oversight

Millennium Challenge Corporation: Georgia and Benin Transportation Infrastructure Projects Varied in Quality and May Not Be Sustainable

Published by the Government Accountability Office on 2012-06-27.

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

             United States Government Accountability Office

GAO          Report to Congressional Committees




June 2012
             MILLENNIUM
             CHALLENGE
             CORPORATION
             Georgia and Benin
             Transportation
             Infrastructure
             Projects Varied in
             Quality and May Not
             Be Sustainable




GAO-12-630
                                              June 2012

                                              MILLENNIUM CHALLENGE CORPORATION
                                              Georgia and Benin Transportation Infrastructure
                                              Projects Varied in Quality and May Not Be
                                              Sustainable
Highlights of GAO-12-630, a report to
congressional committees




Why GAO Did This Study                        What GAO Found
MCC was established in 2004 to help           In Georgia, quality and sustainability issues jeopardize the long-term usefulness
developing countries reduce poverty           of the Samtskhe-Javakheti road project. The Millennium Challenge Corporation
and stimulate economic growth                 (MCC) funded the rehabilitation of about 217 kilometers of road linking the
through multiyear compact                     previously isolated Samtskhe-Javakheti region with Tbilisi, the country’s capital,
agreements. As of June 2012, MCC              and reducing the driving time from 8 ¼ hours to 2 ¾ hours. The project was
had signed 26 compacts totaling about         intended to increase exports from the region, integrate people in the region with
$9.3 billion in assistance. Seven             the rest of Georgia, and expand trade with Turkey and Armenia. However, the
compacts, including those with Georgia        urgency to meet fixed time frames resulted in problems implementing the
and Benin, closed in 2010 or 2011.
                                              project’s quality assurance framework. For example, the construction supervisor
Most had a transportation
                                              did not have enough staff to properly monitor construction and ensure quality.
infrastructure project (a road or a port)
that received about 50 percent of the
                                              Despite several recommendations from MCC’s independent engineer, MCC and
compact’s total funding. This report,         its Georgian counterpart, the Millennium Challenge Account (MCA-Georgia), did
prepared in response to a                     not adequately increase the number of construction supervisors, which resulted
congressional mandate to review               in pavement defects in parts of 5 of the 11 road sections and deterioration of
compact results, examines how MCC             structures such as drainage and retaining walls. One 15-kilometer section
ensured the quality and sustainability        contained enough defects that the road had to be completely repaved.
of MCC’s two transportation                   Furthermore, much of the repair work was to be done in the contracts’ 1-year
infrastructure projects in Georgia and        defects liability period, after the compact closed and at a time when MCC no
Benin. GAO analyzed MCC                       longer had oversight authority. Although MCC took steps to ensure the road
documents, interviewed MCC officials          project’s sustainability, the Georgian government has demonstrated limited ability
and stakeholders, and observed the            to keep the road operational and maintained.
transportation infrastructure projects in
those countries.                              In Benin, construction for the Port of Cotonou project generally met established
                                              quality standards, but several components were not in operation at the compact’s
What GAO Recommends                           end. MCC funded the construction of several port infrastructure improvements,
                                              including a jetty, a wharf, internal port roads, a railway, and security and
To ensure that compact projects are
                                              electricity distribution systems. The project was intended to increase the efficient
implemented to established quality
standards, GAO recommends that                transport and volume of goods flowing through the port. However, several
MCC (1) review how it uses                    components—including the new south wharf, the port security system, and the
information from its independent              electricity distribution system—were not in operation at compact completion
engineers, and (2) develop a                  because the Port Authority had not ensured that the necessary infrastructure,
mechanism to maintain influence on            staffing, or policies were in place to operate them. For example, the new south
contractor repairs after compact              wharf, which was intended to increase the cargo tonnage moving through the
closure. To ensure sustainability of          port, is not in operation in part because the Port Authority does not have the
compact projects, GAO recommends              funds to complete the dredging needed to allow large vessels to access the new
that MCC evaluate the tools it uses to        wharf. Even though MCC took steps to ensure that the government of Benin
ensure that partner countries have            could sustain the operations and maintenance of the project—such as
adequate resources to operate and             conducting a feasibility study, incorporating conditions precedent into the
maintain MCC-funded infrastructure.           compact, hiring a port advisor, requiring a compact closure plan, and identifying
MCC agreed with all three                     steps the government of Benin should take to support sustainability in the
recommendations but did not commit            compact letter of completion—they were not sufficient. As a result, Benin’s
to taking any actions to address them.        inability to supply the resources, manpower, or policies needed to operate all of
                                              the port’s components calls into question whether the port project will achieve
                                              expected compact results or be sustained throughout the life of the infrastructure.

View GAO-12-630. For more information,
contact David Gootnick at (202) 512-3149 or
gootnickd@gao.gov.

                                                                                       United States Government Accountability Office
Contents


Letter                                                                                               1
                       Background                                                                    4
                       In Georgia, Quality and Sustainability Issues Jeopardize the Long-
                          Term Usefulness of the Samtskhe-Javakheti Road Project                     9
                       In Benin, Port Construction Is Generally Good Quality, but Full
                          Operability of Port Components Is Uncertain                              39
                       Conclusions                                                                 57
                       Recommendations for Executive Action                                        58
                       Agency Comments and Our Evaluation                                          58

Appendix I             Objectives, Scope, and Methodology                                          61



Appendix II            Additional Photographs Related to Figure 20 Compact-Funded
                       Improvements in the Port of Cotonou                                         64



Appendix III           Comments from the Millennium Challenge Corporation                          65



Appendix IV            GAO Contact and Staff Acknowledgments                                       68



Related GAO Products                                                                               69



Tables
                       Table 1: Defects as of Substantial Completion by Lot                        31
                       Table 2: Uncompleted Works and Outstanding Defects as of
                                Substantial Completion, by Lot                                     46
                       Table 3: Status of Key Components of Port of Cotonou                        49




                       Page i                               GAO-12-630 Millennium Challenge Corporation
Figures
          Figure 1: MCC’s Contract Management Structure for Infrastructure
                   Projects                                                            7
          Figure 2: MCC-Georgia Compact Funding at Signature and at
                   Completion                                                        10
          Figure 3: Scope Changes for the Samtskhe-Javakheti Roads
                   Rehabilitation Project                                            12
          Figure 4: Division of the Samtskhe-Javakheti Roads Rehabilitation
                   Project into Lots                                                 14
          Figure 5: Georgia Construction Timeline                                    16
          Figure 6: Example of the MCC-Funded Road, Lot 1 (Inset:
                   Unrehabilitated Road Bypassed by MCC-Funded Road)                 21
          Figure 7: MCC-Funded Bridge in Lot 7                                       22
          Figure 8: Seal Coat Repair on Center of Road in Lot 4                      23
          Figure 9: Failed Patch and Continued Deterioration in Lot 3                23
          Figure 10: Additional Pavement Cracking in Lot 2                           24
          Figure 11: Pavement Milling and Patching Under Way in Lot 3A               25
          Figure 12: Defective Drain Tops                                            26
          Figure 13: Drainage Channel Construction Defects in Lots 2 and 6i          27
          Figure 14: Drainage System Drain Holes Too High to Allow Water
                   to Drain in Lot 3                                                 28
          Figure 15: Failed Retaining Wall in Lot 2                                  29
          Figure 16: Erosion                                                         30
          Figure 17: Damaged Concrete Barrier Wall, Drainage Channel
                   Needing Maintenance, and Erosion-Filled Drainage                  36
          Figure 18: Snow on Roads in Lot 4                                          38
          Figure 19: MCC Benin Compact Funding at Signature and
                   Completion                                                        40
          Figure 20: Compact-Funded Improvements in the Port of Cotonou              41
          Figure 21: Benin Construction Timeline                                     43
          Figure 22: Jetty Is Complete and Serving Its Intended Purpose              45
          Figure 23: Lighting Pole under Construction                                47
          Figure 24: Constructed South Wharf without Landside
                   Infrastructure                                                    51
          Figure 25: Breach in Boundary Wall                                         54
          Figure 26: Congestion on the East-West Port Road                           56




          Page ii                             GAO-12-630 Millennium Challenge Corporation
Abbreviations

CEO               chief executive officer
IRI               International Roughness Index
ISPS              International Ship and Port Facility Security
km                kilometer
MCA               Millennium Challenge Account
MCC               Millennium Challenge Corporation
SOLAS             International Convention for the Safety of Life at Sea



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Page iii                                     GAO-12-630 Millennium Challenge Corporation
United States Government Accountability Office
Washington, DC 20548




                                   June 27, 2012

                                   The Honorable Patrick Leahy
                                   Chairman
                                   The Honorable Lindsey Graham
                                   Ranking Member
                                   Subcommittee on the Department of State,
                                   Foreign Operations, and Related Programs
                                   Committee on Appropriations
                                   United States Senate

                                   The Honorable Kay Granger
                                   Chairwoman
                                   The Honorable Nita Lowey
                                   Ranking Member
                                   Subcommittee on State, Foreign Operations,
                                   and Related Programs
                                   Committee on Appropriations
                                   House of Representatives

                                   The Millennium Challenge Corporation (MCC), a U.S. government
                                   corporation, was established in 2004 to provide aid to developing
                                   countries that have demonstrated a commitment to ruling justly,
                                   encouraging economic freedom, and investing in people. MCC provides
                                   assistance to eligible countries through multiyear compact agreements to
                                   fund programs targeted at reducing poverty and stimulating economic
                                   growth. MCC compacts may not be longer than 5 years. 1 As of June
                                   2012, MCC had signed 26 compacts with 25 countries, committing a total
                                   of approximately $9.3 billion in U.S. funding. 2




                                   1
                                       22 U.S.C. § 7708(j).
                                   2
                                    MCC commits funding when a compact is signed and obligates funds after the compact
                                   enters into force. As of June 2012, MCC had signed initial compacts with, in order of
                                   signature, Madagascar, Honduras, Cape Verde, Nicaragua, Georgia, Benin, Vanuatu,
                                   Armenia, Ghana, Mali, El Salvador, Mozambique, Lesotho, Morocco, Mongolia, Tanzania,
                                   Burkina Faso, Namibia, Senegal, Moldova, the Philippines, Jordan, Malawi, Indonesia and
                                   Zambia. In February 2012, MCC signed a second compact with Cape Verde.




                                   Page 1                                     GAO-12-630 Millennium Challenge Corporation
In the fiscal year 2008 Consolidated Appropriations Act, Congress
directed GAO to review the results achieved by MCC compacts. 3 Seven
of the 26 compacts were completed in 2010 or 2011, including those with
the Republic of Georgia and Benin. 4 All 7 compacts included a
transportation infrastructure project (a road or a port) which—except in
the case of Armenia—received 50 percent or more of the compact’s total
funding. In response to the congressional mandate, this report examines
the quality and sustainability of MCC’s transportation infrastructure
projects in Georgia and Benin. GAO has previously reviewed other
compact results and found that insufficient planning, escalation of
construction costs, and insufficient MCC review led to project delays,
scope changes, and cost increases. We made recommendations to
address the need for better planning and design. 5 To improve planning
and designs, MCC has committed specific funds and has increased the
length of time between compact signature and project implementation.
MCC developed the compacts with Georgia and Benin before it revised
these practices.



3
 Consolidated Appropriations Act, 2008, Pub. L. No. 110-161, § 668(d)(1)(A). The act also
required us to examine the financial control and procurement practices of MCC and its
accountable entities. We responded to this requirement separately in GAO, Millennium
Challenge Corporation: MCC Has Addressed a Number of Implementation Challenges,
but Needs to Improve Financial Controls and Infrastructure Planning, GAO-10-52
(Washington, D.C.: Nov. 6, 2009).
4
 The 5 other completed compacts are Honduras, Cape Verde, Nicaragua, Vanuatu, and
Armenia. We do not include the Madagascar compact in this list of compacts because, as
the result of a pattern of actions inconsistent with MCC policy, MCC formally terminated
the compact effective August 31, 2009. Protests and instability in Madagascar in January
2009 ultimately led to the forced resignation of the country’s elected president.
5
 See GAO-10-52 and GAO, Millennium Challenge Corporation: Compacts in Cape Verde
and Honduras Achieved Reduced Targets, GAO-11-728 (Washington, D.C.: July 27,
2011). In GAO-10-52, GAO recommended that MCC should (1) establish a programmatic
goal that MCAs conclude all project planning efforts—to include MCC final approvals of
the MCAs’ final feasibility surveys, engineering surveys, environmental surveys, and
resettlement studies—prior to entry into force, but not later than the point at which the
MCAs issue contract solicitations; and (2) require MCAs to obtain detailed reviews of
project cost estimates—to include the extent that risks to projects, such as cost escalation,
schedule delays, and other issues, have been considered—and of project designs before
contract solicitation for large construction projects to better ensure that projects can be
successfully bid and built. In GAO-11-728, GAO recommended that MCC should work
with partner countries to make project planning, design, and construction decisions that
reduce long-term maintenance needs and costs to maximize the sustainability of MCC-
funded infrastructure projects and reduce the amount of maintenance required after
compact completion.




Page 2                                        GAO-12-630 Millennium Challenge Corporation
To assess the quality and sustainability of the two MCC-funded
transportation infrastructure projects in Georgia and Benin, we analyzed
U.S. agency documents and observed project results in both countries.
We interviewed MCC officials in Washington, D.C., and MCC and
Millennium Challenge Account (MCA) officials in Georgia and Benin
regarding the results of the transportation infrastructure activities,
including their quality and sustainability. 6 We also met with partner
country government officials, contractors, project managers, construction
supervisors, and relevant private businesses. We based our assessment
of the projects’ quality on observations of defects in a site visit to the
projects, a review of reports provided by MCC, interviews of officials, and
the quality assurance framework established by MCC, MCA, and their
contractors. For this report, the definition of sustainability is based on the
Organisation for Economic Cooperation and Development definition,
which defines “sustainability” as “the continuation of benefits from a
development intervention (such as assets, skills, facilities, or improved
services) after major development assistance has been completed.” We
operationalized this definition by specifying that sustainability is the ability
of MCC’s partner country government to operate and maintain the new
infrastructure in such a condition as is required to produce the projected
benefits for the period of time those benefits are expected.

MCC enters into a legal relationship with partner country governments
that vests responsibility for day-to-day management of compact project
implementation to the MCA, including monitoring and evaluation activities
such as setting and revising targets, but such MCA actions require MCC’s
direct oversight and approval. Therefore, throughout this report, we
attribute all decisions related to project rescoping and compact targets to
MCC. See appendix I for further details on our objectives, scope, and
methodology.

We conducted this performance audit from November 2011 to June 2012
in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe the



6
 Partner country governments vest responsibility for day-to-day management of MCC
compact project implementation in accountable entities, usually referred to as Millennium
Challenge Accounts.




Page 3                                       GAO-12-630 Millennium Challenge Corporation
                   evidence obtained provides a reasonable basis for our findings and
                   conclusions based on our audit objectives.



Background
MCC Organization   MCC is managed by a chief executive officer (CEO), appointed by the
                   President with the advice and consent of the Senate, and is overseen by
                   a Board of Directors. The Secretary of State serves as board chair and
                   the Secretary of the Treasury serves as vice-chair. 7 MCC’s model is
                   based on a set of core principles deemed essential for effective
                   development assistance, including good governance, country ownership,
                   focus on results, and transparency. According to MCC, country ownership
                   of an MCC compact occurs when a country’s national government
                   controls the prioritization process during compact development, is
                   responsible for implementation, and is accountable to its domestic
                   stakeholders for decision making and results.

                   In keeping with the MCC principle of country ownership, MCC enters into
                   a legal relationship with partner country governments. During the 5-year
                   compact implementation period, the partner government vests
                   responsibility for day-to-day management, including monitoring and
                   evaluation of the progress of compact projects, to an accountable entity
                   established to implement the compact (an entity’s name is usually formed
                   from “MCA” plus the country’s name—for example, MCA-Benin). MCC
                   provides the framework and guidance for compact implementation,
                   monitoring, and evaluation that MCAs are to use in implementing
                   compact projects.

                   Following the compact end date, the partner government must close the
                   program within 120 days (the closure period). During the closure period,
                   MCC funds may be used only for project goods, works, or services
                   incurred before the compact end date, or for closure expenses. For
                   example, the government may expend MCC funds to settle final invoices
                   and claims, secure unfinished project sites against potential health or


                   7
                    Other board members are the U.S. Trade Representative, the Administrator of the U.S.
                   Agency for International Development, the CEO of MCC, and up to four Senate-confirmed
                   nongovernmental members appointed by the President from lists of individuals submitted
                   by congressional leadership.




                   Page 4                                     GAO-12-630 Millennium Challenge Corporation
                    safety hazards, prepare final reports, and conduct other activities
                    specified in MCC’s closeout guidelines. However, the government may
                    not expend MCC funds to undertake or continue activities that were
                    planned for completion within the compact term, including expenses for
                    activities such as completion of works, supervising engineer services, and
                    consulting services.


Quality Assurance   MCC places several requirements on MCAs to ensure proper
Framework           management and quality assurance of MCC-funded infrastructure
                    projects. These requirements create a quality assurance framework for
                    infrastructure projects that requires that each MCA have an individual
                    project director—for example, a roads director—who oversees the
                    activities of the other actors, including outside implementing entities or
                    project management consultants, construction supervisors, and
                    construction contractors. 8

                    •      Project management consultant/implementing entity: Before receiving
                           project funding, MCC requires the MCAs to engage the services of a
                           project management firm or an implementing entity to help manage
                           administrative aspects of compact projects.

                    •      Construction supervisor: MCAs contract with construction supervisors
                           to conduct oversight of day-to-day construction and the activities of
                           the construction contractors to ensure compliance with contract
                           requirements. Construction supervisors play an important role in
                           ensuring construction quality by performing such tasks as approving
                           construction materials, overseeing testing, and inspecting completed
                           work.

                    •      Construction contractor: MCAs contract with construction firms to
                           build the project. The construction contractor is also responsible for
                           controlling the quality of its work, which involves, among other tasks,
                           material and construction testing. 9



                    8
                        The organization of the management structure may vary across compacts and projects.
                    9
                     Testing is typically completed to ensure construction materials meet performance
                    characteristics. For example, compaction tests are done to ensure underlying soils can
                    support pavement structures. In addition, completed work is tested to ensure that it was
                    installed properly and performs as intended. For example, smoothness tests are
                    performed on newly placed pavements.




                    Page 5                                        GAO-12-630 Millennium Challenge Corporation
In general, MCAs deliver infrastructure projects through a design-bid-build
approach in which the MCA contracts with a design engineer to develop
technical plans and specifications that are used by a construction
contractor, hired under a separate MCA procurement action, to build the
project. In some cases, project designs already exist and MCAs do not
engage a design engineer in implementing the project. In other cases a
design-build approach is used and MCA contracts with a contractor that
becomes responsible for both project design and construction.

In addition, MCC may hire an independent engineer to assist in
overseeing the progress of construction as managed by the MCAs and
executed by their contractors. The objective of engaging an independent
engineer is to obtain high-quality technical support in order to strengthen
MCC’s ability to better assess the quality of ongoing program activities
and to make better informed judgments about the status of ongoing
activities, particularly where assessment of project activities affects
MCC’s ability to further disburse funds. An independent engineer may
also provide technical input on program decisions and documents
submitted by MCC partner-country counterparts and help MCC ensure
that funds are being spent according to the conditions and frameworks
established in the compact. Figure 1 depicts the oversight, management,
and contractual relationships among MCC, the MCA, and their
contractors for infrastructure projects.




Page 6                                GAO-12-630 Millennium Challenge Corporation
                        Figure 1: MCC’s Contract Management Structure for Infrastructure Projects




Sustainability of MCC   MCC takes steps to ensure the sustainability of the projects it funds
Projects                during both the design and implementation phases. First, MCC compacts
                        are to be designed so that projects are sustainable for about 20 years, or
                        as appropriate for the structure. Also, during the compact development
                        process, MCC assesses the mechanisms in place to enhance
                        sustainability, including a partner country’s policies and practices that will
                        enable MCC investments to continue to provide benefits. For instance, as



                        Page 7                                  GAO-12-630 Millennium Challenge Corporation
                          part of compact proposals submitted to MCC, partner countries are
                          required to identify risks to project sustainability and describe the
                          measures needed to ensure that project benefits can be sustained
                          beyond the period of MCC financing. Partner countries are to consider a
                          number of issues affecting sustainability, including environmental
                          sustainability; institutional capacity for operations and maintenance; and,
                          for proposed infrastructure projects, recent funding, performance, and
                          expected expenses for operations and maintenance.

                          During compact implementation, MCC tracks progress against key policy
                          reforms and institutional improvements that were included as conditions
                          in the compact to enhance project impact and sustainability. Such
                          conditions in an agreement are known as conditions precedent, which
                          must be met by one party before a second party to the agreement can
                          perform or do its part. In the case of an MCC compact, MCC establishes
                          conditions precedent that must be met by the partner government or MCA
                          before financial disbursements are made. For example, MCC may require
                          that the government increase its budget allocation for road maintenance
                          before releasing final payments.


Transportation            For the purposes of this report, transportation infrastructure comprises
Infrastructure Projects   public works that provide the conveyance of passengers or goods from
                          one place to another. It includes structures such as roads, seaports,
                          airports, and railways. Such projects may take years to plan and
                          implement. For example, typical highway projects in the United States
                          can take from 10 to 15 years for planning, design, and construction.

                          Transportation infrastructure construction contracts may contain a defects
                          liability clause that obligates a contractor to repair or rectify defects in the
                          construction for a set period after the construction supervisor has deemed
                          the works substantially complete. 10 In a construction agreement, a
                          contractor’s main obligation is to carry out the works to final completion,
                          free of defects and to the standard set out in the agreement. A defects
                          liability clause is intended to supplement this obligation by ensuring that
                          the contractor remedies any defective work that becomes noticeable
                          during the defects liability period, usually 1 year. The clause also provides



                          10
                            In essence, “substantially complete” means that the works can generally be used as
                          intended and that only minor work remains.




                          Page 8                                      GAO-12-630 Millennium Challenge Corporation
                          a mechanism for repairing defects that may arise during the defects
                          liability period.


                          In Georgia, MCC funded the rehabilitation of about 217 kilometers 11 of
In Georgia, Quality       road linking the previously isolated Samtskhe-Javakheti region with
and Sustainability        Tbilisi, the country’s capital. 12 However, the urgency to meet fixed time
Issues Jeopardize the     frames resulted in problems implementing the quality assurance
                          framework and led to construction defects in parts of 5 of the 11 road
Long-Term Usefulness      lots. 13 Furthermore, while MCC took steps to ensure the road project’s
of the Samtskhe-          sustainability, the Georgian government has demonstrated limited ability
                          to keep the road operational and maintained up to this point.
Javakheti Road
Project

MCC Compact Funded the    MCC signed a compact with the Republic of Georgia in September 2005
Rehabilitation of the     to stimulate growth in regions outside Tbilisi where more than 40 percent
Samtskhe-Javakheti Road   of the country’s total population resides. A rough asphalt road before the
                          compact, the Samtskhe-Javakheti Road was in such disrepair it
in Georgia                prevented residents in the region from easily reaching Tbilisi. The
                          purpose of the rehabilitation was to improve transportation for regional
                          trade to

                          •     increase exports from the region;

                          •     increase social, political, and economic integration of the people in the
                                region with those in the rest of Georgia;



                          11
                            The number of kilometers of road rehabilitated (217) is based on GAO’s review of MCC
                          provided takeover certificates indicating the number of kilometers of road accepted from
                          the construction contractors as complete and a March 2012 trip report issued by MCC’s
                          independent engineer. In some documents, MCC reports rehabilitating 220 kilometers of
                          road, including sections of the road where small amounts of finishing work (e.g. painting)
                          were undertaken even through major road works were not done on those sections.
                          12
                              Actual construction began in the town of Teleti, at the outskirts of Tbilisi.
                          13
                            Each section of road to be constructed in Georgia is described as a lot. The lots include
                          construction works such as pavement rehabilitation, bridge rehabilitation or replacement,
                          drainage systems, guardrails and concrete barrier walls, signage, and pavement
                          markings. MCA-Georgia named the lots as follows: 1, 2, 3, 3A, 4, 5i, 5ii, 6i, 6ii, 6iii, and 7.
                          We have used its nomenclature.




                          Page 9                                            GAO-12-630 Millennium Challenge Corporation
•    expand international trade by providing a more direct link from Tbilisi
     and eastern and southern Georgia to Turkey and Armenia; 14 and

•    develop the tourism potential of Vardzia, a 13th century rock-cut
     monastery.

MCC originally granted $295.3 million for the compact’s two projects—
Enterprise Development and Regional Infrastructure Rehabilitation, which
included the Samtskhe-Javakheti Roads Rehabilitation activity (see fig.
2). 15 In November 2008, after Georgia’s war with Russia over South
Ossetia, MCC increased the compact by $100 million. The compact
entered into force in April 2006 and ended in April 2011.

Figure 2: MCC-Georgia Compact Funding at Signature and at Completion




Note: MCC added $100 million to the compact in November 2008 after Georgia’s war with Russia.
Other projects include funds disbursed before entry into force to facilitate the implementation of the
compact. At compact close, $8.1 million remained undisbursed.

MCC originally planned to rehabilitate 245 kilometers of existing road at a
cost of $102.2 million (or $417,000 per kilometer), but after several
changes to the project’s scope, rehabilitated about 217 kilometers at a
cost of about $212.9 million (or $981,000 per kilometer). The road
project’s length was first reduced after the initial contract solicitation



14
  As of our December 2011 site visit, the border crossing with Turkey was not open
because the Turkish government had not yet installed the necessary infrastructure on its
side of the border. The government of Georgia anticipates its opening in 2013.
15
 For additional information on the projects included in the Georgia Compact, see GAO,
Millennium Challenge Corporation: Summary Fact Sheets for 17 Compacts,
GAO-10-797R (Washington, D.C.: July 14, 2010).




Page 10                                             GAO-12-630 Millennium Challenge Corporation
attracted bids that exceeded the amount of funding originally available for
the road work. As a result, the project was divided into shorter sections
and contracts were let for about 170 kilometers of road. In the winter of
2008-2009, after MCA-Georgia allocated an additional $60 million to the
road project, about 50 kilometers of road were added to the project (see
fig. 3). MCA-Georgia also reallocated an additional $50.7 million from
other activities to the road project between May 2008 and January 2011
to cover additional cost increases, including costs to accelerate work to
ensure its completion before the end of the compact. 16




16
  Funds were transferred from the regional infrastructure development project, energy
rehabilitation project, Georgia regional development fund project, agribusiness
development project, program administration, audit, and fiscal and procurement
management activities.




Page 11                                     GAO-12-630 Millennium Challenge Corporation
Figure 3: Scope Changes for the Samtskhe-Javakheti Roads Rehabilitation Project




                                        Page 12                                   GAO-12-630 Millennium Challenge Corporation
The Urgency to Meet         The road was rehabilitated at an increased cost in a compressed
Compressed Construction     construction time frame because of insufficient planning, work added late
Time Frames Resulted in     in the compact, and poor performance by one contractor. Because of the
                            compressed construction time frames, MCA-Georgia’s construction
Problems Implementing       supervision and construction contractors had difficulty fully implementing
the Quality Assurance       the quality assurance framework. In addition, problems identified by
Framework and               MCC’s independent engineer were not adequately addressed. As a
Construction Defects in 5   result, repair work remained at the end of the compact and the quality of
of the 11 Road Lots         construction varied across the lots. Although some infrastructure, such as
                            the bridges, appeared to be well built, parts of 5 of the 11 lots—
                            representing about 60 percent of the kilometers rehabilitated—had
                            noticeable pavement deterioration and other defective structures. The
                            extent of the defects varied among the lots, with some lots requiring
                            pavement surface sealing or a relatively small amount of patching.
                            However, the road in one lot was planned to be entirely repaved. As of
                            March 2012, work was ongoing. (Figure 4 shows how the road was
                            divided into lots and handled by different contractors.)




                            Page 13                              GAO-12-630 Millennium Challenge Corporation
Figure 4: Division of the Samtskhe-Javakheti Roads Rehabilitation Project into Lots




                                         Page 14                                      GAO-12-630 Millennium Challenge Corporation
Road Was Rehabilitated at      MCA-Georgia awarded most of the final construction contracts with 2
Increased Cost under           years or less before the compact end date because of planning delays,
Compressed Construction Time   work added late in the compact, and poor performance by one contractor.
Frames because of Several      See figure 5 for a timeline of the compressed time frame under which the
Factors                        road rehabilitation occurred.




                               Page 15                             GAO-12-630 Millennium Challenge Corporation
Figure 5: Georgia Construction Timeline




                                          Page 16   GAO-12-630 Millennium Challenge Corporation
Note: Contractor A lot lengths were as of the time the event occurred, Contractors B, C, and D lot
lengths were as of the end of the compact. Individual lot lengths may not add to total lengths because
of rounding.

a
 When lot 3 was awarded to contractor A, it included work later re-awarded as lot 3A as well as 4
kilometers of road at Tsalka that were eventually removed from the project altogether.


Insufficient planning delayed construction: MCC reports that conducting
feasibility studies and preparing designs and bid documents took over a
year of compact time. In addition, a lack of accurate cost estimates
resulted in a delay of 8 to 10 months in the first contract’s award. In April
2007, MCA-Georgia made its initial procurement for two road contracts
and found that the project cost was greater than estimated and exceeded
the funds available for the road work. 17 As a result, it removed about 75
kilometers from the scope, revised the project into smaller lots, conducted
a new procurement, and awarded contracts for lots 2, 3, and 4 (about 120
kilometers total) to contractor A in March 2008 and for lots 5i, 5ii, and 6i
(about 50 kilometers total) to contractor B in May 2008—23 and 25
months after the compact entered into force, respectively.

New work was added when additional funding became available late in
the compact implementation period: In November 2008, MCC made
additional funds available for the road project. The following spring, 3
years after the compact entered into force, MCA-Georgia awarded three
additional road contracts (lots 1, 6ii, 18 and 7). At this point, only about 2
years remained under the compact to complete the work.

Poor performance by one contractor delayed implementation by about a
year: Contractor A failed to meet its contractual obligations. After
removing segments from contractor A’s scope of work in July and
December 2009 and awarding them to other contractors, MCA-Georgia
terminated the contract in August 2010. While reassigning the work from
contractor A to the other contractors allowed the contract to be completed
before the end of the compact, MCC officials reported that the process
cost MCA-Georgia about $45 million more than the original $65 million
contract and added at least 1 year of construction time.




17
  GAO discussed these initial cost escalation and planning challenges in a previous
report. See GAO-10-52.
18
     Lot 6iii was added as an addendum to the contract for lot 6ii in August 2009.




Page 17                                            GAO-12-630 Millennium Challenge Corporation
                             •   MCA-Georgia provided a notice of nonperformance to contractor A in
                                 April 2009. That July, MCA-Georgia removed lot 4 from the contract
                                 (48 kilometers) and awarded it to another contractor through a limited
                                 procurement process. By using the quicker limited procurement
                                 process, MCA-Georgia hoped to take advantage of time remaining in
                                 the 2009 construction season and improve the likelihood of getting the
                                 work completed in the 21 months remaining in the compact.

                             •   In December 2009, contractor A’s performance was still a problem,
                                 and MCA-Georgia removed an additional 15 kilometers from the
                                 contract (lot 3A). According to MCC officials, MCA-Georgia re-
                                 awarded this work through a full, competitive procurement process.
                                 As a result, the procurement took more than 4 months, mostly over
                                 the winter season, which left about 1 year to complete the work.

                             •   In August 2010, MCC terminated the contract with contractor A for the
                                 remaining 57 kilometers of road (work for this section was about 80
                                 percent complete, according to MCC’s independent engineer). With
                                 only 8 months left before the compact was to end—and most of those
                                 being winter months—MCA-Georgia removed about 4 kilometers from
                                 the project and re-awarded the other 53 kilometers using a limited
                                 procurement process so that work could begin immediately. According
                                 to MCC, MCA-Georgia paid contractor B $31.8 million to complete the
                                 work before the compact’s April 2011 deadline. An independent
                                 adjudicator found the additional cost for completing the work to be
                                 within the bounds of what may reasonably be expected in such
                                 circumstances.

Quality Assurance Problems   The MCC-required quality assurance framework was in place, but issues
Identified by MCC’s          identified by MCC’s independent engineer—the technical advisor MCC
Independent Engineer Not     hired to assist in overseeing the progress of construction—were not
Always Addressed             always addressed. Specifically, the contractors did not always perform
                             their quality control responsibilities, the construction supervision firm had
                             insufficient staff to conduct its work, and MCA-Georgia did not always use
                             the construction supervisor as set out in the quality assurance framework.

                             Contractors did not always conduct quality control activities: The
                             contractors did not always fulfill their contractual quality control role,
                             according to MCC officials and MCC’s independent engineer’s reports.
                             For example, MCC’s independent engineer reported that some
                             contractors continued work in less-than-favorable conditions, such as cold
                             and rainy weather, to complete the work before the end of the compact.
                             Conducting work in these conditions can cause problems with curing



                             Page 18                               GAO-12-630 Millennium Challenge Corporation
concrete (such that it does not reach its design strength) or with asphalt
raveling (not bonding to other asphalt layers). In addition, to meet time
frames, much work was completed at night when poor lighting, less
inspection, and colder temperatures made it more difficult to perform
high-quality work. Finally, one contractor did not supply a required quality
assurance plan. 19 Without the contractor’s quality assurance plan for the
specific contract, the construction supervisor did not know when the
contractor would be testing materials or who to contact regarding
identified problems. In addition, the same contractor turned in test reports
after the tested work had already been covered by subsequent stages of
work. As a result, if the construction supervisor found that the earlier work
was defective, the contractor would have to remove the subsequent work
to repair it.

Construction supervisor had insufficient staff: Quality control errors by the
contractors should have been caught by the construction supervisor, but
the construction supervisor had insufficient numbers of staff to adequately
implement the quality assurance framework, according to MCC’s
independent engineer. MCA-Georgia did increase the contract
supervision, but not to the independent engineer’s recommended level.
While MCC had taken steps to try to ensure sufficient supervision of the
construction, it did not have authority to enforce the independent
engineer’s recommendations.

•    MCC’s independent engineer, accompanied by MCC officials, visited
     the road project and provided written reports almost quarterly between
     February 2009 and November 2010—the compressed construction
     time frames under which most of the roadwork occurred. The reports
     stated that there were not enough construction supervision staff, and,
     in four of those reports, the independent engineer advised that the
     supervisory situation was jeopardizing the project’s quality and
     success. A project management official told us that, because of the
     insufficient number of staff, the construction supervisor did not
     observe some quality testing that was done by the construction
     contractors, as required in its contract.




19
  A contractor’s quality assurance plan identifies such things as the type of tests to be
conducted, the frequency at which materials will be tested, and how the results will be
reported.




Page 19                                       GAO-12-630 Millennium Challenge Corporation
                                •    In February 2009, MCA-Georgia increased the number of construction
                                     supervision staff to oversee the three lots added to the project’s
                                     scope. 20 In addition, MCA-Georgia hired a separate construction
                                     supervisor to oversee lot 3A when it was created, increasing the staff
                                     available overall for construction supervision on the project. However,
                                     the MCC independent engineer recommended that additional
                                     construction staff were still needed to ensure the quality of the work
                                     under way. The independent engineer also reported that the
                                     construction supervisory firm’s fee was lower than typical for this type
                                     of international work. 21 Nonetheless, MCA-Georgia chose not to fund
                                     additional staff for the construction supervision firm.

                                •    MCC had included a condition precedent in the compact that required
                                     MCA-Georgia to engage a construction supervisor. However, because
                                     the condition was satisfied once MCA-Georgia engaged a supervisor,
                                     MCC stated that the condition precedent did not give it any authority
                                     to withhold funds because of insufficient supervision staffing.

                                Construction supervisor was not always used in accordance with the
                                quality assurance framework: According to two reports by MCC’s
                                independent engineer, MCA-Georgia did not always use the construction
                                supervision staff effectively. According to the quality control framework in
                                the construction firms’ contracts, the construction supervisor should issue
                                all instructions to the contractors. However, MCC’s independent engineer
                                noted that the MCA-Georgia staff responsible for the road project
                                communicated directly with construction contractors and issued oral
                                instructions directly to the contractors to accelerate work. The
                                independent engineer further noted that this practice could lead to claims
                                of additional work, increasing costs, because contractors received
                                different instructions from the construction supervisor and MCA-Georgia.

Road Was Improved, but          The MCC project generally improved the road by reducing its driving time
Quality Problems Exist in the   and roughness and installing bridges that appeared well built. However,
Pavement and Some Structures    several sections of the road had pavement defects and structures such as
                                drainage systems and retaining walls that are deteriorating.


                                20
                                  MCC stated the value of the construction supervisor’s contract increased from an initial
                                value of $2.7 million to a final value of $7.4 million.
                                21
                                  The independent engineer reported that the firm’s fee was 3.5 percent of the contract
                                cost, while the international norm is 5 to 6 percent. According to MCC, MCA-Georgia
                                spent a total of 4.2 percent of the overall construction costs on supervision of all road lots.




                                Page 20                                        GAO-12-630 Millennium Challenge Corporation
MCC Project Created Improved Road and Bridges

The MCC project improved the condition of the road. Before rehabilitation,
the Samtskhe-Javakheti road was passable but rough, with a driving time
of about 8¼ hours. The project decreased the road’s roughness, and after
rehabilitation, the same trip could be made in about 2¾ hours. MCC
reported roughness measurements before rehabilitation that indicated a
vehicle would have to drive under about 30 miles per hour for passengers
to ride comfortably. 22 Road roughness measurements made after project
completion indicated that passengers could ride comfortably even at
speeds of 75 miles per hour. We traveled a portion of the road that was
bypassed by the rehabilitation project and found it to be filled with
potholes and patches. We found the new road was much smoother (see
fig. 6).

Figure 6: Example of the MCC-Funded Road, Lot 1 (Inset: Unrehabilitated Road
Bypassed by MCC-Funded Road)




The scope of the project also included rehabilitating or rebuilding 27
bridges (see fig. 7). In March 2012, MCC’s independent engineer
reported that all bridges were performing well and had only a few defects


22
  MCC reports indicated an average International Roughness Index (IRI) of 16.6 before
the rehabilitation and 1.5 after the rehabilitation. IRI is a measure of road pavement
roughness in terms of meters per kilometer. The IRI affects vehicle operating costs, ride
quality, and road damage.




Page 21                                      GAO-12-630 Millennium Challenge Corporation
such as erosion of embankment slopes, and incomplete guardrail
hardware. We observed only minor defects such as a small chip in a
bridge beam but no apparent quality problems.

Figure 7: MCC-Funded Bridge in Lot 7




Pavement Defects Occur in Parts of 5 of the 11 Road Lots

While the pavement in some lots appeared to be in good condition, the
pavement in other lots was not. We observed that the pavement in road
lots 1 and 7 was smooth with minimal defects. However, we found
pavement deterioration in parts of 5 of the 11 road lots. 23 The amount of
deterioration and completed repair work varied in those lots, which
constituted about 60 percent of the total kilometers of the final project.




23
 We found noticeable pavement deterioration and repairs in lots 2, 3, 3A, 4, and 6ii.




Page 22                                      GAO-12-630 Millennium Challenge Corporation
•   In lots 4 and 6ii, surface deterioration had been treated with a surface
    sealer to keep the surface from deteriorating further (see fig. 8). While
    seal coating may keep water from entering the cracks and make the
    road look better in the short term, it does not add pavement strength.
    As a result, deterioration will continue under the anticipated increased
    traffic loads for the project if the underlying cause of the cracking is
    not repaired.

Figure 8: Seal Coat Repair on Center of Road in Lot 4




•   Lots 2 and 3 had undergone patching, but in one case the patch failed
    and the deterioration had continued beyond the patch, as shown in
    figure 9.


Figure 9: Failed Patch and Continued Deterioration in Lot 3




Page 23                                   GAO-12-630 Millennium Challenge Corporation
•   In other places, we found continued cracking in need of repair, as
    shown in figure 10. This type of cracking—known as alligator
    cracking—is caused by fatigue failure of the asphalt surface, which is
    related to weakened layers of asphalt beneath the pavement,
    insufficient pavement thickness, excessive loading, or some
    combination of these factors.

Figure 10: Additional Pavement Cracking in Lot 2




•   In lot 3A, much of the pavement was failing and under repair. The
    contractor was in the process of milling the top layer of pavement in
    some areas and full-depth patching of the pavement in other areas
    (see fig. 11). In June 2011, MCC’s independent engineer noted that
    the entire lot 3A section of road (15 kilometers) had been constructed
    poorly and had moderate to severe levels of distress in the pavement,
    which indicated that a poor quality of asphalt had been used. The
    construction supervisor stated that the contractor paved the road in lot



Page 24                                 GAO-12-630 Millennium Challenge Corporation
    3A in two layers and that the second layer was paved when the
    weather was rainy to complete the project on time. However, the
    second layer did not bond to the first and thus fell apart. According to
    the independent engineer, some portions of the road will require full-
    depth reconstruction of the road. A Georgian government official
    stated that the lot 3A contractor had agreed to replace the base
    materials in some places and repave the entire lot.

Figure 11: Pavement Milling and Patching Under Way in Lot 3A




The construction supervisor’s most recent (December 2011) list of
pavement defects indicated pothole patching and surface dressing was
needed for lots 2, 3, 3A, 5i, and 5ii. However the independent engineer’s
March 2012 trip report stated there were more extensive pavement
defects that required correction measures such as pothole repair, surface
dressing, crack repairs, or full-depth reconstruction for lots 1, 2, 3, 3A, 4,
5ii, 6ii, 6iii, and 7. The independent engineer also noted in several
locations that the defects resulted from incorrectly repaired previous
defects, the inadequate winter maintenance of the roads, and, in one



Page 25                                 GAO-12-630 Millennium Challenge Corporation
section of road, traffic loads heavier than the road was designed to carry.
The independent engineer also stated that if the roads are not correctly
repaired, they will worsen. Defects not properly repaired will likely fail
under increased traffic loads or further deteriorate, creating potholes as
water enters the cracks in the winter and then freezes. On the basis of the
independent engineer’s assessment that some of the project contractors
were not meeting contract specifications, MCC sent a letter to MCA-
Georgia in September 2010, noting that the work methods on lots 2, 3,
3A, and 4 were not to the standards expected and that the base material
and pavement compaction required immediate improvement. The letter
also stated that if the contractors did not improve the work, it would not be
accepted.

Some Drainage Structures and Retaining Walls Were Defective

Structures such as drains and retaining walls are critical to a road’s
longevity. A working drainage system helps to keep water off the road,
which is critical to safety and to keep pavement from prematurely
deteriorating. However, we found defects in the drainage systems of 7 of
the 11 lots. For example:

•   In lots 1, 5ii, 6i, 6ii, and 7, we found some of the drainage channels
    collapsing or cracked, which could cause the drains to become
    blocked (see fig. 12).

Figure 12: Defective Drain Tops




In lots 2, 6i, and 6ii, we found the concrete drainage channels with
defects because of poor concrete construction (see fig. 13).




Page 26                               GAO-12-630 Millennium Challenge Corporation
Figure 13: Drainage Channel Construction Defects in Lots 2 and 6i




•   In lots 3, 5i, and 5ii, drains were installed above the water level in
    some places, making it impossible for water to drain off the road (see
    fig. 14).




Page 27                                  GAO-12-630 Millennium Challenge Corporation
Figure 14: Drainage System Drain Holes Too High to Allow Water to Drain in Lot 3




According to MCC’s independent engineer, the quality of the drain
placement and the construction of the tops were inadequate because the
concrete did not cure properly or had already started to harden before it
was poured. If the drainage system does not work properly, the water will
saturate and weaken the underlying ground and cause the road to
deteriorate or freeze in the winter and create a safety hazard.

Furthermore, we observed a failed retaining wall that, if left unrepaired,
could damage the road. Because the retaining wall had failed, serious
erosion had occurred, and if the erosion continues, it will progress until it
reaches the road, jeopardizing the road’s future usefulness (see fig. 15).




Page 28                                  GAO-12-630 Millennium Challenge Corporation
Figure 15: Failed Retaining Wall in Lot 2




We also found additional erosion in lots 2, 6ii, and 7 (for example, see fig.
16). The independent engineer in his March 2012 report indicated a few
erosion concerns for lots 2, 3, and 7 that needed to be corrected. The
corrections are necessary for motorist safety and to protect the pavement,
bridges, and retaining walls.




Page 29                                     GAO-12-630 Millennium Challenge Corporation
                              Figure 16: Erosion




Work and Defects Remained     Although the construction supervisor certified the contracted road work as
after Compact End Date, but   substantially complete by the end of the compact, the previously
MCC Has No Authority to       described construction defects had not been repaired. Once the work was
Ensure Their Completion and   certified as substantially complete, responsibility for the roads moved
Repair                        from the contractors to MCA-Georgia, and final contract payments with
                              MCC funds were made. However, according to the contracts, contractors
                              continue to be responsible for the completion of any work or defects
                              related to work quality during a 1-year defects liability period. The transfer
                              of the road lots to MCA-Georgia included a list of about 700 defects
                              identified by the construction supervisor to be completed or repaired after
                              substantial completion and before the end of the defects liability period
                              (see table 1). Additional defects can be added to the list by the
                              construction supervisor if they appear in the 1-year liability period. MCC
                              officials stated that it is desirable to complete as much of the work as
                              possible before the defects liability period starts. However, it was
                              necessary to accept the work as substantially complete before the end of
                              the compact time frame so that final MCC funds disbursement could be




                              Page 30                                GAO-12-630 Millennium Challenge Corporation
made to MCA-Georgia. As a result, the work that remained and the repair
of the remaining defects were moved into the defects liability period. 24

Table 1: Defects as of Substantial Completion by Lot

    Lot                                                                          Number of defects
    1                                                                                                33
    2                                                                                                85
    3                                                                                                24
    3A                                                                                               70
    4                                                                                              128
        a
    5i                                                                                               43
         a
    5ii                                                                                              37
        a
    6i                                                                                             129
    6ii                                                                                              58
    6iii                                                                                             13
    7                                                                                                32
              b
    Other                                                                                            49
    Total                                                                                          701
Source: GAO analysis of MCC documents
a
 An additional 49 defects were listed on bridges on lots 5i, 5ii and 6i, which we could not attribute to a
specific lot.

b
Defects not attributable to a specific lot.


Additional factors present challenges to ensuring the defective work is
adequately repaired:

•            MCC’s independent engineer reported in October 2011 that the repair
             work under way on lot 3A was not in accordance with standard
             procedures and that the road that had been patched was
             unsatisfactory. For example, the contractor did not apply sufficient
             bonding material to ensure that the layers of asphalt would adhere to
             each other before laying additional asphalt. In addition, the




24
  We received an update from the construction supervisor of the construction defects
remaining as of March 2012, but the reporting format is not the same as used at the time
of takeover, and as a result, it is not possible to evaluate how many of those defects
remain or new defects have appeared.




Page 31                                              GAO-12-630 Millennium Challenge Corporation
     independent engineer commented that patch cutting and laying of
     asphalt were not properly done.

•    We observed in December 2012 that much repair work remained to
     be done. In addition, during the summer construction season in 2011
     no construction supervision firm was in place for about 2 months of
     August and September 2011. According to the October 2011 report of
     MCC’s independent engineer, this may have affected the contractors’
     progress in rectifying construction defects. The gap in supervision
     occurred because the Georgian government contracted with a new
     construction supervisor for the defects liability period after the
     compact-funded construction supervisor’s contract ended. The new
     construction supervisor provided us with a summary of defects
     remaining at the end of 2011, but it was not in the same format as the
     original defects list. It was thus impossible to determine which defects
     had been corrected and which had been added.

The Georgian government held performance guarantees from the
contractors to ensure the work was completed. 25 However, correction of
the work could not be completed in the 1-year defects liability period, and
the independent engineer reported in March 2012 that the performance
guarantees for lots 1, 4, 6ii, and 6iii had expired before the lots were
accepted as complete. The independent engineer also reported the
performance guarantees for lots 2, 3, 3A, 5i, 5ii, 6i, and 7 were extended
until August 2012, after the expected date that those lots will be
accepted. 26

Although several officials in Georgia stated that the repairs will be made,
MCC has little ability to ensure the work will be done or done correctly.
MCC has little oversight ability to ensure the work is completed now that
the compact has ended. For example:




25
  These performance guarantees are contractual instruments with a third party that allow
the Georgian government to ensure a contractor meets its contractual obligations or the
Georgian government can have the third party pay to complete the contractors’
commitments, up to the amount of the guarantee.
26
  The MCC independent engineer reported in March 2012 that it expected final
acceptance of lots 1, 4, 6ii, and 6iii in April 2012—about 3 to 4 months after the end of
their 1-year defects liability periods and final acceptance of lots 2, 3, 3A, 5i, 5ii, 6i, and 7 in
July 2012—about 4 to 8 months after the end of their defects liability periods.




Page 32                                          GAO-12-630 Millennium Challenge Corporation
                            •    MCC reported that documentation regarding the status of the projects
                                 in the defects liability period is held by the Georgian government.
                                 While the Georgian government provided MCC the project status for 3
                                 of the 11 lots as of April 2012, the documentation provided was not in
                                 English.

                            •    MCC’s independent engineer’s last trip to Georgia to review the status
                                 of the project was in March 2012, just before its contract expired.
                                 MCC will have little technical assistance in determining the extent to
                                 which all quality issues were addressed through the planned end of all
                                 of the defects liability periods in July 2012. MCC stated that it is
                                 considering other arrangements to support a site inspection in June
                                 2012.

                            •    All funds have been paid to the Georgian government for the project,
                                 and the conditions precedent for the compact are no longer in force,
                                 such as requiring a project management consultant and a
                                 construction supervisor to be in place. MCC officials stated that they
                                 therefore have no authority to ensure the road is repaired
                                 appropriately before the Georgian government takes final acceptance
                                 of the roads and releases the funds retained to the contractors.



MCC Took Steps to Ensure    To sustain planned benefits such as reduced travel times and reduced
Sustainability, but the     user costs, Georgia will need to keep the road operational and maintain
Georgian Government         the pavement in good condition. 27 Before signing the compact, MCC took
                            several steps to ensure that Georgia would be able to sustain the planned
Shows Limited Ability to
                            benefits of the rehabilitated road. However, we found that regular
Keep the Road Operational   maintenance requirements, snow removal operations, and limited funds
and Well Maintained         will challenge the Georgian government’s ability to sustain MCC’s
                            investment in the road.

MCC Took Steps to Ensure    MCC took steps to ensure sustainability by including conditions precedent
Sustainability              in the compact and by funding some equipment for road maintenance. 28


                            27
                              User costs include such items as vehicle maintenance, tire wear, increased fuel and oil
                            costs, and vehicle depreciation.
                            28
                              “Conditions precedent” are terms in an agreement that indicate that certain conditions
                            must be met by one party before a second party to the contract is obligated to perform or
                            do its part. In the case of an MCC compact, MCC establishes conditions precedent that
                            must be met by the partner government or MCA before MCC disburses funds.




                            Page 33                                      GAO-12-630 Millennium Challenge Corporation
MCC officials stated that the Georgia compact included a condition
precedent requiring the Georgian government to maintain a certain level
of funding to ensure proper maintenance of the road during the
compact. 29 MCC officials further stated that the condition precedent
followed a similar requirement set in a World Bank loan agreement that
had been entered into slightly earlier than the MCC compact, which
emphasized ensuring that the government has the resources necessary
to care for its national roads. MCC reported that, to sustain the economic
opportunities generated by the road improvements, Georgia increased
road maintenance funding from $33.6 million in 2006 to $56 million in
2010. In addition, MCC officials stated that the Roads Department of the
Ministry of Regional Development and Infrastructure had been working
with the World Bank to develop the institutional framework and technical
capacity to provide good road maintenance. MCC officials also stated that
they allowed MCA-Georgia to use funds left over at compact end to
purchase some equipment (such as an excavator and a road-patching
vehicle) that would help equip the Georgian road department to perform
maintenance. Finally, MCC officials stated that Georgia, similar to other
developing countries, will face difficult decisions in how it spends its
money. They noted that the Georgian government has a preference for
constructing new roads instead of maintaining old ones; however, they
believed that Georgia would maintain the new road as a source of
national pride and hoped that, by working with MCC and other
infrastructure development partners such as the World Bank, the
government had come to realize the value of maintaining its
investments. 30




29
  According to MCC, the funding requirements set out as the condition precedent were for
the entire Georgian road network and not just for the MCC-funded road.
30
 In its response to a draft of this report, MCC again stated that the government of
Georgia has communicated its commitment to ensuring the defects are fixed and to
maintain the road over the long term. See appendix III.




Page 34                                     GAO-12-630 Millennium Challenge Corporation
Routine and Emergency   During our visit to the road, we found that many maintenance items not
Maintenance Not Done    covered under the contractors’ defects liability period were not being
                        done. For example, we found several lots where the pavement markings
                        were worn and needed to be repainted, guardrails and concrete barrier
                        walls had been damaged and not repaired, drainage systems needed
                        repair, and erosion was filling the drainage system and had not been
                        cleaned (see fig. 17).




                        Page 35                            GAO-12-630 Millennium Challenge Corporation
Figure 17: Damaged Concrete Barrier Wall, Drainage Channel Needing
Maintenance, and Erosion-Filled Drainage




Page 36                                GAO-12-630 Millennium Challenge Corporation
                           The MCC independent engineer also noted in June 2011, October 2011,
                           and again in March 2012 that routine maintenance seemed to be lacking
                           on some lots, including cleaning drainage channels and culverts,
                           repairing damaged guardrails, and repairing erosion spots, and other
                           miscellaneous damages. A Georgian official stated that there were
                           maintenance contracts in place to make these kinds of repairs, and the
                           MCC independent engineer stated in March 2012, that it did find
                           Georgian road department contractors performing some routine
                           maintenance tasks, but additional efforts were needed, and that a lack of
                           snow removal in the 2011-2012 winter had likely resulted in increased
                           road deterioration.

Lot 4 Is Subject to Road   The feasibility study for the road project noted that portions of lots 3, 4,
Closure because of Snow    5ii, 6i, and 6ii are prone to snow drifts and part of lot 4 is sometimes
                           closed from October to March. Snow removal is part of keeping the road
                           operational. In its absence, the road is closed to traffic and the planned
                           benefits of the improved road such as reduced user costs, reduced travel
                           time to Tbilisi, and economic benefits from increased trade will not be fully
                           realized.

                           In the curved areas of the road prone to icing, we saw small piles of salt
                           and sand; however, we did not see snow removal equipment or any
                           winter maintenance operations, even though the Georgian government
                           officials stated they had maintenance contracts in place to provide snow
                           removal operations. The project’s feasibility study had recommended
                           installing snow fences to minimize snow drifts on the road, but on the
                           basis of environmental concerns, MCA-Georgia chose to plant trees
                           (living snow fences) to stop the snow drifting across the road and reduce
                           maintenance costs. However, many of these trees did not survive. Living
                           snow fences take several years to provide effective snow control.

                           During our December 2011 field work, we found that the road was closed
                           in lot 4 for the 2 days we were on-site because of snow drifts on one short
                           (about a quarter of a kilometer) portion of lot 4. The project included
                           electronic message signs on the road leaving Tbilisi to allow motorists to
                           choose an alternate route. In addition, we found other portions of lot 4 to
                           have only one lane open to traffic (see fig. 18). The independent
                           engineer’s March 2012 trip report stated that the Georgian road
                           department’s snow removal operations had been lacking during the 2011-
                           2012 winter season, which had heavy and repeated snow storms. The
                           engineers stated the road had been closed in lot 4 from December 2011
                           until they visited in March 2012 and they found other sections of the road
                           with only narrow lanes open, resulting in traffic jams and minor accidents.


                           Page 37                               GAO-12-630 Millennium Challenge Corporation
Figure 18: Snow on Roads in Lot 4




Available Maintenance Budget        The Georgian government may not have a sufficient maintenance budget
May Be Insufficient for Road        to maintain and operate the road. A Georgian government official stated
Upkeep and Operation                that it had about $63 million in its 2012 budget to maintain roads. This
                                    appears to be a decrease from previous years’ road maintenance
                                    budgets ($81 million in 2011 and $90 million in 2010). However, this is
                                    still an increase over the $56 million MCC reported that it had budgeted in
                                    2010 to fulfill a condition precedent in the compact. Furthermore, of the
                                    overall 2012 road maintenance budget, the government had budgeted
                                    about $720,000 for maintaining the MCC road specifically. However, this
                                    amount of funding may be insufficient because MCA-Georgia approved
                                    paying contractors almost $700,000 to provide winter snow removal for
                                    only part of the road (lots 2, 3, 3A, and 4) during the 2010-2011 winter.

Road Construction Defects           The road construction defects discussed above may increase
Jeopardize Long-Term                maintenance costs, decrease the life span of the project, and result in
Sustainability                      reduced benefits from the project. Even if the road defects are adequately
                                    repaired, they could increase the cost of maintenance because of the
                                    need to seal cracks at the edges of pavement patches and reseal road
                                    surface treatments periodically to provide protection to the pavement. If
                                    not adequately repaired, the roads will need ongoing maintenance to
                                    keep them in such condition that they can provide benefits to the citizens
                                    of Georgia.




                                    Page 38                              GAO-12-630 Millennium Challenge Corporation
                           In Benin, MCC constructed several infrastructure improvements to the
In Benin, Port             Port of Cotonou, including a jetty, a wharf, internal port roads, a railway,
Construction Is            and security and electricity distribution systems. The project was intended
                           to increase the efficient transport and volume of goods flowing through
Generally Good             the port. At project completion, the quality of construction generally met
Quality, but Full          established quality standards. However, several of the port’s critical
Operability of Port        components were inoperable at the end of the compact, including the new
                           south wharf, the port security system, and the electricity distribution
Components Is              system. The government of Benin’s inability to supply the resources,
Uncertain                  manpower, or policies needed to operate all of the port’s components
                           calls into question whether the port project will meet expected compact
                           results or be sustainable for the life of the infrastructure.


MCC Compact Funded         In February 2006, MCC signed a compact with Benin, providing $307
Infrastructure             million for four projects—Access to Land, Financial Services, Justice, and
Improvements to the Port   Markets—to improve physical and institutional infrastructure and increase
                           private sector activity and investment. 31 The Access to Markets activity,
of Cotonou in Benin
                           which accounted for just over $169 million, or 55 percent of the total
                           compact funding, went to improve the Port of Cotonou’s infrastructure,
                           specifically to increase efficiency and the volume of goods flowing
                           through the port. By the time the compact ended, the final cost of the
                           infrastructure improvements increased to about $188 million, accounting
                           for over 60 percent of the final compact amount (see fig. 19). The
                           compact entered into force in October 2006 and ended in October 2011.




                           31
                            For additional information on the projects included in the Benin compact, see
                           GAO-10-797R.




                           Page 39                                     GAO-12-630 Millennium Challenge Corporation
Figure 19: MCC Benin Compact Funding at Signature and Completion




Note: Other projects include funds disbursed before entry into force to facilitate the implementation of
the compact. At compact close, $5.5 million funds remained undisbursed.


The project components were awarded to construction contractors in a
series of lots, as follows (see fig. 20):

•    lot 1: jetty to slow the rate at which sand will fill the access channel;

•    lot 2: south wharf, a new wharf intended to increase volume of goods;

•    lot 3: east-west road, security, electricity distribution system, fire
     protection, and lighting; and

•    lot 3A: bypass road, railway, boundary wall, truck parking lot, and
     lighting.

In addition, the MCC funds allowed the port to purchase oceanographic
equipment, antipollution equipment, and a tugboat.




Page 40                                             GAO-12-630 Millennium Challenge Corporation
Figure 20: Compact-Funded Improvements in the Port of Cotonou

   Interactive graphic    Directions:
                                   Online: Mouse over each TEXT LABEL below for more information and photo

                                   Print: To print photos and additional information, go to appendix II.



                                                                                                                       Truck
                                                                                                                       scale

    250-truck
   parking lot                                             Central            Fire Water
                                                          electrical         station tank
                                   Reconstructed           station
                                   main east-west
                                     port road
                                                                                                      Port of Cotonou

       Port                                                         South wharf
      bypass
       road                                                                                                                 Railroad
                                                          Perimeter security
                                                            boundary wall                   New                             shunting
                                                                                          railroad                            yard
                                                                                            link




             Benin                                              N
                                                                          Mali                       Niger
                    Lot 1: Jetty                                                    Burkina                                       Sand
                                                                                     Faso                                         stopping
                    Lot 2: South wharf                                                                                            jetty
                                                                             Africa
                                                    Source: GAO analysis of MCC data; Map Resources (map).
                                                                                                 Benin
                    Lot 3: East-west road, security,
                    electrical, fire protection, and lighting             Cote
                                                                         d'Ivoire                            Nigeria
                    Lot 3A: Bypass road, boundary                                             Togo
                    wall, parking area, lighting,                                   Ghana
                    and railway
                                                                                                     Cotonou
                    Perimeter security boundary wall
                                                                             Atlantic Ocean

                                                  Source: GAO analysis of MCC data; Map Resources (map).




                                               Page 41 	                                                      GAO-12-630 Millennium Challenge Corporation
                               While the project was largely completed as planned, components for a
                               proposed Lot 4—which included a storage facility for dry bulk goods such
                               as grains and sand and a fish quality inspection station—were deemed
                               not viable once MCA-Benin conducted its feasibility studies. As a result,
                               MCA-Benin did not tender a bid for that lot. According to MCC officials,
                               the funds originally planned for those items were shifted to the other
                               infrastructure components. The funds also helped cover cost increases
                               and additional work on the wharf such as increasing wall length and
                               dredging the berth. 32


The Quality of                 MCC’s two primary challenges in completing the port project were
Construction Was               overcoming a late start to the construction, and managing the
Generally Good, but Many       underperformance of one contractor. Despite these challenges, most of
                               the infrastructure components had no or only minor quality issues.
Defects Left for Repair or     However, one lot had over 500 uncompleted tasks or defects when the
Minor Works to Be              compact closed.
Completed after Compact
Closure

Implementation Challenged by   MCA-Benin did not sign contracts with its construction contractors until
Delayed Start and One          almost 3 years after the compact entered into force. During those years,
Underperforming Contractor     MCA-Benin studied what components of the port project would be
                               feasible. As a result, construction contractors had just 2 years to complete
                               their work (see fig. 21).




                               32
                                 Additional dredging is required to accommodate larger ships as set out in the conditions
                               of the concession agreement negotiated by the Port Authority for a private firm to operate
                               the new south wharf.




                               Page 42                                      GAO-12-630 Millennium Challenge Corporation
Figure 21: Benin Construction Timeline




                                         Page 43   GAO-12-630 Millennium Challenge Corporation
                             In addition, MCA-Benin had to manage the poor performance of the
                             contractor for lot 3 to get the project finished within the compact’s time
                             frame. According to MCC, the lot 3 contractor experienced internal
                             management problems, missed important contract deadlines, did not
                             perform contracted work, and provided inconsistent information to MCA-
                             Benin and MCC. In August 2010, MCA-Benin terminated components of
                             the contract, including the bypass road, railway, parking lot, and boundary
                             wall. MCA-Benin awarded the terminated components as lot 3A to the
                             contractor for the jetty that had been successful in meeting the time
                             frames for the jetty component. After several extensions of time, the lot 3
                             contractor’s remaining work was certified as substantially complete,
                             months after the originally anticipated contract completion date and 1 day
                             after the end of the compact. However, several components were left to
                             be finished or corrected during the defects liability period.

Some Project Components      We found some of the project components to be completed and
Were Well Constructed, but   functioning for their intended use with only minor repairs needed during
One Lot Had Over 500         the defects liability period. For example, the lot 1 jetty was installed and
Problems                     reducing the amount of sand coming into the port from the ocean, thereby
                             reducing periodic dredging maintenance costs (see fig. 22). We did
                             observe that some areas of the jetty’s concrete surface had small areas
                             of cracking, which will require future maintenance.




                             Page 44                               GAO-12-630 Millennium Challenge Corporation
Figure 22: Jetty Is Complete and Serving Its Intended Purpose




The construction supervisor reported that some project components
needed to be repaired or completed upon substantial completion of the
contracts. However, because the construction supervisor deemed these
issues minor, he was able to certify each contract as substantially
complete and allow each contractor to make repairs or finish the work
during the 1-year defects liability period following the substantial
completion of the contract. MCC officials stated that the use of the defects
liability period to complete work was not an ideal situation, but it was
appropriate for situations in which the contractor needed to rely on an
outside entity to complete the work (such as for the electricity distribution
system) and in cases where the construction supervisor deemed the work
to be minor. 33

We observed some of these items during our field work and also
concluded that they were generally minor in nature; however, lot 3 had


33
   In technical comments on a draft of this report, MCC noted that MCA-Benin’s works
contracts were based on the FIDIC yellow book, pursuant to which a third-party engineer,
hired by MCA-Benin, was contractually responsible for determining when the works had
achieved substantial completion. MCC also noted that all but 5 have been remediated.




Page 45                                     GAO-12-630 Millennium Challenge Corporation
over 500 items to be completed or corrected in the defects liability period
(see table 2). As of April 2012, the project management consultant
provided documentation that only 20 items remained to be completed and
5 items were listed as outstanding defects in lot 3. The consultant
reported no uncompleted work or outstanding defects reported to be
remaining from the takeover date on lots 1, 2, or 3A.

Table 2: Uncompleted Works and Outstanding Defects as of Substantial
Completion, by Lot

 Lot                                 Uncompleted work                   Outstanding defects        Total
 1                                                             0                            0          0
 2                                                           13                            30        43
 3                                                         219                           290        509
 3A                                                            4                         120        124
 Total                                                     236                           440        676
Source: GAO analysis of MCA-Benin construction supervisor documents.


Note: The lots’ dates of substantial completion range from December 2010 to October 2011.


For lot 3, the construction supervisor reported that minor items needed to
be completed or corrected included connecting the fire pump to the power
supply, completing some paved areas, and installing a truck weigh
station. In lot 3A, we also observed uncompleted work—such as lighting
poles had not been completed in the 250-truck parking lot—and some
minor defects needing repair—such as missing manhole covers in the
road and a leaking pipe connecting the water tank to the fire control
system (see fig. 23).




Page 46                                                       GAO-12-630 Millennium Challenge Corporation
                           Figure 23: Lighting Pole under Construction




MCC Took Steps to Ensure   Although MCC took steps to ensure the port project’s sustainability, many
Sustainability, but Port   of the project’s key components—the south wharf, the security system,
Authority Has Not Been     the electricity distribution system, and the fire station—were either not
                           operational or only partially operational at the end of the compact. The
Able to Operate Key        south wharf had additional work remaining to be completed by the Port
Project Components         Authority and the concessionaire hired to operate the wharf for it to be
                           functional, and the Port Authority had not ensured that all other necessary
                           infrastructure and staffing were in place for the security system, the
                           electricity distribution system, and the fire station.

MCC Took Steps to Ensure   MCC took several steps to ensure that the government of Benin could
Sustainability             sustain the operations and maintenance of the project components.
                           These steps included conducting a feasibility study, incorporating
                           conditions precedent into the compact, hiring a port advisor, requiring a
                           compact closure plan, and identifying steps the government of Benin
                           should take to support sustainability in the compact letter of completion.

                           Feasibility study: In accordance with its policies, MCC funded a study to
                           determine the technical and financial feasibility of the port activities
                           proposed by the government of Benin. Through this process, MCC
                           identified activities that would provide an economic benefit to Benin and
                           ensure the likelihood for future sustainability.

                           Conditions precedent: Two conditions precedent were included in the
                           compact to help ensure the sustainability of the port.


                           Page 47                                 GAO-12-630 Millennium Challenge Corporation
•    First, the compact required the Port Authority to enter into a contract
     with a private firm to operate the new south wharf to ensure its open
     and transparent operation, eliminate corruption, and improve
     operations.

•    Second, MCC required the Port of Cotonou to meet the International
     Ship and Port Facility Security code. 34 Meeting the code means that
     that ships stopping later at U.S. ports would not be required to
     undergo increased security scrutiny, thus decreasing costs to shipping
     companies.
Port advisor: MCC funded the hiring of a port advisor to review port
operations and make recommendations to improve the operations of the
port and ensure an adequate cash flow through increased shipping fees
to operate the port.

Compact closure plan: MCC requires all MCAs to create a Program
Closure Plan, outlining the steps it will take when the compact ends to
finalize any compact commitments in an orderly fashion. The Program
Closure Plan for Benin includes some steps aimed at helping sustain the
compact’s investment, including for the Port of Cotonou. Most notably, the
compact closure plan describes the government of Benin’s intention to
establish an agency, in part, to complete and implement a “MCA-Benin
experience sustainability program.”

Compact completion letter: MCC also sent a letter to the government of
Benin in January 2012 to formally mark the conclusion of the compact
and to provide final recommendations to ensure the sustainability of
compact investments, among other things. In addition, MCC noted that
efforts made by Benin to maximize the results and ensure the
sustainability of this compact would be considered in decisions related to
a potential second compact. The letter specifically identified the following
as actions the government of Benin needs to complete:



34
  The International Ship and Port Facility Security (ISPS) code is a comprehensive set of
measures to enhance the security of ships and port facilities. The purpose of the ISPS
code is to provide a standardized, consistent framework for evaluating risk, enabling
governments to offset changes in threat with changes in vulnerability for ships and port
facilities through determination of appropriate security levels and corresponding security
measures. The ISPS code is implemented through chapter XI-2 special measures to
enhance maritime security in the International Convention for the Safety of Life at Sea
(SOLAS), 1974.




Page 48                                      GAO-12-630 Millennium Challenge Corporation
                                         •   ensure the competitiveness of the Port of Cotonou and increase its
                                             throughput (including ensuring the fluidity of traffic through the port,
                                             implementing a suitable operations scheme for the truck parking
                                             facility, and controlling total fees charged to importers);

                                         •   complete customs department reforms;

                                         •   enforce port security systems (including control of truck and
                                             pedestrian access traffic); and

                                         •   execute the port channel access improvements required to meet the
                                             terms of the south wharf concession agreement and to achieve the
                                             intended increase in port capacity.


The Port Authority Has Been              Despite the steps MCC took to help ensure sustainability, several key port
Unable to Operate Key                    components were not operational at the end of the compact because the
Components of the Port,                  Port Authority had not taken the necessary steps to operate all project
Calling into Question the Port’s         components (see table 3). The Port Authority’s inability to operate all
Long-Term Sustainability                 components of the port at compact completion calls into question its
                                         ability to maintain port operations and to achieve MCC’s anticipated
                                         economic return.

Table 3: Status of Key Components of Port of Cotonou

                                Status as of                                       Status as of
                                             a                                                b
Lot   Component               December 2011        GAO findings                    April 2012   April 2012 updates
1     Jetty                          ●             Jetty is slowing the entry of       
                                                   sand into the port.
2     South wharf                                 Concessionaire needs to                     Port Authority has requested
                                                   install paving, cranes, and                  the International Finance
                                                   other infrastructure. Planned                Corporation to assist in finding
                                                   operational date: January                    a way to fund its commitment
                                                   2013.                                        to dredge the port entry as
                                                                                                required in the concession
                                                                                                agreement.
3     East-west road                              Congestion worse than before;               Congestion still a problem.
                                                   28 hours average truck-in-
                                                   port-time versus 24 before
                                                   compact.




                                         Page 49                                    GAO-12-630 Millennium Challenge Corporation
                                    Status as of                                                           Status as of
                                                 a                                                                    b
Lot   Component                   December 2011            GAO findings                                    April 2012   April 2012 updates
      Security system                                     Lacks staff. Planned                                                 Facilities turned over to the
                                                           operational date: unknown.                                            Port Authority in February
                                                                                                                                 2012, about 10 staff in the
                                                                                                                                 control centers, in the process
                                                                                                                                 of hiring additional staff to
                                                                                                                                 operate the system, and
                                                                                                                                 identification badge system not
                                                                                                                                 in use.
      Electricity distribution                            Needs new increased power                                            Waiting on increased power
      system                                               feed from local utility. Planned                                      feed from local utility, but not
                                                           full operational date: unknown.                                       expected before January
                                                                                                                                 2013.
      Fire protection (station,                           Lacks staff, and traffic                                             Port Authority is using fire
      trucks, and water tank)                              congestion prevents                                                   trucks, developing operation
                                                           circulation of fire trucks.                                           plan, increasing staff,
                                                           Planned full operational date:                                        recruiting staff, training staff,
                                                           unknown.                                                              and waiting for correction of
                                                                                                                                 construction defects to be fully
                                                                                                                                 operational.
      Weigh station                                       Under construction.                                                  Construction complete,
                                                                                                                                 calibration of scales and
                                                                                                                                 training under way; plan is to
                                                                                                                                 be operational in June 2012.
      Lighting                                            In operation.                                           
3A    Bypass road                                         Parked trucks prevent one                                            Trucks still using one lane of
                                                           lane from being used.                                                 road for parking.
      Railway                                             In operation.                                           
      Boundary wall                                       At least one breach in wall                                          Gates not yet constructed by
                                                           identified, gates need to be                                          concessionaire.
                                                           installed by concessionaire at
                                                           south wharf site.
      Truck parking lot                                   Lot not in use and no                                                Port Authority plans to sign a
                                                           concessionaire hired to                                               concession agreement in July
                                                           operate the lot. Planned                                              2012, and Port Authority
                                                           operational date: unknown.                                            occasionally uses the lot.
      Lighting for parking lot                            Lights not yet installed.                                            Lighting completed.


                                             :   In operation
                                             :   In operation but not fully utilized
                                             :   Not in operation

                                             Source: GAO analysis of data from MCC, the Autonomous Port of Cotonou, Bolloré Africa Logistics, Maersk Line, and Royal
                                             Haskoning.
                                             a
                                             GAO conducted a site inspection in December 2011.
                                             b
                                              Update based on April 2012 correspondence with the construction supervisor, Port Authority, and
                                             port shipping companies.




                                             Page 50                                                         GAO-12-630 Millennium Challenge Corporation
South Wharf Is Not in Use

Although MCC funded a new south wharf to increase tonnage moving
through the port, and ensured that the Port Authority contracted a
concessionaire to operate the south wharf, to increase private investment
and generate income for the Port Authority, it is not in operation because
the Port Authority has not completed additional dredging and the
concessionaire has not finished the landside works, such as paving the
wharf area or installing cranes (see fig. 24). 35

Figure 24: Constructed South Wharf without Landside Infrastructure




In exchange for the right to manage and operate the south wharf, the
concessionaire paid the Port Authority a concession fee. The Port
Authority intended to use that fee to deepen the access channel—its
contractual obligation under the agreement—so that larger cargo ships


35
  In technical comments provided by MCC on a draft of this report, MCC stated that there
was never an expectation that all landside works required to operate the new south wharf
at full capacity would be completed by the end of the compact term (October 2011).
However, the economic analysis prepared for MCC’s investment decision in 2005 shows
that the expansion of shipping capacity due to the South Wharf investment would be fully
available in 2010.




Page 51                                     GAO-12-630 Millennium Challenge Corporation
could use the concessionaire’s facility. The concessionaire also agreed to
construct or install the necessary landside equipment and infrastructure.
However, because of an error in assessing the amount of work to be
done and an underestimation of the cost, the concession fee was
insufficient to fund the required dredging. A Port Authority official stated in
April 2012 the Port Authority is currently evaluating bids for the work. The
concession agreement also stipulated that the concession should be
operational 18 months after the concession start date. However,
according to a concessionaire official, the concession company had not
yet agreed upon a start date with the Port Authority as of April 2012. 36
However, the concessionaire was proceeding with constructing its portion
of the landside works. MCC officials stated that the concessionaire’s
construction will be completed in December 2012, and a concessionaire
official told us the wharf would be operational in January 2013; however,
if the Port Authority does not honor its part of the concession agreement
and finish the dredging, a concessionaire official stated it may reduce the
amount of landside works it is going to finish, such as not install as many
cranes or not pave the entire wharf area, because it could operate the
south wharf only for smaller ships. Smaller ships and reduced wharf area
would likely reduce the amount of cargo tonnage through the port and the
fees the port would receive from the concession. As of April 2012, the
Port Authority had requested the International Finance Corporation’s
assistance investigating how it could fund the required dredging and meet
its commitment of the concession agreement, but it had not yet awarded
any contracts to perform the work. 37

Security System Is Not Being Fully Utilized

The Port of Cotonou may be unable to provide effective security for the
port or retain its International Ship and Port Facility Security certification
because the MCC-funded port security system was not in operation as of




36
  In its initial economic rate of return analysis, MCC had anticipated that, by 2010, the
south wharf would have increased the capacity of the port by almost 30 percent.
37
  The International Finance Corporation is a member of the World Bank Group.




Page 52                                       GAO-12-630 Millennium Challenge Corporation
our December 2011 visit. 38 The Port Authority had not hired sufficient
staff, enforced its security policies, or maintained its security perimeter.

•    The security system requires 150 to 257 individuals to staff the
     operations on a 24-hour basis. 39 As of April 2012, there were about 90
     security personnel on staff and, according to a port authority official,
     the port authority was recruiting an additional 25 people. The
     construction supervisor stated that as of April 2012 the Port Authority
     had about 10 individuals staffing only the operation of two control and
     surveillance centers, which, according to MCC officials, were being
     operated only during the day. Without adequate trained staff, the
     security system cannot function to its full capacity.

•    The Port Authority was not fully enforcing established security
     policies, as of December 2011. For example, the port was not fully
     controlling access to the port. Even though a Port Authority official
     stated that everyone entering the port is required to wear some form
     of identification (a badge, arm bracelet, or uniform), in our December
     2011 site visit we observed several visitors with improper or no
     identification at all. According to a Port Authority official, the MCC-
     funded access system was still not in full operation as of April 2012.

•    In December 2011, we also observed a railway access gate had not
     been installed on the south wharf site, creating a breach in the
     boundary wall allowing people to bypass the security system and gain
     entry into the port. The gate was not a part of the MCC-funded work,
     and while the Port Authority is working with the wharf concessionaire
     to install a gate at the location, the temporary measure implemented
     by the Port Authority leaves the port vulnerable (see fig. 25).




38
  The new security system was turned over to the Port Authority in February 2012 and
includes a control and surveillance center, a secondary control and surveillance center, a
visitors’ reception center to issue badges, six access control stations, perimeter fencing
with port intrusion detection, security cameras, alarms, radio communications, and
computer equipment to operate it.
39
  The port authority estimated 150 security personnel are required to operate the new
security system, while the contractor installing the system calculated about 192 security
personnel are required to operate the system 24 hours a day, 7 days a week, and the
project management consultant for the project calculated 257 security personnel were
required to adequately secure the port 24 hours per day.




Page 53                                      GAO-12-630 Millennium Challenge Corporation
Figure 25: Breach in Boundary Wall




Electricity Distribution System Lacks Sufficient Power to Operate
at Capacity

MCC funded an electricity distribution system for the port that does not
function to capacity because the Port Authority had not ensured that the
amount of power transmitted to the port from the power company would
be adequate. The MCC-funded distribution system was designed to
distribute 15 megavolt-amps of electricity and planned to initially provide
10 megavolt-amps; however, the current conduit to the port provides only
2 megavolt-amps. Until the 10 megavolt-amps of power is provided, the
contractor cannot make final connections or test the system. As of April
2012, a project management official reported that the increased power
service had not yet been provided to the system and the officials did not
expect it to be provided before the October 2012 end of the defects
liability period. That same month MCC officials told us that they did not
expect the power service to be upgraded before January 2013.




Page 54                              GAO-12-630 Millennium Challenge Corporation
Fire Station Lacked Sufficient Staff to Operate MCC-Funded Fire
Engines

The MCC-funded fire station was not in use as of December 2011
because the Port Authority had not hired sufficient staff. The Port
Authority received three new fire engines as part of the MCC project, but
had not increased the staffing level, which MCA-Benin’s feasibility study
stated was necessary to operate the fire engines on a 24-hour basis. In
addition, truck congestion on the roads within the port prevents the fire
engines from circulating when needed.

As of April 2012, port authority officials stated that the fire protection
system was still not in service because of construction defects in the
water tank valve and testing had not been completed. However, the port
officials stated that they had recruited and trained additional firemen, and
were recruiting other personnel to operate and maintain the system, such
as inspectors, a diesel mechanic, and plumbers. At the time of the
feasibility study, the Port Authority had 14 fire prevention staff. In April
2012, a Port Authority official stated that the authority plans for a total
staff of 25.

Port Roads Are Severely Congested

Although the east-west port road and the bypass road were completed
with only minor quality issues such as missing manhole covers, significant
truck congestion jeopardizes their utility. The compact goal was to reduce
the average number of hours trucks stayed at the port from 24 hours to 7
hours. However, the average after the compact ended is 28 hours.
According to officials from two shipping companies, one of their primary
concerns was that truck congestion at the port would likely limit their
ability to increase the volume of merchandise passing through the port
(see fig. 26).




Page 55                               GAO-12-630 Millennium Challenge Corporation
Figure 26: Congestion on the East-West Port Road




The Port Authority has taken some steps to alleviate the truck congestion.
For example, the Benin government engaged a private firm to install
tracking and communication devices in trucks beginning in December
2011 that would allow trucks to enter the port when their shipper is ready
to load or unload them. However, an official from the firm stated that, as
of April 2012, the Benin government had not allowed the firm to initiate
the system even though it has been ready to operate since late
November 2011. The government of Benin also has plans to move some
operations to off-site “dry ports” where containers will go through customs
and be loaded and emptied. However, shipping company officials
questioned whether the existing railway will be able to transfer the cargo
to the dry ports. According to March 2012 statements by shipping
company officials, the Port Authority attempted to implement the use of
the railway and a privately operated dry port for containers going to
hinterland countries at a site about 55 kilometers away from the port. 40
However, according to one of the shipping company officials, the railway
could transport only 90 of the 200 containers needed to be transported
daily to the dry port. One shipping company official stated the company



40
  Hinterland countries are those inland countries that lie behind a port. For Benin, the
hinterland countries include Niger, Burkina Faso, Chad, and Mali. Togo and Nigeria are
also common destinations for goods transiting through the Port of Cotonou.




Page 56                                      GAO-12-630 Millennium Challenge Corporation
              had over 1,700 containers backlogged in the port in early March 2012,
              taking an average of more than 25 days to get a container from the port to
              the dry port. Shipping officials reported that as of late March 2012, port
              officials have allowed the containers to be either loaded and emptied in
              the port or transported by truck to another dry port, but congestion was
              still a problem.

              Parking Lot In Operation but Not Being Fully Utilized

              MCC funded the construction of a 250-truck parking lot that was handed
              over to the Port Authority in September 2011; however, as of April 2012,
              Port Authority officials stated the parking lot was not in full use because
              they had not engaged a company to manage the concession. MCC
              officials stated that trucks are occasionally moved to the lot to alleviate
              congestion. Port Authority officials stated that they plan to sign a
              concession agreement In July 2012 to manage the lot.


              Some of the challenges MCC faced in Georgia and Benin were not
Conclusions   unique. As with other early compacts, insufficient planning, escalation of
              construction costs, and insufficient MCC review led to project delays,
              scope changes, and cost increases. In the case of Georgia, MCC
              specifically had problems ensuring the quality of its transportation
              infrastructure project even though it had a quality assurance framework
              because it did not adequately address problems in contract supervision
              identified by the independent engineer. As a result, the road had
              significant pavement defects and numerous quality issues at compact
              completion. Furthermore, MCC has no leverage over the government or
              contractors once compacts end, even though contractors may be
              expected to continue work in the 1-year defects liability period following
              the contract. In Georgia, the construction contractors were required to
              remediate quality issues after the end of the contract, but MCC cannot at
              this point ensure that the repair work is properly done.

              Even though MCC took steps to provide for the sustainability of its
              investments in both Georgia and Benin, the projects in both countries
              have maintenance and operability challenges that jeopardize the benefits
              they were projected to achieve. In Georgia, the ability of the government
              to maintain the road is in question. Without sustained maintenance—such
              as repairing drainage systems and removing snow—the road will need
              additional repairs and have limited usefulness in the winter. In Benin, key
              project components, including security and electricity distribution systems
              and the south wharf, were not operational at the end of the compact. The


              Page 57                               GAO-12-630 Millennium Challenge Corporation
                      operation of these and other interconnected systems depends on the
                      partner government, which to date has been unable to fund and
                      implement the work required to begin port operations. As a result, MCC
                      may have invested considerable U.S. resources in equipment and
                      structures that will not be used to maximum benefit and thus not provide
                      the expected economic benefits. MCC should take this opportunity to
                      review the problems that emerged from Georgia, Benin, and other
                      completed compacts and to establish or strengthen mechanisms by which
                      it can better invest U.S. resources in future compacts.


                      To maximize the quality and sustainability of future projects, we
Recommendations for   recommend that the MCC Chief Executive Officer take the following
Executive Action      actions:

                      To ensure that its quality assurance framework is fully implemented and
                      to ensure that transportation infrastructure projects are built to the
                      established quality standards, MCC should

                      •   review how MCC uses information and professional recommendations
                          provided by its independent engineers to address identified
                          deficiencies and to ensure projects are constructed to the quality
                          standards set out in contracts, and

                      •   develop a mechanism to maintain influence through contracts’ defects
                          liability periods when they extend beyond the compact end date.

                      To ensure sustainability of compact projects, MCC should evaluate the
                      effectiveness of the tools it uses (such as its feasibility studies and
                      conditions precedent) to ensure that partner countries have adequate
                      infrastructure, staff, and policies necessary to operate and maintain MCC-
                      funded infrastructure following the compact.


                      In written comments on a draft of this report, MCC stated that it agrees
Agency Comments       with our three recommendations; however, it did not commit to
and Our Evaluation    undertaking any specific actions to address them. With respect to the first
                      recommendation to review its use of information and recommendations
                      from its independent engineers, MCC stated that it does guide its
                      oversight of compact projects using the analysis provided by its
                      independent engineers, but that the quality of advice can vary and
                      independent engineers are not always privy to all factors affecting
                      compact programs. However, MCC did not state that it would review its


                      Page 58                              GAO-12-630 Millennium Challenge Corporation
practices regarding how it uses information from these independent
engineers. With respect to our second recommendation regarding the
need for a mechanism to maintain influence on contracts whose defects
liability periods extend beyond compact end dates, MCC noted that it
sustains a dialogue with its partner countries after compact closure to
emphasize the importance of continued oversight. However, as MCC
officials have noted, because its authorizing legislation limits the term of
compacts to 5 years, MCC’s ability to assist partner countries directly
once a compact closes is restricted. MCC did not state that it would seek
any additional authority to maintain influence after the end of a compact.
With respect to our third recommendation, to evaluate the tools it uses to
ensure projects’ sustainability, MCC listed ways that it works to ensure
sustainability throughout the development, implementation, and closure of
compact programs. MCC also noted that it revised its Compact
Development Guidelines in January 2012 and included steps to
strengthen the agency’s assessment of sustainability during compact
development. However, MCC did not commit to evaluate the
effectiveness of the tools it has used or plans to use to ensure its projects’
sustainability.

We have reprinted MCC’s comments in appendix III. We have also
incorporated technical comments from MCC in our report where
appropriate.


We are sending copies of this report to interested congressional
committees and the Millennium Challenge Corporation. In addition, this
report is available at no charge on the GAO website at
http://www.gao.gov.




Page 59                               GAO-12-630 Millennium Challenge Corporation
If you or your staff have any questions about this report, please contact
David Gootnick at (202) 512-3149 or gootnickd@gao.gov. Contact points
for our Offices of Congressional Relations and Public Affairs may be
found on the last page of this report. GAO staff members who made
major contributions to this report are listed in appendix IV.




David Gootnick
Director
International Affairs and Trade




Page 60                             GAO-12-630 Millennium Challenge Corporation
Appendix I: Objectives, Scope, and
              Appendix I: Objectives, Scope, and
              Methodology



Methodology

              The fiscal year 2008 Consolidated Appropriations Act, Public Law 110-
              161, mandated that GAO review the results of Millennium Challenge
              Corporation’s (MCC) compacts. For the purpose of this engagement, we
              examined the quality and sustainability of MCC’s two transportation
              infrastructure projects in Georgia (the Samtskhe-Javakheti Road
              Rehabilitation Activity) and Benin (the Port of Cotonou Access to Markets
              Project). Transportation infrastructure is defined as public works that
              provide the conveyance of passengers or goods from one place to
              another.

              GAO selected MCC’s compacts in Georgia and Benin as the focus of this
              engagement through a subjective process. Our selection universe was
              those compacts ending in 2010 and 2011 that had a transportation
              infrastructure project. In a previous engagement we had reviewed the
              MCC-funded transportation infrastructure projects in Cape Verde and
              Honduras. 1 Georgia and Benin, in combination with these previously
              reviewed projects, provided some geographic variety as well as the ability
              to compare two port projects and two large road projects.

              We based our assessment of the projects’ quality on the quality
              assurance requirements established by MCC, the partner countries’
              Millennium Challenge Accounts (MCA), and their contractors. MCC
              requires the MCAs to (1) have an individual project director or to engage
              the services of a project management firm to help manage the
              administrative aspects of compact programs, (2) contract with
              implementing partners (such as construction firms) using MCC’s
              procurement guidelines, and (3) engage a construction supervisor to
              oversee the day-to-day construction and ensure compliance with contract
              requirements.

              For this report, the definition of sustainability is based on the definition
              from the Organisation for Economic Cooperation and Development’s
              Development Assistance Committee, which defines “sustainability” as
              “the continuation of benefits from a development intervention after major
              development assistance has been completed.” The Organisation for
              Economic Cooperation and Development’s Development Assistance
              Committee is an international forum of many of the largest funders of aid



              1
               GAO, Millennium Challenge Corporation: Compacts in Cape Verde and Honduras
              Achieved Reduced Targets, GAO-11-728 (Washington, D.C.: July 25, 2011).




              Page 61                                 GAO-12-630 Millennium Challenge Corporation
Appendix I: Objectives, Scope, and
Methodology




with a mandate to promote development cooperation and other policies
so as to contribute to sustainable development. We operationalized this
definition by specifying that sustainability is the ability of MCC’s partner
country governments to operate and maintain the new infrastructure in
such a condition as is required to produce the projected benefits for the
period of time those benefits are calculated.

To assess the quality and longer-term sustainability for compacts in
Georgia and Benin, we analyzed MCC, MCA, and other documents;
interviewed MCC officials and stakeholders; and observed project results
in both countries.

•   We reviewed the compact agreement for Georgia and Benin. We also
    reviewed documents prepared by MCA officials, independent
    construction supervisors, project management consultants, MCC
    independent engineers, and government officials, including monthly
    reports, special studies, testing reports, and daily inspections. We
    also reviewed final reports submitted to MCA by contractors on
    compact activities.

•   We interviewed MCC and MCA officials in both countries regarding
    the results of each compact activity, including the quality and
    sustainability of the projects. We visited infrastructure projects in both
    countries, including visits to the port in Benin, and to the Samtskhe-
    Javakheti road in Georgia. We met with project construction
    contractors, independent construction supervisors, and MCA project
    management consultants. In addition, we interviewed officials from the
    governments of Georgia and Benin about compact implementation,
    results, and sustainability, including Benin’s Ministry of Maritime
    Economy and Port Authority, and Georgia’s Ministry of Infrastructure.

•   We traveled to Benin and the Republic of Georgia in December 2011
    and conducted site inspections to verify the extent to which the MCC-
    funded transportation infrastructure projects had been completed and
    to observe whether there were any visible deficiencies in construction.
    All photographs in this report attributed to GAO were taken during this
    time period.

These interviews, document reviews, and site visits were used to
determine if the MCAs had implemented MCC’s quality assurance
framework, if there was supporting documentation to verify that quality
testing had been undertaken, if any quality deficiencies were encountered
during construction, if any quality deficiencies remain, and whether the



Page 62                                GAO-12-630 Millennium Challenge Corporation
Appendix I: Objectives, Scope, and
Methodology




infrastructure projects would be sustainable. We were not able to view
actual work in progress or visit testing facilities for most infrastructure
contracts because the work had already been completed.

To determine the amount of funding used for transportation infrastructure
projects, we reviewed MCC financial data. We included compact
implementation funding—funds disbursed before entry into force to
facilitate the implementation of the compact—with other projects not
related to transportation infrastructure.

MCC enters into a legal relationship with partner country governments,
which vest responsibility for day-to-day management of compact project
implementation in the MCA, including monitoring and evaluation activities
such as setting and revising targets, but such MCA actions require MCC’s
direct oversight and approval. Therefore, throughout this report, we
attribute all decisions related to project rescoping and compact targets to
MCC.

Finally, some of the reports and documents referenced above were
written in French or Georgian. We translated these documents internally
to enable our analysis.

We conducted this performance audit from November 2011 to June 2012
in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe the
evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.




Page 63                                GAO-12-630 Millennium Challenge Corporation
Appendix II: Additional Photographs Related
              Appendix II: Additional Photographs Related to
              Figure 20: Compact-Funded Improvements in
              the Port of Cotonou


to Figure 20: Compact-Funded Improvements
in the Port of Cotonou




              Page 64                                      GAO-12-630 Millennium Challenge Corporation
Appendix III: Comments from the Millennium
              Appendix III: Comments from the Millennium
              Challenge Corporation



Challenge Corporation




              Page 65                                      GAO-12-630 Millennium Challenge Corporation
Appendix III: Comments from the Millennium
Challenge Corporation




Page 66                                      GAO-12-630 Millennium Challenge Corporation
Appendix III: Comments from the Millennium
Challenge Corporation




Page 67                                      GAO-12-630 Millennium Challenge Corporation
Appendix IV: GAO Contact and Staff
                  Appendix IV: GAO Contact and Staff
                  Acknowledgments



Acknowledgments

                  David Gootnick, (202) 512-3149, or gootnickd@gao.gov
GAO Contact
                  In addition to the contact named above, Emil Friberg Jr. (Assistant
Staff             Director), Michael Armes (Assistant Director), Leslie Locke, and Miriam
Acknowledgments   Carroll Fenton made key contributions to this report. Additional technical
                  assistance was provided by John Bauckman, Lynn Cothern, George
                  Depaoli, David Dornisch, Aryn Ehlow, Etana Finkler, Heather Hampton,
                  Ernie Jackson, and Jena Sinkfield.




                  Page 68                              GAO-12-630 Millennium Challenge Corporation
Related GAO Products
             Related GAO Products




             Millennium Challenge Corporation: Compacts in Cape Verde and
             Honduras Achieved Reduced Targets. GAO-11-728. Washington, D.C.:
             July 25, 2011.

             Millennium Challenge Corporation: Summary Fact Sheet for 17
             Compacts. GAO-10-797R. Washington, D.C.: July 14, 2010.

             Millennium Challenge Corporation: MCC Has Addressed a Number of
             Implementation Challenges, but Needs to Improve Financial Controls and
             Infrastructure Planning. GAO-10-52. Washington, D.C.: November 6,
             2009.

             Millennium Challenge Corporation: Independent Reviews and Consistent
             Approaches Will Strengthen Projections of Program Impact. GAO-08-730.
             Washington, D.C.: June 17, 2008.

             Management Letter: Recommendations for Improvements to MCC’s
             Internal Controls and Policies on Premium Class Air Travel.
             GAO-08-468R. Washington, D.C.: February 29, 2008.

             Millennium Challenge Corporation: Projected Impact of Vanuatu Compact
             Is Overstated. GAO-07-1122T. Washington, D.C.: July 26, 2007.

             Millennium Challenge Corporation: Vanuatu Compact Overstates
             Projected Program Impact. GAO-07-909. Washington, D.C.: July 11,
             2007.

             Millennium Challenge Corporation: Progress and Challenges with
             Compacts in Africa. GAO-07-1049T. Washington, D.C.: June 28, 2007.

             Millennium Challenge Corporation: Compact Implementation Structures
             Are Being Established; Framework for Measuring Results Needs
             Improvement. GAO-06-805. Washington, D.C.: July 28, 2006.

             Analysis of Future Millennium Challenge Corporation Obligations.
             GAO-06-466R. Washington, D.C.: February 21, 2006.

             Millennium Challenge Corporation: Progress Made on Key Challenges in
             First Year of Operations. GAO-05-625T. Washington, D.C.: April 27,
             2005.

             Millennium Challenge Corporation: Progress Made on Key Challenges in
             First Year of Operations. GAO-05-455T. Washington, D.C.: April 26, 2005.


             Page 69                             GAO-12-630 Millennium Challenge Corporation
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