Background

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

		Candidate Countries

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

		Eligibility Determinations

The Millennium Challenge Act requires that the MCC board base its  eligibility decisions, “to the maximum extent possible,” on objective and  quantifiable indicators of a country’s demonstrated commitment to the  criteria enumerated in the act. MCC selected its indicators based on their  relationship to growth and poverty reduction, the number of countries  they cover, their transparency and public availability, and their relative  soundness and objectivity.
For fiscal years 2004 and 2005, MCC’s process for determining country  eligibility for MCA assistance had both a quantitative and a discretionary  component (see fig. 1). MCC first identified candidate countries that  performed above the median in relation to their peers on at least half of  the quantitative indicators in each of the three policy categories—Ruling  Justly, Investing in People, and Encouraging Economic Freedom—and  above the median on the indicator for control of corruption. (See app. III  for a table describing the indicators, listing their sources, and summarizing  the methodologies on which they are based.) In addition, MCC considered  other relevant information—in particular, whether countries that scored  substantially below the median (at the 25th percentile or lower) on an  indicator were addressing any shortcomings related to that indicator. MCC  also considered supplemental information to address gaps, lags, or other  data weaknesses as well as additional material information.
Encouraging Economic Freedom 11. Country credit rating 12. One-year consumer   8.  Public primary education  spending (as a percent of GDP) 9.  Public expenditure on health   (as a percent of GDP)
The Millennium Challenge Act requires that, within 5 days of the board’s  eligibility determinations, the MCC Chief Executive Officer submit a report  to congressional committees containing a list of the eligible countries and  “a justification for such eligibility determination” and publish the report in  the Federal Register.

		MCA Compacts

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

		Threshold Program

The Millennium Challenge Act authorizes a limited amount of assistance to  certain candidate countries to help them become eligible for MCA  assistance. These candidate countries must (1) meet the fiscal year 2004 or  2005 requirements for MCA candidacy and (2) demonstrate a significant  commitment to meeting the act’s eligibility criteria but fail to meet those  requirements. MCC has implemented these legislative provisions as its  Threshold Program. Figure 2 compares features of MCC compact and  Threshold Program assistance; appendix IV describes the Threshold  Program.

		MCC Governance

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

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

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

		MCC Used Quantitative Indicators and Judgment to Determine Eligibility

MCC used the 16 quantitative indicators, as well as the discretion implicit  in the Millennium Challenge Act, to select 17 countries as eligible for MCA  compact assistance for fiscal years 2004 and 2005 (see fig. 3).
Fiscal year 2004: In May 2004, the MCC board selected 16 countries  as eligible for fiscal year 2004 funding. The countries deemed eligible  include 13 that met the quantitative indicator criteria and 3 that did not  (Bolivia, Georgia, and Mozambique). Another 6 countries met the  criteria but were not deemed eligible.
Fiscal year 2005: In October 2004, the MCC board selected 16  countries as eligible for fiscal year 2005 funding. The countries deemed  eligible included 14 countries that met the indicator criteria and 2  countries that did not (Georgia and Mozambique). Ten countries met  the criteria but were not deemed eligible. Fifteen of the 16 countries  also had been deemed eligible for fiscal year 2004; the only new  country was Morocco.
MCC did not provide Congress its justifications for the 13 countries that  met the indicator criteria but were not deemed eligible for fiscal years  2004 and 2005 (one of these countries, Tonga, did not score substantially  below the median on any indicator). The act does not explicitly require  MCC to include a justification to Congress for why these countries were  not deemed eligible.
In addition, our analysis of countries that met the indicator criteria but  were not deemed eligible suggests that, besides requiring that a country  score above the median on the indicator for control of corruption, MCC  placed particular emphasis on three Ruling Justly indicators (political  rights, civil liberties, and voice and accountability) in making its eligibility  determinations. In fiscal years 2004 and 2005, 6 of the 13 countries that  met the indicator criteria but were not deemed eligible had scores equal to  or below the median on these three indicators. On the other hand, the 13  countries that were not deemed eligible performed similarly to the eligible  countries on the other three Ruling Justly indicators—government  effectiveness, rule of law, and control of corruption—as well as on the  indicators for Investing in People and Encouraging Economic Freedom.

		Not All Source Data for Quantitative Indicators Were Publicly Accessible

Although MCC published its country scores for all of the indicators at its  Web site, some of the indicator source data used to generate the scores  were not readily available to the public. We found that source data for nine  of the indicators were accessible via hyperlinks from MCC’s Web site,  making it possible to compare those data with MCC’s published country  scores. However, for the remaining seven indicators, we encountered  obstacles to locating the source data, without which candidate countries  and other interested parties would be unable to reproduce and verify  MCC’s results.
Primary education completion rates: The published indicators were  created with data from several sources and years, and not all of these  data were available on line.
Primary education and health spending (percentage of gross  domestic product): When national government data were unavailable,  MCC used either country historical data or data from the World Bank  to estimate current expenditures.
Diphtheria and measles immunization rate: The general hyperlink  at the MCC Web site did not link to the data files used to create the  published indicators.
One-year consumer price inflation: The published indicators were  created with a mix of data from several data sources and different  years.
Fiscal policy: The published indicators were created with  International Monetary Fund (IMF) data that are not publicly available.
Days to start a business: Updated indicators were not published  until after the board had made its fiscal year 2004 eligibility decisions.

		Use of Quantitative Indicators Had Some Inherent Limitations

MCC’s use of the quantitative indicator criteria in the country selection  process for fiscal years 2004 and 2005 involved the following inherent  difficulties:    Owing to measurement uncertainty, the scores of 17 countries may  have been misclassified as above or below the median. In fiscal years  2004 and 2005, 7 countries did not meet the quantitative indicator  criteria because of corruption scores below the median, but given  measurement uncertainty their true scores may have been above the  median. Likewise, 10 countries met the indicator criteria with  corruption scores above the median, but their true scores may have  been below the median.
Missing data for the days to start a business and trade policy indicators  reduced the number of countries that could achieve above-median  scores for those indicators. For fiscal years 2004 and 2005, 20 and 22  countries, respectively, lacked data for the indicator for days to start a  business, and 18 and 13 countries, respectively, lacked data for the  trade policy indicator. Our analysis suggests that missing data for these  two indicators may have reduced the number of countries that passed  the Encouraging Economic Freedom category.
The narrow and undifferentiated range of possible scores for the  political rights, civil liberties, and trade policy indicators led to  clustering—“bunching”—of scores around the median, making the  scores less useful in distinguishing among countries’ performances. In  fiscal year 2005, for example, 46 countries, or two-thirds of the  countries with trade policy data, received a score of 4 (the median) or 5  (the lowest score possible) for trade policy. Our analysis suggests that  bunching potentially reduced the number of countries that passed the  Ruling Justly and Economic Freedom categories and limited MCC’s  ability to determine whether countries performed substantially below  their peers in affected indicators.
With respect to the indicator for control of corruption, countries deemed  eligible for MCA compact assistance represent the best performers among  their peers; at the same time, studies have found that, in general, countries  with low per capita income also score low on corruption indexes. Of the  17 MCA compact eligible countries, 11 ranked below the 50th percentile  among the 195 countries rated by the World Bank Institute for control of  corruption; none scored in the top third.

	MCC Is Refining Its Compact Development Process

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

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

Between August 2004 and March 2005, MCC received compact proposals,  concept papers, or both, from 16 MCA compact-eligible countries, more  than half of which submitted revised proposal drafts in response to MCC’s  assessments. In March 2005, MCC approved a 4-year compact with  Madagascar for $110 million to fund rural projects aimed at enhancing  land titling and security, increasing financial sector competition, and  improving agricultural production technologies and market capacity; MCC  and Madagascar signed the compact on April 18, 2005. MCC is negotiating  compacts with Cape Verde, Georgia, Honduras, and Nicaragua and is  conducting in-depth assessments of proposals from two additional  countries. Figure 4 summarizes the types of projects that eligible countries  have proposed and that MCC is currently reviewing.
The countries’ initial proposals and concept papers requested about  $4.8 billion; those that MCC is currently reviewing (see fig. 4) and  negotiating request approximately $3 billion over 3 to 5 years. Our  analysis—based on MCC’s goal of being a top donor as well as Congress’s  requirement that the corporation fund compacts in full—shows that the  $2.4 billion available from fiscal year 2004 and 2005 appropriations will  allow MCC to fund between 4 and 14 compacts, including Madagascar’s  compact, for those years. MCC’s $110 million compact with Madagascar,  averaging $27.5 million per year, would make it the country’s fifth largest  donor (see app. VI for a list of the largest donors to MCA compact-eligible  countries in fiscal years 2002-2003).

		MCC Continues to Refine Its Compact Development Process

As of April 2005, MCC is continuing to refine its process for developing  compacts. According to MCC officials, the compact development process  is open ended and characterized by ongoing discussions with eligible  countries. According to a recent IG report, MCC’s negotiating a compact  with Madagascar has served as a prototype for completing compacts with  other countries. At present, the compact proposal development and  assessment process follows four steps (see fig. 5).
Step 1: Proposal development. MCC expects eligible countries to  propose projects and program implementation structures, building on  existing national economic development strategies. For instance, the  Honduran government’s proposal is based on its Poverty Reduction  Strategy Paper (PRSP) and a subsequent June 2004 implementation  plan. MCC also requires that eligible countries use a broad-based  consultative process to develop their proposals. MCC staff discuss the  proposal with country officials during this phase of compact development.  Although MCC does not intend to provide funding to countries for  proposal development, some countries have received grants from  regional organizations for proposal development.
Step 2: Proposal submission and initial assessment. Eligible  countries submit compact proposals or concept papers. MCC has not  specified deadlines for proposal submission or publicly declared the limits  or range of available funding for individual compacts. According to MCC  officials, the absence of deadlines and funding parameters permits  countries to take initiative in developing proposals. However, according to  U.S.-based NGOs, the lack of deadlines has caused some uncertainty and  confusion among eligible country officials. Honduran officials told us that  knowing a range of potential funding would have enhanced their ability to  develop a more focused proposal.
During this stage, MCC conducts a preliminary assessment of the proposal,  drawing on its staff, contractors, and employees of other U.S. government  agencies. This assessment examines the potential impact of the proposal’s  strategy for economic growth and poverty reduction, the consultative  process used to develop the proposal, and the indicators for measuring  progress toward the proposed goals. According to MCC, some eligible  countries have moved quickly to develop their MCC programs. Others  initially were unfamiliar with MCC’s approach and some faced institutional  constraints. MCC works with these countries to develop programs that it  can support. In addition, MCC is exploring ways—such as providing  grants—to facilitate compact development and implementation. Once  MCC staff determine that they have collected sufficient preliminary  information, they seek the approval of MCC’s Investment Committee to  conduct a more detailed analysis, known as due diligence.
Step 3: Detailed proposal assessment and negotiation. MCC’s due  diligence review includes an analysis of the proposed program’s objectives  and its costs relative to potential economic benefits. Among other things,  the review also examines the proposal’s plans for program  implementation, including monitoring and evaluation; for fiscal  accountability; and for coordination with USAID and other donors. In  addition, the review considers the country’s commitment to MCC  eligibility criteria and legal considerations pertaining to the program’s  implementation. During their review, MCC staff seek the approval of the  Investment Committee to notify Congress that the corporation intends to  initiate compact negotiations; following completion of the review, MCC  staff request the committee’s approval to enter compact negotiations.  When the negotiations have been concluded, the Investment Committee  decides whether to approve submission of the compact text to the MCC  board.
Step 4: Board review and compact signing. The MCC board reviews  the compact draft. Before the compact can be signed and funds obligated,  the board must approve the draft and MCC must notify appropriate  congressional committees of its intention to obligate funds.

		MCC Has Identified Elements of Program Implementation and Fiscal Accountability Framework

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

	MCC Is Taking Steps to Coordinate with Key Stakeholders

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

		U.S. Agencies Are Contributing Resources and Technical Assistance

MCC initially coordinated primarily with U.S. agencies on its board and is  expanding its coordination efforts to leverage the expertise of other  agencies. USAID and the Department of State in Washington, D.C., and in  compact-eligible countries, have facilitated meetings between MCC  officials and donors and representatives of the private sector and NGOs in  eligible countries. In addition, several of the six USAID missions contacted  by GAO reported that their staff had provided country-specific  information, had observed MCC-related meetings between civil society  organizations and governments, or had informed other donors about MCC.  MCC has also coordinated with the Department of the Treasury and USTR.  For example, according to MCC officials, MCC has regularly briefed these  agencies on specific elements of compact proposals and established an  interagency working group to discuss compact-related legal issues.
Since October 2004, MCC has expanded its coordination through formal  agreements with five U.S. agencies, including the Census Bureau, Army  Corps of Engineers, and Department of Agriculture, that are not on the  MCC board. MCC has obligated more than $6 million for programmatic  and technical assistance through these agreements, as shown in figure 7.

		MCC Is Consulting with Other Donors and Using Donor Expertise

MCC has received information and expertise from key multilateral and  bilateral donors in the United States and eligible countries. For example,  World Bank staff have briefed MCC regarding eligible countries, and  officials from the Inter-American Development Bank said that they have  provided MCC with infrastructure assessments in Honduras. According to  MCC, most donor coordination is expected to occur in eligible countries  rather than at the headquarters level. In some cases, MCC is directly  coordinating its efforts with other donors through existing mechanisms,  such as a G-17 donor group in Honduras.
In addition to soliciting donor input, MCC officials have encouraged  donors not to displace assistance to countries that receive MCA funding.  Donors in Honduras told us that MCA funding to that country is unlikely to  reduce their investment, because sectors included in the country’s  proposal have additional needs that would not be met by MCA.

		MCC Has Met with NGOs

According to MCC officials, MCC is holding monthly meetings with a U.S.- based NGO working group and hosted five public meetings in 2004 in  Washington, D.C, as part of its domestic outreach efforts. The NGOs have  shared expertise in monitoring and evaluation and have offered  suggestions that contributed to the modification of 1 of MCC’s 16  quantitative indicators. In addition, MCC has met with local NGOs during  country visits.
Some U.S-based NGOs have raised questions about the involvement of  NGOs in this country and of civil society groups in compact-eligible  countries. Environmental NGOs told us in January 2005 that MCC had not  engaged with them since initial outreach meetings; however, MCC  subsequently invited NGOs and other interested entities to submit  proposals for a quantitative indicator of a country’s natural resources  management. Representatives of several NGOs commented that MCC  lacks in-house expertise and staff to monitor and assess civil society  participation in compact development. In addition, U.S.-based NGOs  expressed concern that their peers in MCA countries have not received  complete information about the proposal development process.

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

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

		Administrative Infrastructure

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

		Accountability

Accountability requires that a government organization effectively  demonstrate, internally and externally, that its resources are managed  properly and used in compliance with laws and regulations and that its  programs are achieving their intended goals and outcomes and are being  provided efficiently and effectively. Important for organizational  accountability are effective strategic and performance planning and  reporting processes that establish, measure, and report an organization’s  progress in fulfilling its mission and meeting its goals. External oversight  and audit processes provide another key element of accountability.
During its initial 15 months, MCC developed and communicated to the  public its mission, the basic tenets of its corporate vision, and key  program-related decisions by the MCC board. MCC began its strategic  planning process when key staff met in January 2005 to begin setting  strategic objectives and it expects to issue the completed plan in the  coming months. In addition, MCC arranged with its IG for the audit of its  initial year financial statements (completed by an independent public  accounting firm) and for two program-related IG reviews. However, to  date, MCC has not completed a strategic plan or established specific  implementation time frames. In addition, MCC has not yet established  annual performance plans, which would facilitate its monitoring of  progress toward strategic and annual performance goals and outcomes  and its reporting on such progress internally and externally. According to  MCC officials, MCC intends to complete its comprehensive strategic and  performance plans by the end of fiscal year 2005.

		Corporate Governance

Corporate governance can be viewed as the formation and execution of  collective policies and oversight mechanisms to establish and maintain a  sustainable and accountable organization while achieving its mission and  demonstrating stewardship over its resources. Generally, an organization’s  board of directors has a key role in corporate governance through its  oversight of executive management, corporate strategies, risk  management and audit and assurance processes, and communications  with corporate stakeholders.
During its initial 15 months, the MCC board adopted bylaws regarding  board composition and powers, meetings, voting, fiscal oversight, and the  duties and responsibilities of corporate officers and oversaw  management’s efforts to design and implement the compact program.  According to MCC, during a recent meeting of the board to discuss  corporate governance, the Chief Executive Officer solicited feedback from  the board regarding defining and improving the governance process.  MCC’s board established a compensation committee in March 2005, and a  charter for the committee is being drafted. In addition, MCC is preparing,  for board consideration, a policy on the board’s corporate governance. As  drafted, the policy identifies the board’s statutory and other  responsibilities, elements of board governance, rules and procedures for  board decision-making, and guidelines for MCC’s communications with  the board. With regard to MCC board membership, seven of the nine board  members have been appointed and installed. Through board agency staff,  MCC staff have regularly informed board members—four of whom are  heads of other agencies or departments—about pending MCC matters.
The board has not completed a comprehensive strategy or plan for  carrying out its responsibility—specifically, it has not defined the board’s  and management’s respective roles in formulating and executing of  corporate strategies, developing risk management and audit and assurance  processes, and communicating and coordinating with corporate  stakeholders. Moreover, although the bylaws permit the board to establish  an audit committee—to support the board in accounting and financial  reporting matters; determine the adequacy of MCC’s administrative and  financial controls; and direct the corporation’s audit function, which is  provided by the IG and its external auditor—the board has not yet done  so. Finally, two of the MCC board’s four other positions have not yet been  filled.

		Internal Control

Internal control provides reasonable assurance that key management  objectives—efficiency and effectiveness of operations, reliability of  financial reporting, and compliance with applicable laws and regulations— are being achieved. Generally, a corporatewide internal control strategy is  designed to    create and maintain an environment that sets a positive and supportive  attitude toward internal control and conscientious management;   assess, on an ongoing basis, the risks facing the corporation and its  programs from both external and internal sources; implement efficient control activities and procedures intended to  effectively manage and mitigate areas of significant risk;   monitor and test control activities and procedures on an ongoing basis;    assess the operating effectiveness of internal control and report and  address any weaknesses.
During its first 15 months, MCC took several actions that contributed to  establishing effective internal control. Although it did not conduct its own  assessment of internal control, MCC management relied on the results of  the IG reviews and external financial audit to support its conclusion that  key internal controls were valid and reliable. Further, MCC implemented  processes for identifying eligible countries and internal controls through  its due diligence reviews of proposed compacts, establishment of the  Investment Committee to assist MCC staff in negotiating and reviewing  compact proposals, and the board’s involvement in approving negotiated  compacts. In addition, MCC instituted an Ethics Program, covering  employees as well as outside board members, to provide initial ethics  orientation training for new hires and regularly scheduled briefings for  employees on standards of conduct and statutory rules. In April 2005, MCC  officials informed us that they had recently established an internal  controls strategy group to identify internal control activities to be  implemented over the next year, reflecting their awareness of the need to  focus MCC’s efforts on the highest-risk areas.
However, MCC has not completed a comprehensive strategy and related  time frames for ensuring the proper design and incorporation of internal  control into MCC’s corporatewide program and administrative operations.  For example, MCC intends to rely on contractors for a number of  operational and administrative services; however, this strategy will require  special consideration in its design and implementation of specific internal  controls.

		Human Capital Management

Cornerstones of human capital management include leadership; strategic  human capital planning; acquiring, developing, and retaining talent; and  building a results-oriented culture. In its initial year, MCC human capital  efforts focused primarily on establishing an organizational structure and  recruiting employees necessary to support program design and  implementation and corporate administrative operations (see app. VIII for  a diagram of MCC’s organizational structure). MCC set short- and longer- term hiring targets, including assigning about 20 employees—depending  on the number and types of compacts that have been signed—to work in  MCA compact-eligible countries; it also identified needed positions and  future staffing levels through December 2005 based on its initial  operations. With the help of an international recruiting firm, MCC  expanded its permanent full-time staff from 7 staff employees in April 2004  to 107 employees in April 2005; it intends to employ no more than 200  permanent full-time employees by December 2005 (see fig. 9). In addition,  MCC hired 15 individuals on detail, under personal services contracts, or  as temporary hires, as well as a number of consultants. Finally, in January  2005, MCC hired a consultant to design a compensation program to  provide employees with pay and performance incentives and competitive  benefits, including performance awards and bonuses, retention incentives,  and student loan repayments. MCC officials told us that they intend the  program to be comparable with those of federal financial agencies,  international financial institutions, and multilateral and private sector  organizations.
Fifteen of these positions are administratively determined; Congress authorized 30 such  positions for MCC in the Millennium Challenge Act.

	Conclusions

In its first 15 months, MCC took important actions to design and  implement the compact program—making eligibility determinations,  defining its compact development process, and coordinating and  establishing working agreements with key stakeholders. MCC also acted to  establish important elements of a corporatewide management structure  needed to support its mission and operations, including some key internal  controls. However, MCC has not yet fully developed plans that define the  comprehensive actions needed to establish key components of an effective  management structure.
We believe that, to continue to grow into a viable and sustainable entity,  MCC needs to approve plans with related time frames that identify the  actions required to build a corporatewide foundation for accountability,  internal control, and human capital management and begin implementing  these plans. In addition, MCC’s board needs to define its responsibilities  for corporate governance and oversight of MCC and develop plans or  strategies for carrying them out. As MCC moves into its second year of  operations, it recognizes the need to develop comprehensive plans and  strategies in each of these areas. Implementation of such plans and  strategies should enable MCC’s management and board to measure  progress in achieving corporate goals and objectives and demonstrate its  accountability and control to Congress and the public. As part of our  ongoing work for your committee, we will continue to monitor MCC’s  efforts in these areas.

	Recommendations for Executive Action

We recommend that the Chief Executive Officer of the Millennium  Challenge Corporation complete the development and implementation of  overall plans and related time frames for actions needed to establish  1.  Corporatewide accountability, including  implementing a strategic plan,   establishing annual performance plans and goals,    using performance measures to monitor progress in meeting both  strategic and annual performance goals, and  reporting internally and externally on its progress in meeting its  strategic and annual performance goals.  2.  Effective internal control over MCC’s program and administrative  operations, including establishing    a positive and supportive internal control environment;    a process for ongoing risk assessment;    control activities and procedures for reducing risk, such as measures to  mitigate risk associated with contracted operational and administrative  services;   ongoing monitoring and periodic testing of control activities; and     a process for assessing and reporting on the effectiveness of internal  controls and addressing any weaknesses identified. 3.  An effective human capital infrastructure, including     a thorough and systematic assessment of the staffing requirements and  critical skills needed to carry out MCC’s mission;   a plan to acquire, develop, and retain talent that is aligned with the  corporation’s strategic goals; and   a performance management system linking compensation to employee  contributions toward the achievement of MCC’s mission and goals.
We recommend that the Secretary of State, in her capacity as Chair of the  MCC Board of Directors, ensure that the board considers and defines the  scope of its responsibilities with respect to corporate governance and  oversight of MCC and develop an overall plan or strategy, with related  time frames, for carrying out these responsibilities. In doing so, the board  should consider, in addition to its statutory responsibilities, other  corporate governance and oversight responsibilities commonly associated  with sound and effective corporate governance practices, including  oversight of  the formulation and execution of corporate strategies, risk management and audit and assurance processes, and    communication and coordination with corporate stakeholders.

	Agency Comments and Our Evaluation

MCC provided technical comments on a draft of this statement and agreed  to take our recommendations under consideration; we addressed MCC’s  comments in the text as appropriate. We also provided the Departments of  State and Treasury, the U.S. Agency for International Development, and  the Office of the U.S. Trade Representative an opportunity to review a  draft of this statement for technical accuracy. State and USAID suggested  no changes, and Treasury and USTR provided a few technical comments,  which we incorporated as appropriate.
Mr. Chairman and Members of the Committee, this concludes my prepared  statement. I will be happy to answer any questions you may have.

	Contacts and Acknowledgments

For questions regarding this testimony, please call David Gootnick at (202)  512-4128 or Phillip Herr at (202) 512-8509.
Other key contributors to this statement were Todd M. Anderson, Beverly  Bendekgey, David Dornisch, Etana Finkler, Ernie Jackson, Debra Johnson,  Joy Labez, Reid Lowe, David Merrill, John Reilly, Michael Rohrback, Mona  Sehgal, and R.G. Steinman.

Appendix I: Scope and Methodology

We reviewed MCC’s activities in its first 15 months of operations,  specifically its (1) process for determining country eligibility for fiscal  years 2004 and 2005, (2) progress in developing compacts, (3)  coordination with key stakeholders, and (4) establishment of management  structures and accountability mechanisms.
To examine MCC’s country selection process, we analyzed candidate  countries’ scores for the 16 quantitative indicators for fiscal years 2004 and  2005, as well as the selection criteria for the fiscal year 2004 Threshold  Program. We used these data to determine the characteristics of countries  that met and did not meet the indicator criteria and to assess the extent to  which MCC relied on country scores for eligibility determination. We also  reviewed the source data for the indicator scores posted on MCC’s Web  site to identify issues related to public access and to determine whether  we could reproduce the country scores from the source data. Our review  of the source data methodology, as well as the documents of other  experts, allowed us to identify some limitations of the indicator criteria  used in the country selection process. For these and other data we used in  our analyses, we examined, as appropriate, the reliability of the data  through interviews with MCC officials responsible for the data, document  reviews, and reviews of data collection and methodology made available  by the authors. We determined the data to be reliable for the purposes of  this study.
To describe MCC’s process for developing compacts, including plans for  monitoring and evaluation, we reviewed MCC’s draft or finalized  documents outlining compact proposal guidance, compact proposal  assessment, and fiscal accountability elements. We reviewed eligible  countries’ compact proposals and concept papers to identify proposed  projects, funding, and institutional frameworks, among other things. To  summarize the projects that countries have proposed and that MCC is  currently assessing, we developed categories and conducted an analysis of  countries’ proposal documents and MCC’s internal summaries. We also  reviewed Madagascar’s draft compact to identify projects, funding, and  framework for program implementation and fiscal accountability. We met  with MCC officials to obtain updates on the compact development  process. In addition, we interviewed representatives of nongovernmental  organizations (NGOs) in Washington, D.C., and Honduras, as well as  country officials in Honduras, to obtain their perspectives on MCC’s  compact development process.
To assess MCC’s coordination with key stakeholders, we reviewed  interagency agreements to identify the types of formal assistance that  MCC is seeking from U.S. agencies and the funding that MCC has set aside  for this purpose. We also reviewed MCC documents to identify the  organizations, including other donors, with which MCC has consulted. In  addition, we interviewed MCC officials regarding their coordination with  various stakeholders. We met with officials from the U.S. agencies on the  MCC board (Departments of State and Treasury, USAID, and USTR) to  assess the types of assistance that these agencies have provided to MCC.  We also contacted six USAID missions in compact-eligible countries to  obtain information on MCC coordination with U.S. agencies in the field. To  assess MCC’s coordination with NGOs and other donors, we met with  several NGOs, including InterAction, the World Wildlife Fund, and the  Women’s Edge Coalition in Washington, D.C., and local NGOs in  Honduras; we also met with officials from the Inter-American  Development Bank in Washington, D.C., and Honduras, as well as officials  from the World Bank, Central American Bank for Economic Integration,  and several bilateral donors in Honduras. Finally, we attended several  MCC public outreach meetings in Washington, D.C.
To analyze MCC’s progress in establishing management structures and  accountability mechanisms, we interviewed MCC senior management and  reviewed available documents to identify the management and  accountability plans that MCC had developed or was planning to develop.  We reviewed audit reports by the USAID Office of the Inspector General to  avoid duplication of efforts. We used relevant GAO reports and widely  used standards and best practices, as applicable, to determine criteria for  assessing MCC’s progress on management issues as well as to suggest best  practices to MCC in relevant areas. Although our analysis included gaining  an understanding of MCC’s actions related to establishing internal control,  we did not evaluate the design and operating effectiveness of internal  control at MCC.
In January 2005, we conducted fieldwork in Honduras, one of four  countries with which MCC had entered into negotiations at that time, to  assess MCC’s procedures for conducting compact proposal due diligence  and its coordination with U.S. agencies, local NGOs, Honduran  government officials, and other donors. In conducting our field work, we  met with U.S. mission officials, Honduran government officials, donor  representatives, and local NGOs. We also visited some existing USAID  projects in the agricultural sector that were similar to projects that  Honduras proposed.
We provided a draft of this statement to MCC, and we have incorporated  technical comments where appropriate. We also provided a draft of this  statement to the Departments of State and Treasury, USAID, and USTR;  State and USAID suggested no changes, and Treasury and USTR provided  technical comments, which we addressed as appropriate.  We conducted  our work between April 2004 and April 2005, in accordance with generally  accepted government auditing standards.

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

(continued)
Lesotho Madagascar Malawi Mali Mauritania Moldova Mongolia Morocco Mozambique Nepal Nicaragua Niger Nigeria Pakistan Papua New Guinea  Paraguay Philippines  Rwanda São Tomé and Principe Senegal Sierra Leone Solomon Islands Sri Lanka Swaziland Tajikistan Tanzania Togo *Tonga Turkmenistan Uganda Ukraine Vanuatu Vietnam Yemen Republic Zambia *  Candidate for FY 2004 only.  ** Prohibited under Foreign Assistance Act in FY 2004 but not in FY 2005.
Table 1 lists each of the indicators used in the MCA compact and threshold  country selection process, along with its source and a brief description of  the indicator and the methodology on which it is based.
Since announcing the 16 quantitative indicators that it used to determine  country eligibility for fiscal year 2004, MCC made two changes for fiscal  year 2005 and is exploring further changes for fiscal year 2006. To better  capture the gender concerns specified in the Millennium Challenge Act,  MCC substituted “girls’ primary education completion rate” for “primary  education completion rate.” It also lowered the ceiling for the inflation  rate indicator from 20 to 15 percent. In addition, to satisfy the act’s  stipulation that MCC use objective and quantifiable indicators to evaluate  a country’s commitment to economic policies that promote sustainable  natural resource management, MCC held a public session on February 28,  2005, to launch the process of identifying such an indicator. MCC expects  to complete the process by May 2005.

Appendix IV: Threshold Program Selection Process

The MCC board used objective criteria (a rules-based methodology) and  exercised discretion to select the threshold countries (see fig. 10). For  fiscal year 2004, the MCC board relied on objective criteria in selecting as  Threshold Program candidates countries that needed to improve in 2 or  fewer of the 16 quantitative indicators used to determine MCA eligibility.  (That is, by improving in two or fewer indicators, the country would score  above the median on half of the indicators in each policy category, would  score above the median on the corruption indicator, and would not score  substantially below the median on any indicator.) MCC identified 15  countries that met its stated criteria and selected 7 countries to apply for  Threshold Program assistance. Our analysis suggests that one of these  seven countries did not meet MCC’s stated Threshold Program criteria.  The MCC board also exercised discretion in assessing whether countries  that passed this screen also demonstrated a commitment to undertake  policy reforms to improve in deficient indicators.
For fiscal year 2005, the MCC did not employ a rules-based methodology  for selecting Threshold Program candidates. Instead, the board selected  Threshold Program and MCA compact-eligible countries simultaneously.  The board selected 12 countries to apply for Threshold Program  assistance, including reconfirming the selection of 6 countries that also  had qualified for the fiscal year 2004 Threshold Program.

Appendix V: Timeline of Key Events

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

Appendix VI: Donors in MCA Compact- eligible Countries

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

Appendix VII: MCC Coordination with Key Stakeholders

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

Appendix VIII: MCC Organizational Structure

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

Summary:
Why GAO Did This Study

In January 2004, Congress established the Millennium Challenge Corporation (MCC) to administer the Millennium Challenge Account. MCC's mission is to promote economic growth and reduce extreme poverty in developing countries. The act requires MCC to rely to the maximum extent possible on quantitative criteria in determining countries' eligibility for assistance. MCC will provide assistance primarily through compacts--agreements with country governments. MCC aims to be one of the top donors in countries with which it signs compacts. For fiscal years 2004 and 2005, Congress appropriated nearly $2.5 billion for the Millennium Challenge Corporation; for fiscal year 2006, the President is requesting $3 billion. GAO was asked to monitor MCC's (1) process for determining country eligibility, (2) progress in developing compacts, (3) coordination with key stakeholders, and (4) establishment of management structures and accountability mechanisms.

What GAO Found

For fiscal years 2004 and 2005, the MCC board used the quantitative criteria as well as judgment in determining 17 countries to be eligible for MCA compacts. Although MCC chose the indicators based in part on their public availability, our analysis showed that not all of the source data for the indicators were readily accessible. In addition, we found that reliance on the indicators carried certain inherent limitations, such as measurement uncertainty. Between August 2004 and March 2005, MCC received compact proposals, concept papers, or both, from 16 eligible countries. It signed a compact with Madagascar in April 2005 and is negotiating compacts with four countries. MCC's 4-year compact with Madagascar for $110 million would make it the country's fifth largest donor. MCC is continuing to refine its compact development process. In addition, MCC has identified elements of program implementation and fiscal accountability that can be adapted to eligible countries' compact objectives and institutional capacities. MCC is taking steps to coordinate with key stakeholders to use existing expertise and conduct outreach. The U.S. agencies on the MCC Board of Directors--USAID, the Departments of State and Treasury, and the Office of the U.S. Trade Representative--have provided resources and other assistance to MCC, and five U.S. agencies have agreed to provide technical assistance. Bilateral and multilateral donors are providing information and expertise. MCC is also consulting with nongovernmental organizations in the United States and abroad as part of its outreach activities. MCC has made progress in developing key administrative infrastructures that support its mission and operations. MCC has also made progress in establishing corporatewide structures for accountability, governance, internal control, and human capital management, including establishing an audit capability through its Inspector General, adopting bylaws, providing ethics training to employees, and expanding its permanent full-time staff. However, MCC has not yet completed comprehensive plans, strategies, and related time frames for establishing these essential management structures and accountability mechanisms on a corporatewide basis.