FARA PROCUREMENT AND IMPLEMENTATION GUIDELINES DRAFT FINAL REPORT

Transcription

1 FARA PROCUREMENT AND IMPLEMENTATION GUIDELINES DRAFT FINAL REPORT December 2010 This publication was produced for review by the United States Agency for International Development. It was prepared by Tetra Tech ES, Inc.

2 FIXED AMOUNT REIMBURSEMENT AGREEMENTS: PROCUREMENT AND IMPLEMENTATION GUIDELINES Draft Final Report December 2010 These guidelines were written by Moenes E. Youannis under contract to Tetra Tech. Disclaimer The authors views expressed in this publication do not necessarily reflect the views of the United States Agency for International Development or the United States Government. EPIQ II MAKING POLICIES WORK FOR PEOPLE

3 EXECUTIVE SUMMARY The US Government s development programs address the pressing needs of many nations around the world. In developing countries, the United States Agency for International Development (USAID) implements activities in sectors with different and specific challenges. Further, the Host Country Implementation Units (HCIUs) responsible for implementing USAID-financed programs differ in their natures and organizational structures, and in most cases lack adequate technical, financial, and managerial capabilities. In implementing its programs, USAID has relied heavily on direct aid contracting, and in some cases primarily for procuring commodities and construction services on the host country (HC) contracting mechanism. More recently, for a variety of reasons, USAID has decided to focus on providing its support directly to host country governments, using existing HC procurement systems, in implementing its upcoming development programs, which include an increasing number of construction projects. This decision has spurred renewed interest in using Fixed Amount Reimbursement Agreements (FARAs). These guidelines provide a brief discussion of the different types of contracting mechanisms the Agency uses in implementing infrastructure activities with a special focus on FARA. It provides a one-stop reference for designing and implementing construction programs through FARAs. Applicable clauses of USAID s Automated Directive System are incorporated in the document. USAID CONTRACTING OVERVIEW Under USAID direct contracts, the Agency is a direct party (signatory) in a mutually binding relationship that obligates the contractor to furnish supplies and/or service, and USAID to pay for them. This puts direct responsibility and liability on USAID. Under this type of contracting, USAID acts on behalf of the HC, which is the ultimate recipient of the service. Under a host country contract, USAID finances, but is not a party to, contractual arrangements between the HC and the supplier of goods and/or service. USAID has approval right for the contracting process throughout the project s implementation. A FARA is a legal agreement between USAID and the HCIU under which USAID agrees to finance an activity without entering any form of contractual relationship with the supplier of the service or commodity. USAID reimburses the HCIU upon the physical completion of an activity, a sub-activity, or a quantifiable element within an activity. The amount of reimbursement is generally fixed in advance and is based on cost estimates reviewed and approved by USAID. A major difference between using USAID direct contracting, host country contracting, and FARA is in the degree of USAID s liability. USING FARA IN CONSTRUCTION PROJECTS Under FARA, USAID reimburses the HCIU for completed projects, subprojects, or quantifiable elements within a project. The amount of FARA PROCUREMENT AND IMPLEMENTATION GUIDELINES EXECUTIVE SUMMARY i

4 USAID s contribution to FARA is controlling. This means that if unforeseen cost increases are encountered, they will be borne by the recipient, and if the costs are less than those estimated (for the same scope and specifications), USAID s contribution will not be reduced. Although the amount of reimbursement under a FARA is generally fixed in advance, under some circumstances, USAID may consider variations to this method FARA. These include advancing USAID funds, a fixed amount reimbursement with escalations negotiated periodically, and a percentage reimbursement based on actual costs. A FARA can be used successfully for many USAID-financed projects to procure goods and services, such as construction services. Under a FARA, USAID may finance goods that are locally produced and goods from Geographic Code 000 (goods from the United States) without limitation. It may also finance goods that are imported from Geographic Code 935 (the Free World) for up to 25% of the total cost of the commodity element of the FARA if goods are locally available and transactions of up to $5,000 if goods are imported specifically for the project. USAID policies on nationality and for host country contracting are waived for the procurement of services under a FARA. The FARA method does not apply to situations where USAID disbursements are not related to identifiable goods or services but to other criteria, such as budgetary or administrative performance. FARAs have less stringent requirements than HC contracting. It is not necessary that the recipient organization under a FARA be host country certified. Nevertheless, for any FARA, the Mission Director or his/her designee is required to assure himself/herself that the recipient organization is qualified to implement the FARA activity effectively. USAID EXPERIENCE The Agency s experience in using FARAs varies by country. While a number of Missions have been using FARAs for many years, others have no or limited experience with them. The Cairo Mission has more than 30 years of experience and has realized many successes in using FARAs to implement infrastructure programs. It has used FARAs to finance projects carried out by local construction contractors and engineering firms, and others by local construction contractors and US engineering firms. As the experience of this and other USAID Missions has shown, FARA has proven to be most appropriate for small-scale, simple technology, and short-duration projects, provided that the HCIU is qualified to implement FARAs. LESSONS LEARNED AND BEST PRACTICES It is important to realize that a FARA is not just a funding mechanism for procuring equipment and services. It is also a tool for development by helping enhance the technical and managerial capabilities of the HCIU. This is a valuable longterm benefit that ensures the sustainability of FARA projects. An important factor for the success of a FARA is good coordination with the HCIU, other donors, and among the USAID team. The time spent in designing a FARA and in clearly defining the role of each of the parties is crucial. It is better to resolve disagreements before starting a FARA program, than having to deal with disputes during implementation. USAID representatives should always remember that the Agency is not a party to any contractual relationship under the FARA. And as such, USAID should refrain from giving any written or verbal instructions to the Engineer or the contractor, especially during site visits, which are extremely important for the success of the FARA. A PROCUREMENT AND IMPLEMENTATION GUIDELINES EXECUTIVE SUMMARY ii

5 Communication is always a problem area. While FARA documents should be in English with a local language translation to ensure better understanding by local officials (English governs in case of disputes), all contracts documents between the HCIU and its contractors should be in the local language using local specifications. Effective communication ensures that the HCIU understands its obligations including the financial burden resulting from a FARA. It is important to document success stories and plan early for public events. This reflects well on both the host country and USAID. THE STEPS IN A FARA Prior to signing a construction FARA, USAID needs to invest adequate time to identify the problem, the proposed project, and the responsible HCIU. USAID should work closely with the HCIU to ensure that it fully understands the FARA terms, and to assess the HCIU s capabilities. USAID should also work with other donors to gain a better understanding of the challenges ahead. Some of the main steps in using FARA method include: Developing a concept paper Signing a bilateral agreement or an Implementation Letter Determining the type of FARA that is most suitable for circumstances and payment terms. The HCIU then engages an Engineer to conduct the required studies, develop designs, prepare schedules and cost estimates, develop the bidding documents, and lead the procurement process. The Engineer provides construction management services throughout the construction period, certifies the contractors invoices for payment by the HCIU, and provides certification that the work is completed according to the design specifications. Upon receipt of the reimbursement request from the HCIU, USAID inspects the completed work and reimburses the HCIU for the work completed in accordance with the FARA terms. A PROCUREMENT AND IMPLEMENTATION GUIDELINES EXECUTIVE SUMMARY iii

6 ACRONYMS A&E FARA HC HCIU IL MOU O&M PPP PROAG USAID architecture and engineering Fixed Amount Reimbursement Agreements host country Host Country Implementation Unit Implementation Letter memorandum of understanding operations and maintenance public-private partnership project grant agreement United States Agency for International Development A PROCUREMENT AND IMPLEMENTATION GUIDELINES ACRONYMS iv

7 TABLE OF CONTENTS 1. Introduction and Background / 1 The FARA / 1 Objectives / 2 2. Infrastructure Contracting Mechanisms / 3 Direct Contracting / 3 Host Country Contracting / 3 Fixed Amount Reimbursement Agreements / 4 3. Using FARA in Construction Projects / 5 General Characteristics / 5 Bilateral Relationship / 6 When to Use a FARA / 6 Why FARA? / 7 Parties to a FARA / 7 Roles of the Parties / 7 FARA Variations / 8 Designing a FARA (ADS 317) / 9 Scope, Size, and Complexity of Work Under a FARA / 11 Cost Sharing and Terms of Payment / 11 FARA Stages and Subprojects / 12 USAID s Role and Staffing Requirements / 12 Host Country Financial, Managerial, and Contracting Capabilities / 13 Working with the HCIU / USAID Experience with FARA / 14 Small-Scale Construction Using Local Firms/ 14 Large-Scale Construction Using Local and US Firms / 14 Small-Scale Construction Using Local and US Firms / Sustainability Issues / 16 Monitoring and Evaluation / 16 Conditional Funding / 16 Performance Indicators / 17 Commodities Financing / 17 A PROCUREMENT AND IMPLEMENTATION GUIDELINES TABLE OF CONTENTS v

8 Building Host Country Capacity / Considerations Prior to Committing Funds / Lessons Learned and Recommendations / 20 Lessons Learned and Best Practices / 20 Recommendations / FARA Steps: From Concept Paper to Project Completion / A FARA Case Study / 25 The Farastan Water Sector Support Program / 25 Case Study Questions / An Alternative to Using FARA / 27 Annexes A Sample Implementation Letter / 29 B USAID General Requirements and Procedures for FARA / 31 C Sample FARA / 34 D Sample Schedule of Project Stages / 40 E Sample of Total Estimated Costs / 42 FARA PROCUREMENT AND IMPLEMENTATION GUIDELINES TABLE OF CONTENTS vi

9 1. INTRODUCTION AND BACKGROUND The US Government s development programs address the pressing needs of many countries that are in different geographies and at different stages of development. In these countries, the United States Agency for International Development (USAID) implements activities in sectors with different characteristic and specific challenges that require different development approaches. Further, the Host Country Implementation Units (HCIUs) that receive assistance and are responsible for implementing USAID-financed programs differ in their natures and organizational structures, not only among countries but also within a country. In most cases, however, they lack the technical, financial, and managerial capabilities required to implement USAID programs. Most of them are also not familiar with UAID regulations. USAID is increasingly interested in using Fixed Amount Reimbursement Agreements for its infrastructure projects. These simple, practical vehicles utilize the HCIUs existing procurement systems. In implementing its programs, USAID has relied heavily on direct aid contracting mechanisms. This has allowed the Agency to ensure that the procurement processes follow applicable regulations and that the final product meets USAID standards. In other cases primarily for procuring commodities and construction services, and to a lesser degree, for procuring technical assistance and engineering service, it has used the host country (HC) contracting mechanism. There are many issues and challenges surrounding the design and implementation of USAID programs using host country contracting. These challenges are only logical given the differences in culture, procurement rules, acceptable standards, and required specifications between the United States and the country receiving USAID support. More recently, for a number of reasons, USAID has decided for focus on providing its support directly to host country governments, using existing HC procurement systems, in implementing its upcoming development programs. In addition, a growing number of construction projects are anticipated under existing major development programs. THE FARA As a result of the developments in how USAID does business, there is increased interest within the Agency to use Fixed Amount Reimbursement Agreements (FARAs). FARAs provide a simple, yet practical, vehicle for implementing infrastructure projects through the existing procurement systems of the HCIUs. USAID s experience in using the FARA mechanism varies from one country to the other. While a number of Missions have been using FARAs for many years, other Missions have little or no experience with them. Because of the successful experiences some Missions have had in FARA PROCUREMENT AND IMPLEMENTATION GUIDELINES INTRODUCTION AND BACKGROUND 1

10 using the FARA mechanism for the procurement of goods and services, a number of Missions have recently expressed interest in using FARAs for upcoming infrastructure programs. These Missions including Pakistan, Rwanda, Tanzania, Zambia, Ghana and Senegal have varying technical capabilities: some have large engineering staffs (mostly Foreign Service Nationals), while others have no engineers on their staff. At the same time, USAID is currently reviewing its procurement regulations, including the contracting options for construction projects. This will enable the Agency to engage host countries in the procurement process, respond more efficiently to the increasing demands by various Missions (including those in post-conflict countries) in a timely manner, and increase the effectiveness of USAID s foreign assistance efforts in accordance with the principles of the Paris Declaration on Aid Effectiveness. This will also increase the transparency of how the Agency implements its programs and will allow host country consultants and construction contractors to develop their capacity to carry similar activities after USAID programs are completed. outlines the necessary steps for implementing construction activities with the overall objective of enabling USAID to meet its long-term development goals. Throughout the document, emphasis is placed on USAID/Egypt s experience with using FARAs during the last 30 years. The examples provided are also based on USAID/Egypt s experience with several of its completed and ongoing FARAs. It is important to note that direct contracting and host country contracting are not the subject of this document, and as such, only a brief overview is provided. Also, this document is based on the applicable regulations in effect when these guidelines were developed; the applicable ADS clauses are incorporated in the document. 1 OBJECTIVES This document provides a brief discussion of the different types of contracting mechanisms the Agency currently uses in designing and implementing construction projects. It also provides contracting and implementation guidelines for using FARA in carrying out infrastructure activities. The USAID Automated Directive Systems (ADS) and its Supplementary References provided an excellent source of information regarding the use of FARAs. The purpose of this document is to: provide to development professionals (engineering and nonengineering) with a one-stop reference for designing and implementing FARAs; it includes definitions, guidelines, case studies, and lessons learned from previous USAID experience; and 1 Please note that the terms Engineer, and architecture and engineering contractor (A&E) have the same meaning. They refer to the engineering consultant responsible for providing engineering services, construction management, and tendering assistance. FARA PROCUREMENT AND IMPLEMENTATION GUIDELINES INTRODUCTION AND BACKGROUND 2

11 2. INFRASTRUCTURE CONTRACTING MECHANISMS USAID s infrastructure programs can be implemented using different contracting mechanisms, depending on such factors as size and complexity of the project, host country capabilities, and availability of qualified staff. This section presents a brief overview of the three main contacting mechanisms USAID employs. 1 Direct contracting 2 Host country contracting 3 Fixed amount reimbursement agreements DIRECT CONTRACTING In direct contracting, there is a direct contractual relationship between USAID and the service provider (Figure 1). USAID is a direct party (signatory) in a mutually binding legal relationship that binds the seller (contractor) to furnish supplies or services, and the buyer (USAID) to pay for them (ADS Chapter 301). Figure 1. Direct Contracting USAID $ HCIU In this mechanism, USAID has direct responsibility and liability (additional cost and responsibility) for the award and supervision of the contractor s performance. The Agency acts on behalf of the host country, which is the ultimate recipient of USAID s services. HOST COUNTRY CONTRACTING Host country contracting (Figure 2) is a means of program implementation in which USAID finances, but is not a party to, contractual arrangements between the host country and the supplier of goods and/or services (ADS Chapter 301, 305). Figure 2. Host Country Contracting USAID HCIU ENGINEER (A&E)? $ CONTRACTOR $? CONTRACTOR ENGINEER (A&E) Although it is not a party to the contractual relationship, USAID must ensure that the contractor and HCIU follow applicable US Government regulations. USAID has approval rights for almost every step in the bidding, selection, and implementation process. FARA PROCUREMENT AND IMPLEMENTATION GUIDELINES CONTRACTING MECHANISMS 3

12 FIXED AMOUNT REIMBURSEMENT AGREEMENTS A Fixed Amount Reimbursement Agreement (FARA) is a legal agreement between USAID and the HCIU whereby USAID agrees to finance an activity without getting into any form of contractual relationship with the supplier of the service or commodity (Figure 3). It is a form of assistance under which the amount of reimbursement is generally fixed in advance based on cost estimates that have been reviewed and approved by USAID. Reimbursement is made when an activity, a sub-activity, or a quantifiable element within an activity is physically completed. The emphasis is on reimbursement based on outputs rather than inputs or costs (ADS Chapters 317, 630). Figure 3. Fixed Amount Reimbursement Agreement USAID ENGINEER (A&E)? HCIU CONTRACTOR A major difference between using USAID direct contracting versus host country contracting and FARA is in the degree of liability USAID assumes. Major Differences between HCC and FARA HCC FARA ADS 305, Bilateral USAID-HC USAID-HC agreement/il USAID contribution Contract price Fixed in advance A&E Contract HCIU or USAID HCIU Payments to A&E Construction Contract Payment for Construction HCIU or USAID HCIU USAID HCIU HCIU HCIU Payment Mode Progress Reimbursement HCC Required Not Required Assessment USAID Approval of HC procurement steps and documents Required Not Required FARA PROCUREMENT AND IMPLEMENTATION GUIDELINES CONTRACTING MECHANISMS 4

13 3. USING FARA IN CONSTRUCTION PROJECTS Using Fixed Amount Reimbursement Agreements provides flexibility in implementing USAID-funded programs. A FARA can be used to carry out programs employing simplified rules and regulations. The fact that USAID shifts the contracting responsibility to the host country also decreases the Agency s liability, workload, and staffing requirements. This section describes how FARAs work. GENERAL CHARACTERISTICS The amount of reimbursement under a FARA is generally fixed in advance based upon cost estimates that have been reviewed and approved by USAID, and reimbursement is made upon the physical completion of an activity, sub-activity, or quantifiable element within an activity. The emphasis is on reimbursement based on outputs rather than inputs or costs (the pure FARA method). USAID is, therefore, not concerned about the procedures the host country uses in acquiring the project s inputs. It is merely concerned about the conformance of the outputs to previously agreed specifications or standards. Nevertheless, USAID still has the responsibility to ensure that acceptable selection procedures and design standards were followed. In other words, USAID and the host country still need to agree on: 1 Definition of the project and the expected output in terms of capacity, general specifications, and end use 2 Subprojects or stages of the project that, when completed, could be considered a quantifiable functional element of the project 3 Cost estimates and expected inflation 4 Time schedule 5 Procurement procedures the host country plans to use. These include competition, limiting the work to private sector contractors, and provisions to hire an engineering firm for construction management 6 Applicable USAID procurement and environmental regulations 7 USAID s planned contribution and applicable exchange rate 8 Procedures for reimbursement upon satisfactory completion of the agreed-upon work FARA PROCUREMENT AND IMPLEMENTATION GUIDELINES FARA AND CONSTRUCTION 5

14 BILATERAL RELATIONSHIP An important element of the FARA is the bilateral arrangement between the US and the host country governments. A bilateral agreement sets a very clear understanding of the obligations of each party as well as the expectations for each. It also describes very clearly the objectives, the results being sought, and the performance indicators for the programs to be implemented. Ideally, the grant or assistance agreement should provide a clear description of the planned project and expected outputs. This also allows the host country to plan for making funding available in a timely manner. Procurement of Goods Three types of goods are generally procured in USAID projects: Indigenous goods. These goods must be indigenous to the host country (goods that are grown, mined, or produced within the country receiving the assistance). They may be financed by Once signed, a bilateral agreement becomes the basis for implementation actions, including FARAs, and thus eliminates, or at least minimizes, the areas of disagreement or lengthy discussions. If the bilateral agreement does not address the elements above, having an Implementation Letter (IL) signed by authorized representatives of USAID and the host country is essential. The IL should cover all the points that the grant agreement should have addressed. In this case, some negotiation is expected. It is extremely important to invest the needed time and effort in addressing possible areas of disagreement prior to starting the FARA program. An important condition that should be addressed is the refund clause. This reserves USAID the right to require a refund of any or all reimbursement amounts made to the HCIU for work that USAID later determines to be incomplete, non-functional, or otherwise not in accordance with the terms of the FARA. USAID without limitation. Imported items. These are goods from Geographic Code 000. They may be purchased without limitation. Imported items of free world origin (see Mandatory Reference, Geographic Code 935) that are available locally may be financed, except that the estimated procurement of such items shall not constitute more than 25% of the total cost of the commodity element of the FARA activity, unless a higher percentage is approved in the IL. Goods imported specifically for the activity. Items imported from any free world country, which are imported specifically for the activity, may be financed if the cost of the transaction does not exceed $5,000, exclusive of transport costs. WHEN TO USE A FARA (ADS 317) Like any procurement or contractual vehicle, there are always guidelines that should be followed in determining what would be the most suitable procurement vehicle for a particular activity. This section presents an overview on when is it possible to use a FARA (ADS 317). Procurement of Services These include construction services, USAID policies on nationality (see ADS 310) and for cooperating country contracts (see ADS 305) are waived for the procurement of services under FARA activities. FARA PROCUREMENT AND IMPLEMENTATION GUIDELINES USING FARA IN CONSTRUCTION 6

15 It is important to note that the Fixed Amount Reimbursement method does not apply to situations where USAID s disbursements are not related to identifiable goods or services, but to other criteria, such as budgetary or administrative performance. (ADS 317 Supplementary Reference.) WHY FARA? It is USAID s policy to use the Fixed Amount Reimbursement method where the project structure and available qualified personnel in the Mission host country meet the criteria discussed under Designing a FARA below. While the criteria and preconditions for using the FARA method may be difficult to meet, the benefits from using it are such that field Missions should seek to apply the method as often as possible. The pure FARA method described in the General Characteristics subsection above and the variations described in the FARA Characteristics section below are acceptable alternatives, even though not all of the latter provide for the reimbursement of a fixed amount (ADS 317). PARTIES TO A FARA USAID and the host country implementing unit (HCIU) are the parties to the FARA under a bilateral agreement or an Implementation Letter. It is important to emphasize that USAID is not a party to any contractual arrangement resulting from entering into a FARA. ROLES OF THE PARTIES The recipient government and USAID identify the project for which US assistance is desired, together with estimated financial requirements for the total project as well as its subprojects. The recipient government may include in its cost estimates an amount for inflation for the expected time period for project implementation (generally not to exceed two years), based on available information and studies. The recipient government submits design specifications and cost estimates for review and approval by USAID. USAID then determines the amount of its contribution to the total project and the allocation of its contribution to specific subprojects and/or elements, as well as conditions for acceptance of the work and reimbursement of its share of the cost. Please note that under a FARA arrangement, USAID generally reimburses the HCIU for costs already incurred and normally paid to the contractor or supplier of services. The amount of USAID s contribution to the total project will be controlling. If unforeseen cost increases are encountered, these will be borne by the recipient. If costs are less than those estimated (provided there are no changes to the scope or specifications), USAID s contribution will not be reduced. The HCIU is responsible for all steps of the procurement process following its rules and regulations; for making funding available; and for complying with USAID FARA terms. USAID has monitoring responsibilities. Regular site visits are crucial to the success of FARA programs. FARA VARIATIONS (ADS 317 S) There are a number of acceptable variations in reimbursement methods, which may be adopted. While these variations differ in important aspects from the fixed amount reimbursement method, their use meets some of the objectives and advantages of the FARA method. The variations include the following: FARA PROCUREMENT AND IMPLEMENTATION GUIDELINES USING FARA IN CONSTRUCTION 7

16 Advance of USAID Funds From time to time, there will be situations where the host country does not have the budget to provide working capital on a current basis to permit projects/subprojects to get underway expeditiously. This may particularly be true in a number of relatively least-developed countries where budget funds are in short supply. Under these circumstances and following a thorough review of the host country s/recipient s financial position and budgetary procedures, USAID can consider advancing funds to permit work to begin. USAID can consider advancing funds to permit work to begin. When reimbursement is made for completed subprojects, USAID would deduct a pro rata amount from each payment until the advance is completely worked off with the final reimbursement. All other criteria and procedures set forth for fixed amount reimbursement will apply. FARA with Escalation Negotiated Periodically When inflation is a major problem, USAID can consider negotiating periodic increases in its fixed amount contribution to the subproject(s). This arrangement would be most applicable where USAID is financing many small subprojects of the same type over a number of years; e.g., construction of 150 schools over a period of 2 to 3 years. In this situation, USAID would agree to a fixed amount reimbursement for, say, 50 schools to be completed during the first year and the renegotiate the fixed amount contribution for the schools to be constructed during subsequent years. When inflation is a major problem, USAID can consider renegotiation period increases in its fixed amount contributions to the HCIU. The advantage of this approach are that it would permit USAID and the borrower to price project costs more realistically and reach agreement on a realistic fixed amount contribution. It would avoid including substantial escalation in USAID fixed amount contribution. All other criteria and procedures set forth for the fixed amount reimbursement will continue to apply. Percentage of Actual Reimbursement From time to time, a project financed by USAID will not allow for the completion of design specifications at the outset; as a result, it may not be possible to establish reasonable cost estimates for individual subprojects. For example, a good case in point is a rural works project, which is labor-intensive, includes a large number of small diverse subprojects (feeder roads, bridges, small irrigation, etc.), and has many of its subprojects scattered over a wide geographic area. Projects of this type do not lend themselves to fixed amount reimbursement because the design specifications and cost estimates for individual subprojects are made during the life of the project. However, it is possible to identify design criteria and construction procedures that will be used and on which cost estimates will be based. Thus, while the fixed amount reimbursement procedure cannot be applied, USAID could reimburse the HCIU for a fixed percentage of actual costs of completed subprojects. Under these circumstances, the actual costs to be shared by USAID should be either: Be defined in the project agreement, which would set forth the cost elements, or Be specified as an amount in an IL as soon as actual cost can be determined; after this point, the letter would not be subject to revision. FARA PROCUREMENT AND IMPLEMENTATION GUIDELINES USING FARA IN CONSTRUCTION 8

17 For the purposes of defining actual costs, liquidated damage recoveries by the host country (HC), if any, during its administration of the construction activity, need not be netted against total allowable costs. It may be assumed that damages, agreed to in writing in advance with independent contractors, would not exceed the real economic losses suffered by the HC due to construction delays or other contractual nonperformance. Prior to reimbursement USAID would require documentation and evidence that would verify actual costs expended for the subproject(s) and a certification by the borrower that the subproject(s) have been completed in accordance with agreed on design specifications and other criteria. In addition, USAID would provide for the inspection of the facilities under construction and final inspection of the completed subproject(s). The inspection could be made on a total or sample basis, depending on USAID s assessment of the capability of the borrower/implementing agency. At the outset, USAID would agree to finance a fixed ratio (e.g., 50%) of the actual cost of each subproject completed. If subproject costs increase, the Agency would be financing a larger amount than expected, although the ratio would remain the same. Unless the borrower is prepared to increase its contribution, cost escalation would lead to a reduction in the number of subprojects financed with USAID resources, because USAID s contribution to the overall project is fixed. This alternative is not as attractive as the fixed amount reimbursement procedure; however, there are still a number of advantages in using it: USAID s overall dollar commitment to the total project remains the same USAID does not increase its percentage contribution to an individual subproject; it will remain fixed USAID only reimburses for completed subprojects. If the subproject is not completed, USAID does not pay. Each of the methods, of course, has advantages and disadvantages that should be considered in making a determination of the method to be followed. DESIGNING A FARA (ADS 317) The fixed amount reimbursement method can be successfully utilized for many USAID-financed projects, both capital and non-capital. However, there are a number of points that should be taken into consideration when designing a FARA: Short-duration Projects Because of the financial burdens placed on the executing agency, the fixed amount reimbursement method seems to be the most appropriate for low-cost, short-term projects (generally two years or less), or projects that can be divided into segments small enough to enable the executing agency to complete subprojects or quantified elements within the project, before receiving USAID disbursement. Subprojects or elements should be generally of a nature that allows them to be completed in no more than 9 to 12 months from the date of initiation of work. Stand-alone Projects Subprojects or elements should be self-sustaining units that will be useful and desirable in their own right, regardless of whether other subprojects or elements are completed. A Large Number of Discrete Activities The fixed reimbursement method lends itself particularly well to projects under which a large number of physically separate construction FARA PROCUREMENT AND IMPLEMENTATION GUIDELINES USING FARA IN CONSTRUCTION 9

18 activities are to be carried out, or where a specific quantity of a commodity is to be produced. Where FARA Does Not Apply The fixed amount reimbursement method is not applicable where USAID disbursements are not related to identifiable goods or services but to other criteria, such as budgetary or administrative performance. failure to meet previously agreed upon specifications. In such cases, reimbursement must be refused. However, it is necessary that the Mission carefully evaluate the implications of such action on its relationship with the host government. It should also fully apprise the host country of the risks involved in the procedures that will be followed before deciding to use the fixed amount reimbursement system. Vetting Host Country Abilities It is particularly important that the Mission assure itself that the recipient organization has sufficient qualified staff and experience to proceed with effective implementation of the project. Adherence to USAID Requirements Use of the fixed amount reimbursement method requires that the Mission either through its own staff or through a contractor conduct periodic inspections of the project as well as certification that the subprojects or elements have been completed in accordance with plans and specifications. Because USAID reimbursement is based upon completed subprojects rather than actual costs, savings from the estimated costs will accrue to the recipient country or organization. It is thus particularly important that attention be given to guaranteeing that the projects be implemented in accordance with agreed plans and specifications, and that any possible collusion between implementing and inspection personnel concerning modifications in inputs be avoided. The Risks of Non-Reimbursement for Unacceptable Work An important criterion that must be met relates to the requirement that USAID make a determination that a subproject or element has been completed prior to reimbursement. It is quite probable that there will be cases where this determination will not be appropriate due to a Vetting Host Country Financial Resources The fixed amount reimbursement method assumes that the recipient country and host country implementing unit have sufficient financial resources to provide the working capital required for a project. This is necessary to ensure that delaying reimbursement until a subproject or element is completed will not have a detrimental effect on the project s implementation. The Mission should thoroughly analyze the financial standing, resources and budgetary procedures of the recipient organization prior to recommending the use of the fixed amount reimbursement method. The FARA method assumes that the HCIU has sufficient financial resources to provide the necessary working capital until a subproject or element is completed. FARA PROCUREMENT AND IMPLEMENTATION GUIDELINES USING FARA IN CONSTRUCTION 10

19 Project Approval Document The use of the FARA or other method should be discussed in the Project Approval Document together with an explanation of the method that will be followed to secure local currency resources. SCOPE, SIZE, AND COMPLEXITY OF WORK UNDER A FARA Although FARAs provide a feasible and practical approach for a wide variety of USAID-funded projects, it should be re-emphasized that the financial commitment created by a FARA could represent a major burden for some host countries. Similarly, the technical complexity of the work might be beyond the technical capabilities of the HCIU. Thus, when designing a FARA, the abovementioned issues should be taken in consideration. Ideally, these issues should be addressed as part of the project design prior to developing the grant agreement. It is reasonable to conclude that FARA has proven to be most appropriate vehicle for smallscale, simple technology, and short-duration projects. The terms of the FARA should allow for: 1 Fast reimbursement of the costs incurred by the host country for the entire project or stages of the work (especially in the case of the pure FARA) 2 Reimbursing the host country for the cost of engaging technical assistance or engineering consultants 3 Providing technical assistance to the HCIU throughout all phases of FARA design and implementation 4 Provisions to ensure sustainability COST SHARING AND TERMS OF PAYMENT The recipient government and USAID identify the project for which US assistance is desired, and calculate the estimated financial requirements for the total project as well as its subprojects. The recipient government may include in its cost estimates an amount for inflation over the expected period of project implementation (not to exceed two years), based on available information and studies. The recipient government then submits design specifications and cost estimates for review and approval by USAID. USAID then determines the amount of its contribution to the total project and the allocation of its contribution to specific subprojects and/or elements. The amount of USAID s contribution to the total project will be controlling. If unforeseen cost increases are encountered, they will be borne by the recipient. If costs are less than those estimated (for the same scope and specifications), USAID s contribution will not be reduced. The amount of USAID s contribution to the total project will be controlling. The recipient will bear any unforeseen costs increases. If the costs are less than originally estimated, USAID s contribution will not be reduced. In some cases USAID, for a number of reasons, may not have sufficient time to postpone executing a FARA until the designs are completed. This means that the estimated cost for the project to be handled under the FARA will not be sufficiently accurate. In this case, tying USAID s FARA PROCUREMENT AND IMPLEMENTATION GUIDELINES USING FARA IN CONSTRUCTION 11

20 share to a percentage of the cost, not to exceed a fixed amount, is a viable option. FARA STAGES AND SUBPROJECTS Stages are segments of the work that when completed, can operate if other parts of the work are not completed for any reason. Subprojects are self-sustaining units that, when completed, will be useful and desirable in their own right, regardless of whether other subprojects or elements are completed. Dividing FARAs into logical, well defined stages has great advantages. It allows USAID and the HCIU to: Keep track of the progress of project completion Set milestones to meet within a fixed time frame for stages or subprojects Ensure better cash flow for the HCIU Have a clear understanding of portions of the work that USAID may eventually not fully finance or ask for a refund of the amounts already paid to the HCIU. Operate the completed stages to serve the community before the overall project is completed. USAID S ROLE AND STAFFING REQUIREMENTS Two individuals and one group have major roles in a FARA: Mission Director The Mission Director or his/her designee should assure him/herself that the recipient organization is qualified to implement the FARA activity effectively (note the difference between host country contracting and FARAs). adequate for the FARA activity or whether USAID should oversee procurement transactions under the FARA. Strategic Objective/Results Package Team This team is responsible for ensuring compliance with the source, origin, and nationality requirements of the FARA. Activity Manager This individual is responsible for the overall management of the FARA throughout the design process, monitoring the project s progress, and verifying that the outputs meet the plan and design standards. This includes managing: The surveys required to identify feasible projects or to respond to a request from the host country for obtaining USAID funding. Determining if the project meets USAID s criteria for FARA financing, and requesting approval from Mission management. Developing the concept paper, Activity Approval Document, project description, grant agreement annex, estimated budget, etc. Regular monitoring and evaluation of the progress of work and ensuring that the outputs match the design standards. Providing guidance to the HCIU throughout various steps of the FARA. This requires teamwork and establishing good professional relationships with the HCIU and other stakeholders. This individual is also responsible for determining whether the recipient s procurement system is FARA PROCUREMENT AND IMPLEMENTATION GUIDELINES USING FARA IN CONSTRUCTION 12

21 HOST COUNTRY FINANCIAL, MANAGERIAL, AND CONTRACTING CAPABILITIES FARAs have separate, less stringent requirements and it is not necessary that the recipient organization under a FARA be host country certified. FARAs are governed under ADS 317 and a specific procurement assessment is not required. Rather, under ADS 317.5, the Mission Director or designee shall assure him/herself that the recipient organization is qualified to implement the FARA activity effectively. No other assessment requirements for FARAs are necessary. The Activity Approval Document should include a discussion of why USAID is convinced that the recipient organization is qualified. The less stringent requirements in assessing a recipient organization s qualifications under a FARA can be explained by the nature of FARAs. As noted in the ADS Supplementary Reference to ADS 317, the primary distinction between FARAs and the other disbursement methods such as host country contracts is that reimbursement is made for outputs rather than inputs. AID is, therefore, thus not concerned with the procedures the host country used in acquiring the inputs. It is merely concerned about the conformance of the outputs to previously agreed specifications or standards. The host country is not just a recipient of USAID funds. It is the eventual owner of the project and a partner of USAID. WORKING WITH THE HCIU It is essential to establish an excellent professional working relationship with the host country implementation unit (HCIU). All organizations have their strengths and weaknesses, and have regulations to follow. In the development field, it is extremely important to appreciate the challenges the HCIU faces. USAID personnel should thus work with the HCIU as a team and share the credit for success. USAID and the HCIU should appoint an authorized representative for each organization. Communications between the two organizations should take place through these authorized representatives. Joint site visits and regular monthly review meetings will help USAID and the HCIU monitor progress and identify issues early enough to take appropriate corrective actions. FARA PROCUREMENT AND IMPLEMENTATION GUIDELINES USING FARA IN CONSTRUCTION 13

22 4. USAID EXPERIENCE WITH FARA USAID has used FARA mechanisms in number of countries for projects of varying sizes and durations. USAID/Egypt, for example, has implemented several programs using different FARA models that respond to the different needs and capabilities of the HCIUs implementing USAID s projects. A clear example of this is USAID s FARA programs with the Alexandria Water Authority, which was founded in 1860, and the Sohag Water and Wastewater Company, which was established in This section provides a brief description of some of the FARA models employed by the Cairo Mission. SMALL-SCALE CONSTRUCTION USING LOCAL FIRMS USAID has used FARAs for small-scale construction activities using local construction contractors and qualified local engineering firms. This option is ideal if local engineering firms have the technical and managerial capacity to provide good-quality design and construction management (A&E) services and if the HCIUs have adequate (the minimum required to perform its role with some guidance from USAID and assistance from the local engineering firm) contracting and engineering capacity. Suef in the 1990s; and is currently being replicated in Assiut and Sohag under the same program. LARGE-SCALE CONSTRUCTION USING LOCAL AND US FIRMS FARAs are ideal on projects that employ local construction contractors and US engineering firms on large-scale, complex multidisciplinary construction activities involving advanced technologies. They are also financially feasible in instances where construction costs are high. This model has been employed successfully in Egypt on the Cairo Sewerage Program. One challenge faced by this and other similar projects is the capacity of the private sector construction companies to undertake large projects. This model has proven to be successful in Egypt in FARA programs under the Helwn Housing and Community Upgrading Project in the 1980s; under the Egypt Utilities Management Small Scale Construction Program in Minia, Fayoum, Beni- FARA PROCUREMENT AND IMPLEMENTATION GUIDELINES USAID EXPERIENCE 14

23 SMALL-SCALE CONSTRUCTION USING LOCAL AND US FIRMS Using FARAs that employ local construction contractors and US engineering firms on relatively small-scale construction activities is ideal if a US engineering firm is already providing architecture and engineering (A&E) services for other components of the program. The US firm should subcontract most of the work to local firms and the number of expatriates should be kept to the minimum required to provide overall program management. This ensures the financial feasibility of the A&E services in relation to construction costs. This model has proven to be successful in the Alexandria Water FARA program. Engaging a US engineering firm solely for the purpose of providing A&E services for a smallscale construction activity can be very costly and financially unfeasible, especially when mobilization costs are usually high. If this is the selected option, it is recommended that the US engineering firm subcontracts most of the work and have one or two expats to provide overall management. It is worth noting that the US A&E firm should draft simple specifications, invitations for bids, and contract documents (all in the local language) to suit the HCIU s requirements and capabilities. It should also make maximum use of locally available equipment and materials. References to US standards and specifications should be minimized, and specifications should be included. All requirements should be spelled out clearly to avoid unnecessary high bids due to bidders lack of familiarity with, or understanding of, US referenced specifications. For all three models, USAID still has the responsibility to conduct regular site visits and provide guidance to all parties. The level of USAID oversight and involvement might be higher for the first of these three models. FARA PROCUREMENT AND IMPLEMENTATION GUIDELINES USAID EXPERIENCE 15

24 5. SUSTAINABILITY ISSUES The sustainability of the facilities built under USAID programs has been, and continues to be, one of the Agency s major concerns. This is not a surprise, given that countries and their institutions differ in how they view proper operations and maintenance procedures, as well as preventive maintenance. In addition, it is important to realize that the actions required to ensure the sustainability of the facilities may require substantial resources that are not necessarily available to most Host Country Implementation Units. Operation and maintenance, and service contracts minimize sustainability risks. One way of trying to minimize the risk that a project will not be sustainable is to include a provision in the FARA for funding a reasonable period of operation and maintenance (usually two years). This O&M task should be carried out by the construction contractor as part of the original contractual arrangement. Another alternative is to require the HCIU to enter into a service contract with a qualified contractor to provide the essential services required to sustain the facility s operation. USAID may fund part or all of the duration of this contract. Although the options provided above could ensure the sustainability of the facilities for a given duration, they cannot guarantee that a facility will be properly utilized after it is completed, and more importantly, after USAID reimburses the host country for the full FARA amount. Following are some suggestions (based on USAID s experience in Egypt) that might be useful in addressing this issue: MONITORING AND EVALUATION Under the project grant agreement s recurring costs and monitoring and evaluation provisions, USAID has some tools to ensure the proper use of the facilities it has financed. These provisions specify monitoring and evaluation reports during the implementation of the project and at one or more points thereafter.. In addition, under the agreement s standard provision annex (the general covenants section), there are two clauses that address this concern: the Utilization of Goods and Services and the Refunds Clause. For a number of reasons, these clauses are very rarely used. CONDITIONAL FUNDING As a condition precedent in the grant agreement, additional funding can be tied to conditions and indicators that require the host country to demonstrate the proper utilization of the facilities. An example is the Egypt Utilities Management grant agreement, under which USAID tied the distribution of additional construction funding among four utilities to each utility s ability to carry out institutional reform actions according to a time schedule. This maximized the benefits from a FARA by using construction activities to leverage institutional reform. FARA PROCUREMENT AND IMPLEMENTATION GUIDELINES SUSTAINABILITY ISSUES 16

25 PERFORMANCE INDICATORS A memorandum of understanding (MOU) can be attached to the Implementation Letter. It would clearly spell out performance indicators for the project, and include a performance indicator matrix that would be updated quarterly. The issue associated with this method is that, at this point of the project, USAID will have little or no leverage if the HCIU does not meet the indicators of the MOU. COMMODITIES FINANCING USAID can employ end-use verification reports or end-use checks to address the proper utilization of commodities financed under a USAID project. The clause addressing commodities is very clear in ADS , and E End Use Checks, and can be used for projects in general after the completion of the programs. It applies to any USAID-funded project. to are presented to help the HCIU improve its systems and enhance its capabilities. A FARA is not only a mechanism to build a facility. It should also help in developing the capacity of HCIU personnel, as well as local engineers and construction contractors. A FARA allows USAID to fund a number of items that could help build the technical and financial capacities of the HCIU through: On-the-job training as part of the construction contract Upgrading HCIU systems Procurement and preventive maintenance programs Procurement of standard operating procedures manuals. BUILDING HOST COUTRY CAPACITY A FARA is not merely a mechanism to build a facility. It should also help in developing the technical and managerial capacities of the host country s officials, local engineering firms, and local construction contractors. Before designing a FARA, USAID should identify the resources and capabilities available. Then, it can design the FARA so that good opportunities FARA PROCUREMENT AND IMPLEMENTATION GUIDELINES SUSTAINABILITY ISSUES 17

26 6. CONSIDERATIONS PRIOR TO COMMITTING FUNDS There are several questions USAID should ask before committing its funds to finance an activity under a FARA. The seven most important questions are: Does the HCIU have the technical, managerial, and financial capabilities required for the FARA program? The lack of such capabilities would be a major problem in implementing a FARA. Under a FARA program, the HCIU is expected to: Undertake procurement action Provide initial funding until work is completed Administer the engineering and construction contracts. Are local consultants and contractors qualified to get the job done? If they are not, can this be addressed? Adequate designs, cost estimates, and construction management are essential for ensuring a project s success. It is extremely important that the host country has the local engineering capacity to perform the required engineering tasks. Is the proposed project feasible? The project s costs and capacity should be related to the benefits that will result from implementing it. To determine whether a project can meet these criteria, USAID should carefully review its feasibility studies. How will the project benefit the community? In some situations, communities will not benefit from a completed project if the project is part of a system that does not necessarily have to be completed on time. An example is a wastewater collection system where the wastewater treatment plant is not completed as scheduled. In such cases, the community will not be able to use the wastewater collection system because it will not be connected to a treatment facility. Thus, the completed system will remain unused. Is sustainability an issue? To ensure project sustainability, the HCIU should have an operations and maintenance plan. The HCIU can either implement the plan itself or outsource these functions. Are there any risks involved? Project risks would include, for example, land acquisition, rights of way, and such financial issues FARA PROCUREMENT AND IMPLEMENTATION GUIDELINES FUNDING CONSIDERATIONS 18

27 as the HCIU not having sufficient resources to fund the early stages of the project unless USAID reimburses it for completed stages. Does USAID have qualified staff to design and monitor the project s implementation? Missions should assess the technical and engineering capabilities of its staff and seek support from other Missions or hire an independent engineer to monitor the project regularly and inspect it prior to processing requests for reimbursement. FARA PROCUREMENT AND IMPLEMENTATION GUIDELINES FUNDING CONSIDERATIONS 19

28 7. LESSONS LEARNED AND RECOMMENDATIONS Several important lessons have emerged from the application of USAID projects using the FARA mechanism. These lessons, in turn, lead to nine major recommendations for the design and implementation of FARA projects. LESSONS LEARNED AND BEST PRACTICES Some Lessons Learned FARA is not simply a funding mechanism to procure equipment and services. It is also a tool for development. The host country is not merely a recipient of USAID funds. It is the eventual owner of the project and a USAID partner. Sustainability issues are serious and should be handled very carefully. Enhancing the HCIU s systems is a long-term benefit. It takes time to design a FARA program, so the USAID team and HCIU should be engaged as early as possible in the design process. The role of each party should be clearly specified it is better to resolve disagreements before starting a FARA program than to deal with disputes during implementation. Each party should stick to its role: doing less is unacceptable, while doing more is dangerous Interfering in the HCIU s selection process should be avoided in all cases; only make sure that agreed-upon procedures are being followed. Some Lessons Learned To encourage transparency, competition, the participation of the private sector, etc., USAID should be firm about its requirements. USAID is not a party to the contracts between the HCIU and the Engineer, consultant or contractor; it does not, and should not, have any contractual relationship with the Engineer, consultant or contractor. USAID should not give the HCIU written or verbal instructions; if this is observed, the HCIU s authorized representative should be contacted. USAID should consider exercising its right to ask the HCIU for a refund of the amount it has paid for work that was not completed. This may spur project participants to make efforts to meet the project s schedule. However, before this option is exercised, USAID should carefully evaluate its implications on the Agency s relationship with the host country government. Site visits are essential. They allow USAID s activity manager to gain a better understanding of the project s problems and progress. Joint site visits are preferable because they allow USAID and the HCIU to witness progress and determine issues. Land acquisitions and rights of way should be discussed with the HCIU as early as possible. The FARA should be prepared in English and this language would govern in case of any disagreement. A copy in the local language would ensure better understanding of the FARA s terms and conditions. Official correspondence between USAID and the HCIU should be in English. FARA PROCUREMENT AND IMPLEMENTATION GUIDELINES LESSONS LEARNED/ RECOMMENDATIONS 20

29 Some Lessons Learned The contractual documents between the HCIU and the provider of goods and services should be in the local language. An English version could be prepared for USAID s information. Success stories should be documented early, and plans should be made to have a public event when the work is completed. Demonstrating successes reflects well on USAID and the HCIU. RECOMMENDATIONS The following are some suggestions for consideration during the design and implementation of a FARA: Recommendations Reach preliminary agreement within USAID and with the HCIU on activities considered for funding through a FARA and on general procurement provisions. This includes developing selection criteria to prioritize proposed activities. Reach agreement with the HCIU on the scope of work and criteria for selecting local engineering consultants and construction contractors. Develop or obtain preliminary cost estimates for proposed activities from a qualified source. This estimate should be reviewed, and revised if needed, after design is completed. Use Implementation Letters (ILs) to document approvals, agreements, and major actions. Use ILs to formally advise the HCIU of USAID regulations and requirements for developing FARAs. Encourage competition and private sector participation. Also request to see contractors prequalification before requesting proposals or bids. USAID funds should cover a percentage of the anticipated cost of engineering, environmental, and construction services (the percentage varies based Recommendations on an agreement of the parties). For construction projects, the HCIU should engage a local engineering firm to: develop feasibility studies, conceptual designs, and final designs conduct environmental studies perform construction management services provide overall assistance to the HCIU in the procurement process. The Engineer develops the contractors prequalification documents and construction bid documents. Explain clearly to the HCIU that compliance with Title 22 of the US Code of Federal Regulations, Part 216, Environmental Procedures (22 CFR 216), is a condition to providing USAID funding. To implement these lessons learned and recommendations to the maximum extent possible, it is recommended that USAID: 1 Provide specific training to Missions on the design and implementation of FARAs 2 Assist Missions in the design and implementation of FARA programs 3 Provide general training to Agency personnel on the use of host country contracts in construction projects 4 Train contracting officer technical representatives on the use of host country contracts in construction projects 5 Provide training on public-private partnership approaches FARA PROCUREMENT AND IMPLEMENTATION GUIDELINES LESSONS LEARNED/ RECOMMENDATIONS 21

30 8. FARA STEPS: FROM CONCEPT PAPER TO PROJECT COMPLETION Before a FARA is signed, USAID needs to invest time in planning for the proposed activity. This is very important, as it is a major factor in a FARA s success. This section contains an illustrative list of guidelines for the steps and actions required prior to signing a FARA and throughout its implementation. 3. Visit facilities or project area During the visit, meet with the facility s management to gain a better understanding of the problem, efforts undertaken to date, and potential implementation challenges. You may also want to involve another team member with technical expertise. 1. Identify the problem, potential activity, and responsible HCIU This might be a USAID initiative or an initiative in response to a request from the host country to finance a specific project. 2. Discuss requested assistance and related activities with the HCIU Visiting the HCIU to discuss the requested assistance and related activities, as well as visiting its offices to meet with its senior and middle management will give USAID a better understanding of the HCIU s problems, work, and resources. Do not raise expectations, make commitments, or promise funding. Be clear that the objective of the visit is to gain a better understanding of the HCIU s needs and circumstances. 4. Review and assess the HCIU s contractual and financial capabilities This initial review and assessment will help determine whether the HCIU can do the job or if outside assistance is required. Assuming the HCIU possesses the required capabilities, move forward; otherwise, think of alternatives for enhancing weak areas. In some cases, USAID may have institutional strengthening programs for the same HCIU. This could be a good source for obtaining support in implementing FARAs. 5. Contact other donors Contact other donors that have ongoing related activities (of the same nature or with the same HCIU) to benefit from their experience, discuss plans, avoid duplication of efforts, and learn more about potential challenges. FARA PROCUREMENT AND IMPLEMENTATION GUIDELINES FARA STEPS 22

31 6. Develop a concept paper The concept paper should be based on an analysis of all factors affecting the project. It should briefly describe the problem, proposed solution, scope, estimated budget, USAID share, staffing requirements, and time schedule. amount or a fixed amount to each, and agree on a reasonable time schedule for implementation. 12. Obtain approvals Finalize USAID approval documents and obtain the required approvals. 7. Meet with the USAID team During the meeting, present your proposed project and obtain Mission approval of the concept paper. 8. Prepare documentation Depending on the program, prepare documentation for either a bilateral grant agreement or an Implementation Letter establishing the FARA program. 9. Meet with the HCIU A the meeting, share documents with the HCIU. Make sure that the HCIU understands and agrees to the terms and conditions in the document. Also make sure the HCIU understands the financial burden and the difference between: USAID paying the contractor for work completed USAID reimbursing the HCIU for costs already incurred and generally paid by the HCIU to the contractor. 10. Determine FARA type Based on the above, determine whether it is appropriate to use a pure FARA method or if it makes better sense to use one of its variations. 11. Discuss stages and subprojects Discuss with the HCIU proposed FARA stages and/or subprojects. Identify reasonable stages and subprojects, assign a percentage of the total FARA Issue Implementation Letter Issue an Implementation Letter (IL) to the HCIU to document the USAID agreement to fund the project under a FARA mechanism. Attach to the letter general guidelines and conditions of the FARA. This IL should also serve as USAID s consent for the HCIU to begin its procurement process for engaging a qualified local engineering consulting firm (the Engineer) to provide environmental studies, design and construction management services, and general procurement support to the HCIU throughout the design and construction process. Obtain the HCIU s formal acceptance of the FARA conditions. 14. Provide sample FARA Provide the HCIU with a sample FARA and attachments. 15. Select Engineer The HCIU, following its own procedures, selects a qualified Engineer and finalizes the contractual arrangements to procure the full range of design, environmental, and construction management services. 16. Develop documents The Engineer develops designs, schedules, final cost estimates, environmental studies, bid documents, and any other required documents. FARA PROCUREMENT AND IMPLEMENTATION GUIDELINES FARA STEPS 23

32 17. Review costs, environmental mitigation measures, and draft documents USAID reviews the final cost estimates, recommended environmental mitigation measures, and draft documents for compliance with USAID regulations (ADS 317 and 22 CFR 216), and other USAID specific-requirements (marking, branding, anti-terrorism, source and origin of commodities and services etc.). 18. Finalize FARA Work with the HCIU to finalize the FARA document including stages for payment. The HCIU signs the FARA and forwards signed copies to USAID. 19. Sign FARA USAID signs the FARA documents and subobligates funds. 20. Prequalify contractors The Engineer assists the HCIU in the prequalification of construction contractors and develops a short list, or includes contractors prequalification as part of the invitation for bid. (In this case, contractors submit a separate technical proposal to be evaluated at the beginning of the selection process). 21. Finalize bid documents The Engineer finalizes construction bid documents and starts the bidding process. 22. Receive bids The HCIU receives bids. The Engineer assists the HCIU in the evaluation process and in making a recommendation for award. 23. Sign contract The HCIU and selected construction contractor sign a contract and send a copy to USAID showing the actual bid price. 24. Provide engineering services The Engineer provides construction management services throughout all stages of construction. 25. USAID inspection USAID periodically inspects construction progress and compliance with regulations and environmental requirements. 26. Payment requests The HCIU submits to USAID requests for payments for each completed stage. The Engineer s certification that the work is in accordance with the scope and specifications should be attached to the reimbursement request. 27. Release funds USAID inspects completed stages and releases to the HCIU the agreed upon percentages of funds. 28. Conduct final inspection and release funds Upon completion of the work and receiving the Engineer s final certification, USAID conducts the final inspection of the completed project and releases the remaining funds. 29. Operations and maintenance The HCIU continues to operate the constructed facilities or outsources operation and maintenance functions to specialized firms. FARA PROCUREMENT AND IMPLEMENTATION GUIDELINES FARA STEPS 24

33 9. A FARA CASE STUDY T his section presents a case study that demonstrates the preparation of a FARA. THE FARASTAN WATER SECTOR SUPPORT PROGRAM On December 1, 2010, The United States Agency for International Development (USAID) and the Government of Farastan, acting through the Ministry of International Cooperation, signed a project grant agreement (PROAG) for support of Farastan s water sector. This PROAG builds on other ongoing World Bank efforts in Farastan. Under the terms of the PROAG, USAID agreed to provide US $30 million (thirty million US dollars) to support the Government of Farastan s policy and regulatory reform program for its troubled water sector through the following activities: 1 Two technical assistance contracts for strengthening local water and wastewater utilities at an estimated cost of $6 million over two years 2 A budget support program based on success in implementing the required reforms ($5 million) 3 Procurement of locally manufactured equipment for the non-functioning water and wastewater facilities ($3 million) 4 Procurement of laboratory equipment from the US ($4 million) 5 Partially fund the small-scale construction program in the underserved rural areas of Farastan over a period of 2 years ($12 million). The program will focus on building small-scale water treatment plants, pipelines, and household connections The Host Country Implementation Unit for this program is the newly established Farastan Water Authority (FWA). FWA was established in July 2009 and is currently trying to upgrade all the water systems in the rural areas at an estimated cost of $90 million. FWA s annual budget for the each of the next five years is $25 million, including $10 million for capital investment. In the rural areas, FWA will focus on building small-scale water treatment plants, transmission pipelines, distribution pipelines, and house connections. While some of the villages have wastewater collection and treatment, others expect to receive this service after three years, as planned. Some of the existing projects are facing implementation difficulties because of recent unexpected inflation and fluctuations in the exchange rate. Farastan relies on two local engineering firms to design capital investment projects. Contracts are usually awarded through a direct order mechanism. Construction contractors are a mix of private and public sector contractors. Most of the recent awards were made directly to public sector contractors at a much lower price than the market price. FWA has ongoing construction contracts in other areas of the country. FARA PROCUREMENT AND IMPLEMENTATION GUIDELINES IMPORTANT DOCUMENTS 25

34 FWA contacted USAID s Mission Director to discuss plans and implementation steps. USAID agreed to the required FARA program to support the Farastan Government. CASE STUDY QUESTIONS In developing the FARA and USAID positions, many questions need to be answered, including the following: 1 Who are the FARA parties? 2 What is the commitment document? 3 What activities are eligible for USAID funding? 4 Is the HCIU qualified? Are its procurement systems adequate? 5 Are there any financial challenges? 6 Are local engineering and construction capabilities adequate? 7 What is the procurement mechanism? 8 What are the environmental concerns? 9 Will the FARA include any stages or subprojects? 10 Will there be more than one FARA? 11 What would be USAID s contribution? 12 Are there any sustainability issues? 13 Does the Mission have engineering staff? 14 What rate of exchange should USAID use? FARA PROCUREMENT AND IMPLEMENTATION GUIDELINES AN ALTERNATIVE 26

35 10. AN ALTERNATIVE TO USING FARA The FARA mechanism is an excellent vehicle for USAID to use the host country s systems, as well as share the project s costs with the host country. Its benefits also extend beyond the completion of a facility or project by developing or improving the systems. and capabilities of the host country. FARA is also a practical way for ensuring sustainability and instilling a sense of ownership in the project. In addition, it minimizes USAID s liability and potential financial overruns. An alternative to using FARAs, especially on large and more complex projects, is the use of host country contracts. Both the FARA and HC contracts share similar characteristics. 1 USAID is not a party to the contract; ideally, its obligation is limited to the approved contract amount 2 USAID s liability is relatively limited 3 The HCIU has ownership of the project However, since USAID pays the contractor directly for work performed, it needs to assure itself that the procurement processes meet USAID host country contracting regulations, and that the work carried out by the contractor meets the contract conditions and specifications. Accordingly, it is recommended that a qualified independent technical consultant, the Engineer, be under a direct contracting arrangement with USAID. Another alternative would be to encourage publicprivate partnership (PPP) arrangements between the HCIU and service providers. Under such arrangements, private sector service providers would be responsible for the finance, design, construction, and operation of a facility to provide the required service. Such arrangements are usually long-term arrangements (15-25 years). The HC would pay a unit fee for the actual service received, but not less than an agreed upon amount regardless of the actual consumption for a certain period (usually a month). The unit fee usually covers the cost of financing the capital investment, operation and management costs, and the fee of the service provider. The HCIU would then collect the consumption fees from the consumers using its own systems. In this alternative, USAID could finance the technical assistance the HCIU requires to enter into such an arrangement. This could include the engineering, legal, environmental, and financial services needed to finalize such transactions and enter into a PPP arrangement. USAID may also provide assistance in the administration of the contract for an agreed upon contract. FARA PROCUREMENT AND IMPLEMENTATION GUIDELINES AN ALTERNATIVE 27

36 FARA Reimbursement Contract with Reimbursement Request Procurement of Construction Services Construction services Public Private Partnership Contract with Pay for Service Service FARA PROCUREMENT AND IMPLEMENTATION GUIDELINES SAMPLE IL 28

37 ANNEX A SAMPLE IMPLEMENTATION LETTER This annex presents an example of an Implementation Letter sent to the Host Country Implementing Unit. It states USAID s approval to fund a project under the FARA mechanism. Appended to the letter are the USAID General Requirements and Procedures for FARAs (Annex B) and a sample FARA (Annex C). (Name) (Director) (HCIU) (Address) Subject: (Grant Agreement Name) Assistance Agreement No. (number) Fixed Amount Reimbursement Program Implementation Letter (IL) No. (number) Dear (name): This Implementation Letter (IL) is in response to your letter dated (date), which requested USAID assistance to fund several construction activities in (project location). This IL shall serve as USAID s concurrence to provide funding support to a number of the activities listed in your letter, from the (name) Assistance Agreement No. (number) subject to the availability of funds and our mutual agreement of the final list of selected projects. This letter also constitutes USAID s consent for the (HCIU) to begin its procurement process for engaging a local qualified consulting firm to provide full environmental, design, and construction management services to (HCIU) throughout the design and construction process. FARA PROCUREMENT AND IMPLEMENTATION GUIDELINES SAMPLE IL 29

38 USAID intends to fund the new activities utilizing the Fixed Amount Reimbursement Agreement (FARA) mechanism. The general requirements and procedures for FARAs are attached to this letter. Please sign your name in the space provided below to confirm your agreement to the terms and conditions of the attachment. Please return the original to USAID and keep a copy for your records. We look forward to continued cooperation with (HCIU). Sincerely, (USAID Authorized Representative) Concurrence: Director HCIU Attachments: 1) USAID General Requirements and Procedures for FARAs 2) An Example of a FARA FARA PROCUREMENT AND IMPLEMENTATION GUIDELINES SAMPLE IL 30

39 ANNEX B USAID GENERAL REQUIREMENTS AND PROCEDURES FOR FARA This annex contains Attachment 1 to the Implementation Letter (Annex A). 1. USAID is required to ensure that the (HCIU) has and maintains the following requirements: a procurement system in place that can effectively administer contract award and voucher procedures for the required services, including construction services sufficient qualified staff and experience to effectively implement and monitor projects that employ the FARA mechanism sufficient financial resources to finance the new activities professional design and engineering construction management services in place for the design, management, and oversight for all aspects of the construction work. 2. FARAs are subject to, and shall be implemented in accordance with, all terms and conditions set forth in the Assistance Agreement and applicable USAID rules and regulations. 3. A FARA will be written for each construction activity and will consist of stages along with a description of the work included in that stage. Each stage shall be a self-sustaining unit that is useful and desirable in its own right regardless of whether other stages are completed and approved for payment. Each stage shall also be assigned a value in local currency with an equivalent USD amount based on the current exchange rate. FARA PROCUREMENT AND IMPLEMENTATION GUIDELINES REQUIREMENTS AND PROCEDURES 31

40 4. (HCIU) shall procure a local engineering firm (Engineer) to: (1) provide environmental and design services and assistance in the development of technical specifications (2) develop project cost proposals (3) draft FARA documents (4) monitor the construction of projects implementation under FARAs to ensure that the work meets the required technical specifications (5) provide certifications of satisfactorily completed construction work for projects, stages or quantified elements of work implemented under FARAs. 5. (HCIU) shall use its own funds to implement all construction work for the new activities. Pursuant to a FARA, USAID will reimburse (HCIU) for the amount assigned to each stage within the respective FARA following the satisfactory completion of the work described in such stage and the Engineer s issuance of a certification to (HCIU), with a copy to USAID, stating that the work of said stage has been satisfactorily completed. It is particularly important that (HCIU) guarantee that the stages are constructed in accordance with the approved project design and technical specifications set forth in the construction activity. 6. The total amount of the USAID reimbursement under a FARA agreement shall be fixed in advance. Savings from the fixed amount (for the same design scope and specification) will accrue to (HCIU) and correspondingly, unforeseen cost increases will be borne solely by (HCIU). 7. USAID will monitor the construction activities and conduct periodic inspections of the plants/facilities to ensure that construction is being implemented in accordance with the agreed upon terms and technical specifications set forth in the FARA, and to facilitate final inspection and certification of satisfactorily completed work by the Engineer. 8. USAID reimbursement for the new activities shall not exceed 90% 2 of the total estimated cost. Pursuant to the Assistance Agreement, the Government of (Host Country) s contribution shall be no less than 10% of the total estimated cost. 9. The completion date of these new activities that are reimbursable by USAID through the FARA mechanism shall not extend beyond the Project Assistant Completion Date (PACD) of the Assistance Agreement. 10. (HCIU) shall not use public sector consultants/contractors/firms for the new activities that are reimbursed by USAID through the FARA mechanism. 11. Commodities financed under FARAs shall have their source and origin USAID Geographic Code 000, (Host Country), or be imported from a country included in USAID Geographic Code 935 for general resale in the Host Country, and not for the specific work called for under the FARA. The total value of imported shelf item procurement shall not constitute more than 25% of the estimated total cost of the commodity element of this project except as USAID may have otherwise agreed in writing. (HCIU) shall also 2 The Mission can choose any figure, but this percentage is usually between 70% and 90%. FARA PROCUREMENT AND IMPLEMENTATION GUIDELINES REQUIREMENTS AND PROCEDURES 32

41 certify that to the best of its information and belief, none of such commodities contain components imported from other than Free World (USAID geographic code 935) countries. FARA PROCUREMENT AND IMPLEMENTATION GUIDELINES REQUIREMENTS AND PROCEDURES 33

42 ANNEX C SAMPLE FARA This annex contains Attachment 2 to the Implementation Letter (Annex A). (Host Country ) Project Agreement No FIXED AMOUNT REIMBURSEMENT AGREEMENT BETWEEN (Host Country) AND THE UNITED STATES AGENCY FOR INTERNATIONAL DEVELOPMENT FOR CONSTRUCTION OF A (Project Name) IN (Geographic Location) FARA No. (Number) FARA PROCUREMENT AND IMPLEMENTATION GUIDELINES SAMPLE FARA 34