    Millennium Challenge Corporation: Compact Implementation
    Structures Are Being Established; Framework for Measuring Results
    Needs Improvement (28-JUL-06, GAO-06-805).

    In January 2004, Congress established the Millennium Challenge
    Corporation (MCC) to administer the Millennium Challenge Account.
    MCC's mission is to reduce poverty by supporting sustainable,
    transformative economic growth in developing countries that
    create and maintain sound policy environments. MCC has received
    more than $4.2 billion in appropriations, and, as of May 2006, it
    had disbursed $22.4 million to four countries whose signed MCC
    compacts have entered into force. For the first three countries
    with compact entry into force--Madagascar, Cape Verde, and
    Honduras--GAO was requested to examine (1) key aspects that MCC
    reviewed, and the criteria it used, in its due diligence
    assessments; and (2) the structures that have been established
    for implementing the compacts.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-06-805
        ACCNO:   A57625
      TITLE:     Millennium Challenge Corporation: Compact Implementation
    Structures Are Being Established; Framework for Measuring Results
    Needs Improvement
         DATE:   07/28/2006
      SUBJECT:   Accountability
    	     Developing countries
    	     Economic analysis
    	     Economic growth
    	     Evaluation criteria
    	     Federal corporations
    	     Financial management
    	     Fiscal policies
    	     Performance measures
    	     Program evaluation
    	     Program management
    	     Program goals or objectives
    	     Program implementation
    	     Cape Verde
    	     Honduras
    	     Madagascar

    ******************************************************************
    ** This file contains an ASCII representation of the text of a  **
    ** GAO Product.                                                 **
    **                                                              **
    ** No attempt has been made to display graphic images, although **
    ** figure captions are reproduced.  Tables are included, but    **
    ** may not resemble those in the printed version.               **
    **                                                              **
    ** Please see the PDF (Portable Document Format) file, when     **
    ** available, for a complete electronic file of the printed     **
    ** document's contents.                                         **
    **                                                              **
    ******************************************************************
    GAO-06-805

         * Report to the Chairman, Committee on Foreign Relations, U.S. Senate
              * July 2006
         * MILLENNIUM CHALLENGE CORPORATION
              * Compact Implementation Structures Are Being Established;
                Framework for Measuring Results Needs Improvement
         * Contents
         * Results in Brief
         * Background
              * MCC Principles
              * MCC Structure
              * Eligibility for MCC Assistance
              * MCC's Compact Development
              * Compact Signature and Entry-into-Force Time Frames
              * MCC Guidance
         * MCC Assessed Five Key Aspects of Proposals While Developing Guidance,
           but Limitations Affected the Accuracy of Economic Analyses
              * MCC Assessed the Consultative Process as Guidance Evolved
              * MCC Assessed Project Coherence While Developing Specific Guidance
              * MCC Screened Projects for Environmental and Social Impact,
                Conditioning Funding on Detailed Assessment
              * MCC Evaluated Country Commitment and Capacity and Estimated
                Project Impact to Assess Sustainability
              * Limitations in Assumptions and Data, as Well as Country
                Involvement, Affected the Accuracy of Economic Analyses
         * MCC-Approved Compact Implementation Structures Are Not Yet Complete;
           Weaknesses in Monitoring and Evaluation Framework May Limit
           Measurement of Results
              * Countries Manage Projects with MCC Review, but Have Faced Delays
                in Staffing Oversight and Management Structures
                   * MCC Has Oversight Staff in Each Country, while Countries
                     Retain Management Responsibility
                   * Oversight and Management Entities Have Faced Staffing Delays
              * MCC Has Made Progress in Ensuring Fiscal Accountability, Although
                Countries' Systems Are Still Being Developed
                   * MCC Has Made Progress in Fiscal Accountability at the
                     Compact Level
                   * MCA-Madagascar and MCA-Cape Verde Have Implemented Internal
                     Controls for Fiscal Accountability, but Their Systems Are
                     Not Yet Fully Developed
                   * MCA-Madagascar
                   * MCA-Cape Verde
                   * Financial Audits for MCA- Madagascar and MCA-Cape Verde
              * MCC-Approved Country Procurement Systems Have Effective
                Characteristics, but Are Early in Their Implementation
                   * MCC Allowed Countries to Propose Procurement Agents and
                     Systems, but Retained Approval Rights
                   * Countries' Procurement Systems Have Strengths, but MCC and
                     Country Systems Are Not Fully Established
              * MCC Has Established Country Monitoring and Evaluation Frameworks,
                but Weaknesses May Limit Measurement of Results
                   * Countries' Programs Include Monitoring and Evaluation
                     Frameworks
                   * Weaknesses in Monitoring and Evaluation Frameworks May Limit
                     MCC's Ability to Measure Results
                   * Ensuring Baseline Data Availability and Quality
                   * Linking Monitoring Plans to Economic Analyses
                   * Accounting for Uncertainty in Achieving Target Values
                   * Using Randomized Controlled Trials in Compact Countries
         * Conclusions
         * Recommendations
         * Agency Comments and Our Evaluation
         * MCC Actions in Response to April 2005 GAO Recommendations
              * MCC Has Developed a Strategic Plan to Enhance Accountability and
                Completed a 2006 Performance Plan
              * MCC Has Made Significant Progress in Establishing Internal
                Controls
              * MCC Has Taken Steps to Develop Human Capital, but Does Not Track
                Allocation of Human Capital to Key Activities
              * MCC Has Taken Steps to Define Corporate Governance
         * Scope and Methodology
         * MCC Projects in Madagascar and Cape Verde
         * Summary of MCC Procurement Agents, Standards, and Provisions in
           Madagascar, Cape Verde, and Honduras
         * Comments from the Millennium Challenge Corporation
              * GAO Comments
         * Comments from the Department of State
              * GAO Comments
         * GAO Contacts and Staff Acknowledgments

    Report to the Chairman, Committee on Foreign Relations, U.S. Senate

    July 2006

    MILLENNIUM CHALLENGE CORPORATION

    Compact Implementation Structures Are Being Established; Framework for
    Measuring Results Needs Improvement

    Contents

    Tables

    Figures

    Abbreviations

    July 28, 2006Letter

    The Honorable Richard G. Lugar Chairman Committee on Foreign Relations
    United States Senate

    Dear Mr. Chairman:

    In January 2004, Congress established the Millennium Challenge Corporation
    (MCC) to administer the Millennium Challenge Account (MCA) for foreign
    assistance.1 MCC's mission is to reduce poverty by supporting sustainable,
    transformative economic growth in partnership with developing countries
    that create and maintain sound policy environments. MCC carries out its
    mission by funding projects or activities in developing countries that
    demonstrate a commitment to MCA objectives. MCC expects to raise incomes
    and lift thousands out of poverty in countries receiving MCC assistance.
    MCC has received appropriations for fiscal years 2004 to 2006 totaling
    more than $4.2 billion, about $3.8 billion of which has been set aside for
    compact assistance; as of May 2006, it had committed $1.5 billion and
    disbursed $22.4 million in compact assistance.2 The President has
    requested an additional $3 billion in MCC funding for fiscal year 2007.

    In April 2005, we reported on MCC's first year of operations, focusing on
    its process for determining country eligibility, progress in developing
    compacts, coordination with stakeholders, and progress in establishing
    management and accountability structures.3 We made several recommendations
    to the Chief Executive Officer (CEO) of MCC and to the Secretary of State,
    in her capacity as board chair, on ways to improve MCC's strategic
    planning, internal controls, and human capital and corporate governance
    policies. At that time, MCC's assessment-"due diligence"-of eligible
    countries' compact proposals4 had resulted in its signing one compact for
    $110 million with Madagascar; by the end of May 2006, MCC had signed
    compacts with seven more countries.5 As of the end of May 2006, six
    compact countries-Madagascar, Cape Verde, Honduras, Georgia, Vanuatu, and
    Nicaragua-had signed the supplemental agreements that MCC requires before
    compacts can "enter into force," when MCC begins to disburse funds for
    compact implementation. MCC has disbursed funds to four of these six
    countries-Madagascar, Cape Verde, Honduras, and Georgia-to begin
    implementing their compacts.

    At your request, we examine in this report MCC's procedures and structures
    for developing and implementing compacts. We focused our work on the first
    three countries to sign compacts: Madagascar, Cape Verde, and Honduras.
    Specifically, we reviewed

    o the key areas that MCC examined in its due diligence assessments of the
    three countries' compact proposals and the criteria that MCC used in these
    assessments and

    o the implementation structures that MCC and the three countries have
    established for oversight and management, fiscal accountability,
    procurement, and monitoring and evaluation of compacts.

    We also report on MCC's response to our April 2005 recommendations (see
    app. I). In conducting our work, we analyzed MCC's process for evaluating
    eligible country proposals, including MCC's guidance documents for
    eligible countries, policies and procedures, economic analysis, and
    documentation of its assessment of proposals submitted by Madagascar, Cape
    Verde, and Honduras. In addition, we reviewed MCC's compacts with the
    three countries and the supplemental agreements required for those

    compacts to enter into force.6 We also reviewed the countries'
    implementation plans, such as those for monitoring and evaluation. We
    supplemented our evaluation of due diligence and implementation documents
    with interviews with MCC officials and site visits to Madagascar and Cape
    Verde, in January and February 2006. We selected these two countries
    because they had advanced further than Honduras in filling key positions
    and beginning compact implementation. These site visits provided us with a
    firsthand perspective of the status of the program and the challenges
    these countries faced in developing their compacts and in beginning to
    implement their programs. Furthermore, we examined MCC's planning
    documents, policies, and procedures and interviewed senior MCC officials.
    We conducted our review from June 2005 through May 2006 in accordance with
    generally accepted government auditing standards. (See app. II for
    additional details of our scope and methodology.)

    Results in Brief

    MCC undertook a wide range of activities in its due diligence of the
    Madagascar, Cape Verde, and Honduras proposals, while at the same time
    developing guidance on key aspects of the countries' proposals. In
    conducting its assessments, MCC applied criteria from general guidance
    issued in 2004, which was shortly before the countries began developing
    their proposals, and from more specific guidance issued in 2005 and 2006.
    MCC's analyses of the projects' economic impact had limitations in their
    use of assumptions and data and degree of country involvement. We focused
    on MCC's assessment of five key aspects: the consultative process during
    proposal development, project coherence, environmental impact,
    institutional and financial sustainability, and economic analyses of the
    projects' impact on economic growth and poverty reduction:

    o Consultative process. MCC obtained the views of government, civil
    society, and private sector officials to determine whether the countries'
    consultative process had been timely, participatory, and meaningful. MCC
    officials told us that, on the basis of these assessments, they had
    returned proposals that were not sufficiently founded on the consultative
    process. However, in assessing the proposals, MCC used criteria contained
    in guidance issued after or shortly before the countries submitted their
    proposals.

    o Project coherence. MCC assessed whether the countries' proposed projects
    were linked to their compact goals and whether the projects addressed key
    impediments to achieving those goals. MCC's initial published guidance to
    the countries did not inform them that projects should be linked to
    compact goals. When MCC issued more specific guidance, in November 2005,
    it had already signed compacts with all three countries. Generally,
    projects were linked to compact goals in the three countries that we
    reviewed.

    o Environmental and social impact. MCC reviewed the probable environmental
    and social impact of proposed projects. For projects that MCC deemed
    likely to have a negative impact, it required further assessment as well
    as an impact management plan. In conducting its assessments, MCC used
    criteria in guidelines issued in March 2005.

    o Project sustainability. MCC assessed whether projects could be sustained
    institutionally and financially after the compacts expired. MCC reviewed
    (1) the countries' commitment to sustaining the projects by making policy
    changes and providing financial resources, (2) the countries'
    institutional capacity to achieve project objectives, and (3) the
    projects' likelihood of being financially self-sustaining based on MCC's
    economic analysis.

    o Economic analyses. To predict the projects' impact on economic growth,
    MCC calculated their economic rate of return-that is, for each dollar that
    it spent, the dollar benefit the country is likely to receive. MCC used an
    economic model that included data and assumptions about project
    beneficiaries' expected behaviors. However, the data and assumptions used
    in some of MCC's economic analyses may not accurately reflect the
    countries' socioeconomic conditions. As a result, MCC cannot be assured
    that it has selected projects that will achieve the compacts' goals. In
    the two countries we visited, Madagascar and Cape Verde, country
    representatives were not closely involved in MCC's economic analyses. This
    limited involvement in the process resulted in countries' having little
    understanding of the underlying economic framework on which the compacts
    were based.

    MCC and the countries have made progress in implementing structures for
    oversight and management, fiscal accountability, and procurement for
    Madagascar, Cape Verde, and Honduras, but some of these structures are not
    yet complete. In addition, although MCC has established monitoring and
    evaluation frameworks, the frameworks have weaknesses that could affect
    MCC's ability to ensure accountability for results.

    o Oversight and management. MCC and the countries have established
    structures that allow for country management with MCC review. MCC
    maintains a small staff in each country, which refers matters requiring
    approval to MCC headquarters in Washington, D.C. Country management
    structures include the following: a steering committee, a stakeholder
    committee, and a management unit. Staffing for all three country
    organizations remained incomplete for months after the compacts entered
    into force. This incomplete staffing at entry into force limits the
    ability of the countries to achieve their compact objectives within the
    fixed time period of the compact.

    o Fiscal accountability. MCC has established a framework of internal
    controls to incorporate fiscal accountability into MCC-funded projects. In
    Madagascar, we found that underlying accountability systems, policies and
    procedures, and internal controls are less fully developed than those in
    Cape Verde, which built on existing government structures and systems.
    Because the accountability systems in both countries are still under
    development, both countries face risks in their key financial processes
    and activities. In January 2006, the MCC Inspector General (IG) issued
    guidelines for the countries' financial audits, and Madagascar and Cape
    Verde are preparing for these audits.

    o Procurement. In each of the three countries, the MCC-approved systems
    have characteristics that typify effective procurement systems-for
    example, integrity, openness, and accountability. These systems are still
    largely untested, and some MCC and country staff and procedures are not
    yet in place.

    o Monitoring and evaluation. Compact countries are required to prepare and
    implement a monitoring and evaluation framework, including plans that
    document the necessary data collection, data quality reviews, analysis,
    and interim and final reporting of results. MCC has conditioned some
    disbursements on the countries' achieving performance targets. However,
    MCC's ability to track and account for results may be limited by
    weaknesses in the frameworks related to the availability and quality of
    baseline data, ensuring linkage between the economic models and the
    monitoring and evaluation plans, and accounting for uncertainty in setting
    targets and measuring progress. In addition, although MCC has retained
    five U.S. research organizations to independently analyze the results of
    MCC compacts, MCC has not completed the research designs needed to use its
    preferred methodology of randomized controlled trials prior to project
    implementation. Not completing the designs prior to project implementation
    potentially limits MCC's ability to perform randomized controlled trials.

    We are recommending that the CEO of MCC (1) adopt procedures that ensure
    greater involvement of compact country stakeholders in developing the
    economic model used to assess projects' likely impact and (2) to the
    extent practical and cost-effective, improve MCC's monitoring and
    evaluation capabilities by obtaining more accurate and reliable baseline
    data, ensuring a clear linkage between MCC's economic analyses and
    monitoring and evaluation frameworks, better accounting for uncertainty in
    setting targets and achieving outcomes, and ensuring the timely
    development of the needed research designs for randomized controlled
    trials prior to project implementation.

    In commenting on a draft of this report, MCC generally agreed with our
    findings, conclusions, and recommendations. The Department of State
    commented that it considered some of the findings of our report as
    reflecting minor or transitory problems, and that the report should note
    the improvements that MCC made during and since the period it covers.
    Throughout this report, we have described MCC and compact progress through
    May 2006. We have reprinted MCC's and State's comments, with our
    responses, in appendixes V and VI. We also incorporated technical comments
    from MCC in our report where appropriate.

    Background

    MCC Principles

    In pursuit of its mission to reduce poverty by supporting economic growth,
    MCC has identified and defined the following three key principles to guide
    its actions:7

    o Reward good policy. "Using objective indicators, countries are selected
    to receive assistance based on their performance in governing justly,
    investing in their citizens, and encouraging economic freedom."

    o Operate in partnership. "Countries that receive MCA assistance are
    responsible for identifying the greatest barriers to their own
    development, ensuring civil society participation, and developing a
    multi-year MCC compact."

    o Focus on results. "MCA assistance goes to those countries that have
    developed well-designed programs with clear objectives, benchmarks to
    measure expected results, procedures to ensure fiscal accountability for
    the use of MCA assistance, and a plan for effective monitoring and
    objective evaluation of results. Programs are designed so that recipient
    countries can sustain progress after the funding under the compact has
    ended."

    MCC Structure

    MCC is a government corporation that is managed by a CEO appointed by the
    President with the advice and consent of the Senate and is overseen by a
    Board of Directors (MCC Board). The Secretary of State serves as board
    chair, and the Secretary of the Treasury serves as vice-chair. Other board
    members are the U.S. Trade Representative, the Administrator of the U.S.
    Agency for International Development (USAID), the CEO of MCC, and up to
    four Senate-confirmed public members who are appointed by the President
    from lists of individuals submitted by congressional leadership.

    Eligibility for MCC Assistance

    The Millennium Challenge Act of 2003 requires MCC to select countries as
    eligible for MCA assistance each fiscal year. Countries with per capita
    income at or below a set threshold may be selected as eligible for
    assistance if they pass MCC indicator criteria and are not statutorily
    barred from receiving U.S. assistance. MCC uses 16 indicators divided into
    three categories: Ruling Justly, Encouraging Economic Freedom, and
    Investing in People.8 To be eligible for MCA assistance, countries must
    score above the median relative to their peers on at least half of the
    indicators in each category and above the median on the indicator for
    combating corruption. MCC used these quantitative indicators, as well as
    the discretion implicit in the Millennium Challenge Act, to select 17
    countries as eligible to apply for MCA compact assistance for fiscal years
    2004 and 2005. For fiscal year 2006, MCC identified 23 countries9 as
    eligible for assistance-the 17 previously selected and 6 additional
    countries, which included lower-middle-income countries eligible for the
    first time in fiscal year 2006.10

    MCC's Compact Development

    After MCC selects eligible countries, they may begin a four-phase process
    that can lead to the entry into force of compacts (see fig. 1). Each phase
    of this process is discussed after figure 1.

    Figure 1: Summary of the MCC Compact Development and Implementation
    Process and Status of Countries Eligible to Apply for Compacts, as of June
    2006

    aMCC must notify congressional appropriations committees 15 days prior to
    obligating funds.

    bCompact negotiations begin after the MCC investment committee approves a
    Consultation Memorandum prepared by the MCC transaction team. The
    memorandum is based on the transaction team's determination that the
    country proposal has sufficient information to justify entering into
    negotiations with the country. MCC must consult with and report to the
    appropriate congressional committees 15 days prior to the start of compact
    negotiations.

    cThe names of newly eligible countries in fiscal year 2006 are italicized.

    dThe MCC Board suspended Gambia's eligibility on June 16, 2006.

    1.Country proposal development. 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 nongovernmental
    organizations (NGO). The eligible country also identifies an "accountable
    entity" to manage the programs funded by MCC.11 Eligible countries
    submitting proposals are not guaranteed funding; instead, MCC assesses
    proposals through its due diligence review. As of May 2006, 14 of the 17
    countries selected as eligible in fiscal year 2004 or 2005, and 1 of the 6
    countries selected as eligible for the first time in fiscal year 2006, had
    submitted proposals accepted by MCC for due diligence review.

    2.MCC's due diligence review. MCC determines whether the proposal that an
    eligible country has submitted meets MCC criteria to ensure that proposed
    programs will be effective and funds will be well-used. Due diligence
    primarily occurs between MCC's acceptances of an "opportunity memo" and an
    "investment memo." MCC assembles a transaction team of MCC staff,
    personnel from other U.S. agencies, and consultants to conduct a
    preliminary assessment of a country's proposal and reports the team's
    findings in an opportunity memo to the MCC investment committee. The MCC
    investment committee consists of MCC's CEO, vice presidents, and other
    senior officials. If the opportunity memo is approved, the transaction
    team launches a detailed due diligence review. The team assesses the
    country proposal, reports its findings, and makes recommendations based on
    its assessment in an investment memo to the MCC investment committee. As
    of May 2006, MCC was conducting due diligence analyses of seven eligible
    country proposals.

    3.Compact negotiation and MCC Board approval. MCC may enter into compact
    negotiations with the eligible country before the investment memo is
    completed. If compact negotiations are successful, MCC staff formally
    submit the compact for MCC Board approval. Once the board approves the
    compact, MCC and the eligible country may sign it. As of March 2006, MCC
    had signed compacts with 8 of the 17 countries determined eligible in
    fiscal years 2004 and 2005. (See fig. 2.) MCC commits the full amount of
    the compact funding at signing but obligates and begins to disburse funds
    to implement projects only after the compact has entered into force. Under
    the Millennium Challenge Act, compacts may remain in force no longer than
    5 years. The compacts stipulate that, with limited exceptions, all funds
    must be spent during that time.

    4.MCC and compact country complete entry-into-force requirements. MCC's
    compact with each country identifies the following supplemental agreements
    that MCC and the country's accountable entity must complete before the
    compact can enter into force.12

    o The disbursement agreement sets out the "conditions precedent"13 and
    other requirements for disbursements from MCC and redisbursements to any
    person or entity. These conditions include performance targets for
    projects outlined in the compact.

    o The procurement agreement sets forth guidelines for all procurements of
    goods, works, and services financed with MCC funding.

    o Compact term sheets for supplemental agreements, which vary by country,
    and include documents such as a governance agreement, fiscal agent
    agreement, form of implementing entity agreement, and form of bank
    agreement.

    After compacts enter into force, MCC may begin the disbursement of funds
    and countries may begin implementing projects. In the first eight
    compacts, approximately 53 percent of funding went to transportation and
    other infrastructure projects; 22 percent went to agriculture and rural
    development; 13 percent went to other project types; and 12 percent went
    to program management, monitoring, and evaluation. (See fig. 2.)

    Figure 2: MCC-Eligible Countries with Signed Compacts, as of May 2006

    Note: Numbers may not add due to rounding of source data. See appendix III
    for photographs of projects we visited in Cape Verde and Madagascar.

    aThe Access to Markets Project in Benin is a major construction project at
    the Port of Cotonou and includes associated studies and institutional
    strengthening.

    bThe Irrigated Agriculture Project in Armenia includes the repair of
    irrigation infrastructure.

    cThe Justice Program in Benin includes institutional strengthening and
    infrastructure components (construction of new courthouses).

    Compact Signature and Entry-into-Force Time Frames

    The length of time from country eligibility selection to compact signature
    has varied, with proposal development and due diligence generally
    requiring the most time (see fig. 3). For the six countries whose compacts
    had entered into force as of the end of May 2006, completing the steps
    necessary for entry into force after compact signing took approximately 3
    to 4 months for Madagascar, Cape Verde, and Honduras; approximately 7
    months for Georgia; 2 months for Vanuatu; and about 10 1/2 months for
    Nicaragua. For the two countries whose compacts had not entered into force
    as of the end of May 2006, 3 months had elapsed since compact signature
    for Benin, and 2 months had elapsed for Armenia (see fig. 3).

    Figure 3: Number of Days Elapsed from Eligibility to Compact Signature or
    Entry into Force, as of May 2006

    aBenin and Armenia have not yet entered into force.

    MCC Guidance

    MCC has issued guidance and policies for its compact development process
    in several stages. Before publishing its initial guidance in May 2004, MCC
    provided countries with preliminary guidance addressing fiscal
    accountability and monitoring and evaluation. Figure 4 shows the evolution
    of MCC's published guidance relative to the end of the due diligence
    process with the investment memo.

    Figure 4: Timeline of MCC Guidance Issuance and Investment Memo Dates

    aMCC issued interim Environmental Guidelines on March 4, 2005, and final
    Environmental Guidelines on January 23, 2006.

    bEconomic analysis guidelines and compact assessment and approval
    guidelines were reissued on January 23, 2006.

    cConsultative process guidance was reissued on January 6, 2006.

    dAccording to MCC officials, MCC provided an initial 2-page guidance to
    eligible countries in December 2004, but it did not publish the guidance
    on the MCC Web site. MCC issued an updated version of the guidance on
    January 6, 2006.

    MCC Assessed Five Key Aspects of Proposals While Developing Guidance, but
    Limitations Affected the Accuracy of Economic Analyses

    MCC undertook a wide range of activities in its due diligence of the
    Madagascar, Cape Verde, and Honduras proposals, while at the same time
    developing guidance on key aspects of the countries' proposals.14 During
    due diligence, MCC primarily considered criteria related to the proposals'
    consultative process, project coherence, environmental impact,
    institutional and financial sustainability, and economic analyses.15 MCC
    generally approved proposals that were based on a consultative process and
    returned proposals that lacked adequate consultations; however, MCC did
    not publish detailed criteria for the consultative process until 1 year
    after selecting the countries as eligible for MCC assistance. In assessing
    project coherence, MCC approved projects that were linked to the overall
    proposal objectives and rejected projects that were not, although its
    assessments used criteria that it had not yet published in its guidance.
    Additionally, MCC screened projects for likely environmental impacts and
    considered factors important for institutional and financial
    sustainability. Finally, MCC conducted economic analyses to assess the
    projects' likely impact on economic growth. However, limitations in
    assumptions and data may have affected the analyses' accuracy and led MCC
    to select projects that would not achieve its goals. Also, a lack of
    country involvement in the analyses does not reflect the MCC principle of
    working in partnership with countries and may have limited the countries'
    understanding of the process.

    MCC Assessed the Consultative Process as Guidance Evolved

    MCC's due diligence for Madagascar, Cape Verde, and Honduras assessed
    whether the countries had consulted with public and private sector and
    civil society stakeholders during proposal development. MCC officials told
    us that before beginning due diligence for the three countries, they
    assessed the consultative process in proposal drafts and, on the basis of
    this review, returned proposals that were not sufficiently founded on a
    consultative process. For example, according to the officials, MCC did not
    accept one country's proposal because, although the country had consulted
    with stakeholders, its proposal did not reflect the priorities identified
    during the consultative process.

    MCC documents indicate that during its due diligence for two of the three
    countries, MCC obtained the views of government, civil society, and
    private sector officials on how the governments conducted the consultative
    process. In addition, MCC assessed any previous experience the country had
    had with a consultative process16 For all three countries, MCC also
    reviewed factors such as the date, frequency, and locations of the
    process. MCC's documentation of these assessments in Madagascar, Cape
    Verde, and Honduras indicated that key stakeholders had generally agreed
    on the proposed compact priorities. However, the MCC assessments noted
    some weaknesses in the Madagascar and Honduras governments' management of
    the process:

    o In Madagascar, some groups expressed concern to MCC that the government
    had provided short notice (less than 10 days) for consultative meetings,
    and that this might have limited rural groups' participation.
    Additionally, the government did not communicate to participants its
    rationale for accepting or rejecting projects. However, despite these
    shortcomings, MCC noted "widespread agreement and enthusiasm for
    the...primary components of [the] proposal" among the business community,
    local and international NGOs, civil society, and donors.

    o In Honduras, MCC found, on the basis of discussions with local civil
    society organizations and international NGOs, that weaknesses-such as the
    large size of meetings-had limited effective participation in the
    consultative process for the poverty reduction strategy, which formed the
    basis of Honduras's MCC proposal. MCC's assessment also indicated that the
    government had not directly asked the consulted groups to identify
    obstacles to growth. However, MCC found that these groups concurred with
    the priorities identified in the country proposal. According to MCC
    officials, they followed up with the Honduran government to address the
    weakness noted by MCC in Honduras's consultative process. As a result,
    according to MCC documentation, the Honduran government conducted
    additional consultative sessions with civil society organizations and
    donors.

    MCC's due diligence of the countries also noted requirements for
    additional consultations during project implementation. For example, in
    some cases, countries were to undertake consultations with local
    stakeholders to identify project sites and conduct environmental
    assessments.

    Our discussions with representatives of civil society groups and donors in
    Madagascar and Cape Verde indicated that they generally concurred with the
    compact proposals.17 In Madagascar, a representative from a key civil
    society organization noted weaknesses in the government's conduct of the
    consultative process similar to those recorded by MCC. Nevertheless,
    stakeholders on the Madagascar advisory council, which includes various
    civil society and other organizations, said that the compact proposal
    generally accounted for their views, especially in comparison with other
    donor programs.

    As a relatively new organization, MCC conducted due diligence reviews
    while it was developing consultative process guidance:

    o Evolving guidance. While developing their proposals, the countries had
    access to general criteria in MCC's 2004 guidance; however, in assessing
    the proposals, MCC applied the more specific criteria contained in its
    detailed 2005 guidance. As figure 5 shows, the 2005 guidance was issued 1
    year after MCC announced the eligibility of Madagascar, Honduras, and Cape
    Verde. According to MCC's Guidance for Developing Proposals for MCA
    Assistance in FY 2004, "...each proposal is expected to reflect the
    results of an open consultative process, integrating governmental
    interests with those of the private sector and civil society." The 2004
    guidance required that proposals include a description of the consultative
    process, such as how the proposal takes into account local-level
    perspectives of the country's rural and urban poor, including women, and
    of private and voluntary organizations and the business community.
    Additionally, the guidance required the country to list all key
    participants, such as government and nongovernmental officials, who played
    a significant role in developing the proposal.

    MCC's 2005 Guidance on the Consultative Process more specifically requires
    eligible country governments to involve their citizens in identifying
    obstacles to economic growth and developing and prioritizing the
    development strategies and programs that will be included in the compact
    proposal. The 2005 guidance further states that an adequate consultative
    process should be timely, participatory, and meaningful. MCC's guidance
    also took into account the country's experience in using a consultative
    process to develop other national or poverty reduction strategies. If the
    compact was built on these consultations, MCC required some additional
    consultations to provide justification of country priorities in the MCA
    proposal.

    Figure 5: Issuance of Key MCC Criteria for the Consultative Process
    Relative to Completion of Due Diligence for Madagascar, Honduras, and Cape
    Verde

    o Incomplete documentation. MCC's documentation of its due diligence for
    the three countries presents summary findings, rather than an analysis of
    the extent to which the countries consulted with the rural and urban poor.
    For example, MCC's due diligence documentation indicates that the
    countries' governments included women's groups and rural sector groups in
    their consultative process; however, the documentation does not indicate
    the extent to which these groups represented the poor. Additionally, in
    Madagascar and Honduras, MCC's documentation does not indicate how MCC
    assessed the extent to which the consulted groups informed compact
    proposal priorities.

    MCC Assessed Project Coherence While Developing Specific Guidance

    In keeping with MCC's emphasis on results, due diligence for the three
    countries also assessed whether proposed projects were linked to one or
    more of the country's compact goals, and whether the projects addressed
    key impediments or constraints to achieving these goals. On the basis of
    its due diligence assessment, MCC rejected projects that were not linked
    to key constraints in two of the three countries we reviewed.
    Specifically, MCC rejected tourism and preschool education projects
    proposed by Honduras because they were not linked to the impediments to
    growth that emerged from the consultative process.18 MCC also rejected
    projects to construct feeder roads, which connect some watershed areas to
    the markets, and provide access to electricity in the rural areas of Cape
    Verde, because MCC's due diligence did not indicate that these projects
    addressed key constraints in Cape Verde.19

    In reviewing MCC's due diligence for the three countries, we found that
    MCC did not issue guidance stating that proposed projects should be linked
    to the compact goal until after it had concluded its due diligence
    assessments. MCC's 2004 guidelines for proposal development broadly
    instruct eligible countries to identify priority areas, such as health or
    education, and their expected goals for each priority area over the term
    of the proposed compact. The guidance also asks the countries to show how
    these strategic goals are related to the economic growth and poverty
    reduction of the country. MCC's November 2005 MCC Compact Assessment and
    Approval Guidelines more specifically indicates that MCC will assess how
    the project addresses compact goals. However, MCC issued the

    November 2005 guidance after completing its due diligence for the three
    countries.20 (See fig. 6.)

    Figure 6: Issuance of Key MCC Criteria for Project Coherence Relative to
    Completion of Due Diligence for Madagascar, Honduras, and Cape Verde

    MCC Screened Projects for Environmental and Social Impact, Conditioning
    Funding on Detailed Assessment

    MCC's due diligence for the three countries included a review of the
    probable environmental and social impact of projects that met its economic
    analysis and other criteria.21 For projects that it deemed likely to cause
    adverse environmental and social impact, MCC required impact assessments
    or environmental analyses, including an impact management plan.

    On the basis of its assessment, MCC assigned each project to category A,
    B, or C during due diligence to reflect its likely impact and assessments

    required.22 For example, MCC assigned all projects in the Madagascar
    proposal to category C, because MCC determined that these projects were
    not likely to have adverse environmental and social impact. In contrast,
    MCC assigned infrastructure projects in Cape Verde's and Honduras's
    proposals to category A or B. For example, the highway expansion project
    in Honduras was assigned category A, because it involves the clearing of
    rights-of-way that will require compensation for more than 200 affected
    people. The port expansion project in the Cape Verde proposal was also
    assigned to category A, because it entails dredging and construction in
    and around an existing port.

    Additionally, MCC assessed whether environmental impact assessments had
    been conducted for category A or B projects. For projects lacking
    environmental impact assessments, MCC conditioned project funding on the
    completion of such assessments as well as on the development of mitigation
    plans in consultation with affected groups. For projects that other
    organizations had assessed for environmental impact, MCC used a U.S.
    agency or a contractor to evaluate the assessment and determine its
    adequacy. For example, in Honduras, another donor had already conducted
    the environmental impact assessment for the highway segments proposed for
    MCC funding. As part of MCC due diligence, the U.S. Army Corps of
    Engineers reviewed these assessments and made recommendations that were
    incorporated in the existing assessments. However, in Cape Verde, the MCC
    contractor conducting due diligence found another organization's
    assessment of the port project's environmental impact to be inadequate. As
    a result, MCC required a new environmental assessment, along with plans to
    manage adverse impact, as a precondition for funding the project. MCC has
    allocated funds for this analysis in the compact budget for Cape Verde.

    MCC's 2004 proposal development guidelines do not address projects'
    environmental and social impact. In assessing environmental impact, MCC
    applied criteria from the Millennium Challenge Act of 2003, which
    prohibits MCC from funding projects that are "likely to cause a
    significant environmental, health, or safety hazard." MCC also used
    criteria laid out in its March 2005 interim Environmental Guidelines,
    which state that MCC will not fund projects that lack the appropriate
    screening or analysis for

    environmental impact.23  The guidance also states that the country has
    primary responsibility for conducting and monitoring environmental
    assessments. (See fig. 7.)

    Figure 7: Issuance of Key MCC Criteria for Environmental Impact Relative
    to Completion of Due Diligence for Madagascar, Honduras, and Cape Verde

    MCC Evaluated Country Commitment and Capacity and Estimated Project Impact
    to Assess Sustainability

    In keeping with its emphasis on sustainable progress, MCC's due diligence
    examined whether the three countries' proposed projects could be sustained
    after their compacts expired. In assessing project sustainability, MCC
    reviewed each country's policy and regulatory environment and commitment
    to reforms and financing of future maintenance costs; it also reviewed
    expected results from MCC-funded projects. In addition, MCC considered the
    countries' institutional capacity to sustain proposed projects as well as
    other donors' roles in strengthening countries' capacity.

    o Country commitment. For specific projects in Madagascar, Honduras, and
    Cape Verde, MCC reviewed policy or regulatory reforms, and host country
    financial commitment, and required some changes or commitment as a
    precondition to funding. For example, MCC determined that agricultural
    projects proposed by Cape Verde and Honduras would not be sustainable
    without the governments' commitment to policy reform. To ensure adequate
    operations and maintenance of proposed irrigation systems, MCC required
    that the Cape Verde government implement fees that reflect the costs of
    scarce water resources and recommended that the Honduran government also
    institute such reforms. In the case of Madagascar, MCC reviewed policy
    reforms in land management and financial sectors that would benefit
    MCC-funded activities.

    o Country capacity. In Madagascar, MCC determined that the government had
    limited institutional capacity to achieve the project objectives of
    increasing land security and promoting financial intermediation to
    increase rural savings and extension of credit. To build the government's
    capacity, MCC budgeted funding for (1) staff recruitment and training at
    Madagascar's land management department to support the land security
    project and (2) finance, management, and production training for rural
    producers and microfinance institutions to support the financial
    intermediation project. In addition, MCC considered the role of other
    donors in strengthening the countries' institutional capacity. For
    example, while assessing road projects, MCC considered the World Bank's
    road sector initiative, which includes institutional capacity-building in
    Cape Verde. In Honduras, MCC considered World Bank-funded and
    Inter-American Development Bank-funded programs intended to develop the
    transportation ministry's management capacity and maintenance contracting
    capacity.

    o Project impact. MCC also relied on the assumptions used in its analysis
    of projects' economic impact to determine the sustainability of
    agricultural sector projects for all three countries we reviewed. For
    example, MCC expects that as a result of MCC-funded technical assistance
    or credit to farmers and rural entrepreneurs, recipients will be able to
    generate enough income to afford these services by paying fees to
    providers. In cases where sustainability depends on achieving MCC's
    projected impact, the soundness of MCC's economic analysis, discussed in
    the next section of this report, will also be an important factor.

    In its sustainability assessments, MCC generally adhered to guidance
    issued in 2005, rather than to guidance from 2004. MCC's May 2004 proposal
    development guidance included a general requirement for a strategy to
    sustain progress after the compact's expiration. MCC's November 2005 MCC
    Compact Assessment and Approval Guidelines did not require such a
    strategy, but the guidelines required identification of factors
    contributing to institutional and financial sustainability for each
    project. (See fig. 8.)

    Figure 8: Issuance of Key MCC Criteria for Project Sustainability Relative
    to Completion of Due Diligence for Madagascar, Honduras, and Cape Verde

    Limitations in Assumptions and Data, as Well as Country Involvement,
    Affected the Accuracy of Economic Analyses

    During its due diligence reviews for Madagascar, Cape Verde, and Honduras,
    MCC analyzed proposed projects' probable impact on the country's economic
    growth and poverty reduction.24 This analysis was intended both to assess
    whether these projects would achieve MCC's goals and to provide a basis
    for monitoring their progress and evaluating their impact.

    To predict each project's impact on economic growth, MCC calculated an
    economic rate of return (ERR)  -that is, the expected annual average
    return to the country's firms, individuals, or sectors for each dollar
    that

    MCC spends on the project.25 In calculating projects' ERRs,26 MCC used an
    economic model that includes the following elements (see fig. 9):

    o MCC's annual expenditures for the project,

    o the project's annual benefits to the country,

    o predicted net benefits27 of the project, and

    o the projected ERR.

    Figure 9: Illustration of MCC's Methodology for Calculating an Economic
    Rate of Return: Advanced Crop Irrigation Project

    ERRs for the proposed projects in Madagascar, Cape Verde, and Honduras
    varied considerably, ranging from 116 percent for Madagascar's land
    titling project to 10 percent for a watershed management and agriculture
    support project in Cape Verde;28 the median ERR for projects in the three
    countries was 14 percent. However, because MCC analyzed the Madagascar and
    Honduras proposals before publishing its first set of economic analysis
    guidelines, the ERRs did not significantly affect those countries' overall
    choice of projects. (See fig. 10.)29 MCC's finding of a low ERR for part
    of Cape Verde's watershed management and agriculture support project
    resulted in the country's dropping an irrigation activity on one island.

    Figure 10: Issuance of Key MCC Criteria for Economic Analysis Relative to
    Completion of Due Diligence for Madagascar, Honduras, and Cape Verde

    Note: The 2006 guidance states that because of economic analyses'
    confirmed tendency to be overly optimistic about project benefits, MCC
    prefers that evidence about project impact be based on evaluations of
    similar, completed projects. For a discussion of the accuracy of such
    economic analyses, see Gerhard Pohl and Dubravko Mihaljek, "Project
    Evaluation and Uncertainty in Practice: A Statistical Analysis of
    Rate-of-Return Divergences of 1015 World Bank Projects," World Bank
    Economic Review, Volume 6 (1992): 255-277. With respect to poverty
    reduction, the guidelines state that poverty reduction should be measured
    by the expected decrease in the poverty gap, defined simply as the amount
    of money that, when transferred to poor people, brings everyone's income
    up to the poverty line.

    We found limitations in the assumptions and data that MCC used in its
    analyses as well as in the countries' involvement in the analyses. These
    limitations may negatively affect the accuracy of the analyses and the
    countries' understanding of the analysis process, respectively.

    o Assumptions and data. Some of the assumptions and data that MCC used in
    its analyses do not fully reflect the countries' socioeconomic
    environment. As a result, MCC cannot be assured that the projects it
    approved, partly on the basis of these analyses, will achieve the
    compacts' goals. For example, in calculating the ERR for the Madagascar
    land titling project, MCC assumed that local small farmers would use newly
    titled land as collateral for loans, invest the borrowed funds in
    agricultural activities, and benefit from the increased income from those
    activities We discussed this assumption with focus group participants in
    Madagascar, including MCA and U.S. government officials, senior Madagascar
    government officials representing ministries affected by the compact, and
    bank representatives. Our discussions suggested that MCC's analysis may
    have been overly optimistic in assuming that small farmers would mortgage
    40 percent of their newly titled land in Madagascar's uncertain market,
    which does not offer insurance.30 While MCC assumed that 40 percent of the
    newly titled land will be collateralized, focus group participants
    believed this was overly optimistic. As a result, MCC may have calculated
    an unrealistically high ERR for the land titling project. Furthermore, the
    project may be more likely to benefit farmers with large, secure

    landholdings and investors from outside the farming community, rather than
    the local small farmers it was intended to help.31

    Similarly, MCC's economic model for a part of Madagascar's finance
    project, the modernization of the National Savings Institution, may not
    accurately reflect the institution's financial condition. MCC's model for
    the institution's modernization uses the institution's April 2003 net
    profits (1.4 billion Malagasy francs) as a baseline for estimating the
    benefits of computerizing the bank. However, according to institution
    officials, 2003 is not a representative year for the bank, and it
    experienced unusually large net losses (13 billion Malagasy francs) after
    an economic crisis in 2002. As a result, MCC may have inaccurately
    estimated the project's likely impact on the banking system.

    o Country involvement. In the two countries we visited, country
    representatives were not closely involved in MCC's economic analyses of
    the proposed projects. This constrained the contribution of the analysis
    process to enhancing country partnership, and stakeholders' understanding
    of MCC's economic analysis-including the data analyzed, assumptions used
    in the analysis, and the expected outcomes. According to country officials
    in Madagascar and Cape Verde, MCC developed the economic models and
    selected data with little assistance from country representatives.
    According to the Cape Verde proposal team, they provided some data but did
    not participate in the actual analysis and did not have a clear
    understanding of the process and the criteria MCC used to assess proposed
    projects. We discussed these issues with MCC officials, who told us that
    the countries' degree of involvement depended on the capability and
    willingness of the countries' proposal development team to actively
    participate in the analyses.

    MCC-Approved Compact Implementation Structures Are Not Yet Complete;
    Weaknesses in Monitoring and Evaluation Framework May Limit Measurement of
    Results

    MCC gave Madagascar, Cape Verde, and Honduras authority to propose and
    develop the implementation structures that they will use to manage
    compacts, although MCC retains authority over a number of management
    decisions. To govern their programs, the countries have created management
    units under the direction of a steering committee, but they have had
    difficulty in filling key positions. The countries also have established
    structures for ensuring fiscal accountability and for managing
    procurements that appear to be effective; however, implementation is still
    at a very early stage, and some required elements of these structures are
    not yet in place. Finally, the countries have established frameworks for
    monitoring and evaluating the performance of MCC projects. However, the
    frameworks have weaknesses related to the inadequacy of baseline data,
    linkage of monitoring plans with economic models, methods of addressing
    uncertainty in achieving stated targets, and the timeliness of research
    designs for randomized controlled trials. These weaknesses may limit MCC's
    ability to track and account for program results.

    Countries Manage Projects with MCC Review, but Have Faced Delays in
    Staffing Oversight and Management Structures

    MCC has established a limited presence in Madagascar, Cape Verde, and
    Honduras and has approved oversight and management structures that allow
    the countries to direct their compact programs, subject to MCC review.
    However, these structures were not fully staffed until months after the
    countries' compacts entered into force. According to MCC officials, the
    delay in staffing has shortened the available time in which to achieve
    compact goals. MCC has adopted a policy that implements its authority to
    provide funding to hire officials prior to compact signature, which may
    reduce delays in hiring in the future.

    MCC Has Oversight Staff in Each Country, while Countries Retain Management
    Responsibility

    Although MCC maintains a limited presence in each country and retains some
    review and approval authorities, the countries have authority to manage
    and oversee the compact program using MCC funds. In each country, MCC has
    directly hired a resident country director and a small staff. The director
    serves as MCC's public face and manages its relationship with the compact
    country, guiding and overseeing the country's efforts to complete needed
    plans and reports, implement accountability mechanisms, and make
    appropriate use of resources. The director also supervises management of
    the MCC office and staff, site visits by MCC staff and technical teams,
    and engagement with MCC headquarters. MCC retains authority and approval
    over several key elements, including quarterly disbursements, plans such
    as those for monitoring and evaluation, procurements above certain
    thresholds, and the hiring of key employees. According to MCC officials,
    resident country directors review matters that require MCC approval,
    sometimes making a recommendation, before forwarding the matters to MCC
    headquarters.

    Each of the three countries has established structures to provide
    oversight and management of their compact programs and to ensure
    stakeholder input (see fig. 11).  Although these structures have most
    elements in common, the countries have the flexibility to design these
    structures to fit their needs.

    Figure 11: Compact Country Oversight and Management Structure

    Note: This figure represents a composite of the Madagascar, Cape Verde,
    and Honduras oversight and management structures. However, in Honduras,
    stakeholder input is obtained through representatives on the steering
    committee, rather than through a stakeholder committee.

    The three countries have generally included the following three key
    oversight and management entities in their structures:

    o The steering committee represents the country government and interfaces
    directly with MCC. The committee is ultimately responsible for the
    oversight and results of the MCC compact, oversees management unit
    employees, and approves and signs off on key decisions and reporting to
    MCC. Steering committee members vary by country but have included
    government executives, such as representatives of the Prime Minister's
    office; representatives of key ministries affected by compact projects;
    and representatives of stakeholder groups, such as civil society and the
    private sector. The MCC resident country director serves as a nonvoting
    member of the steering committee. According to MCC guidelines, MCC must
    approve the individual members of the steering committee.

    o In Madagascar and Cape Verde, a stakeholder committee meets periodically
    to advise and inform the steering committee regarding compact
    implementation and to serve as the official liaison between interested
    parties and the steering committee. Stakeholder committee members include
    representatives of civil society, the private sector, and NGOs. MCC
    approves the type of organization that should be represented on the
    committee (e.g., civil society) but does not approve the specific
    individuals. MCC reserves the right to approve all changes in the
    committee's membership.

    o The management unit is directed by the steering committee and has
    principal responsibility for overall compact management and
    implementation.32 The compact lists key management positions responsible
    for daily program operations. The steering committee hires

    employees for these positions, but MCC retains the authority to approve
    the country's choices.33

    Oversight and Management Entities Have Faced Staffing Delays

    In each of the three countries, key compact management positions have
    remained unfilled after the compacts have entered into force. Madagascar
    and Cape Verde did not hire key officials until several months after their
    compacts' entry into force in July and October 2005, respectively. As of
    April 2006, Honduras's hiring of key officials was not yet complete,
    although the compact entered into force in September 2005. (See table 1.)
    This incomplete staffing at entry into force limits the ability of the
    countries to achieve their compact objectives within the fixed time period
    of the compacts.

    Table 1: Hiring Dates for Key Positions Identified in Madagascar, Cape
    Verde, and Honduras Compacts, as of April 2006

                               Hiring date
    Key position         Madagascar         Cape Verdea     Honduras

                            (entry into force  (entry into     (entry into force
                                               force
                            July 27, 2005)                     Sept. 29, 2005)
                                               Oct. 17, 2005)
    Managing director:   Incumbent          January 1, 2006 The first person
                            participated in                    to hold this
    Responsible for the  compact                            position, from
    overall operation of development and                    November 2005 to
    the management unit, served as interim                  March 2006, left
    including all        director prior to                  after the change
    communications with  being confirmed on                 in ruling party
    third-parties and    November 22, 2005.                 from the January
    the public,                                             elections. The
    including other                                         current managing
    donors. Certifies                                       director was hired
    all quarterly                                           March 6, 2006.
    financial and
    performance reports,
    budgets, and any
    other documents
    presented to the
    steering committee.
    Manager of           November 22, 2005  March 1, 2006   April 10, 2006
    administration and
    finance:

    Responsible for
    ensuring that
    reporting is
    prepared, and that
    all accounting
    records are
    maintained in a form
    acceptable to MCC.
    Manager of           November 22, 2005c January 1, 2006 Selection in
    procurement: b                                          progress.

    Serves as a liaison
    with the procurement
    agent and for the
    preparation of
    periodic reporting
    to the steering
    committee regarding
    procurement
    activities.
    Key position         Madagascar         Cape Verdea     Honduras

                            (entry into force  (entry into     (entry into force
                                               force
                            July 27, 2005)                     Sept. 29, 2005)
                                               Oct. 17, 2005)
    Manager of           January 19, 2006   January 1, 2006 Selection in
    monitoring and                                          progress.
    evaluation:

    Responsible for
    setting up the data
    collection,
    analysis, and
    reporting systems
    for the overall
    program, and, in
    turn, for training
    and assisting
    project managers in
    their implementation
    project monitoring
    systems for each
    project.
    Manager of           Position does not  March 1, 2006   April 1, 2006
    environmental and    exist at
    social assessment:   MCA-Madagascar.

    Ensures that
    environmental and
    social mitigation
    measures are
    followed for all
    activities of the
    program, in
    accordance with the
    provisions set in
    the compact and
    other documents.
    Managers of          Land Tenure:       Watershed       Rural Development:
    individual compact   Incumbent          Management and  Selection in
    projects:            participated in    Agricultural    progress.
                            compact            Support:
    Project managers     development and                    Transportation:
    should have sectoral served as interim  January 1, 2006
    expertise relevant   manager prior to                   April 1, 2006
    for their respective being confirmed on Infrastructure:
    projects. Project    November 22, 2005. January 1, 2006
    managers are
    responsible for the  Finance:           Private Sector
    day-to-day oversight                    Development:
    and management of    November 22, 2005  January 1, 2006
    implementing
    entities.d           Agricultural
                            Business
                            Investment:

                            November 22, 2005.

                            A new manager took
                            over this position
                            on January 19,
                            2006.

    Source: MCC compacts and hiring data.

    aAccording to MCC, in Cape Verde, some of the key staff "became engaged"
    shortly after Compact signature-though the hiring process was not
    complete. These positions, including the senior economist, project
    managers, and monitoring and evaluation manager, were retained through a
    provisional employment contractual arrangement made with the Ministry of
    Finance.

    bThis position is referred to as the "procurement specialist" in Honduras.

    cIncumbent serves as manager of procurement and of administration and
    finance.

    dThe Cape Verde compact, for example, defines an "implementing entity" as
    a government affiliate, nongovernmental organization, or other public or
    private sector entity or persons to which MCA-Cape Verde may provide
    funding, directly or indirectly, to implement or carry out the projects or
    any other activities in furtherance of the compact.

    The apparent reasons for these difficulties in hiring key personnel vary
    by country. For example:

    o In Madagascar, according to U.S., MCC, and country officials, finding
    technically qualified candidates for key positions has presented a
    challenge compounded by competition for their availability. According to
    the Managing Director of MCA-Madagascar, hiring her MCA team was difficult
    because "all the good people in Madagascar are taken."

    o In Honduras, a postelection change in government has delayed staffing
    the program management unit. After a recent national election, the
    director of the management unit resigned to allow the new administration
    to appoint a director. According to MCC, all other management unit staff
    appointed under the previous government have been retained.

    o In Honduras, the monitoring and evaluation director position and one of
    the project director (Rural Development) positions have been difficult to
    fill. MCA-Honduras recompeted both of these positions because the first
    attempt did not produce suitable candidates.

    In October 2005, after the signature of its first six compacts, MCC
    adopted a policy implementing the authority given it by section 609(g) of
    the Millennium Challenge Act of 2003 to make grants to facilitate the
    development and implementation of compacts. MCC's policy includes a
    provision where, if certain conditions are met, it may fund an eligible
    country's request for "management support payments" for salaries, rent,
    and equipment for the country's MCA technical team prior to compact
    signature. MCC has used this authority in four countries. Experienced
    officials may therefore be hired and in place prior to compact signature
    and the delays in hiring may be reduced in the future.

    MCC Has Made Progress in Ensuring Fiscal Accountability, Although
    Countries' Systems Are Still Being Developed

    MCC has established a framework of internal controls to incorporate fiscal
    accountability into compacts between MCC and recipient countries. The MCC
    fiscal accountability framework includes an accountable entity (MCA),
    which is responsible for internal control and at least an annual audit of
    the program's financial and procurement transactions, with semiannual
    audits initially expected for countries starting implementation.34
    MCA-Madagascar and MCA-Cape Verde both have made

    significant progress in implementing the framework's internal controls.35
    However, MCA-Madagascar's newly formed system is somewhat less mature than
    that established by MCA-Cape Verde. While MCA-Madagascar has established
    internal control processes, some processes that are routinely practiced
    are not formally documented, and it has not yet converted to a fully
    automated financial management system. MCA-Cape Verde was established
    partly within the country's Ministry of Finance, and it continues to
    develop internal controls, put in place key finance and administration
    personnel, and make use of existing information system platforms with the
    characteristics of advanced and integrated systems. Neither country has
    yet had an MCA unit in operation long enough to require an annual audit,
    but officials at both MCAs told us that they expected their first audits
    to be completed within the period established by the MCC IG.

    MCC Has Made Progress in Fiscal Accountability at the Compact Level

    MCC has made progress in defining the mechanisms and processes of internal
    control that provide reasonable assurance of fiscal accountability at the
    compact level. MCC incorporated these internal controls into a fiscal
    accountability framework for the compacts between MCC and recipient
    countries. To help countries implement this framework, MCC also developed
    guidance36 and a series of charts that identify the characteristics of
    each element of the framework, responsibilities of key personnel, and
    examples of alternative methods of achieving fiscal accountability. Figure
    12, which is based on these charts, provides an overall view of the
    framework.

    Figure 12: Elements of the MCC Fiscal Accountability Framework

    Although MCC identifies the country's government as ultimately responsible
    for meeting its fiscal accountability requirements, the country's
    accountable entity is responsible for ensuring that basic internal control
    functions-such as funds control and documentation, cash management,
    disbursement controls, and timely and meaningful reporting-are

    established as specified in the country's compact.37 The fiscal
    accountability framework also requires that the accountable entity obtain
    at least an annual audit of financial and procurement transactions.

    Each country's compact requires the accountable entity to develop its own
    fiscal accountability plan (FAP), which typically includes a transparent
    process for ensuring that open, fair, and competitive procedures will be
    used to administer grants or cooperative agreements and procurement.
    Required elements of the FAP include funds control, internal controls,
    accounting standards and systems, reporting, public availability of
    financial information, cash management, procurement and contracting, the
    role of independent auditors, and the roles of fiscal and procurement
    agents.

    MCA-Madagascar and MCA-Cape Verde Have Implemented Internal Controls for
    Fiscal Accountability, but Their Systems Are Not Yet Fully Developed

    MCA-Madagascar and MCA-Cape Verde have made significant progress in
    implementing internal controls for fiscal accountability, although their
    systems are not yet mature or fully developed. In line with their compacts
    and supplemental agreements with MCC, both countries have put in place
    such elements of the fiscal accountability framework as bank agreements,
    fiscal agents, procurement agents, and financial reporting mechanisms;
    however, controls called for in the framework, such as proper and
    consistent accounting and authorization of transactions, are still in
    development. Because the controls are not yet fully operational, we
    focused on those that have been put in place in relation to an internal
    control maturity model that provides a scale of development.38 We found
    that both MCAs differ in the maturity of their internal controls.
    Madagascar is using a newly formed entity; therefore, the maturity of
    MCA-Madagascar's internal control is still at a developing stage. MCA-Cape
    Verde used an existing government institution with established processes
    and systems as the accountable entity and, therefore, represents a higher
    level of internal control maturity. Neither country has yet been required
    to provide any financial statement audits, but officials at both MCAs told
    us that they expected their audits to be completed within the period
    specified in their compacts.

    MCA-Madagascar

    Although MCA-Madagascar has established important internal control
    processes, some have not been formally documented, and processes in
    several areas are in the early stages of development. (See table 2.) The
    government of Madagascar proposed, and MCC agreed, to establish
    MCA-Madagascar as a new unit of government with the sole purpose of
    managing implementation of the MCC compact. The MCA has established
    finance and administrative operations based on the MCC fiscal
    accountability framework, with segregation of duties39 over such functions
    as work-order approval, vendor selection, and authorization to disburse
    funds. Standard operating procedures for these processes are outlined in
    the MCA's FAP, which was approved by MCC in January 2006. However, the FAP
    includes limited detail on asset management, and sections in the
    management of tax exemption, information technology management,
    communications, and audits serve mainly as placeholders with information
    "to follow." Although MCA-Madagascar acquired and is testing an automated
    accounting system, current use of a manually based system leaves
    operations vulnerable to human omission and error. The FAP makes reference
    to MCC's procurement agreement guidelines but does not formally
    incorporate procurement processes.

    Table 2: Status of MCA-Madagascar Internal Controls, as of February 2006

         Internal control                           Status
    Key capability        o Overall, a fiscal accountability framework is in
    attributes            place and functioning.

                             o The FAP was approved by MCC in January 2006.

                             o Duties are segregated, with oversight of fiscal
                             and procurement agent activities performed by
                             MCA-Madagascar officials.

                             o Bank agreements have been established.

                             o Expenditure process is in place.

                             o MCC conducts quarterly visits to review fiscal
                             activities.

                             o Staff has been hired.
    Control efforts under o Formal documentation that covers the internal
    way                   control structure for all significant transactions
                             and events (i.e., standard operating procedures) is
                             being developed on the basis of existing documents
                             and practice.

                             o Procurement has not yet been formally incorporated
                             into the FAP. At the time of our review, the
                             procurement manual was considered to be an annex to
                             the FAP.
    Potential residual    o Accounting system carries the inherent risks of a
    risks                 manually based system.

                             o The MCC IG risk assessment of the MCA-Madagascar's
                             financial operations identified high vulnerabilities
                             in several critical areas-procurement, cash
                             management, and disbursements-that may adversely
                             impact financial operations.

                             o Lack of a disaster recovery or back-up plan could
                             result in the loss of critical data.

                             o Inadequately addressed data security could result
                             in fraud, waste, and abuse.

    Source: GAO analysis of MCA-Madagascar systems and documents.

    Although internal controls with and without formal documentation were in
    operation in MCA-Madagascar at the time of our review in February 2006, a
    risk assessment performed by the MCC IG in December 2005 found
    vulnerabilities in high-risk areas that could affect the MCA's financial
    operations. The assessment was performed during MCA-Madagascar's
    implementation phase to detect early-on any vulnerabilities that could
    prevent the MCA from establishing effective financial operations. The IG
    reported that the MCA had high vulnerabilities in several critical
    areas-including procurement, cash management, and disbursements-that may
    adversely impact its financial operations, and that it had not implemented

    all of the key controls described in its compact with MCC.40 The IG also
    reported that the MCA's FAP was interim and not comprehensive in
    establishing the internal controls needed to effectively manage the funds
    provided by MCC.

    MCA-Madagascar's internal controls are in development. It is putting in
    place a control framework defined in MCC's fiscal accountability
    framework, but the MCA currently has basic internal control policies and
    processes that are not fully documented or implemented. Due to the
    developmental stage of MCA-Madagascar's internal controls, residual risks
    currently exist in its key financial processes and activities.

    MCA-Cape Verde

    MCA-Cape Verde is developing its internal controls on the basis of the
    Cape Verde government's existing structure and information system
    platforms, which have the characteristics of advanced and integrated
    systems (see table 3). The MCA was established in the Ministry of Finance,
    and management is focused on implementing its interim FAP, which was
    approved by MCC in December 2005. The MCA is using ministry staff, and
    most key finance and administration personnel are in place. To support the
    financial processing requirements set out in Cape Verde's compact, the MCA
    is also using the ministry's financial management information system and
    the basic accounting system that the Cape Verde government has used for
    several years. Cape Verde's fiscal agent, which is responsible for the
    MCA's financial processing, consists of Ministry of Finance staff with
    experience in the budget, treasury, and financial processes and in the use
    of the accounting system. The MCA's expense transaction flows are
    documented, and key duties and responsibilities are segregated.

    Table 3: Status of MCA-Cape Verde Internal Controls, as of February 2006

           Internal control                           Status
    Key capabilities          o Fiscal agent and key finance and
                                 administration personnel are mostly in place.

                                 o Basic accounting system appears to be fully
                                 operational.

                                 o The interim FAP is in place.

                                 o Transparency of operations is enhanced by Cape
                                 Verde's Web site and management oversight.

                                 o Information system platform was preexisting in
                                 the Ministry of Finance and is fully
                                 operational.

                                 o Expenditure flows for MCA office transactions
                                 are documented.

                                 o Procurement and payment authorizations are
                                 segregated.
    Control efforts under way o Currency conversion capability for accounting
                                 system is being implemented.

                                 o Conversion to commitment-based budgeting
                                 system is under way.

                                 o Accounting policies and procedures manuals are
                                 being formalized.

                                 o Outside audit entity is yet to be contracted.

                                 o The FAP is being updated and finalized.

                                 o Enhanced transparency initiative is to be
                                 completed, which includes management tools.
    Potential residual risks  o Currency conversion calculations and some
                                 conversion schedules are being done manually,
                                 which could lead to potential errors or
                                 omissions.

                                 o Complications may result from converting to an
                                 enterprisewide and commitment-based budgeting
                                 system.

                                 o Potential conflicts of interest could arise
                                 due to the different ministries that currently
                                 have operational responsibilities and may also
                                 participate in the oversight of the
                                 effectiveness and efficiency of MCA-Cape Verde's
                                 operations.a

                                 o Lack of a disaster recovery plan could result
                                 in the loss of critical data.

    Source: GAO analysis of MCA-Cape Verde systems and documents.

    aMCC officials have stated that they believe this risk is mitigated
    through clearly defined roles and responsibilities, autonomy of the
    ministries, and specific controls over procurement approvals.

    MCA-Cape Verde had internal controls across the entity, documented
    transaction flows, sources of risk identified, and risk-mitigating control
    processes that were mostly documented at the time of our review. MCA-Cape
    Verde also had several internal control efforts under way, including the
    development of policies and procedures manuals. As these efforts continue,
    the MCA continues to have some residual risks that are related to specific
    processes.

    Financial Audits for MCA-Madagascar and MCA-Cape Verde

    MCA-Madagascar and MCA-Cape Verde are preparing for financial statement
    audits as required in their compacts. In January 2006, the MCC IG issued
    guidelines for MCA financial audits and a standard statement of work for
    the MCAs to use in their financial audits and posted lists of MCC-approved
    audit firms for Madagascar and Cape Verde.41 According to MCC IG revised
    guidance issued in January 2006, compacts are to have an audit completed
    no later than 90 days after the first anniversary of the entry into force
    of the compact or such other periods as parties may agree in writing. The
    MCC IG recently informed us that the audits for MCA-Madagascar and
    MCA-Cape Verde are to be completed by September 30, 2006, for the period
    from entry into force until June 30, 2006. The MCC IG also told us that it
    waived the first audit to be completed for MCA-Madagascar as stipulated in
    the compact documents because the MCA did not have any financial activity
    for the period to be audited.

    Although we were able to assess the countries' progress in establishing a
    system of internal controls to provide the financial accountability
    required by MCC, it is too early to assess the effectiveness of those
    controls over the funding provided to them. Each country has made
    progress, but they are at different stages of maturity in their underlying
    accountability systems, policies and procedures, and internal controls.
    Oversight mechanisms that support program effectiveness as compact
    projects disburse funds throughout multiple countries and promote the
    segregation of procurement and payment processes will be critical for the
    continual monitoring of progress, the development of key accountability
    mechanisms that function as intended, and the mitigation of risks to
    acceptable levels.

    MCC-Approved Country Procurement Systems Have Effective Characteristics,
    but Are Early in Their Implementation

    Consistent with MCC guidance, each of the three countries-Madagascar, Cape
    Verde, and Honduras-proposed its own procurement system, subject to MCC
    review and approval during due diligence. Although the approved systems
    have characteristics that we have found typical of effective procurement
    systems, their effectiveness has not yet been tested by many procurements.
    In addition, some of the staff and procedures needed to implement the
    systems are not yet in place at MCC headquarters or in compact countries.

    MCC Allowed Countries to Propose Procurement Agents and Systems, but
    Retained Approval Rights

    To capitalize on existing country knowledge and experience, MCC has given
    the countries flexibility to choose their procurement agents and
    standards, with the choice subject to MCC approval during due diligence.
    Madagascar and Cape Verde are using private and public sector procurement
    agents, respectively, and Honduras is using a combination of public and
    private sector agents.42 (See app. IV.) In contrast to donors such as the
    World Bank, MCC also allowed the countries to propose their own standards
    for managing procurements.43 (See app. IV for details of the countries'
    procurement agents and standards.) MCC required the countries to adhere to
    "procurement principles" that include equal access to procurements,
    competition for awards, and transparency of the process.44 Madagascar,
    Cape Verde, and Honduras have used either existing World Bank standards or
    their own laws to govern MCC procurements. In its procurement agreement
    with each country, MCC included modifications to the country's selected
    standards to reconcile them with U.S. law and MCC principles. For example,
    MCC required that countries not include preferences for domestic suppliers
    in solicitations paid for with MCC funds.

    Although MCC's agreements with the three countries give the countries a
    number of authorities over procurements, MCC retains certain approval
    rights. MCC's fiscal accountability framework describes procurement as one
    of the highest-risk areas of fiscal accountability. MCC's compact,
    disbursement agreement, and procurement agreement with each of the
    countries describe the relationship, roles, and authority of MCC, the
    procurement agent, and the compact country (see app. IV for details).
    Although these agreements have some common elements, each agreement is
    unique to the individual country. To determine when MCC approval of
    individual actions is appropriate, MCC included review thresholds in the
    procurement agreements keyed to procurement size and methods. Above cost
    thresholds, which vary among countries, MCC must approve items such as the
    procurement method, terms of reference, and selection. Below thresholds,
    the compact country may conduct procurements in keeping with the
    procurement plan without additional MCC oversight. These thresholds are a
    risk management tool that maximizes MCC control for larger transactions
    but leaves discretion to the compact country for smaller transactions.45

    Countries' Procurement Systems Have Strengths, but MCC and Country Systems
    Are Not Fully Established

    Although the three countries' procurement systems vary, each has
    characteristics that we have previously identified as typical of effective
    international procurement systems.46 These characteristics are similar to
    the principles, such as equal access, competition, and transparency, that
    MCC applies in its review of the systems during due diligence. However,
    MCA officials in Madagascar and Cape Verde told us that they had completed
    few procurements that would test the systems in practice. Furthermore, MCC
    headquarters has not yet finished hiring its procurement staff, and
    procurement systems in Madagascar and Cape Verde are not yet fully
    established.

    o Incomplete staffing. As of May 2006, MCC headquarters had hired its
    senior director of procurement but had not yet hired five director-level
    procurement staff in its Accountability Department. According to MCC
    officials, the function of these vacant positions is currently being
    filled by six intermittent personal service contractors, and MCC has
    offered one of these contractors a full-time position.47 During our site
    visits in January and February 2006, staff in Madagascar and Cape Verde
    reported that the time frames for MCC review of procurements had been
    satisfactory. However, if MCC staffing does not increase as the countries
    submit more procurement decisions for approval, MCC may have difficulty in
    conducting timely reviews of these decisions.

    o Incomplete systems. During our site visits, we found that some elements
    of the procurement systems documented in MCC's agreements with Madagascar
    and Cape Verde were not yet in place or had not functioned smoothly.

    o Neither country had yet established the procurement bid protest body
    required by MCC or put in place automated systems for procurement tracking
    and management, although both reported plans to do so in 2006. Madagascar
    also had not established a process for reviewing contractor change order
    requests.

    o During our visit to Madagascar, a senior MCC official discovered that
    the country's procurement plan for months 2 through 4 did not reflect
    current project work plans. As a result, the procurement agent was
    preparing for procurements that were no longer needed. Members of the
    Madagascar management team told us that they would establish new
    procedures to coordinate future work plan changes with the procurement
    agent.48

    o In Cape Verde, the procurement review commission lacked office space and
    was concerned about being able to handle the number of reviews required of
    it once procurements begin in earnest. The commission is comprised of
    members who are fully employed elsewhere and are not permitted to delegate
    their work. The members have worked nights and weekends or have negotiated
    with their supervisors to be released from their other jobs to perform the
    commission's work. According to MCC, subsequent to our site visit, Cape
    Verde has taken actions to mitigate the risks to the efficient operation
    of the commission.49

    o Both Madagascar and Cape Verde reported difficulties with an MCC
    requirement that documents be in both English and the local language. Cape
    Verdean procurement review commission members are not required to speak
    English but are expected to review documents prepared in English. Cape
    Verde was considering hiring a full-time translator to address this
    need.50 In Madagascar, the translation of a French document prepared by
    the implementer of the finance project and requested by MCC delayed the
    approval of needed project procurement.

    MCC Has Established Country Monitoring and Evaluation Frameworks, but
    Weaknesses May Limit Measurement of Results

    Each of the three countries' (Madagascar, Cape Verde, and Honduras)
    programs includes a monitoring and evaluation framework that includes
    plans for data collection, data quality reviews, analysis, and interim and
    final reporting of results. We found several weaknesses in the monitoring
    and evaluation frameworks that could affect MCC's ability to track and
    account for program results.

    Countries' Programs Include Monitoring and Evaluation Frameworks

    Each of the three countries' programs includes detailed plans for
    monitoring and evaluating program results. MCC approved Madagascar's and
    Cape Verde's plans in November 2005 and April 2006, respectively, while
    Honduras's plan existed in April as a detailed draft but had not yet been
    approved. According to MCC officials, Honduras's plan is not final pending
    the staffing of the monitoring and evaluation director position to ensure
    country understanding and buy-in. In accordance with MCC

    guidance, the countries' plans include separate components for monitoring
    and evaluation:  51

    o The monitoring component includes, among other things, key indicators
    that are linked as closely as possible to the variables identified in the
    economic analysis of the country's proposed projects. These indicators are
    to be used throughout implementation to assess whether the program is
    likely to achieve the desired results. The monitoring component also
    identifies baseline and target values for each indicator and includes
    plans for periodic performance reports and data quality reviews. MCC
    guidelines state that monitoring can be on select indicators to minimize
    reporting requirements.52

    o The evaluation component identifies, among other things, the methodology
    that will be used to assess the program's impact, such as randomized
    controlled trials, and describes plans for collecting baseline, interim,
    and final data on program results.

    Countries' monitoring and evaluation plans use, to varying degrees, the
    economic analysis of the proposed projects to identify indicators for
    monitoring progress toward project objectives, calculate targets for each
    indicator, and evaluate the achievement of compact goals. The economic
    relationships specified in the models, such as the relationship between
    improved infrastructure and farm output, provide a basis for tracking
    project success. The monitoring framework also includes setting target
    values for indicators. Figure 13 illustrates indicators at various levels
    for a rural development project in Honduras.

    Figure 13: Indicator Structure for Honduras's Rural Development Project

    Although the specifics of the countries' plans vary, the monitoring
    component of each plan calls for the country's MCA to submit periodic
    performance reports and data quality assessments to MCC. Performance
    reports will include quarterly assessments to alert the countries and MCC
    to any problems, periodic audits that analyze performance at all compact
    levels, and annual reports that consolidate the quarterly reports and
    recommend adjustments. Most performance data will be gathered by project
    implementers, either country government employees or contractors; the
    plans allow for contracting with other entities to prepare the reports. In
    addition, each plan calls for third-party data quality reviews over the
    course of the compact. For example, in Madagascar, data quality
    assessments are planned to occur every 6 months during the first year and
    annually thereafter.53

    Weaknesses in Monitoring and Evaluation Frameworks May Limit MCC's Ability
    to Measure Results

    In reviewing the frameworks for monitoring and evaluation in the three
    countries, we identified several challenges that MCC faces in ensuring
    accountability for results. These challenges include (1) ensuring the
    availability and quality of baseline data, (2) establishing clear links
    between the economic model and the monitoring and evaluation framework,
    (3) accounting for the degree of uncertainty in expected outcomes, and (4)
    using randomized controlled trials in compact countries.

    Ensuring Baseline Data Availability and Quality

    Baseline data are essential to measuring the results of MCC-funded compact
    projects. Although MCC has taken steps to collect baseline data for
    monitoring and evaluation, problems with data availability and quality may
    lead to challenges in measuring the progress and impact of the countries'
    projects over time. MCC officials told us that they worked with their
    country counterparts to set up a Management Information System that can
    meet the requirements for collecting performance data. In addition, MCC
    evaluated the technical capabilities of the country staff and the
    information system the country proposes to use for data management
    purposes. Finally, MCC budgeted funding for surveys in Madagascar and Cape
    Verde to collect baseline data when it was not available. However, we
    found that some of the baseline data in the countries' monitoring plans
    were not complete, and that some of the data MCC collected were not
    reliable.

    o Baseline data availability. In some instances, the countries' monitoring
    and evaluation plans lack complete baseline data against which to measure
    progress. For example, two activity and final project indicators in
    Madagascar's plan-"volume of production covered by warehouse receipts in
    zones" and "volume of microfinance institution lending in the
    zones"-currently lack baselines because the intervention zones have not
    yet been selected. Moreover, although the collection of performance data
    is closely linked to project implementation, Madagascar's plan contains no
    intermediate outcome indicators and target values, thereby making it
    difficult to effectively track project progress. (See fig. 13 for an
    example of the role of intermediate outcome indicators in the monitoring
    structure of Honduras.)

    o Baseline data quality. MCC may face challenges in ensuring the quality
    of the baseline data that it uses to monitor and evaluate program impact
    and, as a result, may have difficulty in accurately measuring the impact
    of compact projects. MCC officials told us that it has been difficult to
    obtain accurate and reliable baseline data against which to measure
    program results. In some countries, MCC has funded surveys to obtain the
    needed baseline data. However, even with the additional resources provided
    by MCC, obtaining baseline data has been a challenge. For example, we
    found significant data quality problems associated with one of three
    surveys that MCC funded to collect baseline data in Madagascar. Our
    interviews with Madagascar and USAID officials who oversaw the survey
    revealed that the survey results, which were used to estimate average land
    values, are flawed in that they do not reflect recent significant changes
    in Madagascar's currency.54 Madagascar's compact goal is to increase
    household income, as measured by the percentage of increase in land
    values.55 Because of the survey error, the land value estimates may not be
    sufficiently reliable to evaluate the project impact and the compact as a
    whole.56

    Linking Monitoring Plans to Economic Analyses

    Linking the indicators used to monitor and evaluate progress to the data
    and assumptions used in MCC's due diligence economic analyses will also
    present a challenge. In reviewing the draft plan for Honduras, we found
    consistent linkages between the indicators for monitoring and evaluation
    and the variables and assumptions used in the economic model. However, in
    the plans for Madagascar and Cape Verde-the first two plans that MCC
    approved-we found instances where MCC did not sufficiently link the
    monitoring plans to the economic models, which may hamper its ability to
    effectively measure project results. For example:

    o After signing its compact with Cape Verde, MCC changed the interim
    targets for seven indicators. In two cases, neither MCC nor Cape Verde was
    able to identify the methodology used to select the indicators in the
    monitoring and evaluation plan.57 According to MCC officials, they decided
    that the assumptions in the economic analysis were a poor basis for
    constructing the monitoring indicators and, therefore, chose other
    indicators and estimated the targets. According to MCC officials, the
    inability to identify the methodology, in conjunction with updated
    baselines and revised work plans in the country resulted in MCC's and Cape
    Verde's agreeing to reduce the interim targets that had been established.

    o MCC's economic analysis for Madagascar's Land Tenure Project, which is
    approximately one-third of the compact budget, did not identify the
    expected benefits from the separate project activities. Therefore, we
    could not track the linkage between the activities in the model to those
    in the monitoring and evaluation plan.

    o MCC's approved monitoring and evaluation plan does not include tracking
    the results of two finance project activities-modernizing the National
    Savings Institution and opening bank branches-although they were included
    in economic analysis calculations during due diligence. According to an
    MCC official, these two finance project activities will be tracked at a
    higher level of aggregation-the finance project level-and monitored by
    tracking the number and value of new accounts. However, this approach may
    not adequately capture the outputs and benefits from the institution's
    modernization and could potentially confound the effect of one activity
    (modernizing the institution) with that of other activities. For example,
    while an increase in the number and value of new accounts could result
    from the two finance project activities, it could also result from an
    overall increase in savings if customers invest in government savings
    bonds, issued recently and prior to the start of the MCC compact.

    Accounting for Uncertainty in Achieving Target Values

    Although the countries' monitoring and evaluation plans acknowledge the
    uncertainty of achieving indicator target values, MCC project monitoring
    does not adequately address (1) the effect of potential variations in
    uncertainty on the range of acceptable target values or (2) the
    plausibility of target values. As a result, some targets specified in the
    countries' monitoring plans may not be achieved.

    MCC disbursement agreements include as a condition precedent that, if an
    indicator value observed during compact implementation does not fall
    within 10 percent of the agreed-on target values, MCC may withhold
    disbursements. MCC applies this 10 percent margin to all projects,
    regardless of type (e.g., agriculture or infrastructure). However, our
    analysis suggests that several factors could cause indicator values for
    many projects to fall outside the 10 percent range.

    o External factors. Uncertainty associated with external factors varies by
    country and project. For example, according to previous GAO work, external
    factors that could affect project implementation might include political
    instability, the lack of commitment of political leaders to necessary
    reforms, the magnitude of assistance from other bilateral and multilateral
    donors, weather conditions that affect crop yields, and the instability of
    international markets.  58 These factors could cause indicator values to
    fall outside the 10 percent range used across all countries and
    projects.59

    o Time factor. The 10 percent range also does not account for the increase
    in the uncertainty of targets over time-for example, target values for
    year 5 of a compact are likely to be less precise than those for year 1.

    Therefore, to the extent that MCC bases its disbursement decisions on
    results falling within a common range, it may not fully account for
    variations in uncertainty across projects and over time.

    According to MCC guidelines, the economic analyses and monitoring and
    evaluation plans should, as much as possible, be clearly linked. However,
    limitations in (1) the economic analyses due to problems with data
    quality, assumptions, and lack of country involvement and (2) the
    consistency between the economic analyses and the monitoring and
    evaluation plans constrain MCC's ability to set plausible targets. If
    targets are overly optimistic, countries may fail to reach them and MCC
    may not be justified in halting disbursements because the countries failed
    due to unattainable targets. Conversely, setting too conservative a target
    may not prompt the country to fully utilize MCC resources. A lack of
    plausible targets may lead to MCC's making ad hoc decisions regarding the
    consequences of missing targets and applying judgment subjectively and
    inconsistently in setting or modifying targets. MCC officials told us that
    they would use a missed target as a cue to discuss with the country's MCA
    its reasons for missing the target, and, on the basis of those
    discussions, they would determine whether to use their authority to
    withhold funding. According to MCC officials, senior management approval
    would be needed to significantly modify targets; however, MCC currently
    has no policy or documentation that defines a "significant modification"
    of targets, especially for targets used as conditions precedent to
    disbursements.

    Using Randomized Controlled Trials in Compact Countries

    MCC has retained research organizations to help the countries evaluate
    program impact using, as appropriate, randomized controlled trials, but
    MCC's involvement of these organizations after project implementation
    begins may limit their ability to evaluate impact accurately.60 These
    organizations' scope of work may include training MCC and compact country
    staff; designing the trials and data collection; and proposing appropriate
    methodologies for, and analyzing results from, impact evaluations.
    According to MCC monitoring and evaluation officials, MCC has begun
    designing impact evaluations by identifying those program components that
    can and cannot be evaluated using randomized controlled trials, which MCC
    has indicated are its preferred method of impact evaluation.61 According
    to MCC officials, MCC considers evaluations using randomized controlled
    trials as "rigorous" and evaluations using other methodologies as
    "standard."

    MCC has hired an independent consultant experienced in impact evaluations
    to work with compact countries to assess the appropriateness of using
    randomized trials to evaluate MCC's projects. When these assessments are
    completed, the five research organizations will be invited to compete to
    conduct randomized trials after compact implementation begins.62 However,
    at that point, the organizations will not have had an opportunity to
    assess the design of the countries' evaluation strategy, including the
    adequacy and reliability of the baseline data. Without the involvement of
    these organizations before implementation of the relevant project(s)
    begins, MCC may not be able to ensure that they have the necessary data
    and have established appropriate research designs for their work. MCC
    officials told us that they thus far had not involved the five
    organizations because rigorous evaluations were turning out not to be
    feasible in some cases, or because the tasks were not large enough to
    warrant the use of the five research organizations.63

    Conclusions

    MCC continues to mature and evolve as an institution, taking on the
    ambitious task of creating new, country-managed organizations while
    developing processes to oversee what are expected to be relatively large
    amounts of foreign assistance. Toward that end, MCC has taken positive
    steps with regard to establishing policies and procedures for MCA
    organizations. However, it has taken time to complete the numerous
    agreements necessary for compacts to enter into force. This could continue
    to present challenges, given that MCC is working simultaneously with a
    number of nations to develop and implement compacts.

    As MCC moves forward, partnering with countries to develop well-founded
    economic assumptions will be crucial to establishing a foundation for the
    work of MCC and its partners. Furthermore, holding countries accountable
    for results requires, to the extent practical and cost-effective:
    collecting reliable and accurate baseline data, linking economic analyses
    to monitoring plans, addressing the uncertainty associated with program
    results, and ensuring the timely development of the research design for
    randomized controlled trials.

    Recommendations

    Because of the central role of reliable economic analyses and the
    importance of partnering with countries in achieving MCC goals and
    ensuring accountability for MCC programs, we recommend that the Chief
    Executive Officer of MCC take the following two steps:

    o Ensure that MCC officials, in partnership with country representatives,
    perform economic analyses that more fully reflect the countries'
    socioeconomic environment and are better understood by country public and
    private sector representatives.

    o To the extent practical and cost-effective, improve MCC's monitoring and
    evaluation capabilities by

    o obtaining more accurate and reliable baseline data needed to permit
    tracking progress during compact implementation;

    o ensuring a clear linkage between MCC's economic analyses and monitoring
    and evaluation frameworks;

    o developing policies, procedures, and criteria for establishing targets
    and for adjusting those targets if unforeseen events affect outcomes; and

    o taking steps to ensure the timely development of the needed research
    design for randomized controlled trials, if they are undertaken, prior to
    project implementation.

    Agency Comments and Our Evaluation

    We received written comments on a draft of this report from MCC and the
    Department of State. In commenting on a draft of this report, MCC
    generally agreed with our findings, conclusions, and recommendations. MCC
    noted that our discussion of the evolving guidance provided to eligible
    countries in 2004 and 2005 was a result of the complex process of engaging
    with eligible countries while simultaneously developing policies and
    procedures. MCC stated that this criticism should not be valid beyond the
    initial instances covered in this report. We recognize that MCC was
    simultaneously addressing a number of issues during this period, but we
    felt it was important to discuss the evolving nature of guidance to
    provide a balanced perspective regarding the process eligible countries
    had to follow to sign compacts.

    MCC also commented (1) that our characterization of data quality issues in
    Madagascar cited only a single survey and (2) that it differed with us on
    the appropriate level of aggregation in linking economic models and
    monitoring and evaluation plans. We note that there was one other instance
    of poor data quality in Madagascar, but that we focused on the
    Agricultural Productivity Survey because of the importance of accurately
    tracking land values to monitor results. We agree that disaggregation may
    not always be feasible, but note that aggregation poses some challenges
    that could limit the effectiveness of monitoring and evaluation. We
    reprinted MCC's comments, with our responses, in appendix V. We also
    incorporated technical comments from MCC in our report where appropriate.

    State commented that some of our findings reflect minor or transitory
    problems and provided specific observations regarding MCC's evolving
    guidance, the assumptions used in MCC's economic models, country
    participation, staffing delays, fiscal accountability structures, and the
    use of randomized controlled trials.

    State noted that MCC's guidance could be expected to evolve, given the
    newness of the organization, and that informal guidance from MCC was
    always available to eligible countries. We agree that guidance could be
    expected to evolve, but we sought to provide a balanced perspective by
    noting instances where MCC's verbal guidance may not have been sufficient
    to assist countries in submitting proposals that met MCC's criteria.

    State questioned the findings from our Madagascar focus groups and our
    finding that MCC conducted economic analyses with limited country
    involvement. Our focus groups resulted in discussions of the assumptions
    used in the Madagascar economic analysis with a broad range of country
    stakeholders representing U.S. and Malagasy agencies and organizations
    involved in implementing the compact. Furthermore, MCC agreed in its
    comments that, in some cases, the level of country engagement on economic
    analysis could be improved. MCC outlined specific steps that it had taken
    to increase country involvement in economic analyses.

    Regarding staffing delays and fiscal accountability structures, State
    commented that we offered no suggestions to MCC for things they could have
    done differently. We added additional material to the report to elaborate
    on the steps MCC has taken to reduce delays in staffing key positions. In
    regard to fiscal accountability, we agree that different countries will
    differ in their maturity of internal control. However, evaluating maturity
    is key to properly assessing risk and establishing effective oversight
    mechanisms.

    Finally, State disagrees with what it terms our "reliance" on randomized
    controlled trials to measure success. This comment misconstrues our
    findings. We did not rely on or advocate this methodology, but rather are
    commenting on MCC's use of randomized controlled trials as its preferred
    method of impact evaluation.

    We have reprinted State's comments, with our responses, in appendix VI.

    We are sending copies of this report to interested congressional
    committees as well as the Secretary of State, the Secretary of the
    Treasury, the CEO of MCC, and the Administrator of USAID. We will also
    make copies available to others upon request. In addition, this report
    will be available at no charge on the GAO Web site at http://www.gao.gov .

    If you or your staff has any questions about this report, please contact
    David Gootnick at (202) 512-3149 or g  ootnickd@gao.gov. Contact points
    for our Offices of Congressional Relations and Public Affairs may be found
    on the last page of this report. GAO staff who made major contributions to
    this report are listed in appendix VII.

    Sincerely yours,

    David Gootnick Director International Affairs and Trade

    Jeanette Franzel Director Financial Management and Assurance

    Appendix I:  MCC Actions in Response to April 2005 GAO Recommendations

    The Millennium Challenge Corporation (MCC) has taken a number of steps to
    address our April 2005 recommendations regarding its strategic planning,
    internal controls, and human capital and governance policies, although
    some aspects of its organizational structure are not yet complete. MCC has
    prepared a strategic plan for fiscal years 2006 through 2011, and an
    annual performance plan for fiscal year 2006. MCC also has strengthened
    its internal controls and taken steps to implement some fiscal
    accountability mechanisms, established an audit committee within its
    governing board, and completed several required audits and reviews.
    However, MCC has not documented all financial control activities and
    continues to face risks from the poor interfacing of its systems with
    those of the Department of the Interior's National Business Center (NBC).
    MCC has reassessed its staffing model, developed a plan for recruitment,
    and implemented an improved performance management system; but, it does
    not systematically track the use of staff resources to verify its human
    capital model. Finally, MCC has approved a corporate governance policy and
    taken steps to improve board involvement in planning, management, and
    communication; but it has not yet fully addressed risk management for the
    corporation.

    MCC Has Developed a Strategic Plan to Enhance Accountability and Completed
    a 2006 Performance Plan

    Consistent with our recommendation to enhance corporate accountability,
    MCC completed a strategic plan, approved by the Office of Management and
    Budget (OMB) in November 2005. In April 2006, MCC completed an annual
    performance plan that provides goals and benchmarks for assessing its
    performance in fiscal year 2006. This annual performance plan will enable
    MCC to report in the future on its progress in meeting its goals.1 As part
    of the annual performance plan process, MCC also has developed goals and
    benchmarks for its individual departments that support the attainment of
    the corporate goals identified in the strategic plan. (See table 4.)

    Table 4: MCC Response to GAO Recommendations for Corporatewide
    Accountability

            Summary of GAO                 MCC actions        MCC actions not
            recommendation                  completed         completed or in
                                                                 progress
    	Implement a strategic    X Completed        N/A
    plan                              strategic plan,
                                         November 2005.
    Establish annual            X Annual           N/A
    performance plans and             performance plan
    goals                             completed in
                                         April 2006.
    Use performance measures    X Annual           N/A
    to monitor progress in            performance plan
    meeting both strategic            completed in
    and annual performance            April 2006.
    goals
    Report internally and                              Completed annual
    externally on progress                             performance plan
    in meeting strategic and                           provides benchmarks
    annual performance goals                           against which to
                                                          measure MCC's fiscal
                                                          year 2006 performance.

    Sources: GAO interviews and analysis of MCC documents.

    MCC Has Made Significant Progress in Establishing Internal Controls

    In response to our April 2005 recommendations, MCC has made significant
    progress in establishing internal controls over program and administrative
    operations at both the MCC headquarters and compact levels.2 MCC has made
    progress in each of the five components of internal controls discussed in
    our April 2005 testimony:3 (1) control environment, (2) risk assessment,
    (3) control activities, (4) monitoring, and (5) reporting.

    o Internal control environment. MCC has initiated several measures to
    establish a positive internal control environment, including documenting
    its organizational structure for the Administration and Finance and
    Accountability structures. The Fiscal Accountability area, which is a
    component of the Accountability structure, currently consists of a
    managing director and several directors; however, other positions to
    support the fiscal oversight of MCC compacts have yet to be filled. A
    formal ethics program has also been established for MCC headquarters.

    o Risk assessment. MCC is developing a process for assessing risks facing
    the corporation and its programs. To this end, MCC has hired a third-party
    consulting firm to support the implementation of processes, based on OMB
    A-123, Management's Responsibility for Internal Control, December 2004,
    criteria, to address risks associated with domestic and foreign
    operations.

    o Control activities. MCC has instituted several control activities to
    reduce risk. MCC has submitted its Strategic Plan under the Government
    Performance and Results Act (GPRA) of 1993 and has completed required
    audits and reviews, such as those required under the Federal Managers
    Financial Integrity Act (FMFIA) of 1982 and the Federal Information
    Security Management Act (FISMA) of 2002.4 MCC is in the process of
    addressing the various material weaknesses, reportable conditions,
    findings, and recommendations identified in the audits. For example, MCC
    continues to address the formal documentation of control activities for
    the financial reporting process at MCC headquarters. MCC also contracted
    with a third-party service-provider, NBC, to maintain its accounting
    system and the recommended Statement on Auditing Standards No. 70 (SAS 70)
    review5 was performed; however, MCC is still addressing issues reported as
    a result of the review, such as the need to address manual processes that
    present inherent risks associated with accounting systems and related
    processes. For example, MCC forwards daily to NBC a package containing
    source documentation that is used by NBC to record transactions to the
    general ledger. Similarly, information for MCC's travel expenses is
    prepared at MCC headquarters office and daily communicated to NBC through
    manual processes. MCC is aware of the need to address these issues and is
    working with NBC to mitigate or eliminate the manual processes.

    o Monitoring.  MCC has taken steps to ensure ongoing monitoring and
    periodic testing of control activities. MCC's investment committee
    embodies functions of monitoring and testing and operating as an integral
    part of MCC's internal control program by overseeing the program units'
    compliance with both the procedural and substantive elements required by
    its internal processes. Also, MCC conducted its first comprehensive survey
    of internal controls, performed by outside consultants, in conjunction
    with its annual audit. In addition, MCC has formed formal review panels to
    monitor the progress of addressing findings from internal and external
    reviews. For example, consistent with OMB guidance, MCC formed an FMFIA
    Management Review Panel to assess the results of the internal control
    survey along with the findings of MCC's independent financial auditors.
    Similarly, MCC implemented a specific procedure to address recommendations
    from reviews and audits performed by its Inspector General (IG).

    o Reporting. MCC has made progress in establishing a process for assessing
    and reporting on the operating effectiveness of its internal controls. MCC
    established a formal board-level audit committee whose responsibilities
    include (1) financial controls; (2) the integrity of the reporting
    process; and (3) performance of the independent audit process. In
    addition, MCC's FMFIA Management Review Panel assessed the results of the
    internal control survey, along with the findings of MCC's independent
    financial auditors. The panel identified four material weaknesses and
    actions that MCC will be taking in future months to resolve them, which
    the acting Chief Executive Officer certified on November 7, 2005.

    MCC officials told us that the development of new internal control
    policies and procedures and the revision of those already in place is a
    continuing process as MCC continues to mature as an organization. Table 5
    summarizes MCC's progress in addressing our April 2005 recommendations.

    Table 5: MCC Response to GAO Recommendations for Internal Controls over
    Program and Administrative Operations

          Summary of GAO              MCC actions completed    MCC actions not
          recommendation                                       completed or in
                                                                   progress
    Complete the
    development and
    implementation of
    overall plans and
    related time frames
    for actions needed
    to establish the
    following:
    A positive and       X Documented the          o Positions within
    supportive internal           organizational          the accountability
    control environment  X structure.              area remain vacant.

                            X Documented a corporate  o Continued efforts
                                     strategy.               to address audit
                            X                         findings of material
                                     Implemented a procedure weaknesses and
                            X for addressing IG audit reportable
                                     findings.               conditions.
                            X
                                     Established formal
                                     ethics program,
                                     including training for
                                     all MCC employees.

                                     Conducted audits
                                     required under FISMA
                                     and FMFIA.

                                     Submitted Strategic
                                     Plan under GPRA.
    A process for        X Identified 14 priority  o Risk assessment
    ongoing risk                  internal control areas  process is still
    assessment                    relating to             being developed.
                                     administrative and
                                     program risks.          o Outside consulting
                                                             firm to support MCC
                                                             risk analysis based
                                                             partly on OMB A-123
                                                             criteria.
    Control activities   X Internal Controls       o MCC continues to
    and procedures for            Strategy Group          work on implementing
    reducing risk, such           identified 14 key       and formally
    as measures to                internal control areas  documenting some
    mitigate risk                 for MCC to focus        procedures and
    associated with               efforts.                control activities.
    contracted
    operational and
    administrative
    services
    Ongoing monitoring   X Established formal      N/A
    and periodic testing          review panels to
    of control                    monitor progress of
    activities                    efforts to address
                                     findings from internal
                                     and external reviews
                                     and formally documented
                                     a process for
                                     addressing MCC IG
                                     recommendations.
    A process for        X Created a board-level   o MCC continues
    assessing and                 audit committee to      efforts to establish
    reporting on the              monitor MCC's financial a comprehensive
    effectiveness of              controls, integrity of  database to track
    internal controls             the financial reporting recommendations.
    and addressing any            process, and
    weaknesses                    performance of the
    identified                    audit process.

    Sources: GAO interviews and analysis of MCC documents.

    MCC Has Taken Steps to Develop Human Capital, but Does Not Track
    Allocation of Human Capital to Key Activities

    MCC has taken steps and is continuing to further develop its human capital
    systems by (1) assessing its staffing needs; (2) improving its
    recruitment, development, and retention systems; and (3) implementing a
    performance management system linking compensation to individual
    contributions toward corporate goals. However, despite having plans to
    increase its staff by an additional 38 percent between May and September
    2006, MCC does not systematically assess its staffing needs, has not
    developed a human capital plan, and has not yet fully implemented its
    improved performance management system, as follows:

    o Staffing. Although MCC has completed an assessment of its human capital
    needs since our April 2005 recommendation, it does not systematically
    track the use of staff time on an ongoing basis. MCC's updated assessment
    of its human capital needs shows that it plans to increase its staffing
    from 218 staff, as of May 2006, to approximately 300 staff, as of
    September 2006.6 MCC also has created an organization chart that includes
    the specific approved positions for each department under the new
    300-person staffing model, and it is hiring for many of these positions
    using limited-term appointments to provide greater flexibility in filling
    future needs.7 According to MCC officials, MCC made its case to OMB for
    increasing staffing to 300 persons on the basis of an analysis of MCC
    staffs' recollection of the amount of time they spent developing the
    Georgia compact, which was thought to have been the most complex compact
    development process to date. However, MCC officials felt that this
    analysis may not have fully captured the amount of time spent by some
    departments in developing the compact. Retrospective analysis was
    necessary because MCC does not track employees' time on mission-related
    projects on an ongoing basis. Without such data, MCC management is not
    able to systematically assess the staffing requirements needed to carry
    out MCC's mission and consistently align its human capital with its
    changing needs.

    o Recruitment and retention. MCC has identified priorities and committed
    resources for recruitment and is developing a human capital plan to
    address retention and training. To support its effort to hire
    approximately 82 additional staff between May and September 2006, MCC has
    retained an outside consultant firm to work on-site and help with
    recruitment and has identified positions as first- or second-tier hiring
    priorities. MCC officials also told us that they are developing an overall
    human capital plan that will include planned activities and a time frame
    for identifying critical skills and competencies for MCC's key positions.
    The officials stated that the human capital plan also will include a
    strategy for staff retention and will address staff training. Currently,
    MCC has developed procedures for providing employees with outside
    training. MCC intends to develop a comprehensive training plan following
    the completion of the human capital plan, a draft of which it expects to
    circulate to MCC senior staff for their review and comment by September
    30, 2006.

    o Performance management. In keeping with our recommendation, MCC has
    established a performance-based compensation framework. MCC provided us
    with documentation of its employee ratings process, showing that employee
    expectations and performance reviews were keyed to organizational goals.
    However, according to MCC officials, MCC did not incorporate the
    departmental performance plans for the year into the performance framework
    for 2006 until March 2006, as the annual performance plan neared
    completion. MCC is shifting from a calendar year to a fiscal year
    performance evaluation schedule to better align employee compensation with
    its annual corporate goals. MCC anticipates that its strategic plan,
    annual performance plan, department plans, and individual performance
    goals will be fully synchronized beginning in fiscal year 2007. (See table
    6.)

    Table 6: MCC Response to GAO Recommendations for Human Capital
    Infrastructure

          Summary of GAO                  MCC actions         MCC actions not
          recommendation                   completed          completed or in
                                                                  progress
    Establish an
    effective human
    capital
    infrastructure,
    including:
    A thorough and        X MCC has reassessed   o MCC currently does
    systematic assessment          its human capital    not track the amount
    of the staffing       X needs at             of time its employees
    requirements and               approximately 300    spend on specific
    critical skills                staff, and OMB has   tasks. Without this
    needed to carry out            approved this model. information, MCC
    MCC's mission                                       cannot systematically
                                      MCC has completed an assess its staffing
                                      updated organization needs on an ongoing
                                      chart identifying    basis.
                                      the positions to be
                                      filled under the new
                                      human capital model.
    A plan to acquire,    X MCC has identified   o MCC has not
    develop, and retain            priorities for       completed an overall
    talent that is        X hiring based on its  human capital plan but
    aligned with the               300-staff model.     plans to circulate a
    corporation's         X                      draft to MCC senior
    strategic goals                MCC has retained an  staff for review and
                                      outside consultant   comment by September
                                      firm in support of   30, 2006.
                                      its effort to
                                      increase staff from  o MCC plans to include
                                      218 in May 2006 to   a retention strategy
                                      approximately 300 at and address training
                                      the end of September in the human capital
                                      2006.                plan.

                                      MCC has developed a  o MCC also plans to
                                      procedure for        develop a
                                      employee training.   comprehensive training
                                                           plan following the
                                                           completion of the
                                                           human capital plan.
    A performance         X MCC has established  o MCC is shifting from
    management system              a performance        a calendar year
    linking compensation           framework that links schedule to a fiscal
    to employee                    compensation to      year schedule of
    contributions toward           employee             performance evaluation
    the achievement of             expectations and     to better align
    MCC's mission and              performance reviews  employee compensation
    goals                          to MCC goals.        with its annual
                                                           corporate goals.

                                                           o MCC anticipates that
                                                           its strategic plan,
                                                           annual performance
                                                           plan, department
                                                           plans, and individual
                                                           performance goals will
                                                           be fully synchronized
                                                           beginning in fiscal
                                                           year 2007.

    Sources: GAO interviews and analysis of MCC documents.

    MCC Has Taken Steps to Define Corporate Governance

    The MCC Board of Directors (MCC Board) has taken steps to define the scope
    of its corporate governance and oversight.8 The MCC Board has approved a
    corporate governance policy developed by MCC with the involvement of staff
    from MCC Board agencies.9 According to MCC officials, the policy
    incorporates guidance on governance matters provided by board members at
    their previous meetings, and the board participated in formulating MCC's
    strategic plan before approving it in December 2005. The board has
    established a board-level audit committee and a charter for that
    committee. According to MCC officials, to address risk, MCC is recruiting
    for the position of risk specialist and has used a contractor to support
    MCC risk analysis. Finally, to improve communication with stakeholders in
    eligible countries, MCC has published and distributed updated guidelines
    for compact development and eligibility. MCC also has developed a series
    of open forums where input is sought from groups with an interest in MCC.
    (See table 7.)

    Table 7: MCC Response to GAO Recommendations for Corporate Governance

              Summary of GAO                     MCC actions      MCC actions not
              recommendation                      completed       completed or in
                                                                     progress
    Recommended that the
    Secretary of State ensure
    that the MCC Board considers
    and defines the scope of its
    responsibilities with
    respect to corporate
    governance and oversight of
    MCC...including oversight of
    the following:
    Executive management         X The MCC Board has    N/A
                                             approved a corporate
                                             governance policy.
    The formulation and          X The board            N/A
    execution of corporate                participated in
    strategies                            formulating MCC's
                                             strategic plan and
                                             approved the plan.
    Risk management and audit    X The MCC Board has    MCC has not yet
    and assurance processes               formed an audit      hired a risk
                                             committee and        specialist for
                                             approved a charter   the corporation
                                             for that committee.  but has used an
                                                                  outside
                                                                  consulting firm
                                                                  to support MCC
                                                                  risk analysis.
    Communication and            X MCC has published    N/A
    coordination with corporate           and distributed
    stakeholders                 X updated guidance on
                                             compact development
                                             and implementation.

                                             MCC has developed an
                                             outreach program of
                                             open forums.

    Sources: GAO interviews and analysis of MCC documents.

    Appendix II:  Scope and Methodology

    At the request of the Senate Committee on Foreign Relations, we examined
    the structures and procedures MCC has developed in consultation with
    compact countries to manage compacts. Specifically, our work focused on
    (1) the key areas that MCC examined in its due diligence assessments of
    proposals for Madagascar, Cape Verde, and Honduras, and the criteria that
    MCC used in these assessments, and (2) the form and adequacy of the
    implementation structures that MCC and compact countries have put in place
    for governance, procurement, fiscal accountability, and monitoring and
    evaluation. In addition, we reviewed MCC's progress in responding to our
    April 2005 recommendations on its corporate management and accountability
    structures (see app. I).

    To accomplish our objectives, we reviewed MCC's documentation of its
    processes and agreements, supplemented by interviews with MCC officials.
    We focused our review for objectives 1 and 2 primarily on the first three
    countries with signed compacts-Madagascar, Cape Verde, and Honduras. These
    countries' compacts were the first to enter into force. To further our
    analysis for objectives 1 and 2, we also visited Cape Verde and Madagascar
    in January and February 2006. We selected Cape Verde and Madagascar for
    our site visits because they had advanced further than Honduras in filling
    key positions and beginning compact implementation. While in Cape Verde
    and Madagascar, we interviewed a number of MCC, Millennium Challenge
    Account (MCA), and government officials and visited project sites.

    To identify MCC's evaluation criteria and process for evaluating eligible
    country proposals in due diligence, we reviewed MCC guidance and the
    record of MCC analysis contained in (1) MCC's "due diligence books," which
    are its internal records of how it assessed proposals submitted by
    Madagascar, Cape Verde, and Honduras, and (2) investment memos, which are
    MCC's analyses based on due diligence and internal recommendations to its
    investment committee. These documents are restricted from public
    dissemination due to their sensitive nature, but MCC made them available
    to us for analysis. We have coordinated with MCC on describing the
    information from these books in general terms without disclosing sensitive
    information. We used MCC's definition of the due diligence process as
    beginning with MCC's opportunity memo and ending with the acceptance of
    the investment memo by MCC's investment committee. Our review, therefore,
    may not capture some changes and decisions made by MCC or eligible
    countries during proposal development and compact negotiations. To
    evaluate MCC's assessments of proposals' consultative process, project
    coherence, environmental and social impact, and institutional and
    financial sustainability, we relied primarily on MCC's data and analysis
    contained in the due diligence books and, to some extent, in the
    investment memos. We compared MCC's analysis in these documents with
    criteria outlined in MCC's guidance. We were able to perform only limited
    independent verification of the use and adequacy of these criteria during
    our site visits. With regard to its economic analyses, MCC also made
    available to us the spreadsheet models it used to develop the economic
    rate of return calculations that formed the basis for its evaluations of
    the suitability of country-proposed projects for MCC funding. We
    independently analyzed these spreadsheets and validated their logic and
    conclusions on the basis of a review of economic literature and practices.
    In addition, in Madagascar, we conducted a series of focus groups with
    country officials to assess the data and logic used by MCC in developing
    their economic analysis.

    To assess MCC's compact implementation structures, we reviewed the
    compacts with Madagascar, Cape Verde, and Honduras and the supplemental
    agreements required for those compacts to enter into force. We
    supplemented this review with our site visits to Madagascar and Cape
    Verde. In all cases, our ability to analyze the adequacy of these
    structures was limited by their relative newness and limited use in actual
    implementation. We addressed the following four areas of MCC's
    implementation structures:

    o To determine the form of governance structures and key positions in
    these three countries, we reviewed the requirements of MCC compacts and
    supplemental agreements. We determined the progress of the country
    organizations in Madagascar, Cape Verde, and Honduras in filling these
    positions and establishing these structures by analyzing MCC's reported
    staffing and status information. We independently assessed MCC's progress
    in our site visits to Madagascar and Cape Verde. We discussed factors
    affecting the filling of these positions through discussions with MCC and
    compact country officials.

    o To assess the adequacy of the countries' fiscal accountability
    structures, we reviewed MCC's overall fiscal accountability framework and
    the operations in place in Madagascar and Cape Verde. We assessed the
    adequacy of these structures according to the criteria contained in GAO's
    Standards for Internal Control in the Federal Government.1 We assessed
    MCC's and the countries' implementation of these structures by using
    criteria in the Internal Controls Capability Maturity Continuum developed
    by the independent risk consulting company, Protiviti, Inc. We
    independently verified the existence of the structures described in the
    plan and discussed its strengths and weaknesses during the site visits.

    o To assess MCC's procurement structures, we reviewed the MCC fiscal
    accountability framework, and the implementing procurement documents for
    the first three compact countries. We then assessed the adequacy of MCC's
    framework, using criteria identified in previous GAO reports on
    international procurement. To determine the status and factors affecting
    the implementation of this framework in Cape Verde and Madagascar, we
    interviewed compact country officials and obtained documentation of
    procurement procedures.

    o To determine the form of monitoring and evaluation structures in the
    three countries with entry into force, we reviewed the requirements of MCC
    compacts and supplemental agreements. We assessed the status of the
    country organizations in Madagascar, Cape Verde, and Honduras to establish
    these structures by analyzing the staffing and status information provided
    to us by MCC. We independently assessed MCC's progress in our site visits
    to Madagascar and Cape Verde. Additionally, we reviewed the scope of work
    of the independent U.S. evaluation contractors retained by MCC, and
    closely reviewed the monitoring and evaluation plan for Madagascar-the
    only plan approved by MCC prior to April 2006. We also reviewed the plan
    for Cape Verde and the draft plan for Honduras. We assessed the adequacy
    of the Madagascar plan against the criteria of data quality, and
    consistency with the economic model and logic identified in MCC's due
    diligence review of projects. We also applied general principles of
    economic logic, such as treatment of uncertainty in data, to assess how
    uncertainty was incorporated into MCC's monitoring and evaluation
    framework.

    To review MCC's progress in responding to GAO's April 2005 recommendations
    (see app. I), we examined MCC documents, such as its strategic plan,
    planning documents, policies, procedures, and human capital documents. In
    December 2005, MCC provided us with a letter outlining the steps that the
    corporation had taken in response to our recommendations. Using this as a
    basis for discussion, we held additional meetings with MCC officials and
    received additional documentation of MCC's responses. We also reviewed the
    findings of the MCC IG analysis of the functions of the Corporation and
    met with the IG to determine the steps that MCC had taken in response to
    IG findings related to our recommendations.

    We conducted our review from June 2005 through May 2006 in accordance with
    generally accepted government auditing standards.

    Appendix III:  MCC Projects in Madagascar and Cape Verde

    Figure 14: Jatropha Plantation, outside Antsirabe, Madagascar, Targeted
    for Assistance by the MCA-Madagascar Agricultural Business Investment
    Project

    Figure 15: Antananarivo Land Records Storage Room, Programme National
    Foncier Offices

    Note: Digitization of these land records is being supported by MCA funds.

    Figure 16: Port of Praia, Cape Verde

    Note: The quay of the current port can only accommodate one large
    international vessel. Under the MCA program, the quay will be expanded to
    almost double its current length, enabling three ships to dock at a time.

    Figure 17: The Road from Assomada to Rincao, Cape Verde

    Note: Using MCA funds, about half of the road will be converted from
    cobblestone to asphalt. The cobblestones from the first half will be used
    to pave the second section of the road leading up to Rincao.

    Appendix IV:  Summary of MCC Procurement Agents, Standards, and Provisions in
    Madagascar, Cape Verde, and Honduras

    Table 8: Procurement Agents and Standards in Madagascar, Cape Verde, and
    Honduras

        Country   Type of procurement  Procurement agent   Procurement standards
                         agent
    Madagascar Nongovernmental     GTZa                Madagascar Law Number
                                                          2004-009 Dated July 26,
                                                          2004 on Public
                                                          Contracts subject to
                                                          listed exceptions in
                                                          Procurement Agreement.
    Cape Verde Governmental        Cape Verde          World Bank Guidelines:
                                      accountable entity  Procurement Under
                                                          International Bank for
                                                          Reconstruction and
                                                          Development Loans  and
                                                          International
                                                          Development Association
                                                          Credits, May 2004, as
                                                          modified for
                                                          nonconsultant services,
                                                          works and goods.

                                                          World Bank Guidelines:
                                                          Selection and
                                                          Employment of
                                                          Consultants  by World
                                                          Bank Borrowers, May
                                                          2004, as modified, for
                                                          consultants.

                                                          Ministry of
                                                          Infrastructure and
                                                          Transportation rules
                                                          apply to procurements
                                                          below $55,000 for
                                                          transportation
                                                          projects.
    Honduras   Hybrid governmental An outside project  World Bank Guidelines:
                  and nongovernmental manager for the     Procurement Under
                                      transportation      International Bank for
                                      project, and a      Reconstruction and
                                      government agency,  Development Loans  and
                                      the Fondo Nacional  International
                                      de Desarollo Rural  Development Association
                                      Sostenible, for the Credits, May 2004, as
                                      Rural Development   modified for
                                      Project.b           nonconsultant services,
                                                          works, and goods.

                                                          World Bank Guidelines:
                                                          Selection and
                                                          Employment of
                                                          Consultants  by World
                                                          Bank Borrowers, May
                                                          2004, as modified, for
                                                          consultants.

    Source: GAO analysis of MCC procurement documents.

    aDeutsche Gesellschaft fu:r Technische Zusammenarbeit is a private company
    owned by the German federal government.

    bNational Fund for Sustainable Rural Development.

    Table 9: Procurement Provisions, Roles, and Responsibilities Stated in MCC
    Agreements with Madagascar, Cape Verde, and Honduras

        Procurement-related       Compact         Disbursement      Procurement
            provisions                              agreement        agreement
    Document              Outlines MCC's     Includes          Lists specific
                             approval rights    conditions        rules and
                             and documents the  precedent to      procedures that
                             responsibility of  disbursements of  the procurement
                             compact country    funds from MCC to agent will
                             governments to     the compact       follow in
                             ensure oversight   country that MCC  managing
                             of procurement.    can use to        procurement for
                                                enforce the       the compact
                                                requirements in   country.
                                                the procurement
                                                agreement and
                                                compact.
    Compact country roles o Provide          o Submit a report o Submit
    and responsibilities  oversight, ensure  comparing actual  reports; and
                             the removal or     procurement       obtain MCC
                             disclosure of any  activity with     approvals
                             conflicts of       procurement plans before
                             interest, and      for the second    undertaking
                             conduct audits on  most recent       procurements
                             at least an annual disbursement      above
                             basis.             period as a       thresholds.
                                                condition
                             o Ensure           precedent to      o Report
                             transparency by    disbursements.    deviations from
                             establishing a Web                   approved
                             site for the       o In Madagascar,  procurement
                             program and        provide a         plan to MCC.
                             posting            semiannual review Cape Verde and
                             procurement        report on         Madagascar to
                             documents online.a compliance with   report
                                                the procurement   deviations
                             o Create           guidelines for    valued at more
                             procurement review MCC review.       than $10,000.
                             bodies in both                       Honduras to
                             Cape Verde and     o In Cape Verde,  report all
                             Honduras.          establish a       deviations.
                                                procurement
                                                review commission o Provide a
                                                and its charter,  procurement
                                                prior to          plan
                                                receiving MCC     semiannually.
                                                disbursements.b

                                                o MCA-Honduras
                                                must create and
                                                approve a bid
                                                challenge system
                                                acceptable to MCC
                                                prior to
                                                receiving funds
                                                for the second
                                                quarter of
                                                operations.
    MCC role and approval o Approve the      o Review and      o Approve
    authority             members of Cape    approve periodic  procurements
                             Verde's            plans and         above
                             procurement review reports.          thresholds.
                             commission and
                             Honduras's                           o Review and
                             procurement                          approve any
                             supervisor                           deviations from
                             agreement.c                          approved plan
                                                                  above certain
                             o Authority to                       thresholds.
                             terminate the
                             compact if the                       o Review and
                             compact country                      approve the
                             government or                        compact
                             another party                        country's
                             materially                           procurement
                             breaches the                         plan, including
                             compact or any                       proposed
                             supplemental                         procurements
                             agreement, such as                   and methods of
                             a procurement                        procurement.
                             agreement.

                             o Requires the
                             signing of a
                             procurement
                             agreement prior to
                             entry into force.

    Source: GAO analysis of MCC documents.

    aIn Cape Verde, MCC compact funding is also supporting the creation of an
    electronic procurement system. First, MCC is funding the establishment and
    implementation of a public e-procurement system for use in compact
    procurements. Second, it is funding the expansion of this system to all
    other units of the government.

    bAs conditions precedent to any disbursements for procurement management,
    MCC has required that the government of Cape Verde will (1) request, as a
    matter of national interest that requires urgent resolution of the
    National Assembly, that the passage of a harmonized public procurement
    law, with a supporting regulatory framework, be placed on the legislative
    agenda and (2) establish a long-term program, with support in the national
    budget, for the establishment of local procurement training capacity
    (facilities and personnel), which will be sustainable without donor
    funding within a period of 5 years.

    cIn Honduras, the compact also requires MCC approval of a procurement
    operations manual.

    Appendix V:  Comments from the Millennium Challenge Corporation

    The following are GAO's comments on the Millennium Challenge Corporation
    letter dated July 7, 2006.

    GAO Comments

    1.MCC stated that "MCC's mandate to engage directly with eligible
    countries shortly after its creation did not allow for the possibility of
    developing and vetting policies and procedures in advance of such
    engagement." We recognize that MCC was simultaneously addressing a number
    of issues during its initial years of operation-selecting eligible
    countries, setting up MCC as an organization, and developing guidance and
    policies while also working with countries to finalize compacts. In the
    context of MCC as an evolving organization, we felt it was important to
    discuss the evolving nature of guidance to provide a balanced perspective
    regarding the process that eligible countries had to follow to sign
    compacts.

    2.MCC stated that our concern regarding baseline data quality stems from
    one survey in Madagascar. However, we found issues with data reliability
    in Madagascar with both the Agricultural Productivity Survey and Household
    Survey. In the second survey, the error was smaller; therefore, we focused
    on the Agricultural Productivity Survey to illustrate the more significant
    example. The measurement of land values is very important for Madagascar's
    monitoring and evaluation plan. Both the compact-level goal of increasing
    household income and the program objective of increasing investment in
    rural Madagascar are measured in terms of land values. In each of the
    zones, the expected increase in household income is estimated at 5 percent
    of the average land value, and the expected increase in investment is
    estimated at 27 percent of the average land value. With a large error in
    baseline data, it will be difficult to accurately track progress toward
    the compact-level goal and program objective.

    3.MCC noted that not every benefit can be isolated and measured during
    implementation, and that disaggregating may not be feasible. We recognize
    that not all outcomes of the economic analysis can be directly tracked
    with indicators at different levels of monitoring or for impact
    evaluation. There are trade-offs between cost and level of detail.
    However, as we note in this report, aggregation poses some challenges that
    could limit the effectiveness of monitoring and evaluation.

    Appendix VI:  Comments from the Department of State

    The following are GAO's comments on the Department of State letter dated
    July 10, 2006.

    GAO Comments

    1.In referring to our discussion about MCC's guidance on project
    coherence, State Department commented that it would be erroneous to
    indicate that countries were wholly unaware of the need to design their
    compact programs to target compact goals, and that informal guidance from
    MCC could have been received at any time. We agree that countries could
    have requested informal guidance from MCC. According to MCC, they did
    provide verbal guidance to countries regarding the need to link projects
    to compact goals. However, MCC rejected tourism and preschool education
    projects proposed by Honduras because they were not linked to the
    impediments to growth that emerged from the consultative process. MCC also
    rejected projects in Cape Verde because MCC's due diligence did not
    indicate that these projects addressed key constraints in Cape Verde.
    Given that these two countries submitted projects that did not meet
    project coherence criteria, MCC's verbal guidance may not have been
    sufficient to direct countries to submit proposals meeting these criteria.
    We recognize that MCC was simultaneously addressing a number of issues
    during its initial years of operation-selecting eligible countries,
    setting up MCC as an organization, and developing guidance and policies
    while also working with countries to finalize compacts. In the context of
    MCC as an evolving organization, we felt it was important to discuss the
    evolving nature of guidance to provide a balanced perspective regarding
    the process that eligible countries had to follow to sign compacts.

    2.State noted that we did not detail the methodology and composition of
    our Madagascar focus groups. We summarized the composition of the focus
    groups in the letter of this report. We met with these 29 individuals,
    including representatives of MCA-Madagascar and Madagascar ministries,
    during the course of our week in Madagascar and reviewed with them the
    assumptions used in MCC's economic model for its projects. As previously
    discussed in this report, we found that these officials were not closely
    involved in MCC's economic analysis. According to MCC and Madagascar
    officials, an MCC economist met with four Madagascar representatives in
    Paris, France, during compact negotiations and reviewed the model with
    them at that time. (MCC officials did travel to Madagascar during due
    diligence to assess proposed projects.) When we discussed this with MCC
    officials, they stated that not traveling to Madagascar to develop the
    model was a mistake, and one that has not been repeated.

    3.State commented that we do not rebut MCC's point that countries' degree
    of involvement depended on their capability and willingness to
    participate. (See comment 2.) In its letter, which is reprinted in
    appendix V, MCC agreed that in some cases, the level of country engagement
    on economic analysis could be improved. MCC also now requires that
    countries engage an economist on the core country team, provides examples
    of the economic rate of return analysis, and has MCC economists make early
    technical guidance trips to work with the core country team and the core
    country team economist. These procedures were not in place when MCC
    conducted the economic analysis for Madagascar, Cape Verde, or Honduras.
    By not thoroughly involving the countries in this analysis, MCC risks not
    meeting its stated principle of focusing on results. In MCC's
    results-based framework, the economic model is the basis for determining
    performance targets against which funding is conditioned. MCA-Madagascar
    may find that the targets are unrealistic if the targets have not been
    thoroughly discussed with, and understood by, Madagascar officials.

    4.State noted that the time for the in-country MCA organizations to hire
    staff compares favorably with general government hiring. Management unit
    officials are hired by a compact country's MCA program steering committee,
    not the U.S. government. As such, it is not "general government hiring"
    and should not be compared with it.

    5.State correctly observed that we did not offer MCC a recommended
    alternative to its taking the time to find good candidates for positions.
    We did not make a recommendation for addressing this issue because MCC has
    adopted a policy implementing the authority given it by section 609(g) of
    the Millennium Challenge Act of 2003 to make grants to facilitate compact
    development and implementation. MCC's current policy includes a provision
    where, if certain conditions are met, it may fund an eligible country's
    request for "management support payments" for salaries, rent, and
    equipment for the country's team prior to compact signature. We have added
    a discussion of this policy in the letter of this report to clarify this
    point.

    6.In referring to our discussion about the different maturity of internal
    control between Madagascar and Cape Verde, State pointed out that
    differences in the maturity of internal control between the countries are
    to be expected, given that some countries have historically more
    well-developed systems. We agree that different countries will differ in
    their maturity of internal control due to historical differences in the
    underlying systems and accountability infrastructures. The current
    maturity of internal control in each country, however, is a key
    consideration in assessing risk and establishing effective oversight
    mechanisms to deal with the unique risks in the key financial processes
    and activities of each country.

    7.State referred to "GAO's reliance on project evaluation criteria that
    make use of randomized controlled trials to measure success." This comment
    misconstrues our findings on the use of randomized controlled trials. We
    do not rely on these criteria. We are commenting on MCC's use of
    randomized controlled trials, which MCC has indicated are its preferred
    method of impact evaluation, and on the potential challenges to the use of
    this approach. State's comments regarding cost-benefit analysis would be
    more appropriately addressed to MCC.

    8.State correctly noted that we did not capture the change to one
    indicator for fiscal year 2006. We have updated the list of MCC indicators
    in footnote 8.

    9.State suggested rewording MCC's expected results to "MCC expects to
    permanently raise incomes...." We did not use the word "permanently"
    because in the three compacts that we focused on for this report, it was
    not used to describe MCC's expected results at the country level.

    Appendix VII:  GAO Contact and Staff Acknowledgments

    David B. Gootnick, Director, 202-512-3149

    In addition to the person named above, Phil Herr (Assistant Director),
    Claude Adrien, Cara Bauer, Gergana Danailova-Trainor, Jeanette Franzel,
    Keith Kronin, Reid Lowe, Norma Samuel, Mona Sehgal, and Michael Simon made
    key contributions to this report. Also, Tim DiNapoli, David Dornisch,
    Etana Finkler, Ernie Jackson, Debra Johnson, Bruce Kutnick, Janice
    Latimer, Charlotte Moore, and Celia Thomas provided technical assistance.

    (320370)

    www.gao.gov/cgi-bin/getrpt? GAO-06-805 .

    To view the full product, including the scope

    and methodology, click on the link above.

    For more information, contact David Gootnick at (202) 512-3149 or
    gootnickd@gao.gov.

    Highlights of GAO-06-805 , a report to the Chairman, Committee on Foreign
    Relations, U.S. Senate

    July 2006

    MILLENNIUM CHALLENGE CORPORATION

    Compact Implementation Structures Are Being Established; Framework for
    Measuring Results Needs Improvement

    In January 2004, Congress established the Millennium Challenge Corporation
    (MCC) to administer the Millennium Challenge Account. MCC's mission is to
    reduce poverty by supporting sustainable, transformative economic growth
    in developing countries that create and maintain sound policy
    environments. MCC has received more than $4.2 billion in appropriations,
    and, as of May 2006, it had disbursed $22.4 million to four countries
    whose signed MCC compacts have entered into force. For the first three
    countries with compact entry into force-Madagascar, Cape Verde, and
    Honduras-GAO was requested to examine (1) key aspects that MCC reviewed,
    and the criteria it used, in its due diligence assessments; and (2) the
    structures that have been established for implementing the compacts.

    What GAO RecommendsGAO recommends that the Chief Executive Officer of MCC
    (1) ensure that economic analyses of compact proposals better reflect
    country conditions and involve country participation and (2) improve
    monitoring and evaluation by obtaining more reliable baseline data,
    ensuring a clear linkage to economic analyses, developing criteria for
    establishing and adjusting targets, and ensuring timely development of
    evaluation designs. MCC generally agreed with GAO's recommendations; State
    commented that some of GAO's findings reflect transitory problems.

    MCC undertook a wide range of activities in its due diligence,
    includingfive key aspects of the Madagascar, Cape Verde, and Honduras
    proposals: (1) countries' consultation with local groups in developing
    compact proposals, (2) projects' coherence with compact goals, (3)
    environmental and social impacts, (4) institutional and financial
    sustainability, and (5) impact on economic growth and poverty reduction.
    MCC based its assessments on an evolving set of criteria: early, general
    guidance to the countries followed by later, more specific guidance. MCC's
    analyses of the projects' economic impact were limited in that some of the
    assumptions and data used may not reflect country conditions. As a result,
    the projects selected on the basis of the analyses may not achieve compact
    goals. In the two countries we visited, Madagascar and Cape Verde, MCC
    conducted the analyses with limited country participation, which resulted
    in countries' having little understanding of the process.

    MCC and the three countries have made progress in establishing compact
    country structures for oversight and management, procurement, fiscal
    accountability, and monitoring and evaluation, although some of these
    structures are not yet complete. The oversight structures allow for
    country management with MCC review, but some organizations were not fully
    staffed for months after the compacts entered into force. Madagascar and
    Cape Verde have implemented fiscal accountability structures for
    MCC-funded projects, and established procurement structures with effective
    characteristics; however, these structures are still largely untested and
    some are still under development. Finally, MCC and the countries have
    established monitoring and evaluation frameworks to track and account for
    program results. However, limitations in the baseline data collected,
    linkage to economic analyses, methods of addressing uncertainty associated
    with program results, and the timely design of randomized controlled
    trials may constrain MCC's ability to monitor and evaluate program
    results.

    Status of MCC Compact Development and Appropriations

    a$22.4 million of the committed amount has been disbursed to begin compact
    implementation.
    *** End of document. ***