Audit of the infrastructure for productive investment project no. 538-0088, AID Regional Development Office/Caribbean

Audit report covers the period 8/84-6/86 and is based on document review and site visits in Antigua and St. Lucia where interviews were held with relevant officials. The project was intended to meet the demand for factory space generated by two projects (5380042/0019) under the Caribbean Basin Initiative. However, due to a downturn in business activity in the region, this demand has not materialized. As a result, of the targeted 600,000 sq ft of factory shells, only 20,000 sq ft (at a location in Antigua) have been built. Only $800,000 of the $12 million A.I.D. loan has been expended. The soft demand for factory space was made worse by competition from government subsidized rental space and conservative banking practices. Responding to the latter problem, RDO/C reduced the loan floor from $250,000 to $100,000 for subloans in 5/86; it is too early to evaluate the effectiveness of this strategy. Also, commercial banks did not honor the liberal credit terms outlined in the project implementation plan. Overall, the project suffered from faulty design and a lack of good management. Estimates of industrial demand, the basis of the project, were never adequately quantified or verified. Further, although RDO/C was aware of the problems facing the project - a 2/86 internal memorandum estimated that the project would use less than half of the A.I.D. loan - it took little action apart from lowering the loan threshhold. Finally, controls over project supplies and construction were inadequate. There were no assurances that some $253,000 worth of project materials were used for project purposes because no inventories had been made. Also, an A.I.D. engineering consultant was unsuccessful in performing a detailed examination of the infrastructure construction. Despite objections from RDO/C, the audit recommends that RDO/C: (1) reprogram or return to the U.S. Treasury at least $6 million in project funds; and (2) change the project design and implementation procedures to address the lessened industrial demand, the need for alternate credit institutions to provide financing at terms acceptable to private investors, and the need to obtain assurances from host country governments that subsidized rental rates will be reduced or eliminated.