oversight

Allegations of Mismanagement of a Peruvian Highway Project Financed With U.S. Assistance Funds

Published by the Government Accountability Office on 1971-12-02.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

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                                       LM095460




Allegations Of Mismanagement
Of A Peruvian ighway Project
Financed With U.S. Assistance Funds                     8-172661




Agency for International Development
Export-Import Bank
Department of Transportation




BY THE COMPTROLLER GENERAL
OF THE UNITED STATES
                              COMPTROLLER      GENERAL     OF   THE      UNITED   STATES
                                             WASHINGTON.    D.C.      20548




       B-172661

 r-r   Dear    Senator      Proxmire:
 T,-
               This is our report           on allegations    of mismanagement              of a Peruvian
       highway      project    financed     with U.S. assistance       funds.      Our review        was
       made pursuant         to your request         dated April    19, 1971, that we determine
       the validity      of charges      of mismanagement          made by Mr. Charles             Pettis,
       who formerly         worked      as an engineer     on the Tarapoto         Iiighway     project
       for Brown        & Root Overseas,         Inc., the project     consultant.

              We have not obtained         formal     agency,      contractor,     or consultant
     comments      on this report;       however,       we have met with representatives
’ - of the Agency      for International         Development,         the Export-Import        Bank                   .,* L/  t   172
     of the United    States,   and the Department              of Transportation,       as well as                       “Eq
  ‘+ with the consultant,      Brown      & Root,      Inc., and the contractor,         Morrison-                     : Ii--
                                                                                                                        .     .
   5 Knudsen,    Inc., and discussed          the facts     included      in the report.     Their  ob-                -- ‘L j
  8’
     servations    are included       in chapter      9 of the report.

                Qfficials     of the Agency         for International         Development         expressed
       concern      regarding       the possible         adverse     effect   this report       may have on
       the negotiations         currently       under      way in Peru between            the Government         of
       Peru and the contractor               to resolve       the project      problems.        We informed
       them that we would make their                    views     known to you but that any further
       observations         by them       on the disadvantages            of public     release    of the infor-
       mation     included      in the report         should     be expressed        directly    to you as the
       review     was performed            at your request.

                We believe    that the contents       of this report     would      be of interest     to
       the Agency     for International       Development;       the Export-Import          Bank;    the
       Department       of Transportaeliorl;      Brown     & Root,  Inc.; and Morrison-
       Knudsen,    Inc.    However,        we plan to make no further          distribution      of this




                                   50 TH ANNIVERSARY               192’6 - Is?‘1
B-172661




report       unless    copies  are specifically   requested,    and then     we shall   make
distribution        only after   your agreement     has been   obtained,




                                                   Comptroller     Generai
                                                   of the United   States

Enclo   sure



The Honorable       William     Proxmire
United States     Senate
COMPTROLLER GENERALpi REPORT                                          ALLEGATIONS OF MISMANAGEMENT OF
TO THE HONORABLEWILLIAM PROXMIRE                                      A PERUVIAN HIGHWAY PROJECT FINANCED
UNITED STATES SENATE                                                  WITH U.S. ASSISTANCE FUNDS
                                                                      Agency for International        Development
                                                                      Export-Import    Bank
                                                                      Department    of Transportation
                                                                      B-172661


 DIGEST
------


WH'YTHE REVIEW WASM4DE

         On April   19, 1971, Senator     William               Proxmire  requested        the General    Accounting
         Office   (GAO) to review   allegations                 made by Mr. Charles          Pettis,  a former
         project   engineer,  of mismanagement                  of the Tarapoto-Rio          Nieva Highway project
         in Peru.     (See p. 73.)-
          ------

FINDINGS AND CONCLUSIONS

         The Tarapoto-Rio        Nieva Highway was planned         to extend    for 232 kilometers
         in the northeast        section   of Peru.     In 1964 the Agency for International
         Development      (AID) and the Export-Import         Bank of the United        States  approved
         financing    totaling      $35.1 million    for the project.         The Government    of Peru's
         share of the project          was about $12 million,       which brought     the total    financ-
         ing for construction          and design   costs for the road to about $47 million.
         As of October       1971 approximately      $16.3 million       of the U.S. funds had been
         disbursed.

         To provide      engineering        services     and control       over the road project,               Peru
         engagedBrown & Root Overseas,                  Inc.,   as the project         consultant.           Construc-
         tion work was begun on the project                  early    in 1966 by an international                  con-
         sortium     headed by the firm          of Morrison-Knudsen,            Inc., as contractor.                Be-
         ginning     in January      1967 numerous        problems      and disagreements            arose among
         the consultant,         the contractor,         and the Government          of Peru over inter-
         pretation       of contract      terms and construction            methods,      primarily        concerning
         the cause of, removal            of, and payment for large              landslides        (hereinafter
         referred      to as slides)        that had occurred        on the project.             By February         1970,
         both the consultant           and the contractor          were no longer         working       on the proj-
         ect and the Government             of Peru had taken over the project.                     The Government
         of Peru and the contractor               are currently       conducting       negotiations          in an
         effort    to resolve       project     problems.

         Mr.     Charles  Pettis,  who was employed  by the firm                    of Brown & Root             Overseas,
         Inc.,     on the Tarapoto   project made the following                     major charges.

         SZide issue

         Mr.     Pettis     charged    that payment for slide  removal   during                  construction         was
         not     authorized       under the terms of the contract     and that                 furthermore,


 Tear   Sheet
because the slides had been caused by its              negligence,      the contractor       should
not be paid for much of this          type of work.       He charged      also that    the consul-
tant originally       had agreed with this    position        but later     had changed    its
position     and had agreed     to authorize  payment       to the contractor       for slide
removal.       Mr. Pettis   stated that this change indicated             that collusion       ex-
isted    between   the contractor     and the consultant.

GAO found        that interpretation       of contract       terms regarding      payment    for slide
removal      by concerned        parties  had varied      from one of supporting          Mr. Pettis'
position       to one of contending         that the specifications         were unclear.        The
evidence       in support      of Mr. Pettis'      charge    of contractor     negligence      was
conflicting.          This conflict      was evident      in the positions      taken by various
experts      brought     to the project       site  to study the cause of the slide             prob-
lem.       (See p. '28.)

The Government      of Peru has instituted             a court       suit   against      the two firms,
which   includes    charges      of poor workmanship,            fraud,     and collusion.            The
two firms     have instituted       court     actions      which,     among other        things,      dispute
the Peruvian      Government's      interpretation          of the contract           specifications.
Because these issues          are before      Peruvian      courts       and therefore         are matters
for the courts      to decide, GAO is not attempting                     to interpret        the contract
terms nor commenting          on the alleged        collusion        charges.

The available       facts      confirm      Mr. Pettis'      contention     that    the consultant
changed    its position         and authorized          payment    to the contractor        for slide     re-
moval.    Although        this    change of position          would have required         about $2.2 mil-
lion   additional for payment for removal of quantities                          of material     involved
in the slide      dispute,        officials     of the Government         of Peru and the U.S. Mis-
sion did not participate                in any study or decisions          reached     by the consul-
tant   to authorize         payment for removal            of the slides.        (See p. 22.)

Engineering desi,gn and practices
by consuZtant

Mr. Pettis      contended     that    the    consultant's         design    for the Tarapoto        road was
deficient     because,     among other         things,      no core borings         had been made to de-
termine    subsurface      conditions        but,     instead,     only shallow        holes had been dug
on the road line.          He alleged        that     the consultant's         design    had not called
for proper      placement     of drainage          pipes under the roadway.              Mr. Pettis     also
charged    that    the consultant's          regional       engineer      had ordered      the contractor
to perform      work totaling       almost       $1 million       without     having    authority     to do
so from the Government           of Peru       or the U.S. Mission.

GAO found,       on the basis of the data available,                 that    the consultant        had
not performed       geologic   surveys     nor taken adequate             core borings,     in areas
involving      deep roadway    cuts;    the drainage       facilities          under large    fills
had not been properly        placed,      which,    in part,       had caused the roadway
fills     to fail;    and the consultant         had approved        a substantial       amount of
work without       obtaining   approval      of the Government            of Peru and the U.S.
Mission.       (See p. 29.)
          The reasons    why geologic  surveys            and core borings         were not taken and suf-
          ficient   pipe was not used on the              project   are not       clear.       The consultant's
          approval    of a substantial  amount            of work without         authorization      appears    to
          have stemmed from a disagreement                over interpretation            of contract     terms.
           (See p. 30.)

          Other       charges

          Mr. Pettis       contended        that,      during    the early   stages      of the project,     the
          contractor       did not have employees                experienced    in road construction         or
          proper     construction          equipment.         The evidence     available        to GAO tends to
          support     this     contention.           GAO could not determine           why these problems
          had occurred        or whether          there     had been any resulting          effects   on the
          overall     progress       and quality          of road construction.            (See p. 37.)

          Mr. Pettis       alleged  that   a fellow    consultant     employee   had improperly               used
          contract     funds derived     from food payments        for personal     expenses     and          had
          charged    the Peru contract        for material      and labor    used to construct               a
          private    house for himself.          A U.S. Mission      audit   and other   records             sub-
          stantiate      these claims.       (See p. 41.)

          GAO believes     that restitution      remains      to be made for at least    $3,200
          for this    employee's     personal   expenditures.        If the Government   of Peru
          does not recover       funds involved     in the irregularities       with respect    to
          the food operation        or if it recovers       only its share,   AID and the Bank
          should take action to recover any improper               food payments    made to the
          companies.      (See p. 50.)

          The U.S. Mission           in Peru and AID/Washington             were aware of many of the
          project's       problems       by early   1967 but did not take substantive               action
          until     the end of 1968.            The Bank relied      on the other       U.S. Government
          agencies      and the two American           firms  involved       to monitor      the project.
          GAO believes         that    the U.S. Mission's        organizational       structure     for man-
          aging this        project      and the apparent      lack of coodination           among the parties--
          AID, the Government              of Peru, the consultant,          and the contractor--involved
          in this      project      contributed     to AID’s lack of timely           action     to resolve
          project      problems.         (See p. 54.)


RECOMMENDATIONS
            OR SUGGESTIONS
          GAO recommends   that   the Administrator               of   AID and the President           of   the     Bank
          take action   to ensure    that:

               --The consultant        employee    involved      in the food fund operation       and in the
                  construction       of a personal      residence     has made or will     make full  res-
                  titution     for   contract   funds,     material,     and labor.    (See p. 50.)

               --If   the Government    of Peru does not pursue      the irregularities     con-
                  cerned with the food operation       or if it recovers      only its share,
                  AID and the Bank determine      the validity    of the certification     made
                  on the food payments     and recover    any improper   amounts paid to the
                  companies.     (See p. 50.)

Tear   Sheet                                                 3
GAO recommends also that the .Administrator of AID take action to ensure
that AID officials responsible for project implementation   are fully aware
of and carry out AID's role of monitoring programs financed with U.S.
foreign-aid funds.   (See p. 63.)

GAO recommends further that, in projects where Bank funds are being used
jointly   with those of another Government agency, the President of the
Bank take action to ensure that the Bank is provided with inspection    or
evaluation reports made by the other Government agency involved.

Upon completion of our review, GAOmet with and discussed the factual
contents of this report with officials     of AID, the Bank, the Department
of Transportation,   the contractor,   and the consultant.  They generally
agreed with the facts presented, and chapter 9 summarizes the views
they expressed.    (See p. 64.)
                         Contents
                                                              Page

DIGEST                                                          1

CHAPTER

  1       INTRODUCTION                                         5

  2       HISTORY AND CURRENT STATUS OF TARAPOTO
          HIGHWAY PROJEZT                                      6

  3       SLIDE ISSUE                                         12
              Interpretation      of contract   terms         12
              Contractor     negligence caused slides         17
              Consultant     changed position    and agreed
                 to authorize     payment for slide re-
                 moval                                        22
              Alleged collusion       between consultant
                 and contractor      for purpose of paying
                 for slide removal                            26
              Conclusions                                     28

  4       ENGINEERING DESIGN AND PRACTICES BY CONSUL-
          TANT                                                29
              Slides could be expected due to project
                 design                                       29
              Limited core borings taken by consultant        29
              Road fill   failures   due to deficiencies
                 in consultant's    design                    31
              Substantial     amount of extra work ap-
                 proved by consultant     without authori-
                 zation                                       35
              Conclusions                                     36

  5       CONSTRUCTIONPRACTICES                               37
             Inexperienced    contractor employees on
                project  during early stages                  37
             Lack of proper construction     equipment        38
             Conclusion                                       39

  6       ALLEGED IMPROPERUSE OF CONTRACTFUNDS                41
              Improper use of excess food funds               41
CHAPTER                                                               Page
               Unauthorized   diversion  of labor and
                 materials  for construction    of a pri-
                 vate residence                                        46
               Conclusions                                             49
               Recommendations                                         50

  7       PERSONALCHARGESAGAINST MR. PETTIS                            51
              GAO observations                                         51
              Conclusion                                               53

  8.      U.S. GOVERNMENT      AGENCIES INVOLVED IN HIGH-
          WAY PROJECT                                                  54
              AID monitoring       responsibilities                    54
               Site-inspection       reports    indicated    numer-
                  ous project     problems                             55
               Lack of timely AID action on identified
                  problems                                             57
               Project    monitoring     by Bank                       58
               Discussions     between officials        of Peru-
                  vian Government and United States
                  Government to resolve project           problems     59
               Conclusions                                             62
              Recommendations                                          63

  9       AGENCY, CONTRACTOR,AND CONSULTANTCOMMENTS                    64
             History     and current      status of Tarapoto
                 Highway project--chapter         2                    64
              Consultant     changed position       and agreed
                 to authorize     payment for slide re-
                moval --chapter      3                                 65
             Alleged collusion         between consultant
                 and contractor      for purpose of paying
                 for slide removal--chapter          3                66
             Slides could be expected due to project
                 design-- chapter 4                                   66
             Road fill     failures     due to deficiencies
                 in consultant's       design--chapter      4          67
              Inexperienced      contractor     employees--
                 chapter 5                                            68
             Lack of proper construction            equipment--
                chapter 5                                             68
             Alleged improper use of contract             funds--
                chapter 6                                             68
CHAPTER                                                                        Page

                    Personal charges against Mr. Pettis--
                      chapter 7                                                70
                    Lack of timely AID action on identified
                      project  problems--chapter 8                             70
APPENDIXES

        I   Letter from Senator              William     Proxmire      dated
              April 19, 1971                                                   73
   II       Map showing         location       and photographs         of
              project                                                          74
 III        Lists of reports on AID Loan 527-L-028,
               Tarapoto-Rio Nieva Highway                                      78
  IV        Principal    officials  having management
               responsibilities    associated with matters
               discussed in this report                                        79

                                  ABBREVIATIONS

AID         Agency for         International         Development

GAO         General Accounting              Office

PS/         soles     (basic     unit      of Peruvian     currency)
                  GLOSSARYOF ENGINEZRING AND

                   CONSTRUCTIONTERMINOLOGY

Access road            A pioneer road constructed  by the con-
                       tractor  to get equipment to the work
                       area.

Change order           A written    order issued by the engineer
                       to the contractor     requiring    that con-
                       tract work be performed in accordance
                       with a change or changes that involve
                       an adjustment     or adjustments     in the
                       basis of payment or performance of
                       any unforeseen work which is essential
                       to complete the contract        but for which
                       no basis of payment is provided in
                       the contract.

Compaction             The act or process of mechanically
                       packing or concentrating  material to
                       achieve a predetermined  degree of
                       firmness or strength.

Directive              A written   order issued by the engineer
                       to the contractor      requiring   that the
                       work, including     all changes that do
                       not involve any adjustment       in the ba-
                       sis of payment, be performed in ac-
                       cordance with the contract.          Included
                       are orders to start,       stop, and resume
                       work and orders to perform work under
                       any contingent    item in the contract.

Excavation             The act of removing any excess mate-
                       rial from the right-of-way.

Fill                   Material    placed, or the act of placing
                       material,    in a depression  to bring the
                       depression up to a planned or accept-
                       able level.

Force account   work   Prescribed    work paid for on the basis
                       of actual    costs and appropriate addi-
                       tions.
Grading                    The act of mechanically   bringing a
                           road surface or subsurface to a pre-
                           determined elevation.

Grubbing                   To clear   by digging     up roots   and
                           stumps.

Landslide                  A downward movement of a mass of rock,
                           earth, or artificial fill on a slope.

Overbreak                  Usually refers to removing more than
                           the required  amount of material from
                           a designed slope.

Prequalification           The selection   of persons, partnerships,
                           or corporations   best qualified   to ex-
                           ecute a project   to be advertised   for
                           public bidding.

Pneumatic      compactor   Any rubber-tired vehicle  or roller          de-
                           signed to achieve compaction,

Resident      engineer     The authorized      representative     of the
                           engineer,    within    prescribed   limits,
                           on technical     and administrative       mat-
                           ters which arise during the term of
                           the contract.

Stabilizer                 Material   added to soils or aggregates
                           to increase their load-bearing    capac-
                           ity, firmness,   and resistance to
                           weathering   or displacement.

Subbase                    The layer or layers of specified   or
                           selected material  of designed thick-
                           ness placed on a subgrade to support
                           the base course,

Subgrade                   The top surface of a roadbed upon
                           which the pavement and shoulders are
                           constructed.

Subsistence                Contract payments for preparing    and
                           furnishing    of daily meals to employees
                           and laborers.
COMPTROLLER GENERAL'S REPORT                                      ALLEGATIONS OF MISMANAGEMENT OF
TO THE HONORABLEWILLIAM PROXMIRE                                  A PERUVIAN HIGHWAYPROJECTFINANCED
UNITED STATES SEiVATE                                             WITH U.S. ASSISTANCE FUNDS
                                                                  Agency for International        Development
                                                                  Export-Import    Bank
                                                                  Department    of Transportation
                                                                  B-172661


DIGEST
------

WHYTHE REVIEW WASMADE

    On April   19, 1971, Senator     William              Proxmire  requested           the General    Accounting
    Office   (GAO) to review   allegations                made by Mr. Charles             Pettis,  a former
    project   engineer,  of mismanagement                 of the Tarapoto-Rio             Nieva Highway project
    in Peru.     (See p. 73.)


FII7jDINGSAND CONCLUSIONS

    The Tarapoto-Rio        Nieva Highway was planned         to extend    for 232 kilometers
    in the northeast        section   of Peru.     In 1964 the Agency for International
    Development      (AID) and the Export-Import         Bank of the United        States  approved
    financing    totaling      $35.1 million    for the project.         The Government    of Peru's
    share of the project          was about $12 million,        which brought    the total    financ-
    ing for construction          and design   costs for the road to about $47 million.
    As of October       1971 approximately      $16.3 million       of the U.S. funds had been
    disbursed.

    To provide        engineering        services     and control       over the road project,                Peru
    engaged Brown & Root Overseas,                   Inc., as the project            consultant.           Construc-
    tion work was begun on the project                     early   in 1966 by an international                   con-
    sortium     headed by the firm             of Morrison-Knudsen,            Inc., as contractor.                Be-
    ginning     in January        1967 numerous         problems     and disagreements             arose among
    the consultant,          the contractor,           and the Government          of Peru over inter-
    pretation       of contract        terms and construction            methods,       primarily        concerning
    the cause of, removal              of, and payment for large               landslides        (hereinafter
    referred      to as slides)          that had occurred         on the project.              By February        1970,
    both the consultant             and the contractor           were no longer         working       on the proj-
    ect and the Government               of Peru had taken over the project.                       The Government
    of Peru and the contractor                  are currently       conducting        negotiations         in an
    effort    to resolve         project      problems.

     Mr.   Charles     Pettis,   who was employed     by the firm                of Brown & Root             Overseas,
     Inc.,   on    the  Tarapoto   project made   the   following                major charges.

     Side     issue

     Mr.    Pettis     charged    that payment for slide  removal   during                    construction         was
     not    authorized       under the terms of the contract     and that                   furthermore,
because     the slides had been caused by its negligence, the contractor                   should
not be paid for much of this           type of work.       He charged   also that     the consul-
tant originally       had agreed with this     position       but later   had changed its
position      and had agreed     to authorize  payment      to the contractor      for slide
removal.       Mr. Pettis   stated that this change indicated           that  collusion      ex-
isted    between   the contractor      and the consultant.

GAO found that        interpretation      of contract      terms regarding      payment for slide
removal      by concerned       parties  had varied from one of supporting              Mr. Pettis'
position       to one of contending       that the specifications         were unclear.       The
evidence       in support     of Mr. Pettis'      charge   of contractor     negligence     was
conflicting.         This conflict      was evident      in the positions     taken by various
experts      brought    to the project       site  to study the cause of the slide           prob-
lem.       (See p. 28.)

The Government     of Peru has instituted             a court       suit   against     the two firms,
which includes     charges      of poor workmanship,            fraud,     and collusion.           The
two firms    have instituted       court     actions      which,      among other      things,      dispute
the Peruvian     Government's      interpretation          of the contract          specifications.
Because these issues         are before      Peruvian      courts      and therefore         are matters
for the courts     to decide,      GAO is not attempting               to interpret        the contract
terms nor commenting         on the alleged        collusion        charges.

The available        facts      confirm     Mr. Pettis'      contention      that the consultant
changed its position             and authorized         payment    to the contractor        for slide    re-
moval.      Although       this    change of position         would have required         about $2.2 mil-
lion   additional        for payment        for removal      of quantities       of material    involved
in the slide       dispute,       officials     of the Government          of Peru and the U.S. Mis-
sion did not participate                in any study or decisions            reached   by the consul-
tant   to authorize payment for removal                    of the slides.         (See p. 22.)

Engineering design and practices
by consuZtant

Mr. Pettis      contended     that    the    consultant's         design     for the Tarapoto         road was
deficient     because,     among other         things,      no core borings          had been made to de-
termine    subsurface      conditions        but,     instead,     only shallow         holes had been dug
on the road line.          He alleged        that     the consultant's          design     had not called
for proper      placement     of drainage          pipes under the roadway.                Mr. Pettis     also
charged    that    the consultant's          regional       engineer      had ordered       the contractor
to perform      work totaling       almost       $1 million       without      having    authority      to do
so from the Government           of Peru       or the U.S. Mission.

GAO found,       on the basis    of the data available,               that    the consultant         had
not performed       geologic    surveys     nor taken adequate             core borings,      in areas
involving      deep roadway     cuts;    the drainage       facilities          under large     fills
had not been properly         placed,      which,    in part,       had caused the roadway
fills     to fail;    and the consultant          had approved        a substantial       amount of
work without       obtaining    approval      of the Government            of Peru and the U.S.
Mission.       (See p. 29.)




                                                    2
   The reasons    why geologic  surveys            and core borings         were not taken and suf-
   ficient   pipe was not used on the              project   are not      clear.       The consultant's
   approval    of a substantial  amount            of work without        authorization      appears    to
   have stemmed from a disagreement                over interpretation           of contract     terms.
    (See p. 30.)

   Other charges
              -
   Mr. Pettis       contended       that,      during    the early   stages      of the project,     the
   contractor       did not have employees               experienced    in road construction         or
   proper     construction         equipment.         The evidence     available        to GAO tends to
   support     this     contention.          GAO could not determine           why these problems
   had occurred        or whether         there     had been any resulting          effects   on the
   overall     progress       and quality         of road construction.            (See p. 37.)

   Mr. Pettis       alleged  that a fellow      consultant     employee   had improperly              used
   contract     funds derived     from food payments        for personal     expenses     and         had
   charged    the Peru contract        for material      and labor    used to construct              a
   private    house for himself.          A U.S. Mission      audit   and other   records            sub-
   stantiate      these claims.       (See p. 41.)

   GAO believes        that restitution      remains      to be made for at least    $3,200
   for this       employee's      personal  expenditures.        If the Government   of Peru
   does not recover          funds involved     in the irregularities       with respect    to
   the food operation           or if it recovers       only its share,   AID and the Bank
   should      take action      to recover   any improper      food payments    made to the
   cailpanies.        (See p* 50.)

   The U.S. Mission           in Peru and AID/Washington             were aware of many of the
   project's       problems       by early   1967 but did not take substantive               action
   until     the end of 1968.            The Bank relied      on the other       U.S. Government
   agencies      and the two American           firms  involved       to monitor      the project.
   GAO believes         that    the U.S. Mission's        organizational       structure     for man-
   aging this        project      and the apparent      lack of coodination           among the parties--
   AID, the Government              of Peru, the consultant,          and the contractor--involved
   in this      project      contributed     to AID's     lack of timely       action     to resolve
   project      problems.         (See p. 54.)


RECOMMENDATIONS
            ORSUGGESTIONS
   GAO recommends   that   the Administrator              of AID and      the   President      of   the     Bank
   take action   to ensure    that:

      --The consultant        employee    involved      in    the food   fund operation    and            in the
         construction       of a personal      residence       has made or will     make full             res-
         titution     for   contract   funds,     material,       and labor.    (See p. 50.)

      --If       the Government    of Peru does not pursue     the irregularities        con-
             cerned with the food operation       or if it recovers     only its share,
             AID and the Bank determine      the validity   of the certification         made
             on the food payments     and recover   any improper    amounts       paid to the
             companies.     (See p. 50.)


                                                     3
GAO recommends      also that      the Administrator      of AID take action          to ensure
that AID officials       responsible      for project     implementation       are fully     aware
of and carry     out AID's     role    of monitoring    programs      financed    with U.S.
foreign-aid    funds.      (See p. 63.)

GAO recommends       further    that,    in projects     where Bank funds are being used
jointly    with those of another           Government    agency,  the President      of the
Bank take action         to ensure    that the Bank is provided        with  inspection     or
evaluation     reports      made by the other       Government   agency involved.

Upon completion     of our review,       GAO met with and discussed       the factual
contents    of this  report    with officials      of AID, the Bank, the Department
of Transportation,       the contractor,       and the consultant.     They generally
agreed with the facts       presented,      and chapter   9 summarizes    the views
they expressed.       (See p. 64.)




                                              4
                                   CHAPTER 1

                                INTRODUCTION

     At the request of Senator William Proxmire on April 19,
1971, the General Accounting Office has reviewed allegations
of mismanagement of the Tarapoto-Rio    Nieva Highway project
in Peru that were made by Mr. Pettis.     Our objective  was
to determine the validity   of those allegations   and whether
Mr. Pettis  had been employed on Government-financed    proj-
ects after he left the Tarapoto project.

        Mr. Pettis   furnished  us with a lengthy statement de-
tailing    numerous allegations    concerning the management of
the project.       We have summarized in this report the major
issues raised by Mr. Pettis       and the evidence we found con-
cerning them during our review.

       Our review was conducted primarily       in Washington,    D.C.,
at the Agency for International      Development,     Department of
State; the Export-Import      Bank; and the Bureau of Public
Roads, Department of Transportation.         We visited   the U.S.
Embassy, the U.S. Mission,      and the project    site in Peru.
We discussed the facts presented       in this report informally
with representatives      of the U.S. Government agencies in-
volved;   the principal    member of the construction     contractor
consortium,    Morrison-Knudsen   of Boise, Idaho; and the con-
sultant,    Brown & Root Overseas, Inc., a subsidiary        of
Brown & Root, Inc., of Houston, Texas.

        We reviewed those documents provided by Mr. Pettis                     and
by his lawyer.         We reviewed also AID files           and records--
including     the official        loan documents; i.e.,         analysis    of
bids, specifications,           contracts,    loan agreements, monthly
progress reports,         briefing    papers, and internal          audit and
investigative        reports.      We interviewed      various agencies'
officials,      including,      where possible,      previously      involved
officials     no longer having project           responsibilities.         The
frequency with which responsible              officers     changed, both in
Washington and in the U.S. Mission,                and the change of gov-
ernment in Peru, however, precluded us from contacting                       and
interviewing       all U.S. Government officials            who had had re-
sponsibility       for the Tarapoto project.


                                         5
                             CHAPTER2

                  HISTORY AND
                           v-s CURRENTSTATUS
                  OF TARAPOTOHIGHWAY PROJECT
                  ---
       In 1957 the Government of Peru expressed its intent      to
construct   a road from the western coast of Peru to the Ama-
zon River port of Yurimaguas in northeast      Peru.   The pro-
posed road was intended to stimulate     Peru's economic devel-
opment by opening vast areas to agricultural      production.
Peru contracted   with two American consulting    firms on sepa-
rate occasions to study the feasibility      of such a road as
well as the best routing   for the road.

        In July 1960 the Bank and an AID predecessor agency
agreed to contribute     $25 million  each to cover part of the
costs of a section of the Trans-Andean Highway.         By 1961 the
Government of Peru had assigned top priority       to the con-
struction     of a part of this road.   (A map showing the road's
location    is included in app. II.)

        In May 1961 the Government of Peru engaged the firm of
Brown & Root Overseas, Inc,,     to provide engineering   services
for several specified    road projects.    The consultant  was di-
rected by the Government of Peru to prepare detailed       plans
for the road along the general route selected by one of the
earlier    consultants.

       By May 1963 the consultant       had completed the fieldwork
for survey and design of the road which became the Tarapoto
highway project,      A technical     and economic feasibility
study for 278 kilometers       of road was presented to Peru in
June 1963.    The consultant      received about $1.2 million    for
the design work on this project,         of which a great percentage,
according to the consultant,        represented   reimbursement  for
out-of-pocket    costs.    These costs were funded mostly through
a Bank loan,

     The consultant   estimated an overall project  construc-
tion life  of 8 years at a total cost of $41,325,000,      In
September 1963 the consultant   turned over complete construc-
tion plans to Peru,


                                   6
       In March 1964, after reviewing the consultant's
studies and designs which attested     to the technical  feasi-
bility   of the project,   the Bank and AID approved financing
for the road project.     On May 19, 1964, an AID loan (527-L-
028) for $12.1 million    was signed with Peru, and on June 25,
1964, Bank Loan 2155 for $23 million     was signed, bringing   to-
tal U,S. funds for the project     to $35.1 million.

        The difference   between the Bank and AID lending and
project    costs, including    cost overruns, was to be assumed
by Peru.     The AID loan was to assist Peru in financing    the
local costs of construction,       and the Bank's loan was to fi-
nance the foreign exchange costs of construction.

        The consultant    prepared final construction    drawings,
specifications,       cost estimates,   and bidding documents which
were subject to review and approval by Government of Peru,
AID, and the Bank prior to issuance to bidders.           Peru, AID,
and the Bank agreed that bidding for construction           of this
highway would be open to one or more prequalified          American
construction      firms in a joint venture with one or more pre-
qualified     Peruvian firms.      Bid documents were released to
prequalified     joint ventures early in July 1964. On Septem-
ber 15, 1964, the bids received from three construction             con-
sortia were opened.        The bids ranged from $58 to $71 million.

       All bids considerably     exceeded the consultant's        origi-
nal cost estimate.      This difference    was attributed,       among
other things,     to an underestimate    by the consultant,       uncer-
tainty    about the stability    of the Peruvian economy, and the
risk of committing     equipment in Peru for an 8-year construc-
tion period.      The Government of Peru formally       rejected     the
three bids on December 22, 1964.         Peru conferred     with AID
and the Bank and then requested the consultant            to reestimate
the project.

      In February 1965 the consultant       submitted new estimates
showing project   construction     costs of approximately
$51.7 million.    The addition     of approximately   $4 million     for
the cost of engineering      supervision   brought the total     project
costs to approximately      $55.7 million.

     AID and Bank representatives   met with the President  of
Peru and responsible  Peruvian Ministry  officials in March

                                    7
1965 to discuss getting        construction     of the road started.
To lower the cost and bring the project              within    available
funding,     it was decided that, with consultant            supervision,
a 33-kilometer     section of the road would be constructed               by
the Peruvian Army, which brought Peru's total                area of re-
sponsibility     to approximately      50 kilometers.        It was de-
cided also to change the surfacing            specifications      of the
road by deleting     the base course and the asphalt surface
and substituting     a gravel,    or similar     crushed-aggregate,
surface.

     The project  was readvertised  in April 1965. In April
Peru and the consultant    signed a new contract, as their
previous contract   had expired.
      By the end of July 1965, four construction               proposals
had been received.         The lowest bidder was Constructora
Emkay, S.A. at approximately          $43.4 million     exclusive     of
taxes.     The other bids ranged from $44.4 to $57.2 million.
The consultant     estimated     its cost at $3.5 million,          which
brought the total       project    cost to approximately        $47 million.
On the basis of the consultant's           bid analysis,       Peru signed a
contract,    which had AID and the Bank's approval,              with
Constructora     Emkay, S.A. (hereinafter        referred    to as the con-
tractor).     The consortium?s       name was changed during the
project    to Conselva.      Conselva    consisted     of the following
companies:     Constructora      Emkay, S.A.; Consorcio de
Ingenieros    Contratistas      Grals, S.A.; Florez & Costa, S.A.;
Grana y Montero, S,A.; Oman Construction               Co., Inc.; Wright
Contracting    Co.; and J.A. Jones Construction             Co.

     Actual construction     work began early in 1966 after some
delay which was attributable        to the difficulty       of supplying
heavy equipment to a remote tropical         area.      Beginning in
January 1967, reports prepared by Bureau of Public Roads
Highway Advisors for AID (hereinafter          referred     to as Highway
Advisors)   cited the emergence of numerous consultant-
contractor    disagreements.    These differences        of opinion con-
cerned construction     methods--i.e.,    blasting      procedure and
access road location --and interpretation           of specifications
primarily   regarding   payment of slide removal.
     Early in 1968 Peru began experiencing difficulty   in
meeting its share of monthly payments to the contractor    and

                                      8
the consultant.     Financing of the unit cost contract-bid
items is provided 60 percent by the Bank in U.S. dollars
and 24 percent and 16 percent by Peru and AID, respectively,
in soles (PS/), the local currency.        The inability    of Peru
to meet its share of monthly payments continued through
1968. Since AID payments were made after approval and pay-
ment by Peru, AID's payments also were delayed, although at
one point AID began disbursing      2 months ahead of Peru to
ease the financial     problems of the contractor.       In July 1968
the contractor   threatened    to reduce its work force unless
monthly payments were current.

       The slide dispute continued until          September 1968 when
the project    was visited     by top officials      of the consultant
and the contractor.        An agreement on the slide problem was
reached,     In essence the-two companies agreed that previous
refusals    of consultant    field   officials    to pay for slide re-
moval were wrong and that additional            payments were due the
contractor.     This reversal      of opinion would have resulted
in a considerable      overrun in project       costs to be borne by
Peru.    The Government of Peru refused to accept the decision
of the consultant      and contractor,       and all subsequent requests
for payment were denied.          On October 3, 1968, a military
junta assumed control       of the Peruvian Government.

       In December 1968 Mr. Charles Pettis         accompanied a Peru-
vian engineer from the project         to the U.S. Mission to report
numerous irregularities       on the Tarapoto project.       An inter-
nal AID audit was initiated        early in 1969, and the AID In-
spections   and Investigations      staff was requested to conduct
a detailed   inquiry    as a result    of the preliminary    audit
findings.

      Productive    work was gradually      reduced in February 1969
when the contractor      stated that paymentsD not being made af-
ter June 1968 necessitated         such action.    Peru wrote to the
consultant    expressing    no confidence     in April 1969 and sus-
pended the consultant's        contract  in May 1969. AID agreed
to a Peruvian request in June to obtain a new consultant
firm.

       In July 1969 Peru assumed engineering    control   of the
project.    Peruvian engineers supervised    the engineering    and
general direction    of contractor work., The contractor     agreed

                                    9
to work on a direct-cost      or force-account    basis until    a new
consultant   could be retained.      Work did continue but at a
much reduced level.      Also in July 1969 the Minister       of
Transport   and Communications wrote directly       to AID/Washing-
ton for assistance     in solving project    problems,    (See p* 59
for discussion    of this letter.)

        As a result   of a special Ministry       of Transport   and
Communications commission report issued in August 1969, Peru
initiated     legal action against the consultant         and the con-
tractor    claiming   collusion,   fraud, poor workmanship and su-
pervision,      etc., in September 1969. Both the contractor
and the consultant      have filed    counterclaims,

      In December 1969 the contractor       informed Peru that un-
less certain  conditions--i.e.,    dropping litigation,       permit-
ting an independent analysis     of slides,     making payment for
already approved work, and obtaining        a new consultant--were
met, the contractor    would stop work on February 1, 1970.

      In its response, the Government of Peru contended that,
in essence, the whole project    had been under complete Peru-
vian control   from July 1969,   In February 1970 the contrac-
tor removed its employees from the project    and the Ministry
assumed complete control   of the work and of contractor   as-
sets.

       In response to a second letter     from the GoverPament of
Peru to AID/Washington       in January 1970, a special commission
was sent to Peru to discuss possible        solutions to the proj-
ect9s problems.       The AID/Washington  team was unsuccessful    in
reaching an agreement with the Government of Peru in the
spring of 1970, but the U.S. Mission and the Embassy have
continued    to maintain contact with the Peruvians on these
issues.    No definitive    agreement has been reached by Novem-
ber 1971.

      The U,S. Mission has estimated        that the contractor   was
responsible     for approximately    95 kilometers   of road before
the Peruvian take-over.        According to the U.S. Mission,     this
did not include a segment of road where an appreciable
amount of clearing,      pioneering,   and bridgework   was done by
the contractor.


                                  10
       Since Peru assumed control        of the road, it has graded
approximately      46 kilometers     of and has stabilized   a few,
isolated    sections.      In addition,    the Peruvians have done a
large quantity      of slide removal, road line relocation,         fill
replacement,     and maintenance on the approximately        95 kilo-
meters worked on exclusively          by the contractor.    The U.S.
Mission estimates       that approximately     91 of the original     232
kilometers    of road construction       have yet to be started.

       The present loan balances of the lending agencies are
about $18.8 million--$9.5      million   of the AID loan and
$9.3 million     of the Bank loan.     These balances do not re-
flect work included on monthly pay estimates         signed by the
consultant    but unapproved by the Peruvian Government, wage
escalations,     slide removal, or other cost overruns.       AID
records stated that, because of these factors,          the road, as
originally    designed, could not be built     within the project
estimate but would cost from 25 to 75 percent more. AID and
the Bank, however, are prepared to agree with a Peruvian
proposal to further      reduce design standards to limit      project
costs.




                                    11
                                CHAPTER 3

                               SLIDE ISSUE

       One of the principal        issues raised by Charles Pettis
concerned the attempts by the contractor              to obtain payment
for the removal of slides occurring            during construction.
Mr. Pettis    charged that payment for slide removal during
construction     was not authorized       by the terms of the contract
and that in any event the contractor            should not be paid for
much of this work because the slides had been caused by the
contractor's      negligence.     He stated that the consultant
originally    had agreed with his views but later            had changed
its position      and had agreed to authorize         payment for slide
removal.     Mr. Pettis     also charged that this change in pay-
ment policy     indicated     that collusion    existed between the two
firms.

      Details concerning the charges made by Mr. Pettis     and
the evidence found by us regarding   these issues are dis-
cussed below.   A map showing the location   of the principal
slide areas and some recent photographs    of the Tangarana
area are on pages 75 to 77.

INTERPRETATION OF CONTRACTTERMS

        Mr. Pettis  stated that he had informed the contractor
that,    on the basis of the terms of the contract,  the con-
tractor    could not be paid for all slide removal.

GAO observation

      Our review of the contract        between the Government of
Peru and the contractor        showed that it incorporated          the
terms of the "Specifications         for the Construction        of High-
ways and Bridges,     1963 edition"     which had been prepared by
the project   consultant     as an overall    specification       for high-
way and bridge construction        in Peru, and incorporated           also
special provisions     relating    to the specific      project.

      The contract included removal of rubble as a separate
bid item, and the records we examined showed that some slide-
removal work would be paid for under this item.      The basic
point is whether slides occurring  during construction    should
be paid for.

                                    12
sQ                                         MAJOR       SLIDE      AREA




              COMPLETED                            m
              STABILIZED
                                                                                          l
              GRADED                               !l!mmm
              CLEARED          (R-O-W]             Yzxl
              GOVT      OF      PERU
                6 ENGR.        BATTALION           m~
              MAJOR        SLIDES
                                                       *



   THE     REGION           EAST         (SOUTHEAST)                     OF   MOYOBAMBA
   CONSTITUTED                 THE         MAJOR             PROJECT          LANDSLIDE
   AREA.      -       (COURTESY               0~           u.s.   MISSION)




THE   PRINCIPAL     LANDSLIDE       IN THE    TANGARANA        AREA    WAS VIEWED
FROM AN OPPOSITE         SLOPE     BY A GAO AUDIT        TEAM.     PARTICULAR
NOTE   SHOULD     BE MADE      OF THE ACCESS        ROAD    LOCATEDDIRECTLY
ABOVE     THE MAIN    ROAD.     MAJOR    SLIDES    OCCURRED       IN THIS AREA    IN
LATE    1968.   - (GAO PHOTOGRAPH,            MAY 1971)




                                                                  13
THESE       TWO   PHOTOGRAPHS          ARE   CLOSE-UPSOF         THE   MAJOR   LANDSLIDE
AREAINTHE           TANGARANA,VIEWED              TOWARD   THE     TOWNOF      MOYOBAMBA.
(GAO    PHOTOGRAPH,         MAY   1971)




                                             14
      General specification    24-5.1 provided that payment for
unclassified  excavation    be made at the contract      unit price.
Specification  24-4.1, which provided for measurement of the
volume to be paid for, stated that "The measurement shall
include overbreakage due to slides when not attributable            to
carelessness  of the contractor."      This specification     was de-
leted by special provision     3.3 which provided that slide re-
moval be considered as a separate bid item.

     The general      specifications        also provide:

     "l-7.15     CONTRACTOR'SRESPONSIBILITY FOR THE WORK:

            Until acceptance of the work by the Minis-
     try, or acceptance in conformance with Subsec-
     tion 3.8.    Opening Sections of Project to Traf-
     fic, the work shall be under the full charge
     and care of the Contractor,        and he shall take
     every necessary precaution        against injury   or
     damage to any part thereof by action of the ele-
     ments or from any other cause, whether arising
     from faulty   materials     or work or from the execu-
     tion or non-execution       of the work.    The Contrac-
     tor shall rebuild,      repair,   restore,  and make
     good all injuries     or damages to any portion       of
     the work occasioned by any of the above causes
     before its completion and acceptance,         and shall
     bear the expense thereof,        except for damage to
     the work due to reasons of force majeure, for
     slides found by the Resident Engineer to have been
     unavoidable,   and for ordinary       wear and tear on any
     section of the road due to normal use by traffic."

     Special     provisions    provided      also that:

     "2.32     Maintenance    During    Construction        -

           "The contractor   will be responsible  for the
     maintenance of the Highway, or sections     of the
     Highway, until   completed and accepted by the
     Highway Department ***."




                                       15
      "2.35   Maintenance   After   Acceptance    -

            "'*** Removal of all slides of 50 cubic
      meters or less during the maintenance period
      shall be considered a part of maintenance.
      The removal of all slides over 50 cubic meters
      shall be a pay item and shall be measured and
      paid for at the contract   unit price for slide
      removal."

       Mr. Pettis      contended that these provisions       should be
interpreted     that generally     the contractor    should not be paid
for slide removal during construction.             The contractor     con-
tended that,      since payment for removal of major slides had
been eliminated        from the roadway and drainage excavation
specifications       by the inclusion   of special provision       3.3,
removal of all major slides would be paid for under bid
item 7, Slide Removal, in the contract            as soon as each
slide was removed by the contractor.            The contractor     con-
tended also that bid item 7 was not limited            to slides which
occurred after the road was essentially            complete,   since the
contract     specifications     did not state or infer      such a limita-
tion.

        Interpretation      of the specifications   by other concerned
parties     varied.      For example, a Highway Advisor took the
position      that the wording of the slide-removal       provision
clearly     implied that slide removal was expected to be per-
formed only after a particular          cut had been completed and
the contractor         had moved out his excavation   equipment.

        On the other hand AID/Washington    officials,      after ana-
lyzing the contract       terms, took the position     that the terms
did not clearly      state whether payment would be made for re-
moval of slides which occurred during construction.              The
consultant     hired by AID to study the slide issue concluded
that the payment for slides and the methods of measurement
 (whether during excavation      or during maintenance)      were not
clearly    defined.




                                    16
CONTRACTORNEGLIGENCE CAUSED SLIDES

       Mr. Pettis   stated that the contractor    should not be
paid for much of the slide-removal     work because the slides
had been caused by the contractor's      negligence.     Mr. Pettis'
charges of negligence or improper construction        practices
related   primarily    to:

      1. Overblasting   the slopes.

      2. Undercutting   the toe, or bottom, of the slopes.
         Mr. Pettis maintained    that in 95 percent of the cut
         slopes the toe of the slopes had been undercut to
         accommodate the roadway width.     This was done re-
         portedly   because of alignment and grade errors by
         inexperienced    grade checkers employed by the con-
         tractor.

      3. Improperly  constructed   access roads.   These roads
         were built  at the top of the cut slopes, which re-
         sulted in adverse vibrations    from equipment moving
         over the roads and in water ponding that drained
         down the slopes and caused slides.

GAO observations

       The contractor    disagreed with Mr. Pettis'   charges but
continued to remove the slides on its own without directions
from Mr. Pettis.       The records we reviewed indicated    that
the contractor     wrote letters   to the consultant  for each
slide removed, in which it blamed the slides on poor design
or bad ground.

      We found conflicting   evidence as to the validity        of
the charges that slides were caused by contractor         negligence.
This conflict   existed among the statements made by experts
and consultants    brought to the project     to study the slide
problem by the consultant,    the contractor,     the U.S. Mission,
and the Government of Peru.

       Records reviewed at the U.S. Mission showed that 11
different    consultants or experts had reviewed the slide
problem and had issued reports.        (See app. III for a list-
ing of these reports.)     In addition,    records furnished   to

                                  17
us by Mr. Pettis   showed that two other experts were brought
to the project   by the consultant in May and June 1967. The
reports from these two consultants   were in addition to the
listing provided to us by the U.S. Mission.

      The report    issued
                        in May 1967 tended to support
Mr. Pettis   with   regard   to the effects
                                        of overblasting   and
construction  of access roads above the cut slopes.     The re-
port issued in June 1967 by a geologist   and blasting   expert
had this to say about the blasting.

      "The massive blasting       with deep drillings  located
      on the theorical      line of cut and charged exclu-
      sively with powerful explosives        speed and facili-
      tates the work, allowing the machinery to elimi-
      nate rapidly    the material    which by this intensive
      explosives,   results     much more fragmented.

      "The negative result    of this method is that the
      vibrations   of the explosions   is felt on the con-
      tiguous zones to the cuts perturbing      the solidity
      of the terrain    and opening small cracks on the
      ground through which water can filtrate       thus in-
      creasing the landslides     and causing failures.

     "Even though it is impossible,         for obvious rea-
     sons, to eliminate      completely   the contraries
     [contrary]    effects   caused by the explosions      on
     the stability     of the cut slopes on the type of
     rocks which are present in this project,           it is
     possible    to reduce it, using some restrictions
     in the use of explosives       for blasting."

        On the other hand records which we reviewed showed
that many of the other consultant's      reports on the project
attributed    the problem of the slides to geological   condi-
tions found at the project     site or to the height of the
design-cut    slopes.

      For example, a consultant     hired by AID concluded in
March 1969 that slides would occur for reasons determined,
among other things,    by the character   of materials  and by the
height of the design slope.     The report added that slides
would occur regardless    of operations   and that the contractor

                                   18
could not anticipate   their volume or number.      Further, the
frequency of slides demonstrated      that this was a result   of
physical  conditions throughout    the area.    The report sug-
gested that the Government of Peru enter into negotiations
with the contractor  to settle   the slide issue.

        The Government of Peru also sponsored several studies
to determine the causes of the slide problem.           According to
U.S. Mission records,      a report highly critical     of the con-
tractor    and the consultant,    but recommending negotiation     of
the slide issue, was released in April 1969 by a special
commission of the Peruvian Highway Department.           According
to a U.S. Mission official,       another report issued on April
1969 by a private     consulting   firm hired by the Government
of Peru was reported to be completely         favorable  to the con-
tractor.     Records reviewed indicated     that both of these re-
ports had been withdrawn by the Government of Peru immedi-
ately after issuance.

       In May 1969 a new commission, 'known as the Special Min-
istry    Commission, was formed by the Government of Peru to
investigate     the project.     In August 1969 this commission is-
sued two reports which, according to U.S. Mission records,
were highly critical       of both the contractor   and the consul-
tant.     These reports formed the basis for the Government of
Peru's charges against the companies of, among other things,
collusion,    fraud, poor workmanship,     and poor supervision.

       The existence   of conflicting      evidence on contractor
negligence    in causing the slides was also found in the U.S.
Mission records we reviewed.          For example, a Highway Ad-
visor,   in his preliminary     report of a road-site       inspection
in April 1968, commented on the seriousness            of the slide
problem.    He noted the project       consultant   claims that the
slides were due to contractor         negligence and therefore       the
consultant   would not approve payment to the contractor.              The
report also contained the following           recommendation and opin-
ion.

      "The question must be resolved immediately      and it
      is recommended that AID apprise the EXIM Bank of
      this and begin discussions     with the Highway De-
      partment officials   to arrive    at a decision that
      will settle   the question of responsibility    of the

                                     19
      slides.      My initial   observations    indicate  that
      there is a difference        of opinion in the inter-
      pretation     of the specifications      covering the work.
      The consultant       has a good reason for disallowance
      based upon negligence        on the part of the contrac-
      tor.     A firm interpretation      of the spec. must be
      made now and the contractor         must be persuaded to
      change his construction        method to minimize the
      slides."

        The above information       was part of a Highway Advisor's
one-page preliminary        report which he was required         to sub-
mit to U.S. Mission officials          within  48 hours after comple-
tion of his inspection.          A detailed   report,    along with any
photographs    taken during an inspection,          is required    by an
AID Manual Order.        Such a report usually        is submitted to
U.S. Mission officials        within    1 to 2 weeks after completion
of an inspection.        It is interesting      to note that the High-
way Advisor,     in his detailed      report submitted      in April 1968,
stated that the cause of the slides was not yet definitely
identified    and made no mention of his earlier            comment as
to the consultant's        having good reason for disallowing         the
contractor's     claims.

        We found that,    in contrast to the above position,     which
appeared to recognize that contractor        negligence was a prob-
lem effecting      the slide issue, later records indicated      a
different     U.S. Mission position   on the issue.      For example,
in March 1969 an AID inspection       team, made up of U.S. Mis-
sion, AID/Washington,       and Bureau of Public Roads officials,
visited    the road site.     The team recommended that the dis-
puted quantities      of slides be verified   separately    and be
considered     separately   by the Government of Peru.

        The trip report expressed the view that, although no
quantitative      determination     had been made by the inspection
group y    it was  generally    agreed  that many of the slides ex-
amined would have occurred regardless           of the construction
procedures and that this was related           primarily to design
standards accepted in the first           place for what was obviously
a difficult     area geologically.

        The U.S. Mission's    position   on the slide issue was
further    defined during    a meeting   between U.S. Mission and

                                   20
Government of Peru officials       in May 1969. At this meeting
the Mission took the position,       on the basis of its consul-
tant's   report,   that the combination    of the design and the
geological    conditions   in the area constituted    the main
cause of the slides.       The U.S. Mission took the position
also that the contractor      had performed normally.

        The records we reviewed indicated       that the U.S. Mis-
sion's position      that the contractor     had performed normally,
in addition     to being supported by its consultant,         was based
on a belief     that the charges against the contractor's         con-
struction    procedures had failed      to take into account such
factors    as the volume of work, the time schedule, the iso-
lation    of the project,    and the adverse conditions       encoun-
tered.     The records further      showed that the U.S. Mission
had recognized      some deficiencies     in the contractor's    opera-
tion but that its work was in general accord with conditions
to be expected in this area.




                                   21
CONSULTANTCHANGEDPOSITION AND AGREED
TO AUTHORIZE PAYMENTFOR SLIDE REMOVAL

        Mr. Pettis   stated that the project     consultant      from
July 1967 until      mid-1968 supported his position        that the
contractor's      negligence   or improper construction       practices
had caused many of the slides.          According to Mr. Pettis,
the consultant,       as a result  of a meeting between high-level
officials    of the consultant     and the contractor,      notified
the Government of Peru in September 1968 that many of the
slides were due to geological        conditions   and that therefore
the contractor      should be paid for slide removal.

     Mr. Pettis    stated also that three different  pay esti-
mates were prepared for September 1968 and that the last
two each included an amount for slide removal.      He added
that the Government of Peru had not accepted the consultant's
new position    on the slide-removal payment or the September
pay estimates.

GAO observation

      Records reviewed at the U.S. Mission reported       the exis-
tence of correspondence   among the project  consultant's      Peru
staff  that supported Mr.  Pettis'position  on the   slide   issue
during the period July 1967 to mid-1968.

        U.S. Mission records we reviewed confirmed that a meet-
ing was held at Tarapoto in the early part of September
1968 between high-level          officials     of the contractor      and the
consultant      to consider the slide issue.           Records showed
that at that time the consultant              brought a geologist      from
within     its own organization         to the site for another inves-
tigation      of the slide problem.          The geologist's    findings,
which attributed        much of the slides to the geological             con-
dition     of the area, were used by the consultant             as the basis
for reversing       its position      on paying for removal of the
slides.

      This position     was reflected  in the consultant's     Septem-
ber 11, 1968, letter      to the Government of Peru, which stated
that a large part of the slides were unavoidable           and would
have occurred no matter what construction        methods had been
employed.    The letter     to the Government further    added that

                                     22
the consultant's     engineers assigned to Peru had been in-
structed   to include amounts for slide removal in the monthly
pay estimates    that the consultant   felt the contractor should
be paid.

      We found that representatives       from the Government of
Peru did not participate     in the meeting in September 1968.
Records furnished    to us by Charles Pettis      showed that the
decision on the slides had been reached on the basis of an
inspection   of the slide area made by representatives          of the
contractor   and the consultant,    excluding Mr. Pettis.        A
record of this inspection , prepared by the Assistant           Resi-
dent Engineer for the consultant,       indicated    that the offi-
cials of the consultant     and the contractor      had previously
discussed the slides and apparently         had agreed that removal
of 80 percent of all the disputed slides would be paid for.

        It was further    reported that many of the decisions            to
pay for removal of the slides in question were made as the
result     of an inspection     from their moving vehicle        rather
than a detailed      inspection,       The Assistant    Resident    Engineer
expressed the view that the inspection             trip had been com-
pletely     unnecessary and that it had been, for all practical
purposes, a "traveling        circus."

       The contractor's   position  on the agreement reached
with the consultant     at the September 1968 meeting was de-
scribed in a record of an interview       between high-level
contractor   officials   and U.S. Mission representatives       in
March 1969. This record showed that the contractor's            offi-
cials had been questioned about the slides and reminded
that there was visible     evidence of questionable     construction
practices,   such as horizontal    shot holes and slope under-
cutting.

        The contractor   officials  readily   admitted that this
either had occurred or could have occurred and that the
contractor       would have to expect to be penalized to some
extent for this.       The record showed further      that the con-
tractor    officials   had insisted   that for ordinary    work such
instances were not unusual and that in this case they rep-
resented a very small fraction       of the total work.

       The record of this meeting         further reported  that the
contractor   had agreed to accept         payment for removal of about

                                     23
80 percent of the total volume of disputed slides that had
occurred as a reasonable compromise in order to get paid.
The record of the meeting also reported that a contractor
official  had insisted    that the ZO-percent reduction did not
represent  the contractor's    true opinion as to its actual
liability  but only a compromise to keep from coming to a
dead halt on the question of slide removal.

     U.S. Mission records confirm Mr. Pettis'    statement that
three separate September 1968 pay estimates    were prepared.
A report of what transpired in the preparation     of these esti-
mates was given to us by the U.S. Mission,    as follows:

     "***The result       of this joint      inspection      was that
     Pettis,    Donelson, et al were instructed              to in-
     clude 1,298,OOO M3 [cubic meters] as Slide Removal
     on the next, or September, Estimate.                  Pettis    re-
     fused to do this,        and instead,      prepared the Septem-
     ber Estimate without         including     the Slide Removal
     Item.    As was customary, he furnished               an advance
     (unsigned)     copy of the Estimate to the GOP [Govern-
     ment of Peru] Coordinator           for his review.          The
     Contractor     refused to sign this Estimate;               Pettis
     was removed as Resident Engineer and Donelson
     designated,      and a new Estimate was prepared in-
     cluding the slides.          The GOP Coordinator          then re-
     fused to sign the new Estimate.               A party of the
     Engineer [consultant]         and Contractor        then left
     for Lima with the Estimate,            apparently      with the
     idea of getting       it signed by the GOP in the Min-
     istry.     In Lima, second thought were had about
     the legality,      of paying for the slides as Item
     7, Slide Removal; therefore,            the Engineer [con-
     sultant]    prepared athird       Estimate,     this time
     putting    the precise amount of 1,298,OOO M3 in as
     additional     excavation.       By this time, however,
     the GOP Coordinator        in Tarapoto had informed the
     Ministry     of the other 2 Estimates,          there had
     been a change in Government, and the Estimate
     was never accepted by the Ministry.               ***"

       At the exchange rate and unit cost provided             for in the
contract,    p ay ment for removal of 1,298,OOO cubic          meters of
slides would have amounted to about $2.2 million.

                                     24
       The U.S. Mission informed us that it never had been
consulted    concerning the September 1968 change in the con-
sultant's    policy on slide removal payment and that,  since
the monthly pay estimates    came to the U.S. Mission from the
Government of Peru, the U.S. Mission never had had to offi-
cially    pass judgment on whether the slide removal could be
paid for in one way or another because the pay estimates      in
question never had been approved by the Government of Peru.




                               25
ALLEGED COLLUSION BETWEENCONSULTANTAND
---
CONTRACTORFOR PURPOSEOF PAYING FOR SLIDE REMOVAL

       Mr. Pettis  stated that meetings between the consultant
and contractor    and the consultant's     change of position in
September 1968 agreeing to pay for removal of the disputed
slides indicated    that collusion     had existed between the two
firms.

GAO observations -

       In support of his charge of collusion,          Mr. Pettis   fur-
nished us with copies of two letters.          One letter     was a
confidential-personal      exchange from a vice president         of the
contractor     to the consultant's    vice president      for Latin
America in March 1968 concerning the slide dispute.               The
letter   expressed the view that,historically,          the Highway
Department had been willing        to pay for removal of slides
that occurred on such projects,         and the writer     hoped that
the contractor      had not been prejudiced    because of past cor-
respondence from the consultant.

        This letter,   rather than referring    to a request for
payment for removal of all slides without           reverting    to ar-
bitration,     as maintained   by Mr. Pettis,   appeared to be dis-
cussing removal of one particular        slide in this context.
The letter,     however, did refer to the very large quantity
of slide material      which the contractor    had removed and for
which he felt entitled       to payment.    The contractor     official
expressed the hope that the consultant         official     would do
everything     he could to pick up these payments.

        The other letter    was written    in October 1968 by the
consultant's      regional  engineer to his manager in Lima.             This
letter,    which was used by the regional          engineer to deliver
the second September 1968 pay estimate,              stated that the es-
timate included the cost for 1,298,OOO cubic meters of addi-
tional    excavation    in accordance with orders received from
executives     of the consultant.       The regional      engineer's   let-
ter further      stated that the quantity       for removal of addi-
tional    excavation    had been given by the contractor           and had
not been confirmed by the technical           staff.      The letter   re-
portedly     was a personal communication obtained by a Peru-
vian employee of the consultant.

                                     26
      U.S. Mission records showed that Mr. Pettis,        along
with a Peruvian engineer from the road project,        had met
with U.S. Mission officials   in late December 1968 concern-
ing the collusion  charge, the regional     engineer's   use of
the food fund, and the construction     of a house for the re-
gional engineer with consultant's    labor.     The U.S. Mission
records indicated  that Mr. Pettis went to the U.S. Mission
on these matters because the Peruvian engineers on the proj-
ect intended to release information     on the irregularities
to the press in Lima if something was not done on the proj-
ect problems.

        U.S. Mission records showed that, as a result       of these
meetings,     the U.S. Mission took action in December 1968 to
initiate     an audit of the consultant's      food fund and an in-
vestigation      into the construction    of the regional  engineer's
house.      Details   on these matters are included in chapter 6.

       In February 1969 AID initiated       an investigation     of the
collusion    charge.   After an extensive      study which lasted
until    June 1970, AID's General Counsel reviewed the inves-
tigation's    results  and concluded that the amount associated
with the alleged collusion      (concerning     claims for slide re-
moval) had not been paid out by either AID from loan funds
or the Government of Peru from other funds.            The Office of
the General Counsel, AID, commented that the contractor             ap-
parently    never actually   had submitted a final       claim for
payment for slide removal and concluded that,            since no funds
had been spent for the slide-removal         item, no claim or fur-
ther action by AID in this regard appeared to be warranted.
Accordingly     the case was not submitted       to the Department
of Justice    and was closed.

       From the records available      to us, we noted that the
contractor    and the consultant    had included amounts for the
disputed slide-removal     charge on pay estimates.      These
amounts were subsequently      withdrawn from the pay estimates
by the contractor    and the consultant,     and consequently  no
U.S. Government or Peruvian funds were paid for removal of
any of the disputed slides.




                                  27
CONCLUSIONS

       The records showed that the interpretation           of contract
terms regarding       payment for slide removal by concerned par-
ties had varied from one of supporting          Mr. Pettis'    position
to one contending that the specifications           are unclear,      Re-
garding Mr. Pettis'        charge of negligence    on the part of the
contractor,      we found that the evidence in support of this
charge was conflicting.          This conflict  existed between posi-
tions taken by the various consultants          brought to the proj-
ect site to study the cause of the slide problem.              In addi-
tion,   different    opinions have been expressed by officials
within   the U.S. Mission and AID/Washington          on the charge
of contractor      negligence.

       The Government of Peru and the contractor          have made
charges and countercharges        which relate,    in part, to the
dispute over the interpretation        of the contract     specifica-
tions for payment of slide removal and to the issues of
poor workmanship,     fraud, and collusion      between the two
firms.     We believe that, because these issues are before
the Peruvian courts,      they are matters for the courts to de-
cide.     Therefore we believe that we should not attempt to
interpret    the contract    terms nor comment on the collusion
charges.

       The record is clear that meetings were held between
the contractor     and consultant    in September 1968 and that as
a result    the consultant   reversed its position      on paying for
removal of slides which occurred during construction              and
which earlier     had been considered as unacceptable         for pay-
ment due to contractor      negligence.     In view of the signifi-
cance of this change in position        and the fact that the
change would have required        about $2.2 million    additional    for
payment for removal of quantities        of material    involved in
the slide dispute,      we believe it worthy of note that offi-
cials of the Government of Peru and the U.S. Mission did
not participate     in any study or decisions      reached by the
consultant     to authorize  payment for removal of the slides.




                                   28
                              CHAPTER4

       ENGINEERING DESIGN AND PRACTICES BY CONSULTANT

      Mr. Pettis raised several issues concerning the design
prepared by the consultant.    Details on these issues and
the evidence found by us are as follows.

SLIDES COULD BE EXPECTEDDUE TO PROJECT DESIGN

      Although Mr. Pettis  took the position   that many of the
slides had been due to contractor's   negligence,   as discussed
in chapter 3, he did recognize that a great deal of sliding
could be expected because of the roadway cuts and the al-
most vertical  slopes of the cuts required    by the design.

GAO observation

       Available   records showed that the deep cuts and high
slopes were attributable         to the design standards adopted
by the Government of Peru.          The road as designed had high
standards with respect to its grade, curvature,             and width.
U.S. Mission records indicated          that, to achieve the design
standards set for this road in the terrain           involved,   enor-
mous road cuts and fills         had been required.     The design
philosophy     for the project     specified  steep slopes to con-
serve excavation      quantities    for reasons of economy.

        The records showed also that the Government of Peru,
AID, and the Bank had approved the road design which in-
cluded the deep cuts and high slopes.          Reports made on the
project      and opinions expressed in connection with the slide
difficulties       since 1968, however, pointed out that slide
problems could be expected on the project          due to the deep
cuts and high slopes.         For example, the former Chief of
Engineering      in AID/Washington   advised us that, on the basis
of the design criteria        for the project,  slides should have
been expected.

LIMITED CORE BORINGS
TAKEN BY CONSULTANT

     Mr. Pettis    contended that no core borings had been
made but, instead,    only shallow holes had been dug on the

                                  29
road line.   He indicated that soil surveys and core borings
normally are made prior to the design phase of a project
for the purpose of determining   subsoil conditions. Such
information  is then used to assist in deciding the best
line of a proposed roadway.

GAO observation

       From a review of engineering      literature    and discus-
sions with engineers,     we observed that geologic studies,
soil surveys, and core borings usually are taken prior to
any decision    concerning the road alignment.         Further review
showed that no geologic studies were made and that the soil
surveys made by the consultant       had consisted     of digging
holes 6 to 10 feet deep along the route of the roadway.             In
1964 a U.S. Mission official      reported that core borings had
not been taken in a few sections where deep cuts were re-
quired because of the lack of equipment and funds.             The
U.S. Mission official     contended that such sections were
limited.    During our visit    to the project      in May 1971, we
noted numerous cuts which were much deeper than 10 feet.

       In May 1971, in a discussion   with us on this matter,
the U.S. Mission's     Chief Engineer admitted that the core
boringshadnot     been made over the length of the project
but explained that the method of design employed by the
consultant    had envisioned that, after construction   was
started,   the consultant   normally would make adjustments   to
the road alignment to keep it running correctly.

       It is interesting     to note that U.S. Mission records
indicated      that the project  consultant's    manager and re-
gional engineer in many cases had refused to make adjust-
ments to the road alignment after the construction            started
in 1966.       This policy was confirmed by an expert hired by
AID in 1969 to study the project.           The expert stated that
the project       consultant was inflexible    when it came to
changing the design and that this policy,          in itself,   was
self-destructive.

      There is conflicting  information       as to the reason why
core borings or geologic studies were         not performed by the
consultant.   The Government of Peru's        investigating   commit-
tee on the Tarapoto highway in August         1969 criticized   the

                                  30
consultant   for not making adequate core borings and geo-
logic studies of the area prior    to design.   On the other
hand U.S. Mission records indicate     that the consultant   had
contended that its request to do the above-mentioned       borings
and studies had been turned down by the Government of Peru.
The consultant's    contention was disputed by the Government
of Peru in its court action against the consultant       and the
contractor.

ROAD FILL FAILURES DUE TO DEFICIENCIES
IN CONSULTANT'S DESIGN

      The basic issue raised by Mr. Pettis        on this aspect
of the work was that the consultant's        design did not permit
the placing of drainage pipes at the bottom of the fills
but, instead,    required that they be placed on the side of
the fill.     Mr. Pettis   contended that,   as a consequence,
water weakened the bottom of the fills        and eventually     caused
the fills   to fail.     An illustration   of Mr. Pettis'    allega-
tion follows.

GAO observation

      During construction      many locations   were encountered
where the road line crossed over draws or ravines on the
sides of the mountains.        For the road to cross these areas,
it was necessary to fill       them in with dirt,    usually brought
in from other sections of the project.           Under these fill
areas the drainage pipes were to be so placed as to enable
water to flow freely      through the fill    area and down the
mountains.

        In May 1971, accompanied by the Highway Advisor and
two Peruvian Highway Department engineers,          we visited      the
road site.      The Peruvians pointed out eight large fill
failures    which had occurred along sections of the roadway
constructed     by the contractor.    These failures     essentially
occurred after the contractor      had left the project        site.
The Peruvian engineers attributed        the failures    to incom-
plete or improperly      installed  subdrainage facilities        or to
the lack of complete stripping       of unsuitable    materials       un-
der the fill.



                                    31
                                  SIDEVIEWOF ROAD
ILLUSTRATING THE ALLEGATION THAT DRAINAGE PIPES WERE IMPROPERLY
  PLACED AT THE SIDES OF FILL AREAS, RATHER THAN AT THE BOTTOM




  m      EXCAVATION       AREA


         FILL   AREA



   0     DRAINAGE      PIPEASPLACED   BYTHECONTRACTOR


         ALLEGEDPROPERLOCATION




                                          32
     The Highway Advisor,         in response to our inquiry    on
this matter,  concurred with        the reasons given by the Peru-
vian engineers for the fill         failures.   He stated that:

     "***Without     a time consuming study involving     a
     lengthy trip to the project       site,  it will not be
     possible to go into the reasons for each individ-
     ual failure,      and even then the conclusions    may
     besuspect     since it depends upon the memory of
     persons involved.       My own inspections   of the
     project,    however, permit me to make observations
     pinpointing     three causes which, to my knowledge,
     occurred singly or in combination        in all of the
     eight failures.       These are, in order of impor-
     tance, the following:

     "1.   Failure to install     sufficient  amounts of sub-
           drainage facilities     under the fills,     or incor-
           rect location     of such drainage facilities.

     "2.   Failure to strip out unsuitable    materials  and
           prepare an adequate foundation    under the fills,
           mostofwhich   areonsteeply   sloping side hills.

     "3.   Improper      location,    both horizontally  and
           vertically,       of the main drainage facility
           (culvert)       in the fills.

     "All three of the above factors        are the direct
     responsibility       of the Engineer [consultant]     since
     he orders the amount and placement of the sub-
     drainage,      the amount of stripping    and foundation
     preparation       to be performed,  and the length,     spa-
     tial placement and entrance exit treatment          of the
     main culvert."

      The Highway Advisor also informed us that the Peruvian
engineers maintained   that construction  practices     had not
been the underlying   causes of the eight fill    failures.

        The Highway Advisor made an effort     to find out why
sufficient    quantities  of drainage pipe had not been used.
He informed us further     that the consultant's     employees had
advised him that all the items for the drainage facilities

                                    33
had been involved in overruns of quantities       greatly   exceed-
ing the original    estimates with the implication     that ef-
forts had been made by the consultant    to keep these over-
runs within   reason and within project  financing.

      The Highway Advisor added that the construction           site
is subject to heavy rainfall;      that the lower parts of the
fills  and foundations    had become saturated      1 or 2 years
after construction;     and that, as a result,      almost any
cause, such as the weight of the fill        itself    or a period
of heavy rain,    could have triggered    the failure.

       The Highway Advisor also mentioned that consideration
must be given to the fact that the fills      which had failed
had been inspected regularly     by the Peruvian project     coor-
dinator or his employees during construction        and that
therefore   it must be assumed that the coordinator      had been
aware of the consultant's    cost-cutting  efforts.




                                 34
SUBSTANTIAL AMOUNTOF EXTRA WORKAPPROVED
BY CONSULTANTWITHOUT AUTHORIZATION

       Charles Pettis    charged that in July or August 1968 the
consultant's    regional    engineer had ordered the contractor
to perform work that totaled        almost $1 million     without hav-
ing authority    to do so from the Government of Peru or the
U.S. Mission.      Mr. Pettis    charged also that this work was
given to the contractor       through what is known as a direc-
tive instead of through an appropriately           approved change
order.     Mr. Pettis   also stated that in certain       areas the
changes for which the regional         engineer had approved pay-
ment were changes that the contractor          already was obligated
to perform under the contract         as a part of maintenance.

GAO observation

        A change order consists         of a written     request from the
 consultant    to the contractor        requiring    work to be performed
 that is in addition       to the work specified         in the basic con-
 tract.     A U.S. Mission audit report issued in June 1969 on
 the AID loan for the project           stated that change orders had
 been issued without the U.S. Mission"s approval and that
 this fact was first       reported to the Mission in December 1966
 after three change orders had been issued.
        The audit report stated also that it took the U.S,
Mission 2 years, until         December 1968, before it was able to
work out appropriate        procedures between the Government of
Peru's Highway Department and the consultant                 for AID ap-
proval of change orders,          The audit report also pointed out
that a difference       in interpretation         of provisions    of the
consultant's     contract    by the U.S. Mission,         the Government of
Peru's Highway Department,          and the consultant         made it dif-
ficult    to require the consultant          to submit change orders
to the U.S. Mission for approval.

       The audit report pointed out also that, as of April
1969, the consultant     had issued a total  of 428 directives,
none of which had been approved by the U.S. Mission,         A
directive   is a written     order from the consultant   to the
contractor    requiring  that the work, including    all changes
that do not involve any adj,ustment in the basis of payment,
be performed in accordance with the contract.


                                   35
       The consultant    took the position     that,    since the di-
rectives     did not represent    major changes in work, the U.S.
Mission's     approval was not needed and in any event progress
of the work could not be held up waiting            for approval.     The
audit report presented a summary of 12 significant             direc-
tives issued by the consultant         that had an estimated      total
dollar    value of about $970,000.        Three of these directives
were over $150,000 each in value.           The U.S. Mission's     audit
report    recommended that AID work out approval arrangements
for the consultant's       issuance of directives.

CONCLUSIONS

       In view of the opinion expressed as to the distinct
possibility    of slides'occurring     because of the design
adopted, we do not understand       why the contract  specifica-
tions dealing with payment for removal of slides during
construction    were so written    that they could be interpreted
in a different    manner by the consultant     and by the contrac-
tor, as described      in chapter 3.

       On the basis of the data available      to us, it is evident
that the consultant      did not perform geologic    surveys nor
take adequate core borings,      in areas involving    deep cuts;
that the drainage facilities      under large fills    were not
properly    placed, which, in part,     caused roadway fills   to
fail;    and that the consultant    approved a substantial   amount
of work without     obtaining  approval of the Government of
Peru and of the U.S. Mission.        The record is not clear as
to the reasons why geologic surveys and core borings were
not taken and why sufficient      pipe was not authorized    or
used on the project.

      The consultant's      approval of a substantial      amount of
work without   authorization      appears to have stemmed from a
disagreement    over interpretation      of contract   terms.   We are
unable to determine from the available          records whether the
work ordered by the directives,         as discussed in the U.S.
Mission's   audit report,     is a part of the work referred      to
in Mr. Pettis'    allegation.




                                   36
                               CHAPTER5

                      CONSTRUCTIONPRACTICES

        Mr. Pettis stated that during the early stages of the
project     the contractor     did not have experienced    employees
or the proper construction         equipment.   Mr. Pettis   contended
that    these factors    affected   the progress of the project.

       Details of the evidence      we found concerning     these alle-
gations are discussed below.

INEXPERIENCED--pm
              CONTRACTOREMPLOYEES
ON PROJECT DURING EARLY STAGES

      T"Ir. Pettis   charged that the contractor's     American em-
ployees assigned to the road project         were experienced  in
dam building      but not in road construction.

GAO observation

        We found references     to the lack of experienced        con-
tractor    employees in the Highway Advisors'        site-inspection
reports on the project.         For example, a July 1967 report
noted that weaknesses in the project         operation     was the ap-
parent lack of know-how on the part of contractor               employees
regarding     highway construction    and the apparent lack of ac-
tion by the contractor's        top management to correct       the sit-
uation.      The report also stated that supervisory          employees
on the job had gotten most of their experience             constructing
missile    sites,   which is not the same as constructing          roads.
The report also pointed out, however, that recent changes
in supervisory      employees might ease the problem.

       In April 1968 the Highway Advisor,         in a report to the
U.S. Mission's     Chief Engineer concerning project        problems,
pointed out that the contractor        did not appear to be making
satisfactory    progress on the project      and that the workman-
ship was not compatible with the contractor's           reputation    as
a top American contractor.         The progress and workmanship
problems were attributed      to the lack of trained,        skilled
equipment operators     and top-level     supervisors.     The report
added that the experience       problem had been reduced


                                   37
considerably    by changes in supervisory employees but that
the problem    of getting skilled help remained.

      The lack of trained operators    had been cited earlier
by the Highway Advisor as contributing       to an uncommonly
high accident rate on the project.       A J%rch 1967 site-
inspection   report noted that the consultant's     resident    en-
gineer had expressed concern about safety on the project
because one of his laboratory    technicians    had been killed
while making a compaction test.

       The contractor's   concern over the lack of trained
Peruvian employees had been noted in the files            we reviewed.
In March 1967 the contractor      requested the Peruvian Highway
Department to change a contract       limitation    concerning em-
ployment of third-country     nationals.       The contractor's
purpose in requesting     the change was to bring to the project
a limited   number of Spanish-speaking        Colombian and Panama-
nian operators     to be used as instructors      to train    locally
hired employees.

      The records available   to us did not show what action,
if any, the Government of Peru had taken on this request.
The records we reviewed showed that the contractor      had made
several changes in top supervisory     employees during the
period of the project,    the last in July 1967.

LACK OF PROPER CONSTRUCTIONEQUIPMENT

      Mr. Pettis    stated that the contractor    did not have the
proper compaction equipment to build the Tarapoto highway
during the early period of the project.        Mr. Pettis  added
that proper compaction of soils is necessary to help ensure
that the road surface is stabilized.        He stated also that
problems with the road's compaction were less serious by
the end of 1967 as additional      equipment had been brought
to the construction      site.

GAO observation

      Our review of available    records showed that in August
1965, at the time the award was made, the consultant      in-
formed the Government of Peru that the quantity     of heavy
equipment the contractor    planned to use on the project    was

                                  38
less than the minimum recommended.    The consultant    recom-
mended that the Government discuss the equipment matter
with the contractor  to make certain  that sufficient     com-
paction equipment would be on the job site.      Records showed
that the U.S. Mission also was made aware of the consultant's
observations  on the equipment matter in August 1965.

      Although the contractor's    equipment deficiencies     had
been pointed out by the consultant,      apparently  little,     if
any s action  was taken because  Highway   Advisors'    site in-
spection reports of August 1966 and January 1967 commented
on the lack of suitable    compaction equipment.

       The reports differed  on the effect    that this lack of
equipment had had on the project.       For  example,  the August
1966 report stated that rollers     being used by the contractor
were not able to provide the required       compaction and that
therefore    the contractor was using rubber-tired     Euclid
scrapers to obtain the required     compaction.

       On the other hand the January 1967 report pointed out
that the work observed had been spread over approximately
50 kilometers    and that no section of the subgrade had been
satisfactorily    completeror       compacted to the required den-
sity and added that this was due to the lack of suitable
compaction equipment.        The report noted that the contractor
had received one 25-ton pneumatic roller         but added that it
would have been more advantageous for the contractor          to
have gotten heavier ones (pneumatic rollers)          and more of
them. An earlier      report    (dated November 22, 1967, prepared
for the contractor)       recommended that a 50-ton rubber-tired
roller    and a smaller type roller      loaded to 4,000 pounds per
linear foot be utilized       to obtain the required    compaction.

     A Highway Advisor site-inspection   report in P'rarch 1967
again mentioned the lack of proper compaction equipment but
added that additional  equipment was reported   to be en route.

C0NCLUSION

       The evidence available    to us tended to support
Mr. Pettis'    charges that, during the early stages of the
project,    the contractor   used einployees inexperienced in
road construction     and did not have the proper equipment

                                 39
to compact the road.    The reasons why these problems oc-
curred and the detrimental   effect  they had on the overall
progress and quality  of road construction   is not clear from
the records we reviewed.




                              40
                             CHAPTER6

           ALLEGED IMPRCPER USE OF CONTRACTFUNDS

      Mr. Pettis   alleged that a fellow consultant     employee
had improperly    used contract    funds.  According to Mr. Pettis,
this employee, who had been the resident       engineer for the
consultant   early in the Tarapoto project     and who later had
been promoted to regional       engineer, had used subsistence
funds to pay for personal expenses and had charged the con-
tract for material     and labor used to construct    a private
house for himself.

      Details  on the specific    allegations   and the evidence
we found follow.

IMPROPER USE OF EXCESS FOOD FUNDS

      Mr. Pettis   charged that the contractor      was responsible
for providing    meals to consultant     personnel but instead paid
a consultant    employee to do so. Mr. Pettis       stated that the
consultant    employee had provided some food but in many cases
had paid laborers     an equivalent    of $1 a day instead of pro-
viding meals.     Funds generated from this food operation        were
then used in some instances       by the consultant    employee to
pay his own personal expenses.

GAO observations

      The contract     specifications     provide that the contractor
is responsible     for preparing      and serving meals to the em-
ployees and laborers      of the consultant.      The specifications
provide that one person's meals for 1 day, properly             fur-
nished, prepared and served, are the unit of measurement.
The contractor    was paid PS/170(1) for each employee's daily


1
 At the time the contract     was signed and through the early
  stages of the project,   the exchange rate was PS/26.80 for
  1 U.S. dollar.   This item initially   provided the equivalent
  of $6.30 a man-day.    By June 1968 the exchange rate had
  risen to PSj43.75 for 1 U.S. dollar;    thus PS/170 was worth
  approximately  $3.90.

                                  41
meals and PS/lOO(l)    f or each laborer's daily meals. These
two items were financed 60 percent by the Bank in dollars
and 24 percent by the Peruvian Government and 16 percent by
AID in local currency.

        Before actual construction       began the above-mentioned
consultant      employee verbally   agreed with the contractor's
project    manager that the consultant       would feed its own per-
sonnel.      The  consultant  would  bill   the  contractor   at the
contract     unit price for the number of man-days on a monthly
basis and, in turn, the contractor          would bill    the Peruvian
Government for that amount.

       The consultant    employee acted as the agent in Tarapoto
for the consultant.       As the consultant's    agent he had the
authority   to bill   the contractor,    receive the resultant
check, endorse it for the consultant,         and cash it.    Once
the check was cashed, the employee exercised          complete con-
trol over the funds.       The feeding agreement, therefore,       can
be viewed as an agreement between the companies.

       By mid-November 1966, the contractor         had the facilities
needed to feed consultant       personnel,  but the consultant        em-
ployee continued to furnish       food while the contractor        pre-
pared the food and served the meals.          It was agreed that
the consultant     would receive PS/55 a man-day to cover the
cost of food for employees and laborers          alike.    The contrac-
tor retained    the difference    between the amount paid to the
consultant    employee and the contract     unit prices as reim-
bursement for meal preparation        and service.

       According to U.S. Mission audit report,     the consultant
employee, rather than provide meals      to all laborers,   paid
them at a daily rate of PS/30 a man-day until        August 1968,
at which time the rate was increased to PS/40 a day.         The
difference    between the rates received by the consultant      and
those paid to laborers     before and after August 1968--PS/25
and PS/15, respectively    --were put into a food fund directly
controlled    by the consultant's   employee and were used by
him for a wide variety     of purposes, many of a personal

1
 This item initially   was worth approximately         23.75,   but by
  June 1968 it was worth approximately   $2.30.

                                   42
nature.     Any profits  accruing from operation  of employee
club facilities     also were put into this fund.

      An audit of the food fund performed by the U.S. Mission
early in 1969 revealed that no accounting      had ever been made
of the money received by the consultant     from the contractor
between February and mid-November 1966.       Since the number
of man-days worked during that period is known, we can es-
timate that the consultant   received about PS/808,000,     or
approximately  $30,150, from the contractor     during that pe-
riod.

      From mid-November 1966 until   December 30, 1968, when
the verbal agreement was terminated,     the consultant    received
PS/55 for each laborer and employee man-day.       A total    of
90,638 man-days were worked, for which the consultant         re-
ceived about PS/5,000,000  (approximately    $165,200).

        Additionally,      the contractor       paid the consultant     about
PS/596,000 (approximately            $16,400) for food provided to con-
tractor    kitchen help, project          visitors,     and the Peruvian
coordinating       engineer.      The consultant       employee therefore
received about PS/5,580,600             (approximately     $181,600) from
November 1966 to December 1968, or a total                 of about
PS/6,400,000        (approximately     $212,000) over an almost 3-year
period,       Subsistence paid to the consultant            by the Peruvian
Government involving          other projects        in Peru was comingled
by the consultant         employee with the Tarapoto project           money.
These additional         subsistence     payments amounted to about
PS/321,260 (approximately            $8,640).

       AID's audit showed that after November 17, 1966, a
journal was maintained      to record purchases of food, subsis-
tence payments to laborers9         and miscellaneous       expenditures.
The report stated that it was not possible              to substantiate
all of these journal      entries    because invoices       or paid re-
ceipts in support of journal         entries    frequently    did not state
the purpose of the expenditures.             The AID audits and inves-
tigations   were able to identify        expenditures      of about
PS/5,070,000    (approximately      $168,000) for food and subsis-
tence payments to laborers        from mid-November 1966 to Decem-
ber 1968.    In addition,     approximately       PS/765,000 (about
$25,300) was identified       as miscellaneous       expenditures     during
that period from the food fund controlled             by the consultant
employee.
                                     43
       The charge that the consultant   employee had used the
excess food money for personal expenses was confirmed by
the U.S. Mission audit.     The audit was able to identify   the
following   personal expenditures   from the food fund.

                                                            Approximate
                                                            U.S. dollar
                                     Sales                  equivalent

Stereo equipment                  PSI     9,643                 $     241
Office furniture                          5,700                       132
Silver                                    6,700                       151
Tools for house
   construction                          30,000                        669
Wedding costs                            56,034                     1,250

                                  PS/108,077                    $2,443

The audit report stated that the wedding costs included such
items as the orchestra,  furniture rental,  liquor, bartenders,
waiters,  flowers, and hotel rooms for guests.

       It appears that, when contractor           and consultant    employ-
ees in Tarapoto reached the verbal agreement concerning the
subsistence   of consultant   personnel,        they did not comply
with the contract    terms.   The contract         between the Govern-
ment of Peru and the contractor         provides that the contrac-
tor not sublet,   assign,   sell,    transfer,      or otherwise dispose
of any part of the contract       without     the written     consent from
the Peruvian Government.      In effect,        the contractor    had as-
signed his responsibility     to feed the consultant's           personnel
to another party-- the consultant        represented      by its employee
in Tarapoto-- and never had obtained the written              consent from
the Peruvian Government.

      In this     case, the consultant    employee became a subcon-
tractor    of the contractor.       Since the consultant     was respon-
sible,    at different    times during the contract      period,   for
preparing    the monthly pay estimates which covered the amounts
payable to the contractor        and was at the same time a subcon-
tractor    of the contractor,     the objectivity   with which the
consultant     could attest    to the work done by the contractor
could be questioned.


                                    44
        The monthly pay estimates           covering amounts payable to
the contractor        for work performed were signed by contractor
and consultant        personnel in Tarapoto and Lima.             Signature
on the pay estimates         certified      that the work for which pay-
ments were requested had been executed in accordance with
plans, specifications,          and terms of the contract.            Monthly
pay estimates were prepared,             signed, and submitted as if the
contractor      was, in fact,       discharging      the contract    obligation
for feeding consultant          personnel.       Moreover, the fact that
certain      consultant    personnel received cash amounts substan-
tially     less than the amounts billed            to the Government of
Peru raises a further          question as to validity          of the certi-
fications.

     The AID Office of General             Counsel expressed     the follow-
ing views on the food fund.

      1. In August 1970 it was reported that no action would
         be taken against the consultant           employee or the con-
         sultant    regarding    the misuse of the food fund.       It
         was pointed out that         the employee had made restitu-
         tion of the amounts in question,            It was further    re-
         ported that, regarding          any possible claim against
         the contractor      relating     to the question of its cer-
         tification     of vouchers,      it had been agreed that AID
         should await the outcome of the Peruvian suit.

      2. In January 1971 it was reported that no action
         should be taken on the matter of the food fund pend-
         ing the outcome of the court actions instituted           by
         the Government of Peru.        In the event that,   for one
         reason or another,      the Government of Peru does not
         take action on the amount which represents        the
         amounts retained      by the companies and not, in fact,
         paid to the consultant's       laborers or used for their
         subsistence,   AID should then consider billing        the
         appropriate   parties     for such amounts.




                                      45
UNAUTHORIZED DIVERSION OF LABOR AND MATERIALS
FOR CONSTRUCTIONOF A PRIVATE RESIDENCE

      Mr. Pettis  charged that consultant  laborers had been
used on the construction   of an employee's private  residence,
the contractor   had put power and water lines into the house,
and these costs had been charged to the Government of Peru.

GAO observations

       Two houses for American employees of the consultant              had
been built    at the project     site.    Construction     of the houses
was not authorized    originally       under the consultant's      con-
tract;   however,they  were paid for after Peruvian approval
had been obtained.      The consultant      employee had requested an
estimate for a third house from the contractor,              who had con-
structed   the other two houses at the site.             When the em-
ployee received the estimate,he          considered    it excessive and
decided to build a house himself.

        As had been done for the two houses originally    built,
the consultant     employee expected to have the house authorized
by Peru after    it was occupied,    The consultant  employee be-
lieved that such action was justified      in that there was not
sufficient    housing at the site for American consultant      em-
ployees.

       Records showed that the third house was constructed    at
a cost of about PS/692,000,    or $16,000.   The U.S. Mission
provided us with the following    photograph taken during con-
struction    of the house.




                                    46
PICTURED   ABOVE     DURING      ITS CONSTRUCTION         IN 1968,   THE   CONSULTANT   EMPLOYEE’S   HOUSE   WAS
THE ONLY   LUXURIOUS        RESIDENCE      IN TARAPOTO.


          The U.S. Mission's     audit report stated that laborers       on
   the consultant's     payroll   had been utilized      on the house but
   that,until    August 1968, a separate payroll         ledger had been
   maintained.      The cost of this labor was not included in
   monthly billings     to Peru.     (Local currency costs of the con-
   sultant    were paid 60 percent by Peru and 40 percent by AID.)
   From September to early in November 1968, however, this la-
   bor was included on the regular         payroll  billed    to Peru by
   the consultant.      The Government of Peru was subsequently
   given a credit     of about PS/88,500 for this charge.

          F'urther investigation     by U.S. Mission auditors   re-
    vealed an additional      credit  of about PS/51,000 was owed the
    Peruvian Government, because 10 additional        laborers  not in-
    cluded in the above credit       had worked a total of 245 man-
    days on the employee's house.        The credit  would cover about
    PS/26,300 in wages and PS/24,500 in subsistence.

             The U.S. Mission audit mentioned above also confirmed
    that     the contractor  had provided the consultant  employee
    with     a considerable  amount of electrical and plumbing

                                                                47
 supplies,  as well as the services of its plumbers and elec-
tricians   on the house.      Due to the results      of the U.S. Mis-
sion's audit,     the contractor's      project   manager ordered a
complete review of all material          and services provided to the
employee.     This resulted     in billings     of about PS/31,600 to
the employee, which brought the total billings             to about
PS/47,000.     The U.S. Mission's       audit report contained a sum-
mary of the improper costs incurred for the house, as fol-
lows:

                             Consultant's                    Contractor
                            charges to Peru                 billings    to
  Cost item          Credit given        Credit       due       employee

                                            (sales)

Building    mate-
   rials                                                    PS/13,105.70
Labor and re-
   lated costs        PS/88,472.56        PS,'26,318.06
Subsistence                                   24,500.OO
Electrical    ser-
   vices and
   material                                   1,200.oo         27,616.93
Plumbing ser-
   vices and
   material                                                      6,284.28
Air travel                                    3,778.40
                      x/88,472.56         PS/55,896.46      PS/47,006.91

        In December 1970 the AID Office of General Counsel took
the view, with respect to the irregularities           on the project,
that the only unresolved        issue concerned the food fund.
This would infer that the issue of the consultant             employee's
diversion     of labor and materials     for the construction     of his
private    residence had been satisfactorily       resolved.     On the
basis of available     records,     we believe that full restitution
may not as yet have been made for the construction             of the
house.




                                     48
CONCLUSIONS

      We believe that the U.S. Mission's    audit and other
records substantiate    the charge that contract   funds, mate-
rial,  and labor were used by a consultant     employee for his
personal use and to pay part of the cost of construction       of
his private'house    at Tarapoto.

      Our analysis  of available    records raises a question as
to whether full restitution      has been made by the consultant
employee.   The U.S. Mission reported      that restitution  had
been made in the following     amounts for the consultant    em-
ployee's house.

     1. About FS/88,500 (approximately    $1,980) was credited
        to the November 1968 consultant's     pay estimate pay-
        able by Peru.

      2. About PS/31,300 (approximately $720) was paid on
         August 12, 1969, in the form of an invoice issued
         to the Peruvian Government.

In addition,   the employee was billed       for about PS/47,000
(approximately    $1,080) by the contractor,     which, according
to the employee, the consultant    deducted from his salary
without his knowledge.

      The amount which internal    AID audits determined the
employee owed to Peru, in addition     to the PS/88,500 previ-
ously credited,    was about PS/55,800 (approximately     $1,285),
of which the employee paid about PS/31,400.       Subsistence     of
PS/24,500 ( approximately    $810) owed to the Peruvian Govern-
ment, as shown in the summary of improper costs on page 48,
was not included in that amount. We found no records which
showed any restitution    by the employee other than the two
amounts shown above.

      In addition, we have been unable to locate any informa-
tion which documents restitution     by the consultant    employee
for about PS/108,080 ($2,440) identified      in the U.S. Mis-
sion's audit as having been diverted      from the food fund for
his personal expenditures.      Thus it seems that restitution
remains to be made for at least PS/132,580,       the equivalent
of about $3,200.

                                 49
      We believe   that, if the Government of Peru does not
recover funds involved in the irregularities       with respect
to the food operation     under the contract   or recovers only
its share of the food payments, AID and the Bank should de-
termine the validity     of the certification   made by the com-
panies regarding    the payments for the consultant     personnel's
food, the amount thereof,      and take action to recover any im-
proper payments.

RECOMMENDATIONS

      We recommend that the Administrator   of AID and the
President   of the Bank take action to ensure that:

     1. The consultant    employee has made or will    make full
        restitution    of contract funds, material,    and labor,

     2. If the Government of Peru does not pursue this mat-
        ter or if it recovers only its share of the food
        payments, AID and the Bank determine the validity   of
        the certifications  made on the food payments and re-
        cover any improper payments to the companies.




                               50
                              CHAPTER 7

              PERSONALCHARGESAGAINST MR. PETTIS

       Charles Pettis   stated that, after the termination          of
his employment by the consultant          in December 1968, he had
been unable to find employment because the consultant            had
blackballed    him in the U.S. engineering-construction         in-
dustry;   his professional    qualifications     had been challenged;
and, when he attempted to leave Peru in August 1969, he was
issued a restricted     passport without any explanation.

GAO OBSERVATIONS

      Whether Mr. Pettis was blackballed       by the consultant
is virtually   impossible    to substantiate.    Since December
1968, he has applief     for positions    with 31 engineering-
construction   firms.      In all cases except one, the firms
did not respond or responded negatively        to his applications.
In one instance,     his resume was accepted, but no further        ac-
tion was taken after he expressed interest        in the job over
a year ago.
      AID, consultant,    and contractor        officials     deny any at-
tempt to blackball     Mr. Pettis.       We noted instances where AID,
contractor,  and consultant      officials      had expressed doubt
about his qualifications     as a resident         engineer.     For ex-
ample, a U.S. Mission official          explained      to representatives
of Peru that, although Mr. Pettis was a good soils engineer,
his promotion to resident       engineer had not worked out.

      An official of the contractor claimed that the slide
problem could have been solved a year earlier    but for consul-
tant employees who lacked competence to manage a job of that
size and who wrongly had opposed contractor   requests   for
payment.

        Although the consultant   had reservations      about Mr.
Pettis'     competence as a resident  engineer,    it   informed the

1Mr. Pettis advised GAO that, to the best of his knowledge,
 two of the positions for which he applied were AID funded.
Government of Peru in August 1969 that Mr. Pettis    deserved
his old job back as a soils engineer.   Mr. Pettis   stated
that accepting  employment with the consultant  would compro-
mise his claim against the consultant.

        In regard to the charge that Mr. Pettis was issued a
restricted      passport,   we noted that he had been given a lim-
ited 4,-month passport extension.           According to the U.S.
Mission,     the limited    passport was issued in accordance with
section 34.9 of the Immigration          and Nationality  Act. This
section of the act deals with its loss of nationality            by
native-born      or naturalized    citizen.    Subsection 4 is appar-
ently the section which was applied to Mr. Pettis,

     "(A) accepting,        serving in, or performing          the du-
     ties of any office,         post, or employment under the
     government of a foreign          state or a political        sub-
     division   thereof,      if he has or acquires the na-
     tionality    of such foreign        states;    or (B) accept-
     ing, serving in, or performing              the duties of any
     office , post, or employment under the government
     of a foreign    state or a political           subdivision
     thereof,   for which office,         post, or employment an
     oath, affirmation,         or declaration      of allegiance
     is required;    ***.I'

According to Mr. Pettis,  he had explained,   when questioned
by the U.S. Embassy's vice consul regarding    passport renewal,
that he had never taken an oath of allegiance    to the Govern-
ment of Peru.

     Records available      to us contained the following explana-
tion of why a limited      passport had been issued by the U.S.
Embassy.

     1. When Mr. Pettis arrived    at the U.S. Embassy in Peru,
        he submitted a completed passport application,    took
        an oath of allegiance   to the United States of America,
        and departed the Embassy. After he left the E%nbassy,
        the consular officer   noted that he was employed by
        the Government of Peru.

     2. The consular officer reported that he had been un-
        able to contact Mr. Pettis concerning his employment

                                    52
        with the Government of Peru.      The limited    amount of
        time between Mr. Pettis'   application     and issuance of
        the passport and in order not to leave Mr. Pettis
        without  a passport, the Embassy issued a passport
        valid for a 4-month period.

     3. State Department records showed that, after it        had
        verified    Mr. Pettis'   statements, it had issued   him
        an unrestricted     passport in September 1969.

CONCLUSION

      The question of whether Mr. Pettis had been blackballed
cannot be established,      as any such action would,by defini-
tion,  be informal     and not necessarily   documented.  We could
not find any overt action to blackball        Mr. Pettis.  The fact
remains, however, that he has applied for 31 jobs since 1969
and has been unsuccessful       in obtaining  employment in the
engineering-construction      field.

      In regard to the passport renewal,  it appears that
Mr. Pettis'  difficulties were a matter of misunderstanding
and expediency.




                                53
                                CHAPTER8

                U.S. GOVERNMENT
                              AGENCIES INVOLVED

                          IN HIGHWAY PROJECT

      Our review of available       evidence showed that both the
U.S. Mission and AID/Washington         had been aware of many proj-
ect problems long before they became major stumbling blocks
to project   progress but had failed       to take timely action on
most of the problems,        Our review showed also that the Bank
had followed    its practice    of relying   on the other U.S. agen-
cies and U.S. firms involved to monitor the project,

      Since mid-1969 the United States Government has engaged
in a series of meetings with the Government of Peru to re-
solve the differences    between Peru and the two U.S. firms
on the cause of project    problems.     As of November 1971, in-
formal discussions    are continuing.     Details  concerning the
U.S. Government agencies'     involvement   in this project   are
discussed below,

AID MONITORING RESPONSIBILITIES

       Internal    AID policy guidance delineates          responsibility
for project      monitoring.     After a loan is extended, AID's
principal     role in project     implementation     is to keep the ac-
tivity    under s,urveillance.       This is to ensure that the proj-
ect's physical      and financial     progress is consistent        with
plans and schedules and that the project             is proceeding with
due diligence      and efficiency     in conformity     with sound engi-
neering,    management, and financial        practices.

        The minimum actions required       by AID policy on project
monitoring     include (1) approval of the proposed engineering
firm and the contract        for engineering    and other professional
services,     (2) approval of bidding documents, including             plans
and specifications,       (3) approval of construction        contract
award and of firms to whom awards are made, (4) review of
periodic    progress reports     submitted ,under the terms of the
agreement to ensure that implementation            is proceeding satis-
factorily,     (5) inspection    at the project      site by the U.S.
Mission and AID/Washington,        as appropriate,       and (6) approval
of contract      change orders,

                                     54
      Our review of available  records showed that AID had
approved (1) the engineering   firm and its contract    with the
Peruvian Government, (2) bidding documents, including       plans
and specifications,   and (3) award of the construction     con-
tract and the consortium to which the award was made.

      Review of periodic   progress reports  submitted by the
consultant   (item 4 above) and site inspections     (item 5 above)
were carried    out by the Highway Advisors assigned to the
U.S. Mission in Peru under a participating     agency service
agreement between AID and the Department of Transportation,

       From June 1965 through November 1971, a total        of 31
site inspection      reports by Highway Advisors were submitted
to the U.S. Mission and forwarded to AID/Washington's          Office
of Engineering.        Copies of the analyses of consultant    prog-
ress reports were submitted to the U.S. Mission's         Chief En-
gineer, who, in turn, reported to AID/Washington,           In addi-
tion,   a Highway Advisor was designated as the loan implemen-
tation    officer  and, as such, was charged with the responsi-
bility    of continuing     project surveillance.

      Although AID had designated a Highway Advisor as loan
implementation    officer,  he had little     authority    to act.    All
decisions based on project     monitoring     had to be channeled
through the U.S. Mission's     Transportation      Coordinator     (who,
according to mission records, was a botanist,            not an engi-
neer), the U.S, Mission's     engineers,    and the Capital      Develop-
ment Officer   before reaching the U.S. Mission Director,             Be-
cause of the organizational     relationships      within    the U.S.
Mission,   one Highway Advisor reported       in April 1968 that
Bureau employees were unable to effectively           monitor the Tara-
pot0 project.

SITE-INSPECTION REPORTS INDICATED
NUMEROUSPROJECT PROBLEMS

      Our review of available  documents showed that reports
filed with the U.S, Mission and AID/Washington      by Highway
Advisors accurately  reflected  most of the major project      prob-
lems.   For example, from January 1967, when first     reported,
to December 1968, the slide issue was cited as a problem in
nine out of 14 of the Highway Advisors'    reports.    The first
report of slides noted that the contractor     had been warned
by the consultant      about excessive dynamiting,       overexcavation,
and a possible    citation   of negligence,     which would preclude
payment for slide removal.        The inspection     report for April
1968 stated that a major problem of slides existed and that
there was a complete difference        of opinion on the subject
between the consultant      and the contractor.       The June 1968
report reaffirmed      the seriousness   of the slide problem, as
did every report from July to December 1968.

        Similarly,   the site inspection       reports  noted conflict-
ing contractor      and consultant     interpretation    of specifica-
tions.     As early as April 1967, the contractor           and the con-
sultant    disagreed on the method of work that would have
complied with specifications.            In October 1967 and February
and April 1968, continuing         disagreement was reported,       parti-
cularly     in regard to specifications         dealing with payment
for slide removal.

        It should be noted that numerous problems were reported
in addition    to the slide and specification   disputes.   Fore-
most among these other reported problems were the lack of
proper compaction equipment and the inadequate number of
skilled    employees,  Both problems were first    cited in August
1966 and continued to be cited in subsequent reports until
as late as October 1967.




                                    56
LACK OF TIMELY AID ACTION ON
IDENTIFIED PROJECT PROBLEMS

       The record is      not entirely  clear on the action taken
by AID to resolve        the problems identified    in the site in-
spection reports.         Although most of the problems were iden-
tified   by the first       month of 1967, we noted no real U.S.
Mission efforts     to     solve them until   April 1968.

      At that time the U.S. Mission's       Chief Engineer,     after
accompanying a Highway Advisor to the road site,           reported
on the seriousness      of the problem of slides to the U.S. Mis-
sion Director    (through the Assistant     Director   for Capital
Development).      The Chief Engineer recommended that (1) a
common U.S. Mission viewpoint       be established,(Z)     the Bank
be advised of the problem, (3) the Peruvian Government be
requested to take action,      and (4) the services      of a special-
ist be obtained.

      The U.S. Mission's      Chief      Engineer wrote to AID/Washing-
ton early in May 1968 stating            that, on the basis of internal
discussions,     the U.S. Mission        would request Peruvian action
on the situation     and that the        Bank should be advised.   The
request for a specialist        would     be made only as a last re-
sort,   the letter   explained,     if     the Peruvian Government was
unsuccessful.

       In mid-June 1968 the U.S. Mission informed AID/Washing-
ton of the apparent reluctance      on the part of the Peruvian
Ministry   and the contractor   to bring the matter of slides
to a head.     The U.S. Mission stated that the Peruvian High-
way Department would await a formal claim for payment from
the contractor--   submission of which the U.S. Mission would
encourage --before    focusing on the problem.

       Also in June 1968 the Acting U.S. Mission Director
wrote to the Peruvian Highway Department indicating         that
there might be significant      work overruns on the job that
would substantially     increase the project's   total  cost,    Near
the end of June, AID advised Peru that, until        some fair
solution    was found by the Peruvian Highway Department and
general agreement was reached on interpretation        of the
specifications,     AID would have to follow a more cautious
disbursement    policy,   to ensure that loan funds were available

                                         57
to pay basic    construction     costs    over   the entire   life   of the
project.

      Although the record indicated      that there had been lim-
ited correspondence     and some conversations      between U.S. Mis-
sion officials    and the Government of Peru, we could find
no record of any substantial      action by AID until         December
1968.    In  December 1968  AID became   involved     in   the  charges
made by Mr. Pettis.      As a result   of these charges, AID noti-
fied the Government of Peru of possible         irregularities       and
arranged for an audit of the project.

        After this significant        first   step, AID (1) obtained
the services       of a geological      consultant   in February 1969--
10 months after          the possible   need was identified,    (2) con-
ducted several audits into allegations              made on the project,
(3) engaged in a series of meetings with Peru concerning
project     irregularities,       and (4) agreed, in February 1970,
to send a special emissary to Peru in an attempt to resolve
project     problems.

PROJECT MONITORING BY BARK

       Unlike AID, the Bank does not have written           guidelines
that delineate     monitoring    responsibilities    for loan projects.
Instead,     the Bank determines     the appropriate    type of moni-
toring   on a project-by-project       basis.

        Prior to the Government of Peru's contract             with the
 contractor,    Bank officials      visited     the project   site in Peru
 and approved the bid documents, plans, and specifications
 for the road.     Additionally,       the Bank approved the contracts
 for the consultant       and the contractor        and the award of the
contracts.      As officials     of two U.S. Government agencies--
AID and the Bureau of Public Roads--were               in Peru during proj-
ect implementation,        the Bank could see no reason to conduct
 its own onsite monitoring.           Additionally,     Bank officials
felt    that the interests      of the Bank were safeguarded by hav-
 ing a U.S. construction        contractor      like Morrison-Knudsen
and a U.S. engineering         consultant     like Brown & Root on the
job.

      The Bank kept informed of project    activities     mainly
through monthly reports   from the consultant.        The Government

                                     58
of Peru had required   the consultant    to submit to the Bank,
AID, and the Peruvian Highway Department monthly progress
reports containing   complete information    on the work being
done on all phases of the project,

      Our review of the consultant's      reports  showed that they
did not include most of the major problems reflected          in site
inspections     prepared by Highway Advisors.     The Bank did not
start   receiving    copies of the Highway Advisors'   reports   un-
til April    1968, at which time it was provided with copies
of prior reports.

DISCUSSIONS BETWEENOFFICIALS OF PERUVIAN
GOVERNMENTAND UNITED STATESGOVERNMENT
TO RESOLVE PROJECT PROBLEMS

      In May and June 1969, the U.S. Ambassador and the           U.S.
Mission Director     engaged in a series of meetings with        offi-
cials of the Government of Peru on Tarapoto-Rio         Nieva    High-
way project   irregularities.       The discussions centered     around
payments for slide removal and the charge of collusion            be-
tween the consultant        and the contractor.

       In a letter    dated July 18, 1969, the Peruvian Minister
of Transport     and Communication formally        requested AID/Wash-
ington's   assistance     in solving    the problems of the Tarapoto-
Rio Nieva Highway project.          This letter    was never responded
to by AID/Washington       and as a result      became an irritant   in
already sensitive      relations.     The letter     and the related
material   subsequently      provided to AID were intended to dem-
onstrate   that immediate action was necessary.

       A copy of the July 18 letter   was sent to the U.S. Mis-
sion which sent an interim    response to the Director   Superior,
Ministry   of Transport  and Communications.   The response was
primarily   a statement  of how the U.S. Mission had cooperated
with the Ministry.

      During our review we attempted     to determine what happened
to the letter    once it reached mD./Washington.      In response
 to our questions,   AID officials  stated that they assumed
 that the letter   had been lost within    AID and that therefore
no reply had been made.


                                   59
       At the U,S. Mission,       we noted a memorandum dated Au-
gust   14, 1969, which was sent to AID's Latin American En-
gineering    Division,    transmitting      a copy of the July 18 letter
and a listing      of the related      material.   AID/Washington     offi-
cials   informed us again that they had no knowledge of receiv-
ing these documents.         No other references      to the Minister's
letter   were identified.

       In January 1970 the Minister      of Economy and Finance
wrote to AID/Washington      requesting   high-level  attention    to
road-project    problems.    In response to this request,       a spe-
cial mission was sent to Peru to discuss claims against            the
two American firms and possible methods for resuming AID
and Bank loan disbursements.         The U.S. team met frequently
with representatives      of the Government of Peru, principally
the Minister    of Transport    and Comnications     and his staff,
in February,    April,   and May 1970; however, no settlement       was
reached.

     It was the position    of the special team that (1) AID
and Bank loan disbursements    could not be resumed until     such
time as the suits against the contractor      and the consultant
were resolved,   (2) the Government of Peru's responsibility
for constructing    the road would require  adequate proof that
the Government of Peru was capable of such an undertaking,
and (3) that the performance     of the Government of Peru would
be monitored by a U-S. company.

       Along these lines,     the U.S. team argued that the two
companies had good reputations        and should be paid for the
work which was generally       agreed to have been satisfactorily
performed,     The U.S.   team  was firm in its position      that the
two companies had performed,        on the whole, satisfactorily.
The team leader stated that he had considered         all evidence
supporting   the charges against the two companies and had
concluded that the Government of Peru had not provided any
information    not previously    available,

      The meetings between the U.S. team and the Government
of Peru's representatives     did not resolve the road project
issues,  and thereafter   the pace of official   diplomatic  dis-
cussions slowed.     In April  1971 the U.S. Mission reported
that the U.S. Ambassador and the U.S. Mission Director       had
raised the issue informally     with high-level  Peruvian


                                     60
officials  on two or three occasions.    Quiet diplomatic   prob-
ing would continue,    according to the U.S. Mission,   to deter-
mine whether there was any disposition    on the part of Peru
to reopen discussions.

      The Government of Peru and the contractor  are currently
conducting negotiations  in an effort to resolve project
problems.




                               61
CONCLUSIONS

      The U.S. Mission and AID/Washington       were aware of many
of the major project      problems by early 1967 but did not take
substantive   action until     the end of 1968.   It appears that
several factors    contributed    to AID's lack of timely action.

        One problem concerned the U.S. Mission's        organizational
structure     for managing the project,       The procedures required
that decisions       on problems noted during project     monitoring
had to be reviewed and filtered        through several layers of
U.S. Mission management before reaching the U.S. Mission
Director.       This procedure existed despite the fact that a
Highway Advisor had been designated as the loan implementa-
tion officer      with primary responsibility     for the project.
We were informed that in October 1968 the organizational
structure    was changed so that the Highway Advisor reported
directly    to the U.S. Mission's     Chief Engineer.

        Another contributing       factor was the apparent lack of
adequate coordination         among all parties        involved on the proj-
 ect from its inception        through 1968. The records indicated
that AID was waiting        for someone else to take leadership           in
 settling    project  problems.,      The initial     U.S. Mission audit
report on the project--        covering the period May 1964, through
April 1969 --stated      that there was a lack of adequate coordi-
nation among AID management officials,               the Government of
Peru, the contractor,         and the consultant.          One factor con-
tributing     to this lack of coordination          was the change of
government in Peru in October 1968.               It should be noted, how-
ever, that that was over a year after the major project prob-
lems had been identified,

         Although the Bank had committed $23 million           to the Tara-
poto road project,       we were told,    and the record showed, that
the Bank had relied        on the other U.S, Government agencies
and the two American firms involved to monitor the project.
Additionally,      the records available     to us indicated        that
the Bank was not aware of the project           difficulties      from
initiation      of the project    in 1966 until    April 1968 when AID
started      to make efforts    to resolve project      problems,

      The Bank would have been aware of the major project
problems over a year earlier  if it originally had received

                                    62
copies of the site-inspection   reports prepared by the High-
way Advisors.  Thus the Bank would have had the opportunity
to take action to eliminate   some of the project problems.

RECOMMENDATIONS

      The role of AID in project       implementation   had been de-
fined in its policy guidance as one of ensuring that projects
are progressing     as planned and with due diligence       and effi-
ciency in conformity       with sound engineering,    management,
and financial    practices,     We recommend that the Administra-
tor of AID take action to ensure that AID officials           respon-
sible for project      implementation   are fully   aware of, and
carry out AID's role in monitoring         programs financed with
U.S. foreign-aid     funds.

      We recommend also that,  in projects   where Bank funds
are being used jointly,   with those of another Government
agency, the President   of the Bank take action to ensure that
the Bank is provided with inspection     or evaluation reports
made by the other Government agency involved.




                                 63
                                 CHAPTER9

         AGENCY, CONTRACTOR,AND CONSULTANTCOMMENTS

     ' Upon completion of our review, we met with, and dis-
cussed the results     of the review with, officials         of AID, the
Bank, the Department of Transportation,           the contractor,      and
the consultant.      These officials    generally     agreed that the
facts presented in this report were accurate.              The officials
of AID, the contractor,      and the consultant,       however, did re-
quest that additional     clarification      be made of some of the
matters discussed.      The following     information     summarizes
these views and our observations        thereon, where appropriate.

HISTORY AND CURRENT STATUS OF
TARAPOTOHIGHWAY PWJECT--CHAPTER 2
                                  *
      AID informed    us that:

     "Essential      to an understanding       of the develop-
     ments in the Tarapoto road problem is the polit-
      ical background in Peru at this period which had
     an overriding        impact on all bilateral       relation-
      ships.    Until October 1968 the democratically-
     elected Balaunde government was in power.                 High-
     way building      was one of the highest priorities
     of the Belaunde government and there was every
     reason to believe that the kinds of technical
     and contractual        problems that emerged in the
     construction       of the Tarapoto road could be set-
     tled by negotiations         in good faith among the
     parties    concerned.       The situation     changed dras-
     tically    in October 1968 when a coup brought the
     present military        government to power.         The na-
     tionalist     and uncompromising military          government
     came to power determined to stamp out what it
     regarded as the corruption           and inefficiency       of
     its predecessor.         One of its first      acts was the
     expropriation        of the International      Petroleum
     Company which cast a pall over U.S.-Peru rela-
     tionships     that still     has an overpowering        impact.
     This shift      in the political      climate clearly       had
     a crucial     effect    on the possibility       of making
     needed adjustments         in the Tarapoto project        and
     made the present impasse a certainty."
                                      64
      The consultant   stated that, because the contract   in-
cluded an amount for slide removal,     it is not correct  to
imply that all slide removals would represent     overruns in the
estimated  costs.    The consultant stated also that an unusu-
ally large overrrun    would not have occurred in the costs for
slide removal.

GAO observations

       The contract    specifies  an item of 1,32O,OOO cubic meters
for removal of rubble which is interpreted         by the parties    to
Be slide removal.       This represents   10 percent of the excava-
tion quantities     provided for in the contract.      That consider-
able cost overruns would have occurred on the project           as the
result    of the consultant's    decision  in September 1968 to au-
thorize    payment for removal of slides which occurred during
construction    is evident from the following      data provided   to
us by the U.S. Mission.

                                                   Cubic meters

      Identifiable     slide   removal   through
         February    1969                            3,300,000

      Additional  slide removal
        (rough estimate)   expected
        if roadway were completed
        under same standards
        (class II highway)                           3,000,000

           Total                                     6,300,OOp

        Comparing the above quantities   of identified and ex-
 pected slide removal of 6,300,OOO cubic meters with the
,quantity   of 1,320,OOO cubic meters included in the contract
  for slide removal,   it is apparent that significant  cost
 overruns for slide removal would have occurred on the proj-
 ect.

CONSULTANTCHANGEDPOSITION AND AGREEDTO
AUTHORIZE PAYMENTFOR SLIDE REMOVAL--CHAPTER3

      The consultant stated that,  with respect  to the report
statement  that Mr. Pettis  had been excluded from an


                                    65
inspection   trip   of the slide area made by officials            of the
consultant    and the contractor,       it should be pointed out that
Mr, Pettis'     immediate supervisor,      who at that time shared
Mr, Pettis'    opinion of the cause of the slides,           was present
throughout    the inspection    trip.     The consultant     added that
there was no real reason for Mr. Pettis'           presence on the in-
spection as his opinion was fully          known to the parties        at
that time.     The contractor     presented similar      views on this
matter,     Regarding the eiscumstances       of Mr. Pettis#       removal
as Resident Engineer,      the consultant     stated that his removal
had been based on his refusal         to obey the direct      instructions
of his project     manager to return to Lima for a conference and
not on his refusal      to sign the pay estimate,

ALLEGED CQLLUSIQN BETWEENCONSULTANTAND
CQNTRBsJTORFOP. PURPOSEOF PAYING FOR
SLIDE REMOVAL--CHAPTER3

       The consultant    denied emphatically    the charge of any
collusion.     The consultant     stated that there were no secret
meetings and that what meetings had been held were not for
fraudulent    or deceitful    purposes but rather were, in effect,
bona fide efforts     to decide the contractor's     appeal of the
decisions    denying payment for slide removal reached by the
consultant's    field representatives.

SLIDES COULB BE EXPECTED
DUE TO PROJECT DESIGN--CKAPTEW 4

        The consultant"s     Chief Engineer informed us, in regard
to the design philosophy         VJhich specified steep slopes, that
flattening    the slopes would have generated earth excavation
quantities    that would have made the project        costs prohibi-
%ive 0 The Chief Engineer added that years of Peruvian high-
way experience      dictated   that steep slopes were less suscepti-
ble to continuing       erosion and to erosion-induced      slides which
caused severe long-term        maintenance problems.

        The consultant    stated that the advice of AID's former
Chief of Engineering       that slides should have been expected
on the design criteria        for the project  could be amplified.
The consultant      contended that    slides not only s
been expected but were expected and were allowed for in a
significant    amount in the job estimate and in the pay quan-
tities    in the bidding documents,,
GAO observations

       Although the consultant          believes     that the contract    terms
are clear on the payment for slide removal, the fact remains
that a significant         difference     of interpretation       of the speci-
fications     existed between the consultant's              field employees
and the contractor         at the project       site while the road was
under construction.           As previously      pointed out the matter of
contract    interpretation         is presently     before the Peruvian
courts.

ROAD FILL FAILURES DUE TO DEFICIENCIES IN
CONSULTANT'S DESIGN--CHAPTER 4

       The consultant    commented that the proper placement of
culverts   was the responsibility     of the Resident Engineer,
who, at certain     times during the project,   was Mr. Pettis.

GAO observation

      The consultant's    position   seems to have ignored the fact
that Mr. Pettis    was an employee of the consultant      and that
the consultant    had responsibility    for control  of its field
personnel.




                                      67
INEXPERIENCED CONTRACTOREMPLOYEES--CHAPTER5

        In the opinion of contractor            officials,       the supervisory
employees on the road project              were experienced         and were
qualified     to handle this project           since many of them did
have some previous        highway experience.             It was also the offi-
cials'    position   that the expertise           required     for excavation
and fill    on large earth-fill           dams and missile         sites was very
similar    to that required         for heavy excavation           on highway
projects.       In addition,      they    said  that    their    supervisor   had
had extensive      experience       in the excavation         and grading of
railways,     which  is   similar      to  highway     construction.

         It is the contractor's    position  that the accident        rate
on the project       was not uncommonly high.     The accident       record
for the project       compares favorably,   according     to the con-
tractor,      with that for other foreign    construction     work where
a large number of untrained        persons,  inexperienced      with
equipment,       are employed.   According to the contractor         sta-
tistical      data varies too much from country      to country      to
be comparable because of differences         in the workmen compen-
sation laws and the method of tying in these laws with social
benefits.

LACK OF PROPERCONSTRUCTION
EQUIPMENT--CHAPTER 5

       Itwas the contractor's  observation that the exact
piece of equipment to be used was a matter of the contractor's
judgment and that the important   thing to be determined was
whether proper compaction was made.

GAO observation

      Records we reviewed indicated            that the equipment used
during early project   stages could           not achieve the required
compaction.

ALLEGED IMPROPER USE OF
CONTRACTFUNDS--CHAPTER 6

     Both the contractor    and the consultant   presented argu-
ments concerning  the legality    of the method used for provid-
ing subsistance  or payment in lieu thereof     to employees of
the consultant.
                                        68
        The contractor  advised us that the agreement to, in
effect,     subcontract a portion  of the contractor"s  responsi-
bility    to feed the consultant's   employees was a valid sub-
contract     authorized under the contract   and was not in viola-
tion of the assignment clause of the contract,

        The consultant,   on the other hand, denied that it had
entered into a subcontract      and stated that from November
1966 it had only supplied the contractor       with the required
foodstuffs     to feed its employees.    The consultant    advised
us that it appeared not to be any concern of the Government
of Peru as to the monetary terms upon which its Tarapoto
office    purchased and provided these foodstuffs       to the con-
tractor.

        The consultant        stated that it was not accurate to allege
or imply that the consultant               had unduly retained      money from
its employees and pointed out that it was not required                      to
provide food to its employees who chose to eat their meals
elsewhere.       The consultant          added that,    at the request of,and
as a convenience to, such workers,                 it actually    had given
them amounts of money representing                the actual cost of the
food they would require,             in order to satisfy       the contractor's
duty to feed them.            Any difference      between what was paid to
employees and the consultant's               receipts    was not a profit,
according     to the consultant,           but was used for the recre-
ational     benefit     of the people in the area and for defraying
the incidental         cost of hospitality         in the area for visiting
dignitaries,        students,     official     and military    commissions,
etc.

GAO observations

       Regardless of whether the arrangements made between
the contractor      and the consultant  for the feeding of the
consultant's     employees is regarded as a subcontract,      the
specifications      provided that the unit of measurement was one
person's meal for 1 day, properly       furnished,  prepared,    and
served.      The reimbursement   of the employees at a rate of
P'S/30 a day did not, in our opinion,       form a basis for the
contractor's     charging PS/170 a day.




                                     69
PERSONAL CHARGESAGAINST MR. PETTIS--CHAPTER 7

      The consultant   denied emphatically      that     it blackballed
Mr. Pettis   in the U.S.  engineering-construction           industry.
In fact,. it has offered him a job as a soils            engineer and
has kept that offer open.

TSiCK OF TIMELY AID ACTION ON
IDENTIFIED PROJECT PROBLEMS--CHAPTER8

       AID officials     stated that the role of the U.S. Mission
(during   1968) was not that of an arbitrator          or mediator of
a complex dispute between two reputable            U.S. firms, both of
which were under contract        to the Government of Peru.          In
AID's opinion such mediation or arbitration            efforts    would
have conflicted      with contractual     procedures regarding       claims,
Early in the project,        the slide-removal     payment issue was
in dispute between the consultant--technically              the advisor
to the Government of Peru--and the contractor.                The consul-
tant, hence the Peruvian Government, was consistently                advis-
 ing against      payment to the contractor.        The U.S. Mission
did not believe      it appropriate     to question the judgment of
both the consultant       and the Peruvian Government by indepen-
dently looking into the merits of the contractor's               claims
for payment for slide removal.

      AID stated the U.S. Mission's       role clearly     was to do
what it could to have the project       carried    out in accordance
with the terms of the loan agreement.          AID officials      noted
that,  during the entire     1966 to April 1968 period cited by
GAO, construction      of the road continued without       interruption.
AID officials     pointed out that at least six experts or groups
of consultants     had been taken to Peru to provide information
or judgments on the causes of the slide problem prior to the
time that AID obtained the services         of its own consultant,

GAO observations

      In our opinion the U.S. Mission's        role in seeing that
this project  was proceeding as planned should have included
the use of AID's good offices,        as an interested  third party,
to get the contractor,    consultant,     and Peruvian Government
together  for discussions   to solve the major problems, once
they were identified    (as current AID policy requires).

                                     70
      In our opinion an independent geologist   was needed
because the differences    in the conclusions on the cause of
the slides reached by the various consultants    employed by
the parties  to the dispute could not be reconciled.




                               71
                                                                                                                                                       APPENDIX I



WILLIAM       PROXMIRE
          WISCONSIN




                                                                                                       April         19,          1971
                         Honorable      Elmer B. Staats
                         Comptroller       Geleral
                         General     Accounting    Office
                         Washington,       D.C. 20548


                         Dear       Elmer:

                                    I would          appreciate                  receiving            a report            from         the

                         General           Accounting                Office          on the         validity         of     Mr.         Charles

                         Pettis'           allegations                   regarding           the     mismanagement                     on the

                         Peruvian           road       building                 contract           he worked         on.         I believe           your

                         Assistant            Director,                  John     Milgate,           has most         of         the     material

                         which       Mr.      Pettis              has      submitted.

                                    I would          also           like        to know whether                Mr.    Pettis             has      since

                         'blowing           the    whistle"                 in Peru          worked        on any government                        funded

                         projects           and,       if         not,      whether          this      was the        result             of     some sort

                         of     formal        or informal                   black       list.

                                    Thank      you          for      your        cooperation.




                         WP:ml




                                                                                        73
APPENDIX II


   THISMAPOFPERU ILLUSTRATESTHECENERALL~CAT~~N~FTHE
              TARAPOTO-RIO NIEVA HIGHWAY PROJECT




          fi        ECUADOR




                        POMACOCHA




                                              0-YURIMAGUAS




                                                              iv,
               “-




                                              TARAPOTO
    \                                &
                                    JUANJUI                    BRASIL

               \




        (COURTESY      OF U.S. MISSION)




                                                         74
.x.
 z
APPENDIXII




        PHOTOGRAPHS         TAKEN     LOOKING   TOWARD       TARAPOTO.       AT   THIS   SITE,
        ONE OF THE      FIRST     BIG PROJECT     LANDSLIDES       OCCURRED.
        (GAO   PHOTOGRAPH,       MAY   1971)




                                                  76
                                                                                                       APPENDIXII




THIS     PHOTOGRAPH,          LOOKING           TOWARD     MOYOBAMBA,           ILLUSTRATES          AN     AREA
IN THE     FIRST    35 KILOMETERS                OF THE    HIGHWAY         PROJECT     WHICH     HAD
ORIGINALLY         BEEN   CLEARED               BY THE    CONTRACTOR,            AS INDICATED.            DENSE
JUNGLE       GROWTH       IS POSING        A THREAT        OF    BLOCKING        DRAINAGE        DITCHES.
(GAO     PHOTOGRAPH,          MAY       1971)




 aIIIm                 INDICATE       AREA        ORIGINALLY        CLEARED        BY   CONTRACTOR


111t1111m11mm1         INDICATES         LOCATION         OF    DRAINAGE       DITCH




                                                          77
APPENDIX III


                                        LIST OF REPORTS ON AID LOAN 527-L-028
                                                 TARAPOTO-RIO NIEVA HIGHWAY (note       a)

                        Title                                                 Author

 1. Earth Slides - Tarapoto-Rio             Nieva
    Highway - Peru                                              Woodward-Clyde      & Associates          Nov. 22, 1967
 2. Stability       of Slopes     and Slides                    Iuis A. Mares Medina
    Carretera       Bolivarian     kfarginal de la              Jose Vera Romero
    Selva                                                       Edmund0 Chavez C.
                                                                Oscar Mualle Flares
                                                                Lindbergh &za C.                          July   1968
 3. Evaluation       of Earth     and Rock Slides               Woodward-Clyde & Associates
                                                                Prepared for EMKAY S.A.                   Aug. 29, 1968
 4. Preliminary       Report     on landslides                  Brown & Root Overseas,             Inc.   Dec. 11, 1968
 5. Geological    Study land Movements at                       Dr.   Laonidas Castro        and
    the Carretera     firgina de la Selva                       Alberto    Martinez                       Dec. 16, 1968
 6. Investigation       of landslides                           Massrs. Frank D. Patton and
    Tarapoto-Rio       Nieva                                    Rudy J. Dietrich.  Prepared
                                                                for Brown & Root                          Jan.   1969
 7. Evaluation    of landslides and                             Dr. F’rank A. Nickell.
    Other Problems of the Tarapoto-Rio                          Prepared for AID
    Nieva portion    of the Olmos-Bagua-
    Yurimaguas Highway                                                                                    Mar. 20, 1969
 8. Report on Slides - Tarapoto-Rio                             GOP Highway Department's
    Nieva Highway (note b)                                      Special Commission                        Apr.   1969
 9. Condiciones   de Estabilidad   de la                        Renardet S.P.A.
    Carretera   Tarapoto-Moyobamba                              Consulting Engineers
    (note b)                                                                                              Apr.   1969

10. Analisis     sobre Costos       Indebidos                   Caminos Invest$gating
    Tarapoto-Rio      Nieva                                     Connnission                               Aug. 1969
11. Conclusiones       C Recomendaciones                        The Investigating
    Tarapoto-Rio       Nieva Highway                            Commission                                Aug. 1969

aThis list supplied   by the U.S. Mission.   It does not include   reports  prepared for the
  consultant  by Dr. Arthur B. Cleaves in My 1967 and by Dr. Mario Pegorer in June 1967.
b Reports reportedly  withdrawn by Government of Peru irmnediately    after issuance.




                                                              78
                                                    APPENDIX IV


                    PRINCIPAL OFFICIALS

            HAVING MANAGEMENT
                            RESPONSIBILITIES

     ASSOCIATED WITH MATTERSDISCUSSED IN THIS REPORT


                                          Tenure of office
                                          From            -To
                    DEPARTMENTOF STATE

SECRETARYOF STATE:
   Dean Rusk                        Jan.     1961    Jan.    1969
   William P. Rogers                Jan.     1969    Present

UNDER SECRETARYOF STATE:
    George W, Ball                  Nov.     1961    Oct.    1966
    Nicholas deB. Katzenbach        Oct.     1966    Jan.    1969
    Elliot  L. Richardson           Jan.     1969    July    1970
   U. Alexis Johnson                July     1970    Sept. 1970
    John N. Irwin II                Sept.    1970    Present

ASSISTANT SECRETARYFOR INTER-
  AMERICAN AFFAIRS AND U.S. COOR-
  DINATOR, ALLIANCE FOR PROGRESS
  (note a>:
    Robert F. Woodward              July     1961     Mar. 1962
    Edwin M. Martin                 Mar.     1962     Jan.    1964
    Thomas C. Mann                  Jan.     1964     Mar. 1965
    Jack H. Vaughn                  Mar.     1965     Mar* 1966
    Lincoln Gordon                  Mar.     1966     June 1967
    Robert M. Sayre (acting)        June     1967     July    1967
    Covey T. Oliver                 July     1967     Dec. 1968
    Viron P. Vaky (acting)          Jan.     1969     Apr.    1969
    Charles A. Meyer                Apr.     1969     Present
U.S. AMBASSADORTO PERU:
    James Loeb                      Apr.     1961     Nov. 1962
    J. Wesley Jones                 Nov.     1962     July    1969
    Taylor Garrison Belcher         Aug.     1969     Present




                               79
APPENDIX IV


                                               Tenure of office
                                               From            -To
              AGENCY FOR INTERNATIONAL DEVELOPMENT

ADMINISTRATOR:
   Henry R. Laborisse                   Feb.       1961    Nov. 1961
    Fowler Hamilton                     SeptO      1961    Dec. 1962
    David E. Bell                       Dee 0      1962    July    1966
    William S. Gaud                     Aug.       1966    Jan.    1969
    John A. Hannah                      Ma.        1969    Present
PERU MISSION DIRECTOR:
    Robert E. Culbertson                 Nov   l   1961    July    1965
    William T. Dentzer,   Jr.           Aug.       1965    July    1968
    Samuel Eaton                        July       1968    July    1969
    George J. Greco (acting)            July       1969    Dec. 1970
    Louis V. Perez                      Dec.       1970    Present


           EXPORT-IMPORT BANK OF THE UNITED STATES

                                                            Date of
                                                          Appointment

BOARDMEMBERS:
   Harold F. Linder
      (note b)              Chairman of the Board          Mar,      1961
   Henry Kearns             Chairman of the Board          Mar.      1969
   Walter C. Sauer          Vice Chairman                  Sept.     1962
   Elizabeth   S. May
      (Mrs.> (note c>       Director                       June      1964
   Hobart Taylor,   Jr.
      (note c>              Director                       Sept.     1965
   Tom Lilley               Director                       Ott B     1965
   R. Alex McCullough       Director                       %Y        1969
   John Clark               Director                       June      1969

OFFICERS:
    Harold F. Linder
      (note b)              President   and Chairman       Mar.      1961
    Henry Kearns            President   and Chairman       Mar.      1969



                                SO
                                            Tenure of office
                                            From            - ‘1’0


                    DEPARTMENTCF COMMERCE

SECRETARYOF COMMERCE(note d):
   Luther Hodges                         Jan.   1961      Jan.       1967
   John P. Conner                        Jan.   1965      Jan.       1967
   Alexander B. Trowbridge
      (acting)                           Jan.   1967      Mar.       1967

FEDERAL HIGHWAY ADMINISTRATOR:
    Rex M. Whitton                       Feb.   1961      Dec.       1966


                 DEPARTMENTCF TRANSPCRTATION

SECRETARYOF TRANSPORTATION
  (note d):
    Alan S. Boyd                         Apr.   1967      Jan.    1969
    John A. Volpe                        Jan.   1969      Present

FEDERAL HIGHWAY ADMINISTRATOR:
    Lowell K. Birdwell                   Apr.   1967      Feb. 1969
    Francis C. Turner                    Mar.   1969      Present

aThe positions  of Assistant  Secretary  for Inter-American     Af-
 fairs  and U.S. Coordinator,  Alliance  for Progress,    were
 combined in February 1964. Mr. Teodoro Moscoso was ap-
 pointed to the post of Coordinator,    Alliance   for Progress,
 in February 1962.

bMr. Linder left the Bank in July 1968. Mr. Sauer acted                as
 Chairman of the Board and President of the Bank until
 Mr. Kearns' appointment.

'No longer   a Board member.
dAll  functions,    powers and duties of the Secretary      of Com-
 merce under certain      laws and provisions    of law relating
 generally    to highways were transferred     to and vested in the
 Secretary    of Transportation,   which position     and department
 were created by the Department of Transportation          Act
 (49 U.S.C. 1651 note).