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«Office of Inspector General July 31, 2008 MEMORANDUM TO: Acting USAID/Bolivia Mission Director, Peter R. Natiello FROM: Regional Inspector ...»

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Office of Inspector General

July 31, 2008


TO: Acting USAID/Bolivia Mission Director, Peter R. Natiello

FROM: Regional Inspector General/San Salvador, Timothy E. Cox /s/

SUBJECT: Audit of USAID/Bolivia’s Integrated Alternative Development Program

(Report No. 1-511-08-007-P)

This memorandum is our report on the subject audit. In finalizing the report, we carefully

considered your comments on the draft report and we have included the mission’s comments in their entirety in appendix II.

The report includes four recommendations for your action. The information provided in the mission’s response to the draft report indicates that management decisions have been made for all four recommendations. Determination of final action for these recommendations will be made by the Audit Performance and Compliance Division (M/CFO/APC) upon completion of the actions planned by the mission.

I appreciate the cooperation and courtesy extended to my staff throughout the audit.

U.S. Agency for International Development Regional Inspector General/San Salvador Unit 3110; APO, AA 34023 Tel: (503) 2501-2999 Fax (503) 2228-5459 Program Needs an Updated Exit Strategy to Phase Out Funding of Tea Factories in the Yungas Region……….…….……………………. 12 USAID/Bolivia’s integrated alternative development program supports the U.S.

Government’s (USG’s) national interest in combating international crime and drugs, and contributes to the USAID/State Department performance goal “trafficking in drugs, precursors, persons and arms disrupted, and criminal organizations dismantled.” The program complements USG-supported interdiction, eradication, and public diplomacy efforts to achieve the performance goal by expanding and strengthening the sustainability of an alternative licit economy in coca-growing and associated regions.

(See page 3.) As part of its FY 2008 audit plan, the Regional Inspector General/San Salvador performed an audit of USAID/Bolivia’s integrated alternative development program to

answer the following questions:

• Did USAID/Bolivia’s integrated alternative development program achieve planned results, and what has been the impact?

• Did USAID/Bolivia’s reporting on its integrated alternative development program provide stakeholders with complete and accurate information on the progress of the program and the results achieved? (See page 5.) For the first audit objective, USAID/Bolivia’s integrated alternative development program (IAD) achieved five of the seven FY 2007 planned results we reviewed. The program met or exceeded its planned results for the annual export value of licit products, the number of families benefited by alternative development or alternative livelihood activities, increased sales of licit farm and non-farm products over the previous year, the number of kilometers of maintained or improved roads, and the number of hectares incorporated into the land ownership process. The program partially met its target for two performance indicators: the number of full-time equivalent jobs created and hectares of alternative development crops under cultivation. We could not determine whether the program achieved planned results for FY 2006 because the mission did not establish targets for the seven selected indicators. (See page 7.) Also related to the first audit objective, the audit showed that the IAD program needs an updated exit strategy to phase out funding of two tea factories (page 12), client groups have yet to pay an outstanding balance of counterpart contributions totaling $213,522 (page 14), and excess program property needs to be disposed of (page 15).

Regarding the second audit objective, USAID/Bolivia (and the mission’s contractors and recipients) reported complete and accurate information on the progress of the program and the results achieved. However, one implementing partner had weaknesses in the collection and reporting of one performance indicator: full-time job generation. (See page 16.)

The report recommends that USAID/Bolivia:

• Take action to implement an exit strategy to phase out financial support for two teaprocessing facilities that have not become self-sustaining as originally envisioned when purchased in 2003. (See page 14.) • Develop and implement an action plan to resolve the lack of counterpart contributions required from seven coffee producer grantees. (See page 15.) • Work with Chemonics and the Government of Bolivia to develop a strategy to dispose of excess property in a timely fashion. (See page 16.) • Work with the Agricultural Cooperative Development International and Volunteers in Overseas Cooperative Assistance (ACDI/VOCA) to correct errors in its reporting on full-time equivalent job creation and institute procedures to accurately report performance data in the future. (See page 17.) USAID/Bolivia agreed with the findings and recommendations in the draft audit report and has begun taking action on some of them. For example, the mission stated that funding mechanisms for the two tea processing facilities have already concluded and that no new activities will take place. Furthermore, the mission stated that the implementing partner will complete an exit strategy by October 31, 2008 for the Chimate tea facility and that a proposal to transfer the Caranavi tea plant will be submitted to the GOB by November 30, 2008. In addition, the mission has specific plans to address the report’s other three recommendations. (See page 19 and appendix II.) The U.S. Government made a large commitment to fighting drug production and narcotics trafficking throughout the Andean Region with the inauguration of Plan Colombia, or the Andean Counterdrug Initiative (ACI), in 2000. Plan Colombia was originally a $4 billion, six-year plan (2000-2005), to reduce drug crop cultivation and improve human rights and the rule of law. The Andean region has been viewed as particularly important because it produces virtually all of the world’s cocaine and increasing amounts of high-quality heroin: Colombia, Peru, and Bolivia are the three largest producers of cocaine. Bolivia ranks third behind Colombia and Peru in the cultivation of coca, with 27,500 hectares under coca production in 2006. This represents an 8 percent increase from 25,400 hectares in 2005.1 ACI is managed by the State Department’s Bureau of International Narcotics Control and Law Enforcement Affairs and funds are divided between programs that support eradication, interdiction, alternative crop development, and democratic institution building. Therefore, some ACI funds are transferred to the U.S. Agency for International Development (USAID) for alternative development programs that support development programs in coca growing areas, including infrastructure development, and marketing and technical support for alternative crops. ACI is not the only source of funds supporting counternarcotics and economic development in the Andean region. In addition to various military and Department of Defense programs, the United States also provides economic development aid in the form of Development Assistance, Child Survival and Health, and Economic Support Funds. While these programs are not considered part of the Andean Counterdrug Initiative, they do support many programs which are tangentially related, such as poverty reduction and infrastructure improvements.

Bolivia was at one time the world’s foremost producer of coca leaf. It made great strides in reducing coca cultivation under the Banzer-Quiroga administration (1997-2002), but current Government of Bolivia (GOB) policies are significantly different from those of the previous governments and generally rely on voluntary eradication. The total estimate of 27,500 hectares of coca bush cultivation in Bolivia in 2006 included 12,000 hectares (44 percent of total cultivation) permitted by Bolivian Law No. 1008 (1988) for traditional uses such as leaf chewing, medicinal preparations, and coca tea with the majority of this land in the Yungas of La Paz. In October 2004, the GOB temporarily authorized the cultivation of 3,200 hectares of coca in the Chapare region. This policy permits up to

0.16 hectares of coca per household for traditional uses. Farmers are to eradicate any coca in excess of these amounts.

It is in this challenging environment that USAID/Bolivia is implementing its integrated alternative development program (IAD) strategy for 2005 to 2009 to make the alternative licit economy in coca-growing areas increasingly sustainable. The mission plans to accomplish this objective by (1) increasing market competitiveness of alternative rural enterprises, (2) improving basic public services and social conditions, and (3) supporting more effective, transparent, and responsive democratic institutions.

United Nations Office of Drugs and Crime, “Bolivia Coca Cultivation Survey” June 2007.

In June 2005, USAID and the GOB signed a five-year agreement to implement the IAD in the Chapare and Yungas regions.2 An implementation letter signed in May 2007 responded to budget cuts and incorporated a number of programmatic adjustments, including shifting focus from the Chapare region toward the Yungas region (the traditional coca growing area). As of September 30, 2007, the program had a total estimated cost of $291 million, had obligated $225 million, and had disbursed $210 million.

The main implementing partners and activities under the IAD program are as follows:

• Chemonics International, Inc. – Chemonics was awarded a cost-plus-fixed-fee contract with a period of performance from March 2005 through February 2010.

The original $60 million contract (currently in the process of being reduced to $50 million because of budget cuts) supports the Rural Competitiveness Activity (ARCo) by identifying and assisting farmer groups and private sector associations that have considerable potential to be competitive in agricultural, agro-forestry, manufacturing, tourism, or other economic sectors. The project emphasis is on market demand, value chains, and sustainability.

• Chemonics International, Inc. – From November 2003 through May 2008, Chemonics (through a separate contract) also implemented the $9 million Bolivia Land Titling Project, aimed at improving the lives of residents of the Cochabamba Tropics region (known as the Chapare) by addressing the lack of secure land tenure. To accomplish this task, the project provided assistance to strengthen the Instituto Nacional de Reforma Agraria and the Government of Bolivia’s property registry entity, the Derechos Reales. This institutional strengthening would allow these GOB entities to replicate the land titling processes in other parts of the country.

• Agricultural Cooperative Development International and Volunteers in Overseas Cooperative Assistance (ACDI/VOCA) – In August 2005, ACDI/VOCA received a $42 million cooperative agreement extending through July 2010 to implement USAID/Bolivia’s Integrated Community Development Fund as part of the overall integrated alternative development program. The principal objectives of the activity are to increase access to public goods and services for communities and smallholder-farmer organizations that are vulnerable to the coca-cocaine economy;

increase the participation of local leaders, local governments and citizen organizations in the development process through a participatory process; improve the welfare of poor rural families by attending to the basic needs of communities;

and support emergency and immediate-impact activities through rapid response to social conflict and natural disasters.

• United Nations Office of Drugs and Crime – In September 2005, the United Nations Office of Drugs and Crime received a grant of $6.7 million from USAID, in addition to its own contribution of $2.5 million, with the goal of establishing and facilitating the management of the natural resources in the Tropics of Cochabamba and the Yungas of La Paz.

According to the United Nations Office of Drugs and Crime’s “Coca Cultivation Survey for Bolivia,” dated June 2007, 69 percent of the total hectares under coca production for 2006 were in the Yungas region and 30 percent were in the Chapare region.

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