Today’s Guest Post is by Chris Williams, Senior Director for Anti-Fraud and Corruption at the Millennium Challenge Corporation, a U.S. development agency. Chris explains the measures MCC takes to prevent corruption from infecting the projects it supports and reviews some lessons it has learned about preventing corruption in large infrastructure projects.  (Full disclosure. I consult with the MCC on corruption prevention although its prevention policies long pre-date my consultancy. I have hounded Chris for some time to write this post, for whatever bias I may have, I think MCC’s corruption prevention efforts provide a model for others in the development community.)

The Millennium Challenge Corporation is an independent U.S. government development agency working to reduce global poverty through economic growth. Created in 2004, MCC provides time-limited grants that pair investments in infrastructure with policy and institutional reforms to countries that meet rigorous standards for good governance, fighting corruption and respecting democratic rights. MCC provides an example of “smart” development assistance, using competitive selection of grant recipients, country-led solutions, country led implementation, and a focus on results to prioritize the use of U.S. taxpayer funds.

A central feature of MCC’s approach, country ownership, is that each partner government receiving a grant from MCC must identify a legal entity to which the government will delegate the responsibility for the projects funded by the MCC. A sign of the importance MCC places on fighting fraud and corruption is that this entity is formally designated the “accountable entity” (generally referred to as an “MCA,” as many are named Millennium Challenge Account Moldova, Millennium Challenge Account Senegal, etc.). This underlines the MCA’s responsibility for ensuring MCC funds are used only for the purposes intended.

MCC doesn’t just assign responsibility for managing fraud and corruption risks to the MCAs, however. Upon establishment of the MCA, MCC immediately begins working with it to put in place financial controls and other standard safeguards to prevent funds from being lost through fraud or corruption.

With MCC’s help, the MCA undergoes training to prevent fraud and corruption (AFC), develops its own custom-tailored AFC risk register using standard risk assessment techniques, and publishes an AFC Action Plan focused on the highest priority risks, which remains in force throughout the implementation of the MCC-funded program. This approach offers lessons for other donor organizations seeking to mitigate risks in the implementation of their own projects through Project Implementation Units or other approaches that involve oversight as opposed to direct management.

For instance, many MCC-funded programs involve construction, renovating or rehabilitating existing or building new infrastructure. The standard approach recommended by MCC and used by MCAs involves hiring two (or more) separate entities for construction projects. For the actual construction work, the MCA hires a construction firm, or “Works Contractor,” to build the desired infrastructure, and an engineering consulting firm, or “Supervisory Engineer,” to oversee the Works Contractor on behalf of the MCA. The contracts used are based on the suite of contracts developed by the International Federation of Consulting Engineers (FIDIC). Part of the MCA’s role is to ensure that the Supervisory Engineer is performing its contractual obligations. Part of MCC’s role is to provide oversight and support to the MCA, including through Independent Engineers, or “IEs,” who work directly for MCC.

MCC and the MCAs have learned many lessons regarding their oversight responsibilities for infrastructure works. MCC has refined its oversight approaches in terms of both level of effort and frequency of conducting its quality assurance and quality control functions through the support of its IEs. Through AFC training, the joint development of AFC risk registers, and the implementation of MCA AFC Action Plans, both MCA and MCC infrastructure staff (as well as staff in other sectors) have become significantly better prepared in trying to mitigate fraud risks and detect potential fraud or corruption in their projects.

Unfortunately, there have still been multiple cases where the Supervisory Engineer has failed to ensure that the Works Contractor has been performing in accordance with the technical specifications of its contract. Some of these failures have come to MCC’s attention after MCC-funded programs have ended as new construction deteriorates at an unexpectedly rapid rate, resulting in investigations by the Office of Inspector General’s Office of Investigations (OIG/I) of the U.S. Agency for International Development (USAID), which serves as MCC’s Inspector General and has the mandate to investigate potential fraud or corruption involving MCC funds. In other cases, careful examination by MCA, MCC, or IE staff have identified issues in time and allowed for the deficiencies to be corrected in a timely manner (and without additional cost to the MCA). Four examples from different types of projects are provided below.

1. ROAD PROJECT: MCC funded a project worth over USD 100 million to upgrade roads in a country. At the end of the compact, MCC’s IE conducted field tests that raised questions about the quality of the work. MCC’s IE attempted to conduct new field tests to confirm its findings using their own staff and equipment, but they were unable to do so due to political instability in the region. Between one-and-a-half and two years after the construction ended, OIG/I hired the country’s national laboratory to conduct tests on sections of road that showed significant levels of deterioration. Based on the tests and field observations by an engineer, OIG/I concluded that the QA and QC conducted by the Works Contractors and the Supervisory Engineers were probably very poor, and estimated that reconstruction of just two of the roads to meet the contractual construction specifications would cost an additional amount of almost 10% of the original contract. However, bad weather, poor road maintenance, poor control of weight of traffic using the roads, and the passage of time eroded not just the roads but the ability to assess what caused this unexpected level of deterioration. Furthermore, MCA staff and the project’s Supervisory Engineers apparently failed to maintain and provide proper documentation during project implementation and at contract close-out, which made it virtually impossible to confidently reconcile project records with post-compact testing.

• AGRICULTURE PROJECT: In one compact program, MCC provided matching grants to agricultural cooperatives to build small-scale infrastructure, each costing less than USD 1 million. Due to the relatively small scale of the individual construction contracts, the positive reputation of the Supervisory Engineer the MCA was using for the activity, and serious and time-sensitive issues facing the rest of the program, MCC decided not to use its own IE to help oversee this activity. About two years after construction was completed, OIG/I received a complaint when an external wall at one of the sites collapsed, revealing that the wall had been built with bricks rather than reinforced concrete as specified in the contract. OIG/I’s investigation revealed that at multiple sites, the Works Contractors and the agricultural cooperatives had agreed to changes in design, as well as in types and quantities of materials used in construction, without modifying the contract itself. The Works Contractors were literally “using two sets of books” – one showing actual types and amounts of materials used, and the other “translating” that into the expected types and amounts of materials from the original Bills of Quantity in the contracts. This was done with the knowledge of the Supervisory Engineer, which recommended that the MCA approve and pay the falsified Interim Payment Certificates (IPC) for the work completed. Although there was no indication that the MCA was charged more than was appropriate, and there was no indication of bribes or payoffs, the Supervisory Engineer knowingly approved false documents, which is the definition of fraud. The Supervisory Engineer conducted its own investigation and found that multiple technicians and supervising engineers knowingly signed off on fraudulent IPCs involving several sites, with lack of managerial oversight from outside the country. In addition to this fraud, some work that should have been rejected was approved, with several situations posing a genuine safety risk. The partner government ended up spending over USD 1 million to remedy the situation.

• ENERGY PROJECT: As part of an energy project worth over USD 100 million, several hundred kilometers of electricity distribution lines were constructed. After the end of the compact, OIG/I received a complaint that over 100 poles of the wrong diameter had been provided by one supplier to one of the Works Contractors. These poles had been accepted by the Works Contractor and, in some cases, were installed as part of the distribution lines. The Supervisory Engineer either did not notice, or did not notify MCA of, the use of materials that did not comply with the technical specifications of the contract while inspecting delivered materials, during works commissioning, and approving the associated payments. Fortunately, MCC’s Independent Engineer did not consider the wrong-sized poles’ diameters to be so small as to pose a performance concern, and the use of the wrong-sized poles did not result in a significant financial gain to the Works Contractor. As the defects liability period had not yet ended when the OIG/I was notified, the Implementing Entity reportedly had the Works Contractor install additional stays for extra stability for at least some of the non-compliant poles that had been installed.

• EDUCATION PROJECT: As part of an education-related project worth over USD 100 million, MCC funded the rehabilitation of dozens of schools throughout a country. One set of schools was being rehabilitated when the COVID-19 pandemic began. After putting in place COVID-19 mitigation plans, the Works Contractors were able to continue work during the pandemic. The Supervisory Engineer issued certificates of completion in September 2020, although with long “punch lists” showing significant amounts of work that remained to be completed. The issuance of the certificates of completion began the 12-months defects liability period and allowed the Works Contractors to avoid penalties for late completion of the work. Local subcontractors of MCC’s Independent Engineer, along with new MCA leadership and MCC’s Resident Country Mission (RCM), raised concerns about the apparently premature issuance of the certificates of completion after making visits to some of the construction sites, and the MCA staff overseeing the rehabilitation of the schools resigned. The Works Contractors continued work on-site, addressing punch list items, while the MCA, RCM, and MCC’s Independent Engineer continued oversight of the Works Contractors’ and the Supervisory Engineer’s performance. Once most of the punch list items were satisfactorily completed, the MCA instructed the Supervisory Engineer to re-issue the certificates of completion, restarting the 12-month defects liability period. The MCA not only replaced the staff who had resigned, but also hired additional staff to help provide oversight of construction sites. In addition, MCA and MCC staff believe that uncovering and addressing this issue relatively quickly and firmly has provided a positive “demonstration effect” for MCA staff, Works Contractors, and Supervisory Engineers on all of the projects being implemented by the MCA.

MCC staff have developed six observations and recommendations about Supervisory Engineers and how best to help MCAs oversee them which are of relevance to both project implementers and the donor organizations that fund them. The six are drawn from MCC’s experience over the years, including four cases of possible fraud or corruption in MCC projects reported either to MCC or to the Office of Investigations within USAID’s Office of Inspector General (OIG/I).

1. Supervisory Engineers sometimes fail to catch instances where Works Contractors do not comply with technical specifications. Hiring of a Supervisory Engineer is not a “set it and forget it” silver bullet.

• The Works Contractor has responsibility for quality control, or “QC,” while the Supervisory Engineer has responsibility for quality assurance, or “QA.” QA/QC involves such activities as testing the quality of materials to be used and measuring the quantity of materials that are actually used. MCAs, as well as MCC and its IEs, should ensure that QA/QC is being done in compliance with contractual specifications. “Trust but verify.”

• MCAs should require Works Contractors to address defects as quickly as possible. Delays in addressing defects not only allow potential damage to accrue, but also complicate the process of assessing responsibility for the defects and the attribution of costs between the various parties.

• MCAs and MCC should quickly send independent testing personnel and equipment out to the field if there are any concerns. Delays in conducting inspections or tests may make it impossible to determine whether problems have arisen because of poor work by the Works Contractor and/or Supervisory Engineer, or because of bad weather, poor maintenance, or unexpectedly heavy use of the infrastructure.

• MCA staff must recognize the importance of maintaining proper documentation during project implementation and at contract close-out and should conduct periodic spot checks of the documentation prepared and maintained by the Supervisory Engineer. Poor documentation may be an indicator of poor overall performance by the Supervisory Engineer.

• MCA staff should bring issues of potential fraud or corruption to the attention of the relevant authorities, as rapid reporting and responses can prevent or at least reduce the damage done. MCC’s standard operating procedure is for the MCAs to post information at relevant project sites, including construction sites, about how to report concerns of potential fraud and corruption.

MCC is sharing this information to the wider anti-corruption community in the hopes that its experiences and recommendations can help partner countries, donor organizations, and project implementers increase the probability that the construction work they manage, fund, and carry out are completed on time, on budget, and free of fraud and corruption.