[Audit Report on Management and Oversight of Selected Construction Projects, Republic of Palau]
[From the U.S. Government Printing Office, www.gpo.gov]

Report No. 00-i-537

Title: Audit Report on Management and Oversight of Selected  Construction
       Projects, Republic of Palau

Date:  July 12, 2000



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U.S. Department of the Interior
Office of Inspector General



AUDIT REPORT
MANAGEMENT AND OVERSIGHT OF
SELECTED CONSTRUCTION CONTRACTS,
REPUBLIC OF PALAU


REPORT NO. 00-I-537

JULY 2000




                                                N-IN-PAL-002-99-M

Honorable Kuniwo Nakamura
President
Republic of Palau
P.O. Box 100
Koror, PW 96940


Subject:  Audit Report on Management and Oversight of Selected 
          Construction Projects, Republic of Palau (No. 00-i-537)


Dear President Nakamura:

This report presents the results of our audit of the Republic of
Palau's management and oversight of selected construction
projects.

Section 5(a) of the Inspector General Act (5 U.S.C. app. 3)
requires the Office of Inspector General to list this report in
its semiannual report to the U.S. Congress.  In addition, the
Office of Inspector General provides audit reports to the
Congress.

Please provide a response to this report by September 15, 2000.
The response should provide the information requested in Appendix
6 and should be addressed to our Pacific Field Office, 415 Chalan
San Antonio - Suite 306, Tamuning, Guam 96911.

                                          Sincerely,


                                          Earl E. Devaney
                                          Inspector General




EXECUTIVE SUMMARY

Management and Oversight of Selected Construction 
Projects, Republic of Palau (No. 00-i-537)

BACKGROUND

The Compact of Free Association between the United States and the
Republic of Palau became effective on October 1, 1994.  Under
Title 2, Section 212(b), of the Compact, the Republic of Palau
received funding to promote economic development through capital
improvement projects.  As of September 30, 1998, Palau had
received Compact Section 212(b) funds of $36 million and related
Section 215 funds of $16.5 million.[1]  Palau invested these
funds in various securities and earned an additional $17.9
million in investment income (net of investment expenses), which
the Compact requires to be used for economic development.  For
the 4-year period ending September 30, 1998, Palau received
Compact funds totaling $70.4 million ($36 million plus $16.5
million plus $17.9 million), had 277 approved projects totaling
$53.4 million, and had expended $34.4 million.  Prior to
implementation of the Compact, Palau was part of the Trust
Territory of the Pacific Islands and had received capital
improvement funds through the Office of Insular Affairs, U.S.
Department of the Interior.  As of September 30, 1998, 11 Trust
Territory capital improvement projects totaling $48.3 million
were still active.

OBJECTIVE

The objective of the audit was to determine whether the Republic
of Palau provided adequate management and oversight of
construction projects funded by either the Trust Territory of the
Pacific Islands or Section 212(b) of the Compact of Free
Association.  The scope of the audit included a review of the
project management activities related to a sample (53 projects,
totaling $6.7 million) of the 277 Compact-funded capital
improvement projects that were active during the period of
October 1994 to May 1999 and a sample (3 projects, totaling $17.5
million) of the 11 Trust Territory projects that were active as
of September 1998. 

**FOOTNOTES**

[1]:Under the Compact of Free Association, the Republic of Palau
was to receive all Section 212(b) funding ($36 million) during
the first year of the Compact.  However, the Compact, which was
actually signed by  the United States and the Republic of Palau
in January 1986, did not become effective until October  1, 1994
because the citizens of Palau did not ratify the agreement until
November 1993.  As a result of the delay, an inflation adjustment
provision contained in Compact Section 215 provided for $16.5
million in addition to the $36 million specified in Section
212(b).

RESULTS IN BRIEF

We found that the Republic of Palau did not adequately manage
National Government capital improvement projects funded by the
Trust Territory of the Pacific Islands and the Compact of Free
Association and did not ensure that Compact funds appropriated
for state capital improvement projects were used efficiently and
effectively as follows:

- The National Government did not (1) ensure that cost estimates
were prepared prior to procuring construction services, (2)
perform or adequately document inspections made at project
construction sites, (3) provide clear bidding instructions to
potential bidders, and (4) adequately document administrative
charges to projects.  These conditions existed because Palau's
Division of Design Engineering did not have an adequate number of
properly trained staff  to effectively perform the construction
procurement and project management functions.  As a result,
capital improvement project funds totaling more than $2 million
were not used efficiently, and 11 Trust Territory-funded projects
valued at $48.3 million were not completed for periods ranging
from 5 to 25 years after the funds were made available for the
projects.  

- The $5.15 million Malakal sewage treatment plant expansion
project funded under a fiscal year 1993 Trust Territory capital
project has not been started, and as a result, the existing
sewage treatment plant continued operating beyond its design
capacity and was discharging pollutants into the coastal waters
adjacent to the plant, potentially having an adverse impact on
Palau's environment and the health and safety of its residents.

- The National Government (1) used Section 212(b) funds to
finance state capital improvement projects that were short-term
in nature and did not meet the long-term economic development
needs of the states and (2) allowed the states to procure
construction services and manage construction projects without
the skilled personnel needed to effectively perform these
functions.  These conditions occurred because the National
Government's policy was to allow each state to manage its own
economic development projects.  In addition, although the
National Government had identified problems with the states'
administration of their projects, corrective actions were not
implemented as a condition for future appropriations of Compact
Section 212(b) funds.  As a result, the National Government
lacked assurance that $4.3 million appropriated to the 16 states
during fiscal years 1995 through 1999 would result in long-term
economic development improvements and that costs of $250,000
incurred on two state-administered construction projects were
reasonable for the services provided.  In addition, we identified
problems related to road construction and land use on Babeldaob
Island that could significantly hamper future economic growth if
corrective action is not taken.

RECOMMENDATIONS

We made 13 recommendations to the President of the Republic of
Palau to address the deficiencies disclosed by our review.
Specifically, we recommended that the National Government request
a technical assistance grant to assist in strengthening the
Division of Engineering, establish professional requirements for
engineering positions and fill those positions, develop a
methodology for distributing the fringe benefit costs of
inspectors among all pertinent projects, and take action to
expedite the completion of the Malakal sewage treatment plant
expansion project.  We also recommended, with regard to state
projects, that the National Government prohibit the use of
Compact Section 212(b) funds for such short-term purposes as the
repair and maintenance of roads, equipment, and structures;
develop a plan to consolidate the road maintenance resources of
the states on Babeldaob Island and integrate the National and
state road systems; assist the states in developing master land
use plans; enforce the National zoning laws and assist the states
in developing local zoning laws; require the Bureau of Public
Works to procure construction and project management services for
Compact-funded state projects; and require the establishment of a
uniform building code.

AUDITEE COMMENTS AND OIG EVALUATION

The President of the Republic of Palau's response to the draft
report agreed  with 11 of the 13 recommendations.  The response
disagreed with and provided additional information on two
recommendations concerning  Babeldaob Island  roads  and National
zoning laws. Based on information provided in the response, we
revised the remaining two recommendations and requested an
additional reply.  

CONTENTS


                                                  Page

EXECUTIVE SUMMARY.................................  1  

INTRODUCTION......................................  7  

BACKGROUND........................................  7  
OBJECTIVE AND SCOPE...............................  8  
PRIOR AUDIT COVERAGE..............................  9  

FINDINGS AND RECOMMENDATIONS...................... 10  

A.NATIONAL GOVERNMENT PROJECTS ................... 10  
B.STATE PROJECTS.................................. 20  

APPENDICES

1.  CLASSIFICATION OF MONETARY AMOUNTS............ 35  
2.  COMPACT SECTION 212(b) AND RELATED FUNDING
    PROVIDED TO THE REPUBLIC OF PALAU............. 36  
3.  CAPITAL IMPROVEMENT PROJECTS FUNDED BY THE
    TRUST TERRITORY OF THE PACIFIC ISLANDS........ 37  
4.  COMPACT SECTION 212(b) FUNDS APPROPRIATED TO THE
    STATES OF THE REPUBLIC OF PALAU............... 38  
5.  OFFICE OF THE PRESIDENT RESPONSE.............. 39  
6.  STATUS OF AUDIT REPORT RECOMMENDATIONS........ 48  



INTRODUCTION


BACKGROUND

The Compact of Free Association between the United States and the
Republic of Palau became effective on October 1, 1994.  Under
Title 2, Section 212(b), of the Compact, the Republic of Palau
received funding to promote economic development through capital
improvement projects.  The types of projects for which the
Section 212(b) funds could be used and annual reporting
requirements were contained in a supplemental agreement to the
Compact.  As of September 30, 1998, Palau had received Compact
Section 212(b) funds of $36 million and related Section 215 funds
of $16.5 million.[2]  Palau invested these funds in various
securities and earned an additional $17.9 million in investment
income (net of investment expenses), which the Compact requires
to be used for economic development.  Therefore, Palau, for the 4
fiscal years reviewed ending September 30, 1998, received Compact
funds totaling $70.4 million ($36 million plus $16.5 million plus
$17.9 million) and had expenditures totaling $34.4 million,
unexpended appropriations totaling $10.3 million, and
unappropriated funds totaling $25.7 million (these amounts are
detailed in Appendix 2). 

Under the Constitution of the Republic of Palau, the National
Government consists of an Executive Branch, with an elected
President; a bicameral Legislative Branch (National Congress);
and a Judicial Branch.  In addition, the Constitution created 16
separate states, each with a governor and a legislature.  The
expenditure of Compact funds is authorized by appropriations
passed by the National Congress as part of the National
Government's annual budget.  Compact Section 212(b)-funded
projects are  divided into two categories: projects administered
by the National Government and projects administered by the
individual states.

In addition to the Compact funds, Palau, prior to implementation
of the Compact in October 1994, was a part of the Trust Territory
of the Pacific Islands and received capital improvement funds on
a discretionary basis through the Office of Insular Affairs, U.S.
Department of the Interior, which provided administrative
oversight through a capital project coordinator located in Palau.
The U.S. Naval Facilities Engineering Command, through an
agreement with the U.S. Department of the Interior, directly
managed the Trust Territory capital projects in Palau.  Since
implementation of the Compact, the remaining Trust Territory
capital projects have been managed by the Division of Design
Engineering of Palau's Bureau of Public Works, with the U.S.
Naval Facilities Engineering Command providing construction
inspection services on behalf of the Office of Insular Affairs.
As of September 30, 1998, 11 Trust Territory capital project
grants, totaling $48.3 million, were still active (see 
Appendix 3).

Title 40, Chapter 6, Section 608, of the Palau National Code
Annotated states, "The Procurement Officer for construction and
architectural and engineering contracts shall be the Director of
the Bureau of Public Works."  However, each state governor was
allowed by the Code to be the procurement officer for the
respective state and had the authority to procure construction
services for state construction projects, including Section
212(b)-funded projects.  Unless a state voluntarily had the
National Government perform the project procurement and
construction management functions, the individual states were
responsible for ensuring that the funds appropriated by the
National Government were spent in accordance with applicable
procurement laws and used to complete the projects successfully.
The National Government maintained some control over the states'
administration of the Section 212(b) funds through an allotment
process by which the Section 212(b)-appropriated funds were
transferred to the individual states upon request.  In addition,
each state was required to prepare annual financial statements,
which were audited by the Republic's Office of the Public Auditor
as part of the single audits required by the Compact.

OBJECTIVE AND SCOPE

The objective of the audit was to determine whether the Republic
of Palau provided adequate management and oversight of
construction projects funded by either the Trust Territory of the
Pacific Islands or Section 212(b) of the Compact of Free
Association.  To accomplish our objective, we interviewed
officials of the Palau National Government, 12 of the 16 state
governments, the Office of Insular Affairs, and the U.S. Naval
Facilities Engineering Command.  We also reviewed applicable
financial and administrative records for National and state
projects to obtain information regarding the status of the
capital improvement projects selected for review.  The scope of
the audit included a review of the project management activities
related to a sample (53 projects totaling $6.7 million) of the
277 Compact-funded capital improvement projects, totaling $53.4
million, that were active during October 1994 through May 1999
and a sample (3 projects, totaling $17.5 million) of the 11 Trust
Territory projects, totaling $48.3 million, that were active as
of September 1998.

Our review was made, as applicable, in accordance with the
"Government Auditing Standards," issued by the Comptroller
General of the United States.  Accordingly, we included such
tests of records and other auditing procedures that were
considered necessary under the circumstances.

As part of the audit, we evaluated the accounting and management
controls over National and state government capital project
appropriations, expenditures, procurement, and construction
management.  Based on our review, we identified major internal
control weaknesses in all four  areas.  The internal control
weaknesses are discussed in the Findings and Recommendations
section of this report.  Our recommendations, if implemented,
should improve the internal controls in these areas.


**FOOTNOTES**

[2]:Under the Compact of Free Association, the Republic of Palau
was to receive all Section 212(b) funding ($36 million) during
the first year of the Compact.  However, the Compact, which was
actually signed by  the United States and the Republic of Palau
in January 1986, did not become effective until October  1, 1994
because the citizens of Palau did not ratify the agreement until
November 1993.  As a result of the delay, an inflation adjustment
provision contained in Compact Section 215 provided for $16.5
million in addition to the $36 million specified in Section
212(b).

PRIOR AUDIT COVERAGE 

During the past 5 years, neither the General Accounting Office
nor the Office of Inspector General has issued any audit reports
on Trust Territory- or Compact-funded capital improvement
projects in the Republic of Palau.  However, the Office of the
Public Auditor, Republic of Palau, issued single audit reports on
14 of Palau's 16 individual states for fiscal year 1996.  (Two
states had not prepared financial statements for fiscal year
1996.)  The single audit reports disclosed internal control
weaknesses related to the states' accounting systems and
compliance with the requirement that Section 212(b) funds should
be expended by the states only on projects for which funds were
appropriated by the National Government.  In addition, the single
audit report on the National Government for fiscal year 1997
disclosed weaknesses related to compliance with the National
Government's procurement law, compliance with reporting
requirements for U.S. Department of the Interior-funded capital
improvement projects, and the recording of project expenditures.
The weaknesses were similar to the procurement, administrative
charges, and project specification problems that we found during
our current audit, which related to the internal controls over
project procurement,  accounting for expenditures, and
formulating appropriations for capital improvement projects.

FINDINGS AND RECOMMENDATIONS

A.  NATIONAL GOVERNMENT PROJECTS

The Republic of Palau did not adequately manage construction
projects funded by the Trust Territory of the Pacific Islands and
the Compact of Free Association.  Specifically, the National
Government did not (1) ensure that cost estimates were prepared
prior to starting projects, (2) perform or adequately document
inspections made at project sites, (3) provide clear bidding
instructions to potential bidders, and (4) adequately document
administrative charges to projects.  The requirements for the
administration of the capital improvement projects were contained
in the grants by which Trust Territory and Compact funds were
provided to the National Government.  However, Palau's Division
of Design Engineering was not staffed with sufficient
professional and technical personnel for the scope and complexity
of projects under its control, did not have written project
inspection procedures, and did not have a training program for
Division staff.  As a result, capital improvement project funds
totaling almost $1.8 million were not used efficiently, and 11
Trust Territory-funded projects valued at $48.3 million were not
completed for periods ranging from 5 to 25 years after the funds
were made available for the projects.  We also found that the
$5.15 million grant to expand the Malakal sewage treatment plant
was not used as planned and that the existing plant was operating
beyond its design capacity, resulting in the discharge of
pollutants into the coastal waters adjacent to the plant.

Project Management

Based on a review of four National capital improvement projects
(three Trust Territory-projects and one Section 212(b)-funded
project), we found that the Division of Design Engineering did
not adequately manage these projects.  As  a result, the Division
approved questionable change orders representing cost increases
of $755,919 and may have to pay $255,000 more for a construction
project because of unclear bidding requirements.  In addition,
the National Government had to absorb labor and other
administrative costs totaling $765,731 that were disallowed by
the Office of Insular Affairs. 

Cost Estimates.  Cost estimates were not prepared prior to
starting the projects or negotiating contract change orders.
Consequently, the National Government had little assurance that
infrastructure projects were negotiated at the most advantageous
prices.  For example, on January 31, 1997, the Division issued a
Notice of Award for a $235,000 contract to construct a waterline
and storage tank in the Village of Imeong in the Ngeremlengui
State under a Section 212(b)-funded project. The scope of work
was expanded through a change order on November 17, 1997 to add
five additional waterlines.  The justification for the change
order stated that the five additional waterlines were not
included in the original bid proposal because the Division
believed that the combined costs would exceed project funding.
However, after the bid opening on November 8, 1996, the Division
realized that the whole system for the village, including the
five additional waterlines, could be constructed within available
funding limits.  Therefore, on May 14, 1997, the Division
requested that the contractor develop an estimate for the
additional work.   On October 20, 1997, the contractor provided
the estimate of $284,475 for the additional work, which was
accepted by the Division.  However, we could not find
documentation showing that cost estimates for each of the six
waterlines had been prepared by the Division prior to the
original solicitation of bids for the project.  When we requested
the National Government's estimated cost for the additional five
waterlines, we were given an estimate dated February 5, 1997,
which showed that the National Government's estimate was
$255,656, or $28,819 lower than the contractor's estimate and the
actual change order amount.  We were not provided any documents
that explained why the contractor was not required to accept the
National Government's lower estimate.  The Manager of the
Division of Design Engineering stated that he did not solicit
bids for the additional five waterlines because soliciting bids
would have delayed the project.

In another example, during the trenching for sewer lines on the
Trust Territory-funded Koror Wastewater System Improvements
Project (No. T-224), the contractor encountered hard rock.  The
Division of Design Engineering issued a change order to cover the
contractor's first invoice of $62,926 for rock removal on a "time
and materials" basis,[3] and the Office of Insular Affairs
approved this change order.  After more rock was found, the
Director of Design Engineering approved, on an incremental basis,
subsequent contractor billings totaling $375,393 to remove the
rock.  However, the Division of Design Engineering did not
perform any testing to estimate the total amount of rock that
would have to be removed and did not consider changing the method
of payment to a more favorable "volume" basis.[4]  Under the time
and materials basis, a contractor has little incentive to perform
work timely, since the contractor's payments are not dependent on
performing the work within specific time frames.  Because there
was no estimate on what the total cost would be and no
preapproval of any other change orders to cover the additional
charges, as were required under the grant agreement,  the
National Government incurred an additional $375,393 that was not
approved by the Office of Insular Affairs and that will not be
reimbursed under the project grant agreement.  Furthermore, the
project was delayed for more than 1 year when the contractor
stopped work in April 1997 because of nonreceipt of payment on
outstanding invoices.  The contractor resumed work in January
1999 after the National Government  agreed in writing to
compensate the contractor for the outstanding invoices.  As of
May 1999, the project had not been completed. 

Project Inspections.  The Division did not perform or adequately
document inspections made at the project sites.  For example, two
contract change orders, totaling $351,707, were approved to
repair leaks in the Peleliu State's existing waterlines as part
of the Trust Territory-funded Rural Water Systems Project (No.
T-209).  However, the U.S. Naval Engineering Command inspector
stated in his field inspection report that during his August 22,
1996 oversight visit to Peleliu, the Division's inspector
accompanying him could not identify where the contractor had made
repairs to the waterlines except for  three areas where water
valve replacements could be verified.  The Naval inspector also
reported that there were no signs of recent excavation along the
existing waterlines to indicate that leaks had been identified
and repaired.  The Naval inspector further reported that the
Division was unable to provide any records, including contractor
documentation, showing the scope of the contractor's work or its
approval by the Division's inspector. The project grant agreement
between the Office of Insular Affairs and the National Government
required the Division to inspect and verify construction work
prior to the approval of progress payments.  However, in this
case, the contractor was paid the total amount of  $351,707
without such inspections and approvals having been performed
and/or  documented.  The Minister of Resources and Development,
whose ministry has oversight responsibility for the Division of
Design Engineering, stated in a June 19, 1997 letter to the
Office of Insular Affairs that the National Government had
initially had an inspector on site but that the inspector's
employment contract expired during the project   and he was not
replaced.  The Minister further stated in the letter that it was
a "mistake" to rely on the contractor to perform the required
work without an inspector present to verify that the work had
been performed.  As a result of not being able to verify the
extent of repair work performed under the change order, the
Office of Insular Affairs capital improvement project coordinator
rejected the National Government's claim  for $351,707, an amount
that  ultimately will have to be absorbed by the National
Government.

Procurement Requirements.  In October 1998, the Division of
Design Engineering solicited sealed bids for the Trust
Territory-funded Koror Sewage Treatment Plant Expansion Project
(No. T-232).  However, the award of the contract was delayed
because of protests by the two firms that were bidding on the
contract.  The dispute related to whether the National Government
required the bid bond to be issued by a surety firm approved by
the U.S. Treasury Department or whether that requirement had been
waived by the Division's Manager.  According to the Palau
Attorney General, the Manager may have given conflicting and
unclear bidding instructions to the lowest bidder and that
because of this procedural error, the bidder, who was otherwise
considered responsive, was eliminated from consideration because
he did not submit a bid bond issued by a U.S. Treasury-approved
surety firm.  In April 1999, the Palau Attorney General ruled
that the contract could be awarded to the second bidder,
resulting in the awarded contract being $255,000 higher than if
the contract had been awarded to the lowest bidder.

Administrative Charges.  We determined that the Office of Insular
Affairs capital improvement project coordinator had rejected
National Government claims against Trust Territory-funded grants
totaling $765,731 that included vacation pay and administrative
costs because the charges could not be related directly to
specific projects.  For example, the Office of Insular Affairs
coordinator stated that he had denied the claim for the entire
cost of an inspector's vacation pay because the inspector had not
worked on the project during his vacation.  A pro rata portion of
the cost of the inspector's vacation is a legitimate project
cost, provided that (1) the Division uses an equitable basis to
allocate the cost to all the projects on which the inspector
works in the same proportion that the inspector's time is charged
and (2) the cost has not been recovered through the approved
indirect cost rate.  Therefore, the Division should develop a
method for allocating the vacation time and other fringe benefit
costs of inspectors equitably among all projects on which the
inspectors work and ensure that detailed distribution records are
maintained to document the basis of the allocations.

Division Staffing

We determined that the deficiencies relating to project
management occurred because the Division of Design Engineering
did not have (1) adequate staffing, (2) a properly qualified
manager, and (3) an active staff training program.  These
conditions are discussed in the paragraphs that follow.

Project Management Staff.  As of May 1999, the Division's
technical staff consisted of 1 licensed civil engineer, 2 civil
engineers (with degrees), 1 architect (with a degree), and 13
support staff (4 surveyors, 8 inspectors, and 1 draftsman).
However, this level of technical staffing was not in compliance
with the requirements of the Trust Territory grant agreements for
capital improvement projects and was insufficient to effectively
perform construction management for the National Government's
Section 212(b)-funded and Trust Territory-funded projects.  For
example, under the Koror Wastewater System Improvements Project
(No. T-224), which was started in 1992 and was in progress as of
May 1999, the Division was to be staffed by a manager/chief
engineer, a structural engineer, an electrical engineer, and a
mechanical engineer.  Although the Division had a civil
engineer[5] on staff during the review, it did not have
structural, electrical, or mechanical engineers on staff.  We
were unable to determine, because of the lack of documentation,
whether the engineers were included in the Division's budget.

The National Master Development Plan for the Republic of Palau,
issued in April 1996, recognized the critical function of the
Division of Design Engineering in implementing capital
improvement projects and specifically recommended that the
Division be staffed with additional personnel who had recognized
engineering qualifications and "substantial experience" in
project design and management.  The most recent position
classification plan for the Division was completed in April 1987
under the National Civil Service System.  According to the
Director, Bureau of Public Service System, none of the
engineering disciplines were included because the former Director
of the Bureau of Public Works had not requested that Palau's
Public Service System include engineering positions in the civil
service study. As such, the National Government had not taken
actions to fully staff the Division with qualified personnel.
Engineers were hired under contract when local qualified
engineers were not available, but the salary rates were not
competitive, which made it more difficult to hire qualified
replacements if the existing engineers did not renew their
employment contracts. 

Division Manager.  We found that the Division Manager, who had
held that position since September 4, 1994, did not have an
engineering degree or prior construction management experience.
Therefore, he did not meet the position classification
requirements that the Manager should be a graduate engineer or an
architect with 8 years of progressively responsible work
experience, including 4 years in a supervisory capacity.  In
addition, since May 1998, the Manager was also functioning as the
Acting Director of both the Bureau of Public Works and the Bureau
of Public Utilities.  In our opinion, the day-to-day operations
of three technical organizations should not be managed by one
individual.

Staff Training.  The Division did not have an adequate training
program to improve the skills of its staff with regard to project
inspection and construction procurement procedures.  The U.S.
Naval Facilities Engineering Command inspector stated that
Division staff did not have sufficient training or experience in
reviewing construction plans or were not trained in all
inspection tasks.  Based on the personnel files, we found that
only one inspector had received extensive training in inspection
and trade techniques and that he had received this training
during his employment as a civilian with the U.S. Navy from 1973
to 1991.  The Division's Manager stated that a training program
had not been established because the work load associated with
the high number of projects and budgetary constraints would have
precluded staff from attending the classes.  The Manager also
said that on May 20, 1999, he had requested assistance from the
Office of Insular Affairs project coordinator in obtaining
training for his staff from the U.S. Naval Facilities Engineering
Command on Guam in the areas of contract administration; field
inspection procedures in civil, mechanical, and electrical work;
document control; and project cost accounting and reporting.  The
Office of Insular Affairs had not responded to the Manager as of
the completion of our fieldwork.

The need for training in construction procurement procedures was
emphasized and recommended in April 1999, when Palau's Attorney
General, in an opinion concerning the construction procurement
dispute for the Koror Sewage Treatment Plant Expansion Project,
stated, "There are certainly many procedural problems in this
procurement which need to be avoided in the future.  These
problems appear to result from a lack of familiarity with the
procurement system and training."  Furthermore, the Attorney
General said that the position of procurement officer at the
Bureau of Public Works had been vacant for about 1 1/2 years,
which we believe may have contributed to the lack of oversight in
detecting the procedural errors occurring during the procurement
process.  The Attorney General stated that unless procurement
activities were conducted in an "orderly manner," the process
"will suffer and so will the quality of the procurements." 

We believe that if the National Government cannot augment
existing Division staff with qualified and sufficient numbers of
personnel and implement an effective staff training program, it
should explore the option of contracting out these functions to a
private engineering firm or to a U.S. Government agency, such as
the U.S. Naval Facilities Engineering Command.

Malakal Sewage Treatment Plant

The Malakal sewage treatment plant expansion project in the Koror
State was authorized $5.15 million in fiscal year 1993.  However,
at the time of our audit, construction of the plant had not begun
because the National Government had not determined which of two
alternate expansion options to pursue and because of deficiencies
in soliciting bids for the original construction contract.
Because the project has not been completed, the Office of Insular
Affairs indicated it may reprogram the funds to projects outside
Palau.  In addition, the existing sewage treatment plant
continued to operate beyond its design capacity, resulting in the
discharge of pollutants into the coastal waters adjacent to the
plant.

Existing Treatment Plant.  The Bureau of Public Utilities,
Ministry of Resources and Development, operates the Malakal
sewage treatment plant (see Figure 1), which is the only sewage
treatment plant serving the Koror State, the most heavily
populated area in Palau. The facility is a mechanical treatment
plant that was built in 1976.

In September 1985, authorization was given by the U.S.
Environmental Protection Agency for the discharge of treated
wastewater from the plant in accordance with limitations for
treated wastewater, monitoring requirements, and other conditions
imposed by the Environmental Protection Agency.  However, since
1993, the treatment plant's operations have not met these
requirements, and the Bureau of Public Utilities has been cited
on a continuous basis by Palau's Environmental Quality Protection
Board[6] for exceeding the discharge limitations (that is,
excessive floating materials, scum, turbidity, odors, and
coliform bacteria counts) and for not properly operating and
maintaining the treatment plant. 

In August 1994, the Wastewater Facilities Plan, which was
commissioned by the National Government, reported that the
Malakal sewage treatment plant was operating beyond its design
capacity and was in critical need of capital improvements for
plant expansion and upgrading, such as repairing or replacing the
compressor and the blower (see Figure 2).

The need to expand the capacity of the treatment plant to meet
not only the present demand but also the increased demand
expected from future economic development was also addressed in
the Republic of Palau's National Master Development Plan, which
was issued in April 1996.  The Master Development Plan stated,
with respect to the wastewater system, "Unless this expansion
takes place in the next few years, the Koror sewer system and the
Malakal sewage treatment plant will not be able to protect the
environment and the public health of the people of Koror."  In
June 1997, an engineering consulting firm issued its report
"Study of Wastewater Treatment & Disposal Alternatives," which
confirmed the need for expanded capacity.   The report stated
that since 1995, the estimated water flow at the plant had
exceeded both the plant's overall rated capacity and the
permitted effluent flow of 0.75 million gallons per day and
concluded that the treatment plant was "overloaded."

Expansion Proposals.  In an effort to assist the Republic of
Palau with its public infrastructure needs, the Office of Insular
Affairs has provided, since 1989, through the U.S. Army Corps of
Engineers, periodic independent reviews of the status of Palau's
public infrastructure.  The most recent review was completed in
February 1998.  In addressing deficiencies with the sewage
treatment plant that were identified through these reviews, Palau
received, during fiscal years 1993 through 1995, Trust Territory
funds totaling $5.15 million for the Koror Sewage Treatment Plant
Expansion Project[7] (No. T-232), which were intended to double
the capacity of the existing treatment plant.  In March 1997, the
final design for a "mirror-image" mechanical treatment plant was
completed by the National Government's consulting engineer.
However, in June 1997, the National Government contemplated
redesigning the project to incorporate a ponding system that
would interface with the existing mechanical treatment plant.
The ponding concept, which requires the use of man-made ponds to
hold the wastewater as part of the treatment cycle, was advocated
by a consulting engineering firm contracted by Koror State.  In
August 1998, the Office of Insular Affairs  informed National
Government officials that while it did not have strong objections
to the construction of a ponding system, the project needed to be
implemented soon, since funding for the project was appropriated
in 1993 because of  its urgency.  The representative further
stated that if actions were not taken to implement the project,
the Office of Insular Affairs would consider reprogramming unused
project funding to other capital improvement projects outside
Palau.

In October 1998, the National Government solicited sealed bids
for the project based on the original plans for a mechanical
treatment plant.  However, the award of the construction contract
was delayed because of deficiencies in the bidding process (see
the section "Procurement Requirements" in this report).  The
project was further delayed because, as recently as May 1999, a
traditional high chief for Koror State requested that the
National Government repair the existing plant and design and
build the alternate ponding system plant.  The Office of Insular
Affairs project coordinator stated that the concept of a ponding
system was a "promising alternative" as long as the necessary
land could be made available.  However, the U.S. Environmental
Protection Agency recommended against the ponding and  wetland
system because acreage was insufficient at the Malakal Island
site to construct the needed wetland of adequate size to meet
future population growth in Koror State.  Because the National
Government has not acted expeditiously to expand the sewage
treatment facility,  pollutants continue to be discharged into
the coastal waters adjacent to the plant.

Recommendations

We recommend that the President of the Republic of Palau:

1.  Direct the Minister of Resources and Development to request a
technical assistance grant from the Office of Insular Affairs,
U.S. Department of the Interior, for the purpose of contracting
with the U.S. Naval Facilities Engineering Command to perform an
assessment of  the technical and administrative staffing and
training needed by the Division, to develop an implementation
plan to correct any deficiencies identified by the assessment,
and to assist Palau in implementing the staffing and training
plans.

2.  Direct the Minister of Resources and Development to hire
individuals for the positions of Director, Bureau of Public
Works, and Director, Bureau of Public Utilities, in accordance
with established civil service regulations and rescind the
designation of the Manager, Division of Design Engineering, to
these positions.

3.  Direct the Director of the Public Service System to establish
civil service position classifications for professional
engineering and other technical positions identified in the
assessment performed in accordance with Recommendation 1.

4.  Direct the Minister of Resources and Development to ensure
that the Division of Design Engineering develops a method for
allocating the vacation time and other fringe benefit costs of
inspectors equitably among all projects on which the inspectors
work and maintains detailed distribution records to document the
basis of the allocations.

5.  Direct the Minister of Resources and Development to take
actions to expedite the completion of the Malakal sewage
treatment plant expansion project.

Republic of Palau Response and Office of Inspector General Reply

The April 7, 2000 response (Appendix 5) to the draft report from
the President of the Republic of Palau said that the Republic has
"already taken or will soon take" the actions specified in
Recommendations 1 through 5.  The Republic, however, should
provide the additional information on the recommendations
detailed in Appendix 6.

General Comments on Finding

The President's response provided additional comments on the
finding, which are addressed in the paragraphs that follow.

Project Inspections.  The response provided a historical
perspective on Peleliu Island's water system problems and the
capital improvement projects implemented to correct the problems.
Although the response did not address the lack of inspections by
the Division of Design Engineering for the particular project
identified in our report, the response did indicate that
additional funding and inspectors had been provided.  In
addition, Palau Public Law 5-34, which became effective on
September 28, 1999, included specific language for the Division
of Design Engineering to provide a greater level inspection of
nationally funded construction projects.

Procurement Requirements.  The response stated that the basis for
selecting the second lowest bidder for the sewage treatment plant
was that the National Government was concerned that awarding the
contract to the lowest bidder could put the project at risk if
the contractor should default because the contractor had not
obtained a bid bond from a U.S. Treasury-approved surety firm.
While we agree with the National Government's concern about the
potential risk if the contractor should default on the contract,
our audit concern was with the apparent informal modification of
the bonding requirement for the contractor that had the lowest
bid, which resulted in a protest being filed and the next lowest
bidder receiving the contract.  The  lack of uniformity in the
procurement process for the sewage treatment plant was part of
the reason why our report emphasized the need for procurement
training.

Project Management Staff.   The response stated that it is the
goal of the Division of Design Engineering, with the guidance
from the Minister of Resources and Development, to improve the
implementation of national and state capital improvement projects
through the application of approved construction standards at the
lowest cost. In that regard, two professional engineers are being
recruited, with additional funding being provided in fiscal year
2000 to hire two more inspectors.

Staff Training.   The response stated that the Division of Design
Engineering had made considerable progress in its ability to
manage capital improvement projects and that since 1994, 108 (90
percent) of 120 projects had been completed.  The response also
commented that technical assistance was needed to develop a
training program for the Division and that the development of the
training courses, as well as the actual conduct of the training,
was a long-term process.  The response included a description of
some of the construction-related training offered in 1995 and
1998 and stated that the Palau Community College had been
requested to develop a construction inspection course to be held
at night for inspectors.  We fully agree with the National
Governments's efforts to hire additional technical staff for the
Division and to provide job-related training.  Implementation of
Recommendation 1, that a technical assistance grant should be
requested from the Office of Insular Affairs, U.S. Department of
the Interior, for an assessment of the Division's staffing and
training needs, should help to improve the National Government's
ability to manage construction projects.

Reprogramming of Unused Funds.  Although the reprogramming of
residual balances of funds for completed Trust Territory capital
projects was not an audit issue, the response stated that Palau
had requested approval from the Office of Insular Affairs, U.S.
Department of the Interior, to have any unspent project
appropriations reprogrammed for use on national water and sewage
system improvements and other infrastructure purposes within
Palau, such as school building repairs.  However the response
further commented that such reprogramming was not allowed by the
Office of Insular Affairs.

**FOOTNOTES**

[3]:The time and materials method provides for the payment of the
actual labor, equipment, and material costs incurred. 

[4]:The volume method establishes a rate to be paid per cubic
measure of material excavated or filled in.

[5]:A civil engineer would have an understanding of the
structural, electrical, and mechanical disciplines but would not
have the in-depth knowledge that an engineer specializing in
these disciplines would have.

[6]:The Palau Environmental Quality Protection Board, which is
responsible for enforcing Palau's environmental laws,  was
created on May 25, 1983 with enactment of Republic of Palau
Public Law 1-58, the Environmental Quality Protection Act.  Palau
has adopted the U.S. National Pollution Discharge Elimination
System regulations that became effective in October 1994.

[7]:Although the grant for expansion of the sewage treatment
plant is officially titled the "Koror Sewage Treatment Plant
Expansion Project," referring to Koror State, the sewage
treatment plant is located on Malakal Island and therefore is
commonly referred to as the "Malakal Sewage Treatment Plant."

B.  STATE PROJECTS

The Compact Section 212(b) funds appropriated by the National
Congress of the Republic of Palau to the individual states of the
Republic were not used effectively and efficiently.
Specifically, the National Government funded state capital
improvement projects that did not appear to meet the long-term
economic development needs of the states but were based on
short-term operating needs, such as routine repairs and
maintenance of  roads, bridges, and other facilities and the
purchase of heavy equipment.  In addition, the Republic allowed
the states to procure construction services and manage
construction projects without the skilled personnel needed to
effectively perform these functions.  The Implementation
Agreement of the Compact of Free Association describes the types
of projects for which Section 212(b) funds can be used.  However,
the National Government did not take actions to correct the
deficiencies because the Palau National Code allowed each state
to procure and manage its construction projects.  As a result,
the National Government had little assurance that almost $4.3
million appropriated to the 16 states during fiscal years 1995
through 1999 would result in long-term economic development
improvements or that two states received full value for
facilities constructed at a total cost of $205,000.  In addition,
we believe that future economic growth could be hampered for the
states on Babeldaob Island if deficiencies related to road
construction and land use planning are not addressed.

Project Selection

Compact Section 212(b) funds were provided for "capital account
purposes" to assist the Republic of Palau in its efforts to
"advance economic development and self-sufficiency of the people
of Palau."  The Agreement Concerning Procedures for the
Implementation of United States Economic Assistance, Programs and
Services Provided in the Compact of Free Association between the
Government of the United States and the Government of the
Republic of Palau (hereafter referred to as the Implementation
Agreement) further required that Section 212(b) funds be used for
the "construction or major repair of capital infrastructure, the
financing of public sector projects identified in the official
overall economic development plans, or public sector
participation in private sector projects which are so
identified."  The Implementation Agreement specifically excluded
"normal operations and maintenance" as allowable uses of Section
212(b) funds.

Our review of 52 state-administered projects, totaling $5.2
million, that were funded by Compact Section 212(b) disclosed
that the National Government was aware of problems with the type
of capital improvement projects implemented by the states and
with the states' administration of the projects. This resulted in
little assurance that almost $4.3 million in appropriations would
result in long-term economic development improvements.  The
National Government attempted to address these problems as
follows:

- The Public Auditor's reports on the annual audits of each
state's financial statements disclosed significant deficiencies
in the states' accounting for Section 212(b) funds and with the
states' use of Section 212(b) funds for projects other than those
for which the funds were appropriated.  These deficiencies
occurred, according to the reports, because of the lack of
accounting systems that could track how the Compact funds
appropriated to the states were spent and the lack of  trained
accounting personnel at the state level.  As a result, the
National Government provided technical assistance to the states
to establish accounting systems and to train state personnel to
use the accounting system.  The National Government also
established internal controls that required each state to justify
the release of project allotments from the Bureau of National
Treasury to the state.  However, according to the Public Auditor
for Palau, accounting deficiencies still existed.

- During April and June 1997, the Senate Committee on Capital
Improvement Projects and Land Matters of the National Congress
reviewed state capital improvement projects to determine past
performance of the states and to set new priorities for future
appropriations.  Their report  addressed  problems with the
administration of state capital projects funded with local and
compact funds, such as regrading dirt roads instead of paving
them and purchasing heavy equipment and constructing buildings
without providing routine repair and maintenance.

- The President of Palau periodically performed site visits to
the states to view the progress of ongoing projects, but reports
on these visits were not prepared to summarize the results of the
President's visits.  However, the President's transmittal letters
that accompanied appropriations bills to the National Congress
highlighted similar deficiencies in the selection and
administration of state capital improvement projects, as well as
suggestions for correcting the deficiencies.  In fiscal year
1998, the President  vetoed all state projects proposed for
funding with Section 212(b) funds because of the  deficiencies he
had identified in the proposed projects.

- Officials at two agencies within the National Government's
Executive Branch said that they were concerned that the
environment on Babeldaob Island would be negatively impacted by
the construction of new roads and the lack of  zoning to control
development in the states.

Examples of deficiencies related to state capital improvement
projects that we identified during our review are discussed in
the paragraphs that follow.

Roads and Bridges.   During fiscal years 1995 through 1999, the
states received appropriations of Section 212(b) funds totaling
$2.02 million for road and bridge projects.  This amount included
$629,500 for the maintenance of roads, although the use of
Section 212(b) funds for regular road maintenance was unallowable
under the terms of the  Implementation Agreement and had been
questioned by the National Congress 1997 report on state projects
as an inefficient use of Section 212(b) funds.  For example, the
National Congress report was critical of the states for building
roads without paving them, which resulted in the continuous need
to regrade the roads and cover them with coral aggregate.  The
report stated that it would have been more economical to pave
each road as it was being built.  During our site visits to 7 of
the 10 states on Babeldaob Island, we identified deficiencies in
road maintenance projects that were funded with Section 212(b)
funds as follows:

- In fiscal year 1996, one state received Section 212(b) funds of
$40,000 for road maintenance.  According to the state governor,
the project was to "clear and clean ditches along the roads."
The state governor said that he could not maintain his state's
roads without the Section 212(b) funding.

- In fiscal year 1996, another state received Section 212(b)
funds of $50,000 to, according to the state governor, "patch up
the existing paved road with work performed by state employees"
and perform "monthly maintenance of the road."  In fiscal year
1999, this same state received $250,000 to be used to resurface
roads and for other state projects.

In our opinion, recurring repairs and maintenance of roads are
normal operating functions that should be funded through the
operating funds of the National Government and/or the state
governments.  Section 212(b) funds should be used only for the
construction or major reconstruction of roads.

We also determined that the National Government allowed the
states on Babeldaob Island to develop their own interstate and
intrastate road systems without any central coordination or
oversight from the National Government, which, according to the
Palau Environmental Quality Protection Board, has had a negative
environmental impact beyond the boundaries of the individual
states.  Specifically, in an April 15, 1998 letter to the
President of Palau, the Board said that many of the newly
constructed state roads had been "poorly planned, executed and
maintained" and were contributing "heavily" to the sedimentation
of streams and surrounding reefs on Babeldaob Island, which will
"eventually lead to their destruction."  Further, the Board
requested the President of Palau's support in declaring a
moratorium on all state road construction on Babeldaob Island
until the Compact Road[8] had been constructed to ensure that
future planning and construction of state roads would complement
the Compact Road, ensure accessibility between the Compact Road
and state roads, and minimize the negative environmental impact
of road construction.  However, the President did not support the
Board's request, and for fiscal year 1999, the National
Government appropriated Section 212(b) funds of $831,000 for
roads, including $821,000 for states on Babeldaob Island, which
consisted of $643,500 for new roads and pavings and $177,500  for
road  maintenance.

Heavy Equipment.   The Implementation Agreement allows Section
212(b) funds to be used for the purchase of heavy equipment but
not for the cost of normal repair and maintenance of such
equipment.  Despite this restriction and awareness by the
National Congress and the President (as detailed in the
paragraphs that follow) of the inefficiency of allowing each
individual state to purchase equipment without adequate
provisions for repairs and maintenance, appropriations of Section
212(b) funds continued to be made to individual states for heavy
equipment.

During fiscal years 1995 through 1999, the states received
Section 212(b) funds totaling $846,000 for various types of heavy
equipment to be used in building and maintaining roads and other
construction projects.  The President of Palau, in the November
5, 1997  transmittal letter accompanying his veto of the National
Congress proposed fiscal year 1998 state appropriations, stated
that "the Republic cannot afford to finance separate public works
road departments for state governments.  Much of the Republic's
road construction and repair [of] equipment could be performed in
a more cost-effective manner if the equipment were consolidated
at the national level."  Additionally, the National Congress 1997
report on state capital improvement projects was critical of the
states for not maintaining their equipment, which resulted in
equipment being "abandoned due to lack of parts, repairs, and
maintenance."  The report said that this practice was a "waste of
resources that the Republic could ill afford."  The report
further stated that the states should coordinate to develop plans
to more efficiently provide for the repair and maintenance of
equipment.  

During our site visits to 7 of the 10 states on Babeldaob Island
during the period of January 18  to April 5, 1999, we observed 13
pieces of state-owned heavy equipment, 9 that worked and 4 that
were in various stages of disrepair.  One state had a garage
where equipment could be worked on in inclement weather, while
other states had no equipment maintenance facilities.  In another
state, we observed a broken road grader that had been left on a
dirt road for at least 3 months.  A member of the U.S. Navy's
Community Action Team stationed in Palau, which  maintained its
own heavy equipment, stated that the action team  had offered to
transport the state's grader to the state's storage yard at no
cost but that the state official responsible for the equipment
declined the offer and left the grader on the road until the
needed parts arrived and could be installed.  Without performing
an in-depth analysis of the actual maintenance work performed on
the grader, we could not determine whether the grader had broken
down because of misuse or because of poor preventative
maintenance.  However, in fiscal year 1999, this state had been
appropriated Section 212(b) funds of $80,000 for "repair of
heavy equipment."

In discussing with state officials on Babeldaob Island the
President's November 1997 request for equipment to be
consolidated at the national level, one state governor stated
that consolidating state public works departments would not be
workable because the states might not cooperate.  However,
another state official said that he believed that  consolidating
state public works departments would be workable, at least on
Babeldaob Island, because the island is only 27 miles long.  We
were unable to identify any National Government official who was
responsible for working with the states to implement the
President's request for consolidation.  In fiscal year 1999, four
states on Babeldaob Island received Section 212(b) appropriations
totaling $414,000 for the purchase and maintenance of heavy
equipment.  Therefore, we concluded that actions had not been
taken to consolidate the public works departments of the states
to use Section 212(b) funds more efficiently and effectively to
meet the heavy equipment needs of the states.

Buildings and Facilities.   During fiscal years 1995 through
1999, the states received Section 212(b) funds totaling
$3,267,800 as follows:  $465,000 for sports facilities, $427,000
for community centers, $520,000 for bais,[9] $40,000 for school
buildings, and $1,815,800 for state administration buildings.
The National Congress 1997 report stated that many of the state
capital improvement projects financed with Section 212(b) funds
were "non-revenue generating and do not meet the economic
development objectives of each state and the nation."  The report
was critical of the appropriation of Section 212(b) funds for the
construction of the bais, stating that "most of  these bais have
been abandoned,   neglected and some are not being used at all."
During our site visits to selected states, we inspected a youth
center that had been constructed with Section 212(b) funds of
$175,000.  A National Congress Senator stated that the facility
did not appear to be used and was showing signs of neglect.
Based on our observations, we believe that, without additional
state revenues or supplemental operational funding from the
National Government, the states will not be financially able to
provide an adequate level of routine maintenance of facilities
constructed with Section 212(b) funds.  This lack of routine
maintenance may result in the deterioration of the structures and
the eventual need for additional funds to renovate the
facilities.  If this occurs, Section 212(b) funds of $3.3 million
will have been spent without long-term economic development that
produces additional revenues for the Republic of Palau and the
individual states.  

Land Use Planning.  The National Congress 1997 report on state
capital improvement projects stated that, in developing plans for
such projects, the states should consider the planned location of
the projects.  The report, to illustrate this point, described a
situation in which a state built its state capitol approximately
10 feet from an existing road, noting that if the road was ever
expanded, the building would have to be relocated.  The following
year, two agencies of the National Government's Executive Branch
cited the lack of control over development and land use planning
as follows:

- In an October 8, 1998 letter to the President of Palau, the
Environmental Quality Protection Board stated that the potential
existed for uncontrolled development on Babeldaob Island and
emphasized that each state should develop a land use master plan
and enact zoning laws to ensure that development in each state
proceeded in an "environmentally sound and sustainable manner."

-  In a December 1998 report titled "Land Use Implementation
Strategy for the Republic of Palau," the Bureau of Lands and
Survey recommended that the National Congress reinstate the Palau
Planning Commission, which was established by Title 31 of the
Palau National Code Annotated,  to implement  land use master
plans.  The report stated that "only rudimentary" land use
planning and zoning existed in Palau (which has only 188 square
miles of land) and that improper land use, such as that related
to constructing roads, dumping waste, and clearing land, can have
a significant negative impact on Palau's terrestrial and marine
environments.

During our visit to 7 of the 10 states on Babeldaob Island, we
also noted that urban planning had not been considered.  For
example, in one state,  a $100,000 community center had been
constructed on filled land on the ocean side of a road that
followed the shoreline.  The placement of the building was
approximately 6 feet from the edge of the filled land, which was
exposed to wave action.  The governor of the state where the
building was located said that the state did not have any zoning
laws which required that buildings be set back a specific minimum
distance from the shoreline.  In our opinion, because of the
placement of the building so close to the shoreline, wave action
during a storm could erode the filled land, resulting in the loss
of or damage to the community center.

We also found that only 4 of 16 states of the Republic of Palau
had land use master plans and that only 1 of the 16 states
adhered to some form of  zoning regulation.  Two of the state
governors  told us that rather than developing land use master
plans on their own, they were working on the development of a
combined master plan for all of the states.  One state governor
further stated that all 16 state governors supported the
development of a combined master land use plan for all the
states.  The state governor also said that a combined approach
should be used for land-use planning for Babeldaob Island because
not every state had sand beaches for resort hotels and that the
strengths and weaknesses of the states should be viewed as a
whole when planning for future development.  However, as of
September 1999, work on a combined land use master plan had not
reached the contracting stage.  In our opinion, because of the
negative impact that inadequate  land-use planning can have on
the long-term economic development and the environment of Palau,
a moratorium should be placed on future Section 212(b) funding of
state capital improvement projects until the recommendations made
in the Land Use Implementation Strategy for the Republic of
Palau, issued by the Bureau of Lands and Surveys, are
implemented.

Project Specifications.  We found that there was a general lack
of uniformity and sufficient detail in the information provided
to the Office of the President and the National Congress by the
states in justifying proposed capital improvement projects.  As a
result, key officials of the Executive Branch and the National
Congress were not fully aware of the scope of work and of the
total  funding required for each proposed project.  Therefore,
sufficient funds were not always appropriated to ensure
successful completion of the projects.  The National Congress
1997 report indirectly commented on this lack of information when
it stated that docks and piers were not built strong enough to
prevent erosion from the ocean and recommended that "sufficient
sums be appropriated on a one-time basis" to construct more
durable docks, which would save financial resources in the long
term.  The report also stated that approved projects were not
always started in the year for which funds were appropriated and
that the delays resulted in the costs of the projects being
increased.  Additionally, a state official told us that, in his
opinion, approved projects should not be started until sufficient
funds have been appropriated and are available to properly carry
out the projects.  However, we found that the Office of the
President and the National Congress had not taken corrective
actions to require states to standardize project proposals and to
provide greater detail as to the costs and other considerations
related to their proposals.  We found, for the fiscal year 1999
appropriation process, that the lack of adequate information on
proposed projects was evident.  For example:

- The written justification submitted by a state for Section
212(b) funding of $100,000 in fiscal year 1999 for the Back-Hoe &
Round Island Road Project stated that the state, "for
infrastructure purposes, . . . has a great need for a heavy
equipment" and that this "single equipment" would be used "to
clear a single road around the island and for other purposes."
The justification further stated that the road is included in the
state's Master Development Plan and that $100,000 is needed for
equipment, manpower, and other tools.  However, the information
provided in the justification did not identify the estimated
costs of labor, equipment, and materials needed to build the
road; the estimated time frame to complete the project; a
description of any environmental and zoning considerations or
lack thereof; and an estimate of future costs to maintain the
road.  The National Congress approved the appropriation of
$100,000, but the President of Palau subsequently vetoed the
appropriation without explaining the reasons for the veto.

- The National Congress approved another appropriation of
$141,000 for a state project to pave a 2-mile portion of a state
road.  The President of Palau subsequently reduced the
appropriation to $121,000 without explaining the reasons for the
reduction.  The state's executive officer stated that the
original $141,000 amount was not based on an engineering estimate
but was developed arbitrarily.  The executive officer also stated
that he was not sure whether the original estimate had included
the cost of preparing the roadbed for paving.  In this case, the
National Congress made an appropriation, and the President
changed the amount without detailed information as to the extent
of work required or a reasonable estimate of the project's cost.

The President of Palau said that he had not historically
requested that the individual states submit detailed information
and in a standardized format for proposed projects.  However,
both the President of the Senate and the Speaker of the House for
the National Congress agreed that project proposals were not
sufficiently detailed or standardized in format for the Office of
the President and the National Congress to use in deciding which
projects to fund and the amount of funding to provide.  The Chief
of the Division of Budget and Management,  which coordinates and
summarizes the detailed budget for the National Government, said
that it would be helpful to have standard budget submissions for
all state capital improvement projects.

Project Procurement and Management

States were performing the construction procurement and
management functions without adequately trained personnel.  This
condition existed because the Palau National Code allowed each
state governor or his/her designee to be the procurement officer
for construction services without specifying the qualifications
needed to function in that capacity.  We determined that states
had little assurance that costs totaling $205,000 incurred on two
Section 212(b)-funded projects were reasonable for work performed
or that the projects were properly designed and built.

Title 40, Section 608(a), of the Palau National Code Annotated
designated the Director of the Bureau of Public Works as the
National Government's procurement officer for construction,
architectural, and engineering contracts.  However, the Code
states that "the Procurement Officer for each state government
shall be that person designated by each state governor."
Further, Section 608(b) of the Code states, "The Procurement
Officers are authorized [to]: . . . procure or supervise the
procurement of all goods, services, and construction needed by
the government; . . . [and] . . . establish and maintain a
program for the inspection, testing, and acceptance of supplies,
services, and construction."  Since the law did not require any
minimum qualifications for the person designated as the
Procurement Officer, there was no assurance that the procurement
and project management functions were performed by qualified
individuals at the state level.  In addition, there was no
requirement in the Code that a National Government agency, such
as the Division of Design Engineering of the Bureau of Public
Works, should inspect the construction work performed.   

In that regard, the National Congress 1997 report stated that the
quality of construction was questionable and recommended that
projects involving construction be inspected by the Division of
Design Engineering.  However, the Division participated in state
projects only if requested by the individual states.
Additionally, in December 1998, as a result of problems with the
use of construction funds by the states, the President of Palau
requested that a manager/engineer from the Ministry of Resources
and Development assist the states with the design, engineering,
and procurement functions as a "project coordinator."  However,
this "project coordinator" position was not filled because of
staff shortages at the Ministry.

The Republic of Palau did not have a uniform building code; thus,
there were no construction standards for all buildings, roads,
bridges, and other structures.  The National Master Development
Plan, which was issued in April 1996, emphasized the need for a
uniform building code and stressed that electrical wiring,
sanitary facilities, structural design, and energy insulation
should be major elements of a uniform building code.  The
negative impact of allowing states to administer construction
projects without National Government oversight and without the
benefit of a uniform building code is illustrated by two state
projects as follows:

- State Capitol Expansion.  A state received Section 212(b) funds
of $65,000 to add a second floor to its state capitol building
(see Figure 3).  In August 1998, the state competitively awarded
a $35,000 construction contract, even though the original project
estimate was between $45,000 and $50,000.  After the project was
started, the state governor approved an $8,182 change order that
was requested by the contractor to add a concrete beam and a
column to the original construction designs. The state governor
(who was the state procurement officer and who also performed the
construction management functions) told us that he approved the
change order without checking with the architect who designed the
second floor addition because the contractor had concerns about
the roof sagging from its weight.  

During a visit to the project site on January 18, 1999, we
observed signs of honeycombing[10] in the bottom portion of the
beam that had been added to the structure.  The honeycombing
existed to such an extent that we could see the reinforcing steel
bars within the beam (see Figure 4).  We also observed that
channels were chipped into the walls to accommodate the
installation of electrical conduits. When we revisited the
project site on March 30, 1999, we noted that the additional beam
and a column that had been observed in January had been removed.
Additionally, the channels that had been chipped for electrical
conduits had been covered and plastered over, thereby concealing
the conduits.  

The contractor stated that the additional beam was removed by his
workers "without [his] permission" and that his concerns over the
need for additional support for the roof had not been resolved.
The designer of the project, who was an architect at the Bureau
of Public Works, stated that he was never contacted by the state
governor or the contractor regarding their concerns about the
adequacy of support for the roof.  The designer further stated
that his plans called for the electrical conduits to be laid
within the wall when it was constructed and not placed in
channels chipped into the wall after its construction.

On September 29, 1998, the state governor requested that the
Director of the Bureau of Treasury allot the remaining $30,000 of
the project balance.   The governor stated that he needed the
$30,000 to pay for the contract change order of $8,182, purchase
furniture costing $13,381 for the capitol building, and perform
renovation work costing $8,437 on the first floor of the
building.  The governor also stated that the work on the first
floor was not included as part of the initial scope of work
because he was not certain that there would be sufficient funds
to do all the desired work.  The governor further stated that
completion of the second floor work would cost about $49,000.
When we asked the governor how the $49,000 related to the $43,182
($35,000 plus $8,182) the contractor had received for work on the
second floor, the governor indicated that he was not certain.

Bridge Construction.  A state received Section 212(b) funds of
$140,000 to build a 46-foot-long and 20-foot-wide bridge over a
river as part of a road building project.  The state obtained the
services of an off-island engineer to design the bridge without
charge.  When we reviewed the plans and specifications that were
used for soliciting bids, we noted that there was no indication
on the documents of the designer's professional qualifications or
of the standards used in the design of the bridge, which,
according to the specifications, was supposed to be able to
accommodate an "80-ton crawler crane."  The state governor, who
was also the state procurement officer, awarded a contract of
$139,481 to the highest of three bidders after two of the bidders
were disqualified for not complying with bidding instructions.
The governor stated that he managed the project himself,
including performing inspections, without oversight by the
Division of Design Engineering.  He also said that the contractor
had hired an individual experienced in bridge building to manage
the construction project for the contractor.  However, when we
asked the governor for inspection records documenting that the
five steel "H" piles needed to support one end of the bridge had
been driven to the required depth,[11]  records were not
provided.  In addition, during our site visit to the bridge on
March 30, 1999 (see Figure 5), we observed that the wing wall[12]
on one side of the bridge was cracked and that, because the wing
wall on the same side was not long enough to prevent erosion of
the embankment, a makeshift structure of sheet metal and tree
branches was used to stop erosion (see Figure 6).

The state's executive officer said that he was uncertain of the
status of the cracked wing wall but that it would "probably" be
repaired prior to completing the backfilling of the area
adjoining the bridge ends and that the embankment would also be
stabilized.

In summary, we believe that because of inadequate oversight of
capital improvement projects at the state level and no uniform
building code, there was little assurance that projects were
designed and built properly.  In discussing these deficiencies,
both the President and the leadership of the National Congress
said that they were concerned that implementation of corrective
actions might be perceived as an infringement of the National
Government on the sovereignty of the individual states.  However,
because the states receive  Compact Section 212(b) funds through
appropriations, the National Government is ultimately responsible
for ensuring that the  funds are used efficiently and effectively
for Palau's long-term economic development.

Recommendations

We recommend that the President of the Republic of Palau:

1.  Take actions, in accordance with the Compact, to prohibit the
use of Section 212(b) funds for the repair and maintenance of
roads, equipment, and structures.

2.  Identify and develop an inventory of the existing and
proposed state roads that make up the National interstate road
system for Babeldaob Island so that future state road
construction can be properly integrated into an overall roadway
system encompassing the Compact Road and individual state roads.

3.  Develop and implement a plan to consolidate the heavy
equipment resources for road maintenance of the states on
Babeldaob Island.

4.  Provide technical assistance to the states for the
development and implementation of master land use plans on either
a national or a state level.

5.  Enforce Title 31 of the Palau National Code Annotated
regarding zoning and request that the Office of Insular Affairs,
U.S. Department of the Interior, provide technical assistance to
the states for development and implementation of zoning laws on
either a national or a state level.

6.  Establish written procedures for the development of detailed
state capital improvement project proposals, including a
standardized format to be used by the states when they request
Compact funding for such projects.

7.  Submit proposed legislation to the National Congress to amend
Title 40 of the Palau National Code Annotated to require the
Director of the Bureau of Public Works to procure constructions
services for all capital improvement projects appropriated to the
states and to require the Division of Design Engineering to
either provide or procure project management and inspection
services for such projects.

8.  Submit proposed legislation to the National Congress to
require the National and state governments of the Republic of
Palau to adopt a uniform building code and appropriate standards
for bridge construction.

Republic of Palau Response and Office of Inspector General Reply

The April 7, 2000 response (Appendix 5) to the draft report from
the President of the Republic of Palau indicated concurrence with
Recommendations 1, 3, 4, 6, 7, and 8 and nonconcurrence with
Recommendations 2 and 5.  Based on the response, we considered
Recommendation 1 resolved and implemented.  Also based on the
response, we revised Recommendations 2 and 5.  We request that
the Republic respond to the revised recommendations, which are
unresolved, and provide target dates and/or titles of officials
responsible for implementation of Recommendations 3, 4, 6, 7, and
8 (see Appendix 6).

Recommendation 2.  Nonconcurrence indicated.

Republic of Palau Response.  The response indicated
nonconcurrence with Recommendation 2 in the draft report, which
called for a moratorium on road construction until the Compact
Road on Babeldaob Island was completed.  The response also stated
that construction of an  "appropriately sited" interstate road
system should continue.

Office of Inspector General Reply.  The recommendation was based
on concerns expressed by the Palau Environmental Protection Board
in an April 15, 1998 letter to the President, which stated that
previously constructed state roads on Babeldaob Island were
poorly planned, executed, and maintained, which therefore
contributed to sedimentation of streams and surrounding reefs.
Although the Environmental Protection Board's letter did not
identify the funding sources, Compact Section 212(b) funds of
more than $2 million were used to fund state roads and bridges,
of which $629,500 was for unallowable road maintenance during
fiscal years 1995 through 1999.  Therefore, we believe that there
should be a coordinated approach to constructing the Compact Road
and individual Compact-funded state roads that will result in a
well-planned interstate road system on Babeldaob Island.  We were
unable to determine whether such a coordinated approach was being
followed because, during the audit, we were unable to identify
which existing or proposed state roads had been officially
designated as part of a national interstate road system.  In
keeping with our original intent and considering the President's
response, we have revised the recommendation to require the
National Government to develop an inventory of current and
planned roads that will connect to the Compact Road as part an
interstate road system for Babeldaob Island.  This inventory
should assist both the National Government and the individual
state governments when identifying road projects to be financed
through Compact Section 212(b) funding.

Recommendation 5.  Nonconcurrence indicated.

Republic of Palau Response.  The response stated that the
National Government could not enforce existing zoning laws within
Koror State, which already has state zoning laws, because of the
separation of state and national government rights under Palau's
Constitution.  In addition, the response stated that the National
Government did not presently have the manpower or the expertise
to assist the states in developing and implementing zoning laws.  

Office of Inspector General Reply.  The response did not address
the lack of land use planning and zoning that the National
Government's  Bureau of Lands had identified in a December 1998
report.  The Bureau's report concluded that the lack of land use
planning and zoning represented a serious threat to Palau's
terrestrial and marine environments. While there may be concern
on the part of the Republic about infringing on the rights of
individual states, we believe that the National Government has a
responsibility to identify problems on a national level and then
to function as a catalyst for corrective action to ensure that
all states address such problems as uncontrolled land use.
Recommendation 5 took into account the conflict of National
versus state rights by including the option for the National
Government to "provide technical assistance to the states for
development and implementation of zoning laws on either a
national or state level."  (Emphasis added.)  This approach
provides a measure of flexibility to the process and still
provides a basis for addressing  national concerns over
unregulated land use.  We have revised the recommendation to
state that the National Government should request the Office of
Insular Affairs, U.S. Department of the Interior, to provide
technical assistance in developing zoning laws.

**FOOTNOTES**

[8]:Compact Section 212(a) required the U.S. Government to build
a paved road around Babeldaob Island.  The contract for this
project was awarded in April 1999, and the project was being
managed by the U.S. Army Corps of Engineers.  This Compact-funded
road is commonly referred to as the "Compact Road."

[9]:Bais are traditional meeting houses in Palau where the
cultural leaders within each state meet to discuss various issues
affecting their community. 

[10]:Honeycombing is a condition in which air pockets or voids
are left in concrete structures. This condition is prevented by
vibrating the concrete when it is poured into the forms to allow
it to settle and fill all air pockets.

[11]:Documentation on the driving of each pile should be detailed
enough to show that the contractor met the design specifications
for the driving of the piles.  In this case, the specifications
required that each pile be driven to a depth of 39.37 feet.  The
driving could be stopped only  if "hard rock" was encountered
before the required depth was reached.  Accordingly, an
inspector's documentation of this portion of the contractor's
work should have been detailed enough to show how deep each pile
was driven and the basis for determining that "hard rock" was
reached for piles driven less than the required 39.37 feet.

[12]:Wing walls are retaining walls adjoining the ends of the
bridge that are used to keep the backfill on each side of the
bridge from eroding into the river.

Recommendation 7.  Concurrence indicated.

Republic of Palau Response.  The response indicated concurrence
with the recommendation but stated that because of the issue of
states rights, a proposed amendment to the procurement law will
be introduced to require the Director of Public Works to be the
Procurement Officer for only nationally funded construction
projects appropriated to the individual states.  The response
further stated that since this proposed amendment to the
procurement law would  include construction projects financed by
Compact Section 212(b) funds, the types of problems identified in
the report should be avoided in the future.  The response also
stated that, in anticipation of the increased work load at the
state level, additional technical staff for the Division of
Design Engineering will be requested for fiscal year 2001 to
address the construction management and inspection of the
nationally funded state construction projects. 

Office of Inspector General Reply.  The alternative action
proposed by the President meets the intent of the recommendation.
The target date and title of the official responsible for
implementation of the recommendation, however, are needed.

APPENDIX 1


CLASSIFICATION OF MONETARY AMOUNTS


-----------------------------------------------------------

                                            Funds To Be Put
Finding Areas                                To Better Use 
-----------------------------------------------------------
A.  National GovernmentProjects                  $404,212 *
              Cost Estimates                     351,707 **
              Project                           255,000 ***
              Inspections                        765,731 **
              Procurement
              Requirements                       $1,776,650
              Administrative Charges         $4,311,300 ***
              Subtotal                          205,000 ***

B.  State Projects 
    Project Selection
    Project 
    Procurement and Management
    Subtotal                                     $4,516,300

    Totals                                       $6,292,950
-----------------------------------------------------------
-----------------------------------------------------------

*Amount consists of Federal funds of $28,819 and 
 local funds of $375,393. 
**Amount represents local funds
***Amount represents Federal funds.


APPENDIX 2


COMPACT SECTION 212(b) AND RELATED FUNDING
PROVIDED TO THE REPUBLIC OF PALAU
AS OF SEPTEMBER 30, 1998

-----------------------------------------------------------------
Description         FY-       FY-       FY-     FY-      Totals 
                    1995      1996      1997    1998 

Compact Section 212(b) Funds   $36,000,000 0  0  0    $36,000,000
Awarded
Compact Section 215 Inflation   16,560,000 0  0  0     16,560,000
Factor Funds Awarded
Interest Earned on Compact Funds         $7,839,085    $1,949,366
(Net Expense)                3,568,086 $4,509,119      17,865,656
Compact Funds Awarded and  $56,128,086 $7,839,085 $1,949,366 
  $70,425,656
Interest Earned                                         4,509,119
Prior Year Unappropriated Funds   Brought Forward   0  42,409,286
  31,021,205  30,689,290
Net Compact Funds Available  56,128,086  46,918,405   38,860,290 
  32,638,656
Less Unappropriated Funds Carried  Forward            42,409,286 
  31,021,205  30,689,290  25,658,656
Appropriations of Compact Funds        $13,718,800   $15,897,200 
  $8,171,000  $6,980,000  $44,767,000
Prior Year Appropriations Brought Forward     0        10,840,973
  16,249,439  11,168,885
Total Available  Appropriations      $13,718,800      $26,738,173
  $24,420,439  $18,148,885
Less Expenditures    $34,425,772    -   -2,877,827    -10,488,734
  -13,251,554  -7,807,657

Unexpended Appropriations Carried Forward             $10,840,973
  $11,168,885  $10,341,228  $16,249,439 


APPENDIX 3


CAPITAL IMPROVEMENT PROJECTS FUNDED BY
THE TRUST TERRITORY OF THE PACIFIC ISLANDS
AS OF SEPTEMBER 30, 1998


Project Title
Project  Fiscal     Total            Total             Available
Number   Year    Authorizations   Expenditures          Balances

Rural Water Systems       T-209   1984    $9,985,707  $9,064,960
  $920,747

Koror Wastewater System    T-224   1991    2,370,479  1,278,641 
  Improvements                                         1,091,838

Koror Wastewater System Deficiency T-225    1991         654,081
  Corrections                             28,399         625,682

Koror-Airai Water System   T-231  1993  500,000  452,517  47,483
  Improvements

Koror Sewage Treatment Plant       T-232     1993      5,150,000
  Expansion                                285,915     4,864,085


Koror Wastewater System Pump  T-233  1993 483,000 84,955 398,045
  Station Upgrade

Palau National Hospital     T-268   1986  23,144,272  23,031,320
  112,952

Palau National Hospital-Equipment     T-268   1992    1,974,800 
  1,077,998  896,802

Koror-Airai Electric Power   T-269  1973 1,452,547  0  1,452,547
  Improvements

Koror-Airai Electrical     CH6354  1990    35,000     0   35,000

Capitol Relocation       T-272   1988    $2,600,000   $2,206,211
                                                       $393,789 

Total Funding              $48,349,886  $37,510,916  $10,838,970


APPENDIX 4


COMPACT SECTION 212(b) FUNDS APPROPRIATED TO
THE STATES OF THE REPUBLIC OF PALAU
AS OF SEPTEMBER 30, 1998


Project Category  FY 1995  FY 1996  FY 1997   FY 1998   FY 1999*
  Totals

Electrical Generators   $65,500                          $65,500

Boats and Engines    0     $728,000   $200,000   0      $390,000
                                                       1,318,000

Heavy Equipment   132,000   279,000   0   0   449,000     860,000

Buildings and  1,007,800   925,000   0   0   1,335,000  3,267,800
Facilities

Docks and Marinas   345,000  333,000   0   0   405,000  1,083,000

Roads and Bridges   479,000  712,000   0   0   831,000  2,022,000

Water Systems and Other    291,500    2,012,000   0   0   986,000
Projects                                                3,289,500

Total $2,320,800 $4,989,000 $200,000  0  $4,396,000$  11,905,800 
Appropriations

*Fiscal year 1999 Compact Section 212(b) appropriations were
effective on November 24, 1998.    


APPENDIX 5


Page 1 of 9


April 6, 2000
Serial: 141- 00

Mr. Robert J. Williams
Assistant Inspector General for Audits
Office of the Inspector General
U.S. Department of the Interior
Washington, D.C. 20240

Re: DRAFT AUDIT REPORT NO. N-IN-PAL-002-99-R

Dear Mr. Williams:

Thank you for the opportunity to respond to the draft audit
report referenced above dated Februarv 17, 2000, regarding
management and oversight of selected construction projects in the
Republic of Palau. Our response Will follow the draft audit
report findings and recommendations in terms of being divided
into Part A. National Government Projects. and Part B. State
Projects.

In response to Part A of the draft audit report. we are pleased
to say that we have instituted significant improvements to the
Palau National Government Capital Improvement Program/Design
Engineering Office (hereafter. CIP Office ) related to the
auditor recommendations offered while the audit was in progress.
These efforts have been assisted by additional funding that has
been provided this f seal year for the CIP Off ce for additional
necessary operating, expenses and to hire two additional
construction project inspectors. Other improvements are also
discussed throughout this letter.

The Palau lKational Congress (the Olbiil Era Kelulau. or OEK )
has authorized the Ministry of Resources and Development ("MRD")
to prepare. design and implement national construction projects
in accordance v, ith appropriation laws and other relevant laws
of the Republic of Palau. The CIP Office works in accordance with
guidelines and procedures set forth by the Ministry of Resources
and Development. ~ eeislation enacted in October 1999 directed
the CIP Office to inspect national and state construction
projects to ensure proper

Page 2 of 9

project implementation in accordance with accepted construction
standards (ref: Republic of Palau Public Law No. :-34, Section
26). Under this section, the C1P Office was directed to adopt
regulations that set the standards for building government
construction projects.

In specific response to audit recommendations, we have already
taken or will soon take the following actions:

1.      The Ministry of Resources and Development will work with
the Office of Insular Affairs, U.S. Department of the Interior.
regarding a request for a Technical Assistance Grant to contract
with the U S. Naval Facilities Engineering Command to perform an
assessment and evaluation of the capabilities of the CIP/DEO.

2.      The Ministry of Resources and Development and the Bureau
of Public Service System have coordinated their efforts for
recruitment of qualified individuals.

3.      The Bureau of Public Service System follows an approved
civil service classification system for all government employees.
If the assessment described in point I above results in
recommendations for classification of professional engineering
and other technical positions. the Bureau of Public Service
System will be directed to add any new classifications. or change
existing classifications.

4.      The Ministry of Resources and Development CIP Office has
recently worked with the Bureau of National Treasury, Division of
Finance and Accounting. to establish specific guidelines for the
allocation of annual. sick and other leaves of absence of CIP
Office staff to appropriate overhead. administration, or
construction accounts.

5.      The Ministry of Resources and Development have agreed to
the request of the Koror State Government for the use of a
combination mechanical/wetlands ponding system for the Malakal
Waste Water Treatment Plant. Accordingly, a Request for
Qualifications has been issued to interested contractors. We have
also requested the Attorney General's Office for assistance in
reviewing the legal aspects of the RFQ in light of a previous
awarding of a contract to a local company to do the original work
(prior to the change in scope to add ponding)

Enclosed are copies of correspondence and other documents related
to the above points, for your reference.

We would like to clarify some of the questions and concerns
mentioned in the audit report

Page 3 of 9

about specific projects. For the Peleliu Water Project and the
Echang Sewer Project, Mr. Mark Braccia, a U.S. Registered
Professional Engineer, was assigned these projects while working
in the CIP Office during the period 1995 - 1997. This conforms to
the requirement that construction projects funded by the
Department of the Interior ("DOI") are to be managed by a
qualified professional engineer. Regarding the change orders for
these two projects, these chance orders were orally agreed upon
at that time by the DOI construction consultant and Mr. Braccia.
in order to proceed with the chances in the work in order not to
delay the projects. Within the same period the DOI Palau office
was closed, which affected project coordination with DOI. During
that time also, the contractor was already working on the change
orders without the normal change order procedure. By the time the
CIP Office was notified by the DOI Palau office (when it was
reopened) that the change orders where not approved. the
contractor had already completed the work including the changes
made on orlglnal scope.

Phase I of the Peleliu Water Svstem project (done by OICC) was a
Canvas Water Catchment at the Peleliu air strip (i.e.. airport)
and wood platform to hold 3 ten thousand gallon tanks situated on
the hill were found not sufficient to satisfy its intended
purpose. In 1995 - 1996. the CIP Office received approval from
DOI to improve the water system at the school area and Imelechol
Hamlet and at the same time the contractor.Monterey Mechanical
Company ( MMC") replaced the wood platform done by OICC with
concrete. This item was overlooked during the time of OICC and it
had to be replaced with concrete in order for the platform to
support the 3 water tanks without them breaking or collapsing.
Before this change was made, the water operator had to stop using
these tanks for safety reasons. In addition to the platform the
contractor (MMC) was also able to trace and repair the leak at
the existing water line. These changes (platform and repair of
leak) have benefited the people of Peleliu by providing them a 94
hours daily water supply system.

Regarding deficiencies on some of the old projects managed by
OICC. the government was able to secure Grant Aid from Japan to
correct several deficiencies. Notable among these projects is the
additional water line from Ngerikiil in Airai to fill the 500.000
gallons water tank at Ketund (hill) at Meyuns Hamlet in Koror.
This was necessary because upon project completion there was not
sufficient water pressure to fill the tank. The same situation is
also the case at the Malakal water tank where the pressure is not
sufficient to reach the tank. Funding will be sought to install
additional lines in order to utilize the tank.

The CIP Office with the guidance of the Minister of Resources and
Development as the Contracting Officer always strives to improve
the implementation of national and state CIP projects to meet
approved construction standards at the lowest cost. This is done
with the

Page 4 of 9

support and cooperation of the CIP management. engineers,
architects, surveyors, inspectors, and administrative staff
available. In addition to the current staff, two professional
engineers are presently being recruited to assist in the Compact
Road and Capital Relocation CIP projects. Within this fiscal year
it is also planned to hire an electrical andlor mechanical
engineer to augment the technical staff.

The CIP Office is working closely with all parties involved in
CIP projects to ensure that the implementation of projects
throughout the country adheres to the procurement law of the
Republic of Palau. In the case of bidding for the Malakal Waste
Water Treatment Plant (i.e., the Koror Sewage Treatment Plant
Expansion Project), the CIP Office and the Minister of Resources
and Development after careful evaluation and study of the
participants deemed it best not to put the Palau National
Government at risk by awarding a contract of this magnitude ($3
million) to a company from a foreign country that conducts
business in a manner different from Palau. In addition, we were
concerned about what recourse Palau would have in the case of a
contract default by the contractor. It was believed that in the
event the contractor could not fulfil its contractual
obligations. recovering Palau's financial investment might prove
to be difficult. Therefore. the issue involved was not simply a
matter of bid bonds, it was a matter of having requiring a bid
bond issued by a U.S. Treasury-approved surety firm so that Palau
would have an acceptable legal avenue to recover damages.
Procedural errors made in notifying the bidders, particularly the
foreign contractor, of bid bond requirements will be avoided in
the future by issuance of clearer bidding instructions.

The Republic of Palau is a young independent nation in the
process of development and may require aid and technical
assistance from other nations from time-to-time. Implementation
of audit recommendations cannot happen overnight. as the process
of systems development, staff training, and other improvements
take considerable time. We will, however, continue to train and
develop local staff to meet U.S. standards. For your information.
the following is a list of training completed and planned for the
CIP Office staff:

6.      In late 1994 and early 1995, the CIP Office sent four
inspectors to participate in an OICC electrical training for
inspectors course. This was funded by the DOI.

7.      In 1998, most of the CIP staff attended a computer
training course specifically on Auto-CAD. This training assisting
the CIP Office in being able to produce better and faster
drawings (architectural and engineering, including surveys)
thereafter.

8.      We have requested additional staff training, through the
DOI - Palau office. We are

Page 5 of 9

waiting for a reply and to firm up the training courses, venue
and schedule.
9.      We have requested that Palau Community College ( PCC")
draft a training course for construction inspectors to be held at
night. PCC is currently working with us on this project.

Regarding the residual balances of several DOI-funded projects
that have been completed, the CIP Office has made numerous
requests to utilize the remaining funds for purposes related to
original U.S. appropriations, with the intention of improving the
scope of the work of key projects. This is similar to what has
been done with several CIP projects funded with Palau National
Government funds, whereby the lowest bid received is less than
the amount budgetedlappropriated for a project, and the savings
are used to improve the scope of the work. We have requested
using DOI CIP project residual balances to improve existing water
systems, to improve the Koror sewer system, and for other
infrastructure purposes such as school building repairs. It is
our understandin_ that Palau will not be allowed to use any of
the residual balances of DOI CIP projects, that these funds will
be either returned to the U.S. Treasury, or "pooled" to be
re-used for high priority projects in the Freely Associated
States. although Palau may not have projects that are as of high
a priority as the other Freely Associated States.

Since 1994 the CIP Office has managed 120 projects, of which 90%
have been completed. There is no doubt that these projects have
provided great benefits to the people of Palau in terms of better
infrastructure and the services they provide -- thereby improving
the quality of life, and similarly, improvin_ the economy of
Palau. Although the changes may not be so obvious to an outsider,
the CIP Office has through the years gained considerable
knowledge about the administration and management of CIP projects
through this varied and intense experience. Together, the
Minister of Resources and Development. as Contractin_ Officer
(i.e., Procurement Officer), and the CIP Office. as the
construction projects manager, have always been very
conscientious in the preparation and awarding of construction
contracts. In cases where contracting questions arise, the Office
of the Attorney General is requested to clarify and settle
specific issues and concerns raised by the parties involved,
prior to any decision on awarding of a contract. Processing
contracts and change orders in accordance with applicable laws.
and in the case of DOI-funded projects. with DOI approval. has
always been a foremost concern of the CIP Office.

The audit findings and recommendations regarding Part B. State
Projects, have also been reviewed and the response to the
recommendations stated on page 24 of the report follows.

Page 6 of 9

The President will ensure that Compact Section 212(b) funds are
no longer utilized for the repair and maintenance of roads,
equipment and structures, by taking all appropriate actions
necessary to ensure that Palau remains in compliance with the
letter and spirit of the Compact of Free Association. The
President will not introduce appropriation legislation that
proposes use of Section 212(b) funds for other than allowable
purposes specified in the Compact. Because the Olbiil Era Kelulau
("OEK") frequently changes the President's proposed sources of
funds for appropriations and also add new items to appropriation
bills, the President will also carefully review legislation prior
to passage by the Olbiil Era Kelulau, and upon the legislation's
passage, to determine if Section 21 2(b) funds have been used
inappropriately, and if so, to take whatever action is necessary
to correct the funding problem.

2.      While Palau agrees that road construction on Babeldaob
must be done in a coordinated manner and should be undertaken
with the ultimate goal of establishing a well-planned and
fully-integrated interstate road system. the length of time which
has gone into planning the Compact Road, the details with which
such plans have been laid out. and the considerable amount of
time it will take to complete the Compact Road makes a complete
moratorium on all road construction throughout Palau unrealistic
and unnecessary. The construction of new roads on islands other
than Babeldaob should not have any impact on the Compact Road.
The construction or upgrading of certain roads, especially
appropriately sited connecting roads, on Babeldaob can be
undertaken without compromising the goal of a well planned and
fully-integrated road system largely because there is little or
no room for changes to the existing plans for the Compact Road.
The Compact Road s route and many of the necessary points of
connection to the Compact Road can be plotted with certainty. As
a result, planning and, to an extent. construction of additional
roads on Babeldaob can be conducted while construction progresses
on the Compact Road and still allow for the desired result.

3.      The Ministry of Resources and Development will initiate
efforts to develop a plan to consolidate national and state
government heavy equipment resources for road maintenance,
provided that a study corroborates the audit recommendations. The
proposed study would address the feasibility and necessity of
centralized heavy equipment pool compared to a decentralized
heavy equipment system (in which states retain road construction
and repair equipment for their own use). There are many policy
issues involved in this maker, including states' rights and
ownership of equipment, and manpower availability at the national
government level.An equipment

Page 7 of 9

consolidation plan would have to have the full support and
cooperation of the state goverurnents. The national government
does not have authority over state governments, and cannot force
any state to turn its heavy road equipment into a "pool." The
possibility of creating an equipment pool by law may also be
explored

4.      RPPL No. 5-3 8 appropriated $440,000 for development of
master plans for all states Within the constraints of limited
manpower and finances, the national government will also make
every effort to provide technical assistance to the states for
the development and implementation of master land use plans.

5.      The National Government shares the Auditor s concern that
the zoning laws of the State of Koror should be enforced in
Koror. However, under the Constitutional government of the
Republic, similar to that of the United States, there are
federalism concerns implicated by the Auditor's recommendation
which may limit the Republic's ability to implement this
suggestion. Pursuant to the Constitution and laws of the Republic
of Palau, the enactment, policing, and enforcement of the Koror
Zoning Law has been committed to the discretion of the state,
specifically, to the Buildin_ and Zoning Official of Koror State.
It would be an illegal arrogation of authority for the National
Government to attempt to enforce that law without an act of the
Olbiil Era Kelulau rescinding the authority which has been
granted to Koror State to establish zoning and building codes
within its jurisdiction. Nonetheless, the National Government
will confer with and, to the extent permitted by law, work with
Koror State to see that the existing provisions of lay, are
enforced there. The Executive Branch of the Palau National
Government does not presently have the manpower and expertise to
provide technical assistance to the states for development and
implementation of zoning laws.

6.      The Ministry of Resources and Development will work with
the Ministry of Administration to establish written procedures
for the development of detailed state capital improvement program
project proposals. including a standardized format to be used by
the states when they request Compact funding for such projects.
This is expected to be completed in time for states to submit CIP
project funding requests for fiscal year 2001, late in fiscal
year 2000. The state CIP proposals would require submission of
preliminary; cost estimates, the proposed scope of work, the
projected future operations. maintenance and repairs costs of
each project, as \vell as specifying future responsibilities in
these areas.

7.      The existing provisions of Title 40, which expressly
declare that the laws and

Page 8 of 9

procedures set forth therein apply to all procurement actions
within the Republic, whether by the National Government or the
State Governments (see 40 PNCA *603), and also expressly identify
the Director of the Bureau of Public Works as the Procurement
Officer for construction projects (see 40 PNCA *608). However,
part (a) of this later section of the PNCA also states that ;'The
Procurement Officer for each state government shall be that
person designated by each state government." Therefore, state
governments have been responsible for procurement of goods,
construction and contractual services for all funds under their
authority, including national government appropriations for state
CIP projects. Therefore, it is proposed to amend the law so that
for the obligation and expenditure of funds resulting from
revenues generated by the states, the Procurement Officer for
each state government shall be that person designated by each
state government. For funds which each state receives from the
national government for state CIP projects, the Director of
Public Works shall be the Procurement Officer. For funds which
each state receives from the national government for the purchase
of goods or contractual services (other than construction,
architectural, design, and surveying) the states could remain
responsible for their own procurement, with technical assistance
available from the national government to assist the states w ith
such procurement upon request.

In Part A on the audit report it has been recommended. and we
concured, that the contracting, management and inspection
capacity ofthe Bureau of Public Works must be improved. At this
time, there is insufficient manpower and expertise in the Bureau
of Public Works to undertake additional state construction
project responsibilities. Therefore, it is planned that when
developing the fiscal year budget, sufficient funds will be
requested to strengthen the Bureau of Public Works Division of
Design Engineering to enable it to take over state procurement of
construction and management and inspection of state projects, w
ith the proposed legislation that would make this mandatory to
follow -- if the OEK indicates that it is in favor of this
approach and is willing to appropriate sufficient funding for the
Division of Design

8.      The National Government has begun examining options for
establishing a national building code and has opened discussions
with consulting firms with expertise in the subject for the
possible drafting of such a code. The National Government will
also explore appropriate opportunities for assistance in
developing standards for bridge construction. The OEK has given
the uniform building code considerable attention within the last
two years, and is expected to work closely with the President in
enacting uniform building code legislation. Building code
legislation will likely

Page 9 of 9

establish the broad requirements for a code, with the actual code
to be established administratively. However, regarding the
uniform building code, and particularly in respect to bridge
construction, the efforts of the National Government are subject
to the same concerns as those brought out in the response to
zoning (item 5 preceding) with respect to the division of powers
and authority between the national and state governments.
Nonetheless, the National Government will confer with the varies
state governments in an attempt to establish appropriate uniform
codes for building and bridge construction throughout Palau.
Enactment of a uniform building code law and implementation of
the code is planned for no later than December 31, 2000.

We look forward to a continued beneficial and productive
relationship with the Office of the Inspector General.

Sincerely,
Kuniwo Nakamura
President of the Republic Of Palau

Enclosures


APPENDIX 6

Page 1 of 2

STATUS OF AUDIT REPORT RECOMMENDATIONS

Finding/Recommendation
   Reference        Status               Action Required 

      A.1         Management           Provide the target date
                  concurs;             and the title of the
                  additional           official responsible
                  information          for formally requesting
                  needed.              an assessment and
                                       evaluation of the
      A.2         Management           Division of Design
                  concurs;             Engineering by the
                  additional           Office of Insular
                  information          Affairs.
                  needed.
                                       Provide the target date
      A.3         Management           and the title of the
                  concurs;             official responsible
                  additional           for initiating the
                  information          recruitment of the
                  needed.              positions identified in
                                       the recommendation.
      A.4         Management
                  concurs;
                  additional           Provide the target date
                  information          and the title of the
                  needed.              official responsible
                                       for developing new
      A.5         Management           position
                  concurs;             classifications for
                  additional           positions identified in
                  information          the assessment
                  needed.              contemplated by
                                       Recommendation A.1.
      B.1         Implemented.
                                       Provide the target date
      B.2         Unresolved.          and the title of the
                                       official responsible
                                       for coordinating the
                                       establishment of cost
                                       allocation guidelines
                                       for fringe benefit
                                       costs of inspectors.

                                       Provide the target date
                                       and the title of the
                                       official responsible
                                       for completing the
                                       Malakal sewage
                                       treatment plan
                                       expansion project.

                                       No further action is
                                       required.

                                       Respond to the revised
                                       recommendation, and
                                       provide the target date
                                       and the title of the
                                       official responsible
                                       for developing an
                                       inventory of state
                                       roads on Babeldaob
                                       Islands that will be
                                       integrated into a
                                       comprehensive
                                       interstate roadway
                                       system  that includes
                                       the Compact Road.


APPENDIX 6

Page 2 of 2


Finding/Recommendation    Status                  Action
    Reference                                     Required

      B.3               Management    Provide the target date and
                        concurs;      the title of the official
                        additional    responsible for developing
                        information   the consolidation road
                        needed.       maintenance plan.

      B.4               Management
                        concurs;      Provide the target date and
                        additional    the title of the official
                        information   responsible for
                        needed.       coordinating technical
                                      assistance to the states
                                      for development and
                                      implementation of master
                                      land use plans.

     B.5                Unresolved.    Respond to the revised
                                       recommendation, and 
                                       provide an action plan
                                       that
     B.6                Management     includes the target date
                        concurs;       and the title of the
                                       additional official
                                       responsible for
                        information    developing and
                                       implementing
                         needed.       zoning laws on either the
                                       individual state or the
      B.7                Management    national level.
                         concurs;
                         additional    Provide the target date 
                         needed.       and the title of the
                                       official responsible for
                                       implementing standardized
                                       procedures for the
                                       development of state
      B.8                Management    capital improvement
                                       project proposals.
                         concurs; 
                         additional
                         information   Provide the target date 
                         needed.       and the title of the 
                                       official responsible for
                                       drafting the proposed
                                       legislation to amend Title
                                       40 of the Palau National
                                       Code Annotated regarding
                                       the procurement authority
                                       of the Director of the
                                       Bureau of Public Works.

                                       Provide the target date
                                       and the title of the
                                       official responsible for
                                       implementing a uniform
                                       building code.







ILLEGAL OR WASTEFUL ACTIVITIES

SHOULD BE REPORTED TO

THE OFFICE OF INSPECTOR GENERAL 


Internet/E-Mail Address
www.oig.doi.gov



Within the Continental United States

U.S. Department of the Interior
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Washington, D.C. 20240 


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Outside the Continental United States


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