Millennium Challenge Corporation: Progress Made on Key Challenges
in First Year of Operations (27-APR-05, GAO-05-625T).		 
                                                                 
In January 2004, Congress established the Millennium Challenge	 
Corporation (MCC) to administer the Millennium Challenge Account.
MCC's mission is to promote economic growth and reduce extreme	 
poverty in developing countries. The act requires MCC to rely to 
the maximum extent possible on quantitative criteria in 	 
determining countries' eligibility for assistance. MCC will	 
provide assistance primarily through compacts--agreements with	 
country governments. MCC aims to be one of the top donors in	 
countries with which it signs compacts. For fiscal years 2004 and
2005, Congress appropriated nearly $2.5 billion for the 	 
Millennium Challenge Corporation; for fiscal year 2006, the	 
President is requesting $3 billion. GAO was asked to monitor	 
MCC's (1) process for determining country eligibility, (2)	 
progress in developing compacts, (3) coordination with key	 
stakeholders, and (4) establishment of management structures and 
accountability mechanisms.					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-625T					        
    ACCNO:   A22807						        
  TITLE:     Millennium Challenge Corporation: Progress Made on Key   
Challenges in First Year of Operations				 
     DATE:   04/27/2005 
  SUBJECT:   Accountability					 
	     Agency missions					 
	     Appropriated funds 				 
	     Appropriations					 
	     Developing countries				 
	     Economic development				 
	     Economic growth					 
	     Eligibility criteria				 
	     Eligibility determinations 			 
	     Foreign economic assistance			 
	     Foreign governments				 
	     Grants						 
	     Internal controls					 
	     International agreements				 
	     Performance measures				 
	     Strategic planning 				 
	     Government agency oversight			 
	     Stakeholder consultations				 
	     MCC Threshold Program				 

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GAO-05-625T

     

     * Summary
     * Background
          * Candidate Countries
          * Eligibility Determinations
          * MCA Compacts
          * Threshold Program
          * MCC Governance
     * MCC Used Quantitative Indicators and Judgment to Determine Country
       Eligibility; Process Involves Ongoing Challenges
          * MCC Used Quantitative Indicators and Judgment to Determine
            Eligibility
          * Not All Source Data for Quantitative Indicators Were Publicly
            Accessible
          * Use of Quantitative Indicators Had Some Inherent Limitations
     * MCC Is Refining Its Compact Development Process
          * MCC Has Received a Number of Proposals and Is Negotiating Several
            Compacts
          * MCC Continues to Refine Its Compact Development Process
          * MCC Has Identified Elements of Program Implementation and Fiscal
            Accountability Framework
     * MCC Is Taking Steps to Coordinate with Key Stakeholders
          * U.S. Agencies Are Contributing Resources and Technical Assistance
          * MCC Is Consulting with Other Donors and Using Donor Expertise
          * MCC Has Met with NGOs
     * MCC Has Made Progress in Developing Management Structures but Has Not
       Completed Corporatewide Plans, Strategies, and Time Frames
          * Administrative Infrastructure
          * Accountability
          * Corporate Governance
          * Internal Control
          * Human Capital Management
     * Conclusions
     * Recommendations for Executive Action
     * Agency Comments and Our Evaluation
     * Contacts and Acknowledgments
     * Appendix I: Scope and Methodology
     * Appendix II: Candidate and Eligible Countries for MCA and Threshold
       Programs, Fiscal Years 2004-2005
     * Appendix III: Indicators Used in the Selection Process
     * Appendix IV: Threshold Program Selection Process
     * Appendix V: Timeline of Key Events
     * Appendix VI: Donors in MCA Compact-eligible Countries
     * Appendix VII: MCC Coordination with Key Stakeholders
     * Appendix VIII: MCC Organizational Structure
          * 
               * Order by Mail or Phone
     * Untitled.pdf
          * Summary
          * Background
               * Candidate Countries
               * Eligibility Determinations
               * MCA Compacts
               * Threshold Program
               * MCC Governance
          * MCC Used Quantitative Indicators and Judgment to Determine
            Country Eligibility; Process Involves Ongoing Challenges
               * MCC Used Quantitative Indicators and Judgment to Determine
                 Eligibility
               * Not All Source Data for Quantitative Indicators Were
                 Publicly Accessible
               * Use of Quantitative Indicators Had Some Inherent Limitations
          * MCC Is Refining Its Compact Development Process
               * MCC Has Received a Number of Proposals and Is Negotiating
                 Several Compacts
               * MCC Continues to Refine Its Compact Development Process
               * MCC Has Identified Elements of Program Implementation and
                 Fiscal Accountability Framework
          * MCC Is Taking Steps to Coordinate with Key Stakeholders
               * U.S. Agencies Are Contributing Resources and Technical
                 Assistance
               * MCC Is Consulting with Other Donors and Using Donor
                 Expertise
               * MCC Has Met with NGOs
          * MCC Has Made Progress in Developing Management Structures but Has
            Not Completed Corporatewide Plans, Strategies, and Time Frames
               * Administrative Infrastructure
               * Accountability
               * Corporate Governance
               * Internal Control
               * Human Capital Management
          * Conclusions
          * Recommendations for Executive Action
          * Agency Comments and Our Evaluation
          * Contacts and Acknowledgments
          * Appendix I: Scope and Methodology
          * Appendix II: Candidate and Eligible Countries for MCA and
            Threshold Programs, Fiscal Years 2004-2005
          * Appendix III: Indicators Used in the Selection Process
          * Appendix IV: Threshold Program Selection Process
          * Appendix V: Timeline of Key Events
          * Appendix VI: Donors in MCA Compact-eligible Countries
          * Appendix VII: MCC Coordination with Key Stakeholders
          * Appendix VIII: MCC Organizational Structure
               * 
                    * Order by Mail or Phone

                 United States Government Accountability Office

Testimony

GAO

Before the Committee on International Relations, House of Representatives

For Release on Delivery Expected  MILLENNIUM CHALLENGE                     
at 10:30 a.m. EDT Wednesday,      
April 27, 2005                    
                                     CORPORATION                              
                                     Progress Made on Key Challenges in First 
                                     Year of Operations                       
                                     Statement of David B. Gootnick, Director 
                                     International Affairs and Trade          
                                     Jeanette M. Franzel, Director Financial  
                                     Management and Assurance                 

GAO-05-625T

Highlights of GAO-05-625T, testimony before the House International
Relations Committee

In January 2004, Congress established the Millennium Challenge Corporation
(MCC) to administer the Millennium Challenge Account. MCC's mission is to
promote economic growth and reduce extreme poverty in developing
countries. The act requires MCC to rely to the maximum extent possible on
quantitative criteria in determining countries' eligibility for
assistance. MCC will provide assistance primarily through
compacts-agreements with country governments. MCC aims to be one of the
top donors in countries with which it signs compacts.

For fiscal years 2004 and 2005, Congress appropriated nearly $2.5 billion
for the Millennium Challenge Corporation; for fiscal year 2006, the
President is requesting $3 billion. GAO was asked to monitor MCC's (1)
process for determining country eligibility, (2) progress in developing
compacts, (3) coordination with key stakeholders, and (4) establishment of
management structures and accountability mechanisms.

GAO recommends that MCC's Chief Executive Officer continue to develop and
implement overall plans and related time frames to establish corporatewide
accountability, internal control, and human capital management. In
addition, GAO recommends that MCC's Board of

April 27, 2005

MILLENNIUM CHALLENGE CORPORATION

Progress Made on Key Challenges in First Year of Operations

For fiscal years 2004 and 2005, the MCC board used the quantitative
criteria as well as judgment in determining 17 countries to be eligible
for MCA compacts. Although MCC chose the indicators based in part on their
public availability, our analysis showed that not all of the source data
for the indicators were readily accessible. In addition, we found that
reliance on the indicators carried certain inherent limitations, such as
measurement uncertainty.

Between August 2004 and March 2005, MCC received compact proposals,
concept papers, or both, from 16 eligible countries. It signed a compact
with Madagascar in April 2005 and is negotiating compacts with four
countries. MCC's 4-year compact with Madagascar for $110 million would
make it the country's fifth largest donor. MCC is continuing to refine its
compact development process. In addition, MCC has identified elements of
program implementation and fiscal accountability that can be adapted to
eligible countries' compact objectives and institutional capacities.

MCC is taking steps to coordinate with key stakeholders to use existing
expertise and conduct outreach. The U.S. agencies on the MCC Board of
Directors-USAID, the Departments of State and Treasury, and the Office of
the U.S. Trade Representative-have provided resources and other assistance
to MCC, and five U.S. agencies have agreed to provide technical
assistance. Bilateral and multilateral donors are providing information
and expertise. MCC is also consulting with nongovernmental organizations
in the United States and abroad as part of its outreach activities.

MCC has made progress in developing key administrative infrastructures
that support its mission and operations. MCC has also made progress in
establishing corporatewide structures for accountability, governance,
internal control, and human capital management, including establishing an
audit capability through its Inspector General, adopting bylaws, providing
ethics training to employees, and expanding its permanent full-time staff.
However, MCC has not yet completed comprehensive plans, strategies, and
related time frames for establishing these essential management structures
and accountability mechanisms on a corporatewide basis.

Directors consider, in addition to its statutory responsibilities, other
responsibilities associated with sound and effective governance.

Selected Elements of MCC Progress as of April 2005

Compact-related activities

www.gao.gov/cgi-bin/getrpt ?GAO-05-625T.

To view the full product, including the scope and methodology, click on
the link above. For more information, contact David B. Gootnick at (202)
512-4128 or Source: GAO. [email protected].

Mr. Chairman and Members of the Committee:

Thank you for the opportunity to discuss GAO's findings and observations
regarding the Millennium Challenge Corporation's (MCC) first year of
operations.

In January 2004, Congress established MCC, 1 a government corporation, to
administer the Millennium Challenge Account (MCA). MCC's mission is to
provide development assistance that reduces extreme poverty through
economic growth and strengthens good governance, economic freedom, and
investments in people. MCC is to carry out its mission by funding projects
or activities in developing countries that demonstrate a commitment to MCA
objectives. MCC assistance is intended to supplement existing development
assistance provided by the United States or other donors; to provide
incentive, MCC aims to be among countries' largest donors. The Millennium
Challenge Act of 2003 authorizes assistance in the form of grants,
cooperative agreements, and contracts, which MCC will administer through
compacts-agreements between the

U.S. government and recipient countries' governments. Candidate countries
are expected to develop compact proposals to secure MCA funding and manage
MCC-funded projects.

The act requires the MCC Board of Directors to determine a country's
eligibility for assistance, based, to the maximum extent possible, on
objective and quantifiable indicators of the country's commitment to
specific criteria set out in the act. 2 MCC is also required to provide to
Congress justifications for the board's eligibility determinations and to
coordinate its activities with those of the U.S. Agency for International
Development (USAID). The act also authorizes MCC to help certain candidate
countries achieve eligibility, which MCC does through its

1

Millennium Challenge Act of 2003, Public Law 108-199, Division D, Title VI
of the Consolidated Appropriations Act, 2004. Also, Title II, Division D
of this act established the Millennium Challenge Account for MCC
appropriations.

2

For fiscal years 2004 and 2005, MCC established an eligibility methodology
that rates countries on 16 indicators, which are selected in part based on
their objectivity and public availability. The indicators are arranged
under the three policy categories-Ruling Justly, Investing in People, and
Encouraging Economic Freedom. To be eligible, countries must score above
the median on at least half of the indicators in each category and above
the median on an indicator for combating corruption.

                                    Summary

Threshold Program. 3 For fiscal years 2004 and 2005, Congress appropriated
nearly $1 billion and $1.5 billion, respectively, for MCC; for fiscal year
2006, the President is requesting $3 billion.

Today I will discuss MCC's activities during its first 15 months,
specifically, its (1) process for determining country eligibility for
fiscal years 2004-2005, (2) progress in developing compacts, (3)
coordination with key stakeholders, and (4) establishment of management
structures and accountability mechanisms.

To address these objectives, GAO analyzed MCC's process for determining
country eligibility, including countries' scores for the quantitative
indicators and the scores' source data for fiscal years 2004 and 2005; we
also examined the selection criteria for the Threshold Program. We
determined that these and other data that we used were sufficiently
reliable for our analysis. In addition, we reviewed MCC documents,
countries' compact proposals and an MCC compact, and reports by USAID and
GAO. We conducted interviews with, among others, officials from MCC, U.S.
government agencies, and nongovernmental organizations (NGOs), and we
attended MCC public outreach meetings in Washington,

D.C. In January 2005, we visited Honduras, one of four countries with
which MCC was negotiating at that time, where we met with officials from
the Department of State, USAID, MCC, and the Honduran government, as well
as donor representatives and local NGOs. We performed our work between
April 2004 and April 2005 in accordance with generally accepted government
auditing standards. (See app. I for further details of our scope and
methodology.)

The MCC Board of Directors based its determinations of countries'
eligibility for MCA assistance on a quantitative indicator methodology, as
required by the Millennium Challenge Act; at the same time, the process
involved certain challenges. Applying its 16 quantitative indicators and
exercising the discretion implicit in the act, the board selected a total
of 17 countries as eligible for compact assistance for fiscal years 2004
and 2005. MCC did not provide Congress its justifications for the 13
countries that met the indicator criteria but were not deemed eligible;
the Millennium

3

The Threshold Program provides assistance to improve scores on the 16
indicators for candidate countries that are not deemed eligible but
demonstrate a significant commitment to meeting MCC eligibility
requirements.

  Page 2 GAO-05-625T

Challenge Act does not require MCC to provide justifications for not
selecting countries. In addition, although MCC published country scores
for the 16 indicators at its Web site, some of the source data used to
generate these scores were not readily available to the public. Our
analysis of the results of MCC's eligibility determinations also revealed
some inherent limitations of MCC's indicator methodology. For instance,
measurement uncertainty may have affected the eligibility determination
for 17 countries, and missing data for two indicators may have reduced the
number of countries that passed the Economic Freedom category.

MCC is refining the compact development process and has taken steps to
identify country-level program implementation and fiscal accountability
elements. Between August 2004 and March 2005, MCC received compact
proposals, concept papers, or both, from 16 eligible countries. It signed
a 4-year compact with Madagascar for $110 million in April 2005 and is
negotiating compacts with 4 other countries. MCC's compact with Madagascar
would make it the country's fifth largest donor. MCC's compact development
process currently involves the following steps:

(1)
           proposal development, (2) proposal submission and initial
           assessment,

(3)
           detailed proposal assessment and negotiation, and (4) board review
           and compact signing. In addition, MCC has identified elements of a
           program implementation and fiscal accountability framework that
           can be adapted to eligible countries' compact objectives and
           institutional capacities.

MCC has initiated coordination of program activities with U.S. agencies,
other donors, and U.S.-based NGOs. U.S. agencies represented on the MCC
Board of Directors-USAID, the Departments of State and Treasury, and the
Office of the U.S. Trade Representative (USTR)-have provided advice,
resources, and assistance to MCC. In addition, MCC has signed agreements
with five U.S. agencies for programmatic and technical assistance. Key
bilateral and multilateral donors are providing information and expertise,
such as country briefings and assessments, to MCC. In addition, MCC is
consulting with some U.S.-based NGOs and has met with country-based NGOs.
However, several U.S.-based NGOs have raised questions about the
involvement of U.S.-based NGOs and country-based civil society groups.

MCC has made progress in establishing key management structures and
elements of accountability mechanisms, but it has not yet developed
essential corporatewide plans, strategies, and time frames. MCC's
accomplishments in its first 15 months included setting up key
administrative infrastructures to support its initial and ongoing program

                                   Background

implementation, establishing an audit and review capability through its
Inspector General (IG), adopting bylaws for its Board of Directors,
providing ethics training to employees, and expanding its permanent
full-time staff. However, MCC has not yet completed the plans, strategies,
and time frames needed to establish corporatewide structures for
accountability, governance, internal control, and human capital
management. For example, the MCC board has not fully defined its
responsibilities for overseeing corporate management, and MCC management
has not yet completed its institutional infrastructure that aligns human
capital planning and performance management with the corporation's goals
and mission.

We recommend that MCC's Chief Executive Officer continue to develop and
complete overall plans and related time frames to address corporatewide
accountability, establish comprehensive internal control over program and
administrative operations, and institute an effective human capital
infrastructure. In addition, we recommend that the Secretary of State, in
her capacity as Chair of the MCC Board of Directors, ensure that the board
considers and defines the scope of its responsibilities with respect to
corporate governance and oversight and develops an overall plan or
strategy, with related time frames, for carrying out these
responsibilities. In doing so, the board should consider, in addition to
its statutory responsibilities, other corporate governance and oversight
responsibilities commonly associated with sound and effective corporate
governance practices. MCC provided technical comments on a draft of this
report and agreed to take our recommendations under consideration.

Each fiscal year, the Millennium Challenge Act requires MCC to select
countries as eligible for MCA assistance by identifying candidate
countries, establishing an eligibility methodology, and making eligibility
determinations. MCC evaluates eligible countries' proposals and negotiates
compacts, which must be approved by the MCC board. The Threshold Program
assists countries that are not deemed eligible but show a commitment to
MCA objectives. MCC is governed by a board of directors consisting of U.S.
government and other representatives.

Candidate Countries

For fiscal year 2004, the Millennium Challenge Act limited candidates to
low-income countries-those with per capita incomes less than or equal to
the International Development Association (IDA) cutoff for that year
($1,415)-that also were eligible for IDA assistance. 4 This provision
limited candidacy in the MCA's first year to the poorest low-income
countries. For fiscal year 2005, candidates were required only to have
incomes less than or equal to the IDA ceiling for that year ($1,465). 5
Additionally, for fiscal years 2004 and 2005, candidates could not be
ineligible for U.S. economic assistance under the Foreign Assistance Act
of 1961. (See app. II for a list of candidate countries for fiscal years
2004 and 2005.)

                           Eligibility Determinations

The Millennium Challenge Act requires that the MCC board base its
eligibility decisions, "to the maximum extent possible," on objective and
quantifiable indicators of a country's demonstrated commitment to the
criteria enumerated in the act. MCC selected its indicators based on their
relationship to growth and poverty reduction, the number of countries they
cover, their transparency and public availability, and their relative
soundness and objectivity. 6

For fiscal years 2004 and 2005, MCC's process for determining country
eligibility for MCA assistance had both a quantitative and a discretionary
component (see fig. 1). MCC first identified candidate countries that
performed above the median in relation to their peers on at least half of
the quantitative indicators in each of the three policy categories-Ruling
Justly, Investing in People, and Encouraging Economic Freedom-and above
the median on the indicator for control of corruption. (See app. III for a
table describing the indicators, listing their sources, and summarizing
the methodologies on which they are based.) In addition, MCC considered

4

The IDA, an arm of the World Bank Group, provides long-term interest-free
loans and grants to the poorest developing countries with limited access
to private sources of capital.

5

For fiscal year 2006 and beyond, the Millennium Challenge Act requires
that candidates for MCA assistance (1) be either low-income or
lower-middle-income countries and (2) not be ineligible for U.S. economic
assistance under the Foreign Assistance Act of 1961. The act defines
lower-middle-income countries as those classified as such by the World
Bank with incomes above the IDA ceiling. MCA assistance to the
lower-middle-income countries may not exceed 25 percent of the total
amount of assistance to all countries for that year.

6

See Millennium Challenge Corporation, "Report on the Criteria and
Methodology for Determining the Eligibility of Candidate Countries for
Millennium Challenge Account Assistance in FY 2004, Annex A: Indicator
Definitions" (available at:
http://www.mca.gov/about_us/congressional_reports/index.shtml).

other relevant information-in particular, whether countries that scored
substantially below the median (at the 25th percentile or lower) on an
indicator were addressing any shortcomings related to that indicator. MCC
also considered supplemental information to address gaps, lags, or other
data weaknesses as well as additional material information. 7

MCC's fiscal year 2004 and 2005 methodology reports state that, where the
act stipulates criteria for which there is limited quantitative
information (e.g., rights of people with disabilities) or no
well-developed performance indicator (e.g., sustainable management of
natural resources), the MCC board relies on supplemental data and
qualitative information such as State Department Human Rights reports,
access to sanitation, deforestation, and trade in endangered species.

Page 6 GAO-05-625T

Figure 1: MCC's Process for Determining Country Eligibility

Source: GAO analysis of MCC selection process.

aThe fiscal year 2004 and 2005 medians for the 16 indicators were based on
the scores of all countries meeting the income criteria, including those
countries that are ineligible to receive U.S. economic assistance under
the Foreign Assistance Act.

bFor fiscal year 2004, MCC used the Primary Education Completion Rate.

c

Average of immunization rates for DPT3-diphtheria, pertussis and
tetanus-and measles.

d

For the consumer price inflation indicator, countries are not required to
score higher than the median; instead, inflation rates must not exceed 20
percent for fiscal year 2004 or 15 percent for fiscal year 2005.

                                  MCA Compacts

The Millennium Challenge Act requires that, within 5 days of the board's
eligibility determinations, the MCC Chief Executive Officer submit a
report to congressional committees containing a list of the eligible
countries and "a justification for such eligibility determination" and
publish the report in the Federal Register.

Eligible countries are invited to submit compact proposals, which are to
be developed in consultation with members of civil society, including the
private sector and NGOs. However, a country's eligibility does not
guarantee that MCC will sign and then fund a compact with that country.
MCC is to sign compacts only with national governments. 8 Under the act,
the duration of compacts is limited to a maximum of 5 years; MCC expects
to approve compacts with durations of 3 to 5 years. MCA funds are not
earmarked for specific projects or countries, and money not obligated in
the fiscal year for which it was appropriated can be used in subsequent
fiscal years. For fiscal years 2004 and 2005, Congress has directed that
MCC use its existing appropriations to fully fund a compact-that is,
obligate the entire amount anticipated for the compact's duration. 9
Funding for compacts and the Threshold Program must be drawn from the
appropriation for the fiscal year in which the country was eligible. MCC
aims to be among the largest donors in recipient countries, which,
according to MCC officials, creates incentive for eligible countries to
"buy into" MCC's principles of policy reform, sustainable economic growth,
country partnership, and results.

Threshold Program The Millennium Challenge Act authorizes a limited amount
of assistance to certain candidate countries to help them become eligible
for MCA assistance. These candidate countries must (1) meet the fiscal
year 2004 or 2005 requirements for MCA candidacy and (2) demonstrate a
significant commitment to meeting the act's eligibility criteria but fail
to meet those

8

The Millennium Challenge Act authorizes assistance to the national
government of an eligible country, regional or local governmental units of
the country, or a nongovernmental organization or private entity.

9

The Consolidated Appropriations Act, 2005, provides that funds
appropriated for MCC for fiscal years 2004 and 2005 are available for
compacts only if the compacts obligate, or commit to obligate (subject to
availability of funds and agreement of the parties), the entire amount
anticipated for the compact's duration. See Public Law 108-447, Division
D, Title II, 118 Stat. 2809, 2980.

requirements. 10 MCC has implemented these legislative provisions as its
Threshold Program. Figure 2 compares features of MCC compact and Threshold
Program assistance; appendix IV describes the Threshold Program.

      Figure 2: Comparison of MCC Compact Assistance and Threshold Program

Source: GAO synthesis of MCC information.

a

According to MCC, participation in the Threshold Program does not
guarantee future eligibility for compact assistance.

bIncludes funds for administrative expenses but excludes $40 million set
aside for fiscal year 2004 and $150 million (up to 10 percent of total MCC
appropriations) in fiscal year 2005 for the Threshold Program. As of April
2005, MCC had not determined the amount of funding set aside for the
fiscal year 2005 Threshold Program.

cThe MCC board could authorize additional Threshold Program funding of up
to 10 percent ($99.4 million) of fiscal year 2004 MCC appropriations.

10

The act limited this type of assistance to 10 percent of MCA's fiscal year
2004 appropriations. The Foreign Operations, Export Financing, and Related
Programs Appropriations Act, 2005, limited this type of assistance to 10
percent of fiscal year 2005 appropriations. Future funding for this type
of assistance will be determined by legislation in subsequent years.

Page 9 GAO-05-625T

MCC Governance

MCC has broad authority under the Millennium Challenge Act to enter into
contracts and business relationships. The act establishes the MCC Board of
Directors and assigns it a key decision-making role in the corporation's
activities, including those related to implementing the compact program.
The act also makes provisions for the board to consult with Congress and
provide general supervision of MCC's IG. 11 The board consists of the
Secretary of State (Board Chair), the Secretary of the Treasury (Vice
Chair), the USAID Administrator, and the U.S. Trade Representative, in
addition to MCC's Chief Executive Officer. The board has four other
positions filled by Presidential appointment with the approval of the
Senate. Two of these positions have been filled. (For a timeline of key
events and milestones since MCC's launch, see app. V.)

MCC Used Quantitative Indicators and Judgment to Determine Country
Eligibility; Process Involves Ongoing Challenges

For fiscal years 2004 and 2005, the MCC board based its determinations of
countries' eligibility on its quantitative indicator methodology as well
on discretion. Although MCC published the countries' indicator scores at
its Web site, some of the indicator source data used to generate the
scores were not readily available. Finally, we found that reliance on the
indicators carried certain inherent limitations.

11

Public Law 108-199 designated the USAID Office of the Inspector General as MCC's
                                      IG.

                              Page 10 GAO-05-625T

MCC Used Quantitative MCC used the 16 quantitative indicators, as well as
the discretion implicit Indicators and Judgment in the Millennium
Challenge Act, to select 17 countries as eligible for MCA to Determine
Eligibility compact assistance for fiscal years 2004 and 2005 (see fig.
3).

    Figure 3: MCA Eligibility Determinations for Fiscal Years 2004 and 2005

Source: GAO analysis of MCC data.

     o Fiscal year 2004: In May 2004, the MCC board selected 16 countries as
       eligible for fiscal year 2004 funding. The countries deemed eligible
       include 13 that met the quantitative indicator criteria and 3 that did
       not (Bolivia, Georgia, and Mozambique). Another 6 countries met the
       criteria but were not deemed eligible.
     o Fiscal year 2005: In October 2004, the MCC board selected 16 countries
       as eligible for fiscal year 2005 funding. The countries deemed
       eligible included 14 countries that met the indicator criteria and 2
       countries that did not (Georgia and Mozambique). Ten countries met the
       criteria but were not deemed eligible. Fifteen of the 16 countries

also had been deemed eligible for fiscal year 2004; 12 the only new

country was Morocco.

MCC did not provide Congress its justifications for the 13 countries that
met the indicator criteria but were not deemed eligible for fiscal years
2004 and 2005 (one of these countries, Tonga, did not score substantially
below the median on any indicator). 13 The act does not explicitly require
MCC to include a justification to Congress for why these countries were
not deemed eligible.

In addition, our analysis of countries that met the indicator criteria but
were not deemed eligible suggests that, besides requiring that a country
score above the median on the indicator for control of corruption, MCC
placed particular emphasis on three Ruling Justly indicators (political
rights, civil liberties, and voice and accountability) in making its
eligibility determinations. In fiscal years 2004 and 2005, 6 of the 13
countries that met the indicator criteria but were not deemed eligible had
scores equal to or below the median on these three indicators. 14 On the
other hand, the 13 countries that were not deemed eligible performed
similarly to the eligible countries on the other three Ruling Justly
indicators-government effectiveness, rule of law, and control of
corruption-as well as on the indicators for Investing in People and
Encouraging Economic Freedom.

12

Cape Verde, eligible in fiscal year 2004, was not a candidate in fiscal
year 2005.

13

According to GAO analysis, 12 of the countries deemed eligible in fiscal
years 2004 and 2005 met the indicator criteria but scored substantially
below the median (25th percentile or lower) on one or two indicators.
MCC's reports to Congress listed 4 countries that scored substantially
below the median (Cape Verde, Lesotho, Morocco, and Sri Lanka). MCC
provided justification for selecting as eligible these 4 countries, but it
did not provide justification for selecting the remaining 8 countries.

14

The 6 countries that scored low on the three governance indicators are
Bhutan, China, Djibouti, Egypt, Swaziland, and Vietnam. The 13 countries
that passed the indicators but were not selected are Bhutan (2004 and
2005), Burkina Faso (2005), China (2005), Djibouti (2005), Egypt (2005),
Guyana (2004 and 2005), Kiribati (2004), Mauritania (2004), Nepal (2005),
Philippines (2005), Swaziland (2005), Tonga (2004), and Vietnam (2004 and
2005). Six of these countries-China, Djibouti, Egypt, Nepal, Swaziland,
and Vietnam-also scored low on trade policy relative to the MCA-eligible
countries.

Not All Source Data for Although MCC published its country scores for all
of the indicators at its Quantitative Indicators Web site, 15 some of the
indicator source data used to generate the scores Were Publicly Accessible
were not readily available to the public. We found that source data for
nine of the indicators 16 were accessible via hyperlinks from MCC's Web
site,

making it possible to compare those data with MCC's published country

scores. However, for the remaining seven indicators, we encountered

obstacles to locating the source data, without which candidate countries

and other interested parties would be unable to reproduce and verify

MCC's results.

     o Primary education completion rates: The published indicators were
       created with data from several sources and years, and not all of these
       data were available on line.
     o Primary education and health spending (percentage of gross domestic
       product): When national government data were unavailable, MCC used
       either country historical data or data from the World Bank to estimate
       current expenditures.
     o Diphtheria and measles immunization rate: The general hyperlink at the
       MCC Web site did not link to the data files used to create the
       published indicators. 17
     o One-year consumer price inflation: The published indicators were
       created with a mix of data from several data sources and different
       years.
     o Fiscal policy: The published indicators were created with
       International Monetary Fund (IMF) data that are not publicly
       available.

15

MCC officials told us that, owing to staffing constraints, MCC did not
post updated indicator data before the board's fiscal year 2004
eligibility decisions. Having added more staff, MCC posted the updated
data prior to the board's fiscal year 2005 decisions.

16

Source data for voice and accountability, government effectiveness, rule
of law, control of corruption, and regulatory quality were from the World
Bank Institute; for trade policy, from the Heritage Foundation; for civil
liberties and for political rights, from Freedom House; and for country
credit rating, from Institutional Investor.

17

MCC officials told us that they use general hyperlinks to prevent users
from linking to outdated Web addresses.

o  Days to start a business: Updated indicators were not published until
after the board had made its fiscal year 2004 eligibility decisions.

Use of Quantitative MCC's use of the quantitative indicator criteria in
the country selection process for fiscal years 2004 and 2005 involved the
following inherent

Indicators Had Some Inherent Limitations difficulties:

     o Owing to measurement uncertainty, the scores of 17 countries may have
       been misclassified as above or below the median. 18 In fiscal years
       2004 and 2005, 7 countries did not meet the quantitative indicator
       criteria because of corruption scores below the median, but given
       measurement uncertainty their true scores may have been above the
       median. Likewise, 10 countries met the indicator criteria with
       corruption scores above the median, but their true scores may have
       been below the median. 19
     o Missing data for the days to start a business and trade policy
       indicators reduced the number of countries that could achieve
       above-median scores for those indicators. For fiscal years 2004 and
       2005, 20 and 22 countries, respectively, lacked data for the indicator
       for days to start a business, and 18 and 13 countries, respectively,
       lacked data for the trade policy indicator. Our analysis suggests that
       missing data for these two indicators may have reduced the number of
       countries that passed the Encouraging Economic Freedom category.
     o The narrow and undifferentiated range of possible scores for the
       political rights, civil liberties, and trade policy indicators led to
       clustering-"bunching"-of scores around the median, making the scores
       less useful in distinguishing among countries' performances. In fiscal
       year 2005, for example, 46 countries, or two-thirds of the

18

Measurement uncertainty, or margin of error, makes it difficult in many
cases to say with accuracy where a country's true score lies. Measurement
uncertainty applies to virtually all indicators, including the World Bank
Institute's governance indicators. The World Bank team that created the
corruption and other governance indicators cautioned that special scrutiny
should be given to borderline cases, saying that "for one-third of the
potentially MCA-eligible countries, there is at least a 25 percent chance
they will be mistakenly classified as below the median when they should be
above, and vice versa." See Daniel Kaufmann and Aart Kraay, Governance
Indicators, Aid Allocation, and the Millennium Challenge Account: A
Summary (Washington, D.C.: The World Bank, December 2002).

19

According to MCC officials, the board also used Transparency
International's (TI) Corruption Perceptions Index as a secondary
corruption source. However, TI scores were not available for all the
fiscal years 2004 and 2005 candidate countries.

MCC Is Refining Its Compact Development Process

countries with trade policy data, received a score of 4 (the median) or 5
(the lowest score possible) for trade policy. Our analysis suggests that
bunching potentially reduced the number of countries that passed the
Ruling Justly and Economic Freedom categories and limited MCC's ability to
determine whether countries performed substantially below their peers in
affected indicators.

With respect to the indicator for control of corruption, countries deemed
eligible for MCA compact assistance represent the best performers among
their peers; at the same time, studies have found that, in general,
countries with low per capita income also score low on corruption indexes.
Of the 17 MCA compact eligible countries, 11 ranked below the 50th
percentile among the 195 countries rated by the World Bank Institute for
control of corruption; none scored in the top third.

MCC has received compact proposals, concept papers, or both, from 16
countries; of these, it has approved a compact with one country and is
negotiating with four others. At the same time, MCC continues to refine
its process for reviewing and assessing compact proposals. As part of this
process, MCC has identified elements of country program implementation and
fiscal accountability that can be adapted to eligible countries' compact
objectives and institutional capacities.

MCC Has Received a Number of Proposals and Is Negotiating Several Compacts

Between August 2004 and March 2005, MCC received compact proposals,
concept papers, or both, from 16 MCA compact-eligible countries, more than
half of which submitted revised proposal drafts in response to MCC's
assessments. 20 In March 2005, MCC approved a 4-year compact with
Madagascar for $110 million to fund rural projects aimed at enhancing land
titling and security, increasing financial sector competition, and
improving agricultural production technologies and market capacity; MCC
and Madagascar signed the compact on April 18, 2005. MCC is negotiating
compacts with Cape Verde, Georgia, Honduras, and Nicaragua 21 and is
conducting in-depth assessments of proposals from two additional
countries. Figure 4 summarizes the types of projects that eligible
countries have proposed and that MCC is currently reviewing.

20

MCC encourages countries to submit concept papers, outlines, or other
documentation for guidance and feedback before submitting initial
proposals.

21

MCC has notified appropriate congressional committees of its intent to
enter into negotiations with these countries.

Page 16 GAO-05-625T

             Figure 4: Types of Proposed Projects under MCC Review

Source: GAO summary and analysis of MCC data as of April 20, 2005.

Note: Dots indicate that one or more projects may be categorized as shown
and are not intended to quantify the number of projects a country has
proposed or the number of projects in a category.

a

"Agribusiness" includes agricultural production, processing, marketing,
and other projects.

b"Business" includes projects related to nonagricultural business
development (e.g., tourism and industrial parks).

c

"Policy reform" also includes assistance for public sector
capacity-building. According to MCC officials, all compacts will contain
project-related policy reform elements, some of which may receive funding.

d

"Transportation infrastructure" includes road, port, and airport planning,
construction, and upgrading.

e

"Water management" includes construction and upgrading of dams, irrigation
systems, and water reservoirs, among other things.

f

MCC approved Madagascar's compact in March 2005; MCC and Madagascar signed
the compact on April 18, 2005.

MCC Continues to Refine Its Compact Development Process

The countries' initial proposals and concept papers requested about $4.8
billion; those that MCC is currently reviewing (see fig. 4) and
negotiating request approximately $3 billion over 3 to 5 years. Our
analysis-based on MCC's goal of being a top donor as well as Congress's
requirement that the corporation fund compacts in full-shows that the $2.4
billion available from fiscal year 2004 and 2005 appropriations will allow
MCC to fund between 4 and 14 compacts, including Madagascar's compact, for
those years. 22 MCC's $110 million compact with Madagascar, averaging
$27.5 million per year, would make it the country's fifth largest donor
(see app. VI for a list of the largest donors to MCA compact-eligible
countries in fiscal years 2002-2003). 23

As of April 2005, MCC is continuing to refine its process for developing
compacts. According to MCC officials, the compact development process is
open ended and characterized by ongoing discussions with eligible
countries. According to a recent IG report, MCC's negotiating a compact
with Madagascar has served as a prototype for completing compacts with
other countries. 24 At present, the compact proposal development and
assessment process follows four steps (see fig. 5).

22

The lower estimated number of compacts assumes that MCC funds 5-year
compacts at a level equal to the average annual assistance provided by the
largest donor in the 17 countries that were eligible in fiscal years 2004
and 2005 (about $109 million). The higher estimate assumes that MCC funds
3-year compacts at a level equal to the average annual assistance provided
by the third largest donor in these countries (about $60 million).

23

Based on OECD net official development assistance (ODA) data. OECD defines
ODA as grants or loans to developing countries undertaken by the official
sector (a) with the promotion of economic development and welfare as the
main objective and (b) if a loan, having a grant element of at least 25
percent.

24

Office of Inspector General, Review of Millennium Challenge Corporation's
Progress in Achieving Its Planned Organizational Structure and Beginning
Its Assistance Programs As of February 28, 2005 (Washington, D.C.: March
2005).

                  Figure 5: MCC's Compact Development Process

Source: GAO analysis and synthesis of MCC's compact development process.

Step 1: Proposal development. MCC expects eligible countries to propose
projects and program implementation structures, building on existing
national economic development strategies. For instance, the Honduran
government's proposal is based on its Poverty Reduction Strategy Paper
(PRSP) 25 and a subsequent June 2004 implementation plan. 26 MCC also
requires that eligible countries use a broad-based consultative process to
develop their proposals. 27 MCC staff discuss the proposal with country
officials during this phase of compact development. Although MCC does not
intend to provide funding to countries for proposal development, 28 some
countries have received grants from regional organizations for proposal
development. 29

Step 2: Proposal submission and initial assessment. Eligible countries
submit compact proposals or concept papers. MCC has not specified
deadlines for proposal submission or publicly declared the limits or range
of available funding for individual compacts. According to MCC officials,
the absence of deadlines and funding parameters permits countries to take
initiative in developing proposals. However, according to U.S.-based NGOs,
the lack of deadlines has caused some uncertainty and confusion among
eligible country officials. Honduran officials told us that knowing a
range of potential funding would have enhanced their ability to develop a
more focused proposal.

During this stage, MCC conducts a preliminary assessment of the proposal,
drawing on its staff, contractors, and employees of other U.S. government
agencies. This assessment examines the potential impact of the proposal's

25

The World Bank and IMF require countries to develop participatory poverty
reduction strategies as a condition for receiving assistance. These
strategies, which are outlined in countries' PRSPs, provide the basis for
World Bank and IMF concessional lending and debt relief.

26

Republic of Honduras, Attaining the Goals of the Poverty Reduction
Strategy: Implementation Plan for 2004-2006, Consultative Group Meeting
for Honduras, Tegucigalpa M.D.C., June 10-11, 2004 (Tegucigalpa: 2004).

27

The Millennium Challenge Act, Sec. 609(d), requires the United States, in
entering into a compact, to ensure that eligible countries consider the
perspectives of rural and urban poor, including women, and consult with
private and voluntary organizations, the business community, and other
donors.

28

The Millennium Challenge Act, Sec. 609(g), authorizes MCC to enter into
contracts with, or make grants to, eligible countries to facilitate
compact development and implementation.

29

For example, Mongolia has received assistance from The Asia Foundation to
develop its proposal. In addition, Honduras and Nicaragua have received
separate grants from the Central American Bank for Economic Integration
(CABEI) and Inter-American Development Bank (IDB).

strategy for economic growth and poverty reduction, the consultative
process used to develop the proposal, and the indicators for measuring
progress toward the proposed goals. According to MCC, some eligible
countries have moved quickly to develop their MCC programs. Others
initially were unfamiliar with MCC's approach and some faced institutional
constraints. MCC works with these countries to develop programs that it
can support. In addition, MCC is exploring ways-such as providing
grants-to facilitate compact development and implementation. Once MCC
staff determine that they have collected sufficient preliminary
information, they seek the approval of MCC's Investment Committee 30 to
conduct a more detailed analysis, known as due diligence.

Step 3: Detailed proposal assessment and negotiation. MCC's due diligence
review includes an analysis of the proposed program's objectives and its
costs relative to potential economic benefits. 31 Among other things, the
review also examines the proposal's plans for program implementation,
including monitoring and evaluation; for fiscal accountability; and for
coordination with USAID and other donors. In addition, the review
considers the country's commitment to MCC eligibility criteria and legal
considerations pertaining to the program's implementation. 32 During their
review, MCC staff seek the approval of the Investment Committee to notify
Congress that the corporation intends to initiate compact negotiations;
following completion of the review, MCC staff request the committee's
approval to enter compact negotiations. When the negotiations have been
concluded, the Investment Committee decides whether to approve submission
of the compact text to the MCC board.

30

The Investment Committee comprises MCC's CEO and vice presidents.

31

MCC's cost-benefit analysis identifies, among other things, potential
economic benefits and intended beneficiaries, as well as financial and
nonfinancial (e.g., environmental impact) project costs. Previous GAO work
on the Global Fund to Fight AIDS, TB and Malaria identified technical
review of grant proposals as a challenging aspect of its operations. See
U.S. Government Accountability Office, Global Health: Global Fund to Fight
AIDS, TB and Malaria Has Advanced in Key Areas, but Difficult Challenges
Remain, GAO-03-601 (Washington, D.C.: May 7, 2003).

32

According to MCC documents, the legal considerations include the country's
statutory requirements for compact approval and enforcement; Millennium
Challenge Act section 605 prohibitions (i.e., military assistance and
training; assistance relating to U.S. job loss or production displacement;
assistance relating to environmental, health, or safety hazards; and use
of funds for abortions and involuntary sterilizations); and exemption MCA
assistance from taxation or reimbursement of such taxation.

MCC Has Identified Elements of Program Implementation and Fiscal
Accountability Framework

Step 4: Board review and compact signing. The MCC board reviews the
compact draft. Before the compact can be signed and funds obligated, the
board must approve the draft and MCC must notify appropriate congressional
committees of its intention to obligate funds.

MCC has identified several broadly defined elements of program
implementation and fiscal accountability that it considers essential to
ensuring achievement of compact goals and proper use of MCC funds. As
signatories to the compact, MCC and the country government will be
fundamental elements of this framework. However, MCC and eligible
countries can adapt other elements (see fig. 6) by assigning roles and
responsibilities to governmental and other entities according to the
countries' compact objectives and institutional capacities. 33
Madagascar's compact incorporates these elements in addition to an
advisory council composed of private sector and civil society
representatives, as well as local and regional government officials. The
compact also requires that MCA-Madagascar, the oversight entity, adopt
additional plans and agreements before funds can be disbursed, including
plans for fiscal accountability and procurement. In addition, the compact
requires the adoption of a monitoring and evaluation plan; provides a
description of the plan's required elements; and establishes performance
indicators for each of Madagascar's three program objectives, which are
linked to measures of the program's expected overall impact on economic
growth and poverty reduction. MCC expects to disburse funds in tranches as
it approves Madagascar's completed plans and agreements. According to the
IG, MCC officials expect to make the initial disbursements within 2 months
after signing the compact. 34

33

Many poor countries have weak, inefficient, and sometimes corrupt
institutions that resist reform. See, for example, U.S. Government
Accountability Office, Developing Countries: Debt Relief Initiative for
Poor Countries Faces Challenges, GAO/NSIAD-00-161 (Washington, D.C.: June
2000). Also see C.I.C.E./Deloitte, Senegal "MCA Jumpstart": Strengthening
Planning and Management Systems to Support Accelerated Development in
Senegal, "MCA Jumpstart" Summary Report, Phase 1 (Dakar, Senegal: USAID,
January 2004) and C.I.C.E./Deloitte, Senegal MCA Jumpstart Phase 2:
Overcoming Absorptive Capacity Constraints (Dakar, Senegal: USAID,
November 2004).

34

Previous GAO work suggests that countries' effective use of development
assistance may depend on their abilities to establish the necessary
institutions for identifying projects and distributing funds. See, for
example, our 2003 report on the Global Fund to Fight AIDS, TB and Malaria
(GAO-03-601).

  Figure 6: Adaptable Elements of MCC's Framework for Program Implementation and
  Fiscal Accountability

Entity Key roles/responsibilities Governmental examples Other examples

Country  o  Oversees and manages program and projects  o  Prime minister's
office  o  Separate legal entity oversight entity  o  Contracts with
fiscal and procurement agents,  o  Ministry (e.g., council or committee)
project implementers, and auditors and reviewers with government, civil

o  Approves contract actions and requests for society, and private sector
payment representation

o  Private company

Fiscal agent  o  Bank account signatory  o  Finance ministry  o  Donor
agency

     o Documents transactions and authorizes  o  Accounting firm
       redisbursement requests  o  Commercial bank
     o Provides accounting and financial reports  o  NGO

Procurement   o Administers and/or       o  Ministries    o  Donor unit    
                   certifies procurement                   
agent           process                                 o  Accounting firm 
                                                           o  Private company 
                                                                 o  NGO       
Bank account o  Dedicated to MCC funds  o  Central bank o  Commercial bank 

Project  o  Implements projects specified in the country's  o  Ministries 
o  Donor unit implementer(s) compact  o  Private company

     o Requests payments from the oversight entity  o  NGO
     o Certifies delivery and receipt of goods and services

Auditors and o  Conducts financial  o  Supreme Audit   o  Accounting firm  
                audits, performance                       
                and                                       
reviewers    compliance reviews,   Institution         o  Consulting firm  
                and data quality                          
                assessments              o  Statistics            o  Academic 
                                           institute              institution 
                                                          o  NGO              
                Source: GAO synthesis of MCC information. 

MCC Is Taking Steps to Coordinate with Key Stakeholders

MCC has received advice and support from USAID, State, Treasury, and USTR
and has signed agreements with five U.S. agencies for program
implementation and technical assistance. In addition, MCC is consulting
with other donors in Washington, D.C., and in the field to use existing
donor expertise. MCC is also consulting with U.S.-based NGOs as part of
its domestic outreach effort; however, some NGOs raised questions about
the involvement of civil society groups. (See app. VII for more details of
MCC's coordination efforts.)

U.S. Agencies Are Contributing Resources and Technical Assistance

MCC initially coordinated primarily with U.S. agencies on its board and is
expanding its coordination efforts to leverage the expertise of other
agencies. USAID and the Department of State in Washington, D.C., and in
compact-eligible countries, have facilitated meetings between MCC
officials and donors and representatives of the private sector and NGOs in
eligible countries. In addition, several of the six USAID missions
contacted by GAO reported that their staff had provided country-specific
information, had observed MCC-related meetings between civil society
organizations and governments, or had informed other donors about MCC. MCC
has also coordinated with the Department of the Treasury and USTR. For
example, according to MCC officials, MCC has regularly briefed these
agencies on specific elements of compact proposals and established an
interagency working group to discuss compact-related legal issues.

Since October 2004, MCC has expanded its coordination through formal
agreements with five U.S. agencies, including the Census Bureau, Army
Corps of Engineers, and Department of Agriculture, that are not on the MCC
board. MCC has obligated more than $6 million for programmatic and
technical assistance through these agreements, as shown in figure 7.

Figure 7: Agreements between MCC and U.S. Agencies

U.S. agency       Purpose             Funds obligated to Agreement date    
                                         agency             and duration      
U.S. Agency for   Implement the                          October 2004      
International     Threshold Program,                     Inderterminate    
Development       with MCC            USAID will charge  durationa         
                     maintaining         MCC a flat         
                     oversight and       administrative fee 
                     ultimate            of 7 percent of    
                     decision-making     funding that USAID 
                     authority. (See     obligates for the  
                     app. IV for a       Threshold Program. 
                     detailed                               
                     description of the                     
                     program.)                              
                     Provide grant or    $1,300,000         March 2005 1-year 
                     enter into an                          duration          
                     agreement with                         
                     Government of                          
                     Madagascar for the                     
                     performance,                           
                     completion and                         
                     delivery of                            
                     baseline                               
                     statistical data                       
                     that will be used                      
                     to                                     
                     assess the impact                      
                     of the Madagascar                      
                     Compact.                               
U.S. Department   Assist in           $1,200,000b        February 2005     
of the Treasury's evaluating fiscal                      5-year duration   
Office of         and financial                          
Technical         aspects of MCC                         
Assistance        funded programs                        
                     including ongoing                      
                     oversight,                             
                     monitoring and                         
                     technical assitance                    
                     in the areas of                        
                     financial                              
                     management as may                      
                     be required for the                    
                     execution of MCC                       
                     Compacts.                              
                     Assist with         $1,500,000b                          
                     evaluations of                                           
U.S. Army Corps   infrastructure                         February 2005
of Engineers      projects proposed                      5-year duration
                     by MCC-eligible                        
                     countries.                             
                     Evaluate roads      $192,753           November 2004     
                     project in                             6-week duration   
                     Honduras.                              
                     Evaluate roads                         February 2005 5-  
                     project in Cape     $100,000           to 6-week         
                     Verde.                                 duration          
U.S. Census       Assess monitoring   $750,000b          March 2005 3-year 
Bureau            and evaluation                         duration          
                     methodologies                          
                     proposed by                            
                     eligible countries                     
                     and assist eligible                    
                     countries in                           
                     implementing the                       
                     methodologies.                         
U.S. Department   Assist in           $1,000,000         March 2005 3-year 
of Agriculture's  evaluating                             duration          
Foreign           agricultural sector                    
Agricultural      projects proposed                      
Service           by MCC-eligible                        
                     countries.                             

Source: GAO synthesis of MCC information as of April 2005.

aFor fiscal year 2004 Threshold Program. All funds under this agreement
must be obligated by September 30, 2005, unless MCC notifies USAID
otherwise.

b

Funding is for a 1-year period.

MCC Is Consulting with Other Donors and Using Donor Expertise

MCC has received information and expertise from key multilateral and
bilateral donors in the United States and eligible countries. For example,
World Bank staff have briefed MCC regarding eligible countries, and
officials from the Inter-American Development Bank said that they have
provided MCC with infrastructure assessments in Honduras. According to
MCC, most donor coordination is expected to occur in eligible countries
rather than at the headquarters level. In some cases, MCC is directly
coordinating its efforts with other donors through existing mechanisms,
such as a G-17 donor group in Honduras.

In addition to soliciting donor input, MCC officials have encouraged
donors not to displace assistance to countries that receive MCA funding.
35 Donors in Honduras told us that MCA funding to that country is unlikely
to reduce their investment, because sectors included in the country's
proposal have additional needs that would not be met by MCA.

                             MCC Has Met with NGOs

According to MCC officials, MCC is holding monthly meetings with a
U.S.-based NGO working group 36 and hosted five public meetings in 2004 in
Washington, D.C, as part of its domestic outreach efforts. The NGOs have
shared expertise in monitoring and evaluation and have offered suggestions
that contributed to the modification of 1 of MCC's 16 quantitative
indicators. In addition, MCC has met with local NGOs during country
visits.

Some U.S-based NGOs have raised questions about the involvement of NGOs in
this country and of civil society groups in compact-eligible countries.
Environmental NGOs told us in January 2005 that MCC had not engaged with
them since initial outreach meetings; however, MCC subsequently invited
NGOs and other interested entities to submit proposals for a quantitative
indicator of a country's natural resources management. Representatives of
several NGOs commented that MCC lacks in-house expertise and staff to
monitor and assess civil society participation in compact development. In
addition, U.S.-based NGOs

35

Previous GAO work on the Global Fund to fight AIDS, TB and Malaria
indicates that it can be difficult to monitor donor spending on specific
programs and to ensure that new grants augment spending at the country
level (see GAO-03-601).

36

The NGO Implementation Working Group on the Millennium Challenge Account
includes InterAction, an alliance of more than 160 U.S.-based
international development and humanitarian organizations.

Page 26 GAO-05-625T

MCC Has Made Progress in Developing Management Structures but Has Not
Completed Corporatewide Plans, Strategies, and Time Frames

expressed concern that their peers in MCA countries have not received
complete information about the proposal development process.

Since starting up operations, MCC has made progress in developing key
administrative infrastructures that support its program implementation.
MCC has also made progress in establishing corporatewide structures for
accountability, governance, internal control, and human capital
management, including establishing an audit and review capability through
its IG, adopting bylaws, providing ethics training to employees, and
expanding its permanent full-time staff. However, MCC has not yet
completed plans, strategies, and time frames needed to establish these
essential management structures on a corporatewide basis. (See fig. 8 for
a detailed summary of MCC's progress.)

Figure 8: MCC's Progress on Key Management Structures

Source: GAO; items under "Actions completed" and "Actions under way or planned"
                 represent GAO's synthesis of MCC information.

a'

Schedule A refers to positions specifically excepted from federal
competitive service requirements.

                         Administrative Infrastructure

b

According to MCC officials, MCC and OMB have agreed that MCC may submit a
modified report to satisfy the Government Performance and Results Act
requirement of a performance plan and report by March 31, 2005. MCC
expects to submit the report by the end of fiscal year 2005.

During its first 15 months, MCC management focused its efforts on
establishing essential administrative infrastructures-the basic systems
and resources needed to set up and support its operations-which also
contribute to developing a culture of accountability and control. In
February 2004, MCC acquired temporary offices in Arlington, Virginia, and
began working to acquire a permanent location. In addition, consistent
with its goal of a lean corporate structure with a limited number of
full-time employees, MCC outsourced administrative aspects of its
accounting, information technology, travel, and human resource functions.
Further, MCC implemented various other administrative policies and
procedures to provide operating guidance to staff and enhance MCC's
internal control. MCC management continues to develop other corporate
policies and procedures, including policies that will supplement federal
travel and acquisition regulations.

                                 Accountability

Accountability requires that a government organization effectively
demonstrate, internally and externally, that its resources are managed
properly and used in compliance with laws and regulations and that its
programs are achieving their intended goals and outcomes and are being
provided efficiently and effectively. Important for organizational
accountability are effective strategic and performance planning and
reporting processes that establish, measure, and report an organization's
progress in fulfilling its mission and meeting its goals. External
oversight and audit processes provide another key element of
accountability.

During its initial 15 months, MCC developed and communicated to the public
its mission, the basic tenets of its corporate vision, and key
program-related decisions by the MCC board. MCC began its strategic
planning process when key staff met in January 2005 to begin setting
strategic objectives and it expects to issue the completed plan in the
coming months. In addition, MCC arranged with its IG for the audit of its
initial year financial statements (completed by an independent public
accounting firm) and for two program-related IG reviews. However, to date,
MCC has not completed a strategic plan or established specific
implementation time frames. In addition, MCC has not yet established
annual performance plans, which would facilitate its monitoring of
progress toward strategic and annual performance goals and outcomes

                              Corporate Governance

and its reporting on such progress internally and externally. According to
MCC officials, MCC intends to complete its comprehensive strategic and
performance plans by the end of fiscal year 2005.

Corporate governance can be viewed as the formation and execution of
collective policies and oversight mechanisms to establish and maintain a
sustainable and accountable organization while achieving its mission and
demonstrating stewardship over its resources. Generally, an organization's
board of directors has a key role in corporate governance through its
oversight of executive management, corporate strategies, risk management
and audit and assurance processes, and communications with corporate
stakeholders.

During its initial 15 months, the MCC board adopted bylaws regarding board
composition and powers, meetings, voting, fiscal oversight, and the duties
and responsibilities of corporate officers and oversaw management's
efforts to design and implement the compact program. According to MCC,
during a recent meeting of the board to discuss corporate governance, the
Chief Executive Officer solicited feedback from the board regarding
defining and improving the governance process. MCC's board established a
compensation committee in March 2005, and a charter for the committee is
being drafted. In addition, MCC is preparing, for board consideration, a
policy on the board's corporate governance. As drafted, the policy
identifies the board's statutory and other responsibilities, elements of
board governance, rules and procedures for board decision-making, and
guidelines for MCC's communications with the board. With regard to MCC
board membership, seven of the nine board members have been appointed and
installed. Through board agency staff, MCC staff have regularly informed
board members-four of whom are heads of other agencies or
departments-about pending MCC matters.

The board has not completed a comprehensive strategy or plan for carrying
out its responsibility-specifically, it has not defined the board's and
management's respective roles in formulating and executing of corporate
strategies, developing risk management and audit and assurance processes,
and communicating and coordinating with corporate stakeholders. Moreover,
although the bylaws permit the board to establish an audit committee-to
support the board in accounting and financial reporting matters; determine
the adequacy of MCC's administrative and financial controls; and direct
the corporation's audit function, which is provided by the IG and its
external auditor-the board has not yet done

Internal Control

so. Finally, two of the MCC board's four other positions have not yet been
filled.

Internal control provides reasonable assurance that key management
objectives-efficiency and effectiveness of operations, reliability of
financial reporting, and compliance with applicable laws and regulations-
are being achieved. Generally, a corporatewide internal control strategy
is designed to

     o create and maintain an environment that sets a positive and supportive
       attitude toward internal control and conscientious management;
     o assess, on an ongoing basis, the risks facing the corporation and its
       programs from both external and internal sources;
     o implement efficient control activities and procedures intended to
       effectively manage and mitigate areas of significant risk;
     o monitor and test control activities and procedures on an ongoing
       basis; and
     o assess the operating effectiveness of internal control and report and
       address any weaknesses.

During its first 15 months, MCC took several actions that contributed to
establishing effective internal control. Although it did not conduct its
own assessment of internal control, MCC management relied on the results
of the IG reviews and external financial audit to support its conclusion
that key internal controls were valid and reliable. Further, MCC
implemented processes for identifying eligible countries and internal
controls through its due diligence reviews of proposed compacts,
establishment of the Investment Committee to assist MCC staff in
negotiating and reviewing compact proposals, and the board's involvement
in approving negotiated compacts. In addition, MCC instituted an Ethics
Program, covering employees as well as outside board members, to provide
initial ethics orientation training for new hires and regularly scheduled
briefings for employees on standards of conduct and statutory rules. In
April 2005, MCC officials informed us that they had recently established
an internal controls strategy group to identify internal control
activities to be implemented over the next year, reflecting their
awareness of the need to focus MCC's efforts on the highest-risk areas.

Human Capital Management

However, MCC has not completed a comprehensive strategy and related time
frames for ensuring the proper design and incorporation of internal
control into MCC's corporatewide program and administrative operations.
For example, MCC intends to rely on contractors for a number of
operational and administrative services; however, this strategy will
require special consideration in its design and implementation of specific
internal controls.

Cornerstones of human capital management include leadership; strategic
human capital planning; acquiring, developing, and retaining talent; and
building a results-oriented culture. In its initial year, MCC human
capital efforts focused primarily on establishing an organizational
structure and recruiting employees necessary to support program design and
implementation and corporate administrative operations (see app. VIII for
a diagram of MCC's organizational structure). MCC set short- and
longer-term hiring targets, including assigning about 20
employees-depending on the number and types of compacts that have been
signed-to work in MCA compact-eligible countries; it also identified
needed positions and future staffing levels through December 2005 based on
its initial operations. With the help of an international recruiting firm,
MCC expanded its permanent full-time staff from 7 staff employees in April
2004 to 107 employees in April 2005; it intends to employ no more than 200
permanent full-time employees by December 2005 (see fig. 9). 38 In
addition, MCC hired 15 individuals on detail, under personal services
contracts, or as temporary hires, as well as a number of consultants.
Finally, in January 2005, MCC hired a consultant to design a compensation
program to provide employees with pay and performance incentives and
competitive benefits, including performance awards and bonuses, retention
incentives, and student loan repayments. MCC officials told us that they
intend the program to be comparable with those of federal financial
agencies, international financial institutions, and multilateral and
private sector organizations.

37

Fifteen of these positions are administratively determined; Congress
authorized 30 such positions for MCC in the Millennium Challenge Act.

Page 32 GAO-05-625T

Figure 9: Actual and Planned Staffing Levels as of April 1, 2005
Direct-hire employees 200

Planned staffing level by December 2005

175

150

125

100

75

50

25

0

Mar. Apr. May Jun. Jul. Aug. Oct. Sep. Nov. Dec. Jan. Feb. Mar. Apr. Dec.

2004 2005 Month

Number of direct-hire employees hired each month

Cumulative number of direct-hire employees Source: GAO analysis of
unaudited MCC data as of April 2005.

MCC has not completed an institutional infrastructure that includes (1) a
thorough and systematic assessment of the staffing requirements and
critical skills needed to carry out its mission; (2) a human capital
planning process that integrates MCC's human capital policies and
strategies with its program goals and mission; and (3) a performance
management system that links employees' pay and incentive programs to
individual knowledge, skills, performance, and contributions. MCC
officials acknowledged the need to refine and systematize MCC's workforce
planning to ensure that the corporation has the human capital capability
needed for a broad range of programs in a number of developing nations.

Conclusions

In its first 15 months, MCC took important actions to design and implement
the compact program-making eligibility determinations, defining its
compact development process, and coordinating and establishing working
agreements with key stakeholders. MCC also acted to establish important
elements of a corporatewide management structure needed to support its
mission and operations, including some key internal controls. However, MCC
has not yet fully developed plans that define the comprehensive actions
needed to establish key components of an effective management structure.

We believe that, to continue to grow into a viable and sustainable entity,
MCC needs to approve plans with related time frames that identify the
actions required to build a corporatewide foundation for accountability,
internal control, and human capital management and begin implementing
these plans. In addition, MCC's board needs to define its responsibilities
for corporate governance and oversight of MCC and develop plans or
strategies for carrying them out. As MCC moves into its second year of
operations, it recognizes the need to develop comprehensive plans and
strategies in each of these areas. Implementation of such plans and
strategies should enable MCC's management and board to measure progress in
achieving corporate goals and objectives and demonstrate its
accountability and control to Congress and the public. As part of our
ongoing work for your committee, we will continue to monitor MCC's efforts
in these areas.

Recommendations for Executive Action

We recommend that the Chief Executive Officer of the Millennium Challenge
Corporation complete the development and implementation of overall plans
and related time frames for actions needed to establish

1. Corporatewide accountability, including

     o implementing a strategic plan,
     o establishing annual performance plans and goals,
     o using performance measures to monitor progress in meeting both
       strategic and annual performance goals, and
     o reporting internally and externally on its progress in meeting its
       strategic and annual performance goals.

2. Effective internal control over MCC's program and administrative
operations, including establishing

     o a positive and supportive internal control environment;
     o a process for ongoing risk assessment;
          * control activities and procedures for reducing risk, such as
            measures to mitigate risk associated with contracted operational
            and administrative services;
          * o  ongoing monitoring and periodic testing of control activities;
            and
     o a process for assessing and reporting on the effectiveness of internal
       controls and addressing any weaknesses identified.

3. An effective human capital infrastructure, including

     o a thorough and systematic assessment of the staffing requirements and
       critical skills needed to carry out MCC's mission;
     o a plan to acquire, develop, and retain talent that is aligned with the
       corporation's strategic goals; and
          * a performance management system linking compensation to employee
            contributions toward the achievement of MCC's mission and goals.
          * We recommend that the Secretary of State, in her capacity as
            Chair of the MCC Board of Directors, ensure that the board
            considers and defines the scope of its responsibilities with
            respect to corporate governance and oversight of MCC and develop
            an overall plan or strategy, with related time frames, for
            carrying out these responsibilities. In doing so, the board
            should consider, in addition to its statutory responsibilities,
            other corporate governance and oversight responsibilities
            commonly associated with sound and effective corporate governance
            practices, including oversight of
     o executive management,
     o the formulation and execution of corporate strategies,
     o risk management and audit and assurance processes, and
     o communication and coordination with corporate stakeholders.

Agency Comments and Our Evaluation

MCC provided technical comments on a draft of this statement and agreed to
take our recommendations under consideration; we addressed MCC's comments
in the text as appropriate. We also provided the Departments of State and
Treasury, the U.S. Agency for International Development, and the Office of
the U.S. Trade Representative an opportunity to review a draft of this
statement for technical accuracy. State and USAID suggested no changes,
and Treasury and USTR provided a few technical comments, which we
incorporated as appropriate.

Mr. Chairman and Members of the Committee, this concludes my prepared
statement. I will be happy to answer any questions you may have.

Contacts and Acknowledgments

For questions regarding this testimony, please call David Gootnick at
(202) 512-4128 or Phillip Herr at (202) 512-8509.

Other key contributors to this statement were Todd M. Anderson, Beverly
Bendekgey, David Dornisch, Etana Finkler, Ernie Jackson, Debra Johnson,
Joy Labez, Reid Lowe, David Merrill, John Reilly, Michael Rohrback, Mona
Sehgal, and R.G. Steinman.

                       Appendix I: Scope and Methodology

We reviewed MCC's activities in its first 15 months of operations,
specifically its (1) process for determining country eligibility for
fiscal years 2004 and 2005, (2) progress in developing compacts, (3)
coordination with key stakeholders, and (4) establishment of management
structures and accountability mechanisms.

To examine MCC's country selection process, we analyzed candidate
countries' scores for the 16 quantitative indicators for fiscal years 2004
and 2005, as well as the selection criteria for the fiscal year 2004
Threshold Program. We used these data to determine the characteristics of
countries that met and did not meet the indicator criteria and to assess
the extent to which MCC relied on country scores for eligibility
determination. We also reviewed the source data for the indicator scores
posted on MCC's Web site to identify issues related to public access and
to determine whether we could reproduce the country scores from the source
data. Our review of the source data methodology, as well as the documents
of other experts, allowed us to identify some limitations of the indicator
criteria used in the country selection process. For these and other data
we used in our analyses, we examined, as appropriate, the reliability of
the data through interviews with MCC officials responsible for the data,
document reviews, and reviews of data collection and methodology made
available by the authors. We determined the data to be reliable for the
purposes of this study.

To describe MCC's process for developing compacts, including plans for
monitoring and evaluation, we reviewed MCC's draft or finalized documents
outlining compact proposal guidance, compact proposal assessment, and
fiscal accountability elements. We reviewed eligible countries' compact
proposals and concept papers to identify proposed projects, funding, and
institutional frameworks, among other things. To summarize the projects
that countries have proposed and that MCC is currently assessing, we
developed categories and conducted an analysis of countries' proposal
documents and MCC's internal summaries. We also reviewed Madagascar's
draft compact to identify projects, funding, and framework for program
implementation and fiscal accountability. We met with MCC officials to
obtain updates on the compact development process. In addition, we
interviewed representatives of nongovernmental organizations (NGOs) in
Washington, D.C., and Honduras, as well as country officials in Honduras,
to obtain their perspectives on MCC's compact development process.

To assess MCC's coordination with key stakeholders, we reviewed
interagency agreements to identify the types of formal assistance that MCC
is seeking from U.S. agencies and the funding that MCC has set aside for
this purpose. We also reviewed MCC documents to identify the
organizations, including other donors, with which MCC has consulted. In
addition, we interviewed MCC officials regarding their coordination with
various stakeholders. We met with officials from the U.S. agencies on the
MCC board (Departments of State and Treasury, USAID, and USTR) to assess
the types of assistance that these agencies have provided to MCC. We also
contacted six USAID missions in compact-eligible countries to obtain
information on MCC coordination with U.S. agencies in the field. To assess
MCC's coordination with NGOs and other donors, we met with several NGOs,
including InterAction, the World Wildlife Fund, and the Women's Edge
Coalition in Washington, D.C., and local NGOs in Honduras; we also met
with officials from the Inter-American Development Bank in Washington,
D.C., and Honduras, as well as officials from the World Bank, Central
American Bank for Economic Integration, and several bilateral donors in
Honduras. Finally, we attended several MCC public outreach meetings in
Washington, D.C.

To analyze MCC's progress in establishing management structures and
accountability mechanisms, we interviewed MCC senior management and
reviewed available documents to identify the management and accountability
plans that MCC had developed or was planning to develop. We reviewed audit
reports by the USAID Office of the Inspector General to avoid duplication
of efforts. We used relevant GAO reports and widely used standards and
best practices, as applicable, to determine criteria for assessing MCC's
progress on management issues as well as to suggest best practices to MCC
in relevant areas. Although our analysis included gaining an understanding
of MCC's actions related to establishing internal control, we did not
evaluate the design and operating effectiveness of internal control at
MCC.

In January 2005, we conducted fieldwork in Honduras, one of four countries
with which MCC had entered into negotiations at that time, to assess MCC's
procedures for conducting compact proposal due diligence and its
coordination with U.S. agencies, local NGOs, Honduran government
officials, and other donors. In conducting our field work, we met with
U.S. mission officials, Honduran government officials, donor
representatives, and local NGOs. We also visited some existing USAID
projects in the agricultural sector that were similar to projects that
Honduras proposed.

We provided a draft of this statement to MCC, and we have incorporated
technical comments where appropriate. We also provided a draft of this
statement to the Departments of State and Treasury, USAID, and USTR; State
and USAID suggested no changes, and Treasury and USTR provided technical
comments, which we addressed as appropriate. We conducted our work between
April 2004 and April 2005, in accordance with generally accepted
government auditing standards.

Appendix II: Candidate and Eligible Countries for MCA and Threshold
Programs, Fiscal Years 2004-2005

                MCC                  Threshold                                                 
Candidate    compact-eligible      Program       Candidate   MCC compact-eligible   Threshold Program
countries        countries        countries      countries         countries            countries
                    2004 2005        2004 2005     (continued)        2004 2005            2004 2005
Afghanistan                                        Lesotho      Lesotho    Lesotho             
*Albania                          *Albania         Madagascar   Madagascar Madagascar          
Angola                                             Malawi                                      Malawi      
Armenia         Armenia  Armenia                   Mali         Mali       Mali                
Azerbaijan                                         Mauritania                                  
Bangladesh                                         Moldova                                     
Benin           Benin    Benin                     Mongolia     Mongolia   Mongolia            
Bhutan                                             Morocco                 Morocco             
Bolivia         Bolivia  Bolivia                   Mozambique   Mozambique Mozambique          
*Bosnia and                                        Nepal                                       
Herzegovina                                                                                    
Burkina Faso                               Burkina Nicaragua    Nicaragua  Nicaragua           
                                           Faso                                                
Cameroon                                           Niger                                       
*Cape Verde     *Cape                              Nigeria                                     
                Verde                                                                          
Chad                                               Pakistan                                    
China                                              Papua New                                   
                                                   Guinea                                      
Comoros                                            Paraguay                                    Paraguay    
Congo                                              Philippines                                 Philippines 
Democratic                                                                                     
Republic                                                                                       
Congo, Rep.                                        Rwanda                                      
Djibouti                                           Sao Tome and                       Sao Tome Sao Tome    
                                                       Principe                       and      and         
East Timor                            East East                                       Principe Principe    
                                     Timor Timor                                               
Egypt. Arab                                        Senegal      Senegal    Senegal             
Rep. of                                                                                        
Eritrea                                            Sierra Leone                                
Ethiopia                                           Solomon                                     
                                                   Islands                                     
Gambia                                             Sri Lanka    Sri Lanka  Sri Lanka           
Georgia         Georgia  Georgia                   Swaziland                                   
Ghana           Ghana    Ghana                     Tajikistan                                  
Guinea                                             Tanzania                           Tanzania Tanzania    
Guinea-Bissau**                                    Togo                                        
Guyana                                     Guyana  *Tonga                                      
Haiti                                              Turkmenistan                                
Honduras        Honduras Honduras                  Uganda                             Uganda   Uganda      
India                                              Ukraine                                     
Indonesia                                          Vanuatu      Vanuatu    Vanuatu             
Kenya                              Kenya   Kenya   Vietnam                                     
Kiribati                                           Yemen                              Yemen    Yemen       
                                                   Republic                           Republic Republic    
Kyrgyz Republic                                    Zambia                                      Zambia      
Lao PDR                                                                                        
* Candidate for FY 2004 only. ** Prohibited under                                     
Foreign Assistance Act in FY 2004 but not in FY                                       
2005. Candidate for FY 2005 only.                                                     

Source: GAO analysis and synthesis of MCC data.

Note: The countries listed do not include the 12 and 14 countries that
were not candidates because of legal prohibitions in fiscal years 2004 and
2005, respectively.

Appendix III: Indicators Used in the Selection Process

Table 1 lists each of the indicators used in the MCA compact and threshold
country selection process, along with its source and a brief description
of the indicator and the methodology on which it is based.

Table 1: Quantitative Indicators Used to Determine MCA Country Eligibility

                                 RULING JUSTLY

Indicator/Source          Description              Methodology             
Political rights Freedom  Measures the ability of  A survey providing an   
House, Freedom in the     citizens to participate  annual evaluation of    
World 2003                freely in the political  the state of global     
                             process. This includes   freedom. A panel of     
                             the right to vote, elect experts uses a broad    
                             representatives who have range of sources of     
                             real power, and compete  information, including  
                             for public office.       foreign and domestic    
                                                      news reports,           
                                                      nongovernmental         
                                                      organization            
                                                      publications, think     
                                                      tank and academic       
                                                      analyses, individual    
                                                      professional contacts,  
                                                      and visits to the       
                                                      region. The panel rates 
                                                      countries on the        
                                                      prevalence of free and  
                                                      fair elections of       
                                                      officials with real     
Civil liberties Freedom   Measures citizen's       power; the ability of   
House, Freedom in the     freedom to develop       citizens to form        
World 2003                opinions, institutions,  political parties that  
                             and personal autonomy    may compete fairly in   
                             without interference     elections; freedom from 
                             from the state.          domination by the       
                                                      military, foreign       
                                                      powers, totalitarian    
                                                      parties, religious      
                                                      hierarchies, and        
                                                      economic oligarchies;   
                                                      and the political       
                                                      rights of minority      
                                                      groups. Countries       
                                                      receive numerical       
                                                      ratings from 1 to 7,    
                                                      with 1 being the most   
                                                      free.                   
Voice and accountability  Measures the ability of  An index of surveys     
Governance Matters III:   institutions to protect  based on several        
Governance Indicators for civil liberties, the     hundred individual      
1996-2002, D. Kaufmann,   extent to which citizens variables measuring     
A. Kraay, and M.          of a country are able to perceptions of          
Mastruzzi, The World      participate in the       governance, drawn from  
Bank, 2003                selection of             25 separate data        
                             governments, and the     sources constructed by  
                             independence of the      18 different            
                             media.                   organizations. The      
Government effectiveness  Measures the ability of  governance indicators   
Governance Matters III:   the government to        are measured in units   
Governance Indicators for formulate and implement  ranging from -2.5 to    
1996-2002, D. Kaufmann,   sound policies,          2.5, with higher values 
A. Kraay, and M.          including quality of     corresponding to better 
Mastruzzi, The World      public service           governance outcomes.    
Bank, 2003                provision, quality of    
                             bureaucracy, competency  
                             of civil servants,       
                             independence of civil    
                             service from political   
                             pressures, credibility   
                             of the government's      
                             commitment to policies.  

Rule of law

Governance Matters III: Governance Indicators for 1996-2002, D. Kaufmann,
A. Kraay, and M. Mastruzzi , The World Bank, 2003

Control of corruption

Governance Matters III: Governance Indicators for 1996-2002, D. Kaufmann,
A. Kraay, and M. Mastruzzi , The World Bank, 2003 Measures the extent to
which the public has confidence in, and abides by, rules of society.
Includes perception of the incidence of crime, the effectiveness and
predictability of the judiciary, and the enforceability of contracts.

Rates countries on the frequency of "additional payments to get things
done," the effects of corruption on the business environment, "grand
corruption" in the political arena, and the tendency of elites to engage
in "state capture."

                      INVESTING IN PEOPLE ECONOMIC FREEDOM

Indicator/Source           Description            Methodology              
Primary (girls') education The number of students EdStats compiles data    
completion rate World Bank (girls) completing     from a variety of        
(EdStats and Education for primary education,     sources. The primary     
All, World Development     divided by the         sources are the UNESCO   
Indicators) and UNESCO     population in the      Institute for Statistics 
Institute for Statistics,  relevant age cohort.   (UIS), the Organization  
various years                                     for Economic Cooperation 
                                                     and Development (OECD),  
                                                     the International        
                                                     Monetary Fund (IMF), and 
                                                     the World Bank and its   
                                                     client countries.        
Primary education spending Total expenditures on  Data from national       
(% OF GDP) National        primary education by   sources was gathered     
Governments and World Bank government at all      directly from the        
(Education For All),       levels, divided by     governments of both the  
various years              GDP.                   candidate countries and  
                                                     the legally prohibited   
                                                     countries in March and   
                                                     April 2004 with the      
                                                     assistance of U.S.       
                                                     embassies.               
Public health spending (%  Total expenditures on  Same methodology as      
OF GDP) National           health by government   Primary education        
Governments, supplemented  at all levels, divided spending (% of GDP).     
by World Bank (World       by GDP.                
Development Indicators),                          
various years                                     
Diphtheria and measles     The average of DPT3    Data officially reported 
immunization rate World    and measles            to WHO and UNICEF by     
Health Organization and    immunization rates for Member States in         
UNICEF estimates of        the most recent year   addition to data         
National Immunization      available.             reported in the          
Coverage, 2002                                    published and grey       
                                                     literature. WHO and      
                                                     UNICEF also consult with 
                                                     local experts -          
                                                     primarily national EPI   
                                                     managers and WHO         
                                                     regional office staff -  
                                                     for additional           
                                                     information regarding    
                                                     the performance of       
                                                     specific local           
                                                     immunization services.   
                                                     The true level of        
                                                     immunization is based on 
                                                     estimates of national    
                                                     immunization for various 
                                                     vaccines.                

Indicator/Source         Description               Methodology             
Country credit rating    A semi-annual survey of   Institutional Investor  
Institutional Investor,  bankers' and fund         reports regularly and   
March 2004               managers' perceptions of  provides credit         
                            a country's risk of       ratings, based on the   
                            default.                  perceived risk of       
                                                      government default,     
                                                      every 6 months for 145  
                                                      countries, including 85 
                                                      MCA countries.          
                                                      Countries are ranked on 
                                                      a scale from 1 to 100   
                                                      based on information    
                                                      provided by economists  
                                                      and sovereign risk      
                                                      analysts from banks and 
                                                      money management and    
                                                      securities firms.       
Fiscal policy IMF World  Overall budget deficit    The IMF provided the    
Economic Outlook, 2003   (after receipt of grants  MCC with the budget     
or more recent data, if  but not concessional      deficit data, which is  
available                loans; includes interest  otherwise not publicly  
                            on debt) divided by GDP,  available. We do not    
                            averaged over a 3-year    know what methodology   
                            period.                   the IMF used to obtain  
                                                      this data for all       
                                                      countries. However, WEO 
                                                      short-term fiscal       
                                                      policy assumptions for  
                                                      advanced economies are  
                                                      based on officially     
                                                      announced budgets       
                                                      adjusted for            
                                                      differences between the 
                                                      national authorities    
                                                      and the IMF staff       
                                                      regarding macroeconomic 
                                                      assumptions and         
                                                      projected fiscal        
                                                      outcomes.               
Trade policy Heritage    A country's openness to   This is a subjective    
Foundation/Wall Street   international trade based indicator. The          
Journal 2004 Index of    on average tariff rates   countries are rated     
Economic Freedom         and nontariff barriers to from 1 to 5, based      
                            trade, on a scale of 1 to primarily on tariff and 
                            5, with 1 being the most  quota rates, where      
                            open.                     available.              
Regulatory quality       Measures of the incidence Same methodology as     
Governance Matters III:  of market-unfriendly      voice and               
Governance Indicators    policies such as price    accountability, above.  
for 1996-2002, D.        controls or inadequate    
Kaufmann, A. Kraay, and  bank supervision, as well 
M. Mastruzzi, The World  as perception of the      
Bank, 2003               burdens imposed by        
                            excessive regulation in   
                            areas such as foreign     
                            trade and business        
                            development.              
Days to start a business The number of days        Doing Business compiles 
May 2004, World Bank     required for companies to a comprehensive list of 
Doing Business           complete all procedures   entry regulations by    
                            necessary to legally      recording all the       
                            start a business.         procedures that are     
                                                      officially required for 
                                                      an entrepreneur to      
                                                      obtain all necessary    
                                                      permits, and to notify  
                                                      and file with all       
                                                      requisite authorities,  
                                                      in order to legally     
                                                      operate a business. The 
                                                      data are from January   
                                                      2003.                   

One-year consumer price inflation

IMF International Financial Statistics (2002, 2003), supplemented by
national government data, and IMF's World Economic Outlook, various years
The most recent 12-month change in consumer prices as reported in the
IMF's International Financial Statistics or in another public forum by the
relevant national monetary authorities.

Consumer price indexes (CPI) are used most frequently as an indicator of
inflation. The CPI reflect changes in the cost of acquiring a fixed basket
of goods and services by the average consumer. Weights are derived from
household expenditure surveys, which may be conducted infrequently.

Since announcing the 16 quantitative indicators that it used to determine
country eligibility for fiscal year 2004, MCC made two changes for fiscal
year 2005 and is exploring further changes for fiscal year 2006. To better
capture the gender concerns specified in the Millennium Challenge Act, MCC
substituted "girls' primary education completion rate" for "primary
education completion rate." It also lowered the ceiling for the inflation
rate indicator from 20 to 15 percent. In addition, to satisfy the act's
stipulation that MCC use objective and quantifiable indicators to evaluate
a country's commitment to economic policies that promote sustainable
natural resource management, MCC held a public session on February 28,
2005, to launch the process of identifying such an indicator. MCC expects
to complete the process by May 2005.

Appendix IV: Threshold Program Selection Process

The MCC board used objective criteria (a rules-based methodology) and
exercised discretion to select the threshold countries (see fig. 10). For
fiscal year 2004, the MCC board relied on objective criteria in selecting
as Threshold Program candidates countries that needed to improve in 2 or
fewer of the 16 quantitative indicators used to determine MCA eligibility.
(That is, by improving in two or fewer indicators, the country would score
above the median on half of the indicators in each policy category, would
score above the median on the corruption indicator, and would not score
substantially below the median on any indicator.) MCC identified 15
countries that met its stated criteria and selected 7 countries to apply
for Threshold Program assistance. Our analysis suggests that one of these
seven countries did not meet MCC's stated Threshold Program criteria. 1
The MCC board also exercised discretion in assessing whether countries
that passed this screen also demonstrated a commitment to undertake policy
reforms to improve in deficient indicators.

For fiscal year 2005, the MCC did not employ a rules-based methodology for
selecting Threshold Program candidates. Instead, the board selected
Threshold Program and MCA compact-eligible countries simultaneously. The
board selected 12 countries to apply for Threshold Program assistance,
including reconfirming the selection of 6 countries 2 that also had
qualified for the fiscal year 2004 Threshold Program.

1

Yemen would have had to improve on at least three indicators to meet the
fiscal year 2004 Threshold Program criteria.

2

Albania was not a candidate for fiscal year 2005 due to per capita income
above the IDA ceiling.

Page 45 GAO-05-625T

                       Appendix V: Timeline of Key Events

Figure 11 illustrates key events and defining actions relating to MCC
since the passage of the Millennium Challenge Act in January 2004.

          Source: GAO synthesis of MCA information through March 2005.

Appendix VI: Donors in MCA Compact-eligible Countries

MCC plans to be among the top donors in MCA compact-eligible countries.
Figure 12 shows the total official development assistance net (average for
2002 and 2003) provided by the top three donors as well as the amount of
total official development assistance net (average for 2002 and 2003)
provided by all donors in each of the MCA compact-eligible countries. As
the figure indicates, based on the average for the years 2002-2003, the
United States was the top donor in Armenia, Bolivia, Georgia, and Honduras
and was among the top five donors in nine additional countries.

 Figure 12: Top Donors in MCA Compact-eligible Countries, Total Annual ODA Net,
                            Average for 2002 - 2003

Eligible Total ODA net countries Largest donors (2004 U.S. dollars in
millions) (2004 U.S. dollars in millions) Armenia

                               IDA ($73) EC ($23)

$ 276

Benin

260

EC ($40) France ($39)

IDB ($138) IDA ($120)

Bolivia

821

Cape Verde

120

Portugal ($26) IDA ($20) EC ($19)

Georgia

272

                              IDA ($52) Ger. ($27)

Ghana

793

IDA ($139) UK ($130)

Honduras

424

Japan ($65) IDB ($58)

80

EC ($18) IDA ($15) Ireland ($12)

Lesotho

IDA ($178) France ($90) EC ($70)

Madagascar

469

512

Mali

IDA ($91) EC ($82) France ($69)

Japan ($75) AsDF ($33) Ger. ($27)

234

Mongolia

France ($181) EC ($141) Japan ($54)

520

Morocco

Italy ($237) France ($231) IDA ($156) Mozambique

1588

IDB ($103) IDA ($98) Ger. ($84)

Nicaragua

695

460

France ($115) IDA ($107) EC ($48)

Senegal

523

Japan ($150) AsDF ($123) IDA ($116)

Sri Lanka

Australia ($13)

New Zealand ($4) 31

Vanuatu

0 20 40 60 80 100 Percent

Largest donors in eligible country AsDF Asia Development Bank Special
Funds IDB Inter-American Development Bank

EC European Commission Special Operating Fund top 3 donors in eligible
country Ger. Germany IMF International Monetary FundUnited States among
the

IDA International Development Association ODA Official Development
Assistance Other donors (concessionary lending arm of the World Bank) UK
United Kingdom Numbers may not add due to rounding

  Source: GAO, based on Organization for Economic Cooperation and Development
                                  (OECD) data.

Appendix VII: MCC Coordination with Key Stakeholders

MCC is coordinating its program and funding activities with various
stakeholders to keep them informed and to utilize their expertise or
resources at headquarters and in the field (see fig. 13). In addition,
several

U.S. agencies have taken steps to coordinate their activities with MCC.

               Figure 13: MCC Coordination with Key Stakeholders

             Coordination mechanisms         Examples of coordination         
U.S.      o  USAID established an MCC     o  USAID and State facilitated   
agencies  coordination unit with three    MCC country visits  o  USAID     
             staff  o  State has assigned an provided country-specific        
             MCA coordinator  o  Treasury    information to MCC.  o  USAID    
             and USTR officials are          formulated its 2003a regional    
             providing advice or reviewing   strategy for Central America     
             information as needed  o  MCC   around MCC's three policy        
             has signed agreements with      categories.  o  State provided   
             -USAID to design and implement  supplemental information for     
             Threshold Program -U.S. Army    country selection process.  o    
             Corps of Engineers (USACE) to   Treasury has facilitated         
             evaluate proposed               coordination with multilateral   
             infrastructure projects         donors.  o  USTR has facilitated 
             -Treasury's Office of Technical meetings with World Trade        
             Assistance to assess and        Organization ambassadors of      
             monitor fiscal accountability   eligible countries.  o  USDA has 
             -U.S. Census Bureau to evaluate reviewed agricultural projects.  
             proposed monitoring and         o  USACE is helping review       
             evaluation methodologies. -USDA infrastructure projects.         
             to evaluate proposed            
             agricultural sector projects.   
Donors    o  MCC conducts direct outreach o  Eligible countries are using  
             to and consultations with       World Bank- and IMF-supported    
             donors in headquarters and      Poverty Reduction Strategy       
             eligible countries  o  Existing Papers to develop compact        
             donor coordination mechanism in proposals.  o  IMF provided      
             eligible countries              budget data for MCC's fiscal     
                                             policy indicator. Inter-American 
                                             Development Bank (IDB) has       
                                             provided studies and             
                                             assessments.                     
                                             o  World Bank and IDB officials  
                                             have briefed MCC.                
                                             o  MCC has sought                
                                             program-specific input from      
                                             donors in eligible countries.    
                                             o  U.S. NGOs have helped MCC     
NGOs      o  Public meetings              identify country-based NGOs      
             o  NGO-specific meetings        o  NGOs have shared monitoring   
                                             and evaluation expertise  o      
                                             NGOs provided input to make an   
                                             Investing in People              
                                             indicator gender sensitive       

Source: GAO synthesis of information provided by MCC.

aA

lthough MCC was formally established in February 2004, an interagency team
that included representatives from the National Security Council, State,
USAID, Treasury, and the Office of Management and Budget began designing
and implementing the MCA initiative in the spring of 2002.

Appendix VIII: MCC Organizational Structure

Within each of the eight functional areas shown in figure 14, the actual
staffing level as of April 2005 appears in the pie chart in each box and
the planned staffing level by December 2005 appears in the right corner of
each box.

                   Source: GAO synthesis of MCC information.

(320347)

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