AID"s control over the financing of a bakery project in Egypt was inadequate

Audit report covers the period 4/80-5/83 and is based on document review and discussions with officials from A.I.D. and the contractor, American Export Group, Inc. (AEG). Control over project financing was totally inadequate, resulting in the payment by the U.S. Government of about $679,925 in unnecessary interest charges and subjecting A.I.D. and the Government of Egypt to considerable financial risk. In violation of U.S. Treasury and A.I.D. regulations, payments to AEG were made in lump-sum rather than incremental amounts. AEG"s use of advanced funds was not restricted and as a result, AEG invested most of the money in an interest earning account. Because documentation requirements governing progress payments were not clearly specified, questionable AEG work progress certificates were accepted, allowing AEG to receive five payments totalling $8.9 million long before it had expended funds already on hand. In a deliberate effort to obtain funds for its own use, AEG ignored verbal instructions as to the proper use of advanced funds and the need to adequately support progress payment requests. It should be determined whether AEG can be billed for the interest costs incurred in providing unjustified advances. In other areas, funds were advanced for commodities before their eligibility had been approved and for designing a model bakery before it was known what equipment would be provided. A.I.D."s poor management of cash and commodities in this project may be indicative of systemic problems. Advance and progress payments are routinely used in procuring custom-made equipment, and financing documents are often poorly written. Other problems - including the failure to restrict the use of advanced funds, to clearly define the basis for progress payments, and to ensure that proper forms are filed - are also common. Accordingly, it is recommended that A.I.D.: reemphasize cash management regulations; review financing documents to ensure that such regulations are clearly specified; review existing letters of commitment and amend those with inadequate financial controls; and strictly enforce commodity eligibility regulations prior to making payments.