Millennium Challenge Corporation: Analysis of Compact Development
and Future Obligations and Current Disbursements of Compact
Assistance (11-APR-08, GAO-08-577R).
The Millennium Challenge Corporation (MCC), now in its fourth
year of operations, provides aid to developing countries that
have demonstrated a commitment to ruling justly, encouraging
economic freedom, and investing in people. MCC provides monetary
assistance to eligible countries through multiyear compact
agreements to fund specific programs targeted at reducing poverty
and stimulating economic growth. MCC has received appropriations
for fiscal years 2004 to 2008 totaling more than $7.5 billion,
and has set aside about $6.4 billion of this amount for compact
assistance. The President has requested an additional $2.225
billion for MCC for 2009, of which MCC plans to use $1.88 billion
for compact assistance with countries currently eligible for
compacts. MCC compact development is a four-phase process: (1) an
eligible country submits a compact proposal; (2) MCC conducts a
due diligence review of the proposed projects; (3) MCC and the
country negotiate and sign the compact; (4) MCC and the country
complete preparations, including developing disbursement plans,
for the compact to enter into force. After the compact enters
into force, compact implementation begins, and funds are
obligated and disbursed. As of March 2008, MCC had selected 28
countries as eligible for compact assistance and had signed
compacts with 16 of these countries. Eleven of these compacts
have entered into force. Ten countries have not signed compacts
and remain in the compact development process. We conducted this
performance audit on the initiative of the Comptroller General.
This report assesses (1) the current status and pace of compact
development; (2) projected time frames for the commitment and
obligation of MCC's existing (2004 to 2008) and requested (2009)
appropriations; and (3) MCC's progress in disbursing compact
assistance.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-08-577R
ACCNO: A81651
TITLE: Millennium Challenge Corporation: Analysis of Compact
Development and Future Obligations and Current Disbursements of
Compact Assistance
DATE: 04/11/2008
SUBJECT: Appropriated funds
Developing countries
Economic analysis
Economic development
Economic growth
Eligibility criteria
Eligibility determinations
Evaluation criteria
Federal aid to foreign countries
Foreign aid programs
Foreign economic assistance
Foreign governments
Foreign loans
Funds management
Internal controls
International agreements
International cooperation
International economic relations
International relations
Performance measures
Program evaluation
Program management
Foreign countries
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GAO-08-577R
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GAO-08-577R:
United States Government Accountability Office:
Washington, DC 20548:
April 11, 2008:
The Honorable John J. Danilovich:
Chief Executive Officer:
Millennium Challenge Corporation:
875 Fifteenth Street NW:
Washington, D.C. 20005-2221:
Subject: Millennium Challenge Corporation: Analysis of Compact
Development and Future Obligations and Current Disbursements of Compact
Assistance:
Dear Mr. Ambassador:
The Millennium Challenge Corporation (MCC), now in its fourth year of
operations, provides aid to developing countries that have demonstrated
a commitment to ruling justly, encouraging economic freedom, and
investing in people. MCC provides monetary assistance to eligible
countries through multiyear compact agreements to fund specific
programs targeted at reducing poverty and stimulating economic growth.
[Footnote 1] MCC has received appropriations for fiscal years 2004 to
2008[Footnote 2] totaling more than $7.5 billion, and has set aside
about $6.4 billion of this amount for compact assistance. [Footnote 3]
The President has requested an additional $2.225 billion for MCC for
2009, of which MCC plans to use $1.88 billion for compact assistance
with countries currently eligible for compacts.
MCC compact development is a four-phase process: (1) an eligible
country submits a compact proposal; (2) MCC conducts a due diligence
review of the proposed projects; (3) MCC and the country negotiate and
sign the compact; (4) MCC and the country complete preparations,
including developing disbursement plans, for the compact to enter into
force. After the compact enters into force, compact implementation
begins, and funds are obligated and disbursed. As of March 2008, MCC
had selected 28 countries as eligible for compact assistance and had
signed compacts with 16 of these countries. Eleven of these compacts
have entered into force. Ten countries have not signed compacts and
remain in the compact development process.[Footnote 4]
We conducted this performance audit on the initiative of the
Comptroller General. This report assesses:
* the current status and pace of compact development;
* projected time frames for obligations of MCC's existing (2004 to
2008) and requested (2009) appropriations; and:
* MCC's progress in disbursing compact assistance.
To address these objectives, we analyzed MCC's budget presentations and
other corporation records for 2004 to 2009 and obtained the views of
MCC officials. We also compared MCC's actual and planned disbursements
for compact assistance from July 2005 through December 2007 for 11
countries that have compacts in force. We conducted this performance
audit from January to March 2008 in accordance with generally accepted
government auditing standards. Those standards require that we plan and
perform our work to obtain sufficient, appropriate evidence to provide
a reasonable basis for our findings and conclusions based on our audit
objectives. We believe that the evidence obtained provides a reasonable
basis for our findings and conclusions based on our audit objectives.
(See enclosure I for additional information about our scope and
methodology.)
Results in Brief:
The 10 countries without signed compacts are in the first or second
phase of compact development. Since MCC made its first eligibility
selections, the length of time required for compact development has
increased substantially. For example, the first 11 countries to sign
compacts completed compact development an average of 25 months after
being selected as eligible. Assuming the next 5 signed compacts enter
into force as MCC projects, the average length of compact development
for all 16 countries with signed compacts will increase to 32 months.
MCC attributed the slowing pace of compact development to several
factors, such as the increased size of more recent compacts, and
estimates that future compact development will take an average of 36
months.
Assuming that MCC signs two additional compacts for $858 million by the
end of 2008, as planned, and that compact development continues at the
pace observed to date, we project that MCC could obligate the balance
of its existing (2004 to 2008) appropriations by the end of 2009.
Similarly, at the observed pace of compact development (32 months), and
assuming MCC funds four compacts with currently eligible countries, we
project that MCC could obligate its entire 2009 request for compact
assistance by the fourth quarter of 2010. However, several factors
could lengthen this projected time frame. For example, if the pace of
compact development slows or MCC funds compacts with countries newly
eligible in 2009, it would not obligate all of its requested 2009
appropriation until 2011.
MCC's actual disbursements substantially lag behind planned
disbursements for all 11 countries with compacts in force because
initial compact disbursement plans underestimated the time required for
compact countries to establish the structures, agreements, and
capabilities to begin implementing compact projects. The slow rate of
disbursements is most critical for Madagascar, Cape Verde, and
Honduras, which are in the third year of compact implementation. For
example, as of December 2007, MCC was 29 months (61 percent) into the
48-month Madagascar compact but had disbursed only $22.7 million (21
percent) of the $109.8 million compact. Unless disbursements for these
countries increase significantly, MCC could have significant obligated,
but undisbursed, balances when the compacts expire and may not be able
to fully achieve compact goals for economic growth and poverty
reduction. MCC reports that it is taking steps to increase
disbursements of compact assistance.
In commenting on a draft of this report, MCC generally agreed with our
factual analysis but disagreed with some of the report's emphasis and
conclusions. MCC concurred with our analysis that the length of time
required for compact development has increased, and attributed this
increase to four primary factors. With regard to our analysis of MCC's
commitment and obligation of funds, MCC said that our report
underemphasized the link between available appropriations and signing
new compacts and that it planned to commit the President's entire
request by the end of 2009, slightly earlier than we projected.
Finally, MCC concurred with our analysis that actual disbursements lag
behind original disbursement projections.
Background:
A country that has been selected as eligible for assistance may begin
the four-phase compact development process that can lead to a compact's
entry into force:
* Country proposal development. After the MCC Board of Directors
selects a country as eligible for assistance, MCC invites the country
to submit a compact proposal. The proposal must be developed in
consultation with members of civil society, including the private
sector and nongovernmental organizations. On receiving a proposal, MCC
conducts a preliminary assessment and reports its findings in an
internal "opportunity memo" to the MCC investment committee. The
opportunity memo signifies the end of the proposal development phase
and the beginning of due diligence review.
* MCC due diligence review. In conducting due diligence, MCC evaluates
the eligible country's proposal against MCC criteria to ensure that
proposed projects will be effective and funds will be well used. For
example, MCC analyzes the projects' costs and economic, environmental,
and social impact. MCC also assesses the level of civil society
participation in proposal development. Based on its assessment of the
proposal, MCC makes recommendations in an investment memo to the MCC
investment committee.
* Compact negotiation and MCC approval. Following the issuance of an
investment memo, MCC enters into formal compact negotiations with the
eligible country. If the negotiations are successful, the MCC Board of
Directors may approve the compact, and MCC and the eligible country
sign it. MCC commits funds for the compact at signing but does not
obligate these funds until the compact enters into force. Each signed
compact includes a multiyear Financial Plan Summary that documents
MCC's planned projects and disbursements by project in each fiscal
year.
* MCC and compact country complete entry-into-force requirements. MCC
and the country's accountable entity must complete supplemental
agreements, including a disbursement agreement and a procurement
agreement, before the compact enters into force and the funds are
disbursed.[Footnote 5]
At the successful conclusion of these four phases, the compact enters
into force, and MCC obligates the full amount of the compact and starts
disbursing assistance as the country starts implementing projects.
Actual and Requested Appropriations, 2004 to 2009:
MCC has received appropriations for fiscal years 2004 to 2008 totaling
more than $7.5 billion and has set aside about $6.4 billion of this
amount for compact assistance. As of March 2008, MCC had obligated
$2.98 billion for 11 compacts that had entered into force and had
committed an additional $2.55 billion for 5 signed compacts, leaving a
balance of about $858 million available for compact assistance (see
table 1). The President has requested $2.225 billion for MCC in 2009,
of which the corporation plans to use $1.88 billion for compact
assistance.
Table 1: Actual and Requested MCC Funding, 2004 to 2009, as of March
2008 (Dollars in millions):
Appropriations:
2004 to 2009 (actual): $7,529;
2009 (requested): $2,225;
Total: $9,754.
Appropriations: Less threshold program[A]:
2004 to 2009 (actual): (601);
2009 (requested): (150);
Total: (751).
Appropriations: Less administrative:
2004 to 2009 (actual): (228);
2009 (requested): (100);
Total: (388).
Appropriations: Less due diligence:
2004 to 2009 (actual): (138);
2009 (requested): (55);
Total: (193).
Appropriations: Less 609 (g)[B]:
2004 to 2009 (actual): (100);
2009 (requested): (35);
Total: (135).
Appropriations: Less USAID IG[C]:
2004 to 2009 (actual): (11);
2009 (requested): (5);
Total: (16).
Total available for compact assistance:
2004 to 2009 (actual): $6,391;
2009 (requested): $1,880;
Total: $8,271.
Appropriations: Obligations for compact assistance (11 compacts):
2004 to 2009 (actual): (2,983);
2009 (requested): [Empty];
Total: (2,983).
Appropriations: Committed for compact assistance (5 compacts):
2004 to 2009 (actual): (2,550);
2009 (requested): [Empty];
Total: (2,550).
Balance available for compact assistance:
2004 to 2009 (actual): $858;
2009 (requested): $1,880;
Total: $2,738.
Source: GAO analysis of MCC data.
[A] The MCC threshold program is designed to assist countries that have
not yet qualified for compact assistance but have demonstrated a
significant commitment to improve their performance on MCC's
eligibility criteria.
[B] 609(g) refers to funds paid by MCC under 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. If
certain conditions are met, MCC may fund an eligible country's request
for "management support payments" for salaries, rent, and equipment for
the country's technical team prior to compact signature.
[C] USAID IG refers to the U.S. Agency for International Development
Office of Inspector General.
[End of table]
Currently Eligible Countries Are in the Early Phases of Compact
Development, and the Average Pace of Compact Development Has Slowed:
All 10 currently eligible countries without signed compacts are in the
initial phases of compact development. The average pace of compact
development has slowed as the 16 countries with signed compacts have
progressed through the process, and it may slow further as the
remaining eligible countries complete compact development.
Eligible Countries Are in the Initial Phases of Compact Development:
Of the 10 currently eligible countries without signed compacts, 8 are
under active consideration[Footnote 6] and all 8 are in the first two
phases of compact development.
* Five countries--Jordan, Malawi, Moldova, the Philippines, and Ukraine-
-are in the first (proposal development) phase of the compact
development process. Of these countries, only Moldova has submitted a
proposal for compact assistance to MCC.[Footnote 7]
* Senegal had previously submitted compact proposals and progressed to
the due diligence phase, but MCC officials expect the country to submit
a new proposal; thus, it will return to the proposal development phase.
* The remaining two countries--Burkina Faso and Namibia--have submitted
proposals and are currently in the second (due diligence)
phase.[Footnote 8]
Figure 1 summarizes the status of compact development for the countries
selected as eligible for compact assistance.
Figure 1: MCC Compact Development and Implementation, as of March 31,
2008.
[See PDF for image]
This figure is an illustration of MCC Compact Development and
Implementation, as of March 31, 2008, depicted as follows:
Compact development: average duration 32 months:
Triggering Event or document: Eligibility determination (selection);
Compact development phase (Phase 1): Country proposal development;
Average duration: 11.3 months;
Eligible countries (months in phase):
* Bolivia (47);
* Senegal (47);
* Timor Leste (29);
* Jordan (17);
* Moldova (17);
* Ukraine (17);
* Malawi (4);
* Philippines (1);
Total amount for compacts: N/A.
Triggering Event or document: Opportunity memo;
Compact development phase (Phase 2): MCC's due diligence review;
Average duration: 10.1 months;
Eligible countries (months in phase):
* Namibia (16);
* Burkina Faso (17);
Total amount for compacts: $858 million.
Triggering Event or document: Investment memo;
Compact development phase (Phase 3): Compact negotiation and MCC board
approval;
Average duration: 2.6 months;
Eligible countries (months in phase): None;
Total amount for compacts: $0.
Triggering Event or document: Sign compact (commit funds);
Compact development phase (Phase 4): MCC and country complete entry-
into-force requirements;
Average duration: 7.8 months;
Eligible countries (months in phase):
* Mozambique (9);
* Lesotho (8);
* Morocco (7);
* Mongolia (5);
* Tanzania (1).
Total amount for compacts: $2,550 million.
Compact implementation: maximum duration 60 months:
Triggering Event or document: Entry into force (obligate funds);
Compact development phase: MCC authorizes fund disbursement and
oversees country implementation of compact;
Average duration: N/A;
Eligible countries (months in phase):
* Madagascar (32);
* Honduras (30);
* Cape Verde (29);
* Georgia (24);
* Vanuatu (23);
* Nicaragua (22);
* Armenia (18);
* Benin (18);
* Ghana (13);
* Mali (6):
* El Salvador (6);
Total amount for compacts: $2,983 million.
Source: GAO analysis of MCC data.
Notes:
Average duration reflects the months that the 16 countries with
signed compacts spent in each phase of compact development.
The opportunity memo is MCC's preliminary assessment of the country's
proposal and is submitted to the MCC investment committee. If the memo
is approved, MCC launches into a detailed due diligence review of the
proposal.
The investment memo contains MCC's findings from its due diligence
review of the country's proposal and recommendations to the MCC
investment committee on compact funding.
Italicized countries were selected as low-middle-income countries
(based on per capita income). Armenia, Cape Verde, and Morocco were
selected as low-income countries but are now classified as low-middle-
income countries.
MCC is monitoring political developments in Bolivia and Timor Leste.
[End of figure]
Average Time Required for Compact Development Has Increased:
The average pace of compact development--the length of time from a
country's selection as eligible to its compact's entry into force--has
slowed substantially since MCC selected the first countries in 2004.
* The first 11 countries to sign compacts took an average of 19 months
to complete the first three phases of compact development. In contrast,
the next 5 countries to sign compacts took an average of 36 months to
complete the first three phases.
* The first 11 countries to sign compacts took an average of about 6
months to complete phase 4 of compact development. Assuming the next 5
countries' compacts enter into force by the end of 2008, as MCC
projects,[Footnote 9] these countries will complete phase 4 in an
average of about 11 months.
* The first 11 countries to sign compacts completed the four phases of
compact development in an average of 25 months. Assuming the next 5
countries' compacts enter into force as MCC projects, the average
length of time required for all 16 countries with signed compacts to
complete compact development would be about 32 months.
Figure 2 compares the average pace of compact development for the first
11 countries to sign compacts with the estimated average pace for all
16 countries with signed compacts (assuming the last 5 compacts enter
into force as MCC projects).
Figure 2: Average Number of Months to Complete Compact Development:
[See PDF for image]
This figure is a illustration of the average number of months to
complete compact development. The following data is depicted:
Average for 11 countries with compacts in force:
6.3 months;
Total: 25 months.
Average for all 16 countries with signed compacts: 32 months;
Proposal development (phase 1) [Eligibility determination]: 11.3
months;
Due diligence review (phase 2) [Opportunity memo]: 10.1 months;
Compact negotiation and signature (phase 3) [Investment memo]: 2.6
months;
Entry into force (phase 4) [Compact entry into force (obligate funds)]:
7.8 months;
Total: 32 months.
Source: GAO analysis of MCC data.
[End of figure]
Pace of Compact Development Could Slow Further:
The average pace of compact development could slow further as the 10
countries without signed compacts move through the four phases. First,
as figure 1 shows, 8 of these countries have remained in the first two
phases of compact development substantially longer than the average for
the 16 countries with signed compacts.[Footnote 10] Second, the average
time required to complete the final phase of compact development likely
will continue to increase. For example, whereas the first 11 compacts
entered into force an average of 6 months after signature, MCC
estimates that subsequent compacts will enter into force 6 to 18 months
after signature. MCC officials plan to use these additional months to
better prepare for project implementation and disbursement of compact
assistance. To support these efforts, MCC plans to increase the use of
compact implementation funding during the period between compact
signature and entry into force.[Footnote 11] MCC estimates that future
compact development will take an average of 36 months from eligibility
selection to entry into force.
MCC officials attribute the slowing pace of compact development to four
primary factors:
* Number of countries selected. MCC's Board of Directors selected 16
countries as eligible for compact assistance in the corporation's first
year of operations. MCC officials focused the corporation's resources
on countries most prepared to move through compact development.
* Increased compact size. Compact development for larger, recent
compacts has required more time and effort, particularly in phases 1
and 2. The average compact size for the first 11 compacts is $271
million; the average size for the most recent 5 compacts is $510
million.
* Country capacity constraints. MCC reports that country capacity
affects the length of compact development, particularly in phase 1, and
those countries with lower capacity generally have taken considerably
longer to complete proposals that support opportunity memos. In this
regard, MCC noted that the overall pace of compact development is more
heavily dependent on the country's capacity and the quality of its
proposal than on MCC.
* Expanded compact development. Reflecting lessons learned from the
first 11 compacts, MCC plans to engage countries earlier and invest
more time and effort in compact development to improve countries'
implementation capacity before compacts enter into force.
MCC Could Fully Obligate Its Existing Appropriations by the End of 2009
and Its Requested Appropriations by Late 2010, at the Earliest:
Based on MCC projections, the corporation could commit the balance of
its remaining 2004 to 2008 appropriations by the end of 2008 and
obligate these funds by the fourth quarter of 2009. Similarly, given
MCC's projected amount and observed pace of compact awards, and
assuming that MCC funds compacts with only the currently eligible
countries, we estimate that MCC could commit and obligate the
President's entire $1.88 billion 2009 request for compact assistance
during 2010. However, if the pace of compact development slows or MCC
funds compacts with countries newly eligible in 2009, we project that
it would not obligate all of the requested 2009 appropriation until
late 2011.
MCC Could Obligate the Balance of Existing 2004 to 2008 Appropriations
by the End of 2009:
At MCC's projected amount and observed pace of compact awards, we
estimate that MCC could commit the balance of its remaining 2004 to
2008 appropriations by the end of 2008 and obligate these funds by the
fourth quarter of 2009. Figure 3 shows MCC's obligations for compact
assistance to date and summarizes the results of our assessment of how
quickly MCC could obligate the balance of its remaining 2004 to 2008
appropriations and requested 2009 appropriations.
Figure 3: Actual and Estimated MCC Obligations for Compact Assistance,
2004 to 2009.
[See PDF for image]
This figure is a combination of a line graph and a timeline, with the
following data depicted (dollars in millions):
Actual obligations for 11 compacts in force:
Fiscal year 2005 Q4: $324.8;
Fiscal year 2006 Q1: $434.9;
Fiscal year 2006 Q2: $434.9;
Fiscal year 2006 Q3: $970.9;
Fiscal year 2006 Q4: $1,206.6;
Fiscal year 2007 Q1: $1,513.9;
Fiscal year 2007 Q2: $2,060.9;
Fiscal year 2007 Q3: $2,060.9;
Fiscal year 2007 Q4: $2,982.6;
Fiscal year 2008 Q1: $2,982.6;
Fiscal year 2008 Q2: $2,982.6.
Project obligations for 5 signed compacts not yet in force:
Fiscal year 2008 Q2 (Lesotho added): $2,982.6;
Fiscal year 2008 Q3: $3,345;
Fiscal year 2008 Q4 (Mongolia, Morocco, Mozambique and Tanzania added):
$5,533.
Project obligations for compacts with Burkina Faso and Namibia
Fiscal year 2009 Q1: $5,533;
Fiscal year 2009 Q2 (Namibia added): $5,858;
Fiscal year 2009 Q3: $5,858;
Fiscal year 2009 Q4 (Burkina Faso added)[A]: $5,858;
Fund compacts with currently eligible countries (MCC plan):
Fiscal year 2009 Q4: $6,391;
Fiscal year 2010 Q1: $6,861;
Fiscal year 2010 Q2: $7,331;
Fiscal year 2010 Q3: $7,801;
Fiscal year 2010 Q4[B]: $8,271.
Fund at least 1 compact with countries newly eligible in 2009:
Fiscal year 2009 Q4: $6,391;
Fiscal year 2010 Q1: $6,659;
Fiscal year 2010 Q2: $6,928;
Fiscal year 2010 Q3: $7,196;
Fiscal year 2010 Q4: $7,465;
Fiscal year: 2011 Q1: $7,734;
Fiscal year: 2011 Q2: $8,002;
Fiscal year: 2011 Q3[C]: $8,271.
Source: GAO analysis of MCC data.
Notes:
(A) MCC obligates the balance of its 2004 to 2008 appropriations,
assuming compacts with Lesotho, Mongolia, Morocco, Mozambique, Namibia,
and Burkina Faso enter into force by the end of 2009 as projected.
(B) MCC obligates all of its requested 2009 appropriations ($1.88
billion), assuming the corporation funds compacts with currently
eligible countries and compact development proceeds at an average pace.
(C) MCC obligates all of its requested 2009 appropriations ($1.88
billion), assuming the corporation funds at least one compact with a
country newly eligible in 2009 and compact development proceeds at an
average pace.
[End of figure]
* As figure 3 shows, MCC plans to obligate the $2.55 billion it has
committed for the five signed compacts with Lesotho, Mongolia, Morocco,
Mozambique, and Tanzania when these compacts enter into force by the
end of 2008.
* MCC plans to use the $858 million balance available for compact
assistance to fund new compacts with Burkina Faso and Namibia. MCC
plans to sign compacts with these two countries and commit the balance
of its existing appropriations by the end of 2008.[Footnote 12]
Assuming that these countries proceed to entry into force as MCC
projects, it could obligate these funds by the fourth quarter of 2009.
Figure 4 shows the actual and projected pace of compact development--
and the actual and projected commitment and obligation dates--for the
five countries with signed compacts not yet in force and for the two
projected new compacts with Burkina Faso and Namibia.
Figure 4: Actual and Projected Compact Development for 2004 to 2008
Appropriations:
[See PDF for image]
This figure is a illustration of the average number of months for
actual and projected compact development. The following data is
depicted:
Five signed compacts:
Mozambique:
Proposal development (phase 1) [Eligibility determination]: 14.9 months
(2004 3Q to 2005 3Q);
Due diligence review (phase 2) [Opportunity memo]: 22.1 months (2005 3Q
to 2007 3Q);
Compact negotiation and signature (phase 3) [Investment memo]: 1.2
months (2007 3Q to 2007 4Q);
Entry into force (phase 4) [Compact entry into force (obligate funds)]:
14.6 months (2007 4Q to 2009 Q1).
Lesotho:
Proposal development (phase 1) [Eligibility determination]: 26.4 months
(2004 3Q to 2006 4Q);
Due diligence review (phase 2) [Opportunity memo]: 10.1 months (2006 4Q
to 2007 4Q);
Compact negotiation and signature (phase 3) [Investment memo]: 2.0
months (2007 4Q to 2007 4Q);
Entry into force (phase 4) [Compact entry into force (obligate funds)]:
11.3 months (2007 4Q to 2008 Q3).
Mongolia:
Proposal development (phase 1) [Eligibility determination]: 17.9 months
(2004 3Q to 2006 1Q);
Due diligence review (phase 2) [Opportunity memo]: 21.4 months (2006 1Q
to 2007 4Q);
Compact negotiation and signature (phase 3) [Investment memo]: 2.2
months (2007 4Q to 2008 1Q);
Entry into force (phase 4) [Compact entry into force (obligate funds)]:
11.3 months (2008 1Q to 2009 Q3).
Morocco:
Proposal development (phase 1) [Eligibility determination]: 22.6 months
(2005 1Q to 2007 1Q);
Due diligence review (phase 2) [Opportunity memo]: 9.4 months (2007 1Q
to 2007 3Q);
Compact negotiation and signature (phase 3) [Investment memo]: 1.6
months (2007 3Q to 2007 4Q);
Entry into force (phase 4) [Compact entry into force (obligate funds)]:
11.0 months (2007 4Q to 2008 4Q).
Tanzania:
Proposal development (phase 1) [Eligibility determination]: 10.2 months
(2006 1Q to 2006 4Q);
Due diligence review (phase 2) [Opportunity memo]: 11.5 months (2006 4Q
to 2007 4Q);
Compact negotiation and signature (phase 3) [Investment memo]: 5.6
months (2007 4Q to 2008 2Q);
Entry into force (phase 4) [Compact entry into force (obligate funds)]:
7.4 months (2008 2Q to 2008 2Q).
Two proposed compacts:
Namibia:
Proposal development (phase 1) [Eligibility determination]: 12.9 months
(2006 1Q to 200& 1Q);
Due diligence review (phase 2) [Opportunity memo]: 16.7 months (2007 1Q
to 2008 3Q);
Compact negotiation and signature (phase 3) [Investment memo]: 3.0
months (2008 3Q to 2008 4Q);
Entry into force (phase 4) [Compact entry into force (obligate funds)]:
4.9 months (2008 4Q to 2009 4Q).
Burkina Faso:
Proposal development (phase 1) [Eligibility determination]: 12.0 months
(2006 1Q to 2007 1Q);
Due diligence review (phase 2) [Opportunity memo]: 17.3 months (2007 1Q
to 2008 3Q);
Compact negotiation and signature (phase 3) [Investment memo]: 3.0
months (2008 3Q to 2008 4Q);
Entry into force (phase 4) [Compact entry into force (obligate funds)]:
12.0 months (2008 4Q to 2009 4Q).
Source: GAO analysis of MCC data:
Note: development after 2008 2Q is projected.
[End of figure]
MCC Could Obligate All of Its Requested 2009 Appropriations by Late
2010, at the Earliest:
The President requested $2.225 billion for MCC in 2009, of which MCC
plans to use $1.88 billion to fund compacts with up to five of the
countries that are currently eligible for MCC assistance. At MCC's
projected amount and observed pace of compact awards, and assuming MCC
funds compacts with only the currently eligible countries, we estimate
that MCC could commit all of its 2009 request for compact assistance by
the first quarter of 2010 and obligate all of these funds by the fourth
quarter of 2010, at the earliest. This analysis assumes that MCC does
not use its 2009 appropriation to fund a compact with the Philippines,
which MCC's Board of Directors selected as newly eligible for compact
assistance in March 2008. Rather, our projection that MCC could
obligate its entire 2009 request for compact assistance by the fourth
quarter of 2010 assumes that MCC signs compacts with at least four of
the five countries that have been eligible the longest--Jordan, Malawi,
Moldova, Senegal, and Ukraine.[Footnote 13] Signing compacts with four
countries implies an average compact size of $470 million.
Several Factors Could Lengthen Projected Time Frames to Fully Obligate
2009 Request:
Several factors could lengthen the projected time frames for MCC to
obligate the President's 2009 request:
* First, as of the end of March 2008, only one of the eight countries
under consideration had submitted a compact proposal.[Footnote 14] Our
estimate that MCC will fully commit and obligate its 2009 request
during 2010 assumes that an additional three countries will submit
proposals by November 2008, and proceed through each phase at the
average pace for the remainder of compact development. Delays in
submitting proposals would extend the time frames.
* Second, at the current pace of compact development, if MCC uses its
2009 appropriations to fund a compact with the Philippines, we project
that the corporation could commit all of its funds by the second
quarter of 2010 and obligate all of its funds by the first quarter of
2011.
* Third, at the current pace of compact development, if MCC uses its
2009 appropriations to fund at least one compact with a country newly
eligible in 2009, we project that the corporation could commit all of
its 2009 request in the first quarter of 2011 and obligate all of these
funds by the end of the third quarter of 2011. MCC plans to select
eligible countries for 2009 in November or December 2008.
* Fourth, all of these estimates assume that countries complete compact
development at the average pace observed to date (32 months). However,
if countries take an average of 36 months to complete compact
development (as MCC currently projects), MCC would obligate all of its
2009 request about one fiscal quarter later.
Figure 5 shows the actual and projected pace of compact development--
and the projected commitment and obligation dates--for five eligible
countries and a country newly eligible for compact assistance for 2009.
Figure 5: Actual and Projected Compact Development for 2009
Appropriations.
[See PDF for image]
This figure is a illustration of the average number of months for
actual and projected compact development. The following data is
depicted:
Moldova:
Proposal development (phase 1) [Eligibility determination]: 19.7 months
(2007 1Q to 2008 3Q);
Due diligence review (phase 2) [Opportunity memo]: 10.1 months (2008 3Q
to 2009 3Q);
Compact negotiation and signature (phase 3) [Investment memo]: 2.6
months (2009 3Q to 2009 4Q);
Entry into force (phase 4) [Compact entry into force (obligate funds)]:
7.8 months (2009 4Q to 2010 3Q).
Jordan:
Proposal development (phase 1) [Eligibility determination]: 19.7 months
(2007 1Q to 2008 3Q);
Due diligence review (phase 2) [Opportunity memo]: 10.1 months (2008 3Q
to 2009 3Q);
Compact negotiation and signature (phase 3) [Investment memo]: 2.6
months (2009 3Q to 2009 4Q);
Entry into force (phase 4) [Compact entry into force (obligate funds)]:
7.8 months (2009 4Q to 2010 3Q).
Senegal (new proposal):
Proposal development (phase 1) [Eligibility determination]: 49.8 months
(2004 3Q to 2008 3Q);
Due diligence review (phase 2) [Opportunity memo]: 10.1 months (2008 3Q
to 2009 3Q);
Compact negotiation and signature (phase 3) [Investment memo]: 2.6
months (2009 3Q to 2009 4Q);
Entry into force (phase 4) [Compact entry into force (obligate funds)]:
7.8 months (2009 4Q to 2010 3Q).
Malawi:
Proposal development (phase 1) [Eligibility determination]: 11.3 months
(2008 1Q to 2009 1Q);
Due diligence review (phase 2) [Opportunity memo]: 10.1 months (2009 1Q
to 2009 4Q);
Compact negotiation and signature (phase 3) [Investment memo]: 2.6
months (2010 1Q to 2010 1Q);
Entry into force (phase 4) [Compact entry into force (obligate funds)]:
7.8 months (2010 1Q to 2011 1Q);
Projected entry into force if compact development takes 36 months to
complete (MCC goal): 2011 2Q.
Newly eligible in FY 2009:
Proposal development (phase 1) [Eligibility determination]: 11.3 months
(2009 1Q to 2009 4Q);
Due diligence review (phase 2) [Opportunity memo]: 10.1 months (2010 1Q
to 2010 4Q);
Compact negotiation and signature (phase 3) [Investment memo]: 2.6
months (2010 4Q to 2011 1Q);
Entry into force (phase 4) [Compact entry into force (obligate funds)]:
7.8 months (2011 1Q to 2011 4Q);
Projected entry into force if compact development takes 36 months to
complete (MCC goal): 2012 1Q.
Source: GAO analysis of MCC data.
[End of figure]
Actual Disbursements Substantially Lag Behind Planned Disbursements:
MCC's actual disbursements (outlays) substantially lag behind planned
disbursements for all 11 countries with compacts in force. The slow
rate of disbursements is most critical for Madagascar, Cape Verde, and
Honduras, which are in the third year of compact implementation. Unless
the pace of disbursements for these countries increases significantly,
MCC could have significant obligated, but undisbursed, balances when
the compacts expire and may not be able to fully achieve compact goals
for economic growth and poverty reduction.
Overall, as of December 2007, MCC's actual disbursements are about 25
percent of planned disbursements.[Footnote 15] As figure 6 shows, over
the last 9 months, MCC's disbursements have risen from $68 million to
$156 million. However, actual disbursements as a percentage of planned
disbursements remain essentially unchanged.
Figure 6: Comparison of MCC's Total Actual and Planned Disbursements
for Compact Assistance, as of March 31 and December 31, 2007.
[See PDF for image]
This figure is a horizontal bar graph depicting the following data:
March 2007:
Actual disbursements (percentage of planned): 26.4% ($68 million);
Planned disbursements: $258 million.
December 2007:
Actual disbursements (percentage of planned): 25.4% ($156 million);
Planned disbursements: $616 million.
Source: GAO analysis of MCC disbursement data.
[End of figure]
Figure 7 illustrates that actual disbursements for program
administration, monitoring, and evaluation are roughly half of planned
disbursements, whereas actual disbursements for project funding are
about 21 percent of planned disbursements.
Figure 7: Actual and Planned Disbursements by Program Administration
and Projects, as of December 31, 2007:
[See PDF for image]
This figure is a horizontal bar graph depicting the following data:
Program administration:
Actual disbursements (percentage of planned): 51.5% ($42 million);
Planned disbursements: $81 million.
Project funding:
Actual disbursements (percentage of planned): 21.4% ($114 million);
Planned disbursements: $535 million.
Source: GAO analysis of MCC disbursement data.
[End of figure]
Further, MCC has not met its planned rate of compact disbursements for
any of the 11 compacts currently in force (see fig. 8). The lag is of
greatest concern for Madagascar, Honduras, and Cape Verde, which are in
the third year of compact implementation. Given the shorter amount of
time left in the compacts with these three countries, actual
disbursements as a percentage of total and planned disbursements are
critical. For example, as of December 2007, MCC was 29 months (61
percent) into the 48-month Madagascar compact but had disbursed only
$22.7 million (21 percent) of the $109.8 million compact. MCC planned
to have disbursed $85.6 million by this date. MCC's signed compacts
contain language providing that when a compact expires or is
terminated, any funding not disbursed by MCC is automatically released
from an obligation in connection with that compact.
Figure 8: Elapsed Time, Actual and Planned Compact Disbursements, and
Total Compact Size for the 11 MCC Compacts in Force, as of December 31,
2007:
[See PDF for image]
This figure depicts elapsed time, actual and planned compact
disbursements, and total compact size for the 11 MCC Compacts in force,
as of December 31, 2007.
Compact: Madagascar;
Actual disbursements (percentage of planned): 26.6% ($22.7 million);
Planned disbursements: $85.6 million;
Total value of compact: $109.6 million;
Elapsed time: 61%.
Compact: Honduras;
Actual disbursements (percentage of planned): 13.6% ($14.9 million);
Planned disbursements: $110.1 million;
Total value of compact: $215.0 million;
Elapsed time: 45%.
Compact: Cape Verde;
Actual disbursements (percentage of planned): 27.5% ($13.9 million);
Planned disbursements: $50.6 million;
Total value of compact: $110.1 million;
Elapsed time: 44%.
Compact: Georgia;
Actual disbursements (percentage of planned): 31.0% ($38.7 million);
Planned disbursements: $124.7 million;
Total value of compact: $295.3 million;
Elapsed time: 35%.
Compact: Vanuatu;
Actual disbursements (percentage of planned): 7.2% ($2.0 million);
Planned disbursements: $27.7 million;
Total value of compact: $65.7 million;
Elapsed time: 34%.
Compact: Nicaragua;
Actual disbursements (percentage of planned): 31.1% ($14.4 million);
Planned disbursements: $46.2 million;
Total value of compact: $175.0 million;
Elapsed time: 32%.
Compact: Armenia;
Actual disbursements (percentage of planned): 40.1% ($11.3 million);
Planned disbursements: $28.1 million;
Total value of compact: $235.7 million;
Elapsed time: 25%.
Compact: Benin;
Actual disbursements (percentage of planned): 366.7% ($17.5 million);
Planned disbursements: $47.6 million;
Total value of compact: $307.3 million;
Elapsed time: 25%.
Compact: Ghana;
Actual disbursements (percentage of planned): 19.4% ($131.4 million);
Planned disbursements: $69.2;
Total value of compact: $547.0 million;
Elapsed time: 17%.
Compact: Mali;
Actual disbursements (percentage of planned): 25.7% (3.5 million);
Planned disbursements: $13.8 million;
Total value of compact: $460.8 million;
Elapsed time: 6%.
Compact: El Salvador;
Actual disbursements (percentage of planned): 31.8% ($4.0 million);
Planned disbursements: $12.7 million;
Total value of compact: $460.9 million;
Elapsed time: 6%.
Source: GAO analysis of MCC data.
[End of figure]
According to MCC officials, actual disbursements are significantly less
than what MCC had projected at the time of compact signing because
initial compact disbursement plans underestimated the time required for
compact countries to establish the structures, agreements, and
capabilities to begin implementing compact projects. As a result,
compact implementation has proceeded at a slower pace than MCC
anticipated, and actual disbursements lag behind initial disbursement
projections.
MCC has set a goal to improve its overall rate of actual disbursements
to about 42 percent of planned disbursements by the end of
2008[Footnote 16] and reports that it has taken several steps to meet
this goal. First, the corporation's 2009 budget justification states
that it restructured in late 2007 to enhance its ability to monitor and
support compact implementation. As part of this restructuring, MCC
officials told us that they had established an internal team to review
each compact project and identify the steps that need to be taken to
complete the project by the end of the compact term. Second, in an
effort to identify potential delays and problems in project
implementation early on, MCC officials told us that the corporation now
requires compact countries to submit quarterly reports that project
detailed disbursements over the next four quarters. Finally, as
previously discussed, MCC officials told us that they plan to lengthen
phase 4 (the period between compact signature and entry into force) to
give countries more time to establish the structures and agreements
needed to begin implementing compact projects.
Agency Comments and Our Evaluation:
MCC provided written and oral comments on a draft of this report; the
corporations' written comments are reprinted in enclosure II. MCC also
provided additional information on the compact development process,
commitment and obligation of existing and requested compact assistance,
and disbursement rates for compact assistance, which we have
incorporated, as appropriate. In its comments, MCC generally agreed
with our factual analysis but disagreed with some of our report's
emphasis and conclusions.
* Compact development. MCC concurred with our analysis that the length
of time required for compact development has increased and attributed
this increase to four primary factors. We have incorporated a
discussion of these factors in the report, as appropriate. MCC also
said that the statutory restriction that MCC have no more than one
compact with a country at a time contributes to the length of the
compact development process. In addition, MCC noted that it has adopted
a goal of completing the compact development process in an average of
36 months and reported that it is implementing several changes to the
process to achieve this objective.
* Commitment and obligations. In its comments, MCC does not disagree
with our factual analysis but states that "by focusing primarily on
obligations, this report underemphasizes the essential link between
available appropriations and signing new compacts." We disagree with
MCC's assertion. Our report clearly projects the timing of both the
commitment and obligation of funds. For example, figures 4 and 5, which
present our projections for individual countries, clearly show both the
projected timing of compact signature (commitment of funds) and compact
entry into force (obligation of funds). MCC also stated that it plans
to sign four compacts in 2009, committing all $1.88 billion requested
for compact assistance for 2009 by the end of that fiscal year. This is
earlier than our analysis based on the average pace of compact
development suggests. To achieve MCC's objective, at least one country
will have to progress from eligibility to compact signature in less
time than the current average of about 24 months.
MCC also characterized one scenario in our analysis (under which the
corporation used its 2009 appropriation to fund at least one compact
with a country newly eligible in 2009) as "worst case." We maintain it
is reasonable to consider an alternative scenario where MCC is unable
to complete compact development with up to five of the countries that
are currently eligible, as stated in its 2009 budget justification. As
MCC officials have noted, the overall pace of compact development is
more heavily dependent on a country's capacity and the quality of its
proposal than on MCC.
* Disbursements. MCC concurred with our analysis that actual
disbursements lag behind original disbursement projections. MCC
reported that it revised its disbursement projections based on updated
cost and schedule information and is taking several steps to improve
disbursement rates in order to fully expend all obligations in the
compact time remaining.
We are sending copies of this report to interested congressional
committees. We will also make copies available to others upon request.
In addition the report will be available at no charge on GAO's Web site
at [hyperlink, http://www.gao.gov].
If you or your staff have any questions or wish to discuss this
material further, please contact me at (202) 512-3149 or
[email protected]. Contact points for our Offices of Congressional
Relations and Public Affairs may be found on the last page of this
report. Emil , Michael Rohrback, and Jordan Holt made
significant contributions to this report.
Signed by:
David Gootnick:
Director, International Affairs and Trade:
Enclosures (2):
Enclosure 1: Objectives, Scope, and Methodology:
This report assesses (1) the current status and pace of compact
development, (2) projected time frames for obligations of the
Millennium Challenge Corporation's existing (2004 to 2008) and
requested (2009) appropriations, and (3) MCC's progress in disbursing
compact assistance. To address these objectives, we analyzed MCC's
budget justifications and other corporation records for 2004 to 2009
and obtained the views of MCC officials.
* Status and pace of compact development. We reviewed MCC budget
justifications, country status reports, and other agency records to
identify the current status of eligible countries and the dates that
they reached the following key compact development milestones: first
notification of eligibility, issuance of the opportunity memo, issuance
of the investment memo, compact signature, and compact entry into
force. To determine the average pace for each phase of compact
development, we calculated the time elapsed between the relevant
milestones for the 16 countries with signed compacts (see table 2).
Table 2: Months to Complete Compact Development Phases for the 16
Countries with Signed Compacts.
Eligible country[A]: Madagascar;
Months to complete proposal development: Time elapsed between selection
as eligible and opportunity memo: 5.1;
Months to complete due diligence review: Time elapsed between
opportunity and investment memos: 2.3;
Months to complete compact negotiation and signature: Time elapsed
between investment memo and compact signature: 4;
Months to complete entry into force: Time elapsed between compact
signature and entry into force: 3.3
Total months to complete compact development: Time elapsed between
selection as eligible and compact entry into force: 14.7.
Eligible country[A]: Honduras;
Months to complete proposal development: elapsed between selection as
eligible and opportunity memo: 3.8;
Months to complete due diligence review: Time elapsed between
opportunity and investment memos: 7.5;
Months to complete compact negotiation and signature: Time elapsed
between investment memo and compact signature: 1.9;
Months to complete entry into force: Time elapsed between compact
signature and entry into force: 3.5;
Total months to complete compact development: Time elapsed between
selection as eligible and compact entry into force: 16.8.
Eligible country[A]: Cape Verde;
Months to complete proposal development: Time elapsed between selection
as eligible and opportunity memo: 5.4;
Months to complete due diligence review: Time elapsed between
opportunity and investment memos: 7.2;
Months to complete compact negotiation and signature: Time elapsed
between investment memo and compact signature: 1.3;
Months to complete entry into force: Time elapsed between compact
signature and entry into force: 3.4;
Total months to complete compact development: Time elapsed between
selection as eligible and compact entry into force: 17.4.
Eligible country[A]: Georgia;
Months to complete proposal development: Time elapsed between selection
as eligible and opportunity memo: 5.7;
Months to complete due diligence review: Time elapsed between
opportunity and investment memos: 8.1;
Months to complete compact negotiation and signature: Time elapsed
between investment memo and compact signature: 2.4;
Months to complete entry into force: Time elapsed between compact
signature and entry into force: 6.8;
Total months to complete compact development: Time elapsed between
selection as eligible and compact entry into force: 23.
Eligible country[A]: Vanuatu;
Months to complete proposal development: Time elapsed between selection
as eligible and opportunity memo: 12.6;
Months to complete due diligence review: Time elapsed between
opportunity and investment memos: 5.3;
Months to complete compact negotiation and signature: Time elapsed
between investment memo and compact signature: 3.9;
Months to complete entry into force: Time elapsed between compact
signature and entry into force: 1.9;
Total months to complete compact development: Time elapsed between
selection as eligible and compact entry into force: 23.7.
Eligible country[A]: Nicaragua;
Months to complete proposal development: Time elapsed between selection
as eligible and opportunity memo: 5.7;
Months to complete due diligence review: Time elapsed between
opportunity and investment memos: 6.9;
Months to complete compact negotiation and signature: Time elapsed
between investment memo and compact signature: 1.6;
Months to complete entry into force: Time elapsed between compact
signature and entry into force: 10.4;
Total months to complete compact development: Time elapsed between
selection as eligible and compact entry into force: 24.6.
Eligible country[A]: Armenia;
Months to complete proposal development: Time elapsed between selection
as eligible and opportunity memo: 12.4;
Months to complete due diligence review: Time elapsed between
opportunity and investment memos: 6;
Months to complete compact negotiation and signature: Time elapsed
between investment memo and compact signature: 4.3;
Months to complete entry into force: Time elapsed between compact
signature and entry into force: 6.1;
Total months to complete compact development: Time elapsed between
selection as eligible and compact entry into force: 28.8.
Eligible country[A]: Benin;
Months to complete proposal development: Time elapsed between selection
as eligible and opportunity memo: 8.7;
Months to complete due diligence review: Time elapsed between
opportunity and investment memos: 9.7;
Months to complete compact negotiation and signature: Time elapsed
between investment memo and compact signature: 3.2;
Months to complete entry into force: Time elapsed between compact
signature and entry into force: 7.4;
Total months to complete compact development: Time elapsed between
selection as eligible and compact entry into force: 29.
Eligible country[A]: Ghana;
Months to complete proposal development: Time elapsed between selection
as eligible and opportunity memo: 8;
Months to complete due diligence review: Time elapsed between
opportunity and investment memos: 17.5;
Months to complete compact negotiation and signature: Time elapsed
between investment memo and compact signature: 1.3;
Months to complete entry into force: Time elapsed between compact
signature and entry into force: 6.5;
Total months to complete compact development: Time elapsed between
selection as eligible and compact entry into force: 33.4.
Eligible country[A]: Mali;
Months to complete proposal development: Time elapsed between selection
as eligible and opportunity memo: 14;
Months to complete due diligence review: Time elapsed between
opportunity and investment memos: 13.8;
Months to complete compact negotiation and signature: Time elapsed
between investment memo and compact signature: 2.4;
Months to complete entry into force: Time elapsed between compact
signature and entry into force: 10.1;
Total months to complete compact development: Time elapsed between
selection as eligible and compact entry into force: 40.4.
Eligible country[A]: El Salvador;
Months to complete proposal development: Time elapsed between selection
as eligible and opportunity memo: 6.3;
Months to complete due diligence review: Time elapsed between
opportunity and investment memos: 3.4;
Months to complete compact negotiation and signature: Time elapsed
between investment memo and compact signature: 3;
Months to complete entry into force: Time elapsed between compact
signature and entry into force: 9.7;
Total months to complete compact development: Time elapsed between
selection as eligible and compact entry into force: 22.4.
Eligible country[A]: Average for 11 countries with compacts in force;
Months to complete proposal development: Time elapsed between selection
as eligible and opportunity memo: 8;
Months to complete due diligence review: Time elapsed between
opportunity and investment memos: 8;
Months to complete compact negotiation and signature: Time elapsed
between investment memo and compact signature: 2.7;
Months to complete entry into force: Time elapsed between compact
signature and entry into force: 6.3;
Total months to complete compact development: Time elapsed between
selection as eligible and compact entry into force: 24.9.
Eligible country[A]: Lesotho;
Months to complete proposal development: Time elapsed between selection
as eligible and opportunity memo: 26.4;
Months to complete due diligence review: Time elapsed between
opportunity and investment memos: 10.1;
Months to complete compact negotiation and signature: Time elapsed
between investment memo and compact signature: 2;
Months to complete entry into force: Time elapsed between compact
signature and entry into force: 11.3[B];
Total months to complete compact development: Time elapsed between
selection as eligible and compact entry into force: 49.8.
Eligible country[A]: Morocco;
Months to complete proposal development: Time elapsed between selection
as eligible and opportunity memo: 22.6;
Months to complete due diligence review: Time elapsed between
opportunity and investment memos: 9.4;
Months to complete compact negotiation and signature: Time elapsed
between investment memo and compact signature: 1.6;
Months to complete entry into force: Time elapsed between compact
signature and entry into force: 11[B];
Total months to complete compact development: Time elapsed between
selection as eligible and compact entry into force: 44.7.
Eligible country[A]: Mongolia;
Months to complete proposal development: Time elapsed between selection
as eligible and opportunity memo: 17.9;
Months to complete due diligence review: Time elapsed between
opportunity and investment memos: 21.4;
Months to complete compact negotiation and signature: Time elapsed
between investment memo and compact signature: 2.2;
Months to complete entry into force: Time elapsed between compact
signature and entry into force: 11.3[B];
Total months to complete compact development: Time elapsed between
selection as eligible and compact entry into force: 52.8.
Eligible country[A]: Mozambique;
Months to complete proposal development: Time elapsed between selection
as eligible and opportunity memo: 14.9;
Months to complete due diligence review: Time elapsed between
opportunity and investment memos: 22.1;
Months to complete compact negotiation and signature: Time elapsed
between investment memo and compact signature: 1.2;
Months to complete entry into force: Time elapsed between compact
signature and entry into force: 14.6[B];
Total months to complete compact development: Time elapsed between
selection as eligible and compact entry into force: 52.8.
Eligible country[A]: Tanzania;
Months to complete proposal development: Time elapsed between selection
as eligible and opportunity memo: 10.2;
Months to complete due diligence review: Time elapsed between
opportunity and investment memos: 11.5;
Months to complete compact negotiation and signature: Time elapsed
between investment memo and compact signature: 5.6;
Months to complete entry into force: Time elapsed between compact
signature and entry into force: 7.4[B];
Total months to complete compact development: Time elapsed between
selection as eligible and compact entry into force: 34.7.
Eligible country[A]: Average for 16 countries with signed compacts;
Months to complete proposal development: Time elapsed between selection
as eligible and opportunity memo: 11.3;
Months to complete due diligence review: Time elapsed between
opportunity and investment memos: 10.1;
Months to complete compact negotiation and signature: Time elapsed
between investment memo and compact signature: 2.6;
Months to complete entry into force: Time elapsed between compact
signature and entry into force: 7.8;
Total months to complete compact development: Time elapsed between
selection as eligible and compact entry into force: 31.8.
Source: GAO analysis of MCC data.
[A] Countries are listed by the dates that their compacts entered into
force.
[B] MCC projects the Lesotho, Mongolia, Morocco, Mozambique, and
Tanzania compacts will enter into force by the end of 2008.
[End of table]
* Commitment and obligation of existing and requested appropriations.
We reviewed and analyzed MCC�s 2009 and prior budget justifications and
interviewed agency officials to identify MCC�s plans for committing and
obligating existing and requested appropriations. For the five
countries with signed compacts that have not entered into force, we
used MCC�s most recent projected entry-into-force dates. MCC�s plans to
sign compacts with Burkina Faso and Namibia by the end of 2008 are
consistent with our projections based on the average time it has taken
countries to complete compact negotiation to date. The projections we
present for Burkina Faso and Namibia are provided by MCC and assume
that both countries enter the compact negotiation phase by the end of
April 2008. We projected when MCC could commit and obligate requested
2009 appropriations under two scenarios: (1) MCC uses the monies to
fund compacts with currently eligible countries according to the plan
stated in its 2009 budget presentation, which was confirmed during
interviews; or (2) MCC uses the monies to fund compacts with at least
one country that it selects as newly eligible in 2009. We assumed that
both the currently eligible countries and those that would be newly
eligible in 2009 would complete compact development phases at the
average pace for the 16 countries with signed compacts. For the three
countries that had already been in the proposal development phase for
longer than average (Moldova, Jordan, and Senegal), we assumed that
they entered the second phase of compact development (due diligence) by
November 2008 and proceeded through the remaining phases of compact
development at the average pace to date.
* Progress in disbursing compact assistance. To determine the extent to
which MCC met its planned disbursement schedule, we compared MCC's
actual and planned disbursements from July 2005 through December 2007
for the 11 countries with compacts in force. For data on planned
disbursements, we used the disbursement schedules published in the
compact documents. For data on actual disbursements, we used MCC's
disbursement data, as of March 31 and December 31, 2007. We determined
that MCC's disbursement data were sufficiently reliable for our
purposes based on discussions with MCC officials and our review of U.S.
Agency for International Development Inspector General audits of MCC's
internal controls and 2007 financial statements. In our analysis of
planned and actual expenditures, we used MCC's assumption that compact
funds are disbursed evenly throughout the compact implementation year.
In practice, however, MCC approves disbursements on a quarterly basis
and disburses compact funds in monthly payments according to the terms
of the quarterly approval.[Footnote 17] Because the 11 compacts are at
different points in their implementation, we prorated planned
disbursements on an annual basis for each country based on the date the
compact entered into force. In developing our estimates, we included
actual disbursed amounts classified by MCC as "pending subsequent
report" as project funding. We discussed the pace of compact assistance
disbursements with MCC officials; however, we did not assess MCC's
plans for improving compact assistance disbursement rates.
We conducted this performance audit from January to March 2008 in
accordance with generally accepted government auditing standards. Those
standards require that we plan and perform our work to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.
[End of enclosure 1]
Enclosure II: Comments from the Millennium Challenge Corporation:
Millennium Challenge Corporation:
875 Fifteenth Street NW:
WASHINGTON, DC 20005-2221:
P: (202) 521-3600:
F. (202) 521-3700:
[hyperlink, http://www.mcc.gov]:
April 7, 2008:
Mr. David B. Gootnick:
Director, International Affairs and Trade:
U.S. Government Accountability Office:
441 G Street, NW:
Washington, DC 20548:
Dear Mr. Gootnick:
Thank you for the opportunity to provide comments on the GAO report
entitled "Millennium Challenge Corporation: Analysis of Compact
Development and Future Obligations and Current Disbursements of Compact
Assistance." MCC appreciates GAO's inclusion of key factors affecting
compact development, but we disagree with some of the report's emphases
and conclusions. In particular, MCC would highlight the essential link
between available appropriations and signing new compacts. We address
report issues below.
Statutory Background:
MCC's statute requires that a country have no more than one compact at
a time. This requirement contributes to the length of the compact
development process analyzed by GAO in this report. Removing this
statutory restriction would expedite compact development because
typical country proposals include multiple projects at different stages
of preparedness. Thus, amending current law to permit MCC to enter into
more than one compact at a time with a single country would help MCC's
planning, programming, and disbursements. [See comment 1]
Time Required for Compact Development:
As GAO has pointed out, the time required for compact development, the
period from eligibility notification to a compact's entry into force
(EIF), has lengthened from the earliest 11 compacts to the most recent
five compacts. There are four primary drivers of this lengthening: [See
comment 2]
Number of Countries Initially Selected: MCC's Board of Directors
selected 16 countries as eligible for compact assistance in May 2004,
and a 17th country in November of that year. MCC focused our limited
resources on the ten countries from that group most prepared to move
quickly on compact development. As we now complete the final phase of
compact development for an additional four of those original 17
selectees (Lesotho, Mongolia, Morocco, and Mozambique), we know they
are not representative of the time required for the four phases of
developing a compact.
Country Capacity Constraints: Country capacity constraints directly
affect the length of the first phase for country proposal development.
After being selected as eligible, a country develops and submits its
proposal with the guidance and support of MCC staff. MCC provides
comprehensive guidance and offers assistance to countries, but we do
not impose deadlines. Countries with lower capacity generally take
considerably more time to complete proposals meeting the standards to
support opportunity memos. MCC's adherence to the principle of country
ownership means that we will not rush our country counterparts in
developing compacts and will only sign compacts that meet the required
standards.
Larger Compacts. More recently, MCC has intentionally signed larger
compacts. which require more effort at each phase, particularly for
phases 1 and 2. The average compact size for the first 11 compacts was
$270 million. The average for the most recent five exceeds $500
million. MCC projects the average compact size for upcoming compacts
will exceed $400 million.
Incorporation of Lessons Learned: MCC has incorporated lessons learned
from the first 11 compacts to engage countries earlier and invest more
time and effort to improve compact development and ensure
implementation capacity before EIF.
MCC Commitments and Obligations:
A critical MCC requirement for new compact development is having
sufficient appropriations at the point of compact signature to commit
the full compact amount. GAO notes that MCC commits the entire amount
for each compact at signing, but by focusing primarily on obligations,
this report underemphasizes the essential link between available
appropriations and signing new compacts. Congress deliberately
instituted the requirement for the up-front commitment of the entire
amount of MCC funding for the full compact term, a key reform of U.S.
development assistance meant to provide certainty for countries that
make considerable efforts in policy reform and compact implementation.
Failure to provide full funding at signing may lead to shorter-term,
less effective projects and result in higher costs as contractors
increase bids to reflect new levels of uncertainty about MCC's ability
to fund long-term contracts. [See comment 3]
MCC is confident we will commit the balance of FY 2004�2008
appropriations in FY 2008 and the FY 2009 appropriations by the end of
FY 2009. GAO's analysis points out that compacts with Burkina Faso and
Namibia, expected to be signed in FY 2008, will consume all
appropriations now available for compact assistance. MCC will not have
any remaining appropriations with which to sign additional compacts
until FY 2009.
MCC obligates a portion of the amount committed at compact signing,
called "compact implementation funding," which we disburse during the
period between compact signing and EIF. When a compact enters into
force, MCC obligates and disburses the remaining amount over the five
years of the compact. Again. GAO's analysis considers the timeframe in
which MCC may obligate its funding but does not sufficiently emphasize
that MCC must have the appropriations available at the time of signing
for commitment.
MCC strongly disagrees with GAO's estimate that MCC will not commit FY
2009 appropriations until FY 2010. MCC plans to commit, and begin
obligating, 2009 appropriations in 2009. [See comment 4] We expect to
sign four compacts in FY 2009, which will commit the entire $1.8
billion of the President's request for compacts, with an average
compact size exceeding $450 million. MCC expects these compacts to
enter into force by FY 2010, thereby obligating all remaining FY 2009
funds. The GAO assertion that MCC might not commit our FY 2009
requested funding until the first quarter of FY 2011 is a worst-case
scenario that does not reflect the compact development work already
underway. MCC is already working with four eligible countries on
developing compacts for FY 2009 funding (Jordan, Moldova, Senegal and
Malawi) and has already launched planning work with two others
(Philippines and East Timor). Any four of these six countries would
fully utilize the requested level of FY 2009 funding. Moreover, in some
of these, we would expect to begin obligating compact implementation
funding during FY 2009. Reductions in appropriations below the
President's request would lengthen the compact development process by
forcing MCC to postpone signing a portion of these compacts. [See
comment 5]
MCC Disbursement Rates:
MCC concurs that actual compact disbursements are behind the original
projected disbursements included in the multi-year financial plans for
the first 11 compacts. As GAO's analysis notes, it took longer than
initially projected to create host country entities and establish the
necessary capabilities to begin full implementation. These structures
are essential to performing MCC's fiduciary responsibilities and
ensuring results and accountability for compact funds. MCC now begins
these processes earlier and invests more effort in the compact
development process at each of the four phases. These efforts will
lengthen the compact development timeline as compared with the original
11 compacts, but they should yield more predictable disbursement rates
for subsequent compacts and help ensure U.S. taxpayer funds are well
spent.
A multi-year financial plan included in a compact is a preliminary
budget based upon the due diligence work done by MCC in the compact
development process. As additional information becomes available
regarding project cost and timelines leading up to EIF and beyond, MCC
revises its disbursement projections. MCC recently completed an
internal review of disbursement projections for FY 2008 that was
reviewed with MCC's Board of Directors, and submitted to Congress on
January 25th. These revisions update the multi-year financial plans and
reflect the on-the-ground reality in our existing countries. MCC will
continue to update disbursement projections routinely as part of MCC's
regular reviews of portfolio work plans and contract schedules.
MCC's internal review reveals lower disbursements in the early years
and increased disbursements in later years, yielding an S curve rather
than a bell curve. This is consistent with the industry standard for
infrastructure projects. MCC implementation teams are committed to full
expenditure of all compact dollars in the time remaining under each of
our compacts.
Changes in MCC's Compact Development Process:
Based on experience to date, MCC is modifying its compact development
process to achieve three objectives:
1) Target an overall timeframe from eligibility selection to EIF of 36
months;
2) Enhance the quality of compact proposals, in terms of the technical
and economic soundness, while ensuring greater cost certainty; and;
3) Accelerate compact implementation by completing more preparatory
work earlier.
Specific process changes include:
* MCC now provides partner countries clear guidance during initial high-
level consultations, based on MCC's experience and requirements, to
encourage a sharper focus on a limited number of interventions that can
be designed and implemented in reasonable timeframes.
* Once eligible, partner countries now lead a series of analyses to
identify the most significant barriers to economic growth in key
economic sectors, to guide their internal consultative process and
proposal development.
* Partner countries are now developing project concept papers as the
basis for early discussions with MCC. These project concepts will
provide both an early screening mechanism and an opportunity for MCC to
help partners plan for detailed project development.
* MCC will mobilize financial and technical resources to help partner
countries develop feasibility studies, environmental impact
assessments, framework resettlement plans, preliminary technical
designs, and procurement packages, and to recruit fiscal and
procurement agents before compact signing. This will ensure greater
cost certainty and strengthen overall design, thereby reducing the time
between compact signing and EIF.
* Finally, MCC will ensure the partner countries have compact
implementation funding after signing to enable commencement of detailed
technical designs for the most complex infrastructure projects prior to
EIF. MCC will work with the government to: develop implementing entity
agreements; finalize detailed implementation plans; develop initial
annual budgets; draft terms of reference for procurement; and pre-
qualify consultants and contractors for early procurement actions.
These early actions will permit smoother implementation upon EIF.
The overall timeframe from eligibility to signing and EIF depends
heavily on the capacity of the host country and the quality of its
proposal. Efforts to reduce this timeline should be guided by the need
to complete environmental and social compliance work, economic and
technical feasibility, design, and implementation planning to ensure
predictable costs and disbursements. The nature of the proposed
investments in a compact also will affect the time needed to complete
these preparatory steps.
Sincerely,
Signed by:
Michael Casella:
Acting Vice President:
Administration and Finance:
Millennium Challenge Corporation:
[End of letter]
Our Evaluation:
The following notes provide our evaluation of the specific comments in
the Millennium Challenge Corporation�s letter.
1. Our analysis reflects MCC�s statutory requirement that it have no
more than one compact with a country at a time. It was beyond the scope
of this report to evaluate this statutory requirement.
2. Our report discusses the factors affecting the length of compact
development on page 8.
3. We disagree with MCC�s assertion that our report underemphasizes the
link between available appropriations and signing new compacts. Our
report projects the timing of both the commitment and obligation of
funds. For example, figures 4 and 5, which present our projections for
individual countries, clearly show both the projected timing of compact
signature (commitment of funds) and compact entry into force
(obligation of funds). In addition, our report discusses MCC�s use of
compact implementation funding during the period between compact
signature and entry into force on page 8. MCC employs these funds under
the authority granted in section 609(g) of the Millennium Challenge Act
and includes these funds in the stated compact amount.
4. MCC plans to sign four compacts and commit the entire $1.88 billion
requested for compact assistance for 2009 by the end of that fiscal
year. This is earlier than our analysis based on the average pace of
compact development suggests. To achieve MCC�s objective, at least one
country will have to progress from eligibility to compact signature in
less time than the current average of about 24 months. Although MCC
states that it expects to begin obligating its requested funds during
fiscal year 2009, our report projects when MCC would fully obligate all
of its requested appropriations. MCC states that it expects to obligate
all 2009 funds by 2010, as our analysis projects.
5. We maintain it is reasonable to consider a scenario where MCC is
unable to complete compact development with four or five of the
countries that are currently eligible and uses its 2009 appropriation
to fund at least one compact with a country newly eligible in 2009. As
MCC officials have noted, the overall pace of compact development is
more heavily dependent on a country�s capacity and the quality of its
proposal than on MCC. In this regard, six of the eight countries have
been in the first phase of compact development substantially longer
than average, particularly Senegal and Timor-Leste (47 and 29 months,
respectively), and only one of the countries in the first phase
(Moldova) had submitted a proposal as of the end of March 2008.
Moreover, as previously discussed, MCC is monitoring political
developments in Bolivia and Timor-Leste, which has recently experienced
civil unrest and did not pass MCC�s eligibility indicators for 2008,
including the control of corruption. Additionally, two of the countries
(Malawi and Philippines) are at the very beginning of compact
development (they were selected in December 2007 and March 2008,
respectively).
[End of enclosure 2]
Footnotes:
[1] The Millennium Challenge Act of 2003 (Public Law 108-199, Division
D, Section 605) authorizes MCC to provide assistance to countries that
enter into public compacts with the United States. MCC has negotiated
compacts with countries that contain agreed upon assistance objectives,
responsibilities, implementation schedules, expected results, and
evaluation strategies. The act stipulates that a compact may not last
longer than 5 years and that MCC may have only one compact with a
country at a time.
[2] Unless otherwise noted in this report, all years refer to fiscal
years.
[3] About $1 billion has been set aside for MCC's threshold country
program, administrative expenses, due diligence, monitoring and
evaluation, and other costs. MCC's threshold program is designed to
assist countries that have not yet qualified for compact assistance,
but have demonstrated a significant commitment to improve their
performance on MCC's eligibility criteria.
[4] In addition to these countries, MCC had previously selected the
Gambia and Sri Lanka as eligible for compact assistance. However, MCC
formally suspended the Gambia's eligibility on June 16, 2006, based on
evidence of growing human rights abuses, increased restrictions on
political rights, civil liberties and press freedom, as well as
deteriorating economic policies and anticorruption efforts. In
addition, the MCC Board of Directors did not select Sri Lanka as
eligible for compact assistance for 2008.
[5] The disbursement agreement sets out the conditions for
disbursements from MCC and redisbursements by the country's accountable
entity to any person or entity. These conditions include performance
targets for the projects outlined in the compact. Procurement
agreements set forth guidelines for all procurements of goods, works,
and services financed with MCC funding.
[6] MCC is monitoring political developments in Bolivia and Timor
Leste.
[7] Moldova submitted a proposal for $518 million in compact assistance
on February 28, 2008.
[8] MCC projects that Burkina Faso and Namibia will advance to the
third phase of compact development (compact negotiation and MCC board
approval) by the end of April 2008.
[9] In February 2008, the MCC Chief Executive Officer told the House
Appropriations Subcommittee on State, Foreign Operations, and Related
Programs that the corporation expected the five compacts would enter
into force in autumn 2008. MCC's 2009 budget justification had
projected these compacts would enter into force during the spring and
summer of 2008.
[10] The MCC Board selected Malawi as newly eligible in December 2007
and the Philippines as newly eligible in March 2008.
[11] MCC employs these funds under the authority granted in the
Millennium Challenge Act for compact development funds and includes the
funds in the stated compact amount. Section 609(g) of the Millennium
Challenge Act provides that MCC may enter into contracts or make grants
to eligible countries for the purpose of facilitating the development
and implementation of compacts. The 2008 House Appropriations Committee
Report (110-197) expressed some concerns that eligible countries may be
misinterpreting MCC's authority under section 609(g) and directed MCC
to provide guidance to countries on that authority.
[12] MCC's plans to sign compacts with Burkina Faso and Namibia by the
end of 2008 are consistent with projections based on the current pace
of compact development.
[13] Because Jordan and Ukraine are low-middle-income countries and,
therefore, limited by the Millennium Challenge Act to no more than 25
percent of total available compact assistance, MCC is more likely to
sign a compact using 2009 funds with only one of these countries.
According to MCC officials, Jordan is more actively engaged in proposal
development.
[14] As previously discussed, Moldova submitted a proposal for $518
million in compact assistance on February 28, 2008.
[15] Planned disbursements refer to the disbursement schedule published
in the signed compacts. MCC develops these schedules prior to the
signing of each compact. As such, its estimates are based either on the
project's prefeasibility study, feasibility study, or design documents,
depending on the status of project development at the time the compact
is signed.
[16] MCC reports that it plans to disburse $450 million by the end of
2008, which is about 42 percent of the disbursements it had planned to
make by that time. See Millennium Challenge Corporation, Budget
Justification 2009 (Washington, D.C., February 2008), page 12.
[17] According to agency officials, MCC is in the process of shifting
to the Department of the Treasury's international payment system,
whereby vendors submit invoices directly to the Treasury for payment.
Once MCC has fully implemented this new system, it will no longer
disburse monthly payments of compact funds directly to MCC country
entities.
[End of section]
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