SANTA ROSA, Texas—During a recent afternoon storm, brothers Angel and Salvador Badillo sat under a tin roof with a couple of friends, sipping beers as the open drainage ditch in front of their clapboard house filled like a moat.

Soon, neighbors’ septic tanks could begin to overflow, creating a smelly and potentially disease-ridden mess.

The homes in Grande Acres—a colonia, or slapped-together neighborhood, on low-lying land 12 miles north of the Rio Grande—were supposed to get sewer service years ago through a nearly $4 million grant from the Environmental Protection Agency. But the city of Santa Rosa, of which Grande Acres is a part, failed to take advantage of the money, and the 2002 grant expired.

In fact, at least $78 million of the $300 million appropriated by Congress during the 1990s to improve Texas’ colonias has gone unspent, according to a recent EPA audit. And with construction costs and other expenses soaring, numerous colonias have had to scale back or give up on some projects.

The EPA says some small-town governments lack the professional staff needed to pull off some of these complex projects, while other ventures have been torpedoed by local infighting and bungling. The audit also accused the EPA of lax oversight that allowed projects to drift.

More than 400,000 people in Texas live in colonias, often-ramshackle communities on unincorporated land close to the border. The colonias consist of shacks, trailers and some well-kept frame houses. Many lack safe drinking water, sewer systems or electricity. During the 1990s, as cities looking for tax revenue began to annex colonias, and their residents gained citizenship and voting power, state and federal politicians began dispensing millions to lift colonia residents out of their squalor.

Lionel Lopez, founder of the South Texas Colonia Initiative, a nonprofit organization that works to improve conditions in colonias, said he was shocked to learn there was so much money sitting unspent.

“To me it’s mind-boggling,” Lopez said. “The bottom line is the little people are the ones who are going to be hurt.”

In Santa Rosa, Javier Mendez, the former city administrator, said the sewer project was foiled by a delay in land acquisition and confusion over the new housing codes the city was supposed to adopt. Also, turnover in the city attorney’s office resulted in conflicting interpretations of the rules governing the project, Mendez said. The grant finally expired.