oversight

International Environment: Operations of the Montreal Protocol Multilateral Fund

Published by the Government Accountability Office on 1997-07-30.

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

                    United States General Accounting Office

GAO                 Testimony
                    Before the Subcommittee on Health and Environment,
                    Committee on Commerce,
                    House of Representatives


For Release
on Delivery
Expected at
                    INTERNATIONAL
10:00 a.m. EDT
Wednesday           ENVIRONMENT
July 30, 1997



                    Operations of the Montreal
                    Protocol Multilateral Fund
                    Statement by Lawrence Dyckman, Associate Director,
                    Environmental Protection Issues,
                    Resources, Community, and Economic
                    Development Division




GAO/T-RCED-97-218
Mr. Chairman and Members of the Subcommittee:

We are pleased to be here today to discuss our work on the Montreal
Protocol Multilateral Fund. The Montreal Protocol is an international
environmental agreement, concluded almost 10 years ago, with the
objective of eliminating the use of substances that deplete the thin layer of
ozone in the stratosphere. Such substances include
chloroflurocarbons—referred to as CFCs—which have long been used in
refrigeration and air-conditioning and as propellants in aerosol containers;
halons, which have been used extensively in firefighting; and compounds
such as carbon tetrachloride, which find wide application as solvents in a
variety of industries. The ozone layer is critical because it protects the
Earth’s plant and animal life from the harmful effects of excessive levels of
ultraviolet light. In the first years after the Protocol was signed in 1987,
most of the developed nations of the world made commitments to reduce
and eventually eliminate their use of ozone-depleting substances, but
relatively few of the developing countries (referred to as Article 5
countries)1 made a similar commitment. By 1990, it became clear that
unless the developing nations also signed the Protocol, the use of
ozone-depleting substances could not be eliminated.

Amendments to the Protocol made at the 1990 Meeting of the Parties in
London addressed this concern by providing for the establishment of the
Multilateral Fund to which the developed countries would contribute
funds to assist the developing countries in their efforts to reduce and
ultimately eliminate the use of ozone-depleting substances. Generally, all
developed countries are assessed for contributions to the Fund as are the
few developing countries that consume more than 0.3 kilograms of
ozone-depleting substances per capita per year. The contributions are
based on the United Nations’ scale of assessments. Countries that
consume less than 0.3 kg per capita per year are eligible to receive
assistance from the Fund. After the establishment of the Multilateral Fund,
many developing countries agreed to the Protocol, and as of May 1997, 110
developing countries had committed to implementing the Protocol. The
Multilateral Fund relies on four international organizations to implement
the bulk of the projects it approves. These implementing agencies are the
World Bank, the United Nations Development Programme (UNDP), the
United Nations Environment Programme (UNEP), and the United Nations
Industrial Development Organization (UNIDO). In addition, a relatively


1
 Article 5 of the Montreal Protocol allows developing countries with less than a 0.3 kg per capita
consumption of ozone-depleting substances a grace period before they must comply with the treaty’s
control provisions.



Page 1                                                                       GAO/T-RCED-97-218
    small percentage of projects is implemented by a few contributing
    countries, including the United States, through bilateral assistance.

    You asked us to develop information on the functioning of the Multilateral
    Fund. Specifically, you asked us to identify (1) principal contributors to
    the Fund; (2) identify the principal recipients of disbursements made from
    the Fund; (3) the purposes for which disbursements were made; (4) what
    has been accomplished with these expenditures; and to (5) describe and
    generally assess the controls and accountability mechanisms in place to
    ensure proper use of money disbursed from the Fund. As agreed with the
    Subcommittee, we also obtained information on the level of administrative
    costs associated with project implementation. Our testimony today will
    discuss the results of our work on each of these questions. In summary,
    we found the following:

•   The United States is the largest contributor to the Multilateral Fund,
    accounting for about 25 percent of the contributions. For 1997 through
    1999, the United States is expected to contribute about $39 million per
    year. We estimate that the United States could avoid interest expenses of
    between $2 million and $3 million associated with its annual contributions
    by using an alternative payment method.
•   From its establishment in 1991 through May 1997, the Multilateral Fund
    has allocated about $570 million for projects in more than 100 Article 5
    countries. China has been the largest recipient, accounting for almost
    $150 million or 26 percent of the total.
•   There are seven broad purposes for which projects have been funded, but
    over 80 percent of the funds have been for investment projects, which help
    businesses to convert their operations from the use of ozone-depleting
    substances and to cease the production of goods containing them.
•   Projects approved to date are projected to phase out the annual use of
    about 84,000 ODP-weighted metric tons of ozone-depleting substances, or
    about 40 percent of the estimated consumption of ozone-depleting
    substances in Article 5 countries.2
•   The Multilateral Fund has a number of mechanisms in place that are
    designed to ensure that funds are properly accounted for and that the
    amounts of funds allocated to specific projects are reviewed and verified.
•   The Multilateral Fund currently pays a 13-percent administrative fee to the
    implementing agencies for their costs associated with project
    implementation. However, efforts are under way to evaluate the



    2
     The ozone-depleting potential (ODP) value is the ratio of a given compound’s ability to deplete ozone
    compared with the ability of a similar mass of CFC-11.



    Page 2                                                                          GAO/T-RCED-97-218
                       appropriateness of the fees, with the goal of reducing the support costs to
                       about 10 percent over the next 3 years.


                       For the period 1991 through 1996, 49 countries were assessed about
Contributions to the   $688 million. The United States’ share was about $174 million, or about 25
Multilateral Fund      percent of the total. Appendix I shows the assessments, payments, and
                       outstanding balances for all 49 countries as of January 31, 1997. For the
                       3-year period 1997 through 1999, the Parties to the Protocol approved
                       $466 million in new assessments. The United States’ share of the new
                       assessment is about $39 million for each of these 3 years. For 1997, the list
                       of contributors has been reduced to 34 countries primarily because
                       countries that had not ratified the 1990 amendments (which established
                       the Fund) were deleted from the list of contributors.

                       There is substantial variability among the countries in paying their
                       assessments. As of January 31, 1997, 22 countries had fully paid their
                       assessments for 1991 through 1996, 13 countries (including the United
                       States) had paid most of their assessments, 3 had paid less than half, and
                       11 had not paid anything.3 The countries that had not paid any part of their
                       assessments were primarily those of the former Soviet Union. These
                       countries, because of their economic position, are referred to as
                       “economies in transition.” While not eligible for funding support from the
                       Multilateral Fund, they are eligible to receive assistance for their efforts to
                       phase out ozone-depleting substances from the Global Environment
                       Facility.4 Cumulatively, as of January 31, 1997, of the $688 million assessed
                       for the period 1991 through 1996, about $550 million, or about 80 percent,
                       had been paid.

                       Countries can pay their assessed contributions with cash or promissory
                       notes, or by providing bilateral assistance to recipient countries.5 In 1993,
                       the Parties to the Montreal Protocol agreed that promissory notes would
                       be acceptable as payment of a country’s contribution to the Fund. Since
                       that time, five countries have used promissory notes to pay at least part of

                       3
                        According to the international advisor for the Environmental Protection Agency’s Stratospheric
                       Protection Division, the United States paid the remainder of its assessments for 1991 through 1996 in
                       May 1997. We did not update the contribution status for other countries past January 31, 1997.
                       4
                        The Global Environment Facility is an international financial institution established in 1991 to provide
                       developing countries with grants and low-interest loans for projects that protect the global
                       environment. Funding is available to assist countries that do not meet the eligibility criteria for
                       assistance from the Multilateral Fund but need assistance in their efforts to comply with the provisions
                       of the Montreal Protocol.
                       5
                        Bilateral assistance is limited to 20 percent of a country’s assessed contribution.



                       Page 3                                                                             GAO/T-RCED-97-218
                    their assessments, deferring the actual outlay of cash. In essence, these
                    contributors benefit from the time value of money between the date a note
                    is provided to the Fund and the date it is cashed. While the Fund can cash
                    promissory notes at any time to meet its needs, the general practice is to
                    cash the notes in six equal payments over a 3-year period.

                    We estimate that based on current U.S. Treasury borrowing rates and the
                    Fund’s general practice for cashing the notes over time, the U.S.
                    government could save between $2 million and $3 million on each of its
                    annual contributions to the Multilateral Fund by using the promissory
                    notes.6 Although the U.S. government makes its payments to the Fund in
                    cash, the Department of the Treasury currently administers over 10
                    international accounts using letters of credit, which also defer payments,
                    similar to promissory notes.


                    Since the establishment of the Multilateral Fund in 1991 through May 1997,
Multilateral Fund   the Fund’s Executive Committee has approved a total of 1,810 projects in
Recipients          more than 100 countries and allocated about $570 million to fund these
                    projects. The geographical distribution of projects supported by the
                    Multilateral Fund shows that the Asia and Pacific region has both the
                    largest number of approved projects, 826, and the greatest share of
                    approved funding—over $330 million or almost 60 percent of the total
                    funding approved. China has been the Fund’s largest recipient with almost
                    $150 million, or 26 percent, of all approved funding. The dominant share of
                    projects and approved funding represented by the Asia and Pacific region
                    is explained by the region’s rapidly expanding economies and population
                    and by its current consumption and enormous potential for the use of
                    ozone-depleting substances. Six of the 10 top recipients of aid from the
                    Multilateral Fund are countries in the Asia and Pacific region, which
                    together have been allocated nearly 50 percent of the total approved
                    funding.

                    The Latin American and Caribbean region ranks next with 473 projects
                    having total approved funding of almost $130 million or nearly 23 percent
                    of all funding approved to date, followed by the Africa region with 320
                    projects and approved funding of about $67 million. Europe has the
                    smallest number of projects—56—with approved funding of about
                    $21 million. This reflects the fact that relatively few European countries
                    are eligible for assistance. The Fund also supports a category of projects,

                    6
                    The United States’ contribution is jointly paid by the Environmental Protection Agency and the
                    Department of State.



                    Page 4                                                                        GAO/T-RCED-97-218
                                  known as global projects, that transcend regional boundaries. As of
                                  May 31, 1997, the Fund had approved 135 global projects with a total
                                  allocation of almost $22 million. The table below shows funding for the top
                                  10 recipient countries; appendix II provides a breakdown of approved
                                  funding by regions and by types of projects.

Table 1: Top 10 Recipients of
Approved Project Funding (as of                                                                Percentage of all
May 1997)                         Country                                    Amount             approved funds
                                  China                                  $148,525,560                      26.0
                                  India                                    39,799,560                        7.0
                                  Argentina                                32,406,150                        5.7
                                  Egypt                                    28,982,860                        5.1
                                  Malaysia                                 27,389,820                        4.8
                                  Thailand                                 27,025,660                        4.7
                                  Brazil                                   26,865,340                        4.7
                                  Philippines                              20,107,380                        3.5
                                  Mexico                                   19,941,390                        3.6
                                  Indonesia                                19,568,120                        3.4
                                  Total                                  $390,611,830                      68.4



                                  There are seven broad purposes or categories for which the projects have
Purposes for Which                been funded: (1) country program preparation, (2) institutional
the Multilateral Fund             strengthening, (3) technical assistance, (4) training, (5) demonstration
Has Been Used                     projects, (6) project preparation, and (7) investment projects.

                                  Preparation of a country program is generally the starting point for a
                                  country that is seeking the Fund’s assistance in converting to
                                  non-ozone-depleting technologies. A country program sets out a country’s
                                  strategy for phasing out ozone-depleting substances. It provides basic
                                  information on the use of ozone-depleting substances, the institutional
                                  framework for controlling them, relevant industry and government
                                  involvement, an action plan with time frames and budgets, and a list of
                                  specific projects requiring financial support from the Multilateral Fund. To
                                  date more than $7 million has been approved for the preparation of 108
                                  country programs.

                                  Institutional strengthening projects build a country’s capacity to phase out
                                  ozone-depleting substances. The establishment of a national ozone unit
                                  within the country’s national government is frequently a key element of




                                  Page 5                                                     GAO/T-RCED-97-218
                     this activity with the goal of satisfying the basic need for institutional,
                     legal, and regulatory capacity to support the implementation of national
                     phaseout plans. As of the most recent meeting of the Fund’s Executive
                     Committee (May 1997), a total of 97 institutional strengthening projects
                     had been approved in 81 recipient countries with a total approved funding
                     of slightly more than $15 million.

                     Technical assistance, training, and demonstration projects constitute
                     vehicles for transferring state-of-the-art technologies to recipient countries
                     to help them meet their phaseout obligations under the Montreal Protocol.
                     As of May 31, 1997, 394 demonstration, technical assistance, and training
                     projects had been approved by the Fund’s Executive Committee, with a
                     combined approved funding level of over $60 million.

                     Project preparation, which involves developing projects for conversion
                     from ozone-depleting to ozone-benign technologies, is an important
                     prerequisite for investment projects. As of May 31, 1997, the Multilateral
                     Fund had approved a total of 383 project preparation activities with a total
                     approved funding level of over $30 million. Project preparation activities
                     typically result in the development of a group of investment project
                     proposals. Investment projects are the largest category of projects and the
                     most important from the standpoint of protecting the stratospheric ozone
                     layer. These projects, which account for slightly over 80 percent of total
                     approved funding, assist business entities in recipient countries in
                     converting domestic and commercial refrigeration, manufacturing,
                     firefighting, and other economic sectors from processes that use
                     ozone-depleting substances to technologies and products that are not
                     ozone-depleting or are at least significantly less so. A typical investment
                     project in the refrigeration sector, for example, may involve eliminating
                     CFCs in the manufacture of domestic refrigerators and freezers. It may
                     also include conversion to CFC-free technology in the manufacture (or
                     “blowing”) of the polyurethane foam used in insulating the refrigerators
                     and freezers. To date, 813 investment projects, with funding allocations of
                     about $458 million, have been approved in 55 countries in all major regions
                     of the world.


                     When fully implemented, projects approved to date are expected to phase
Accomplishments in   out the annual use of almost 84,000 metric tons of ozone-depleting
Phasing Out          potential. This is about 40 percent of the estimated ODP-weighted
Ozone-Depleting      consumption of ozone-depleting substances in Article 5 countries.
                     Appendix IV provides a breakdown of ODP metric tons to be phased out by
Substances

                     Page 6                                                      GAO/T-RCED-97-218
    type of project and by implementing agency as of May 31, 1997. As of
    December 31, 1996, however, only 20,487 ODP metric tons had actually
    been phased out. This difference is attributable to two factors. First,
    because of time lags between project approvals and the start of project
    implementation, the number of projects actually in progress or completed
    at a particular point in time is significantly smaller than the total number
    of projects approved by the Multilateral Fund’s Executive Committee.
    Second, projects that are under way, particularly investment projects,
    often take longer to complete than originally projected. As of
    December 31, 1996, only 688, or 45 percent of the 1,537 projects approved
    since 1991 had been completed. Of the approved funding of $485 million
    for these projects, only $197 million (41 percent) had been disbursed,
    leaving an undisbursed balance of about $288 million for completion of
    those projects. Planned spending commitments by the four implementing
    agencies in 1997 total about $128 million, meaning that less than half of the
    undisbursed funds approved for projects through 1996 is expected to be
    disbursed by the end of 1997.

    Some of the reasons cited for delays in project implementation and
    completion include the following:

•   Recipients attempted to renegotiate projects after Executive Committee
    approval.
•   The business entity needed more time to secure financing from
    counterparts.7
•   The grant recipients decided to change project specifications.
•   The business entity chose to delay conversion until competitors’ projects
    were approved by the Executive Committee.
•   The business entity wanted government regulations passed before
    allowing implementation to proceed.
•   The bidding process resulted in higher costs than budgeted for the project.

    Delays in the start of projects and slower than anticipated progress once
    they have begun have concerned the Multilateral Fund’s Executive
    Committee. In May 1997, the Executive Committee required the


    7
     As provided for in the Montreal Protocol, the Multilateral Fund covers only the agreed incremental
    costs of converting existing enterprises from ozone-depleting to non-ozone-depleting technologies. In
    practical terms, this means that the Fund will defray all additional costs above and beyond those costs
    Article 5 countries would have expected to incur as they developed their infrastructure and consumer
    markets in the absence of the Protocol. Furthermore, the Fund will cover incremental costs only up to
    the proportion of local (or other Article 5 country) ownership of the enterprise. Thus, if a business
    entity has 60-percent local ownership and 40-percent ownership by a multinational corporation, the
    Fund will cover only 60 percent of the agreed incremental costs of a project approved for that
    enterprise.



    Page 7                                                                          GAO/T-RCED-97-218
                    implementing agencies to submit reports, by the next meeting of the
                    Executive Committee, for projects (1) where no disbursement has
                    occurred for 18 months after project approval and (2) that remained
                    uncompleted 12 months after the prescribed completion date. Information
                    from these reports will be used to develop guidelines to ensure that the
                    project preparation process includes measures to prevent delays in
                    implementation or completion in the future. The Executive Committee
                    also decided projects that have had their funding requests significantly
                    reduced during the review process could not proceed until the intended
                    recipients confirm that they have additional funding available to allow for
                    prompt project implementation.

                    Summary data on project type, approved funding, and project status are
                    detailed in appendix III.


                    The Multilateral Fund has a number of mechanisms in place that are
Mechanisms to       designed to ensure that funds are properly accounted for and that the
Ensure the Proper   amount of funds allocated to specific projects is reviewed and verified.
Use of Funds        When it was established in 1991, the Fund accepted the accounting and
                    auditing mechanisms of the implementing agencies and relied primarily on
                    the implementing agencies’ long-established institutional procedures.
                    According to a 1995 report by COWIconsult,8 an international consultant,
                    the implementing agencies have elaborate procedures, long experience in
                    accounting for financial resources used in developing countries, and
                    well-established auditing mechanisms. The report stated that the study
                    team found no evidence that the agencies’ procedures were less elaborate,
                    implementation less careful, or auditing less thorough for activities
                    financed by the Multilateral Fund.

                    UNEP serves as the Fund’s treasurer. As a part of its agreement with the
                    Executive Committee, UNEP is responsible for obtaining and distributing
                    contributions, entering into agreements with the implementing agencies,
                    and submitting the Fund’s accounts to the Executive Committee for each
                    calendar year. UNEP receives certified and/or audited reports from the
                    implementing agencies, which provide aggregate expenditure or
                    disbursement figures. These figures are reported annually to the Executive
                    Committee. Because the Multilateral Fund is considered to be an integral

                    8
                     At their fourth meeting, held in November 1992, the Parties to the Montreal Protocol directed that a
                    study be undertaken to review and evaluate the effectiveness of the financial mechanism established
                    in the Protocol. UNEP retained COWIconsult of Copenhagen, Denmark, in association with Goss
                    Gilroy Inc., to perform this study. The study, entitled Study on the Financial Mechanism of the
                    Montreal Protocol, was issued in March 1995.



                    Page 8                                                                          GAO/T-RCED-97-218
    part of UNEP’s and the United Nations’ accounts, its audits are the sole
    responsibility of the Internal and External Audit of the United Nations.
    The report of the United Nations Board of Auditors for the 2-year period
    ending December 31, 1995,9 reported findings and made recommendations
    related to UNEP’s program and financial management, procurement, and
    other areas, but the overall results revealed no material weaknesses or
    errors considered material to the accuracy, completeness, or validity of
    the financial statements as a whole. The auditors rendered an opinion that
    the financial statements presented fairly UNEP’s financial position and the
    results of its operations for that financial period; the statements were
    prepared in accordance with the stated accounting policies; and
    transactions were in accordance with the financial regulations and
    legislative authority.

    In addition, the implementing agencies are required to provide the Fund’s
    Executive Committee with an annual progress report on the
    implementation of approved work programs and activities related to
    country programs and projects. These reports include information on
    project approvals and disbursements; updates on project completions;
    global and regional project highlights; performance indicators; status of
    agreements and project preparation, by country; and administrative issues
    (operational, policy, financial, and others). Finally, each recipient country
    is required to report annually to the Executive Committee on the progress
    of the implementation of its country program.

    With regard to individual projects, the Multilateral Fund has developed a
    multilevel review process:

•   The implementing agencies review project proposals to ensure that they
    meet eligibility criteria and arrange for external technical and cost reviews
    of investment projects before submitting them to the Fund Secretariat.
•   The Secretariat determines whether the proposals meet eligibility and
    policy requirements and checks the proposed costs against data on past
    costs and suppliers’ estimates. It may also consult with outside experts on
    technical and cost issues before making a recommendation to the
    Executive Committee.
•   The Executive Committee’s Project Review Subcommittee examines the
    recommended proposals and reports to the full committee.
•   The Executive Committee’s individual members consider the
    Subcommittee’s report and may also assess the projects independently,



    9
     UNEP’s accounts are maintained on a biennial, or 2-year, basis.



    Page 9                                                             GAO/T-RCED-97-218
sometimes requesting a fresh round of external technical and cost reviews
before the Committee makes its final funding decisions.

The project review process frequently results in significant alterations to
projects, cost reductions, and in outright rejection of some projects. These
alterations may be agreed to by the Secretariat and the implementing
agency before a proposal is submitted to the Executive Committee, or they
may occur during the meetings of the Project Review Subcommittee or the
Executive Committee itself. Most often, the dialogue on these issues
occurs mainly between the implementing agencies and the Fund
Secretariat.

The 1995 COWIconsult report concluded that the project review process
introduces a strong element of discipline into the project development and
approval procedure. COWIconsult reviewed a sample of 23 projects
submitted to the Fund Secretariat and found that the Secretariat’s views
appeared to carry great weight with the Executive Committee in that the
review process resulted in cost reductions in 13 of the 23 projects, with an
overall average reduction of 20 percent. Moreover, in 6 of the 23 projects
reviewed there was a very significant difference in the amount of support
originally requested and the final request reviewed by the Secretariat and
the Executive Committee. Overall, the study concluded that the review
process results in significant but not excessive reductions in the approved
costs of projects supported by the Fund.

We also reviewed a sample of projects to determine the current effect of
the review process on the cost of projects, and as a result, on the
cost-effectiveness of the Fund’s expenditures for them. We selected a
sample of 10 projects approved by the Executive Committee in 1996 that
comprised 7 investment projects, 2 technical assistance projects, and 1
institutional strengthening project. Each of the four implementing
agencies was represented by two projects in the sample, which also
included two bilateral projects.

For seven of the projects, we found reductions ranging from 9 to almost
70 percent resulting from the review by the Secretariat staff, whose
recommendations were generally endorsed by the Executive Committee.
The overall average reduction for these seven projects amounted to
48 percent. However, this average is heavily influenced by major
reductions on two very large investment projects made between the
original submissions and the final approvals. Even the one bilateral
investment project we reviewed had experienced a 23-percent reduction



Page 10                                                    GAO/T-RCED-97-218
                        as a result of the review process. The three remaining projects were
                        approved by the Executive Committee as originally submitted.

                        An important consequence of the reduction in approved funding for these
                        projects was that their cost-effectiveness, expressed in terms of dollar cost
                        per kilogram of ozone-depleting substances eliminated, improved
                        significantly. In the cases of the two projects with the largest percentage
                        reductions in cost, the cost-effectiveness ratios went from $8.91/kg to
                        $2.80/kg and from $6.95/kg to $4.12/kg, respectively. A third project had a
                        similarly impressive improvement in cost-effectiveness, going from
                        $6.42/kg to $3.97/kg.

                        In addition to the control and review mechanisms and practices already in
                        place, the Executive Committee has realized that it could strengthen its
                        oversight by requiring project completion reports and developing a project
                        monitoring and evaluation system. The Multilateral Fund is currently
                        developing a uniform format for project completion reports that is
                        expected to be submitted to the Executive Committee for its review before
                        the end of 1997. In addition, a Subcommittee on Monitoring, Evaluation,
                        and Finance was recently established to address the need for a monitoring
                        and evaluation system. The Subcommittee developed a monitoring and
                        evaluation program to be implemented over the next year. When fully
                        implemented, the system may help the Executive Committee enhance the
                        Fund’s effectiveness by drawing on lessons learned from completed
                        projects.


                        In addition to funds allocated for projects of various types, the Multilateral
Administrative          Fund pays the implementing agencies for administrative support costs
Support Costs Paid to   associated with project implementation. These costs include, among other
the Implementing        things, staff, office space, office equipment, and supplies; accounting,
                        audit, and procurement services; management backup; and travel needed
Agencies                to properly oversee project implementation. In the case of UNDP, UNEP, and
                        UNIDO, payment for administrative support has, by agreement with the
                        Fund, been fixed at a flat 13-percent of the amount approved by the
                        Executive Committee for projects’ implementation. In the case of the
                        World Bank, up until mid-1995, reimbursement for administrative support
                        was based on actual expenditures reported by the Bank. But, from that
                        time forward, the Bank also has been compensated for administrative
                        support on the 13-percent flat fee basis. This level of administrative
                        support costs is generally consistent with prevailing administrative cost
                        allowances within the United Nations system.



                        Page 11                                                     GAO/T-RCED-97-218
                 Nevertheless, in 1994 some members of the Executive Committee began to
                 question the continued appropriateness of a uniform 13-percent fee paid to
                 the implementing agencies. They expressed the view that with the initial
                 start-up phase of operations completed and with experience gained in
                 implementing a wide assortment of projects and activities, the continued
                 payment of administrative support at this level could result in
                 unnecessarily high costs to the Multilateral Fund. At its March 1994
                 meeting, the Executive Committee requested that the Secretariat perform
                 an analysis of each implementing agency’s administrative costs. The
                 Secretariat contracted with a consultant to perform this study, who
                 reported in September 1994 that the administrative cost levels were not
                 excessive. In fact, the consultant’s report concluded that the flat
                 13-percent administrative support fee had been insufficient to cover all of
                 the costs that the implementing agencies might legitimately have charged
                 the Fund and, as a result, the agencies were, in effect, subsidizing part of
                 the cost of projects. However, the report recognized that over time the
                 Fund’s administrative costs could be expected to decline as a percentage
                 of overall project costs as a result of getting past the high cost of start-up,
                 greater experience and resulting increased efficiency, economies of scale,
                 and other factors. In November 1996, the Parties to the Montreal Protocol
                 directed the Executive Committee to work toward the goal, over the next
                 3 years, of reducing agency support costs to an average of below
                 10 percent to make more funds available for other activities.

                 In February 1997, the Executive Committee decided that an independent
                 consultant should be recruited to work with the Secretariat and
                 implementing agencies to identify options and approaches for reducing the
                 overall level of administrative costs, focusing on revising the current
                 uniform, fee-based system. The Chief Officer of the Fund’s Secretariat
                 informed us that a consultant has recently been selected to carry out this
                 work and is expected to submit a report in September 1997. He said the
                 Secretariat and the Executive Committee will be working over the next 3
                 years, in consultation with the implementing agencies, to reduce
                 administrative support costs to an overall average of less than 10 percent.


                 Because of the potential for considerable interest savings, we recommend
Recommendation   that the Administrator of the Environmental Protection Agency and the
                 Secretary of State implement an alternative payment method such as
                 promissory notes or letters of credit for the U.S. contribution to the
                 Multilateral Fund and seek the assistance of the Department of the
                 Treasury in implementing this recommendation. In commenting on a draft



                 Page 12                                                      GAO/T-RCED-97-218
of this testimony, the Environmental Protection Agency and the
Department of State agreed in concept to our recommendation and are
exploring options for using an alterative payment method.


Mr. Chairman, this concludes my prepared remarks. At this point, I would
be glad to respond to any questions you or Members of the Subcommittee
may have.




Page 13                                                 GAO/T-RCED-97-218
Appendix I

Summary of Contributions to the
Multilateral Fund for 1991-96 as of January
31, 1997

                           Agreed          Cash       Bilateral   Promissory        Outstanding
Party                contributions     payments     assistance         notes       contributions
Australia             $12,169,842     $11,422,914     $746,928           $0                   $0
Austria                 6,212,240       6,080,450      116,628            0               15,162
Azerbaijan                 63,182              0             0            0               63,182
Belarus                 3,309,593              0             0            0            3,309,593
Belgium                 8,588,289       8,588,289            0            0                    0
Brunei Darussalam          34,833              0             0            0               34,833
Bulgaria                  897,207        753,523             0            0              143,684
Canada                 24,948,120      17,570,667    2,186,483            0            5,190,970
Cyprus                    148,670        148,670             0            0                    0
Czech Republic          2,849,573       2,849,573            0            0                    0
Denmark                 5,399,598       5,194,598      205,000            0                    0
Finland                 4,574,634       4,359,543      103,440            0              111,651
France                 48,598,094       5,921,449    1,571,603    41,105,042                   0
Georgia                    90,020              0             0            0               90,020
Germany                72,415,467      39,905,823    1,355,296    31,154,348                   0
Greece                  2,938,344       2,938,344            0            0                    0
Hungary                 1,420,925       1,420,925            0            0                    0
Iceland                   241,067        241,067             0            0                    0
Ireland                 1,498,654       1,446,898            0            0               51,756
Israel                  1,574,736       1,574,736            0            0                    0
Italy                  34,042,507      28,644,156            0            0            5,398,351
Japan                  98,501,042      76,783,706            0            0           21,717,336
Kuwait                    286,549              0             0            0              286,549
Latvia                    143,684              0             0            0              143,684
Liechtenstein              80,356         80,356             0            0                    0
Lithuania                 148,038              0             0            0              148,038
Luxemburg                 499,552        499,552             0            0                    0
Malta                      28,052         28,052             0            0                    0
Monaco                     59,787         59,787             0            0                    0
Netherlands            12,426,686       9,661,853            0     2,764,833                   0
New Zealand             1,928,536       1,928,536            0            0                    0
Norway                  4,436,982       4,436,982            0            0                    0
Panama                     16,915         16,915             0            0                    0
Poland                  3,327,029        473,318             0            0            2,853,711
Portugal                1,708,280       1,229,333            0            0              478,947
Russian Federation     54,813,611              0             0            0           54,813,611
Singapore                 531,221        459,245        71,976            0                    0
                                                                                      (continued)


                            Page 14                                            GAO/T-RCED-97-218
                                Appendix I
                                Summary of Contributions to the
                                Multilateral Fund for 1991-96 as of January
                                31, 1997




                               Agreed                 Cash                 Bilateral           Promissory             Outstanding
Party                    contributions            payments               assistance                 notes            contributions
Slovakia                      956,372                583,249                        0                       0               373,123
Slovenia                       61,290                        0                      0                       0                61,290
South Africa                3,201,108              2,859,433                  30,000                        0               311,675
Spain                      16,532,425            16,532,425                         0                       0                        0
Sweden                      9,271,415              8,682,563                        0                       0               588,852
Switzerland                 9,116,083              8,869,839                 242,600                        0                    3,644
Turkmenistan                   56,603                        0                      0                       0                56,603
Ukraine                    12,841,967                785,600                        0                       0           12,056,367
United Arab Emirates        1,623,182                559,639                        0                       0             1,063,543
United Kingdom             40,096,675            19,664,354                         0            20,432,321                          0
United States             173,751,570           144,189,080              10,296,412                         0           19,266,078
Uzbekistan                  1,362,934                        0                      0                       0             1,362,934
Subtotal                 $679,823,539         $437,445,442              $16,926,366            $95,456,544            $129,995,187
Disputed contributions      8,098,267                        0                      0                       0             8,098,267
Total                    $687,921,806         $437,445,442              $16,926,366            $95,456,544            $138,093,454

                                Note: The testimony uses the term “assessments” to refer to the agreed contributions shown on this
                                table.

                                Source: Report of the 21st Meeting of the Executive Committee of the Multilateral Fund for the
                                Implementation of the Montreal Protocol, UNEP/OzL.Pro/ExCom/21/96 (Feb. 20, 1997).




                                Page 15                                                                         GAO/T-RCED-97-218
Appendix II

Approved Funding by Major Geographic
Regions and Types of Projects


Type of                       Asia and the                         Latin America
project              Africa         Pacific           Europe      and Caribbean                 Global                  Total   Percentage
Country          $2,111,660     $2,423,230           $623,520          $1,734,030            $200,000          $7,092,440             1.24
program
preparation
Institutional     4,225,730      4,919,170            722,500           5,209,010                     •        15,076,460             2.64
strengthening
Technical         4,135,660     12,518,630            465,000          10,781,010          16,353,320          44,253,630             7.75
assistance
Training          1,526,380      3,124,970            116,630           3,131,820           2,602,880          10,502,680             1.84
Demonstration      720,130       2,453,390                    •         2,358,120             250,000           5,781,640             1.01
Project           2,853,070     16,476,480          1,589,090           8,344,870           1,653,430          30,916,940             5.41
preparation
Investment       51,766,470    289,777,480         17,555,250          98,089,370             500,000         457,688,570            80.11
projects
Total           $67,339,100   $331,693,350        $21,072,020       $129,648,250         $21,559,630        $571,312,350            100.00
Percentage            11.79          58.06                3.69               22.69                3.77                 100.00

                                        Source: Montreal Protocol Multilateral Fund, Inventory of Approved Projects.




                                        Page 16                                                                         GAO/T-RCED-97-218
Appendix III

Summary Data by Project Type and Status
as of December 31, 1996


                                                          Approved                          Percentage                       Planned
                Number of     Number    Percentage       funding as           Funds            of funds                  commitments
Type            approvals   completed    completed         adjusted       disbursed          disbursed           Balance      in 1997
Country              112          91              81     $5,089,872      $4,456,464                    88       $633,408      $434,000
program
preparation
Institutional         85          12              NA     13,936,759        5,693,830                   41      8,242,929     3,546,219
strengthening
Technical            208         123              59     32,324,137      19,483,385                    60     12,840,752     5,648,950
assistance
Training             107          69              64      9,121,870        7,213,034                   79      1,908,836     1,371,270
Demonstration         35          16              46      6,257,875        3,723,973                   60      2,533,902     1,614,967
projects
Project              303         245              81     21,603,966      20,056,292                    93      1,547,674       676,000
preparation
Investment           687         132              19   396,642,263      136,677,671                    34   259,964,592    114,619,694
projects
Total               1,537        688              45 $484,976,742 $197,304,649                         41 $287,672,093 $127,911,101

                                        Source: Montreal Protocol Multilateral Fund, Consolidated Progress Report.




                                        Page 17                                                                      GAO/T-RCED-97-218
Appendix IV

ODP Metric Tons to Be Phased Out as of
May 31, 1997


Project type                   World Bank                UNDP                UNEP               UNIDO              Bilateral                 Total
Country program                         •                      •                   •                   •                    •                    •
preparationa
Institutional strengtheninga            •                      •                   •                   •                    •                    •
Technical assistance             1,380.00               627.06                27.20               61.00                52.50           2,147.76
Training                             0.00                  0.00             310.90                  0.00               15.40                326.30
Demonstration projects             135.00                38.16                 0.00                 0.00             354.50                 527.66
                    a                                                               b
Project preparation                     •                      •                 NA                    •                    •                    •
Investment projects             44,440.72             19,797.04                  NAb         15,743.72               619.47           80,600.95
Total                           45,955.72             20,462.26             338.10           15,804.72             1,041.87           83,602.67
Percentage                          54.97                24.48                 0.40               18.90                 1.25                100.00
                                            Note: The ozone-depleting potential (ODP) value is the ratio of a given compound’s ability to
                                            deplete ozone compared with the ability of a similar mass of CFC-11.
                                        a
                                         Country program preparation, institutional strengthening, and project preparation projects do not
                                        directly contribute to the phaseout of ozone-depleting substances.
                                            b
                                             NA indicates not applicable. UNEP is prevented by its charter from implementing investment
                                            projects and, unlike the other three Multilateral Fund implementing agencies, does not undertake
                                            project preparation activities.

                                            Source: Montreal Protocol Multilateral Fund, Inventory of Approved Projects.




(160372)                                    Page 18                                                                        GAO/T-RCED-97-218
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