oversight

Foreign Assistance: U.S. Economic and Democratic Assistance to the Central Asian Republics

Published by the Government Accountability Office on 1999-08-11.

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

                   United States General Accounting Office

GAO                Report to the Chairman, Committee on
                   International Relations, House of
                   Representatives


August 1999
                   FOREIGN
                   ASSISTANCE

                   U.S. Economic and
                   Democratic
                   Assistance to the
                   Central Asian
                   Republics




GAO/NSIAD-99-200
United States General Accounting Office                                                   National Security and
Washington, D.C. 20548                                                             International Affairs Division



           B-283079                                                                                         Letter

           August 11, 1999

           The Honorable Benjamin A. Gilman
           Chairman, Committee on International Relations
           House of Representatives

           Dear Mr. Chairman:

           This report responds to your request that we examine the economic and democratic assistance that
           the United States has provided to the Central Asian Republics of Kazakhstan, the Kyrgyz Republic,
           Tajikistan, Turkmenistan, and Uzbekistan. With the break up of the Soviet Union in 1991, the United
           States has provided a broad foreign assistance program to these republics, including development of
           market-oriented economies and democracy building.

           Unless you publicly announce its contents earlier, we plan no further distribution of this report until
           30 days after its issue date. At that time, we will send copies to the Honorable Madeleine K. Albright,
           the Secretary of State; the Honorable Harriet C. Babbitt, the Acting Administrator of the U.S. Agency
           for International Development; and other interested congressional committees. We will also make
           copies available to others upon request.

           Please contact me at (202) 512-4128 if you or your staff have any questions about this report. Other
           GAO contacts and staff acknowledgements are listed in appendix II.

           Sincerely yours,




           Benjamin F. Nelson
           Director, International Relations and
            Trade Issues




                      Leter
Executive Summary



Purpose               With the breakup of the Soviet Union in 1991, the five countries that
                      comprise the Central Asian Republics (CAR)1—Kazakhstan, the Kyrgyz
                      Republic, Tajikistan, Turkmenistan, and Uzbekistan—became independent
                      along with Russia and the other former republics of the Soviet Union. The
                      United States has important strategic interests in CAR, including
                      dismantling Kazakhstan’s nuclear arsenal; developing oil and gas reserves;
                      and helping stabilize a region surrounded by China, Iran, and Russia.

                      The FREEDOM Support Act of 1992 authorized a broad foreign assistance
                      program for the independent states of the former Soviet Union that
                      included development of market-oriented economies and democracy
                      building.2 Since fiscal year 1993, the U.S. Agency for International
                      Development (USAID) has provided about $274 million for economic and
                      democratic reform initiatives in the five republics. Expressing concern
                      about what USAID has accomplished in CAR and USAID’s oversight of its
                      CAR programs, the Chairman, House Committee on International
                      Relations, asked GAO to determine

                      • what USAID’s economic and democratic reform initiatives in CAR were
                        designed to achieve; what has been accomplished; and what factors, if
                        any, have limited the implementation of reforms;
                      • whether lessons learned from similar USAID programs in Central
                        Europe3 and Russia have been applied in CAR; and
                      • how USAID ensures that its assistance funds in CAR are spent for
                        intended purposes.



Results in Brief      USAID’s economic and democratic reform initiatives in the five republics
                      are designed to help develop market-oriented economies, increase citizen
                      participation in economic and political decision-making, and promote more
                      democratic and responsive governments. With USAID and other donor
                      assistance, the CAR governments have made progress in this regard. Most
                      notably, Kazakhstan and the Kyrgyz Republic—the two republics most
                      committed to reforms—have privatized many small and medium-sized,

                      1
                       CAR is a term of convenience applied by the Department of State to the five independent republics and
                      does not signify a political or economic union among them.
                      2
                       The “Freedom for Russian and Emerging Eurasian Democracies and Open Markets Support Act of
                      1992,” also known as the FREEDOM Support Act. (P.L. 102-511, 106 Stat. 3320, 22 U.S.C. sec. 5801).
                      3
                       The Central European countries gained their independence from the Soviet Union in 1989.




              Leter   Page 2                                                        GAO/NSIAD-99-200 CAR Assistance
                     Executive Summary




                     state-owned enterprises; implemented trade and financial reforms; and
                     developed nongovernmental organizations and independent broadcast
                     news stations to encourage greater citizen involvement in governmental
                     activities.

                     However, the goal of reaching a market-oriented democracy in each of
                     these five republics is decades away. Even those republics that appear to
                     have the greatest commitment to reform—Kazakhstan and the Kyrgyz
                     Republic—have not completed many reforms. For example, both still have
                     many large, state-owned enterprises that have not been privatized and new
                     tax codes that have not been effectively enforced. With the exception of
                     the Kyrgyz Republic, none have supported key democratic reforms, such as
                     holding fair and free elections. Several important factors have affected the
                     implementation of reforms in all the republics, including long-standing
                     government corruption; inadequate resources to implement and enforce
                     new laws and regulations; inexperience in managing market economies
                     and democracies; and, most importantly, the governments’ limited
                     commitment to implement comprehensive reforms at the national level.

                     USAID’s programs in CAR reflect numerous lessons learned from similar
                     programs in Central Europe and Russia. For instance, based on efforts to
                     privatize economies in Central European countries, USAID designed an
                     integrated program to privatize the CAR economies, stressing simultaneous
                     reforms in the fiscal, legal, and financial sectors. Similarly, based on
                     experience with democratic reforms in Russia, USAID has focused on
                     working with citizen groups rather than with national political leaders and
                     institutions that are adverse to reforms.

                     To ensure that assistance funds are spent for intended purposes, USAID
                     requires that cognizant technical officers carry out various project
                     oversight requirements. Based on GAO’s review of 14 CAR projects, USAID
                     was meeting these requirements.



Background           Based on the FREEDOM Support Act of 1992, the current U.S. strategy for
                     CAR seeks to have each country adopt and implement policies, laws, and
                     regulations that provide the framework for market-oriented economies and




             Leter   Page 3                                        GAO/NSIAD-99-200 CAR Assistance
                          Executive Summary




                          democratic societies.4 The strategy provides the basis for USAID’s
                          economic and democratic reform initiatives.

                          Complicating USAID’s efforts, however, is the region’s long history of
                          isolation. According to USAID, over 150 years of Russian and Soviet
                          domination left CAR isolated from western technology, economic progress,
                          and political development. In addition, unlike the other newly independent
                          states (NIS) in the former Soviet Union and Central Europe, CAR had no
                          history as independent nation states. The historical lack of citizen
                          involvement in economic and government decision-making has led to the
                          underdevelopment of citizen involvement with and experience needed to
                          operate market-oriented democracies. Consequently, CAR began the
                          transition process far behind the other former Soviet Union states.



Principal Findings

USAID’s Assistance Has    USAID, in conjunction with other donors and the host governments, has
Contributed to Economic   helped the two republics most committed to reform—Kazakhstan and the
                          Kyrgyz Republic—begin the transition to market-oriented democracies.
and Democratic Reforms
                          USAID has concentrated its reform efforts on these two republics,
                          providing $150 million and $83 million, respectively, since fiscal year 1992,
                          or more than 85 percent of USAID’s economic and democratic assistance to
                          CAR.

                          • USAID’s overall economic reform strategy is to help the CAR
                            governments (1) privatize state-owned enterprises, (2) introduce tax
                            and budget reforms, (3) promote the growth of private enterprise, and
                            (4) improve the financial sector.
                          • USAID’s democratic reform initiatives are aimed at promoting
                            democracy at the national level, increasing citizen participation in
                            economic and political decision-making, and advancing more
                            responsive local government.

                          USAID provided advisors, training, small grants, and some equipment to
                          assist both governmental and nongovernmental organizations (NGO) in


                          4
                            United States Assistance and Economic Cooperation Strategy for Central Asia (Washington, D.C.:
                          Department of State, July 1994).




                          Page 4                                                       GAO/NSIAD-99-200 CAR Assistance
Executive Summary




designing and implementing economic and democratic reforms. For
example, in Kazakhstan and the Kyrgyz Republic,

• USAID helped privatize 17,000 and 1,000 small to medium-sized,
  state-owned enterprises, respectively; adopt modern tax codes; enact
  commercial legislation; convert over 2,000 enterprises to the use of
  international accounting standards; improve the banking systems; and
  establish stock exchanges. In the Kyrgyz Republic, USAID helped the
  government join the World Trade Organization.
• USAID helped increase public participation in the political process by
  developing over 2,500 NGOs; strengthening over 100 independent radio
  and television news stations; and assisting in organizing town hall
  meetings, political debates, and public hearings.

USAID has not provided much assistance to the other three republics. The
Turkmenistan and Uzbekistan governments generally have not been
committed to reforms, and civil strife has limited opportunities to initiate
reforms in Tajikistan. State and USAID rank Tajikistan, Turkmenistan, and
Uzbekistan as having made the least progress in their transition to
sustainable, market-oriented democracies compared to other countries in
NIS. Nevertheless, USAID has assisted with some accomplishments in
each country, such as privatizing about 500 small state-owned enterprises
in Tajikistan, increasing the number of NGOs in Turkmenistan, and
implementing a modern tax code in Uzbekistan.

USAID and State officials said it could take decades before CAR’s transition
to market-oriented economies is complete. USAID’s economic reform
initiatives have been supported by the national governments, at least in
part, because of the potential income from foreign investment and resource
development. Yet, despite the privatization of nearly two-thirds of the
small- and medium-sized enterprises in Kazakhstan and the Kyrgyz
Republic, many large enterprises are still owned and operated by the
governments. Moreover, many of the laws and regulations that support a
market-oriented economy are either not being enforced or are
nonexistent—new tax codes have not been effectively enforced, most
commercial legislation has not been fully implemented, and the banking
sector has not been fully reformed. In all the republics, corruption is
longstanding and pervasive. For example, unnecessary export licensing
processes remain a source of bribery and corruption.

With the exception of the Kyrgyz Republic, the CAR governments have
been slow to initiate democratic reforms because they threaten the



Page 5                                        GAO/NSIAD-99-200 CAR Assistance
                         Executive Summary




                         incumbent governments’ control. Only the Kyrgyz Republic has committed
                         to hold free and fair elections at the presidential and parliamentary levels.
                         Democratic development is still characterized by a lack of citizen
                         involvement and government controls over the broadcast news media have
                         led to self-censorship and a reluctance to report stories that might offend
                         public officials.


USAID Has Incorporated   USAID officials said that incorporating lessons learned from Central
Lessons Learned From     Europe and Russia was inherent in the CAR program’s design and
                         implementation, as illustrated by the following:
Other Similar Programs
                         • Based on USAID’s approach to privatization in Central Europe, USAID
                           designed an integrated plan for market development. USAID found in
                           Central Europe that five elements were essential to enable private
                           sector growth following privatization. These included the development
                           of (1) tax reform to support the financial obligations of the government;
                           (2) the legal framework for commercial, trade, and investment activity;
                           (3) accounting reform to provide credible financial data for economic
                           decision-making; (4) bank reforms to provide the capital for private
                           sector growth to improve corporate governance; and (5) stock markets
                           to help enterprises raise capital. USAID incorporated each of these
                           elements in its development plan for the republics.
                         • Based on USAID’s experience in Eastern Europe and Russia, USAID has
                           focused its democratic assistance on working with citizens to develop a
                           civil society that would push for democratic reforms from the bottom
                           up, rather than focusing on the national government. USAID found in
                           Russia that without the political support of national leaders, assistance
                           targeting national institutions and political processes was not likely to
                           achieve democratic reform. USAID has adopted this strategy to
                           establish and support nongovernmental organizations to build
                           consensus for democratic reform and has purposely avoided providing
                           direct assistance to national governments that have not been supportive
                           of democratic reform.

                         These and other lessons applied in CAR were identified through various
                         studies, conferences, and staff experiences. Although the use of lessons
                         learned was envisioned from the start of the USAID program in CAR,
                         USAID is now taking steps to develop a more formal system. USAID
                         officials said such a system would help identify and disseminate lessons
                         learned more effectively than the current system.




                         Page 6                                         GAO/NSIAD-99-200 CAR Assistance
                         Executive Summary




USAID Is Meeting Its     USAID ensures that assistance funds are spent for intended purposes
Oversight Requirements   through various project oversight requirements. USAID regulations and
                         guidance generally require its cognizant technical officers to maintain
                         communications with contractors and grantees, conduct site visits to verify
                         work performance, and review programmatic and financial reports to
                         compare actual progress and costs against expected results and costs.
                         GAO reviewed seven economic and seven democratic reform projects in
                         CAR and found that USAID had complied with its oversight requirements.5



Recommendations          GAO is not making any recommendations in this report.



Agency Comments          The Department of State and USAID were provided a draft of this report for
                         comment. USAID provided written comments (see app. I), which State
                         said it concurred with. USAID also provided technical comments that we
                         have incorporated, as appropriate. In its written comments, USAID noted
                         that the report makes a number of important points about the region and
                         does a good job of describing USAID’s efforts in CAR. USAID also provided
                         a listing of recent changes in CAR that are not specifically addressed in the
                         report.




                         5
                          Funding for the economic reform projects selected represented $136 million or 6 2percent of the total
                         economic assistance to CAR since fiscal year 1992. Funding for the democratic reform projects
                         selected represented $32 million or 60 percent of the funding for democratic assistance since fiscal year
                         1992.




                         Page 7                                                          GAO/NSIAD-99-200 CAR Assistance
Contents



Executive Summary                                                                              2


Chapter 1                                                                                     10
                       U.S. Economic and Democratic Reform Strategies                         10
Introduction           Historical Constraints to Development                                  12
                       The Central Asian Republics                                            12
                       Objectives, Scope, and Methodology                                     14


Chapter 2                                                                                     16
                       Economic Reforms                                                       16
USAID’s Assistance     Democratic Reforms                                                     25
Has Contributed to     CAR’s Economic and Democratic Transitions Are Far From Complete        31
                       Conclusions                                                            33
Economic and
Democratic Reforms

Chapter 3                                                                                     35
                       Lessons Learned                                                        35
USAID Has              USAID Is Formalizing Its Lessons Learned Process                       37
Incorporated Lessons
Learned in Its Car
Programs

Chapter 4                                                                                     38
                       Communications                                                         39
USAID Complied With    Site Visits                                                            39
Its Oversight          Performance and Financial Reports                                      40
                       Files                                                                  41
Requirements
Appendixes             Appendix I: Comments From the U.S. Agency for International
                         Development                                                          42
                       Appendix II: GAO Contacts and Staff Acknowledgments                    46


Table                  Table 1.1: USAID Obligations for CAR Economic and Democratic
                         Assistance Programs by Country, Fiscal Years 1992-98                 11




                       Page 8                                     GAO/NSIAD-99-200 CAR Assistance
          Contents




Figures   Figure 1.1: Map of the Central Asian Republics                         13
          Figure 2.1: Ratings of Economic Policy Reforms and Democratic
            Freedom in Central Europe and NIS                                    32




          Abbreviations

          CAR        Central Asian Republics
          CTO        cognizant technical officer
          IMF        International Monetary Fund
          NGO        nongovernmental organization
          NIS        newly independent states
          USAID      U.S. Agency for International Development
          WTO        World Trade Organization




          Page 9                                     GAO/NSIAD-99-200 CAR Assistance
Chapter 1

Introduction                                                                                                           Chapte1
                                                                                                                             r




                    Significant economic, political, and security interests have shaped U.S.
                    assistance to the five Central Asian Republics (CAR)—Kazakhstan, the
                    Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan. In addition to
                    furthering the nuclear disarmament of Kazakhstan, U.S. interests in CAR
                    include (1) promoting market-oriented economic reforms; (2) establishing
                    democratic political institutions; (3) developing energy resources in the
                    region; and (4) fostering regional stability, including the movement toward
                    greater integration with western and international institutions. This report
                    examines the U.S. Agency for International Development’s (USAID)
                    assistance program to help each of these republics develop
                    market-oriented economies and make the transition from communism to
                    democracy. Since fiscal year 1992, USAID has provided about $274 million
                    to assist CAR in this transition.



U.S. Economic and   The FREEDOM Support Act of 1992 authorized a broad foreign assistance
                    program for the independent states of the former Soviet Union that
Democratic Reform   included development of market-oriented economies and democracy
Strategies          building. The current U.S. strategy for CAR forms the basis for USAID
                    economic and democratic reform initiatives.1 The strategy seeks to have
                    each country adopt and implement policies, laws, and regulations that
                    provide the framework for market-oriented economies and democratic
                    societies. Specifically, the strategy calls for

                    • competitive, market-oriented economies in which the majority of
                      economic resources are privately owned and managed and
                    • transparent (open) and accountable governments and the
                      empowerment of citizens, working through civic and economic
                      organizations that ensure broad-based participation in political and
                      economic life.

                    The U.S. strategy recognized the importance of other donors in the region,
                    including the International Monetary Fund (IMF), the World Bank, and the
                    European Bank for Reconstruction and Development. These institutions
                    have provided CAR over $4.3 billion in financial assistance since 1992, and
                    significantly influence economic reforms by setting certain requirements or
                    “conditions” for their loans and grants. The strategy called for systematic
                    in-country coordination with these and other donors to avoid duplication,


                    1
                      United States Assistance and Economic Cooperation Strategy for Central Asia (Washington, D.C.:
                    Department of State, July 1994).




            Leter   Page 10                                                      GAO/NSIAD-99-200 CAR Assistance
        Chapter 1
        Introduction




        to assure consistency in programming and advisory services, and to
        leverage U.S. resources.

        USAID has developed strategic objectives, action plans, and strategies for
        its own programs to implement the U.S. strategy. Table 1.1 illustrates
        USAID funding for its economic and democratic reform initiatives in CAR
        for fiscal years 1992-98.



        Table 1.1: USAID Obligations for CAR Economic and Democratic Assistance
        Programs by Country, Fiscal Years 1992-98

        Dollars in millions
                                       Economic           Democratic                           Percentage
        Country                           reform             reform               Total            of total
        Kazakhstan                           $122                   $28           $150                       55
        Kyrgyz Republic                         70                   13              83                      30
        Tajikistan                               3                     4              7                       2
        Turkmenistan                             3                     2              5                      2
        Uzbekistan                              23                     6             29                      11
        Total                                $221                   $53           $274                      100
        Note: Obligations are commitments to provide federal funding resulting in the immediate or future
        outlay of funds.
        Source: U.S. Government Assistance to and Cooperative Activities With the New Independent States
        of the Former Soviet Union, Fiscal Year 1998 Annual Report (Washington, D.C.: the Office of the
        Coordinator of U.S. Assistance to NIS).


        The strategy also stated that the size and type of the U.S. assistance were
        expected to reflect the extent to which national leaders demonstrated a
        commitment to reforms. USAID has concentrated its economic and
        democratic reform efforts in Kazakhstan and the Kyrgyz Republic—the two
        republics most committed to reform. USAID has limited its assistance to
        Turkmenistan and Uzbekistan because of their lack of commitment to
        reforms, while Tajikistan has had few opportunities to initiate reforms due
        to civil strife.

        USAID does not provide U.S. funds directly to the CAR governments.
        Instead it funds U.S. contractors and grantees that, in turn, provide
        technical assistance, small grants, and equipment to CAR government
        agencies and nongovernmental organizations (NGO) involved in economic
        and democratic reforms. For example, USAID hired experts to advise CAR
        ministries on drafting laws needed to privatize the state-controlled



Leter   Page 11                                                      GAO/NSIAD-99-200 CAR Assistance
                         Chapter 1
                         Introduction




                         economy. USAID advisors also worked with citizen groups to help develop
                         NGOs and provide advice and equipment needed to establish independent
                         broadcast news stations.



Historical Constraints   According to State and USAID, CAR is the most undeveloped region in the
                         newly independent states (NIS) of the former Soviet Union. None of the
to Development           countries had experience with market-oriented economies or democratic
                         governments before the breakup of the Soviet Union. First Russian and
                         then Soviet, domination left the area isolated from western technology,
                         economic progress, and political development.

                         As a result, according to State and USAID, the development of market
                         economies requires major changes in attitude and incentive systems for
                         individuals as well as businesses. For example, USAID officials pointed out
                         that in three out of the five republics, current leadership continues in the
                         hands of former Communist Party chairmen who have recast themselves as
                         national leaders, renamed the party, and were elected unopposed or with
                         limited opposition. In general, according to State, the parliaments remain
                         dominated by these national leaders, and there is little understanding of
                         large-scale, rule-based democracy among the general public, who are
                         largely disinterested in politics.



The Central Asian        With the breakup of the Soviet Union, the United States and other countries
                         recognized CAR’s strategic location and largely untapped natural
Republics                resources. Figure 1.1 illustrates the region’s geographic significance, with
                         CAR bordering China, Iran, and Russia.




                         Page 12                                       GAO/NSIAD-99-200 CAR Assistance
                                                Chapter 1
                                                Introduction




Figure 1.1: Map of the Central Asian Republics



                                Russia




                                                            Kazakhstan
                                                               Kazakhstan



                                                 Aral Sea                       Almaty
                                                                                 Almaty        China
                          Ca
                           sp




                                                                                   Bishkek
                               ian




                                                                    Tashkent
                                                                    Tashkent
                                 Se




                                                                                             Kyrgyz
                                     a




                                                               Uzbekistan                    Republic
                                         Ashgabat
                                         Ashgabat                           Dushanbe
                                                   Turkmenistan                              Tajikistan




                                                                  Afghanistan
                                         Iran




                                                Following is a brief description of each of the republics.

                                                • Kazakhstan is the ninth largest country in the world and stretches from
                                                  Mongolia to the Caspian Sea. It has large reserves of oil, gas, and
                                                  minerals. Its size, location, and overall political and economic stability
                                                  have made Kazakhstan an important regional force. Despite being a
                                                  very large country, Kazakhstan has a population of just under 15 million,
                                                  according to a recent census, with a per capita income of $1,300.
                                                • The Kyrgyz Republic is a small, mountainous country situated south of
                                                  Kazakhstan and west of China. It is landlocked, with few natural
                                                  resources and limited industrial and agricultural production. The
                                                  United States considers the Kyrgyz Republic an enthusiastic regional



                                                Page 13                                                GAO/NSIAD-99-200 CAR Assistance
                         Chapter 1
                         Introduction




                           reformer and views it as a “laboratory” for demonstrating the
                           effectiveness of market-oriented democratic reforms. Its population of
                           4.5 million has a per capita income of $440.
                         • Tajikistan is bordered by Afghanistan, China, the Kyrgyz Republic, and
                           Uzbekistan. Civil war broke out in 1992 and, despite a 1997 peace
                           accord, continued fighting poses a challenge to peace in the republic.
                           U.S. assistance is primarily focused on humanitarian aid and promoting
                           the peace process. Tajikistan’s 6 million citizens have a per capita
                           income of $330.
                         • Turkmenistan is primarily a desert country, which borders Iran and
                           Afghanistan. Turkmenistan possesses the world’s fourth largest known
                           reserves of natural gas and significant reserves of oil. Turkmenistan’s
                           population of 4.4 million has a per capita income of $630.
                         • Uzbekistan borders the other four republics. The Department of State
                           views Uzbekistan as central to maintaining the stability and
                           independence of the region. Uzbekistan’s 22 million population is the
                           largest in CAR, and its relatively large market is viewed as a potential
                           launching point for commercial expansion in the region. Uzbekistan’s
                           per capita income is $1,000.



Objectives, Scope, and   To determine what USAID’s economic and democratic reform initiatives
                         were designed to achieve, what has been accomplished, and what factors
Methodology              have limited their implementation, we reviewed program documents,
                         including State and USAID strategy documents and project assessments.
                         We also interviewed State and USAID officials in Washington D.C., who
                         designed and managed the program, and met with headquarter
                         representatives of key USAID contractors and grantees involved with
                         projects in CAR. Our references to and observations about CAR or former
                         Soviet Union laws and regulations are based on interviews with USAID and
                         CAR government officials and other secondary sources, rather than our
                         own independent legal analysis.

                         In Kazakhstan and the Kyrgyz Republic, which accounted for about
                         85 percent of USAID’s economic and democratic reform assistance to CAR,
                         we reviewed USAID documents discussing accomplishments and
                         impediments, survey data, and independent evaluations of USAID’s
                         economic and democratic reform efforts. We also met with the U.S.
                         Ambassador to the Kyrgyz Republic; the U.S. Chargé d’Affaires in
                         Kazakhstan; the USAID Director for CAR; various USAID project officers
                         and USAID’s in-country contractors and grantees; and host government
                         officials, including members of parliament, the Supreme Court, and



                         Page 14                                      GAO/NSIAD-99-200 CAR Assistance
Chapter 1
Introduction




government ministries. We visited project sites and observed training
sessions to see how transition activities were implemented and to discuss
the views of the recipients of USAID assistance.

To determine whether USAID applied lessons learned to its country
programs in CAR, we reviewed program documents and evaluations of
USAID’s assistance programs in Central Europe and Russia and compared
the strategy and program implementation with those of CAR. We
interviewed USAID officials in Washington, D.C.; Kazakhstan; and the
Kyrgyz Republic and analyzed program documents to catalogue examples
of lessons learned. In the region, we attended regularly scheduled
discussions hosted by the USAID mission with its contractors and grantees
to see how program experiences were communicated and coordinated.
Finally, we reviewed documentation used by USAID to identify and
communicate lessons learned.

To determine how USAID ensures that its assistance funds in CAR are
spent for intended purposes, we reviewed relevant federal regulations
including Office of Management and Budget circulars; Federal Acquisition
Regulations; and USAID regulations and guidance for contracts, grants, and
cooperative agreements. To assess USAID's compliance with its oversight
requirements, we selected seven economic and seven democratic reform
projects as case studies. Funding for the economic reform projects
selected represented $136 million or 5 9percent of the total economic
assistance to CAR since fiscal year 1992. Funding for the democratic
reform projects selected represented $32 million or 64 percent of the
funding for democratic assistance since fiscal year 1992. To determine if
USAID was complying with USAID regulations, we reviewed the 14 project
files; observed meetings between USAID and its contractors and grantees;
conducted site visits; and interviewed contractors and grantees, cognizant
technical officers, and USAID Office of Procurement officials.

We conducted our review from July 1998 to June 1999 in accordance with
generally accepted government auditing standards.




Page 15                                      GAO/NSIAD-99-200 CAR Assistance
Chapter 2

USAID’s Assistance Has Contributed to
Economic and Democratic Reforms                                                                  Chapte2
                                                                                                       r




                    In working with other donors and the CAR governments, USAID has
                    assisted with a number of economic and democratic achievements in all
                    the republics. These include privatization of small and medium-sized
                    state-owned enterprises; trade, investment, and financial reforms; and the
                    development of NGOs and independent broadcast news stations to
                    promote reforms. However, most of the achievements have occurred in
                    Kazakhstan and the Kyrgyz Republic—the two republics most committed
                    to reforms. Officials from CAR governments and local NGOs said that
                    USAID assistance was instrumental in furthering these achievements.

                    USAID and State officials said it could take decades before CAR’s transition
                    to a market-oriented democracy is complete. Even in Kazakhstan and the
                    Kyrgyz Republic, many large enterprises are still owned by the
                    governments; new tax codes have not been effectively enforced; most
                    commercial legislation has not been fully implemented; and the financial
                    sectors have made few loans. With the exception of the Kyrgyz Republic,
                    none of the countries have instituted critical democratic reforms at the
                    national level, such as holding fair and free elections for the heads of
                    government, or endowing the legislative representatives with the
                    independence or authority to challenge the executive branch.
                    Furthermore, Tajikistan, Turkmenistan, and Uzbekistan have not
                    demonstrated a commitment to implementing comprehensive reforms.

                    USAID and State officials cited several factors that have impeded reforms,
                    including long-standing government corruption, the lack of resources to
                    implement and enforce new laws and regulations, and the governments’
                    limited commitment to implement comprehensive reforms at the national
                    level.



Economic Reforms    CAR’s command economies and its economic dependence on Russia
                    present major challenges to the development of market economies in CAR.
                    The historical lack of citizen involvement in economic decision-making has
                    led to the underdevelopment of citizen involvement with and experience
                    needed to operate market-oriented economies. USAID’s efforts to promote
                    economic reform have been impeded by these historical constraints, as
                    well as by the resistance of CAR governments to make comprehensive
                    economic reforms.

                    To facilitate CAR’s transition to a market-oriented economy, USAID
                    initiated programs to help the governments (1) privatize state-owned
                    enterprises, (2) introduce tax and budget reforms, (3) improve the trade



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                               and investment climate, and (4) develop the financial sector. Although
                               USAID has provided assistance to all five republics, it has focused on
                               Kazakhstan and the Kyrgyz Republic because they have been more
                               supportive of reform.

                               USAID has helped the governments of Kazakhstan and the Kyrgyz Republic
                               begin creating the foundation for market economies. Both have privatized
                               most of their state-owned enterprises; passed market-oriented laws to spur
                               commerce, trade, and investment; and created the basic institutions
                               needed for banking and capital markets activities. However, the complete
                               transition to market-oriented economies is decades away. Impediments
                               include the limited government commitment to comprehensive economic
                               reforms, inexperience in operating a market economy, insufficient
                               resources to pay the costs associated with implementing new institutions
                               and laws, and pervasive corruption in the region.


Privatization of State-owned   In CAR, as in the rest of the Soviet Union, Moscow’s central planners
Enterprises                    established production patterns based on political objectives rather than
                               economic efficiencies. Free enterprise was not permitted, and monopoly
                               production through giant state enterprises dominated economic activity,
                               skewing incentive structures, misallocating resources, and encouraging
                               wasteful production patterns. The privatization process sought to break
                               the linkage between the government and enterprises to allow private sector
                               activity to develop.

                               In its strategy, State considered privatization of state-owned enterprises to
                               be the single most important element in the economic transformation of
                               the region. Privatization was needed to transfer the majority of economic
                               resources from the CAR governments to the private sector. USAID’s
                               assistance aimed to help CAR governments design and implement
                               privatization programs. This included providing experts to help the
                               governments put in place policies to promote competitive privatization
                               procedures, such as methodologies to determine the value of state-owned
                               enterprises, and procedures to accelerate their sale. They also trained local
                               staff that worked closely with their government counterparts to help
                               implement and monitor enterprise sales during the privatization process.

                               The degree of privatization has varied based on the governments’
                               commitment to reforms. Kazakhstan, the Kyrgyz Republic, and to a lesser
                               extent, Tajikistan, have been the most committed to privatization. For
                               example,



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                         • Kazakhstan privatized over 17,000 small- and medium-sized state-owned
                           enterprises by the end of 1997, or nearly 70 percent of all state-owned
                           enterprises in the country;
                         • the Kyrgyz Republic privatized approximately 1,000 enterprises by the
                           end of 1996, or about 70 percent of small- and medium-sized enterprises;
                           and
                         • Tajikistan privatized 500 small enterprises by the end of May 1998, and
                           an estimated 65 percent of the small enterprises are now in the private
                           sector, with the government planning to complete privatization of these
                           small enterprises by the end of March 1999.

                         However, Kazakhstan and the Kyrgyz Republic have backed away from
                         their commitment to privatize their largest, most profitable, state-owned
                         enterprises, including those in the energy and mineral sectors. USAID
                         considers privatizing these enterprises critical to the overall success of the
                         economic reform efforts because of the potential foreign investment value
                         and potential contribution to their respective countries’ tax base. USAID
                         and State officials said that corruption was a key factor in the governments’
                         retrenchment, as it would reduce government officials’ ability to control
                         the enterprises for kickbacks and profit skimming. Tajikistan has not
                         privatized many of its medium- and large-scale enterprises, and the process
                         has been plagued by problems, such as how to value the enterprises.
                         According to USAID/CAR1 officials, Tajikistan has recently begun planning
                         to privatize additional enterprises in response to deadlines required to meet
                         World Bank loan requirements. Turkmenistan has rejected advice on
                         privatization from USAID, the World Bank, and IMF because it lacks the
                         commitment to reforming its economy.


Tax and Budget Reforms   Under the Soviet Union, tax systems often stymied the growth of private
                         enterprise through excessive taxation, and none of the CAR governments
                         had experience overseeing a decentralized, voluntary, compliance-based
                         tax regime. Local governments were dependent on subsidies from the
                         national governments and lacked the autonomy or the authority to raise
                         and spend revenue on its needs. Annual budget allocations were based on
                         ad hoc adjustments to traditional expenditure patterns, and
                         performance-based budgeting was nonexistent.



                         1
                         We use USAID/CAR to refer to USAID’s mission for CAR located in Almaty, Kazakhstan. USAID/CAR
                         manages USAID’s programs in all five republics.




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USAID’s action plan considered tax and budget reforms as necessary to
help create a stable macroeconomic environment. USAID focused its
efforts at the national level on (1) implementing modern tax codes and
improving tax administration, (2) rationalizing the finance system between
national and local governments, and (3) improving budget planning and
implementation.

• In the tax reform area, USAID advisors provided technical support to
  the governments in the development of the new tax codes, provided
  technical support and training on tax administration, developed a
  strategy to automate tax administration, and helped develop software
  for the automated system.
• For fiscal decentralization, USAID provided advisory support and
  training to promote basic fiscal decentralization.
• In the budget reform area, USAID provided long-term advisors and
  training support designed to help the governments rationalize their
  expenditure process and provided technical expertise in the
  development of a budget process law designed to rationalize the annual
  budgeting process and modernize the budget classification systems.

With USAID assistance, Kazakhstan, the Kyrgyz Republic, and Uzbekistan
became the first countries in NIS to adopt modern tax codes, enacting the
new codes in 1995, 1996, and 1998, respectively. Kazakh and Kyrgyz
officials said USAID assistance, which included drafting the new codes and
providing training for its administration, was instrumental in gaining these
achievements. Despite the enactment of the new tax codes, tax collection
has not improved in Kazakhstan or the Kyrgyz Republic. According to
USAID, these governments have not developed the strong tax
administration capabilities necessary to improve tax collection efforts, and
must substantially improve their tax collection to maintain macroeconomic
stability. USAID is working with these governments to make these
improvements but has been stymied by funding limitations and government
resistance to fully implementing reforms.




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USAID officials also stated that the governments had made little progress
on intergovernmental finance and budget reforms. For example,
accordingto a 1998 USAID report,2 the following conditions existed:

• In Kazakhstan, the government was not committed to reforming its
  intergovernmental finance and fiscal analysis systems, and in budget
  reforms, the Ministry of Finance was resisting changing expenditure
  norms. In addition, ministry officials were unwilling to implement cash
  control systems necessary to prevent a commitment of funds beyond
  available resources.
• The Kyrgyz Republic had not proceeded with reforms of
  intergovernmental finance or the budget systems, despite assistance
  from USAID, the World Bank, and others. This was due, in part, to the
  relatively poor economic conditions of the local governments, which
  reduced their ability to implement reforms. As for budget reforms, the
  lack of automated systems reduced the government’s ability to produce
  accurate budget reports.

More recently, according to USAID/CAR officials, the situation has
improved in both countries, with USAID helping the governments develop
program budgeting. USAID advisors are also helping to draft a law on
intergovernmental finance in Kazakhstan.

Nevertheless, according to USAID/CAR officials, these reforms would have
proceeded much more quickly if government bureaucracies in both
Kazakhstan and the Kyrgyz Republic were less corrupt and less reluctant to
cede power over funding sources. Regarding intergovernmental reforms,
the Kazakhstan government has not wanted to decentralize control, while
in the Kyrgyz Republic, the problem is the relative poverty of most
regions—five of the seven Kyrgyz regions are financed by the remaining
two, providing few options for a systematic solution. In addition, budget
reforms are considered more difficult to make than tax reforms because
there is little public interest in reforming a system that most people know
little about. USAID officials said that both national and local government
ministries have resisted the development of transparent budgets, fearing
that it could lead to budget reductions. This occurred in Turkmenistan, for
example, where USAID’s fiscal reform program has made limited progress
because, in part, ministries refused to reveal their real expenditures.



2
 Strategic Review of Fiscal Reforms in the NIS (Washington, D.C.: USAID, Oct. 1998).




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Improving the Investment   Under the Soviet Union, laws provided little protection for private property
Climate                    or investor rights, which dampened the willingness of domestic and foreign
                           investors to invest in CAR. USAID is helping the CAR governments create
                           the legal and regulatory systems needed to establish a stable investment
                           climate for private enterprise. USAID’s assistance is aimed at helping the
                           governments (1) draft, pass, and implement key commercial laws and
                           regulations; (2) join the World Trade Organization (WTO) which would help
                           promote passage of commercial laws and help integrate the countries with
                           international trade organizations; (3) implement international accounting
                           standards to promote transparency and investment and improve
                           management capability; and (4) improve the customs services to increase
                           foreign investment.

Commercial Laws            The lack of commercial, trade, and investment laws has been a major
                           impediment to the development of market-oriented economies in CAR.
                           USAID’s commercial law initiative is designed to put the legal and
                           regulatory framework in place to promote commercial transactions and
                           spur local and foreign investment in CAR.

                           With USAID assistance, Kazakhstan and the Kyrgyz Republic have adopted
                           a number of commercial laws. For example, the Kyrgyz Republic passed a
                           modern civil code (with sections on contracts, leasing, and intellectual
                           property), as well as laws on collateral, bankruptcy, customs, procurement,
                           and foreign investment. A judge on the Kazakhstan Supreme Court, as well
                           as the Director of the Legal Department in the Kyrgyz White House, both of
                           whom had participated in the reform efforts, said that USAID assistance
                           was critical in the development and passage of their country’s new
                           commercial laws. According to USAID, these laws provide a basic
                           framework for commercial activity.

                           According to USAID, neither government has fully implemented most of
                           the new laws or developed the institutional capacity to enforce them.
                           USAID officials said that the governments do not have the necessary funds
                           to publish and disseminate new laws and regulations. Nor do the
                           governments have adequate funds to train the thousands of administrators
                           necessary to interpret and enforce the new laws and regulations.
                           Furthermore, the governments have yet to establish an enforcement
                           system for the efficient adjudication of commercial disputes.

World Trade Organization   USAID has supported CAR efforts to join WTO as a way to promote a
Accession                  greater understanding of and commitment to trade and investment



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                           liberalization.3 USAID/CAR officials have also encouraged WTO
                           membership as a means to cement links with critical international
                           institutions and to pursue policy dialogue on a number of investment
                           issues. These include the passage of commercial laws on intellectual
                           property rights, contracts, licensing, customs, tax administration,
                           bankruptcy, and collateral. USAID has provided technical assistance and
                           training support to encourage a range of investment reforms that are
                           crucial for the economic growth prospects in CAR. USAID also provided
                           assistance to help interested governments draft WTO membership
                           documents and technical support to prepare the governments for
                           negotiations with WTO on membership.

                           With USAID assistance, Kazakhstan, the Kyrgyz Republic, and Uzbekistan,
                           have taken their initial steps toward WTO membership. In 1998, the Kyrgyz
                           Republic became the first country in the former Soviet Union to join WTO.
                           According to a director in Kazakhstan’s Ministry of Energy, Industry, and
                           Investment, as well as the Deputy Minister for Economic Policy in the
                           Kyrgyz White House, USAID advisors played an indispensable role both in
                           helping the countries’ progress toward WTO membership and in
                           encouraging overall trade and investment reforms.

                           Despite progress toward WTO membership by Kazakhstan, it missed a 1998
                           self-imposed goal to join WTO and failed to adopt key trade and
                           investment-related legislation. USAID/CAR officials attributed this delay to
                           pressure from Russia not to join WTO before Russia does, which, according
                           to USAID officials, will not occur in the foreseeable future. Uzbekistan
                           submitted its application for WTO membership but has not passed key
                           commercial legislation necessary for membership. According to USAID
                           officials, USAID has provided no assistance to Tajikistan because of the
                           ongoing civil strife, and Turkmenistan has not made a commitment to join
                           WTO.

International Accounting   When CAR gained its independence, the republics had no standardized,
Standards                  credible financial data with which to make rational economic decisions.
                           Without accurate, reliable financial data, private domestic and foreign
                           firms, banks, and governments cannot make key business decisions.




                           3
                            WTO is a multilateral organization that provides the legal and institutional framework for the
                           international trading system. It also serves as a forum for international trade negotiations.




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                  To help provide accurate financial information, USAID has encouraged
                  CAR to adopt International Accounting Standards as a means to attract
                  international investment. USAID officials said that accounting standards
                  are critical for potential investors to analyze and act on investment
                  opportunities and for enterprise management’s decision-making. USAID
                  helped the governments implement the standards. In late 1996, Kazakhstan
                  became the first of the former Soviet Republics to adopt International
                  Accounting Standards, and as of December 1998, 1,500 Kazakhstani
                  enterprises had converted to the new standards.

                  In January 1998, the Kyrgyz Republic became the second country in NIS to
                  adopt the standards. USAID helped the Kyrgyz Republic convert
                  approximately 800 enterprises to the new standards and trained over
                  260 accounting specialists in training institutions, audit and accounting
                  firms, and enterprises undergoing conversions on how to implement the
                  new standards.

                  However, USAID has not yet succeeded in establishing fully functional
                  self-regulatory organizations required to develop and enforce professional
                  standards for the accountants and auditors needed to fully implement the
                  new standards. According to USAID/CAR officials, however, significant
                  progress has been made in both Kazakhstan and the Kyrgyz Republic in this
                  area during the first half of 1999.

Customs Reforms   To facilitate trade and investment, USAID has provided technical
                  assistance to improve customs procedures in CAR. For example,

                  • Kazakhstan adopted rules to improve customs processing and has
                    eliminated export tariffs and the requirement to register exports;
                  • the Kyrgyz Republic passed laws to eliminate repetitive and
                    burdensome licensing requirements; and
                  • Uzbekistan passed both a customs code and a customs tariff law, as well
                    as issuing implementing regulations on customs valuation.

                  According to USAID/CAR officials, corruption and the lack of political
                  commitment to fully implement the new laws and complete additional
                  reforms have hampered progress. In both Kazakhstan and the Kyrgyz
                  Republic, the licensing process remains a source of bribery, with chaotic
                  procedures and no standardization of requirements across ministries.
                  Unnecessary licensing requirements remain both as obstacles to
                  investment and sources of corruption. USAID officials also said that the
                  governments lack adequate funds for training customs officials and do not



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                          normally provide funding for the printing and distribution of new laws and
                          regulations. The Director of the Legal Department of Kazakhstan’s
                          Customs Committee said that, as a result, customs officers are not always
                          aware of new laws or regulations or understand how to interpret them.


Improving the Financial   Key financial institutions, such as banks and capital markets, did not exist
Sector                    in the western sense in CAR. In response, USAID adopted two initiatives,
                          banking reform and capital markets development, to promote private
                          sector growth. According to USAID’s strategy, these were needed to
                          provide (1) new sources of capital to enterprises as they restructured under
                          private ownership, (2) investors with accurate information on the financial
                          status of newly privatized enterprises and (3) mechanisms for capital to
                          flow to profitable enterprises and away from nonviable ones.

Banking Reforms           With USAID assistance, Kazakhstan and the Kyrgyz Republic have
                          strengthened their financial sector through banking reforms. Central bank
                          representatives from both countries said that USAID provided critical
                          assistance in helping the banks implement international banking
                          regulations and enhance their monitoring of commercial banks. These
                          officials said that, as a result of these reforms, the health of the commercial
                          banks has improved. For example,

                          • the Kazakhstan Central Bank closed insolvent banks and reduced the
                            number of banks from 230 to 75 to improve capitalization through
                            implementation of stricter licensing procedures; and
                          • the Kyrgyz National Bank implemented new capital adequacy
                            requirements and closed insolvent banks; as a result, the number of
                            banks meeting the new capital requirements rose to 85 percent in 1997
                            compared to 42 percent in 1995.

                          Despite these achievements, banking reforms are far from complete. In
                          both Kazakhstan and the Kyrgyz Republic, the banking sector is lending at
                          very low levels, with an adverse impact on business development. USAID
                          and the central banks lack adequate funds to completely implement
                          additional reforms, and the governments have not fully committed to
                          supporting these reforms. For example, the Kyrgyz Republic has yet to
                          complete the automation of its accounting system, adopt a modern
                          payments system law, and implement an efficient electronic payments
                          system for the banking sector.




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Capital Markets Development   Institutional mechanisms for raising capital through equity or secured debt
                              did not exist in CAR. USAID’s strategy was to provide technical assistance
                              and training support to the reform-minded governments in CAR to help
                              develop key laws and institutions needed for securities markets, including
                              a stock exchange, broker-dealer associations, and national securities
                              commissions.

                              USAID assistance has helped Kazakhstan, the Kyrgyz Republic, and in a
                              very limited way Uzbekistan develop and implement the laws, regulations,
                              and infrastructure necessary to establish capital markets. USAID officials
                              said that, despite these achievements, none of the three stock exchanges
                              are fully developed.

                              • Activity on the markets is low due to public mistrust and limited savings
                                and, more recently, the Asian and Russian financial crises and the
                                resulting capital flight from the emerging markets.
                              • Both the Kazakhstan and Kyrgyz governments have pulled back from
                                their plans to offer high-quality shares of state-owned enterprises for
                                sale through the stock exchanges. USAID/CAR and U.S. embassy
                                officials in Kazakhstan and the Kyrgyz Republic attributed these
                                decisions to corruption associated with government control over these
                                lucrative state-owned enterprises, as well as to low prices associated
                                with the slump in the global commodities markets.
                              • For a while, the Kyrgyz Republic was not able to bring “gray market”
                                (outside of the exchange) trading into the stock market. In May 1999,
                                however, the Kyrgyz Republic ended this activity, which accounted for a
                                significant percentage of trading. In order to enhance the prospects for
                                sustainability, a Presidential Decree stipulated that all trading shall be
                                conducted through the exchange.
                              • Uzbekistan has maintained government control over the securities
                                regulatory body, the central depository, and the stock exchange.
                                According to USAID officials, this is a clear conflict of interest, and as a
                                result, these institutions have not developed.



Democratic Reforms            CAR’s closed political systems, combined with the dual legacy of
                              communism and CAR’s centralized regimes, present major challenges to
                              democratic development. The lack of citizen involvement in government
                              decision-making has led to the underdevelopment of a civil society and
                              fostered the belief that citizens have little ability to influence government
                              decisions affecting their daily lives. USAID’s efforts to promote democratic




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                             reform have been impeded by these historical constraints as well as by the
                             resistance of CAR governments to make the necessary changes.

                             As a result, USAID has focused its assistance on CAR citizens, as opposed
                             to national institutions, in an effort to develop a broad-based consensus for
                             democratic change. USAID is promoting increased and better-informed
                             citizen participation in political and economic decision-making. To meet
                             this goal, USAID has (1) targeted national pro-reform officials to promote
                             democratic reforms, (2) helped develop NGOs to lobby for reforms,
                             (3) increased independent news media to better inform CAR citizens, and
                             (4) recently initiated a program to promote democratic reforms at the local
                             government level.


Promoting Effective          USAID has sought to increase the CAR governments’ transparency,
Government at the National   responsiveness, and accountability to its citizens by assisting newly elected
                             legislatures, judicial bodies, and electoral commissions to organize and
Level
                             carry out their functions. USAID worked to support the development of
                             democratic institutions and practices within national governments (except
                             in Turkmenistan) by targeting pro-reform government officials for
                             assistance. USAID provided (1) training and technical assistance to
                             improve parliamentary practices and legislative drafting; (2) legal resource
                             and judicial training centers in order to help organize the legal system,
                             improve training, and adopt ethical codes of conduct; and (3) electoral law
                             development and civic/voter education in preparation for upcoming local,
                             parliamentary, and presidential elections.

                             • In Kazakhstan, USAID focused its democracy assistance on areas
                               outside of national government institutions, concluding that the
                               government would not support democratic reforms. The Kazakhstan
                               government is dominated by its president, who was recently reelected to
                               a second 6-year term. However, the primary opposition candidate was
                               not allowed to run in the election, which the U.S. embassy considered
                               flawed. Despite the government’s resistance to democratic reforms,
                               USAID has had some recent successes in promoting government
                               accountability, including staging a debate where parliamentary
                               candidates discussed issues in a nationally televised broadcast for the
                               first time.
                             • The Kyrgyz Republic is considered the most open and democratic
                               country in the region and, unlike in the other republics, USAID has
                               provided technical assistance and training to the parliament and
                               judiciary. For example, USAID training and liaison support increased



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                    the capacity of the parliament to initiate and draft legislation. USAID
                    also played an active role in persuading members of the parliament to
                    meet with their constituents and allow USAID-assisted NGOs to
                    contribute to the legislative process.
                  • Tajikistan is still emerging from over 6 years of civil war. A peace
                    accord signed between the government and the opposition in June 1997
                    formally ended the civil war. However, splinter groups and warlords
                    fighting over the drug trade have continued to destabilize the country.
                    Due to the political situation, USAID has focused its democracy
                    activities in Tajikistan on promoting and supporting the peace process.
                    However, USAID also provided guidance on constitutional and judicial
                    reform issues and assisted the government in developing a voter
                    registration system to promote elections to meet international
                    standards.
                  • In Turkmenistan, the president has dominated the national government
                    since his days as head of the Communist Party in 1985. According to
                    State, the president has retained power over the judiciary and a
                    50-member parliament. Given this, USAID has limited democracy
                    programs in Turkmenistan.
                  • In Uzbekistan, USAID has made limited progress assisting the
                    government in becoming more transparent and accountable to its
                    citizens. According to State, Uzbekistan is ruled by a highly centralized
                    presidency, comprised of the president and a small circle of advisers.
                    Nonetheless, USAID’s efforts recently resulted in the formation of a
                    judges’ association and its adoption of a code of ethics, signs that
                    provide some encouragement for future reform initiatives.

                  With the exception of the Kyrgyz Republic, CAR’s governments have
                  resisted opening and liberalizing government and have impeded USAID’s
                  efforts to promote democracy at the national level. As a result, USAID
                  attempted only modest reform efforts to achieve this goal and targeted its
                  assistance in areas where it was most likely to achieve positive results.
                  Government officials in the region were largely holdovers from the Soviet
                  period. State officials noted that these officials were generally tolerant
                  only to democracy initiatives that were not perceived as threats to their
                  control and so have largely resisted democratic reforms at the national
                  level.


Developing NGOs   Because USAID views CAR as lacking the political commitment to institute
                  democratic reforms at the national level, it has focused on promoting
                  democracy by increasing citizen participation through the development of



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                        NGOs. According to USAID, the underlying rationale for this approach is
                        that systemic reforms cannot be forced upon a government. If the political
                        will to reform does not exist at the national level, then primary emphasis
                        needs to be placed on local level reforms.

                        USAID has worked with NGOs that are active across a wide spectrum of
                        disciplines, from economic to social development. A growing number are
                        involved in public advocacy efforts and, through targeted USAID training
                        and technical assistance, have demonstrated a capacity for developing
                        governmental relations, providing public education, and performing
                        community organizing. For example, a film documentary on tuberculosis
                        produced by a public advocacy organization led the Kazakhstan
                        government to initiate a tuberculosis eradication campaign. Also, an NGO
                        in the Kyrgyz Republic that 2 years ago was unable to obtain an
                        appointment with government officials now has its counterparts in the
                        government regularly travel to the organization’s offices to coordinate with
                        them on consumer rights legislation and regulations.

                        USAID’s effort to develop the CAR’s NGO sector has achieved measurable
                        results. Less than 5 years ago, the only NGOs were social welfare
                        organizations connected with the government and a limited number of
                        environmental groups. At the end of 1998, over 2,500 were active in CAR—
                        609 in Kazakhstan, 870 in the Kyrgyz Republic, 515 in Tajikistan, 117 in
                        Turkmenistan, and 439 in Uzbekistan—an increase of 65 percent from 1996.
                        USAID played a critical role in the development of these NGOs by
                        providing training, technical assistance, legislative drafting, and legal
                        support.

                        Despite these achievements, the NGOs in CAR still have funding and other
                        problems that challenge their viability. The majority of NGOs are
                        dependent on external financing to maintain operations and activities.
                        Most organizations have low memberships and a narrow constituency
                        base. The majority of these organizations—which are predominantly
                        located in the capitals and some major cities—have an urban bias and
                        underserve rural areas. USAID officials told us that pending legislation in
                        several of the CAR parliaments, such as tax laws on charitable giving,
                        would be a key factor in enhancing the sustainability of NGOs. USAID was
                        assisting in drafting and supporting the passage of such legislation.


Promoting Independent   Increasing the availability of information is a key component of USAID’s
Broadcast News Media    efforts to encourage better-informed citizen participation in economic and



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political decision-making. A diverse flow of information is a means to
promote government transparency and accountability and serves as
protection against corruption. USAID worked to strengthen and promote
independent media by providing (1) radio and television station
management training, (2) technical assistance, (3) broadcast equipment,
and (4) legal and legislative drafting assistance.

USAID assistance has helped strengthen over 100 independent news
broadcasting stations and has provided citizens with an alternative to
state-controlled media. USAID assistance has contributed to an increase in
independent daily news broadcast time and the percentage of the
population with access to independent news. For example, USAID
estimates that in Kazakhstan, 26 television and 18 radio stations averaged
25 minutes of independent daily news broadcast time, and 40 percent of the
population had access to independent news. Similarly, in the Kyrgyz
Republic, 16 television and 11 radio stations averaged 20 minutes of
independent daily news broadcast time, and 81 percent of the population
had access to independent news. The number of stations and news time in
Tajikistan and Uzbekistan was less impressive, but nonetheless had
increased as the result of USAID’s efforts. USAID has not conducted
independent media activities in Turkmenistan because the government
opposes an independent media.

USAID’s training was highly valued by media officials we met. Station
management training modules were credited with making outlets more
economically viable, and the provision of broadcasting equipment was
viewed as a key input that enabled stations to be competitive with
state-owned stations in terms of production quality. USAID legal assistance
was responsible for helping broadcast stations throughout the region
obtain licensing and maintain compliance in an uncertain regulatory
environment, thereby preventing many stations from being closed.

Despite the gains in independent media outlets, serious challenges to the
media exist in the region. The greatest challenge to an independent media
was in Kazakhstan, where recent actions by the government, including
cost-prohibitive rates for licenses, have increased government controls
over the media and resulted in the closing of 36 television and radio
stations. In addition, throughout CAR, the independent media face many
common problems, including challenges to editorial independence and to
economic survival. Independent stations are subject to both direct and
indirect pressure from government officials. According to media officials
we spoke with, there is a clear understanding on their part about what can



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                  Chapter 2
                  USAID’s Assistance Has Contributed to
                  Economic and Democratic Reforms




                  and cannot be reported, and self-censorship is practiced. Government
                  officials at the national and local level apply pressure to restrict reporting
                  on political matters, resulting in the media’s shying away from stories that
                  might offend public officials. USAID officials report that governments
                  manipulate access to information by channeling information to
                  government-controlled stations. Finally, many independent stations,
                  especially those located outside major urban areas, have difficulty
                  generating advertising revenues to sustain their operations.


Assisting Local   In the summer of 1998, USAID began promoting effective, responsive, and
Governments       accountable local governments in Kazakhstan and the Kyrgyz Republic.4
                  By supporting the development of democratic institutions at the local level,
                  USAID sought to promote decentralization, citizen involvement, and
                  appropriate resource management.

                  Historically, CAR has had little experience with local government, as most
                  administrative and financial decision-making power resided at the national
                  level. USAID is providing a broad array of technical assistance, including
                  assistance in budgeting, financial management, competitive procurement
                  systems, public hearings, and policy development guidance to local
                  government officials.

                  In Kazakhstan, USAID has been limited in its ability to address local
                  government reforms due to resistance by the national government. USAID
                  assisted in several attempts to draft an effective local government law to
                  increase fiscal and administrative decentralization, but the national
                  government either withdrew or weakened the draft laws before submitting
                  them to parliament. This was largely because after independence, the
                  national government allowed oblasts (provinces) significant autonomy, but
                  several northern oblasts with large Russian populations pressed for
                  secession from Kazakhstan. As a result, the national government
                  significantly limited its efforts to give local government greater authority
                  and autonomy. USAID’s start-up activities have been hampered by the lack
                  of a national government counterpart to coordinate and advocate for local
                  government initiatives.




                  4
                   USAID has not pursued this strategic objective in Turkmenistan or Uzbekistan due to a lack of central
                  government commitment to local government reform and in Tajikistan due to the ongoing civil conflict.




                  Page 30                                                       GAO/NSIAD-99-200 CAR Assistance
                         Chapter 2
                         USAID’s Assistance Has Contributed to
                         Economic and Democratic Reforms




                         According to USAID officials, the Kyrgyz Republic government appears
                         committed to decentralization, and it is beginning the process of devolving
                         authority to local governments. Elections for council members were held
                         in over 450 villages, and all villages had enacted charters (20 towns,
                         including the capital, Bishkek). The national government created an Office
                         of Local Government that actively promotes an agenda to strengthen local
                         government. The existence of a counterpart agency in the government
                         facilitated start-up activities, and most of USAID’s project tasks were being
                         implemented on schedule. However, despite these achievements, local
                         governments remained constrained by the Ministry of Finance’s control
                         over their budgets. Until local governments are able to generate sufficient
                         revenue to cover their expenses, the ability to achieve effective,
                         responsible local government will be significantly limited.



CAR’s Economic and       USAID and State monitor the pace of economic and democratic transitions
                         of the 25 countries that constitute Central Europe and NIS. A 1998
Democratic Transitions   State/USAID report5 ranked three of the five countries in CAR—Tajikistan,
Are Far From             Turkmenistan, and Uzbekistan—among the least economically and
                         democratically developed of the 25 countries that made up Central Europe
Complete                 and the former Soviet Union. The semi-annual report used a wide variety
                         of indicators drawn primarily from non-U.S. government sources such as
                         the Freedom House and the European Bank for Reconstruction and
                         Development Investment. These indicators cover such areas as whether
                         (1) most of the gross domestic product is derived from private enterprises,
                         (2) foreign investment and foreign trade are encouraged, (3) the head of
                         state and parliaments are elected through free and fair elections, and
                         (4) the media is free and independent.

                         The Kyrgyz Republic was rated the most advanced in CAR with economic
                         and democratic reforms ranked 12 and 16, respectively. Kazakhstan was
                         ranked 16 economically and 21 politically. Figure 2.1 depicts the economic
                         reform and democratic freedom rankings for the countries of Central
                         Europe and NIS.




                         5
                           Monitoring Country Progress in Central and Eastern Europe and the New Independent States
                         (Washington, D.C.: USAID and the Department of State, Apr. 1998).




                         Page 31                                                     GAO/NSIAD-99-200 CAR Assistance
Chapter 2
USAID’s Assistance Has Contributed to
Economic and Democratic Reforms




Figure 2.1: Ratings of Economic Policy Reforms and Democratic Freedom in Central
Europe and NIS
Economic policy reforms
5




                                                                                                 Hungary
4
                                                                                Czech Republic
                                                                                                 Poland
                                                                 Slovakia                        Estonia

                                                                                                 Slovenia
                                                  Croatia
                                                                Russia                           Latvia
3                                                                                                Lithuania
                                               Kyrgyz Republic                    Bulgaria
                                                                Moldova               Romania
                Kazakhstan        Armenia             Albania   Georgia
        Uzbekistan                                              Macedonia
                                                  Ukraine
2
                                     Azerbaijan
                     Belarus

                     Tajikistan
    Turkmenistan

1
    1                      2                        3                       4                          5
                                            Democratic freedoms

Source: Monitoring Country Progress in Central and Eastern Europe and the New Independent States.


The report also noted that none of the 25 countries have completed their
economic and democratic transitions. Even the most reformed countries,
such as Poland and Hungary, still have far to go relative to the economic
policies of industrial market-oriented economies. In addition, the report
said that CAR, like others in the former Soviet Union, have implemented
the “easiest” reforms, such as privatizing small and medium-sized
enterprises and passing new laws. None of the countries in the former
Soviet Union or Central Europe have completed the hardest transitions.
These include implementing commercial laws, banking reforms, and
capital markets development—reforms that often challenge the vested
interests of the ruling elite or require the full involvement of the region’s
citizens.

USAID/CAR officials agreed that, despite the accomplishments in CAR, the
transitions are far from complete and the remaining tasks are the most



Page 32                                                             GAO/NSIAD-99-200 CAR Assistance
              Chapter 2
              USAID’s Assistance Has Contributed to
              Economic and Democratic Reforms




              difficult. However, they noted that the State/USAID rankings do not give
              sufficient credit to the amount of progress made by CAR, particularly
              Kazakhstan and the Kyrgyz Republic. They said that the region was much
              less developed than those countries in Central Europe that had a tradition
              of market-oriented democracies to build upon and the report’s rankings do
              not adequately portray the degree of movement thus far. They noted that
              neither the ruling elite nor their citizens have any experience with the
              institutions nor the behaviors needed to operate market economies and
              democracies and that this could take generations to develop. Given the
              historical constraints to development in CAR, and where CAR began the
              development process, USAID/CAR officials said that Kazakhstan and the
              Kyrgyz Republic had made considerable progress since the beginning of the
              USAID program.

              USAID’s 1998 Agency Performance Report further stated that CAR, like
              other areas of NIS, continues to have transition difficulties.6 According to
              the report, two-thirds of USAID’s economic programs failing to meet
              USAID expectations were in NIS. Contributing factors included (1) the
              difficulties of replacing entrenched communist institutions, (2) USAID’s
              limited experience (approximately 10 years) in helping countries transition
              from communism compared to its 40 years of development work, (3) the
              limited USAID field presence in NIS, and (4) unexpected political and
              economic crises. Democratically, the report ranked Kazakhstan, Tajikistan,
              Turkmenistan, and Uzbekistan as “not free,” while the Kyrgyz Republic was
              ranked “partly free.” The report stated that all of the countries in NIS
              continue to face challenges to a fuller transition to democracy. Organized
              crime and corruption undermine effective governance, while the economic
              woes of the republics leave citizens little time for political participation.



Conclusions   USAID has helped Kazakhstan and the Kyrgyz Republic begin the transition
              to market-oriented economies and lay the foundation for democratic, civil
              societies. Kazakhstan and Kyrgyz officials said that USAID assistance was
              instrumental in their achievements. However, the reforms are far from
              complete, and further development of the region must be considered a
              long-term effort. USAID’s economic reform initiatives have been supported
              by the national governments, at least in part, because of the potential
              income from foreign investment and resource development. In contrast,
              with the exception of the Kyrgyz Republic, the CAR governments have

              6
               1998 Agency Performance Report (Washington, D.C.: USAID, Apr. 1999).




              Page 33                                                    GAO/NSIAD-99-200 CAR Assistance
Chapter 2
USAID’s Assistance Has Contributed to
Economic and Democratic Reforms




been slow to make democratic reforms because they threaten the
incumbent governments’ control.




Page 34                                    GAO/NSIAD-99-200 CAR Assistance
Chapter 3

USAID Has Incorporated Lessons Learned in
Its Car Programs                                                                                                     Chapte3
                                                                                                                           r




                          Incorporating lessons learned from Central Europe and Russia into the
                          CAR program was envisioned from the beginning of the program. State’s
                          strategy document stated that lessons learned from Central Europe and the
                          other regions of the former Soviet Union would figure prominently in the
                          design and implementation of the CAR programs.1 USAID’s action plan for
                          economic reforms was based on USAID’s economic reform efforts in
                          Central Europe. USAID officials noted that the application of lessons
                          learned was inherent in devising their program strategies and operations,
                          and numerous channels exist for their continued utilization. Nevertheless,
                          USAID recently began an effort to formalize its lessons learned process to
                          help the agency identify and communicate those lessons.



Lessons Learned           USAID/CAR officials provided numerous examples of lessons learned from
                          similar programs in Central Europe and Russia that had been applied to the
                          economic and democratic reform programs in CAR. They said that the
                          identification and implementation of lessons learned was an integral part of
                          their planning and program operations. Among the most prominent
                          lessons were that USAID should (1) take an integrated approach to
                          privatization to help create the enabling environment necessary for private
                          sector development, (2) coordinate with other donors working in the
                          region, (3) focus democratic assistance at the grassroots level if national
                          governments do not support democratic reforms, and (4) ensure that NGOs
                          and independent media have the necessary legal and financial
                          underpinning for sustainability. USAID officials said that lessons learned
                          emanated both from efforts to refine ongoing USAID programs as well as in
                          response to specific problems identified in Central Europe and Russia.


Economic Reform Lessons   Based on USAID’s approach in Central Europe, USAID designed an
Learned                   integrated approach to market development. USAID found in Central
                          Europe that five priority areas must coincide with the privatization process
                          to create the enabling environment needed for private sector development.
                          These include development of (1) tax reform to support commercial
                          development and the fiscal sustainability of the government;
                          (2) commercial laws and regulations to provide the legal framework for
                          trade, investment, and commercial activity; (3) accounting and audit
                          reform to provide the standardized and credible financial data necessary


                          1
                           United States Assistance and Economic Cooperation Strategy for Central Asia.




                          Page 35                                                      GAO/NSIAD-99-200 CAR Assistance
                            Chapter 3
                            USAID Has Incorporated Lessons Learned in
                            Its Car Programs




                            for rationale economic decision-making; (4) bank reforms to provide the
                            capital for private sector growth and improve corporate governance; and
                            (5) capital markets development to serve as a source for enterprises to
                            raise capital and provide market discipline. USAID incorporated all five
                            elements in its action plan and has accomplishments in each area.

                            Also using lessons learned from Central Europe, USAID/CAR has
                            coordinated with other donors working in CAR. Although USAID provides
                            relatively small amounts of money compared to the World Bank and IMF,
                            USAID found that by working with these institutions it could use its
                            expertise to help countries implement World Bank and IMF programs that
                            support USAID goals. USAID/CAR has employed this approach. For
                            example, USAID/CAR worked with (1) the World Bank to get commercial
                            banks in Kazakhstan to convert to international accounting standards;
                            (2) IMF to train monetary policy officials in Kazakhstan and the Kyrgyz
                            Republic on how to implement IMF’s macroeconomic stabilization
                            programs; and (3) IMF to develop tax codes for Kazakhstan, the Kyrgyz
                            Republic, and Uzbekistan.

                            USAID/CAR also used USAID’s successful approach in Central Europe to
                            help integrate CAR into the world economy by developing their links with
                            international multilateral economic institutions, such as the World Bank
                            and IMF. Central European countries, according to USAID, had a strong
                            incentive to proceed with reforms based on the prospects of memberships
                            with these western institutions, and the reforms required for such
                            membership are closely aligned with USAID objectives. For example,
                            USAID used the Kyrgyz Republic’s desire to join WTO to encourage the
                            passage of commercial, trade, and investment laws needed for
                            membership. Similarly, all the republics in CAR are members of the World
                            Bank and IMF, and the Kyrgyz Republic has joined WTO.


Democratic Reform Lessons   USAID has focused its democratic assistance on citizens rather than on the
Learned                     national government. In Russia, USAID found that without the political
                            support of national leaders, assistance targeting national institutions and
                            political processes was unlikely to achieve democratic reform. This lesson
                            is especially relevant for CAR, where four of the five national leaders have
                            resisted democratic reforms. As a result, USAID worked with citizen
                            groups to help develop a civil society that would push for democratic
                            reforms. Thus far, the CAR national governments and institutions have not
                            been directly affected and, as previously noted, USAID has helped
                            numerous NGOs get started.



                            Page 36                                       GAO/NSIAD-99-200 CAR Assistance
                       Chapter 3
                       USAID Has Incorporated Lessons Learned in
                       Its Car Programs




                       Based on USAID’s experience in countries throughout the former Soviet
                       Union, USAID worked to provide the legal foundation to establish NGOs.
                       USAID has given legislative drafting assistance to parliaments, using
                       examples of laws adopted elsewhere in NIS to encourage a number of
                       legislative reforms. These laws are intended to help NGOs develop and
                       thrive, and secure their right to exist and operate in society.

                       In addition, in Russia, USAID found that the biggest problem facing
                       independent television and radio stations was maintaining their economic
                       viability. As a result, USAID has incorporated advertising and business
                       management seminars into its CAR training programs. In addition, to help
                       stations increase their revenues with advertising, USAID has also
                       commissioned ratings surveys to demonstrate to potential advertisers the
                       audience levels of the independent stations.



USAID Is Formalizing   These lessons learned (and others) were identified by USAID through
                       various channels, including USAID conferences, publications and reports,
Its Lessons Learned    and weekly and monthly discussions between USAID and its contractors
Process                and grantees. In addition, USAID’s selection process for hiring advisors
                       gives significant weight to prior work experience in the former Soviet
                       Union. These advisors in turn had their own mechanisms for incorporating
                       lessons learned into their activities.

                       Although numerous lessons learned from Central Europe and Russia have
                       been applied in CAR, USAID’s Bureau for Europe and New Independent
                       States has begun considering ways to help ensure that such experiences
                       are not overlooked or forgotten. According to USAID officials, the “lessons
                       learned” system has been largely dependent on staff sharing their
                       experiences with one another. But many veterans of the region are retiring
                       or rotating to different posts. USAID risks losing their acquired knowledge
                       and expertise without a central mechanism to identify, analyze, and
                       communicate lessons learned. Consequently, the Bureau has undertaken a
                       number of stock-taking exercises to extract "lessons learned." These
                       include assessments of nearly 10 years of progress on each of the Bureau's
                       program objectives. In the fall of 1999, USAID plans to sponsor a “Lessons
                       in Transition Conference,” where public and private sector leaders from all
                       NIS countries will exchange experiences in transforming their economic,
                       political, and social systems. The Bureau is also preparing a strategic plan
                       that will incorporate lessons learned into guidance for field missions. On
                       this foundation, USAID plans to begin development of a more formalized
                       system to identify and communicate lessons learned.



                       Page 37                                       GAO/NSIAD-99-200 CAR Assistance
Chapter 4

USAID Complied With Its Oversight
Requirements                                                                                                         Chapte4
                                                                                                                           r




              Oversight for assistance activities in CAR is shared between USAID
              headquarters in Washington, D.C., and USAID/CAR in Almaty, Kazakhstan.
              Initially, all U.S. assistance activities in CAR were managed from
              Washington, D.C., as was the case with other NIS countries because USAID
              had few staff and resources in the region. As USAID/CAR’s staffing has
              increased, USAID has shifted the management of assistance activities to
              the mission to provide for more direct oversight and greater accountability.
              According to USAID, USAID/CAR managed about 65 percent of USAID’s
              assistance programs in CAR as of December 1998. By the end of fiscal year
              1999, USAID/CAR expects to manage 80 percent of USAID’s assistance
              programs in CAR.

              USAID safeguards its assistance funds to CAR through various oversight
              requirements. For the 14 CAR activities we examined,1 USAID is meeting
              its project oversight requirements for contracts, grants, and cooperative
              agreements—the financial instruments used by USAID. 2 USAID
              regulations and guidance3 generally require its cognizant technical officers
              (CTO) to provide oversight of contractor and grantee activity. According to
              these regulations and guidance, CTOs are required to maintain
              communications with contractors and grantees, conduct site visits to verify
              work performance, and review programmatic and financial reports to
              compare actual progress and costs against expected results and costs.
              CTOs working with contracts must also maintain files documenting
              significant actions, and, while not specifically required, CTOs are
              encouraged to do the same for grants and cooperative agreements.

              USAID’s regulations and guidance give broad authority to CTOs to
              determine the level of required oversight. For example, CTOs have wide
              latitude in determining how often they should communicate with
              contractors or grantees and how many site visits they should conduct.
              According to USAID’s Office of Procurement, this gives CTOs the
              discretion to determine how best to manage their programs.

              1
               Funding for the economic reform projects selected represented $136 million or 62 percent of the total
              economic assistance to CAR since fiscal year 1992. Funding for the democratic reform projects
              selected represented $32 million or 60 percent of the funding for the democratic assistance since fiscal
              year 1992.
              2
               Contracts are used to acquire property or services. Grants and cooperative agreements are used to
              transfer money, property, or services to grantees whose programs support U.S. goals and objectives.
              We use “grantee” to refer to both grant and cooperative agreement awardees.
              3
               USAID oversight guidance for contacts is in its “Contractor Information Bulletin 93-8,” while the
              oversight requirements for grants and cooperative agreements are in its Automated Data System-303
              regulations.




              Page 38                                                        GAO/NSIAD-99-200 CAR Assistance
                 Chapter 4
                 USAID Complied With Its Oversight
                 Requirements




Communications   CTOs are required to maintain regular communications with the contractor
                 or grantee. We found that USAID/CAR CTOs had regular, if not daily,
                 interactions with contractors and grantees via telephone and electronic
                 mail, and weekly meetings with contractors and grantees at USAID/CAR
                 offices for program updates and coordination of development strategies.
                 In addition, CTOs, contractors and grantees, and the Ambassador met
                 monthly to discuss progress on and impediments to meeting project goals
                 and objectives. USAID/CAR also had country representatives in each of the
                 satellite offices in the Kyrgyz Republic, Tajikistan (until all U.S. personnel
                 were evacuated in mid-1998), Turkmenistan, and Uzbekistan who
                 maintained communication with CTOs, monitored projects, and served as
                 liaisons for the contractors and grantees and the respective embassies.

                 The five Washington, D.C.-based CTOs we interviewed said that they
                 maintained regular communication with the U.S. offices of contractors and
                 grantees. We documented examples of this communication, including
                 electronic mail, facsimiles, and telephone conversations with their U.S.
                 offices concerning progress and impediments in meeting project
                 objectives, workplans, and funding issues. In addition, they relied upon
                 project officers in USAID/CAR for oversight of contractor and grantee
                 activities in CAR. These project officers attended the weekly and monthly
                 USAID/CAR meetings with contractors and grantees used to assess
                 program status.



Site Visits      CTOs are required to visit project sites to help gauge project progress.
                 USAID’s Office of Procurement officials stated that CTOs could meet this
                 requirement by delegating this responsibility to project officers in country.
                 CTOs for the projects we reviewed all met USAID’s requirement.

                 In the USAID/CAR project files we reviewed, we found numerous trip
                 reports documenting CTO site visits. For example, USAID/CAR CTOs and
                 staff attended a conference on accounting conversion and evaluated a
                 contractor’s progress toward implementing accounting reforms at two
                 Kazakhstan factories. We also participated in numerous site visits with
                 CTOs in Kazakhstan and the Kyrgyz Republic. During these site visits,
                 CTOs met with the contractors and grantees as well as with government
                 and NGO officials.

                 Two of the five Washington, D.C.-based CTOs we interviewed had
                 conducted site visits in CAR. But, due to time and resource constraints,



                 Page 39                                        GAO/NSIAD-99-200 CAR Assistance
                    Chapter 4
                    USAID Complied With Its Oversight
                    Requirements




                    these CTOs said they often relied on project officers at USAID/CAR to
                    make site visits on their behalf.



Performance and     CTOs are required to review periodic performance and financial reports
                    filed by the contractor or grantee. CTOs we interviewed all used
Financial Reports   performance and financial reports submitted by contractors and grantees
                    to monitor performance and progress toward meeting project objectives
                    and to verify key cost elements in the award. Several Washington,
                    D.C.-based CTOs said that, given their distance from CAR, reviewing
                    performance reports was critical to staying informed about grantee
                    activities. We also found that CTOs used the reports to evaluate the
                    performance of contractors and to support USAID/CAR’s contractor
                    performance reports. Based on these reports, in one instance, USAID/CAR
                    forced a contractor to make personnel changes to improve project
                    performance.

                    CTOs we interviewed also reviewed financial reports submitted by
                    contractors and grantees to determine whether USAID funds were properly
                    expended. Records in the files we examined showed that CTOs had
                    reviewed the financial reports for correctness and appropriateness of costs
                    billed to USAID, as required. CTOs at USAID/CAR assessed the accuracy of
                    the financial reports based on their weekly and monthly meetings with
                    their contractor or grantee, site visits, and review of performance reports.
                    Washington, D.C.-based CTOs said that they relied on information from
                    USAID/CAR project officers, the contractor and grantee, performance
                    reports, and past experience when reviewing the reasonableness of costs.

                    USAID/CAR officials stated that further verification provides additional
                    assurance that costs billed by contractors conform to award provisions.
                    USAID/CAR was conducting line-by-line payment verifications on all the
                    monthly vouchers submitted by contractors, using time and attendance
                    sheets; expense records for travel, per diem, and direct costs; and other
                    financial documentation. USAID/CAR officials stated that this level of
                    effort was justified based on an October 1998 analysis that found that five
                    of eight contractors in CAR provided inadequate documentation to support
                    their vouchers or presented questionable costs for reimbursement. For the
                    three USAID/CAR-managed contracts we reviewed, payment verifications
                    had been done.




                    Page 40                                       GAO/NSIAD-99-200 CAR Assistance
        Chapter 4
        USAID Complied With Its Oversight
        Requirements




Files   USAID requires CTOs to keep files that include financial and program
        reports; CTO trip reports; briefings; and correspondence among the
        contractor, the contracting officer, and CTO. Based on our review of three
        USAID/CAR contract files, all were in compliance with USAID regulations.
        However, the USAID/Washington, D.C., contract file we reviewed was
        missing all monthly and quarterly performance reports. The CTO stated
        that he had received and reviewed the reports, as required, but his files
        were not readily available, and we could not independently verify his
        assertion.

        Although CTOs are not required to keep files for grantees, CTOs for the one
        grant and five cooperative agreements we reviewed maintained files that
        included program reports, vouchers, and correspondence among the
        grantee, CTO, and project officers in country. Files for the five cooperative
        agreements we reviewed also contained workplans and staffing approvals
        for the grantee’s in-country personnel.




        Page 41                                        GAO/NSIAD-99-200 CAR Assistance
Appendix I

Comments From the U.S. Agency for
International Development                                   Appenx
                                                                 Idi




              Page 42         GAO/NSIAD-99-200 CAR Assistance
Appendix I
Comments From the U.S. Agency for
International Development




Page 43                             GAO/NSIAD-99-200 CAR Assistance
Appendix I
Comments From the U.S. Agency for
International Development




Page 44                             GAO/NSIAD-99-200 CAR Assistance
Appendix I
Comments From the U.S. Agency for
International Development




Page 45                             GAO/NSIAD-99-200 CAR Assistance
Appendix II

GAO Contacts and Staff Acknowledgments                                                         AppenIx
                                                                                                     di




GAO Contacts         Jess T. Ford, (202) 512-4268
                     A.H. Huntington, III (202) 512-4140



Acknowledgments      In addition to those named above, Edward J. George, Jr.; Patrick A.
                     Dickriede; Jodi M. Prosser; Jiyearn Chung; and Rona Mendelsohn made key
                     contributions to this report.




(711412)      Lert   Page 46                                    GAO/NSIAD-99-200 CAR Assistance
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