by September
                                                       2009.
                        o Construction will be done on
                        a fixed-price basis according
                        to the plans and
                        specifications of the design
                        prepared under separate
                        contract.

    Source: GAO synthesis of USAID information.

    Comments from the Department of State Appendix IV

    Comments from the U.S. Agency for International Development Appendix V

    The following are GAO's comments on the U.S. Agency for International
    Development's letter dated March 30, 2006.

    GAO Comments

    1.USAID states that it intends to use fixed-price contracts because the
    contracts provide the maximum incentive for the contractor to control
    costs and perform effectively in order to complete the work on time. We
    agree that fixed-price contracts can be effective in controlling costs by
    shifting performance risk to the contractor. However, as USAID also notes
    and we point out in the report, costs may increase due to other
    circumstances, such as site conditions being different than expected and
    the potentially lengthy process of acquiring land. As our recommendation
    indicates, it is important that Congress be kept informed of cost and
    expenditure information in order to effectively oversee expenditures of
    U.S. funds.

    2.We modified the text of footnote 5 and added explanatory notes to tables
    4 and 5 to reflect USAID's comments regarding obligations and expenditures
    of funds.

    GAO Contact and Staff Acknowledgments Appendix VI

    David Gootnick, (202) 512-4128 or g  ootnickd@gao.gov.

    In additional to the contact named above, Phillip Herr, George Taylor,
    Michael Armes, Ming Chen, Reid Lowe, Michael Maslowski, and Thomas Zingale
    made key contributions to this report.

    (320359)

    www.gao.gov/cgi-bin/getrpt? GAO-06-488 .

    To view the full product, 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-06-488 , a report to congressional committees

    April 2006

    FOREIGN ASSISTANCE

    USAID Has Begun Tsunami Reconstruction in Indonesia and Sri Lanka, but Key
    Projects May Exceed Initial Cost and Schedule Estimates

    In December 2004, an earthquake off the coast of Indonesia caused a
    tsunami that left more than 230,000 people killed or missing and presumed
    dead and an estimated $10 billion in damage in 12 countries. In May 2005,
    Congress appropriated $908 million for relief and reconstruction. U.S.
    emergency relief efforts budgeted at $327 million were nearly completed in
    December 2005. The U.S. Agency for International Development (USAID) plans
    to spend $496 million on longer-term reconstruction, focusing on Indonesia
    and Sri Lanka, with the remaining $85 million allocated to other U.S.
    agencies. GAO has been mandated to monitor USAID's reconstruction efforts.
    In this report, GAO describes USAID's (1) progress in Indonesia and Sri
    Lanka, (2) financial and technical oversight measures, and (3)
    implementation challenges.

    What GAO Recommends

    GAO recommends that the Secretary of State, in the department's semiannual
    report due to Congress in June 2006, provide updated cost estimates and
    schedules. If the updated information differs substantially from initial
    projections, the report should also include alternative project scopes and
    the need for additional sources of funding, if necessary. The Department
    of State agreed to fully implement this recommendation.

    USAID has beguna number of reconstruction activities in Indonesia and Sri
    Lanka. As of January 31, 2006, approximately 8 months after Congress
    appropriated funding, USAID had obligated $111 million (32 percent) and
    expended $9 million (3 percent) of the $349 million budgeted for
    reconstruction in Indonesia, and it had obligated all and expended $2
    million (2 percent) of the $85 million budgeted for reconstruction in Sri
    Lanka. However, rising prices of materials and labor in both countries may
    increase costs for many construction efforts, including USAID's
    "signature" projects, which are intended to generate greater visibility
    for U.S. assistance. In addition, revisions to initial assessments of site
    conditions may challenge USAID's ability to finish its signature project
    in Indonesia-a 150-mile road in Aceh Province-by September 2009, the
    estimated completion date. In Sri Lanka, the time needed to complete
    designs and plans may make it difficult to finish one part of USAID's
    signature project-a bridge at Arugam Bay-by March 2008, although this
    project is currently slightly ahead of schedule. USAID plans to complete
    most of its other reconstruction projects, such as building schools and
    restoring livelihoods, by September 2007.

    USAID has established financial and technical oversight for its tsunami
    recovery programs in Indonesia and Sri Lanka. For financial oversight,
    USAID plans to arrange a concurrent audit of the signature road project in
    Indonesia and strengthen Indonesian and Sri Lankan audit capacities. For
    technical oversight, USAID has begun to add staff to oversee its signature
    construction projects and has acquired additional construction engineering
    expertise from another U.S. agency. An additional engineer will start work
    in Indonesia in May 2006. In Sri Lanka, USAID has added two engineers to
    its staff and plans to hire an additional construction oversight engineer
    in April 2006, prior to beginning construction.

    In implementing its Indonesian and Sri Lankan reconstruction programs,
    USAID faces several broad challenges. These include working in regions
    with long-standing conflicts, coordinating with host governments and
    nongovernmental organizations, and ensuring that non-tsunami-related
    development assistance activities are not neglected. To address these
    challenges, USAID has taken actions such as engaging in peace-building
    initiatives, participating in regularly scheduled coordination meetings,
    and hiring and reassigning staff to assist with increased workloads.

    Tsunami-Damaged Road (left) and USAID-Funded Maintenance Work in Indonesia
    *** End of document. ***