Background

		MCC Compact Development and Implementation

MCC undertakes a process each fiscal year to identify countries as  candidates for MCA assistance. MCC uses per capita income data to  identify two pools of countries as eligible candidates: low-income  countries and lower-middle-income countries. Candidate countries also  must not be statutorily barred from receiving U.S. assistance. MCC’s Board  of Directors then uses quantitative indicators to assess a candidate  country’s policy performance. To be eligible for MCA assistance, a country  must pass the indicator for control of corruption and at least one-half of  the indicators in each of the following three categories: ruling justly,  investing in people, and encouraging economic freedom. To pass an  indicator test, a country must score better than at least one-half of the  other candidates (above the median) in its income group. If the policy  performance of a country implementing a compact declines, the board can  suspend or terminate the compact.
Eligible countries may develop and propose projects, with guidance from  MCC, with the goal of achieving economic growth and poverty reduction.  MCC conducts an initial peer review of the country’s proposal, including  an examination of proposed accountability and procurement structures,  project scope, preliminary cost estimates, and the feasibility of  implementing projects within the 5-year compact period. MCC also may  provide 609(g) funds to the country to assist in compact development. If  MCC accepts the proposal, it negotiates and signs a compact with the  eligible country, committing the full amount of the compact. After  compact signature, the MCA completes additional agreements, budgets,  and plans prior to entry-into-force. At entry-into-force, MCC obligates and  begins disbursing compact funds, and compact implementation begins.
Following MCC’s internal reorganization in October 2007, MCC revamped  its compact development process to include greater up-front engagement  with eligible countries and assistance in conducting needed studies and  establishing management structures. MCC’s 2010 Congressional Budget  Justification notes that it revised the phases of compact development in an  effort to address the challenges and problems it encountered with current  compacts.

		MCC Compacts in Honduras, Georgia, and Cape Verde

The three compacts we selected for review vary in the type and size of  projects funded, but each devotes more than one-half of compact funds to  infrastructure projects, such as roadways, bridges, and ports. Figures 1, 2,  and 3 provide compact obligations by country. As of August 2009, these  three compacts were in their 4th year of 5 years of compact  implementation.

		MCC Financial Controls, Compact Procurement Structure, and Contract and Project Implementation Oversight

MCC has developed management and control guidance and structures to  implement the statutory requirements for fiscal accountability and for  open, fair, and competitive procurements. MCC and MCAs have  established processes for controls over compact funds; the procurement  of required goods, works, and services; and the development and  management of contracts after award.

			Financial Controls

MCC compacts and related documents include sections on fiscal  accountability that describe the agreement between MCC and the recipient  country in areas such as financial management and procurement practices.  According to MCC’s Fiscal Year 2007 Guidance for Compact-Eligible  Countries, two key entities are generally involved in fiscal accountability.  First, the country must authorize an accountable entity to oversee the  MCC program and its components, allocate resources, oversee and  implement a financial plan, approve expenditures and procurements, and  be accountable for MCC program results. Second, the compact typically  will require a fiscal agent for MCC-funded activities that is responsible for  certain aspects of fiscal accountability, such as funds controls and, in  some cases, procurement management. The MCC fiscal accountability  framework is depicted in figure 4.
To address financial management, MCC requires each MCA to adopt a FAP  that clearly documents the policies and procedures, including internal  controls, that will help ensure appropriate fiscal accountability over the  use of MCC-provided funds. In its Fiscal Year 2007 Guidance for  Compact-Eligible Countries, MCC provided the MCAs with information  that the MCAs should consider when developing their policies and  procedures. For example, the MCAs should ensure that, in developing  procedures for their disbursements, they consider funds control and  documentation (i.e., procedures for authorizing, verifying, and recording a  transaction); separation of duties and other internal controls (i.e.,  procedures for segregating approval and processing duties); and  procedures related to the reconciliation of funds. MCC, as a component of  this framework, is responsible for reviewing and approving certain policy  documents and for ensuring that financial controls are adequately  structured and implemented for each country.
MCC assesses the status of financial management at the compact country  through the review of reports, in particular annual financial audits of the  MCA financial statements and Quarterly Disbursement Reports. MCC  requires annual financial audits of the resources managed by the MCAs to  assess whether funds received and costs incurred are recorded in  conformity with the terms of the compact agreement and generally  accepted accounting principles. MCC also requires Quarterly  Disbursement Requests and Reports from the MCAs, which describe the  funds used in the past quarter and the estimated expenses requiring MCC  funding for the next quarter and beyond. After reviewing and approving  the quarterly disbursement requests, MCC authorizes disbursement of the  funds for the next quarter.
Prior to fiscal year 2008, MCC requested that the Department of the  Treasury (Treasury) transfer compact funds into the MCA bank accounts  (e.g., permitted bank accounts) for redisbursement by the MCAs to their  contractors. According to MCC officials, in September 2008, MCC started  using the Treasury’s Common Payment System to make direct payments to  the MCA contractors. However, as shown in figure 4, countries still  maintain permitted bank accounts that are used to redisburse funds  received from MCC. Thus, the MCAs may continue to internally process  and manage project or program payments through the use of the country’s  permitted bank account, which receives funds during MCC’s quarterly  disbursements.

			Compact Procurement Structure

As part of the country’s proposal for compact funding, the MCAs identify  their approach to procurement. Prior to May 2007, the guidelines used by  the MCAs were negotiated and documented in a procurement agreement— a supplemental agreement to the compact. MCC currently uses standard  procurement guidelines, based on World Bank guidelines, and requires  their use in compacts, unless it specifically permits alternative procedures.  MCC also has developed several guidance papers that assist countries in  implementing the standard procurement guidelines. The MCAs may  contract with a procurement agent to perform key procurement  functions. Figure 5 summarizes MCC’s compact procurement process.
The MCAs manage compact procurements, but MCC retains review  authority at points in the process, including procurement planning,  prequalification, bid evaluation, and proposed contract award. MCC’s  guidelines require both MCA and MCC approvals at up to three levels:   (1) the MCA procurement director, (2) the MCA governing body, and   (3) MCC. The level of review depends on the value and method of the  procurement. Higher-value procurements and those using less-competitive  methods generally require more second- and third-level reviews and  approvals. Before MCC published standardized guidelines, the Honduras,  Georgia, and Cape Verde procurement agreements required the first  approval to be by the MCA management, and the second approval to be by  the MCC governing body, or in the case of Cape Verde, by a special  Procurement Review Commission consisting of Cape Verde government  officials.

			Contract and Project Implementation Oversight

To conduct oversight of large infrastructure projects managed by the  MCAs, MCC reviews key documents, such as bidding packages, contract  documents, technical project requirements, and work plans. In general,  MCC’s implementation process for infrastructure contracts and projects  requires that the MCAs have individual project directors—for example, a  roads director—who oversee outside implementing entities and project  management consultants. MCC also requires the MCAs to engage the  services of a project management firm or an implementing entity to help  manage compact projects before receiving project funding. MCA  independent construction supervisors conduct oversight of day-to-day  construction and the activities of the construction contractors to ensure  compliance with contract requirements. MCC’s Implementation Support  Team (IST) and resident country director, aided by MCC’s own  independent engineers, monitor progress of the construction works as  managed by the MCAs and executed by their contractors. To report  progress, the MCAs prepare quarterly reports to MCC. MCC’s deputy vice  presidents hold quarterly country portfolio reviews during which the IST  reports on implementation progress as well as issues and concerns. Figure  6 depicts the oversight, management, and contractual relationships  between MCC, the MCA, and their contractors for infrastructure projects.

	MCC’s Accountability Framework Does Not Always Help Ensure Adequate Funds Controls in Compact Countries

The MCAs have made progress in implementing polices and procedures  for managing their administrative and operating expenses. However, our  review of these policies and procedures, as documented in each country’s  FAP, found gaps in the design of the policies and procedures, which  prevented the establishment of an adequate internal control structure. In  addition, our tests of transactions at the three MCAs showed that  processed financial transactions did not consistently comply with the  MCAs’ established controls, resulting in transactions that lacked proper  approvals and adequate documentation.

		MCA Fiscal Accountability Plans Had Gaps and Did Not Address Certain Key Controls

During our review of the three MCAs we visited, we found that each entity  had documented policies and procedures in their FAPs as required by  MCC. However, travel and payroll policies in two of the three countries we  visited were incomplete or did not address key procedures or controls. In  addition, the FAPs in all three countries lacked policies and procedures  related to disbursements for each MCA’s main project or program  expenses. The lack of adequate and comprehensive policies contributes to  internal control structures that increase the risk of fraud, waste, and abuse  in MCC-funded projects. For example:    Travel policies in Honduras and Cape Verde lacked key requirements for  supporting documentation. For example, in Honduras, travel policy  allowed employees to be paid for lodging and per diem for local or  international travel prior to the trip but did not require staff to submit  detailed documentation related to hotel or airline flight receipts upon  return to document the completion of travel. In addition, the policy did not  address certain key issues, such as a business class airfare policy.  Similarly, Cape Verde’s travel policies and procedures did not require staff  to submit documentation related to hotel expenditures. Furthermore,  Cape Verde’s FAP authorized business class airfare for travel of 9 hours or  more, regardless of whether stops were made overnight for business or  personal reasons.
Payroll policies in Honduras and Cape Verde did not include a requirement  for staff to prepare individual time sheets or other documentation that  could be used by direct supervisors to verify actual hours worked before  payroll was processed. Although payroll at these countries is based on  contracted salaries, we could not determine from the documentation  available whether staff members had actually worked the compensated  hours.
The FAPs in all three countries lacked policies and procedures for  authorizing and paying major program expenses, such as payment for road  resettlement, investments, grants, and credit line transactions. These  program expenses are often managed by an implementing entity and  comprised some of the largest disbursements for the MCAs we reviewed.  For example, in Honduras the credit line and grant disbursements totaled  $9.9 million, or 29 percent of the total disbursement amount of $33.8  million for the period we reviewed. Specific program or project  requirements could be found through extensive reviews of various  agreements between the MCAs and their implementing entity or other  external guidance. However, key controls related to the disbursement  approval process and documentation requirements for these transactions  were not documented in the countries’ FAPs. It is important to include  the relevant controls for these activities in the FAP to ensure that the  MCAs have an adequate structure in place to efficiently manage their  projects and provide a central point of reference for all documentation and  approval requirements.
The lack of comprehensive policies and procedures at the MCAs is the  result of limitations in the initial guidance that MCC provided to the three  MCAs. MCC’s initial Guidance for Compact-Eligible Countries consisted  primarily of outlining the responsibilities of MCC and the recipient  government in matters related to financial management and provided  general guidance about the foundation of the policies and procedures to  be developed. For example, the guidance stated that (1) procedures must  be in place to ensure that disbursements are executed in accordance with  the compact or related documents, (2) records must be maintained that  provide clear support of a transaction, and (3) procedures must  incorporate the principle of segregation of duties and internal controls.  However, this guidance did not contain examples of the policies and  procedures that the MCAs could implement to ensure an adequate fiscal  accountability structure. For example, more specific or detailed guidance  in payroll, travel, and inventory controls would have assisted the MCAs in  developing comprehensive policies and procedures. According to MCC, to  help the MCAs comply with their responsibility for developing their FAPs,  MCC’s fiscal accountability directors often worked hand-in-hand with the  MCAs and fiscal agents while drafting their initial guidance. The directors  also collaborated with colleagues who worked on other countries’ FAPs to  help ensure that the major internal controls and critical FAP elements  were addressed.
To help address shortcomings in the FAPs, in November 2008, MCC  developed a FAP template with suggested policies and procedures to help  compact countries strengthen their FAPs. The FAP template provides  suggested policies and procedures regarding segregation of duties and  asset management, as well as examples of financial controls in areas such  as travel and payroll. According to MCC officials, the template is designed  to be a guidance document that provides examples of how controls could  be structured for different expense types. For example, the template  requires employees to submit time sheets for supervisory approval and  travelers to submit hotel receipts for travel expenses. MCC management  does not require compact countries to model their policies and procedures  on the guidance provided in this template FAP or adopt its provisions  because MCC delegates responsibility for implementing internal control to  the countries’ accountable entity, which can tailor their FAPs to meet their  needs. Rather, the MCC-developed FAP template serves as a reference  point that can be used by compact countries when drafting their FAPs.

		MCAs Did Not Consistently Apply Internal Controls Established in the FAPs and Other Documents

For controls provided in the FAP and other MCA documents to be  effective in preventing unauthorized or improper disbursements, the MCA  management must ensure that control activities established in its policies  and procedures are properly applied. However, our review of the MCAs’  compliance with established control activities in operational areas—such  as travel, payroll, program- or project-related expenses, and inventory— identified instances where the MCAs did not consistently comply with  established controls. These control deficiencies and inadequate  monitoring of the MCAs’ implementing entities, increase the risk of fraud,  waste, and abuse of MCC program funding.

			Travel Expenses

A random sample of travel disbursement transactions for each of the three  MCAs we reviewed showed instances in which management failed to  consistently comply with the controls described in the FAP’s travel  policies and procedures, which resulted in improperly documented or  approved travel disbursements. For example, trip reports, which the MCA  management requires as evidence of travel completion, were not always  provided in Honduras and Cape Verde. Specifically, all of the 33 prepaid  travel disbursements we tested in Honduras lacked such supporting  documentation. In Cape Verde—which also requires other supporting  documentation, such as boarding passes—we found that 19 of the 30 travel  transactions we tested lacked documentation to support trip completion.  Therefore, we could not determine whether the trips were completed or  complied with the applicable authorization for these transactions.
Travel policies for MCA-Honduras and MCA-Georgia require employees to  obtain travel authorizations and provide receipts upon completion of  travel for reimbursement transactions. In Honduras, for 9 of the 22 travel  reimbursements we tested, the supporting documentation lacked certain  required documents, such as boarding passes and hotel receipts. Three of  the 22 travel reimbursements were made even though the travel  authorizations did not have all of the required information. For these   3 transactions, documentation showed management approval, even though  all required trip details were not properly documented. For MCA-Georgia,  8 of the 35 travel reimbursements we tested did not have certain  documentation, such as hotel receipts or boarding passes, as evidence that  the trips had taken place.
Our MCA-Georgia sample also included one travel disbursement for a  board member of the Georgia Regional Development Fund (GRDF), which  did not reflect a reasonable effort to minimize costs charged to the  investment fund. According to the GRDF travel guidelines, board  members can travel in business class if the total length of the flights— including layovers, but excluding stopovers—exceeds 14 hours. According  to the policy, a board member may add the time of a flight before a  stopover to the time of a flight after a stopover to determine the flight’s  total length. During our testing, we identified a transaction in which a  board member booked two round-trip tickets for a board meeting in  Tbilisi—one from his residence in Washington, D.C., to London, where he  also has a residence, and one from London to Tbilisi. The trip included a  36-day stopover in London after the board meeting, but before the board  member traveled back to Washington, D.C. The ticket from London to  Tbilisi, a 5-hour flight, was booked in premium class, and the total cost of  the ticket was $3,640, justified by the 14-hour exception. However, a   36-day stopover in London should make the traveler ineligible for business  class travel under the 14-hour rule. Although this travel was made in  accordance with the GRDF guidelines that we have previously mentioned,  it did not reflect a reasonable effort to minimize anticipated costs to the  investment fund.

			Payroll Expenses

Our review of the implementation of payroll controls, using a random  sample of disbursements, identified several instances in which payroll  disbursements were made without adequate documentation or approvals  as required in the FAPs. Our testing in Georgia determined that 4 of the   62 payroll transactions we tested lacked direct supervisor approval on the  time sheets, and 59 of 62 transactions lacked the approval and certification  of the human resources manager, as required by MCA-Georgia’s FAP. For  Cape Verde, we were unable to trace disbursements to the contracted  salary amount for 4 of our 15 sample items because employee files were  not always updated to reflect annual cost-of-living increases.

			Program- and Project-Related Expenses

Program- and project-related expenses include payments disbursed by the  MCAs for grant expenses, resettlement expenses, investment funds, and  other operating expenses. Many program- and project-related expenses  are often managed by an implementing entity hired by the MCAs to  oversee project implementation. During our testing, we identified issues  related to incomplete documentation and a lack of management approval  of these expenses. The lack of adequate management reviews and a poor  control environment in these areas resulted in unsupported and  questionable costs related to disbursements at the three countries we  tested.
Grant expenses. During our testing of grants made by the MCAs, we  observed payments to beneficiaries that lacked adequate evidence that  certain prerequisites were met. We also identified inconsistencies in the  documentation provided as support for the transactions. During our  testing in Honduras, we identified 20 instances from a random sample of  53 grant disbursements where the forms provided to the MCA as evidence  of receipt by the beneficiary of the agricultural equipment items were not  signed by the beneficiary or were signed by the contractor responsible for  delivering the goods to the beneficiary. Thus, we could not determine  whether the beneficiary had received the goods. In Georgia, our testing  identified 7 instances from a random sample of 54 grant disbursements in  which beneficiaries did not certify, as required by the grant agreements,  that certain milestones were met before they received funds. Furthermore,  several of the samples we tested had different beneficiary signatures on  the payment request form and the grant agreement documents. The most  recent audit of MCA-Georgia, performed by their independent audit firm,  also identified significant shortcomings in the supporting documentation  for grant disbursements.
Resettlement expenses. Resettlement payments compensate  landowners for property used for the MCA projects, such as road and  pipeline construction. During our testing of resettlement disbursements  in Honduras, we identified transactions that lacked the documentation  required to support the disbursement amount and the recipient’s eligibility  to receive the funds. In 6 of the 25 transactions we selected in Honduras,  the files had inadequate documentation to provide evidence that the  beneficiary had received funds and did not include the beneficiary’s  signature. In some cases, the beneficiary’s signature was not the same as  that on other documents in the file. Several files had different signatures  on documents that (1) evidenced acceptance of the resettlement offer by  the beneficiary and (2) acknowledged that the beneficiary received the  funds from MCA-Honduras. These control deficiencies occurred due to the  absence of an MCA policy requiring confirmation of these signatures.  According to MCA-Honduras officials, in some cases the officials were  familiar with the beneficiaries and with those who had signed for them.
Investment funds. MCA-Georgia established a fund that made  investments in businesses that met certain criteria to further their  development. The GRDF management agreement describes processes,  such as board authorizations, investment fund goals, and documentation  requirements, that should be met before investment payments are  requested and approved. Our review of 5 investment transfers, totaling  $3.7 million, showed that 2 transactions were processed without adequate  documentation of the required board approvals. Also, 3 of the   5 investments did not have fully completed investment proposals before  approval by the GRDF Board of Directors. Furthermore, two of the five  payment requests made to the MCA fiscal agent lacked supporting  documentation and required follow-up to ensure that GRDF personnel had  provided the required documentation. In its semiannual audit covering the  last 6 months of 2008, the MCA-Georgia auditor also reported that  transactions related to the GRDF investment fund lacked adequate  documentation.
Other operating expenses. Other operating expenses include MCA  disbursements for technical services, construction services, and office- related expenses. During our testing of these expenses, we found  instances of inadequate documentation and approvals. For example, in  Honduras, we identified 23 of 58 operating expense transactions that did  not have the required supporting documentation, such as a Certificate of  Delivery of Goods Report. As a result, for these items, there was no  evidence that the goods or services were provided before the invoices  were processed and payments were made to the contractors. We were able  to verify the existence of 17 of the 23 items that did not have a certificate  in the financial files. However, we were unable to verify the existence of  the remaining 6 items.
In Georgia, MCA procurement officials had not properly approved 3 of the  58 transactions we tested. In addition, 8 of the 58 transactions were not  supported by adequate documentation. For these 8 transactions, we could  not determine whether payments were made in accordance with the  applicable contracts because the invoices were insufficiently detailed. For  example, one invoice requested payment for “fourth quarter . . . under  services agreement,” with no additional information provided. In addition,  in its June 2009 report, the MCA-Georgia auditor reported $1.2 million in  questioned costs due to a similar lack of supporting documentation for  one road construction project. The auditor also noted significant  shortcomings in the supporting documentation for interim payment  applications of the civil works performed by the contractor.
In Cape Verde, we found that, in 4 of the 37 technical services transactions  tested, amounts disbursed to a contractor did not agree with the  provisions of the applicable contract. For these transactions, 4 payments  were made on one contract that did not have a payment schedule that  listed the deliverables to be provided for MCA-Cape Verde to initiate  payment. As a result, we could not determine whether the correct amounts  were paid for services rendered for the invoices we examined.

			Inventory

Our testing of a random selection of assets included in inventory identified  several instances where documentation was not in compliance with  inventory policy and procedures, as required in the FAPs. As a result, we  could not always determine whether the items provided were the same as  the items in the asset listing. For example, of the 39 inventory items we  tested in Georgia, we were unable to determine whether 15 of these items  were the same as the items described in the inventory list due to poor  recordkeeping, such as incomplete asset information, lack of asset tags,  and inadequate serial number tracking. These 15 items included   7 computers and 1 cell phone. MCA-Georgia auditors also reported that  inventory and asset management was a problem in their semiannual  financial audits citing shortcomings in recordkeeping, tagging of assets,  and inaccurate or incomplete recording of asset movements and changes  in custody. Auditors recommended that the MCA fully implement the  asset management procedures described in MCA-Georgia’s Asset  Management Manual. In addition, MCA-Georgia and MCA-Cape Verde  reported instances of lost or stolen inventory items, such as laptops or  other electronic equipment, indicating the need for improved property  safeguarding controls. The MCA-Georgia fiscal agent stated it could not  identify 16 items in its last MCA-wide inventory process in December 2008.  Among the 16 items were 4 computers and 4 cell phones. Subsequent to  our visit, the MCA fiscal agent performed another inventory count in May  2009 and located some of missing items. Furthermore, MCA-Cape Verde  officials stated that after-hours thefts had resulted in a number of missing  laptops and a projector, which were still missing at the time of our  fieldwork in May 2009.

	MCC Has Decreased Its Level of Procurement Review; Countries Generally Adhered to MCC Requirements

MCC has increased standardization of the MCA procurement guidelines,  which were initially determined on a country-by-country basis. In the most  recent version of its procurement guidelines, released in July 2008, MCC  reduced the number of approvals required from MCC and the MCA while  at the same time requiring postprocurement reviews to supplement MCC  oversight. The MCAs we assessed generally adhered to MCC’s  procurement guidelines, although they did not fully comply with some  requirements, such as contractor eligibility and price reasonableness  determinations. In addition, we found that when the MCAs delegated  procurement responsibility to outside entities, the procedures used by  these entities were generally consistent with MCC’s procurement  framework.

		MCC Has Increased Standardization of Procurement Guidelines and Reduced Its Level of Review

MCC has increased standardization of the MCA procurement guidelines. In  its initial compact country procurement agreements, MCC permitted  countries to select their own procurement guidelines but reviewed them to  determine whether they met MCC requirements for open, fair, and  competitive procurement. In May 2007, MCC issued standardized  procurement guidelines to simplify country processes, according to MCC  officials. MCC reviews and now requires their use in all new compacts.  MCC officials also said that using a standardized procurement framework  encourages more firms to bid on MCA procurements, because they  become familiar with MCC requirements and do not have to adjust to new  ones for different MCAs.
MCAs in each of the three countries we examined have modified the  procurement framework they used while implementing compacts. The  MCAs in Honduras, Georgia, and Cape Verde all began their compacts  using country-specific procurement guidelines. MCC officials told us that  Honduras and Georgia switched to MCC’s standard guidelines in May 2007  and August 2008, respectively. MCA-Cape Verde has continued to use its  own procurement guidelines because most of their large procurements  were complete, according to MCC and MCA-Cape Verde officials.

			MCC Has Reduced Its Involvement in Approving Procurements

According to MCC officials, MCC’s initial level of involvement in  procurement development and review was unsustainable, especially as  MCC’s compact portfolio grew. According to MCC officials, they were  getting “bogged down” looking at smaller procurements, and they  concluded that the MCAs’ governing bodies were likewise required to  review too much detail within individual procurements. MCA country  officials with whom we spoke also stated that the initial review process  delayed procurement and thus the project schedule. For example, as early  as 2006, MCA-Cape Verde was concerned about the mismatch between the  number of reviews required of the Procurement Review Commission and  the time frame of projects.
In the most recent version of its procurement guidelines, released in July  2008, MCC introduced the “Implementation Model Framework” as the  standard procurement model for all compact countries and reduced the  number of required approvals by MCC. This model formalizes the extent to  which MCC is involved in procurements and further reduces the number  of points at which MCC approvals are required. Although the MCAs’  procurement procedures do not change, for those countries transitioning  to this model, MCC plays more of an oversight role. MCC’s July 2008  version of the procurement guidelines also establishes a 2-tier system of  approvals that allows for even fewer reviews of procurement actions for  those countries with a good procurement record. Schedule A of the 2-tier  system represents the initial level of review for most countries, which is  referred to as implementation support. As countries gain experience and  MCC gains confidence that they are implementing MCC procurement  guidelines, MCC permits the country to transition to Schedule B, which is  referred to as oversight.
See appendix II for a discussion of the oversight model and a comparison  of the review required under Schedule A and Schedule B to the review  required in previous procurement guidelines.

			MCC Conducts Postprocurement Reviews and Requires Procurement Audits

When it reduced the number of required pre-approvals, MCC also  formalized a separate postprocurement review process to supplement its  oversight of the MCA procurements. In July 2008, MCC began to conduct  yearly interim activity reviews (IAR) of compact countries. The IARs  assess a nongeneralizable random sample of procurements from each  country for compliance with procurement and contract administration  processes. As of August 2009, MCC had conducted IARs of eight compact  countries. In the three IARs for the countries we examined, MCC officials  reported that the procurement files were in “excellent,” “good,” and  “acceptable” condition. These three IARs reviewed a total of 29  procurements. In the case of Cape Verde, critical issues identified by the  IARs included failure to create a Procurement Implementation Plan and to  conduct price reasonableness analyses. During our fieldwork, we  discussed the IAR findings with the procurement director in Cape Verde,  who reported that the MCA was addressing the issues identified in the IAR  and provided documentation of additional processes.
MCC guidelines for audits of accountable entities require that the MCA  auditors assess and report on procurement compliance. According to the  guidelines, the audit’s specific objectives should include testing  compliance with the procurement agreement, procurement guidelines, and  the FAP. We reviewed 7 audit reports for Georgia, Honduras, and Cape  Verde and found no reporting of material procurement-related findings,  although some audit reports did not clearly state that they included  procurement within the scope of the audit. In all, we reviewed 24 audit  reports for MCA countries—3 reports had procurement-related findings.  One of these 3 audit reports had seven findings, another had five, and the  last had one. The other 21 audit reports did not contain any reporting  related to procurement.

		MCAs We Assessed Generally Adhered to MCC Procurement Guidelines

MCAs we assessed generally adhered to MCC Procurement Guidelines but  have not documented that they fully complied with some requirements. On  the basis of our review of a stratified random sample of 138 procurement  files, we estimate that the three MCAs we reviewed obtained almost all of  the required approvals from MCC in the procurement process, and that  they obtained approvals from the MCA governing body in most cases. We  also estimate a high rate of MCA compliance with MCC procurement  requirements for    using a competitive bidding process to conduct procurements;    advertising procurements and preparing bid documents;    using MCC procedures for opening bid documents, documenting the  reasons for disqualified bids, and selecting the winning bidder; and   documenting receipt of the good or service procured.
Table 1 provides additional details on the procurement requirements we  tested and our estimated results. Appendix III provides more information  on the specific findings for the procurement criteria we tested.
Despite general compliance with MCC procurement guidelines, the MCAs  did not document contractor eligibility and evaluation panel impartiality in  all cases, as follows:    Contractor eligibility: In Georgia, 25 percent of procurements in fiscal  year 2008 documented contractor eligibility. In addition, we estimate that  MCA-Honduras documented contractor eligibility in about 74 percent of  the procurements it conducted in fiscal year 2008. MCC requires that the  MCAs conduct contractor eligibility reviews for all procurements. Parties  to be excluded from MCC contracts include firms declared ineligible under  World Bank anticorruption policies and U.S. antiterrorist policies. MCC  has taken steps to improve eligibility verification and documentation by  issuing guidance for contractor eligibility in February 2008. MCC’s  guidance was prompted by a U.S. Agency for International Development,  Office of Inspector General, assessment of procurement that found that  MCAs had not fully complied with guidance on determining contractor  eligibility.
Impartiality of the evaluation panel: We found that all three MCAs we  reviewed documented the impartiality of the bid evaluation review panel  less than 90 percent of the time. For example, we estimate that MCA-Cape  Verde documented the impartiality of the technical evaluation panel for   74 percent of all procurements in fiscal year 2008, and that MCA-Honduras  documented technical evaluation panel impartiality for 80 percent of  procurements. Our review of all procurements in Georgia in fiscal year  2008 found that MCA-Georgia documented impartiality of the technical  evaluation panel 86 percent of the time. Although MCA compliance was  below 90 percent for evaluation panel impartiality, the margin of error on  our estimates for MCA-Honduras and MCA-Cape Verde may bring them  close to 90 percent compliance.
Additionally, we found that the MCAs we reviewed did not consistently  document their evaluation of the reasonableness of prices contained in the  winning bid. MCC guidance states that the MCAs should conduct and  document price reasonableness analysis for all procurements to ensure  that no more than a commercially reasonable price is paid to procure  goods, works, and services. While MCC guidance states that competitive  bids or bids close to the budget, among other criteria, may be used to  identify a price as reasonable, MCC’s procurement directors generally did  not document this determination in their files or the evaluation reports.  MCA procurement directors believed that they did not need to document  price reasonableness if they received multiple competitive bids for a  procurement or if bids were within the planned budget. An MCC review of  an MCA-Cape Verde procurement, conducted in February 2009, also found  that the MCA had not conducted a price reasonableness analysis.

			When MCAs Delegated Procurement Responsibility, the Procedures Used Were Generally Consistent with MCC’s Procurement Framework

When the MCAs delegated procurement responsibility, procurement  procedures used by the outside entities were generally consistent with  MCC procurement principles and guidance. For all three MCAs we visited,  procurements were generally conducted by the MCA procurement staff or  its contracted procurement agent. We found examples of instances where  the MCA had used alternate guidelines or delegated procurement  responsibility to an outside entity.
For procurement of small works, MCA-Cape Verde used procurement  guidelines developed by the Cape Verde Ministry of Industry and  Transport (MIT) that did not use the same standard for price  reasonableness as MCC. These differing standards led MIT to  automatically discard bids that it considered “unreasonably low” but that  would have been evaluated under MCC guidelines. In Cape Verde,  procurements for road and bridge construction began before the compact  entered-into-force. Although MCC reviewed and accepted the results of  these MIT procurements, the MCA file did not contain a full record of the  procurement procedure for the $3.4-million bridge procurement.
MCA-Georgia used two outside entities to conduct procurements.  Procurement responsibility for Regional Infrastructure Development  projects was delegated to the Municipal Development Fund (MDF) of  Georgia, and procurement responsibility for most procurements  conducted for Agricultural Development Activity grant programs was  given to the Citizens Network for Foreign Affairs (CNFA), the nonprofit  organization managing the grant program.
In the case of MDF, a March 2006 collaboration agreement between MDF  and MCC lays out the procurement procedures that MDF is required to  follow in conducting procurements financed entirely or in part by MCC.  These procurement guidelines have the same requirements as the March  2006 MCA-Georgia procurement guidelines. However, MCC issued updated  procurement guidance in 2007 and 2008 and did not modify the  collaboration agreement to encompass these new requirements. For  example, we found that MDF procurements did not meet the requirements  for advertising and contractor eligibility that MCC issued in 2007 and 2008.
In the case of grants administered by CNFA, we found that MCA-Georgia  has created a separate procurement process. CNFA relies on grantees to  identify suppliers for goods and to provide price quotes from multiple  suppliers showing that their chosen supplier has the lowest price.  According to CNFA officials, CNFA staff check with the identified  suppliers to verify that the prices provided by grantees to CNFA are  accurately reported. However, CNFA staff do not conduct independent  market research to ensure that the price estimates provided by grantees  are reasonable and comparable with market prices. According to MCA- Georgia, grant recipients often live in rural areas and need to procure  secondhand equipment, and thus they are often best equipped to identify  existing suppliers.

	MCC Conducts Oversight, but Insufficient Planning of Projects during Compact Development Has Undermined Project Implementation

Project status reports of MCC and MCA consultants indicate that the MCA  projects have encountered problems, which include delays, scope  reductions, and cost increases. These problems are due, in part, to  insufficient planning, escalation of construction costs, and insufficient  MCC review. MCC is conducting oversight during implementation by  monitoring project performance, establishing incentives for  accountability, and using cross-functional teams to oversee and support  the projects.

		MCA Projects We Assessed Have Encountered Problems Due to Insufficient Planning of Projects

On the basis of our review of contractor reports in the three countries we  assessed, we found that MCC-funded infrastructure projects were  substantially delayed. For example:    After receiving initial contractor bids in excess of the planned budget,  MCA-Georgia restructured what it had planned to award as three large  contracts for the road projects into six smaller planned contract lots,  leading to a delay of at least 6 months to rebid and award the contracts.  Under the second procurement, MCA-Georgia was able to award contract  lots 2, 3, and 4 and parts of lots 5 and 6—rather than six full lots—within  the available project budget. At the time of our site visit in March 2009, the  road construction contractors were behind 3 to 4 months on a schedule of  24 to 30 months in part due to contractor delays in getting labor,  equipment, and field offices operational. One contractor also experienced  delays due to issues related to the need to revise the designs, delayed  preparation of construction working drawings, and slow coordination of  the utility relocations. In July 2009, subsequent to our visit to Georgia,  MCA-Georgia removed one roadway lot from one of the contractor’s  contracts and awarded it to another contractor. The action was taken  following MCA-Georgia’s assessment that one contractor’s performance  was unacceptable based on the contractor’s failure to make sufficient  progress on the road. MCA-Georgia awarded that roadway lot to another  contractor in an attempt to complete the road projects within the compact  time frame.
Delays of up to 9 months occurred in constructing approximately 100  kilometers of the CA-5 highway project in Honduras. The delays were in  part due to the MCA having to contract for additional topographic surveys  that were needed to update the designs, revising designs to add additional  travel lanes and road intersections, realigning the road to minimize  property resettlement requirements, and addressing contractor  performance issues. At the time of our visit in December 2008, the  construction contractor for two sections of the road was about 3 months  behind schedule on contracts of 24 months in duration due to slow  progress during the rainy season.
In Cape Verde, phase I of the port project was delayed 9 months. In  addition, the construction contractor for the roads project was granted an  11-month extension on a 30-month contract. The Cape Verde bridges  project was extended from 12 to 30 months. The reasons for delays varied  across the three projects and included in some instances procurement  delays, the inability of the MCA to provide site access for the contractor to  begin work, and having to improve designs that were not ready for  implementation.
Our review of contractor reports indicated that these MCAs reduced the  scope of projects, including the following:    MCA-Georgia reduced the original compact scope for the award of   245 kilometers of road construction contracts to just over 170 kilometers  because the full scope of the contracts could not be awarded within the  initial compact budget.
In Honduras, MCC was no longer exclusively funding the construction of  the CA-5 highway project as planned under the compact. One of the four  road sections of the CA-5 highway could not be awarded within the  funding available through the compact, nor could construction be  completed within the 5-year window. As a result, the scope of the  roadwork as funded by MCC was reduced and, at the time of our review,  compact funding covered the cost of approximately 65 kilometers along  portions of three sections of road. The section not funded by MCC was  being funded through a loan from the Central American Bank for  Economic Integration to the government of Honduras.
Two of five roads in Cape Verde were eliminated from the contractor’s  project scope due to increased costs. In addition, the construction of  phase II of the MCA-Cape Verde port project could no longer be funded  under the available compact budget and, at the time of our review, was on  hold until outside donor assistance could be used.
Examples of MCA contract cost increases in the three countries we  reviewed include the following:  In MCA-Georgia, the independent construction supervisor estimated that  the final contract price for one road contract, originally awarded at   $65.0 million, would rise by 15 percent, or nearly $10.0 million; another  contract, originally awarded at $33.1 million, would rise by nearly   18 percent or about $6.0 million.
Changes in contract costs totaling about $2.0 million—an approximately  17 percent increase—were approved on the Cape Verde roads project,  which was originally awarded at about $11.0 million.
Contract cost changes on the Cape Verde bridges contract have been  approved for a total of about $750,000—approximately 23 percent—on a  contract initially awarded at $3.3 million.

			Insufficient Planning, Cost Escalation, and MCC’s Insufficient Design Review Have Contributed to the Need to Restructure Projects

Our review of the three MCAs found that projects had to be redesigned  and restructured due to insufficient planning before implementation,  which led to delays in implementation. Our past work found that it is  critical to set appropriate time frames to conduct planning, design, and  construction activities.
Insufficient planning. Insufficiently developed project designs led to  redesign and delays in contract award and implementation in each of the  three compact countries. For example, in five of the six projects we  reviewed (six contracts for roads projects in each of the three countries,  and two contracts for the port and bridges projects in Cape Verde), we  found that insufficient planning—principally due to poor topographic  surveys—led to inadequate designs. The redesign of projects delayed the  bid process while designs were revised and, in other cases, resulted in  significant modification of designs after contract award. Industry experts  have found that actual costs for projects with limited planning can range  from 20 to 30 percent higher than estimated. The following examples  highlight some of the problems our review found that were reported by  MCC, the MCAs, and their consultants:    MCA-Georgia issued contract variation orders to address identified  shortcomings in the project design. After beginning construction, the  contractor found discrepancies between the design and the existing  roadway conditions. This discrepancy required additional topographic  engineering surveys, more-developed designs, and additional construction  work. In addition, trees between 8.0 and 15.9 centimeters are legally  required under Georgian law to be cut rather than uprooted with heavy  equipment, but this requirement was not identified as a payable item in  contract documents. Furthermore, the extent of the work required to  relocate utilities was not sufficiently addressed in the design, according to  the contractor. MCC officials noted that MCA-Georgia had contracted  separately for a utility relocation survey that proved to be deficient.
MCA-Honduras had to undertake additional topographic engineering  surveys because earlier surveys were not sufficiently detailed or were  unavailable. This issue contributed to a 4½-month delay in awarding  contracts. In addition, fundamental planning decisions, such as adding  travel lanes, interchanges, and safety features, were still under review  during the design stage, which took time to resolve and resulted in  significant changes in scope.
MCA-Cape Verde, after construction award, found that road designs,  accepted by the government of Cape Verde, were of poor quality and  inadequate as a basis for construction. The topographic information in  the design was inadequate, and thus the designs inaccurately represented  the extent of the work required.
MCA-Cape Verde found that bridge designs had to be revised after the  award of the construction contract because the initial designs were not  sufficiently adequate for construction.
MCA-Cape Verde’s port project faced potential delays due to differences  between the actual topographic and seafloor conditions and the conditions  represented in the design drawings for required shore protection and the  coastal road serving the port.
Cost escalation. We found that cost escalation of construction materials  and schedule delays associated with project redesigns also contributed to  the need to restructure projects. For example, three road projects (six  contracts) and the port project experienced cost escalation of  construction material prices—especially oil, which heavily affects  roadway construction costs. In its oversight role, MCC is not directly  responsible for the development of cost estimates. However, our review of  MCC Standards of Clearance indicated that MCC has a role in ensuring  that the MCAs properly update—to include adjusting for the escalation of  construction costs—and revalidate cost estimates before contract  solicitation and throughout the project life cycle.
Although MCC officials stated that the MCC project teams are  knowledgeable about the MCA cost estimates and schedules, MCC does  not have a formal policy governing their development and review and does  not centrally track updates over a project’s life cycle. In addition, MCC  does not issue guidance to the MCAs on assessing the extent to which cost  escalation should be considered a risk factor and assessing its potential  impact on planning, design, and construction schedules. MCC requires the  MCAs to include an “owner’s contingency” in project cost estimates to  cover unforeseen conditions and risks, such as cost escalation. MCC also  reviews cost estimates of MCA projects quarterly as part of the  disbursement request review process.
Evidence we reviewed suggested that the MCAs’ initial cost estimates  were not realigned when project scopes were revised or as prevailing  market conditions changed. For example, the budget and cost estimates  supporting the first MCA-Georgia road procurement—canceled because  bids exceeded available project funding—were largely based on planning  estimates that were 2 years old. In addition, the estimates did not  sufficiently account for (1) cost escalation, (2) changes in scope and  standards that occurred after the feasibility study, (3) weakening of the  U.S. dollar, and (4) an increase in construction work worldwide that  resulted in less competition.
Design review. We found that MCC consultants’ reviews of designs  before award of contract were insufficient. For example, one of MCC’s  consultants characterized its design review as “big picture in nature” and  “not to be considered a detailed review,” stating specifically that “building  drawings were not completed and not reviewed,” and that “the cost  estimate was not reviewed.” In contrast, our review of industry leading  practices indicates that a well-organized, detailed review can ensure that  design plans and specifications are sufficient for construction and will  provide the contractor with sufficient information to prepare a  competitive and cost-effective bid. MCC has taken some steps to modify  its compact development process by increasing its assistance to support  MCA planning for projects before implementation. Previously, final  feasibility studies, environmental assessments, and detailed project  planning were typically not completed until after entry-into-force. Under  the new process, that type of planning is more likely to be completed  before entry-into-force. See figures 7 and 8, which show MCC’s prior and  current compact development and implementation processes.
MCC officials stated that they are making greater use of MCC 609(g)  funding authority and Compact Implementation Funds to support these  activities earlier in the process for more recent compacts. MCC also noted  that it expects to make greater use of Compact Implementation Funds to  assist the countries in preparing their procurement processes and begin  final project design in cases when planning feasibility studies are  completed.

		MCC Conducts Oversight during Implementation

In all nine contracts that we examined—the three road projects (six  contracts), the port project, the bridges project, and the pipeline project— we found that MCC’s Implementation Support Team (IST) conducts  oversight and monitors project performance during compact  implementation. We also found that MCC has a resident country director  (RCD) in each compact country. The RCD monitors MCA management and  project implementation as MCC’s representative to the government in the  compact country and at the board meetings of accountable entities. The  RCD is not a voting member, but provides oversight over MCA decisions  about contract awards and contract changes affecting cost, schedule, and  scope.
MCC requires the MCAs to prepare implementation plans that include  program and project work plans and uses independent consultants to  monitor MCA reporting status against those plans. MCC also reviews key  documents, such as bidding packages, contract documents, and technical  project requirements. We found that MCC staff in-country and in  Washington, D.C., visit projects firsthand to confirm MCA reporting and  assessment of status of projects. MCC officials stated that, to integrate  oversight efforts, they schedule consultant site visits to coincide with  those of headquarters staff, to the extent possible.
According to MCC officials, communication occurs daily between the  RCD, the deputy RCD, their counterparts in the MCAs, and the MCAs’  individual project directors. The MCAs prepare quarterly progress reports  for MCC. The RCDs discuss project performance—usually weekly—with  the MCAs, including discussions about scope, cost, schedule, and other  project-related issues. The RCD’s monitoring is reported informally to  MCC headquarters on an ongoing basis and formally in quarterly country  portfolio reviews with MCC’s deputy vice presidents. During those  reviews, the IST also reports on implementation progress.
Under the compact model of country ownership, MCC does not have the  authority to direct MCA contractors that implement MCA projects but  works with the MCAs, which direct contractors to take corrective actions.  MCC, through provisions in the compacts and MCC Program Procurement  Guidelines—and outlined in MCC Standards of Clearance—has the right to  review and approve MCA projects and contract documents and may direct  the MCAs to ensure that (1) appropriate design standards and  specifications are used, (2) schedules and cost estimates are prepared,   (3) environmental and social assessments are made and incorporated into  projects’ scopes, and (4) changes to contracts that increase the value by   10 percent or more are justified. In Georgia, MCC’s engineers raised  significant design and environmental concerns about the Naniani landslide  site and potential risk to the pipeline project at the site. MCC’s engineers  reported that the existing pipeline ruptured in December 2006 due to a  landslide, and that a reoccurrence could damage the MCC-funded repairs.  MCC’s consultant reviewed the geotechnical information and  recommended rerouting the pipeline and that it be included in the project  scope of the Georgian Oil and Gas Corporation. The recommendation  was accepted and incorporated, and MCC and its consultant continued to  monitor the project, conducting a follow-up inspection of the site in July  2008. MCC’s consultant reported that the pipeline was completed and at a  location far better than the original location. The rerouting of the pipeline  is shown in figure 9.
MCC’s compact framework sets out conditions that the MCAs must meet  before receiving funds that act as incentives for establishing accountable  organizational structures to implement country compacts. We found that,  in all nine projects in the three countries in our review, MCC required that  the MCAs engage the services of a project manager or an implementing  entity to help the MCAs manage the infrastructure projects outlined in  their compacts before they received project funding. In some instances,  the MCAs contracted with a commercial project management consultant  to act as a project manager on the MCAs’ behalf. In other instances, the  MCA entered into a formal agreement with another government entity that  acted as the implementing entity. For example, for its road construction  projects, MCA-Georgia contracted with an international project  management firm.
MCC also ensures that the MCAs have accountable individuals, to meet  another condition for receiving project funding, to oversee the  management of large infrastructure projects. MCC requires the MCAs to  assign “project directors,” such as a roads director, to monitor  implementing entities and outside project management contractors. In  Georgia and Cape Verde—where the infrastructure projects reviewed  included roads and bridges, a pipeline, and a port project—we found that  MCC required the MCAs to have project directors for the different types of  projects. In addition, we found that MCC required the MCAs to use  independent construction supervisors to conduct oversight of day-to-day  construction, including overseeing construction progress and the actions  of the construction contractor to ensure compliance with contract  requirements. In the case of the pipeline project in Georgia, the  implementing entity acted as both the project manager and the  independent construction supervisor.
MCC also requires the MCAs to conduct oversight of their project  management units and projects through an MCA supervisory board  generally comprising high-level government officials and representatives  of the business sector and civil society. The board places additional high- level oversight and accountability on the performance of the project  management units, the projects, and MCA contractors. The supervisory  board must be briefed on challenges that require changes to the project  scope, contract cost, schedule, or contractor. MCC also works with the  MCAs’ supervisory boards to restructure projects when needed to keep  them within their budgets and compact time frames. The board is required  to approve changes that the MCA project management unit proposes and  decisions about hiring or replacing staff when performance and  accountability issues warrant a change. In one of the three countries we  reviewed, MCC took action when it had concerns about the effectiveness  of the MCA’s top-level management officer and worked with the  supervisory board to see that the compact country changed the leadership  of the MCA’s project management unit.

			MCC Uses Cross-Functional Teams to Oversee Projects

We found that MCC uses integrated cross-functional project teams— comprising headquarters’ IST and its independent engineering  consultants—to provide technical expertise and operational support to  MCC’s oversight and to the MCAs in implementing infrastructure projects.  MCC headquarters personnel who support oversight include contracting,  financial, legal, environmental, and engineering staff. MCC also has about  24 engineering and environmental consultants that it uses to support MCC  project oversight reviews.
On the basis of evidence contained in MCC’s independent engineers’  reports, MCC conducts reviews of project scope, cost, schedule, design  and specifications, contractor performance, and environmental and safety  issues. In cases where individuals must be moved and property acquired to  accommodate projects, MCC also conducts reviews to ensure that the  MCAs comply with MCC resettlement policies. In addition to conducting  technical reviews of projects, MCC independent consultants also report on  the performance of MCA project management consultants and  construction supervisors in conducting effective project and construction  management.

	Conclusions

MCC works in challenging and resource-poor countries and has provided  them with ownership and flexibility in the ways they can meet MCC’s  statutorily mandated requirement to ensure fiscal accountability and open,  fair, and competitive procurements. While the MCAs we examined have  made progress in implementing policies and procedures for financial  management, some gaps remain. Without additional specificity from MCC  in its financial guidance, the MCAs may continue to use inadequate  policies and procedures that do not reflect best practices in their internal  financial management and in monitoring the financial control activities of  their implementing entities. In addition, although the MCAs generally  adhered to MCC procurement requirements, absent their consistent  adherence to guidance on conducting and documenting price  reasonableness analysis, MCC will not be able to ensure that it receives  the best value in procurements. Finally, MCC is conducting oversight and  has taken steps to advance planning for infrastructure projects. However,  the process changes MCC has made will not address problems caused by  shortcomings in the designs that were not discovered until after contract  award and by cost estimates that did not sufficiently account for cost  escalation associated with project delays and construction prices.  Planning should be completed earlier so that the MCAs have more time to  conduct effective design reviews and independent cost reviews.  Otherwise, MCC risks funding MCA projects that cannot be completed  within the 5-year compact time frame and within the allotted compact  budgets. Earlier project planning and design and cost reviews will likely  add to the cost and time required for planning and design, but should  result in better designs, help to control costs, and reduce the challenges  encountered during implementation.

	Recommendations for Executive Action

To improve MCC’s financial controls, procurement practices, and contract  management, we recommend that the Chief Executive Officer of the  Millennium Challenge Corporation take the following five actions:  1.  Revise MCC guidance to MCAs to require that MCA FAPs include  comprehensive policies and procedures related to the MCAs’ financial  transactions that are in accordance with best practices covering  procedures such as authorizations, approvals, and key documentation  of all transaction types. 2.  Revise MCC guidance to MCAs to require that MCA FAPs incorporate  policies and procedures related to disbursements of the MCAs’ primary  project- or program-related expenses, including oversight procedures  and responsibilities for MCA personnel in charge of monitoring and  evaluating the implementing entities’ compliance with contract  agreements. 3.  Reinforce existing MCC guidance to MCAs on conducting and  documenting price reasonableness analyses. 4.  Establish a programmatic goal that MCAs conclude all project planning  efforts—to include MCC final approvals of the MCAs’ final feasibility  surveys, engineering surveys, environmental surveys, and resettlement  studies—prior to entry-into-force, but not later than the point at which  the MCAs issue contract solicitations.  5.  Require MCAs to obtain detailed reviews of project cost estimates—to  include the extent that risks to projects, such as cost escalation,  schedule delays, and other issues, have been considered—and of  project designs before contract solicitation for large construction  projects to better ensure that projects can be successfully bid and  built.

	Agency Comments and Our Evaluation

We received written comments on a draft of this report from MCC. In  commenting on the draft, MCC accepted GAO’s recommendations and  provided additional comments on some of our findings.
Regarding MCA financial controls, MCC accepted our recommendations  and commented that some MCA travel and payroll policies did not require  the documentation we looked for to verify expenses. However, without  such documentation, we could not verify that travel actually occurred for  the travel transactions or that employees worked the necessary number of  hours for the payments made. Finally, MCC clarified certain aspects of the  GRDF investment guidelines; accordingly, we have adjusted the report to  reflect this clarification.
Regarding procurement, MCC accepted our recommendation and stated  that it had now incorporated its existing guidance on price reasonableness  analyses and contractor eligibility into MCC Procurement Guidelines so  that they carry the weight of MCC policy. Furthermore, MCC procurement  directors have been directed to reject any evaluation reports received  from an MCA that do not include these determinations.
Regarding infrastructure planning and oversight, MCC stated that it  accepted our recommendation that they conclude planning efforts prior to  contract solicitation—ideally, prior to entry-into-force of the compact— and modified its processes beginning in fiscal year 2008 to require  completion of feasibility studies and environmental assessments before  compact signing. We are in the process of assessing the specific actions  MCC has taken that address our findings.
MCC also accepted our recommendation that they obtain detailed reviews  of project designs and cost estimates but stated that it conducts a number  of reviews in due diligence and prior to the release of design and bidding  documents. While MCC conducts reviews, our assessment of the compacts  we examined, all of which had significant design, cost, and schedule  issues, indicates that the project review process can still be improved. For  example, MCC could expand its reviews by soliciting specialized project  management experience in risk analysis and scheduling.
We have reprinted MCC’s comments, with our responses, in appendix IV.  We also incorporated technical comments from MCC in our report where  appropriate.
We are sending copies of this report to interested congressional  committees, the Chief Executive Officer of the Millennium Challenge  Corporation, and other parties. In addition, this report will be available at  no charge on the GAO Web site at http://www.gao.gov.
If you or your staffs have any questions about this report, please contact  David Gootnick at (202) 512-3149 or gootnickd@gao.gov. Contact points  for our Offices of Congressional Relations and Public Affairs may be found  on the last page of this report. GAO staff who made major contributions to  this report are listed in appendix V.

Appendix I: Objectives, Scope, and Methodology

The fiscal year 2008 Consolidated Appropriations Act, Public Law 110-161,  mandated that GAO review the financial controls and procurement  practices of the Millennium Challenge Corporation (MCC) and its  accountable entities and the results achieved by its compacts. For the  purpose of this initial engagement, we focused on financial controls and  procurement practices for MCC compacts and on the development,  implementation, and oversight of contracts and projects at MCC and its  accountable entities.
We assessed MCC’s overall framework for financial controls, procurement  practices, and contract management through a detailed review of these  areas at three MCC compact countries: Honduras, Georgia, and Cape  Verde. While we cannot statistically project our findings to other countries  on the basis of these three countries, we chose these countries because  they totaled approximately 39 percent of MCC’s disbursements at the end  of fiscal year 2008. Intervening political events in other MCC countries also  affected the selection of countries.
To determine whether MCC’s financial controls help ensure accountability  over compact country funding, we obtained an understanding of MCC  financial requirements imposed on the country when compact agreements  were signed. MCC delegates much of the development and implementation  of internal control procedures and the fiscal oversight of its federal  funding to the country’s Millennium Challenge Account (MCA)  accountable entity. As a result, we focused our work on policies and  procedures at the three selected MCAs, including internal controls related  to their financial transactions and on MCC’s oversight of this process.
To assess the extent to which the MCAs had adequate policies and  procedures for managing their operations effectively, we used MCC’s  financial guidance and our Standards for Internal Control in the Federal  Government. Specifically, we (1) obtained relevant policies and  procedures as documented in the country Fiscal Accountability Plan  (FAP) and determined whether the policies were comprehensive;   (2) interviewed each MCA’s financial management staff to discuss  additional control procedures not documented in the country FAP or other  agreements; and (3) obtained additional documents, such as compact  agreements or service contracts, to determine whether additional internal  control information was included in these agreements. While our internal  control standards for the federal government are not binding for the  MCAs, they are a statement of best practices, and adherence to these  standards provides reasonable assurance that fraud, waste, abuse, and  mismanagement will be prevented or promptly detected.
To determine the extent to which the MCAs were effectively implementing  their internal controls as described in their FAPs’ policies and procedures  or other agreements, we gained an understanding of each MCA’s overall  financial management structure, and policies and processes by  interviewing MCA officials. Specifically, we:    Conducted walk-throughs and interviews with each MCA’s financial  management officials to identify relevant policies and procedures,  including key internal control activities for its financial transactions.
Performed tests of those control activities that we considered key in  providing reasonable assurance that transactions were correct and proper,  including segregation of duties related to the approval and authorization of  payments: dividing key duties and responsibilities among different  people to reduce the risk of error or fraud,    adequate supporting documentation: supporting the disbursements  through documentation to provide a basis for reconciling payment  amounts and authorizations to disbursement of funds,   proper execution of transactions and events: authorizing and executing  transactions by persons acting within the scope of their authority to  ensure that only valid transactions are initiated and approved, and   physical control over assets: securing assets and periodically counting  and comparing totals with control records.
We tested MCA transactions using data collection instruments (DCI) and  criteria described in the MCA’s policies and procedures as documented in  the MCA’s FAP or other documentation, such as project- or program- related contracts or agreements with third parties hired to manage or  oversee implementation of the project activities. If transactions were not  properly supported, we queried MCA officials to determine whether the  required documentation could be located.
To perform tests of internal controls included in the MCA’s policies and  procedures, we selected stratified random samples of disbursement  transactions for fiscal years 2007 and 2008. Given the variation in the  programs and projects conducted by the three countries selected, we  divided our work into strata that included operational expenses such as  travel; payroll; and project-related expenses, such as credit lines,  resettlements, grants, and investments. See table 2 for additional details on  the number and dollar value of transactions tested.
The MCAs often contract out the management or oversight of some  program- or project-related activities to implementing entities that have  more specialized knowledge or needed skills. For some of these  implementing entities, we selected additional transactions and tested  controls at their site to determine whether transactions were properly  documented and to assess the MCAs’ oversight of those activities. We  selected items from the country’s inventory list to test whether the MCA  had established an adequate system to ensure physical control over assets.  Disbursements for each country were randomly selected within each  stratum to ensure an objective selection.
Our initial methodology for transaction testing included the selection of a  statistical sample of transactions at each MCA; however, as our countries  changed, we found that inconsistencies between the countries’ financial  management reporting systems did not always allow us to select an  individual transaction to trace. For example, certain MCA systems  processed transactions, such as payroll, in a batch process, and a payment  selected from the database could be an entire monthly payroll, rather than  a payment involving an individual. In addition, for some credit line and  resettlement programs, the MCAs transferred large balances to credit  institutions that would be divided and paid to specific recipients. In these  cases, we selected additional transactions to test other key controls that  could not be tested with the large transfers. Because of this limitation, we  decided to use a random sample selection and to present results for the  selected samples, rather than projecting to the entire population.
We assessed the reliability of the financial data provided by the three  countries we reviewed by (1) performing electronic testing of required  data elements, (2) reviewing existing information about the data and the  system that produced them, and (3) interviewing agency officials  knowledgeable about the data. We determined that the data were  sufficiently reliable for the purposes of this report.
To describe MCC’s procurement framework and its evolution, we  reviewed MCC compact agreements, current and previous editions of  MCC’s procurement guidelines, procurement agreements, procurement  guidance papers, and implementation letters. We did not independently  assess the adequacy of the World Bank procurement guidelines upon  which MCC procurement guidelines are based. We assumed after  discussion with internal GAO procurement experts that fully implementing  World Bank/MCC guidelines would constitute open, fair, and competitive  procurement.
We also interviewed MCC officials in Washington, D.C., and compact  countries, and MCA procurement officers and procurement agents in  compact countries, to further our understanding of how MCC and the  MCAs have managed and overseen procurement activities and to identify  any issues with implementing MCC’s framework in practice. We analyzed  current and previous editions of MCC guidance and agreements to identify  how MCC’s requirements and procedures have evolved. We further  reviewed MCC interim activity reviews and audits of the MCAs to  document MCC’s post-review and audit processes.
To assess the adherence of MCA compact countries to MCC’s procurement  framework, we examined a stratified random sample of completed fiscal  year 2008 MCA entity procurements for our three focus countries. As  shown in table 3, we divided these procurements into the following four  strata: (1) sole source procurements, (2) the five largest dollar value  procurements, (3) procurements requiring MCC review, and   (4) procurements that did not require MCC review. We identified the  universe of procurements in each country using MCC’s Procurement  Performance Report (PPR) for each country. To ensure that the PPR  sufficiently reflected the procurements in each country, we interviewed  staff at the MCAs and checked reported procurement dates and  descriptions in the files against those reported in the PPRs. We found a  high degree of accuracy in the data reported in the PPRs, which provided  us with reasonable assurance that the PPRs were sufficiently reliable for  the purposes of our analysis.
We reviewed all sole source procurements in each country during fiscal  year 2008 because of their high risk for abuse, as outlined in the U.S.  Agency for International Development, Office of Inspector General’s Fraud  Indicators. We also reviewed the five largest dollar value procurements in  each country because of the dollars involved and their importance for  compact implementation. We divided the remaining procurements into  those with and without MCC review to determine whether MCC  involvement in procurement changed the level of compliance with MCC’s  guidelines. Because of the small number of procurements with MCC  review in each country, we selected all of these procurements in our  sample. In addition, because the number of procurements with MCC  review was so small relative to those without MCC review in each country,  we could not make a valid comparison between the two strata. In Cape  Verde and Honduras, we selected a stratified random probability sample  for each country large enough to generate percentage estimates with a  margin of error of at most plus or minus 10 percentage points at the   95 percent confidence level. We selected 63 of the 105 procurements from  Honduras and 47 of the 72 procurements from Cape Verde. With this  probability sample, each procurement in the population had a known,  nonzero probability of being included in the sample. Each procurement in  the sample was subsequently weighted in the analysis to account  statistically for all procurements in the population, including those that  were not selected. All percentage estimates from these samples presented  in this report have a margin of error of plus or minus 10 percent or less,  unless otherwise noted.
In Georgia, we reviewed all 28 procurements conducted in fiscal year 2008  because the relatively small number of procurements conducted in the  country over that time period made sampling unnecessary.
We examined the selected procurements using a DCI to determine  whether procurements were conducted according to MCC’s procurement  criteria. We assessed the MCA procurement process on compliance with  MCC procurement guidelines, as outlined in table 4.
We reviewed each file to assess whether it contained documentation that  the MCA had followed the required procedures. If required documentation  was not present in the file, we queried MCA officials to determine whether  the required document could be located elsewhere. We did not, however,  assess the quality of these required documents. In addition, our review  included only a limited number of procurements that were completed  following the introduction of MCC’s implementation model and Schedule  B approvals matrix. Therefore, our findings do not assess the effectiveness  of the implementation model.
In addition to the statistical selection of the procurements for review using  our DCI, we also judgmentally selected procurements whose reporting in  the PPR exhibited potential indicators of fraud, such as multiple contract  awards to a single entity, contracts awarded in multiple lots where  awarding as one lot would have required additional reviews, and contracts  awarded on a sole source basis. Some of these procurements were  selected for inclusion in our DCI analysis; the remainder were assessed  through interviews or document review to determine whether these  potential fraud indicators could be explained by other circumstances. In  addition, because canceled procurements represent lost time and effort  spent in developing the procurement or contract, we identified canceled  procurements in each country in fiscal year 2008. Although we did not do a  formal review of these procurements using the DCI, we interviewed the  MCA staff about these procurements to understand the reasons for  cancellation.
To assess the time frames required for MCC procurements, we identified  key procurements in each of our three focus countries. We defined key  procurements as those with a contract award amount greater than or equal  to $1 million for goods, works, or consultant services. We then reviewed  Procurement Implementation Plans for those procurements, where  available, and compared the time frames anticipated in those plans with  the actual procurement time frames provided to MCC in the PPR to  determine the difference between planned and actual time frames. We  further reviewed associated reporting documents and discussed these key  procurements with the MCA procurement directors to determine the  causes for any delays in these key procurements.
To assess MCC’s development, implementation, and oversight of  contracts, we examined the three infrastructure construction contracts  with the largest dollar value and the largest consultant services contract  associated with construction services in each of our three sample  countries.
We reviewed the following MCAs:    Honduras: The Honduras compact called for the improvement of  approximately 110 kilometers of the CA-5 highway comprising the “North  Segment” (sections 3 and 4) and a “South Segment” (sections 1 and 2),  both of which are located north of Tegucigalpa. We reviewed three MCC- funded road construction contracts associated with the CA-5 highway  project in Honduras. The contracts are identified as roadway sections  2, 3, and 4, with contract awards of $48.4 million, $16.2 million, and   $23.2 million, respectively. Other roadway sections of the highway are  being improved by other funding sources. (See fig. 10.)
Georgia: We reviewed one MCC-funded construction contract, awarded  for 8.7 million Georgian Lari—valued at more than $6.2 million at the  time—for phase II of the North-South Gas Pipeline Rehabilitation Project  at nine sites along the pipeline. (See fig. 11.)
We also reviewed two road construction contracts associated with the  Samtskhe-Javakheti Roads Rehabilitation Project—for rehabilitation of  approximately 171 kilometers of roads in the Samtskhe and Javakheti  regions—that were awarded under what is identified as the “2nd  procurement.” The first contract under that procurement was awarded in  March 2008 for $65.0 million; the second was awarded in May 2008 for  $33.1 million. An earlier procurement effort—identified as the “1st  Procurement”—intended to award three contracts to rehabilitate 245  kilometers was canceled in June 2007 after contractor bids exceeded the  available budget. When Georgia received an additional $100 million in  compact funding, it allowed for a “3rd procurement” that enabled MCA- Georgia to award three additional road contracts, two in April 2009 and  the third in June 2009, totaling about 46 kilometers. (See fig. 12.)
Cape Verde: In the case of Cape Verde—which consists of 10 separate  islands—we reviewed three contracts valued at more than $56.6 million to  improve Cape Verde’s port, roads, and bridges. The contract for the phase  I port project, to upgrade and expand the port of Praia on Santiago Island,  was awarded for $42.3 million. The roads contract, to rehabilitate five  roads on Santiago Island, was awarded for more than $11.0 million. Two of  five roads were eliminated (identified as roads 3 and 5) from the contract  scope due to cost increases. The contract for reconstruction of four  bridges, on Santo Antão Island (not shown), was awarded for roughly   $3.3 million. (See fig. 13.)
We also examined MCC’s use of its independent engineers in supporting  MCC’s oversight efforts related to the previously discussed infrastructure  contracts and projects. To conduct our work, we reviewed project reports  prepared by (1) the MCAs, (2) MCA implementing entities, (3) MCA  project management consultants, (4) MCA independent construction  supervisors, (5) MCA construction contractors, (6) MCC independent  engineers, and (7) MCC. Those project reports generally report on project  status, including scope, cost, schedule, engineering, environmental, and  health and safety issues. To further understand and corroborate these  reports, we interviewed MCC officials in Washington, D.C., and MCC  resident country directors working in the compact countries. We also  interviewed MCA management in the compact countries, MCA project  management consultants, MCA independent construction supervisors,  MCA design engineers, and MCA construction contractors.
We compared MCC’s oversight with GAO’s Executive Guide: Leading  Practices in Capital Decision-Making to assess MCC’s activities against  best practices. Our assessment of planning, design, schedule, and cost  status of projects was informed by our review of MCC and MCA reports  and those of their contractors. Our evaluation of the sufficiency of MCC’s  oversight documents was guided by lessons learned from past GAO work  on infrastructure projects and industry best practices. Lastly, we made  field visits to select projects in Honduras and Georgia to confirm some of  the information reported within contractor progress reports. Because a  recent U.S. Agency for International Development, Office of Inspector  General, audit of Cape Verde compact implementation included field visits  to projects, our findings for this objective did not rely on a site visit in  Cape Verde.
We conducted this performance audit from June 2008 to October 2009 in  accordance with generally accepted government auditing standards. Those  standards require that we plan and perform the audit to obtain sufficient,  appropriate evidence to provide a reasonable basis for our findings and  conclusions based on our audit objectives. We believe the evidence  obtained provides a reasonable basis for our findings and conclusions  based on our audit objectives.

Appendix II: Reductions in MCC Procurement Review Thresholds

MCC’s most recent version of its procurement guidelines, released in July  2008, established a 2-tier system of approvals that allows for less MCC  review of procurement actions. Schedule A under these guidelines  represents the initial level of review for most countries and is a reduction  in review from all previous versions of the procurement guidelines. As  countries gain experience and MCC gains confidence that they are  implementing MCC procurement guidelines, MCC permits the country to  transition to Schedule B.
MCC uses professional judgment and its implementation model framework  to identify countries that may graduate from Schedule A to Schedule B.  Among other things, the framework addresses the MCA’s (1) capability  and experience, (2) successful execution of previous procurements,   (3) appropriate and qualified procurement advisors, and (4) maturity of  the compact.
Schedule A reduced the level of MCC approvals in 20 of 61 potential  procurement actions, entirely eliminating MCC review in 9 cases. In 13 of  61 potential procurement actions, Schedule B reduced the level of MCC  review below that of Schedule A—in all 13 cases by removing MCC review  altogether. As of October 2008, five countries have transitioned to  Schedule B.

Appendix III: Documentation of Compliance with MCC Procurement Criteria

This appendix provides a more detailed breakout of the results of our  procurement requirement testing contained in table 1 of this report.

Appendix IV: Comments from the Millennium Challenge Corporation

Following are GAO’s comments on the Millennium Challenge  Corporation’s letter dated October 23, 2009.

	GAO Comments

1.  In its comments, MCC pointed out that for the purposes of travel,  MCA-Honduras and MCA-Cape Verde generally pay travelers a daily  subsistence allowance for each day of the travel to cover travelers’  expenses related to lodging, meals, and incidental expenses. The  allowance is calculated using specified per diem rates. As MCC stated,  not every country requires the submission of receipts for such  expenses. However, if the MCA does not receive such supporting  documentation for travel expenses, the MCA has no proof that the  travel actually occurred. As a case in point, even though Cape Verde’s  FAP lists a number of supporting documents that travelers should  provide after returning from a trip, we found that 19 of the 30 travel  transactions we tested lacked such documentation. Therefore, we  could not confirm that travel was completed. Furthermore, the  required trip reports were not always provided in Honduras and Cape  Verde to substantiate that the travel occurred. 2.  MCC noted that the FAP for MCA-Honduras calls for a monthly payroll  sheet to confirm payments to staff. However, we found that the  information on the monthly payroll sheet only included personnel  information, such as names and payment amounts. Without individual  time sheets, we were unable to verify that employees worked the  necessary number of hours for the payments made. We view this as a  key control in the payroll process. Additionally, MCC developed a FAP  template in November 2008 that provides examples of how controls  could be structured. For example, the template requires employees to  submit time sheets for supervisory approval. Taking actions to adopt  these procedures would help ensure the propriety of these  transactions. 3.  MCC pointed out that the Georgia Regional Development Fund  investments met guidelines that permit such investments. MCC also  stated that one investee was not a subsidiary of a larger company that  fell outside of the investment guidelines. Based on MCC’s comments,  we reevaluated the evidence previously provided and agree with MCC  regarding the subsidiary, but reconfirmed the principal place of  business for the two companies as Tbilisi. We modified footnote 31 to  reflect this information. Also, as stated in footnote 31, the fund  manager used calculation methods that made it difficult to determine  whether one of the businesses complied with the investment  guidelines. Having clear supporting documentation and guidance are  critical to ensuring that these investments, and the other areas we had  concerns with, adhere to the guidelines. We appreciate that MCC  stated it plans to work with the MCAs to strengthen compliance with  documentation requirements where needed as part of a review of the  FAPs. 4.  MCC reports that, as of fiscal year 2008, it requires the completion of  full feasibility and environmental assessments, including resettlement  plans, before compact signature. We support MCC’s efforts to take  action to finalize those project planning activities prior to compact  signing and are in the process of assessing the specific actions MCC  has taken to implement the recommendation. According to MCC, while  it instituted the process change in fiscal year 2008, the revised process  has thus far only been applied to the Senegal compact, signed in  September 2009, and to due diligence for a proposed compact with  Moldova. 5.  We recognize that MCC is using its independent engineers, the MCA’s  project consultants, and the compact country’s project stakeholders to  review designs. However, our assessment of the compacts we  reviewed, all of which had significant design issues, cost growth, and  schedule delays, indicates that the project review process can still be  improved before contract solicitation. For example, MCC could  expand its review of final designs, cost estimates, and risk  assumptions by soliciting services of a technical specialist with project  management experience in project risk analysis and project  scheduling. Based on the projects we reviewed and the problems we  found, we believe that outside expertise would benefit the project  review process and avoid the expense of addressing issues related to  the lack of planning.

Appendix V: GAO Contact and Staff Acknowledgments

	Staff Acknowledgments

In addition to the person named above, Emil Friberg, Jr. (Assistant  Director), Mike Armes, John Bauckman, Lynn Cothern, Lucia DeMaio, Tim  DiNapoli, Mattias Fenton, Jordan Hamory Holt, Elizabeth Martinez,  Heather Rasmussen, Donell Ries, Michael Simon, Susan Tieh, Patrick  Tobo, and Matt Wood made key contributions to this report. Also, Jehan  Abdel-Gawad, Jim Ashley, C. Etana Finkler, Ernie Jackson, Amanda Miller,  Charlotte Moore, Josh Ormond, and Jena Sinkfield provided technical  assistance.

Summary:
Why GAO Did This Study

Established in January 2004 with a mission to reduce poverty through economic growth, the Millennium Challenge Corporation (MCC) has committed $6.9 billion for compacts with 19 developing countries. MCC vests compact management with accountable entities in recipient countries, called Millennium Challenge Accounts (MCA). MCAs, with guidance from MCC, allocate resources, oversee and implement a financial plan, approve expenditures and procurements, and implement compact projects. This report, directed by the fiscal year 2008 Consolidated Appropriations Act, assesses MCC and MCA (1) financial controls; (2) procurement practices; and (3) development, implementation, and oversight of contracts and projects. GAO focused on financial and procurement transactions and projects at MCAs in Honduras, Georgia, and Cape Verde, countries with high disbursement totals as of the end of fiscal year 2008.

What GAO Found

As required by MCC guidelines, each of the three MCAs GAO reviewed had developed a Fiscal Accountability Plan (FAP) that documented policies and procedures related to internal control, such as funds control, documentation, and segregation of duties. However, each of the FAPs GAO reviewed, in place as of the end of fiscal year 2008, had gaps in certain areas, such as incomplete policies and procedures for some expenses. Although MCC agreements require that each country prepare a FAP, the initial guidance MCC provided to the three MCAs was general and did not contain sufficient information to help the countries develop sound internal control structures. For example, guidance stated that records must support transactions and that procedures must incorporate segregation of duties. However, specific guidance on payroll, travel, and inventory controls would have helped the MCAs develop comprehensive policies. To address this, MCC developed a FAP template in November 2008, but MCC allows the MCAs flexibility and does not require them to implement the template's policies and procedures. In addition, GAO identified a significant number of the transactions tested that lacked adequate supporting documentation or were not properly approved by management. These deficiencies increase the risk of fraud, waste, and abuse of MCC program funding. MCC has increased standardization of the MCA procurement guidelines, which were initially developed on a country-by-country basis. The MCAs GAO assessed generally adhered to MCC's procurement guidelines. GAO found that, in some cases, MCAs did not document a price reasonableness analysis of winning bids. GAO also found that when MCAs delegated procurement responsibility to outside entities, the procedures used by these entities were generally consistent with MCC's procurement framework. MCC conducts oversight of MCA infrastructure contracts and projects, but insufficient planning of projects during compact development and cost escalation has undermined project implementation. As a result of insufficient planning, designs had to be revised, and project scopes have been reduced. Significant delays to project schedules--the result of undertaking additional planning and design--further compounded the escalation in construction costs experienced on projects and contributed to the restructuring of projects. For example, two of five planned roads in Cape Verde were eliminated, in part due to insufficient design and cost increases. In addition, the schedule for construction of the remaining three roads was extended by 11 months. MCC has worked with the MCAs to significantly restructure projects to keep them within their budgets and 5-year compact time frames. MCC also has taken steps to provide increased assistance to MCAs to help them conduct better planning for projects. However, these changes alone will not address the problems projects encountered with design development and cost escalation. Industry best practices and past GAO work have shown that conducting design reviews and updating cost estimates prior to contract solicitation help to ensure that projects can be successfully bid and constructed.