[Report on the Saipan Harbor Improvement Project, Commonwealth Ports Authority, Commonwealth of the Northern Mariana Islands (No. 2003I0073)]
[From the U.S. Government Printing Office, www.gpo.gov]
Title: Report on the Saipan Harbor Improvement Project, Commonwealth
Ports Authority, Commonwealth of the Northern Mariana Islands
(No.�2003 I 0073)
N-IN-NMI-003-00-R
United States Department of the Interior
OFFICE OF INSPECTOR GENERAL
1849 C Street, NW � Mail Stop 5341
Washington, DC 20240
September 30, 2003
Mr. Jose Lifoifoi
Chairman, Board of Directors
Commonwealth Ports Authority
P.O. Box 1055
Saipan, MP 96950
Subject: Report on the Saipan Harbor Improvement Project, Commonwealth Ports Authority, Commonwealth of the Northern Mariana Islands (No.�2003 I 0073)
Dear Mr. Lifoifoi:
This report presents the results of our audit of the Saipan Harbor Improvement Project, Commonwealth Ports Authority.
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 November 28, 2003. The response should provide the information requested in Appendix 5 and should be addressed to me at the address above, with a copy to our Caribbean Field Office, Ron deLugo Federal Building � Room�207, St.�Thomas, VI 00802.
Sincerely,
Roger La Rouche
Assistant Inspector General for Audits
cc: Honorable Juan N. Babauta,
Governor, Commonwealth of the Northern Mariana Islands
Mr. Carlos Salas,
Executive Director, Commonwealth Ports Authority
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N-IN-NMI-003-00-R
United States Department of the Interior
OFFICE OF INSPECTOR GENERAL
1849 C Street, NW � Mail Stop 5341
Washington, DC 20240
September 30, 2003
Memorandum
To: David B. Cohen - Deputy Assistant Secretary for Insular Affairs
From: Roger La Rouche - Assistant Inspector General for Audits
Subject: Report on the Saipan Harbor Improvement Project, Commonwealth Ports Authority, Commonwealth of the Northern Mariana Islands (No.�2003 I 0073)
This report presents the results of our audit of the Saipan Harbor Improvement Project, Commonwealth Ports Authority.
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 November 28, 2003. The response should provide the information requested in Appendix 5 and should be addressed to me at the address above, with a copy to our Caribbean Field Office, Ron deLugo Federal Building � Room�207, St.�Thomas, VI 00802.
[Page Intentionally Left Blank]
CONTENTS
INTRODUCTION
Background 1
Objective and Scope 2
Prior Audit Coverage 3
RESULTS OF AUDIT
Management of the Harbor Project 4
RECOMMENDATIONS
10
APPENDICES
1. Monetary Impact 13
2. Contract Modifications 14
3. Commonwealth Ports Authority Response 15
4. Office of Insular Affairs Response 28
5. Status of Recommendations 30
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INTRODUCTION
BACKGROUND
In October�1981, Commonwealth Public Law�2 48 established the Commonwealth Ports Authority as a public corporation of the Commonwealth of the Northern Mariana Islands (CNMI) and defined the powers and duties of the Ports Authority. These powers and duties include the adoption and enforcement of rules and regulations for the operation of its ports. The Ports Authority was given responsibility for the operation, maintenance, and improvement of all airport and seaport facilities on the islands of Saipan, Tinian and Rota. A Board of Directors, which consists of seven members who are appointed by the Governor and serve 4 year terms, governs the Ports Authority.
The Saipan seaport consists of two docks (Baker and Charlie) that were built during World War II and were in a state of disrepair. The U.S. Department of the Interior recommended that new docks be constructed instead of trying to repair the existing facilities because the cost of repair would be approximately equal to the cost of constructing new docks.
To finance the construction of the Saipan Harbor, the Ports Authority received $23.5�million from the U.S. Department of the Interior, which consisted of a $10�million direct grant and $13.5�million from covenant funds. The covenant funds were used by the Commonwealth Development Authority (CNMI�s authorized agent) to secure revenue bonds. The proceeds of the bonds were loaned to public agencies to finance capital improvement projects. In addition, the Ports Authority obtained independent financing through the public issuance of two tax exempt municipal bonds totaling $56.3�million to finance a portion of the project. The total estimated project cost was $50�million.
In January 1993, the Ports Authority competitively awarded the construction project to the lowest bidder and entered into a fixed price contract totaling $36�million. However, because of poor construction management and extensive delays, the project was not substantially completed until April�1999, costs had escalated to $50�million as of September�30,�2000, and the Ports Authority continued to incur costs for unfinished jobs associated with the Saipan Harbor project.
The Office of Insular Affairs (OIA) has a Field Representative stationed on Saipan. According to OIA�s administrative manual, Chapter�3, Field Representatives have a number of grant monitoring responsibilities. These responsibilities include conducting quarterly surveys of the grant projects, investigating compliance with grant terms and conditions, advising OIA�s Grants Manager to deny reimbursement of funds when it is determined that the insular government is not in compliance with grant terms and conditions, and working with the insular governments to assist in correcting deficiencies so reimbursement of expenditures may occur as quickly as possible.
OBJECTIVES AND
SCOPE
The objective of the audit was to determine whether the Ports Authority had (1) complied with applicable Federal and local laws and regulations in awarding the design and construction contracts; (2) administered the U.S. Department of the Interior grant in accordance with applicable laws and regulations; and (3) adequately monitored project operations. A secondary audit objective was to determine whether the Office of Insular Affairs, U.S. Department of the Interior had adequately fulfilled its grant oversight responsibilities. The scope of the audit included a review of the Ports Authority�s project planning, procurement, and construction files, and Federal grant records from fiscal years 1998 through 2000 and other periods as appropriate. We also conducted physical inspections of the Saipan and Rota West harbors.
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 system of internal controls related to the management of the Saipan Harbor project to the extent we considered necessary to accomplish the audit objectives. Our review identified internal control weaknesses at the Commonwealth Ports Authority and the Office of Insular Affairs, U.S. Department of the Interior which are discussed in the Results of Audit section of this report. Our recommendations, if implemented, should improve the internal controls in these areas.
PRIOR AUDIT
COVERAGE
During the past 5�years, neither the U.S. General Accounting Office nor the Office of Inspector General has issued any reports on the Commonwealth Ports Authority
RESULTS OF AUDIT
MANAGEMENT OF
THE HARBOR
PROJECT
We found that the Commonwealth Ports Authority did not effectively manage the Saipan Harbor project (Figure 1). Specifically, the Authority:
( Did not adequately analyze or justify contract change orders and incurred contract cost overruns totaling $6.9�million.
( Entered into a noncompetitive contract for construction management services totaling $3.3�million. The Office of Insular Affairs (OIA) was aware that the construction management contract was awarded without a formal bid, but did not intervene.
( Improperly used liquidated damages of $980,000 from the Saipan Harbor project for a project on Rota.
Figure 1. Aerial view of the Saipan Harbor after completion of the improvement project.
(Office of Inspector General photograph)
Change Orders of
$6.9�Million Awarded Without Competition
The Ports Authority noncompetitively awarded nine construction change orders totaling $6.9�million, increasing the original construction contract amount from $36�million to $42.9�million (see Appendix 2).
According to the grant terms and conditions, the grantee is required to follow the administrative requirements (referred to as the Common Rules) contained in the Code of Federal Regulations (43�CFR�12). The requirements for procurements which are financed with Federal funds are that Insular Areas follow �the same policies and procedures it uses for procurements from its non Federal funds.� Both the CNMI�s and the Ports Authority�s procurement rules and regulations require competitive procurements. Part 1.2 of the Ports Authority�s Procurement Rules and Regulations states, �The underlying purposes and policies of these regulations are: . . . (c) to provide increased economy in Authority procurement activities and to maximize to the fullest extent practicable the purchasing value of Authority funds and (d) to foster effective broad based competition within the free enterprise system.� Part 3.2(1) also states, �The purchase of all supplies and materials and all construction works, when expenditure exceeds $25,000.00, shall be by contract let to the lowest responsible bidder.� Further, Part 1.4 of the Procurement Rules and Regulations states, �These regulations apply to every expenditure of Authority funds which are not subject to federal procurement regulations. . . . Nothing in these regulations shall be construed to prevent the Authority from complying with the terms and conditions of any grant, cooperative agreement or memoranda of understanding.�
Competition will generally result in lower costs. For example, in a December 12, 1996, letter to the Authority�s Executive Director regarding additional dredging to deepen the harbor from 35�feet to 40�feet, the construction manager recommended that �it may be worthwhile for CPA [Commonwealth Ports Authority] to call for competitive proposals as opposed to a change order.� The construction manager further stated, �The earlier example of the Baker Bay Modification [Change Orders 2 and 3] shows that CPA actually saved [money] by deleting specific items out of [Samsung Construction Co., Ltd.]�s contract and rebidding. In fact, on two occasions [Samsung]�s subsequent bid on work deleted from their contract ended up considerably lower than their price on the original bid.� However, the Ports Authority did not follow the construction manager�s recommendation.
The Code (43�CFR,�Part�12.80(d)) also states that the grantee must inform the Federal agency about �problems, delays, or adverse conditions which will materially impair the ability to meet the objective of the award. This disclosure must include a statement of the action taken, or contemplated, and any assistance needed to resolve the situation.� In addition, the grant terms and conditions required that the CNMI Government notify the Office of Insular Affairs immediately of any problems so that sufficient technical assistance could be provided to resolve the problems.
We found no documentation that the Ports Authority had attempted to notify OIA of the proposed construction change orders or requested technical assistance to perform cost analyses to determine whether the additional costs proposed by the construction contractor were fair and reasonable. Therefore, the Ports Authority did not have reasonable assurance that it had obtained the most economical price for the additional work performed because it did not ensure that all contract modifications were awarded competitively or otherwise determine that proposed costs were reasonable.
Finally, we noted a conflict between the construction contract provisions and the procurement requirements. Section�40 02(1) of the construction contract stated that the Contracting Officer was authorized to make alterations in the work, provided that the aggregate amount of the alterations did not change the total contract price by more than 25�percent, this contract provision contradicts the Authority�s policy that any expenditure over $25,000 be done through competitive procurement. The Port Authority should not stipulate contract terms that conflict with grant related requirements.
Noncompetitive Construction Management Contract Awarded for $3.3�Million
The Ports Authority awarded a noncompetitive contract, totaling $3.3�million, to Efrain Camacho Consulting Engineers, to provide construction management services for the Saipan Harbor project. As we previously noted, any contract resulting from the grant was required to be awarded on a competitive basis. Despite these requirements, we found that during a July 25, 1992 meeting, the Authority�s Board of Directors unanimously approved the selection of Camacho to provide construction management services for the Saipan Harbor project. Specifically, the minutes of the meeting state:
The Chairman felt that, since the Board has decided to award the Saipan Harbor Improvement Project to [a firm that was later replaced], construction management be selected to oversee the project. The Chairman noted that Efrain Camacho Consulting Engineers has been meeting and providing CPA [the Authority] with technical assistance without a formal contract. The Board was provided with a copy of Mr. Camacho�s fee proposal dated May 14, 1992.
According to the minutes of a November 27, 1992 board meeting, the former Executive Director stated, �It is an FAA [Federal Aviation Administration] requirement that CPA advertise for airport/seaport consulting for design and construction management services. The Request for Qualification is due on November�30.� We believe, however, that this attempt at competition was simply after-the-fact justification to support a decision already made by the Board to award the construction management contract to Camacho. The minutes of the November�27, 1992 meeting also stated that a board member �emphasized that special consideration be given to those professionals who are actively helping CPA� and later �again stressed to the Board to remember the efforts and continuity of the professionals that are helping CPA.� The minutes also noted that �in the interest of expediency, CPA had one firm do both A&E (architects and engineers) and CM (construction and management) services.� These remarks, combined with those made at the July 25, 1992 board meeting, suggest that competitive procurement of the construction management services was not legitimately contemplated and that Camacho would be given preference because he was already performing work for the Authority.
Subsequently, on April�15,�1993, the Authority�s Board of Directors repealed in its entirety Part�3.7 of the Authority�s Procurement Rules and Regulations, which provided competitive selection procedures for professional, advisory, and technical services. Seven days later, the Authority entered into a noncompetitive $1.5�million contract with Camacho. Consequently, there was no assurance that the Ports Authority received a fair and reasonable price for the construction management services. Additionally, there were nine amendments to the construction management contract, totaling $1.8�million, which changed the scope of work and increased the total contract price to $3.3�million.
Our review of board minutes for January�1993 through April�1993 revealed that no justification was given by the Board of Directors as to why it repealed Part�3.7 of the Procurement Rules and Regulations. In addition, no documents were provided by the Ports Authority to show that it had obtained the approval of the grantor agency for the noncompetitive contract or that it had issued a request for proposals from other architectural/engineering firms. Further, in an October 15, 2001 document, the Authority�s Board Secretary wrote that the repeal of Part 3.7 of the Procurement Rules and Regulations had been brought to the attention of the Authority�s legal counsel and that the legal counsel had indicated that he did not know the reason why the Authority had repealed Part�3.7.
We interviewed the Authority�s Executive Director, the Saipan Ports Manager, and a member of the current Board of Directors, all of whom stated that they were not aware that the previous Board had repealed the section of the Procurement Rules and Regulations related to professional, advisory, and technical services. The Board member who we interviewed also stated he did not agree with the method in which the construction management contract was handled by the previous Board. He stated that there appeared to be a lack of checks and balances where the construction manager was concerned. The Executive Director stated that he had not seen any documentation that the previous administration had issued requests for proposals or required a statement of qualifications from the construction management firm, and our review also did not disclose any such documentation. The Executive Director also stated that, in retrospect, the Ports Authority should have issued a request for proposals in order to ensure that the Authority was getting the best possible price, which is why he now requires that competitive proposals be submitted for professional service contracts.
Office of Insular Affairs
Did Not Intervene
OIA�s Federal Capital Improvement Projects Coordinator told us that although he had been aware of the problems and delays in completing the project, he had �moved on to other projects� once Interior funds were exhausted in 1994. In addition, the Projects Coordinator stated that �the Office of Insular Affairs does not get involved in the procurement selection of contractors.� However, we found that in two of six inspections of the Saipan project conducted by the Projects Coordinator, he had identified that the construction management contract was awarded without a formal bid, which was contrary to Federal regulations. However, no action was taken to address the deficiencies. We believe that OIA should develop guidance to address deficiencies in procurements made with grant funds.
Use of Saipan Harbor Project Funds Totaling $980,000 on Another Project Questionable
The Ports Authority may have improperly used $980,000 of $1�million derived from liquidated damages paid by the construction contractor for construction delays in Saipan. The funds were used to pay costs claimed by the construction contractor for additional dredging work, equipment repairs, and various miscellaneous items related to a project to renovate the Rota West Harbor.
We found that the Ports Authority had not notified or obtained prior approval from OIA to use funds applicable to the Saipan Harbor improvement project for a project on Rota. OIA funded 47�percent ($23.5�million of $50�million) of the Saipan Harbor project. Consequently, we believe that OIA had a vested interest in $460,600 (47�percent) of the $980,000 value of construction work that was performed on Rota in lieu of liquidated damages. OIA should resolve the issue concerning the $460,600. The Authority�s Executive Director agreed that the liquidated damages should not have been used for the project on Rota because there were more urgent projects that needed to be done at the Saipan Harbor.
RECOMMENDATIONS
TO THE CHAIRMAN,
BOARD OF
DIRECTORS
We recommend that the Chairman of the Board of Directors instruct the Executive Director to:
1. Establish policies and procedures to ensure compliance with specified conditions of grant awards.
2. Reinstate the competitive procurement rules and regulations for professional, advisory, and technical service contracts related to Federal funds.
TO THE DEPUTY
ASSISTANT
SECRETARY FOR
INSULAR AFFAIRS
We also recommend that the Deputy Assistant Secretary for Insular Affairs:
3. Develop policies and procedures for addressing deficiencies in procurements made with OIA grant funds.
4. Resolve the questionable use of liquidated damages applicable to the Saipan Harbor project for the project on Rota.
COMMONWEALTH
PORTS AUTHORITY
RESPONSE
The response (Appendix 3) to the draft report from the Executive Director of the Commonwealth Ports Authority concurred with Recommendations 1, 2, and 3, and indicated that corrective actions would be taken. However, we request additional information for all three recommendations (see Appendix�5).
The response also recommended changes and clarifications to the report and expressed disagreement with our questioning of $980,000 (of out of $1.7�million) related to the Rota West Harbor.
OFFICE OF
INSPECTOR
GENERAL REPLY
Based on the response from the Ports Authority, we modified the report as appropriate and clarified (1) the requirement of the grant terms and conditions that the Ports Authority use competitive procurement procedures and (2) the lack of competition with regard to construction contract modifications and the construction management contract.
Regarding the use of liquidated damages of $980,000, we maintain our position that because OIA contributed a total of $23.5�million toward the cost of constructing the Saipan Harbor project, it has a vested interest in the disposition of the liquidated damages. Therefore, the Ports Authority should work with OIA to determine how to resolve this matter.
OFFICE OF INSULAR
AFFAIRS RESPONSE
The response (Appendix 4) to the draft report from the acting Director of Insular Affairs did not concur with two recommendations that were addressed to the Office of Insular Affairs. Based on the response and additional analysis, we have revised the two recommendations and request that the Deputy Assistant Secretary for Insular Affairs provide the information shown in Appendix 5. General comments from the acting Director�s response are summarized in the following paragraph.
The response stated that OIA effectively uses available resources to monitor the use of grant funds and takes corrective action to recover grant funds that are used inappropriately, and that OIA was not required to monitor the Saipan Harbor project once the grant funds were exhausted. Regarding the contract for construction management, the response stated that the Commonwealth Ports Authority may have acted properly when it awarded the contract noncompetitively because Federal procurement regulations would not apply to the Authority. Finally, the response stated that OIA management officials were not included in the audit exit conference that was held on November�29, 2001.
OFFICE OF
INSPECTOR
GENERAL REPLY
Regarding grant administration, the response stated specifically that �we do not understand the audit�s conclusion that the Office of Insular Affairs retains an oversight role in the administration of the Port Project� where �Federal funds used in this project were fully expended by August 1994, six years prior to commencement of this draft audit.� We note that construction of the project started in 1993 and ran into 2000. Funds from OIA were used to finance the construction. The fact that the Authority obtained all grant funds in fiscal year 1994 does not automatically signal that grant funds were used in accordance with the grant agreement. We believe that OIA should continue to monitor projects financed with Federal funds until the project is complete � thus assuring that Federal funds were used effectively.
In regard to procurement, the response correctly notes that the Code of Federal Regulations allows �States� (defined to include the Insular Areas) to use their own procurement procedures. We have clarified in the report that both the CNMI�s and the Ports Authority�s procurement rules and regulations require the use of
competitive procurement procedures.
We agree that OIA did not attend the audit exit conference. According to our records, on October 29, 2001, we called OIA�s Federal Capital Improvement Projects Coordinator on Saipan to schedule an audit exit conference, and OIA headquarters personnel were also informed of the exit conference. In addition, the Projects Coordinator provided a copy of our preliminary draft report to OIA headquarters personnel prior to the audit exit conference. Therefore, we believe OIA management officials had ample opportunity to review the preliminary draft report and participate in the exit conference.
APPENDIX 1 - MONETARY IMPACT
FINDING AREAS
Funds To Be Put
Questioned Costs To Better Use��
Improper Use of Project Funds
for Rota West Harbor
$460,600* $519,400
__________
*This amount represents the Federal share (47�percent) of the value of work in lieu of liquidated damages that was improperly used on Rota.
APPENDIX 2 - CONTRACT MODIFICATIONS
Change Order
Number����
Change Order Description����������������������
Change Order
�����Amount�����
1
Steel sheet substitution, removal and disposal of underwater debris, waste oil and associated clean-up materials
$ (25,000)
2
Baker Bay modification, demolition plan, and removal and disposal of underwater debris
187,823
3
Increased volume of work and materials associated with the Baker Bay modification, elimination of work from construction contract, and performance of community work at Managaha Island and Rota West Harbor
(1,953,249)
4
Deletion of dredging work at the turning basin, increased dredging at the entrance channel, and deletion of transit shed removal
(26,000)
5
Purchase of additional fenders, increased dredging work at entrance channel, decreased dredging and revetment work at Able Dock, extension of fire line protection, and increased filling work
388,034
6
Increased dredging work at entrance channel, turning basin and berth, above water disposal and filling, dredging work and improvements at Delta Dock, and deletion of dredging work at C-4 Berth
7,600,000
7
Additional dredging work at Rota West Harbor
741,327
8
Payment corrections
0
9
Deletion of upland disposal work
(32,235)
Total
$6,880,700
APPENDIX 3 - PORTS AUTHORITY RESPONSE
Appendix 3
Page 2 of 13
Appendix 3
Page 3 of 13
Appendix 3
Page 4 of 13
Appendix 3
Page 5 of 13
Appendix 3
Page 6 of 13
Appendix 3
Page 7 of 13
Appendix 3
Page 8 of 13
Appendix 3
Page 9 of 13
Appendix 3
Page 10 of 13
Appendix 3
Page 11 of 13
Appendix 3
Page 12 of 13
Appendix 3
Page 13 of 13
APPENDIX 4 - INSULAR AFFAIRS RESPONSE
Appendix 4
Page 2 of 2
APPENDIX 5 - STATUS OF RECOMMENDATIONS
Finding/Recommendation �� Reference�������������
1 and 2
3 and 4
Status������
Management concurs; additional information requested.
Unresolved.
Action Required�����������������������
Indicate the status of the recommendations and, for recommendations not yet implemented, provide a plan of action, including the target dates and the titles of the officials responsible for implementing the recommendations.
Respond to the revised recommendations. If concurrence is indicated, provide a plan of action, including the target dates and the titles of the officials responsible for implementing the recommendations.
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