Analysis of Future Millennium Challenge Corporation Obligations  
(21-FEB-06, GAO-06-466R).					 
                                                                 
The Millennium Challenge Corporation (MCC)--intended to provide  
aid to developing countries that have demonstrated a commitment  
to ruling justly, encouraging economic freedom, and investing in 
people--has received appropriations for fiscal years (FY) 2004-06
totaling more than $4.2 billion. About $3.8 billion of this	 
amount has been set aside for compact assistance. As of January  
2006, MCC had signed or approved eight compacts obligating about 
$1.5 billion, leaving an unobligated balance of about $2.3	 
billion. To assist in this year's budget deliberations, this	 
letter provides a range of estimates under two scenarios of how  
quickly MCC could obligate this balance and three possible levels
of FY 2007 appropriations at the current pace of compact award.  
The President has requested an additional $3 billion for MCC for 
FY 2007. To address this objective, we analyzed MCC's FY 2005 and
2006 budget presentations and other corporation records. We	 
selected two illustrative scenarios for future MCC obligations:  
(1) a "higher cost" scenario in which the average size of future 
compacts is consistent with MCC projections and (2) a "lower	 
cost" scenario in which future compacts are consistent with the  
average compact size to date.					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-466R					        
    ACCNO:   A47377						        
  TITLE:     Analysis of Future Millennium Challenge Corporation      
Obligations							 
     DATE:   02/21/2006 
  SUBJECT:   Appropriated funds 				 
	     Appropriations					 
	     Budget obligations 				 
	     Developing countries				 
	     Federal aid to foreign countries			 
	     Funds management					 
	     Financial analysis 				 
	     Projections					 

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GAO-06-466R

     

     * Summary
     * Assumptions Used in Our Analysis
     * Analysis of Future MCC Obligations
     * Some Implications of Our Analysis
     * Comments from MCC
     * PDF6-Ordering Information.pdf
          * Order by Mail or Phone

February 21, 2006

The Honorable Richard G. Lugar

Chairman, Committee on Foreign Relations

United States Senate

Subject: Analysis of Future Millennium Challenge Corporation Obligations

Dear Chairman Lugar:

The Millennium Challenge Corporation (MCC)-intended to provide aid to
developing countries that have demonstrated a commitment to ruling justly,
encouraging economic freedom, and investing in people-has received
appropriations for fiscal years (FY) 2004-06 totaling more than $4.2
billion. About $3.8 billion of this amount has been set aside for compact
assistance.1 As of January 2006, MCC had signed or approved eight
compacts2 obligating about $1.5 billion,3 leaving an unobligated balance
of about $2.3 billion. To assist in this year's budget deliberations, this
letter provides a range of estimates under two scenarios of how quickly
MCC could obligate this balance and three possible levels of FY 2007
appropriations at the current pace of compact award. The President has
requested an additional $3 billion for MCC for FY 2007.

To address this objective, we analyzed MCC's FY 2005 and 2006 budget
presentations and other corporation records. We selected two illustrative
scenarios for future MCC obligations: (1) a "higher cost" scenario in
which the average size of future compacts is consistent with MCC
projections and (2) a "lower cost" scenario in which future compacts are
consistent with the average compact size to date. For both of these
scenarios, we assumed that MCC would sign an average of two compacts per
quarter-the actual rate observed since April 2005. We discussed our
estimates with MCC officials and have incorporated their comments as
appropriate. We conducted our work in December 2005 through February 2006
in accordance with generally accepted government auditing standards.

Summary

Under the higher-cost scenario, MCC would obligate the balance of its FY
2004-06 appropriations in the second quarter of FY 2007. Assuming that
subsequent compact size remains consistent with MCC projections, an FY
2007 appropriation of $1, $2 or $3 billion will support the funding of
compacts through, respectively, the third quarter of FY 2007, the fourth
quarter of FY 2007, or the second quarter of FY 2008. The cumulative
number of compacts under this scenario ranges from 18 to 23.

United States Government Accountability Office

Washington, DC 20548

1About $400 million has been set aside for MCC's threshold country
program, administrative expenses, due diligence, monitoring and
evaluation, and other costs.

2The Millennium Challenge Act of 2003 (Public Law 108-199, Division D,
Section 605) authorizes MCC to provide assistance to countries that enter
into public compacts with the United States. MCC has negotiated compacts
with countries that contain agreed assistance objectives,
responsibilities, implementation schedules, expected results, and
evaluation strategies.

3Through January 2006, MCC had expended about $12 million of the $1.5
billion obligated for compact assistance.

Under the lower-cost scenario, MCC would obligate the balance of its FY
2004-06 appropriations during the fourth quarter of FY 2007 (about 6
months later than under the first scenario). Assuming that subsequent
compact size remains consistent with the average to date, an appropriation
of $1, $2 or $3 billion will support the funding of compacts through,
respectively, the third quarter of FY 2008, the first quarter of FY 2009,
or the third quarter of FY 2009. The cumulative number of compacts under
this scenario ranges from 25 to 34.

Assumptions Used in Our Analysis

For the higher-cost scenario, we assumed an average size of (a) $300
million for compacts funded with MCC's FY 2006 appropriations and (b) $345
million for compacts funded with its FY 2007 appropriations. These figures
are consistent with recent MCC projections. For the lower-cost scenario,
we assumed an average compact size of $190 million. This amount is
consistent with MCC's FY 2006 budget presentation and the actual average
for the eight compacts signed or approved to date. For these compacts, MCC
ranks among the top three donors in five of the eight countries and among
the top 10 donors in the remaining three countries.4 According to its FY
2005 and 2006 budget presentations and recent comments by the
corporation's Chief Executive Officer, MCC seeks to be among the largest
donors in each country that receives compact assistance. Table 1
summarizes some key characteristics of the compacts signed or approved
from April 2005 through January 2006.

Table 1: Characteristics of MCC Compacts Signed or Approved, April 2005 to
January 2006 
Dollars in millions
                                                               Average        
                              Month signed    Total   Length    amount  Donor 
Country      Status        or approved    amount  (years)  per year   rank
Madagascar   Entry into    April 2005        110        4        28      8 
                force a                                                
Honduras     Entry into    May 2005          215        5        43      5 
                force a                                                
Nicaragua    Signed        June 2005         175        5        35     10 
Cape Verde   Entry into    July 2005         110        5        22      3 
                force a                                                
Georgia      Signed        Sept. 2005        295        5        59      2 
Armenia      Approved b    Dec. 2005         236        5        47      3 
Vanuatu      Approved b    Jan. 2006          66        5        13      2 
Benin        Approved b    Jan. 2006         307        5        61      2 
Total                                      1,514              308.2 
Average                                      189                    
Source: GAO analysis of MCC records and data from the Organization for
Economic Cooperation and Development.
                
aSigned compacts in which MCC and partner countries have negotiated
additional agreements covering disbursement of funds, governance,
procurement, fiscal and procurement agents, and other implementation
matters.     
                
bCompact approved by MCC Board of Directors but not yet signed by
corporation and country officials.

For both scenarios, we assumed that over the next several years MCC would
sign an average of two compacts per quarter-the actual rate observed. From
April 2005 through January 2006, MCC signed or approved compacts with
eight countries, or two compacts per quarter. This rate is the lower bound
of the target range of two to four compacts per quarter established in
MCC's FY 2006 budget presentation.

4To make this determination, we compared the average annual size of each
compact with the gross official development assistance (average for
2003-04) provided by the top 10 donors in each country.

Analysis of Future MCC Obligations

Under the higher-cost scenario, the corporation would obligate the balance
of its FY 2004-06 appropriations by the second quarter of FY 2007.
Assuming subsequent compact size remains consistent with MCC projections,
an FY 2007 appropriation of $1, $2 or $3 billion would fund compacts
through, respectively, the third quarter of FY 2007, the fourth quarter of
FY 2007, or the second quarter of FY 2008.5 The cumulative total of
compacts funded under this scenario would be 18, 20 or 23.

Under the lower-cost scenario, the corporation would obligate the balance
of its FY 2004-06 appropriations by the fourth quarter of FY 2007 (or
about 6 months later than under the first scenario). Again assuming that
subsequent compact size remains consistent with the average to date, an
appropriation of $1, $2 or $3 billion would fund compacts through,
respectively, the third quarter of FY 2008, the first quarter of FY 2009,
or the third quarter of FY 2009. The cumulative number of compacts funded
under this scenario would be 25, 30 or 34.

Figure 1 presents our estimate of MCC's cumulative obligations and number
of compacts signed under these two scenarios, as well as MCC's obligations
to date.

Figure 1: Estimated MCC Obligations and Numbers of Compacts under Higher-
and Lower-Cost Scenarios and Current Obligations as of January 2006

5Our estimates assume that about 10 percent of the corporation's FY 2007
appropriations would be set aside for MCC's threshold country program,
administrative expenses, due diligence, monitoring and evaluation, and
other costs, leaving the remaining 90 percent to finance compacts.

Some Implications of Our Analysis

Over the period covered by our analysis, the substantial expansion in the
number of compacts-and thus the number of countries in which MCC would
operate6-suggested by MCC's current and target rates for signing compacts
could present several challenges for the corporation. First, such an
expansion could exhaust the pool of candidate countries that meet MCC's
quantitative eligibility criteria. Our analysis of MCC data suggests that
34 candidate countries-8 lower-middle income and 26 low income-met MCC's
FY 2006 quantitative indicator criteria. We previously reported that 19
and 24 low income candidate countries met MCC's criteria in FY 2004 and
2005, respectively.7

Second, such an expansion could significantly challenge MCC's ability to
make eligibility determinations; review and assist in proposal
development; conduct due diligence reviews; negotiate, sign, complete
entry into force requirements; and assist in the development of compact
implementation structures for a large number of additional countries. For
the eight countries in table 1, an average of 484 days elapsed from
eligibility determination to compact signing or approval. It took, on
average, an additional 112 days for three of these countries to advance
from compact signing to entry into force.

Third, monitoring and evaluating the implementation of complex,
multi-million-dollar compacts in a large number of countries could strain
MCC's management and oversight capabilities. Several development experts
have stated that MCC's proposed staffing level (300) is very lean for an
organization planning to disburse $2 billion or more per year.

Comments from MCC

Overall, MCC officials characterized our analysis as unbiased and fact
based. With regard to the implications of our analysis, MCC officials
stated that the corporation was taking steps to reduce the time required
to develop, review, and start implementing compacts. These steps include
(1) developing guidance to assist eligible countries in developing
proposals that will require limited revision; (2) reducing the time
required to conduct due-diligence reviews by increasing staffing and
resources devoted to this task;8 and (3) implementing policies intended to
reduce the time between compact signing and entry into force by requiring
MCC teams and countries to resolve key implementation details and issues
earlier in the compact development process. Consistent with recent public
remarks made by the corporation's Chief Executive Officer, MCC officials
recognized that implementing compacts in developing countries will present
substantial challenges. MCC officials also provided updated information
about projected compacts and several technical comments, which we have
incorporated as appropriate.

6Under the Millennium Challenge Act, countries may have only one
Millennium Challenge compact in effect at a time.

7See U.S. Government Accountability Office, Millennium Challenge
Corporation: Progress Made on Key Challenges in First Year of Operations,
GAO-05-455T (Washington, DC: April 26, 2005).

8MCC plans to increase its staff from about 170 to 300 between January and
September 2006.

                                   - - - - -

If you or your staff have any questions about this letter, please contact
me at 202-512-4128 or [email protected] . Phil Herr and Michael Rohrback
made significant contributions to this letter.

Sincerely yours,

David B. Gootnick Director, International Affairs and Trade

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