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GAO reports vulnerability to waste, fraud and abuse

By Haidee V. Eugenio SAIPAN, CNMI (Saipan Tribune, Mar. 18, 2010) - The Government Accountability Office (GAO) said yesterday that nearly 40 percent of grant projects in the Commonwealth of the Northern Mariana Islands (CNMI) and other U.S. insular areas funded through the U.S. Interior Department's Office of Insular Affairs (OIA) have internal control weaknesses that increase their susceptibility to mismanagement, fraud, waste, and abuse.

[PIR editor’s note: For the entire GAO report follow this link.]

The Commonwealth Health Center's (CHC) dialysis project on Saipan ranked first among 24 OIA-funded projects with the highest prevalence of internal control weaknesses.

Of the 24 projects, 13 are in the CNMI, including the dialysis center.

These weaknesses in the dialysis center project include frequently changing priorities, lack of local operations and/or maintenance funding, limited local capacity, and contractor issues.

OIA provided a capital improvement grant for the CHC dialysis clinic in 1997. It was scheduled to be built by August 2004, but was not completed until December 2007. As of September 2009, the dialysis center still lacked Medicare and Medicaid certification and was not yet in use.

These were among key issues in the GAO's 70-page report yesterday to the U.S. Senate Committee on Energy and Natural Resources titled, "U.S. Insular Areas: Opportunities Exist to Improve Interior's Grant Oversight and Reduce the Potential for Mismanagement."

GAO, the investigative arm of the U.S. Congress, also said that several cases of misconduct and mismanagement involving insular areas have raised additional concern about the capacity of OIA to monitor grants and detect cases of mismanagement.

Two examples are the extensive delays in the construction of CHC's dialysis facility in the CNMI that was provided funds in 1997 but as of August 2009 had yet to be certified and used, and the 2007 indictment of two ranking American Samoa officials charged with fraud, bribery, and obstruction pertaining to federal grants.

CHC's dialysis center started as a US$5 million project that ballooned to US$17.6 million three years ago, to US$22 million last year.

Besides the CHC dialysis center, other CNMI projects with a high percentage of internal control weaknesses are the Commonwealth Utilities Corp. power plant rehabilitation on Saipan, the Rota Health Center, the Tinian landfill, and the Tinian wastewater system.

For example, in 2005, the CNMI government shifted OIA funds from a project originally funded in 2004 updating a Tinian school building to a project developing a wastewater system. In 2007, funds were again shifted from this incomplete wastewater project to a project developing a Tinian airport instrument landing system, which has since been suspended.

Press secretary Angel Demapan said yesterday that the CIP Office was notified that the report was completed but the Fitial administration has yet to receive/review the report.

Lt. Gov. Eloy S. Inos, in a letter to GAO Director Anu K. Mittal after receiving a draft copy of the report, said the CNMI finds the grant management report "well written, balanced in its analysis, and makes positive suggestions for improving grant implementation."

Inos, however, gave specific comments on the GAO report's analysis and conclusion.

Among other things, Inos said since the percentage of internal control weaknesses is so high, this may be an indicator that the reporting requirements are inappropriate.

He said the CNMI agrees with GAO that the changing of priorities and ineffective management has affected performance, but these results were symptomatic of the previous grant management structure, which was recently revised.

Inos told GAO that the CNMI has concerns in regard to the five-year period for evaluating agency effectiveness. He said significant changes in agency effectiveness can be implemented within one fiscal year and these changes should be recognized in any evaluation structure.

"Establishment of a five-year period for evaluation minimizes any changes and is biased toward government that has well-developed financial systems," Inos told Mittal in a Feb. 23, 2010 letter, attached to the final GAO report.

Interior, through, OIA, provides some US$400 million annually in financial assistance to insular areas, roughly US$70 million of which is awarded annually as grant funds to the CNMI, American Samoa, Guam, and the U.S. Virgin Islands.

These grant funds are for capital improvement projects such as roads, schools, and medical facilities.

But GAO noted that over the past five years, OIA has taken steps to improve project implementation and management.

Most notably, OIA established incentives for financial management improvements and project completion by tying a portion of each insular area's annual allocation to the insular governments' efforts in these areas-such as their efforts to submit financial and status reports on time.

In addition, OIA established expiration dates for grants to encourage expeditious use of the funds.

"Despite these and other efforts, some insular areas are still not completing their projects in a timely and effective manner, and OIA faces key obstacles in compelling them to do so," GAO said.

Anthony M. Babauta, Interior Assistant Secretary for Insular Affairs, said he's pleased with GAO's conclusion that OIA has made important strides in implementing grant reforms.

Babauta, who was in the CNMI in January to visit the CHC dialysis center and other OIA-funded project sites, among other things, said OIA concurs with GAO's recommendations.

"OIA will continue to improve its processes and also work with other federal agencies and insular grantees to help ensure that effective internal controls are in place," Babauta told Mittal.

GAO said the internal control weaknesses, including insufficient reporting and record-keeping discrepancies, can be categorized into three types of activities that may increase the possibility of mismanagement: grant recipient activities, joint activity between grant recipients and OIA, and OIA's grant management activities.

It said weaknesses associated with grant recipient activities were the most common issues GAO found, encompassing 62 percent of the weaknesses exhibited by OIA grant projects.

The joint activity-redirection of grant funds, a practice by which OIA allows insular areas to move grant funds between projects-accounts for 24 percent of the weakness present in OIA grant projects.

While project redirection can be a helpful tool, it can contribute to project mismanagement if not used appropriately, said GAO.

Weaknesses associated with OIA grant management activities, including discrepancies in grant management data, account for 14 percent of the weaknesses in grant projects.

Insular areas confront a number of challenges in implementing OIA grants, which can be categorized into project planning challenges such as frequently changing local priorities; project management challenges such as limited local capacity for project implementation; and external risk factors, including the declining economic conditions of American Samoa and the CNMI.

"While some of these challenges are beyond the insular areas' control, others result from decisions made by the insular area governments. These challenges can result in implementation delays for grant projects," GAO said.

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