Background

		Management of MCC Programs

MCC, a government corporation, is managed by a chief executive officer  (CEO), whom the President appoints with the advice and consent of the  Senate, and is overseen by a Board of Directors. The Secretary of State  serves as board chair, and the Secretary of the Treasury serves as vice- chair. MCC’s model is based on a set of core principles deemed  essential for effective development assistance, including good  governance, country ownership, focus on results, and transparency.  According to MCC, country ownership of an MCC compact occurs when a  country’s national government controls the prioritization process during  compact development, is responsible for implementation, and is  accountable to its domestic stakeholders for both decision making and  results.
In keeping with the MCC principle of country ownership, MCC enters into  a legal relationship with partner country governments. During the 5-year  compact implementation period the partner government vests  responsibility for day-to-day management, including monitoring and  evaluation of the progress of compact projects, to accountable entities in  recipient countries (the entities’ name is usually formed from “MCA” plus  the country’s name—for example, MCA-Cape Verde). MCC provides the  frameworks and guidance for compact implementation, monitoring, and  evaluation that MCAs are to use in implementing compact projects.
To promote transparency, MCC makes information available on its Web  site throughout the life of a compact, such as project budgets and  descriptions, projected outcomes, and quarterly updates on financial and  program progress. This transparency enables stakeholders to review the  information that contributed to MCC investment decisions, track program  progress against targets, and, once programs reach completion, see  clearly which programs did or did not achieve their goals.

		MCC Compacts in Cape Verde and Honduras

The Cape Verde and Honduras compacts were among the first countries  that MCC selected as eligible for assistance and the first to reach the end  of the 5-year implementation period. The two compacts varied in the type  and size of projects funded, but each devoted more than half of compact  funds to infrastructure projects such as roads and ports. Each compact  also included a smaller agricultural development project such as farmer  training or construction of agricultural infrastructure.
MCC and the government of Cape Verde signed a 5-year compact in July  2005, which entered into force in October 2005 and ended in October  2010. The compact, for which MCC committed $110.1 million in funding  at compact signature, consisted of three projects. Figure 1 shows Cape  Verde compact funding by project at signature and compact end.
Table 1 shows the Cape Verde projects’ planned activities and funding  allocations at compact signature.
MCC and the government of Honduras signed a 5-year compact in June  2005, which entered into force in September 2005 and ended in  September 2010. The compact, for which MCC committed $215 million in  funding at compact signature, consisted of two projects. Figure 2 shows  Honduras compact funding by project at signature and compact end.
Table 2 shows the Honduras projects’ planned activities and funding  allocations at compact signature.
Each fiscal year, MCC identifies countries that are candidates for  assistance. MCC uses per capita income data to identify two pools of  candidate countries: low-income and lower-middle-income countries.  MCC’s Board of Directors then uses quantitative indicators to assess a  candidate country’s policy performance to determine eligibility. If the  policy performance of a country declines during implementation of a  compact, the board can suspend or terminate the compact.
After MCC selects a country as eligible, the country begins a four-phase  process that can lead to a compact’s entry into force: (1) the eligible  country develops and submits a compact proposal; (2) MCC conducts a  due diligence review of the proposed projects; (3) MCC and the country  negotiate and sign the compact after MCC board approval; (4) MCC and  the country complete preparations, including developing disbursement  plans, for the compact to enter into force. After the compact enters into  force, compact implementation begins, and funds are obligated and  disbursed. Following MCC’s internal reorganization in October 2007,  MCC revamped its compact development process to include greater initial  engagement with eligible countries and assistance to countries in  conducting needed studies and establishing management structures.
MCC compacts are to be designed so that projects are sustainable over  20 years. During the compact development process, MCC is to assess  the mechanisms in place to enhance sustainability, including the policies  and practices that will enable MCC investments to continue to provide  benefits. For instance, as part of compact proposals submitted to MCC,  partner countries are required to identify risks to project sustainability and  describe measures needed to ensure that project benefits can be  sustained beyond the period of MCC financing. Partner countries are to  consider a number of issues affecting sustainability, including  environmental sustainability; institutional capacity for operations and  maintenance; and for proposed infrastructure projects, recent funding,  performance, and expected expenses for operations and maintenance.  Furthermore, during compact implementation, MCC tracks progress  against key policy reforms and institutional improvements that were  included in the compact to enhance project impact and sustainability.

		MCC Monitoring and Evaluation Framework and Economic Rate of Return Analysis

For each compact, countries are required to create a monitoring and  evaluation plan, which is one aspect of MCC’s efforts to assess a  compact’s results. MCC developed guidelines in 2006 to assist eligible  countries in the preparation of the monitoring and evaluation plan and  issued an updated policy in 2009. According to MCC’s 2009 monitoring  and evaluation policy, the policy applies to new or revised monitoring and  evaluation plans developed after issuance of the policy in May 2009.
According to MCC’s 2006 guidelines for monitoring and evaluation plans,  performance monitoring helps track progress toward compact goals and  objectives, as well as serves as a management tool. In addition,  according to MCC’s 2009 monitoring and evaluation policy, the plan’s  monitoring component outlines the performance indicators by which  compact results will be measured. The plan’s monitoring component also  establishes a performance target for each indicator and the expected time  the target will be achieved. For example, the number of kilometers  completed may be an indicator for road construction projects and a  numeric target is set to be completed by compact end.
In response to MCC’s experiences with early compacts, MCC has learned  that plans may change during compact implementation and that it may be  necessary to modify programs after the execution of a compact  agreement. Recognizing that MCC has a responsibility to ensure that  program modifications are promptly and transparently assessed based on  adequate due diligence and consultation, in August 2010, MCC adopted a  policy to establish a single process for evaluating and approving such  modifications. The agency updated this policy in March 2011.
A rescoped compact project or activity refers to any change in the scope  or substance of a compact program, including the modification, addition  or elimination of a project, activity or subactivity that may entail potential  alterations to the intended beneficiary group. In response to such  changes, MCC allows for modifications to associated indicators and  targets. According to MCC policy issued in 2009, indicators in the  monitoring and evaluation plan can be modified by (1) adding a new  indicator, (2) removing an existing indicator, or (3) changing a descriptive  quality of an existing indicator. The policy also outlines several reasons  for adding or changing indicators. For instance, an indicator may be  removed because a change to the project renders the indicator irrelevant  or the cost of collecting data for an indicator outweighs its usefulness.  End-of-compact targets associated with these indicators can also be  changed, including increasing or decreasing targets. MCC’s 2009 policy  also outlines specific circumstances under which targets may be  changed, including changes in scope of the activity or exogenous factors  such as natural disasters or political turmoil. Ultimately, the justification for  deleting or modifying an indicator or target must be adequately  documented in revised monitoring and evaluation plans.
Figure 3 shows a timeline of the MCC monitoring and evaluation plans for  the Cape Verde and Honduras compacts. For both countries, only final  monitoring and evaluation plans, issued in October and December 2010  for Cape Verde and Honduras, respectively, were subject to MCC’s 2009  monitoring and evaluation policy.
MCC hires independent researchers to evaluate the impact of compact  projects, and the monitoring and evaluation plan outlines aspects of  planned impact evaluations, including questions, methodologies, and data  collection. These analyses compare projects’ final results with an  estimate of what would have happened without the project, measuring  changes in individual, household, or community income and well-being  that result from a particular project.
During its due diligence review of each compact proposal, MCC  analyzes proposed projects’ estimated impact on the country’s economic  growth and poverty reduction. Specifically, MCC calculates a projected  economic rate of return (ERR)—that is, the expected annual average  return to the country’s firms, individuals, or sectors for each dollar that  MCC spends on the project. In calculating project ERRs, MCC uses  information such as MCC’s expected annual expenditures for the project  and the projected annual benefits to the country. In calculating expected  project benefits, MCC projects the sustainability of investments over a  relatively long term, typically 20 years, and includes assumptions about  the probability that necessary maintenance will be completed. MCC  establishes a minimum acceptable ERR, referred to as a hurdle rate, that  compact projects should achieve to be eligible for funding. It uses this, as  well as other information gathered during the due diligence process, to  inform its internal decisions to fund proposed projects and compacts.
According to MCC’s 2006 guidelines for monitoring and evaluation plans,  the economic analysis links to the development of indicators and targets  for monitoring compact results. Furthermore, according to MCC’s 2009  policy on monitoring and evaluation of compacts, monitoring and  evaluation plans should be directly linked to economic analyses. The  variables from the ERR analysis of benefit streams should be used as  performance indicators and targets in the monitoring and evaluation plan.  MCC’s 2009 policy also states that when MCC is considering changes to  targets that are linked to the ERR analysis, modified targets should be  analyzed to assess whether they maintain the integrity of the original  ERR. If the new ERR is below the minimum acceptable ERR for the  compact, the target change will require additional MCC approval.

		MCC’s Project Management and Quality Assurance Framework for Infrastructure Projects

MCC’s implementation process for infrastructure contracts and projects  requires that the MCAs have individual project directors—for example, a  roads director—who oversee the activities of outside implementing  entities, project management consultants, design engineers, independent  construction supervisors, and project construction contractors. In  general, MCAs deliver infrastructure projects through a design-bid-build  approach in which a design engineer develops technical plans and  specifications that are used by a construction contractor, hired under a  separate MCA procurement action, to build the works.
Independent construction supervisors contracted by the MCA conduct  oversight of day-to-day construction and the activities of the project  construction contractors to ensure compliance with contract requirements.  Independent construction supervisors play an important role in ensuring  construction quality by performing such tasks as approving construction  materials, overseeing testing, and inspecting completed work. In  addition to MCA’s independent construction supervisor, MCC employs its  own independent engineering consultants to monitor progress of the  construction works as managed by the MCA and to assess its quality.

	Performance Targets and Sustainability Issues

MCC met some key original targets and many of its final targets for the  Cape Verde and Honduras compacts. Additionally, MCC took steps to  provide for the sustainability of the projects, but the governments of both  Cape Verde and Honduras may have difficulty maintaining the  infrastructure projects in the long term due to the lack of funding, among  other challenges.

		Cape Verde: MCC Altered the Scope of Its Three Projects, Meeting Some Key Original Targets and Many Final Targets

MCC rescoped each of the three projects under the Cape Verde compact,  reducing some key targets. MCC met or exceeded some key original targets  and met many final targets by the compact’s end. Table 3 shows the  performance results for key indicators for the Cape Verde compact projects.  For more detail on the Cape Verde compact results, see appendix II.
Port of Praia. MCC disbursed $54.9 million to fund reconstruction of a  wharf, a new container yard, and a new access road. MCC and MCA- Cape Verde reduced the activity’s original scope as a result of inaccurate  early planning concerning design details and construction materials that  led to cost increases and implementation delays. They split the activity  into two phases, with MCC funding the first and the Cape Verde  government funding the second. The first phase of construction  represents about one-third of the total expected cost of both phases of  port construction, and nearly 100 percent of the works for phase 1 were  completed by compact end. MCA-Cape Verde established a  management structure consistent with MCC’s requirements to ensure  work met quality standards and functions as intended. The Cape Verde  government is funding construction of the second phase—expansion of  another wharf and construction of a new breakwater. Figure 4 shows the  locations and photographs of the two phases of the port activity.
Roads and bridges. MCC disbursed $27.7 million to fund the  rehabilitation of three roads and construction of four bridges. MCC’s  original targets included the rehabilitation of five roads totaling 63  kilometers and four bridges. However, MCA-Cape Verde found that the  World Bank-funded designs were of poor quality and decided to revise  them to a higher standard, which led to increased costs. As a result of the  increased costs, MCC and MCA-Cape Verde reduced the scope of the  activity, and MCC exceeded the final target of 39.3 kilometers of road  rehabilitated. MCA-Cape Verde established a management structure  consistent with MCC’s requirements to ensure work met quality standards  and functions as intended.
Water management and soil conservation. MCC disbursed $6 million  to build water management infrastructure in three watersheds. MCC met  its original key target of constructing 28 reservoirs, and 40 percent of its  key original target and 76 percent of its final target for the volume of water  available. When environmental concerns were identified during  implementation, MCC rescoped the activity from a combination of wells  and reservoirs to reservoirs only. According to MCC officials and  stakeholders, rescoping and implementation delays reduced the amount  of water available by compact end.
Agribusiness development services. MCC disbursed $5 million for the  agribusiness development services activity. Midway through the compact  implementation period, MCA-Cape Verde determined that the Cape  Verde agricultural ministry lacked the capacity to train farmers. It hired a  contractor to train ministry staff, delaying implementation of the activity.  By the compact’s end, MCC achieved about 13 hectares under improved  or new irrigation, or 11 percent of the original target of 121 hectares and  12 percent of the final target of 111 hectares.
Access to credit. MCC disbursed $600,000 to make a credit line  available to microfinance institutions (MFI) for agricultural loans in the  three watersheds. The MFIs provided $617,000 in loans, or 103 percent,  of the key original and final target of $600,000.
Partnership to mobilize investment. MCC disbursed about $400,000 to  fund the creation of a credit bureau during the compact closeout period in  January 2011. However, MCC had initially allocated $5 million for this  activity but eliminated some funding and associated indicators when  MCC, the World Bank, and the government of Cape Verde were unable to  agree on the sectors that should receive investment.
Financial sector reform. MCC disbursed $1.4 million to fund technical  assistance to MFIs and support financial sector policy reforms, and  exceeded its key original and final target.

		Honduras: MCC Rescoped Some Activities under the Honduras Compact, Meeting Few Key Original Targets and Most Final Targets

MCC rescoped some activities under the Honduras compact, reducing  certain key targets. MCC met a key original target for the Honduras  compact, and met or exceeded most of its final targets by the compact’s  end. Table 4 shows the performance results for key indicators for the  Honduras compact projects. For more detail on the Honduras compact  results, see appendix III.
CA-5 highway. MCC disbursed approximately $90.3 million to  reconstruct four sections of a major highway in Honduras. MCC  completed two sections of highway, totaling about 50 kilometers, or 45  percent of the original compact target. The disbursement also partially  funded the reconstruction of a third section, which MCA-Honduras did not  complete by the end of the compact, and the relocation and design costs  for reconstruction of a fourth section of the CA-5 highway activity. MCA- Honduras established a management structure consistent with MCC’s  requirements to ensure work met quality standards and functioned as  intended. MCA-Honduras officials identified three factors that affected  their ability to achieve targets for this activity and resulted in a new  estimated cost of $219 million for all four sections of highway:    Contract bid amounts. Increases in project costs above initial estimates  as a result of unit price increases for items such as asphalt, as well as  additions to project scope and design, such as added travel lanes, were  a principal cause of cost increases, according to MCC officials.    Land acquisition costs. Due diligence studies conducted prior to  construction did not include the cost of the full-market value of  acquiring land and relocating households and businesses adjacent to  roads. The original allocation increased from $3.1 million to about  $20.2 million.    Contract modifications. Contract modifications raised construction  contract costs by about 6 percent primarily as a result of insufficient road  designs that required work beyond that included in the contract plans.
Remaining work on a third and a fourth sections is being funded with a  loan of about $130 million from the Central American Bank for Economic  Integration (CABEI) and is expected to be completed by the middle of  2012. Figure 5 shows the locations of the CA-5 highway activities.
Secondary roads. MCC disbursed $27.7 million to upgrade key  secondary roads. MCC met its revised target for the construction of 65.5  kilometers of secondary roads, 72 percent of the original target of 91  kilometers. According to MCA-Honduras officials, the scope was reduced  because updated estimated costs to upgrade the planned roads, after the  first contract was bid, exceeded original estimates by 80 percent. MCA- Honduras established a management structure consistent with MCC’s  requirements to ensure work met quality standards and functioned as  intended.
Weight control system. MCC disbursed almost $90,000 for a vehicle  weight control activity but eliminated the activity when the Honduras  compact was partially terminated due to Honduras’ political situation.
Farmer training and development. MCC disbursed approximately $26.6  million through the farmer training and development activity. MCC funded  the training of 6,029 farmers to harvest high-value horticultural crops,  meeting its final target of 6,000, or 82 percent of the original target of  7,340. According to MCC, this target was reduced to provide additional  technical assistance to those trained to increase the sustainability of the  assistance provided. A number of farmers stated that, as a result of the  training, they began growing different types of crops and using new  techniques, which led to larger volumes and higher quality, and, thus,  increased income.
Farm-to-market roads. MCC disbursed approximately $20.1 million to  upgrade farm-to-market roads. By the end of the Honduras compact,  MCC had funded the reconstruction of 495 kilometers of farm-to-market  roads—33 percent of the original target of about 1,500 kilometers and 99  percent of the final target of 499 kilometers. The farm-to-market roads  activity was rescoped because the Honduran quality, environmental, and  social standards on which the cost estimates were based did not meet  compact requirements, which increased the cost from $14,300 to $42,000  per kilometer. In addition, according to MCC officials, the change in  target to reconstruct fewer kilometers was based on MCC’s decision to  improve the durability and life of the roads by adding drainage structures  to reduce water damage, which increased the per-kilometer cost.
Farmer access to credit. MCC disbursed $12.8 million for the farmer  access to credit activity. The activity consisted of three components  designed to increase the supply of credit to rural borrowers—a $6 million  agricultural credit trust fund designed to provide loans to financial  institutions for rural lending, technical assistance to strengthen financial  and nonfinancial institutions, as well as expansion of the national property  registry. Initial lack of interest in the trust fund among traditional banking  institutions and a delay in demand for credit among farmers led MCA to  refocus the activity on smaller sources of credit and to expand  beneficiaries to nonprogram farmers, agribusinesses, and other  producers and vendors in the horticultural industry. By compact  completion, the trust fund had disbursed $10.7 million in loans—37  percent of the original target for the value of loans disbursed and 178  percent of the revised target.
Agricultural public goods grant facility. MCC disbursed $8.8 million to  fund 15 small competitive grants to enhance and accelerate the  development of market-based commercial agriculture. MCC exceeded a  key original and final target for this activity. Specifically, grants for  irrigation projects connected 967 farmers to the community irrigation  system—almost 250 percent of the target of 392 farmers.

		MCC Took Steps to Enhance Project Sustainability, but Cape Verde and Honduras Face Long-Term Challenges in Maintaining Infrastructure Projects

MCC took steps to provide for the sustainability of compact projects, but  certain activities in Cape Verde and Honduras face challenges to long- term sustainability. MCC’s efforts included establishing specific conditions  for compact funding disbursements. However, the governments of both  Cape Verde and Honduras may have difficulty maintaining infrastructure  projects in the long term due to the lack of funding, among other  challenges. In addition, decisions to limit certain design features present  challenges to maintaining rehabilitated roads. For noninfrastructure  projects, steps taken by MCC enhanced the sustainability of some  activities, but sustainability challenges remain for other activities.
Infrastructure project. MCC took steps to enhance the sustainability of  its infrastructure project investments by establishing specific conditions  for compact funding disbursements. However, as can be seen in the  following examples, in some cases the Cape Verde government has not  been able to meet or has partially met these conditions, calling into  question the long-term sustainability of the infrastructure project activities.    MCC included privatization of port operations as a condition of the  compact. The Cape Verde government agreed and developed a law  enabling the port authority to enter into contracts with private  operators. However, because the port is incomplete, the solicitation of  such contracts has been delayed. The second phase of construction  is expected to continue until March 2013. As a result, MCC no longer  has leverage over the government to ensure this condition is met.    MCC set a condition of the compact that the government of Cape  Verde would establish and adequately fund a road maintenance  account. In 2003, the government established a road institute that has  since developed its capacity to raise revenue for maintenance work.  However, government officials reported that the funds currently meet  less than 50 percent of road maintenance requirements.
In the case of the MCC-funded roads and bridges activity, decisions  made to control costs and limit the environmental impacts of  construction—such as reducing the amount of earthwork to remove steep  roadside slopes and installing or repairing fewer drainage structures— contributed to road maintenance requirements. The additional  requirements may stress the Cape Verde government’s ability to perform  maintenance. Figure 6 depicts areas of erosion damage along one of the  MCC-funded rehabilitated roads, and Cape Verde government-funded  repairs, that we observed during our visit.
Watershed management and agricultural support project. MCC took  steps to enhance the sustainability of activities completed under the  watershed management and agricultural support project. Although these  steps increased sustainability of certain activities, other activities face  challenges.
In January 2009, the government of Cape Verde established a water- fee structure for the three watersheds to fund infrastructure  maintenance to meet an MCC condition for funding disbursements.  MCA-Cape Verde also worked with community water management  organizations, now responsible for maintenance, to develop water  management plans. However, as of December 2010, water fees had  not yet been collected in one of the three watersheds.    The MCA-Cape Verde contractor took steps to promote the  sustainability of the agribusiness development services activity,  including helping to establish and train farmers associations and  developing training materials for the Cape Verde agricultural  ministry—which plans to continue training farmers. However, the  contractor reported that ministry field staff do not have time to train  farmers, given their workloads. According to the contractor, ministry  staff have multiple responsibilities, including involvement in multiple  donors’ agriculture-related projects.    MCA-Cape Verde determined that all MFIs performed well under the  access to credit activity, and MCC converted the loans to grants at the  end of the compact, which will sustain agricultural loan efforts for at  least 2 years.
Private sector development project. MCC required the Cape Verde  Chambers of Commerce, the implementers of a new credit bureau, to  secure a private sector partner and private sector investments to help  support the bureau before MCC provided funding to the chambers.  Private ownership may provide an incentive to enhance the sustainability  of the credit bureau.
Transportation project. To enhance the sustainability of its  transportation project investments, MCC conditioned compact funding  disbursements on the government meeting increased road maintenance  funding levels and included a vehicle weight control activity in the project.  However, the funding levels that the government achieved may not be  sufficient to fund all road maintenance needs. In addition, the weight  control activity was terminated. Both issues call into question the long- term sustainability of the infrastructure project activities.    According to the compact, the key issue for sustainability of the  transportation project is routine, periodic, and emergency road  maintenance, such as sealing cracks, repainting the pavement  markings, cleaning ditches and drainage structures, repairing  potholes, resurfacing, and clearing landslides. As a condition of  compact funding, MCC and the Honduran government agreed to  increase funding levels for maintenance, which the government met,  increasing funding from $37 million in 2005 to $64 million in 2010.  However, this funding is to maintain all Honduran roads, not  specifically compact-funded roads and does not ensure road  maintenance after 2010. According to MCC officials, they expect that  the Honduran government will maintain the MCC-funded sections of  CA-5 and some of the key secondary roads but are concerned that it  may not be at the level required to maximize the roads' lifespan.  Contractors and construction supervisors also expressed concerns  that the roads will be adequately maintained. According to  transportation ministry officials and documents, the government’s  maintenance allocation for 2010 represents less than half of the road  maintenance allocation required by Honduran law and is about 30  percent of the amount officials estimate is needed to maintain the  roads.    The extent to which the Honduran government implements the vehicle  weight control activity, which MCC eliminated in 2009 in response to  the political situation, also affects sustainability. According to  government officials, a large number of truckers exceed legal weight  limits. Without enforcement of weight limits on the CA-5 and other  MCC-funded roads, the roads will deteriorate faster and require  additional maintenance.
In addition, decisions to limit certain design features may present  challenges to maintaining the reconstructed roads. We observed quality  deficiencies—erosion, roughness, and landslides—that will likely increase  the amount and cost of maintenance needed over time (see fig. 7).  Failure to perform needed maintenance will result in road deterioration  decreasing the road-user cost benefits expected from the improved  roads. Most of these deficiencies could have been mitigated during  project design and construction. For example, the project designer could  have included the International Roughness Index (IRI) measures in the  contract documents as a performance specification, requiring the  contractor to meet IRI targets set by MCC and MCA-Honduras—which  would decrease long-term maintenance and road-user costs.  Additionally, landslides and their associated maintenance costs could  have been minimized if more detailed geotechnical analysis evaluating  slope stability had been conducted during design. Such analysis would  have enabled designers to include landslide stabilization and prevention  measures in the construction plans. A more detailed geotechnical study  regarding slope stability was completed for portions of CA-5 section 2  after a landslide occurred.
Rural development project. MCC took steps to increase the  sustainability of activities under the rural development project. The  sustainability of some activities was enhanced by these steps, but for  other activities challenges remain.    The contractor for the farmer training activity involved the private  sector in program activities, including buyers, wholesalers, and input  and equipment service providers to increase sustainability. The farmer  training activity also helped farmers form associations to increase the  sustainability of techniques and production practices. However,  according to the contractor and Honduran farmers, some program  farmers, who began receiving assistance late in the compact, are  expected to face difficulty sustaining new techniques without the  support of technicians.
In many cases, responsibility for maintenance of upgraded farm-to- market roads resides with the municipalities where the roads are  located. However, according to MCA-Honduras officials, the  municipalities lack equipment, expertise, and funding for road  maintenance.    MCA-Honduras took steps to increase the sustainability of the farmer  access to credit activity in Honduras by enabling the agricultural credit  fund to continue for 5 years beyond the end of the compact. In  addition, according to the activity contractor, the financial products  developed with the technical assistance are self-sustaining and self- financing.    Local organizations supported the implementation of the agricultural  public goods grants, which will help improve the activity’s  sustainability, according to MCA-Honduras officials. For example,  local communities with new irrigation works were trained in the  maintenance of such systems and put in place fee structures to fund  maintenance costs.

	Impact Evaluations and ERR Issues

Impact evaluations and ERR analyses assist MCC in estimating the  impact of compact projects on long-term economic growth. MCC funds  independent impact evaluations, which contribute to understanding  whether an investment achieved its intended impact. According to MCC  officials, these evaluations have been delayed because of delays in  project implementation and a change in approach to the timing of the  evaluations. MCC’s ERR provides a means of estimating the proposed  projects’ impact on a country’s economic growth relative to costs over a  relatively long time period, typically 20 years. However, updated ERRs  were not always well-documented or linked to revised targets. In addition,  MCC has not issued guidance for re-estimating ERRs at compact  completion or in subsequent years.

		MCC Impact Evaluations Are Ongoing, and MCC Has Taken Steps to Revise Designs in Response to Implementation Challenges and Delays

Cape Verde. MCC plans to conduct impact evaluations, but project  implementation delays have slowed progress.    Port activity. MCC has delayed contracting for an impact evaluator  for the infrastructure project’s port activity until the completion of  phase 2 of port construction in 2013. According to the 2010 Cape  Verde monitoring and evaluation plan, it is unclear whether the  originally planned impact evaluation is feasible, and MCC may revise  the evaluation design if necessary.    Roads and bridges activity. MCC has not yet engaged an impact  evaluator for the infrastructure project’s roads and bridges activity.  According to the 2010 Cape Verde monitoring and evaluation plan, if  the collected baseline data do not support the planned evaluation  design, MCC would accept a revised evaluation design.    Watershed management and agricultural support project. MCC  engaged an impact evaluator in the last year of implementation of the  watershed management and agricultural support project, and slower  than expected project implementation has delayed final data collection  for the impact evaluation. According to the independent evaluator  hired to assess the project, designing the evaluation after compact  implementation may limit the quality of the results by, for instance,  hindering the collection of quality baseline data. Baseline data were  collected before project implementation, but the impact evaluator has  cited concerns about the quality of this data. According to MCC  officials, MCC plans to address these concerns about the quality of  baseline data through additional data collection.    Private sector development project. The private sector  development project, which was significantly rescoped, will not be  assessed using a quantitative evaluation since the technical  assistance provided did not lend itself to a quantitative evaluation;  however, a qualitative evaluation has been completed.
Honduras. Project delays and challenges in implementing originally  planned impact evaluation designs have slowed progress of some impact  evaluations. MCC initially anticipated completing impact evaluations for  the Honduras compact projects by the end of the compact. However,  according to MCC officials, MCC modified its approach to impact  evaluations so that evaluations are completed after the end of the  compact.    Transportation project. The impact evaluation for the transportation  project began before project implementation, but delays in road  construction led to delays in collecting necessary data and completing  the evaluation. According to the impact evaluator, other than some  delays in final data collection, the transportation impact evaluation  was planned with a robust design and has been implemented as  planned.    Farmer training and development activity. Challenges encountered  in implementing the original evaluation design led to potential  limitations in the results. As a result, MCC added a supplemental  design to enhance the methodology. Specifically, the impact evaluator  had identified a certain group of farmers to participate in the program  and serve as a sample for the evaluation. However, the activity  contractor chose not to train a large portion of the selected group,  reducing the sample size for the evaluation and potentially limiting the  results. According to MCC, the challenge in implementing the original  evaluation design arose because the contractor was focused on  achieving targets set in the contract, instead of implementing the  activity in parallel with the evaluation methodology, which was not  outlined in the contract. MCC noted that this experience highlighted  the importance of incorporating impact evaluation designs into  implementation plans and contracts and the need to anticipate and  manage potential tradeoffs.    Farmer access to credit activity. According to the impact evaluator,  the assessment of the farmer access to credit activity was  complicated by changes that took place during implementation, such  as the expansion of the activity beyond an exclusive focus on program  farmers, as well as the delay in program implementation. By the time  changes were made to the activity, no baseline data had been  collected. Subsequently, MCA-Honduras hired a third-party contractor  to collect qualitative data. However, when the impact evaluator’s  contract ended at the end of the compact, these data had not been  analyzed and an evaluation report had not been completed as  originally intended.    Agricultural public goods grants facility activity. The impact  evaluator conducted an economic rate of return calculation by  comparing the costs and benefits that resulted from the agricultural  public goods grants facility activity. For example, the report compared  the expected costs and benefits as a result of certain grant activities  with the estimated costs and benefits had the grant activity not been  implemented. The evaluator produced a final report on the impact of a  selection of the 15 public goods grants.

		ERR Analyses during Compact Implementation Were Not Always Well- Documented or Linked to Key Revised Targets

MCC updated its ERR analyses for the Cape Verde and Honduras  compacts when project activities changed significantly during  implementation. However, the updated ERR analyses were not always  well-documented or supported. In addition, the analyses were not  consistently updated when projects or activities were rescoped or when  key targets were revised, as stated in MCC guidance and policy  documents.
Updated ERR analyses were not well-documented or supported for  projects constituting almost 50 percent of compact funds in Cape Verde  and more than 65 percent of compact funds in Honduras.    For Cape Verde, MCC increased its ERR for the port improvement  activity from 23 percent to 29 percent as the investment cost tripled.  In re-estimating the ERR, MCC relied on a new model prepared by a  French engineering consulting firm. The model incorporated efficiency  gains leading to benefits to consumers and firms, such as reduced  wait times and other cost savings. The analysis assumes that these  benefits also have an economywide effect. However, MCC does not  have documentation for the modeling of the economywide effect. As a  result, it is unclear how the analysis incorporates the project’s effect  on the overall economy. If the economywide effect is not taken into  account, the activity ERR drops from 28.6 percent to 9.3 percent,  which is below MCC’s hurdle rate of 10 percent cited in the MCC  Cape Verde restructuring memo. However, according to an MCC  official, the prevailing hurdle rate was 4.8 percent, and thus the  investment remained well above the minimum standard established  for Cape Verde. Furthermore, the extent to which consumers will  benefit from the project is also not clear.    For Honduras, the original economic analysis for the transportation  project established an ERR of 24 percent. Updates of the monitoring  and evaluation plan in 2008 and 2010 cite an ERR of 12 percent.  However, documentation for the underlying quantitative analysis  supporting the updated ERR is not available.
Updated ERR analyses do not always reflect changes in key targets  revised after decisions about project rescoping have been made.    For Cape Verde, when each of the three projects was rescoped, MCC  updated all relevant ERR analysis. However, the updated ERR  analysis does not reflect the values or numerical ranges of key  updated targets in the monitoring and evaluation plan. For example,  the revised targets for the watershed management and agricultural  support project include a revised volume of available water of 627,500  cubic meters, but in the updated ERR analysis, total water capacity is  17,000 cubic meters. In addition, the revised targets for the project  include a farmer productivity target of 9.4 to 14.3 tons of crops per  hectare, which overlaps only slightly with the range for farmer  productivity of 13 to 20 tons of crops per hectare in the updated ERR  analysis.    For Honduras, where both compact projects were rescoped, MCC did  not update the projected ERRs for the transportation and rural  development projects to reflect all changes. For example, for the  transportation project, MCC eliminated the weight control activity but  did not update the project level ERR in the revised monitoring and  evaluation plan to reflect this rescoping. In addition, the projected  ERR for the farm-to-market roads activity was updated in the revised  monitoring and evaluation plans, but this update was not incorporated  in revising the rural development project level ERR. Moreover, MCC  revised key targets, but the ERR analyses do not reflect those  revisions. For example, the original ERR analysis for the farmer  training and development activity of the rural development project is  based on 14,400 hectares of high-value crops at the end of the  compact. The 2008 and 2010 monitoring and evaluation plans  establish revised targets of 11,830 and 8,400 hectares, respectively,  at compact completion but do not revise the ERR.
MCC officials stated that when key indicators and targets were modified,  MCC assessed the effects of these changes on ERRs using the existing  models but did not formally document those assessments. MCC officials  also attributed the lack of consistent linkage between ERR analyses and  key revised targets to the fact that economist staffing shortages limited  their ability to update the economic analysis every time key indicators and  targets were modified.

		MCC Has Not Issued Guidance for Re- estimating ERRs Following Compact Completion but, If Estimated, ERRs Are Likely to Be Lower Than Predicted

MCC has not developed guidance for re-estimating project ERRs at  compact completion or in subsequent years. Although MCC does not  have guidance that requires re-estimation of ERRs, it plans to update  ERRs for its investments in Cape Verde and Honduras. Since the initial  ERR analysis is an estimate of the expected total increase in incomes  over a typical 20-year period attributable to a proposed MCC-funded  project relative to the total costs, ERR analysis at compact completion  can provide updated estimates based on actual project costs. Further, for  projects or activities that have been rescoped, revised estimates of  benefits can be included in the ERR analysis. In addition, when data on  actual benefits accrued to project beneficiaries are collected by impact  evaluations, these data can also be used to re-estimate the ERRs.  According to MCC officials, MCC requires independent evaluators to  calculate ERRs at compact completion, but guidance is currently not  available to guide this analysis. In the case of the sole Honduras ERR  calculated at compact completion to date by an independent evaluator, in  the absence of guidance, the evaluator prepared the ERR analysis in  such a way that it cannot be compared to the initial ERR estimate.  Furthermore, even though the original ERRs are estimated over a 20-year  period, according to MCC officials, MCC has not yet determined whether  it will re-estimate the returns as additional benefit data from impact  evaluations or other sources become available. Without an accurate  estimate of the compacts’ projected benefits, the extent to which the  compacts further MCC’s goal of poverty reduction, economic growth, and  transformative development cannot be accurately evaluated.
Reductions in project scope and other factors are likely to reduce re- estimated ERRs. In one instance where MCC has revised the ERR at  compact completion—the farmer training and development activity in  Honduras—the revised ERR was lower than originally predicted, at 14.6  percent versus 21 percent. For any further re-estimates of Cape Verde  and Honduras ERRs, several factors would likely contribute to lower  estimates of returns on investments than originally predicted—as seen in  the following examples.    Reductions in projects’ or activities’ original scopes while MCC  investments remained largely unchanged would lower expected  benefits. For example, for the Honduras transportation project, MCC  reduced the scope of the secondary roads construction activities to  align actual costs with project allocations and terminated the weight  control activity. Similarly, in Cape Verde, MCC funded about one-third  of the port improvement activity.    Measured results that lagged behind project or activity targets would  lead to lower benefits than originally projected. For example, the  original ERR analysis of the rural development project in Cape Verde  assumed that the project would lead to 111 hectares under drip  irrigation; however, by compact completion, about 13 hectares were  under drip irrigation.
Factors subsequent to compact completion    Cost overruns for MCC-funded projects not finished by compact  completion would lead to lower ERRs. Costs for the Cape Verde port  improvement activity, which was not finished by compact completion,  are currently estimated at about $148 million. These costs exceed  both the estimated investment costs of about $106 million for the  activity in the updated ERR analysis and the cost contingency of 20  percent included in the updated analysis, totaling approximately $127  million.    Factors affecting long-term sustainability, such as maintenance of the  physical infrastructure and future training to prevent depreciation of  acquired skills and human capital, can affect estimated benefits. For  example, according to MCA-Honduras officials, the sustainability of  many of the farm-to-market roads constructed for the Honduras rural  development project is in question because the municipal  governments responsible for maintaining the roads lack equipment  and expertise. If less than optimal maintenance is achieved, estimated  benefits will be reduced, which would lead to lower ERRs.

	Conclusions

MCC made significant investments in support of sustainable economic  growth in Cape Verde and Honduras and will benefit from lessons learned  during implementation of these compacts, which were among the first to  enter into force. As we previously reported, insufficient planning,  escalation of construction costs, and insufficient MCC review have led to  project delays, scope reductions, and cost increases. MCC directed the  majority of funding in the Cape Verde and Honduras compacts to  infrastructure projects, and for the economic benefits of these  investments to be realized, the projects must be properly sustained over  the planned 20-year benefit period. To promote sustainability, MCC took  steps to require partner countries to plan to efficiently operate and  maintain the infrastructure, including privatization of port operations in  Cape Verde and the provision of road maintenance funding in Cape  Verde and Honduras. The partner countries made progress meeting  MCC’s requirements in these areas, but they continue to face funding and  other challenges that are key to sustainability. At the same time, MCC lost  its ability to influence country decisions regarding sustainability once the  compacts ended. In addition, MCC and MCA made design decisions that  did not include measures to minimize landslides and erosion and did not  include international roughness criteria among the contract specifications,  which will result in higher long-term maintenance costs. In light of road  maintenance funding deficits in both countries, these decisions put the  sustainability of MCC-funded roads at risk.
MCC’s ERR projections serve as the foundation and economic  justification for MCC’s investments. MCC guidance and policy statements  indicate that key indicators and targets used for monitoring and MCC’s  ERR analyses should be directly linked. However, indicators and targets  changed significantly over the 5-year implementation period, sufficient to  alter the foundation of the initial ERR projection. In some instances, the  lack of documentation on updated ERR analyses makes it difficult to  know whether the revised ERR results are accurate and reliable. In other  cases, MCC updated its ERRs during compact implementation, but the  ERR analyses were not clearly linked to the revised targets in the  monitoring and evaluation plans. Although MCC updated ERR projections  in response to changes in implementation, it currently does not have  guidance for re-estimating ERRs at compact completion or during the 20- year period when compact benefits are realized. Looking forward, if MCC  plans to update ERRs at or following compact completion as a means of  assessing project benefits relative to actual costs, it will be critical to use  a consistent methodology that reflects final compact results and costs.  Without an accurate representation of the compacts’ projected benefits,  MCC, Congress, and other key stakeholders and beneficiaries cannot  accurately evaluate the extent to which the compacts further MCC’s goals  of poverty reduction and economic growth.

	Recommendations for Executive Action

We recommend the MCC Chief Executive Officer take the following three  actions:  To maximize the sustainability of MCC-funded infrastructure projects and  to reduce the amount of maintenance required after compact completion,  work with partner countries to make project planning, design, and  construction decisions that reduce long-term maintenance needs and  costs.
To enhance the accuracy of MCC’s ERR projections,    ensure, during compact implementation, that updated ERR  analyses are well-documented and supported and that key revised  indicators and targets are reflected in updated ERR analyses; and    develop guidance for re-estimating ERRs at compact completion  and during the long-term period when compact benefits are  realized to ensure that updated estimates reflect the most recent  and reliable information available for MCC’s compact investments  and outcomes.

	Agency Comments and Our Evaluation

In written comments on a draft of this report, MCC agreed with the intent  of our recommendations and committed to developing specific actions to  implement them. With respect to the first recommendation on the  sustainability of MCC-funded infrastructure projects, MCC acknowledged  the importance of maintenance and sustainability of its investments. MCC  stated that, when designing projects, it works with partner countries to  ensure that institutions and systems are in place to provide for the  projects’ long-term sustainability. In addition, MCC said that it looks to  strike a proper balance between its initial capital investments and ongoing  operations and maintenance costs. While MCC said that it pays  considerable attention to minimizing operations and maintenance costs,  MCC also stated that some maintenance-related measures raised in our  report—such as slope protection along reconstructed roads—may not be  justified in all cases. MCC further commented that financing maintenance  is a challenge in both developed and developing countries. MCC agreed  with both aspects of our second recommendation to enhance the  accuracy of MCC’s ERR projections. MCC agreed that, when project  design and scope changes are proposed during compact implementation,  updated ERR analyses should be adequately documented and the  consistency between the updated ERR analyses and targets should be  maintained. With respect to the third recommendation to develop  guidance for reestimating ERRs following compact completion, MCC  acknowledged the importance of measuring ERRs over the life of its  projects and stated that it is committed to developing guidance to  continue monitoring the results of compacts and measuring long-term  impacts of MCC investments.
MCC also highlighted other positive contributions of the Cape Verde and  Honduras compacts beyond the results achieved for key indicators and  targets. Specifically, MCC stated that policy reforms in Cape Verde and  new legislation in Honduras are expected to have positive lasting impacts  in these countries. In addition, MCC noted that in response to  implementation challenges, MCC was able to leverage its resources and  obtain additional financing to support the completion of compact activities.  Finally, MCC emphasized that country-led implementation of its compacts  fosters good governance and effective administration of development  assistance.
We have reprinted MCC’s comments in appendix IV. We also  incorporated technical comments from MCC in our report where  appropriate.
We are sending copies of this report to the Millennium Challenge  Corporation and interested Congressional Committees. In addition, the  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  me 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: Scope and Methodology

The fiscal year 2008 Consolidated Appropriations Act, Public Law 110- 161, mandated that GAO review the results of Millennium Challenge  Corporation’s (MCC) compacts. For the purpose of this engagement, we  reviewed MCC compact results in Cape Verde and Honduras, the first  compacts to complete the 5-year term at the initiation of our review. We  examined the extent to which MCC (1) achieved performance targets and  longer-term sustainability for projects in the Cape Verde and Honduras  compacts and (2) assessed progress toward the compacts’ goals of  income growth and poverty reduction. We focused our review more  heavily on infrastructure activities, which represented a higher portion of  compact funds in both countries. We specifically focused on the port  activity and roads and bridges activity in Cape Verde, and the CA-5  highway and secondary roads activities in Honduras.
To assess the extent to which MCC achieved expected performance  targets and longer-term sustainability for compacts in Cape Verde and  Honduras, we analyzed MCC documents, interviewed MCC officials and  stakeholders, and observed project results in both countries. We reviewed  the compact agreement for Cape Verde and Honduras, as well as MCC  guidance on measuring and reporting compact results, including the  agency’s Framework for Results, Policy for Monitoring and Evaluation of  Compact and Threshold Programs, Guidance on Quarterly MCA  Disbursement Request and Reporting Package, Common Indicators  Directive, and guidelines for monitoring and evaluation plans. We  interviewed MCC officials in Washington, D.C., regarding their processes  for overseeing compact activities. We traveled to Santiago and Santo  Antão islands in Cape Verde in December 2010 and Tegucigalpa,  Honduras, in November 2010. We interviewed MCC and Millennium  Challenge Account (MCA) officials in both countries regarding the results of  each compact activity, including the quality and sustainability of the  projects. We visited infrastructure projects in both countries, including visits  to the port and to roads and bridges in Cape Verde, and to the CA-5  highway, and secondary and farm-to-market roads in Honduras. We met  with project construction contractors, independent construction supervisors,  and MCA project management consultants. We interviewed contractors  and grantees of noninfrastructure activities and held meetings with  beneficiaries of certain projects. For Cape Verde, we interviewed the  contractor and two grantees for the access to credit activity, the contractor  for the credit bureau activity under the private sector development project,  and the contractor and eight beneficiaries of the watershed management  and agricultural support project, including the farmer training activity. For  Honduras, we interviewed the contractor and more than 30 beneficiaries of  the farmer training and development activity, contractors and several  financial institutions participating in the farmer access to credit activity, and  three grantees in the agricultural public goods grants activity. In addition,  we interviewed officials from the governments of Cape Verde and  Honduras about compact implementation, results, and sustainability,  including Cape Verde’s Ministry of Environment, Rural Development and  Marine Resources, Port Authority, and Ministry of Infrastructure, Transport  and Telecommunications, and Honduras’ Ministry of Transportation,  Ministry of the Presidency, Ministry of Agriculture, and Ministry of Finance.  We also reviewed final reports submitted to MCA by contractors and  grantees on compact activities.
We reviewed three versions of the monitoring and evaluation plans for  each country to identify the performance indicators and associated  targets to be achieved by compact end. MCC used these performance  indicators and targets to track progress and assess results of compact  activities; thus, we used these indicators and targets as criteria for  assessing MCC results achieved. To track progress toward compact  goals, MCA is required to compile and submit a performance indicator  tracking table on a quarterly basis as part of its quarterly disbursement  request package sent to MCC. This tracking table displays performance  targets and progress on all performance indicators included in a country’s  monitoring and evaluation plan. A complete indicator tracking table  provides detailed information that shows cumulative past performance,  recently completed performance, and the remaining annual targets for  each performance indicator. We collected and analyzed all available  indicator tracking tables for both countries to account for the actual results  achieved against each performance target throughout the compact. We  met with MCA staff in Cape Verde and Honduras about the steps they  took to ensure that data used to track program results were valid, reliable,  and timely, including conducting periodic data checks and hiring  independent evaluators to review the reliability of data. We determined  that these data were sufficiently reliable for the purposes of our review.
In assessing and reporting MCC’s results, we compared actual results  achieved at the end of the compact for each performance indicator to the  original and, in some cases, the revised targets associated with each  indicator. Given that there were three versions of the monitoring and  evaluation plan for each country, we considered the original target to be  the one listed the first time a performance indicator was introduced and  the final target the one listed in the final 2010 monitoring and evaluation  plan. In addition, in some cases, MCC revised the name or  characterization of a performance indicator while the definition and type of  measurement remained constant. In these cases, we chose to report the  original target as that associated with the original or parent indicator, and  the final target as that associated with the revised indicator. Given that  MCC tracked several performance indicators for each compact project,  we chose to report on a selection of key indicators that most closely  represented the goal of each compact activity. For example, we reported  the volume of available water for the water management and soil  conservation activity in Cape Verde but did not report the value of  irrigation construction contracts signed. In addition, we considered which  performance indicators MCC selected to report on in its public  communications about compact results. We did not report results for  indicators that MCC eliminated and stopped tracking during the life of the  compact, but we reported on such eliminated indicators in discussions of  canceled or rescoped activities.
To examine the extent to which infrastructure projects met performance  targets, met quality standards, and were sustainable, we interviewed  MCA officials, project construction contractors, independent construction  supervisors, project management consultants, the Cape Verde port  design engineer, and officials with the Honduran ministries of  transportation and finance. We also reviewed documents prepared by  MCA officials, project construction contractors, independent construction  supervisors, project management consultants, MCC independent  engineers, and government officials, including monthly reports, special  studies, testing reports, and daily inspections. Lastly, we conducted site  inspections of projects that accounted for a majority of the MCC-provided  infrastructure funding in Cape Verde and Honduras to verify the extent to  which projects had been completed and to observe whether there were  any visual deficiencies in construction. These interviews, document  reviews, and site visits were used to determine if the MCAs had  implemented MCC’s quality assurance framework, if there was supporting  documentation to verify that quality testing had been undertaken, if any  quality deficiencies were encountered during construction, if any quality  deficiencies remain, and whether the infrastructure projects would be  sustainable. We were not able to view actual work in progress or visit  testing facilities for most infrastructure contracts because the work had  already been completed.
To examine the extent to which MCC assessed progress toward the  compacts’ goals of income growth and poverty reduction, we reviewed  MCC’s monitoring and evaluation guidance, Guidelines for Economic and  Beneficiary Analysis, three versions of the monitoring and evaluation  plans for each country, monitoring information MCC and MCA collected,  data quality reviews, final reports prepared by contractors and grantees,  documents related to impact evaluation contracts, impact evaluation  design reports, final impact evaluations, and original and revised  economic rate of return (ERR) analyses. We also interviewed MCC  officials in Washington, D.C., regarding their processes for overseeing  compact activities, developing monitoring plans, and carrying out  assessments of progress toward the compacts’ goals. During site visits,  we interviewed MCC and MCA officials in Santiago and Santo Antão  islands in Cape Verde and Tegucigalpa, Honduras, about monitoring  procedures and data quality activities for compact projects. We also  interviewed officials from the national statistical agencies in Cape Verde  and Honduras, contractors, partner government agencies, and project  contractors involved in data collection activities, as well as contractors  implementing impact evaluations and other analysis.
To assess MCC’s results framework, we analyzed the connection  between the ERR estimates and related statements in the economic  impact section of the monitoring and evaluation plans, the values of the  variables that should translate into indicator targets in those plans, and  the underlying economic analyses provided in support of the expected  economic impact statements made in those plans. In addition, we studied  the evaluation components of the plans and compared them with the  evaluations’ actual proposed designs and implementation to assess the  extent to which the evaluations accurately reflected the designs  envisioned in the plans, the likelihood that MCC would be able to gather  reliable information on actual benefits attributable to the compact, and the  ability of MCC to update the ERRs as that information becomes available.  We reviewed MCC’s evolving guidance for ERR and monitoring and  evaluation analyses. We also examined spreadsheets MCC provided in  support of their updated calculations. To further discuss MCC’s  approaches and to clarify aspects of the economic impact analysis, we  interviewed MCC economists, impact evaluators, and other officials  regarding MCC’s monitoring and evaluation framework and estimated  economic impact.
MCC enters into a legal relationship with partner country governments,  which vest responsibility for day-to-day management of compact project  implementation to the MCA, including monitoring and evaluation activities  such as setting and revising targets, but such MCA actions require MCC’s  direct oversight and approval. Therefore, throughout this report, we  attribute all decisions related to project rescoping and compact targets to  MCC.
Finally, some of the reports and documents referenced above were  written in Portuguese or Spanish. We translated these documents  internally and created English summaries to enable our analysis.
We conducted this performance audit from September 2010 to July 2011  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: Cape Verde Compact Results

	Cape Verde Compact Background

Located off the coast of West Africa, Cape Verde is a group of 10 islands,  with a population of about 500,000. Cape Verde was classified as a  lower-middle income country with a per capita income of $3,010 for fiscal  year 2011. U.S. development assistance accounts for about 9 percent of  total assistance to Cape Verde over the last 10 years, making the United  States its third-largest donor.
MCC and the government of Cape Verde signed a 5-year compact in July  2005, which entered into force in October 2005 and ended in October  2010. The compact, for which MCC provided $110.1 million in funding at  compact signature, consisted of three projects.    The infrastructure project was aimed at increasing integration of  internal markets and reducing transportation costs. Activities include  upgrading and expanding a major port and rehabilitating five roads  and constructing four bridges. Expected beneficiaries of this project  include consumers, importers and exporters, shippers, and residents.    The watershed management and agricultural support project was  aimed at increasing agricultural productivity in three targeted  watershed areas on three islands. Activities include the development  of water management infrastructure and activities to increase the  productive capacity of farmers. Expected beneficiaries of this project  include individual farmers, farm households, and government and  private sector participants.    The private sector development project was aimed at spurring private  sector development on all islands. Activities include investments in the  private sector and technical assistance to microfinance institutions.  Expected beneficiaries include individuals and companies, urban and  rural poor, and existing microfinance institutions.
In addition, the compact included funding for program administration and  monitoring and evaluation activities to support administration and  implementation of the compact, program management, and reporting.
Table 5 shows the Cape Verde projects’ planned activities, objectives,  and beneficiaries as of compact signature.

	Cape Verde Infrastructure Project

		Port Activity

			Port: Objective

MCC allocated $53.7 million to fund infrastructure improvements at the  Port of Praia—Cape Verde’s largest port, accounting for approximately 50  percent of the total volume of port traffic—to support the country’s goal of  expanding the facility to promote continued economic development. The  activity was planned to address constraints such as a lack of space for  wharf-side cargo handling and lack of a breakwater to protect against  waves that can impair stevedoring operations. The activity was planned  with five components:  1.  construction of a new cargo village—container storage yard—on a  plateau above the wharves;  2.  reconstruction of a wharf (wharf 2), including demolition of existing  3.  construction of a new access road to connect the wharves to the  cargo village (lower access road) and public road system (upper  access road);  4.  expansion of a wharf (wharf 1) to extend its length and build a new  storage yard on reclaimed land; and  5.  construction of a new breakwater.
MCC disbursed $54.9 million for the port activity. MCC met a key final  target and eliminated some indicators for this activity (see table 6 for key  performance results for the port activity). After determining during the  activity’s planning and design that it would not be able to fund all planned  port improvements, MCC and MCA-Cape Verde reduced the activity’s  scope by splitting it into two phases, with MCC funding the first phase  (components 1, 2, and 3) and the Cape Verde government funding the  second phase (components 4 and 5).
MCA-Cape Verde completed most of phase 1 in October 2010, and the  Cape Verde government expects to complete phase 2 by March 2013.    Phase 1. MCA-Cape Verde funded phase 1 of the port activity at  $45.3 million. MCA-Cape Verde deleted the construction of some  buildings from the contract scope to keep costs within funding limits,  and the Cape Verde government subsequently funded construction of  the buildings at approximately $16 million through a loan from a  Portuguese bank.    Phase 2. The Cape Verde government funded phase 2 of the activity  (components 4 and 5) at approximately $87 million through a loan  from the Portuguese government. Work is to be completed over a 30- month period ending in March 2013 in accordance with the design  initially funded by MCC.
Inaccurate early planning of the port activity led to cost increases and  implementation delays.    Cost increases. Costs increased as a result of inaccurate early  planning assumptions concerning design details and construction  materials. For example, the cargo village and access road were built  in different locations than initially planned, and according to MCC,  relocating these components resulted in significant cost increases. In  addition, initial plans specified the use of a detached breakwater to  protect the wharves, but subsequent analysis and model testing  showed the need for an attached breakwater, which was more  expensive to construct. Also, initial plans were based on an incorrect  assumption that quarry materials would be available at minimal cost  from government-owned quarries. However, by the time  implementation began, the government no longer controlled the  quarries, and materials had to be procured from private sources,  increasing the activity’s cost.
Implementation delays. Rescoping the port activity contributed to  implementation delays that resulted in MCA-Cape Verde using more  than half of the 5-year compact implementation period for planning,  design, and contract procurement actions before awarding a  construction contract. As a result, implementation of the phase 1  components did not begin until year 3, when MCC had originally  intended to have completed these components, and completion of  phase 2 components is not expected until March 2013, approximately  29 months after compact end.
To provide management control and ensure quality for the port activity,  MCA-Cape Verde established an organization consistent with MCC’s  management structure for infrastructure projects. The management  organization for the Cape Verde port activity consisted of a project  manager for MCA-Cape Verde; project managers for the activity’s  implementing entity, the Cape Verde transportation ministry; an MCA- contracted independent construction supervisor; an MCA-contracted  design engineer; and an MCC-contracted independent engineering  consultant.
Work completed for the port activity was performed according to  contractual requirements, generally met quality standards, and should  enable the infrastructure to function for the duration of its design life,  according to the construction supervisor’s progress reports and members  of the management organization. However, a defect in construction of the  shore protection structure built for the lower access road posed a threat to  the road’s stability, which MCC took steps to remedy. According to the  design engineer, in May 2009 the construction contractor expressed  concerns about building an underwater trench included in the design for  the shore protection structure, claiming that the seafloor was uneven  and consisted of materials that were not shown on design documents.  However, at the construction supervisor’s direction, the contractor  attempted to install the structure as specified in the design and completed  work in July 2010. Subsequently, the design engineer determined that the  underwater trench was not properly constructed and did not provide an  adequate foundation for the shore protection structure. To address this  issue, MCC contracted the U.S. Army Corps of Engineers to inspect the  as-built condition of the trench and develop alternatives for correcting the  construction defects. In its initial assessment, the U.S. Army Corps of  Engineers estimated that the cost of remedying the construction defects  would range from approximately $1 million to $2.8 million. Costs for  repairs to the underwater trench will be shared by the construction  contractor and the Cape Verde government, according to an agreement  between the two parties and MCA-Cape Verde in January 2011.
MCC determined that privatizing operations at the Port of Praia was  critical to the sustainability of the port activity and included privatization of  the port operations as a condition for disbursement of compact funding.  MCC reasoned that privatization was needed to enable the port to handle  current and projected traffic in a manner that would lead to improved  financial performance. Although the government of Cape Verde agreed to  this condition and developed a law to enable the port authority to enter  into contracts with private operators, the port authority has been delayed  in soliciting contracts for port operations services because construction of  the port is incomplete, with phase 2 work expected to continue until  March 2013. MCC reports that the port authority has taken initial steps in  developing model contracts for port operations, but it no longer has  leverage over the port authority to ensure that this condition is met.

		Roads and Bridges Construction Activity

			Roads and Bridges: Objective

MCC allocated $25 million to fund the rehabilitation of five roads on  Santiago Island and construction of four bridges on Santo Antão Island.  The activity was intended to support Cape Verde’s goal of improving  mobility on the two islands by closing road network gaps to ensure more  reliable access both to intra-island markets and services and provide  transportation linkages on the targeted islands.
MCC disbursed $27.7 million for the Cape Verde roads and bridges  activity by compact completion. MCC met revised targets for the roads  rehabilitation, after reducing the scope of the planned roads, and met its  targets for the bridges construction (see table 7 for key performance  results for the roads and bridges activity).
MCC reduced the scope of road rehabilitations but maintained the scope  of bridge construction work after redesigns of original plans led to  increased costs.    Roads. MCA-Cape Verde awarded a $12.6 million contract to  rehabilitate five roads, totaling 62.2 kilometers, in April 2006.  Subsequent redesign of the road plans, to more accurately reflect the  extent of work required, increased the cost of the contract to $18.5  million and extended the contract completion date from 30 months to  44 months after the May 2006 work start date. To keep the work  within funding limits, MCC and MCA-Cape Verde reduced the scope  of planned rehabilitation to three roads totaling 39.6 kilometers. Work  was completed for the first road (Road 1) in June 2009; for the second  (Road 4) in July 2009; and for the third (Road 2) in January 2010.    Bridges. MCA-Cape Verde awarded a $3.4 million contract in  November 2006 to build the four bridges. Subsequent redesigns of  the planned construction, intended to make the bridges more durable,  increased the contract value to $5.8 million and extended the  completion date from 12 months to 34 months after the December  2006 work start date. Bridge work was completed in October 2009.
Figure 8 shows the locations of the planned roads, with photographs of  the rehabilitated roads, on Santiago Island.
Figure 9 shows the four bridges that were constructed on Santo Antão  Island.
On beginning work for the Cape Verde roads and bridges activity, MCA- Cape Verde found that the designs did not accurately represent the  extent of work required. For example, inadequate topographic information  in the road designs resulted in designs that did not accurately reflect the  amount of earthwork involved in improving the roads. Revisions to the  designs allowed for improvements to make the structures more durable:  additional drainage culverts, concrete lining of ditches, rip-rap  placement to protect roads from erosion and landslides, and increased  bridge heights to provide more clearance for water.
To provide management control and ensure quality for the Cape Verde  roads and bridges activity, MCA-Cape Verde established an  organizational structure consistent with MCC’s management structure for  infrastructure projects. The management organization for the Cape Verde  roads and bridges activity consisted of a project manager for MCA-Cape  Verde; a project manager for the activity’s implementing entity, the Cape  Verde transportation ministry; two MCA-contracted independent  construction supervisors, one for roads and one for bridges; and an MCC- contracted independent engineering consultant, who provided oversight  on both the roads and bridges construction contracts.
In general, work on the roads and bridges activities met quality  requirements. However, the new infrastructure is subject to damage from  sometimes harsh environmental conditions, and the Cape Verde  government faces challenges in funding needed maintenance and  ensuring the infrastructure’s sustainability.
Quality of roads. Work completed for the roads activity was performed  according to contractual requirements, generally met quality standards,  and should enable the infrastructure to function for the duration of its  design life, according to the construction supervisor’s progress reports  and members of the activity’s management organization. However, the  mountainous terrain through which the roads were built presents hazards  such as landslides and erosion from storm water runoff. According to the  construction supervisor, the low volume of traffic for which the roads were  built influenced decisions to limit some design features, such as removing  steep roadside slopes and installing or repairing drainage structures and  retaining walls, to control costs. For example, in consideration of limiting  costs and reducing environmental impacts, the construction supervisor  authorized less earthwork than had been proposed by the construction  contractor when the road activity was being redesigned. This resulted in  the exposure of some road sections to potential damage from landslides  and water runoff because they are adjacent to steep slopes. We  observed areas along Road 2, in particular, where the road structure had  failed, apparently as the result of insufficient drainage or weakened  retaining structures that were unable to withstand water flows during rain  storms. We also observed repair efforts by the Cape Verde government’s  road maintenance contractor that illustrate how sustained attention to  maintenance will be needed to keep the road network functional   (see fig. 6 on page 27).
Quality of bridges. Work completed for the bridges activity was  performed according to contractual requirements, met quality standards,  and should enable the infrastructure to function for the duration of its 50- year design life, according to the construction supervisor’s progress  reports and the MCA-Cape Verde project manager. The construction  supervisor’s final report noted that the bridges may have been  overdesigned, with more concrete and reinforcing steel than required for  structural stability. The report also indicated that the type of cement  used in the concrete mix was different, and less resistive to corrosion,  than the type originally specified. To protect the bridges from corrosion,  due to their proximity to the ocean shore, the construction contractor  applied a waterproofing treatment to the concrete that was used to  construct the bridges. However, use of this waterproofing treatment  creates a new maintenance requirement for the Cape Verde government  to manage.
MCC determined that stable maintenance financing was critical to  sustaining its roads and bridges activity and established this as a  condition for disbursement of compact funds. Over the course of the  compact, the Cape Verde government’s road institute developed its  capacity for collecting user fees that it directed to funding maintenance for  the national road network. However, according to Cape Verde  government officials, the agency lacks adequate funds for road  maintenance. For example, road institute officials indicated that lack of  funds for road maintenance is the greatest challenge facing the agency,  and other Cape Verde government officials told us that current funding for  road maintenance would meet less than half of requirements.

	Cape Verde Watershed Management and Agricultural Support Project

		Water Management and Soil Conservation Activity

MCC disbursed approximately $6 million for the water management and  soil conservation activity, which was designed to improve natural  resource management and increase agricultural productivity in three  watersheds—Faja (São Nicolau Island), Mosteiros (Fogo Island), and  Paul (Santo Antão Island)—through the construction of water  management and distribution infrastructure.
MCC met some key original and final targets for the water management  and soil conservation activity (see table 8 for key performance results for  the water management and soil conservation activity). Because the  activity was rescoped and construction delayed, the agency expects that  agricultural productivity will be delayed. For example, MCC did not meet  its original or final target for the volume of water available in the three  watersheds at compact end. MCC achieved approximately 353,000 cubic  meters for the volume of available water in the three watersheds at  compact end, which was about 40 percent of the original target of  approximately 875,000 cubic meters and about 76 percent of the final  target of approximately 466,000 cubic meters. According to MCC, since  the water was delayed, the agency does not expect immediate changes  in agricultural productivity.
Responding to environmental concerns identified during implementation,  MCC rescoped the activity from a combination of wells and reservoirs to  only reservoirs, which delayed completion and operation of water  management infrastructure as well as the adoption of drip irrigation.  Following a 2-year delay in constructing water management  infrastructure, not all reservoirs were operational at compact end. As of  January 2011, MCC reported all 28 reservoirs constructed were  operational. MCC officials, the contractor, and some farmers we met with  in Cape Verde said that farmers were slow to adopt drip irrigation  because of the delay in the construction of infrastructure and the low  water availability. MCC also reported that, for fully functional water  systems, adoption of drip irrigation was slow, partially due to the  completion of works coinciding with the rainy season. For example, during  our visit to one reservoir in the Paul watershed in December 2010, we  found that five of the seven available drip irrigation connections were  hooked up to farm plots. Figure 10 shows a connected farm plot.
MCC and the government of Cape Verde took some initial steps to  enhance the sustainability of completed water management  infrastructure. For instance, in January 2009, the government of Cape  Verde’s National Water Council established a water-fee structure for the  three watersheds. MCC reported that it was actively engaged with the  government to develop the water-fee policy, which was a condition  required for MCC disbursements. In addition, communities and water  users are responsible for maintenance of the water management  infrastructure. The Cape Verde agricultural ministry and an MCA-Cape  Verde contractor also worked with local community water associations,  composed of farmers and other water users, to develop water  management plans for each watershed. However, during our visit to Cape  Verde, we found that the National Water Council had not begun collecting  water fees in one of the three watersheds.

		Agribusiness Development Services Activity

MCC disbursed approximately $5 million for the agribusiness  development services activity, which consisted at compact signature of  several activities to increase the productivity and marketing of agricultural  products by farmers and agribusinesses, including training of farmers,  technical assistance in postharvest agricultural techniques, and  construction of postharvest packing and quality control centers.
MCC did not meet key original targets and most final targets for the  agribusiness development services activity (see table 9 for key  performance results for the agribusiness development services activity).  For example, MCC reported that 553 farmers were trained in at least  three out of five subject areas by compact end, achieving 69 percent of  the target of 800 trained farmers.
MCC rescoped the agribusiness development services activity following  implementation challenges, and the contractor reported challenges in  implementing the activity and achieving targets.    Small agribusiness sector. MCC reported that it eliminated the  activity’s focus on the agribusiness sector after finding that sector in  Cape Verde to be small, but continued to work with the broader  agricultural sector.    Limited training capacity of Cape Verde agricultural ministry  staff. MCA-Cape Verde reported that it had originally planned for the  Cape Verde agricultural ministry to implement the farmer training  activity; however, when it found that the ministry did not have the  capacity to train farmers, it hired a contractor to assist in  implementation of the farmer training activity and other aspects of the  agribusiness development services activity.    Limited authority of contractor over Cape Verde agricultural  ministry staff. The contractor reported that its inability to directly train  farmers and lack of authority over ministry field staff trainers made it  difficult to meet the training targets.    Limited targeting of farmer trainings. The contractor reported that  using the Cape Verde agricultural ministry’s farmer training list, which  was not targeted, resulted in a significant portion of time and  resources spent on beneficiaries that had little interest in the training  and saw little value in attending training sessions. We spoke with  several farmers in one watershed in Cape Verde who said the training  had been helpful, but most were unable to specify which training they  had taken, new information they had learned, or new techniques they  had applied on their farms.
The MCA-Cape Verde contractor took steps to promote sustainability of  agribusiness development activities, and the Cape Verde agricultural  ministry has expressed interest in continuing certain activities beyond the  end of the compact, but MCC and the contractor have expressed concern  about the sustainability of some activities. For example, the contractor  took steps to promote the sustainability of the agribusiness development  services activity after compact completion, including developing training  materials for the Cape Verde agricultural ministry, helping establish and  train farmers associations, and implementing a farm-to-market pilot  project for testing postharvest practices along the produce value chain.  The Cape Verde agricultural ministry reported that it will continue training  farmers through its extension centers using training materials developed  under the compact activity. However, the contractor reported that even  after receiving training under the compact, all ministry field staff did not  have the capacity to train farmers, given their work loads. For example,  the contractor stated that ministry field staff had multiple responsibilities,  including involvement in multiple donors’ agriculture-related programs.
The Cape Verde agricultural ministry has also taken steps to privatize  management of the postharvest center, including a commitment in  February 2010 to finance the costs of operating the postharvest center  and advertisement in June 2010 for a private management team.  However, the postharvest center was not in operation as of December  2010 and had not yet been privatized. According to MCC officials, the  ministry did not contract with a private management team and has  established a government management team to manage operations for  the next 2 years. MCC reported that it has flagged privatization of the  postharvest center as an issue critical to the sustainability of the project.  MCC stated that it has received assurances from the ministry that it  intends to privatize operations, but MCC is unclear about the timeline.

		Access to Credit Activity

MCC disbursed $600,000 for the access to credit activity, which was  designed to meet demands in the three watersheds for financing drip  irrigation, working capital, and agribusiness development.
MCC exceeded key original and final targets for the access to credit  activity (see table 10 for key performance results for the access to credit  activity). For example, four eligible microfinance institutions (MFI)  accessed the $600,000 MCC credit line to provide $617,000 agricultural  loans. MCC and the contractor stated that they were optimistic about  continued demand for drip irrigation credit once water management  infrastructure was fully operational and the rainy season ended.
According to MCC, as a result of the strong performance of the four MFI  loan portfolios, MCC converted its loans to each MFI into grants at the  end of the compact, enhancing the sustainability of agricultural credit  efforts. Following an evaluation of the MFIs’ operational and financial  performance, MCA-Cape Verde determined that all four MFIs were  eligible for conversion of MCC loans under the credit line to grants. MCC  converted its loans into grants by the end of 2010. Two MFIs reported  that they had not previously provided loans in the agricultural sector in  certain locations, but following a positive experience with the MCC credit  line, they anticipate continued growth of these loan portfolios.
MCC did not require that an oversight entity monitor the MFIs’ use of  grant funds for agricultural purposes beyond the end of the compact, but  the agency included limited oversight terms in the grant conversion that  may promote sustainability. The agency specified in its grant terms that  funds are to be used solely for agribusiness and drip irrigation credit and  are subject to MCC audit for the first 2 years.

	Cape Verde Private Sector Development Project

		Partnership to Mobilize Investment Activity

MCC disbursed about $400,000 for the partnership to mobilize investment  activity, which was intended to help the Cape Verde government identify,  prioritize, design, and implement interventions to increase investment in  priority sectors.
MCC had not funded private sector investments in priority sectors for the  partnership to mobilize investment activity by the end of the compact, but  had funded the creation of a private credit bureau during the  administrative closeout period (see table 11 for key performance results  for the partnership to mobilize investment activity). MCC had initially  allocated $5 million for this activity, but MCC, the World Bank, and the  government of Cape Verde were unable to agree on which priority sectors  should receive investment support. Therefore, MCC reallocated funds  from this activity to the compact’s infrastructure project. However, MCC  funded technical assistance to support the creation of a private credit  bureau. In January 2011, after the end of the compact and during the  administrative closeout period, the Chambers of Commerce signed a  contract with an investment partner to create a private credit bureau.  Upon signature of this contract, MCA-Cape Verde provided $250,000 to  the Chambers of Commerce to invest in the credit bureau.
MCC took steps to support the new credit bureau’s operational and  financial sustainability by requiring a private sector partnership and  private sector investments to be in place before MCC provided support for  the activity. Private ownership may provide an incentive to enhance the  sustainability of the credit bureau.

		Financial Sector Reform Activity

MCC disbursed $1.4 million for the financial sector reform activity, which  consisted of technical assistance to support the development of  microfinance institutions and government efforts to expand access to the  primary market for government securities.
MCC met or exceeded its original and final targets, but eliminated a key  target for the financial sector reform activity (see table 12 for key  performance results for the financial sector reform activity). For example,  MCC met or exceeded its targets for MFI operational and financial self- sufficiency. According to MCC officials, technical assistance to the  government of Cape Verde under the compact also helped produce  financial sector reforms, but MCC eliminated funding for financial software  to implement reforms following procurement delays.
Under this activity, MCC funded technical assistance to eight MFIs in  several areas, including accountability and internal controls, lending  methodologies, and client services, to support their operational efficiency  and financial sustainability. According to two MFI representatives we  spoke with during our visit to Cape Verde, the assistance they received  helped professionalize MFI credit agents and provided them with  technical competence to develop and market loan products for the  agricultural sector.
The MFIs that received technical assistance achieved operational and  financial self-sufficiency, which will enable them to continue their  agricultural loan operations. In addition, according to MCC, the Cape  Verde government agreed to fund the software with country funds and  completed the financial sector reforms, showing strong country ownership  and commitment to compact goals.

Appendix III: Honduras Compact Results

	Honduras Compact Background

Honduras, with a population of about 7.2 million, was classified as a low- income country with a per capita income of $1,820 for fiscal year 2011.  U.S. development assistance accounts for about 13 percent of total  assistance to Honduras over the last 10 years, making the United States  its fourth-largest donor.
MCC and the government of Honduras signed a 5-year compact in June  2005, which entered into force in September 2005 and ended in  September 2010. The compact, for which MCC provided $215 million in  funding at compact signature, consisted of two projects.    The transportation project was aimed at reducing transportation costs  between targeted production centers and national, regional, and  global markets. Activities include reconstructing portions of highways  and secondary roads. Expected beneficiaries include road users and  urban and rural businesses.    The rural development project was aimed at increasing the  productivity and business skills of farmers who operate small and  medium-size farms and their employees. Activities include providing  technical assistance to farmers in the production of high-value crops  and constructing and improving selected farm-to-market roads.  Expected beneficiaries include trained farmers, their communities,  and the agricultural sector.
The compact also included funding for program administration, to support  compact implementation and program management, and for monitoring  and evaluation to measure the impact of compact activities.
Table 13 shows the Honduras compact’s planned activities, objectives,  and beneficiaries, as of compact signature.

	Honduras Transportation Project

		CA-5 Highway Reconstruction Activity

			CA-5 Highway: Objective

MCC allocated $96.4 million to reconstruct 109 kilometers of the CA-5  highway. The northern portion of the CA-5 highway connects  Tegucigalpa—the capital of Honduras—to Puerto Cortes on the north  coast, providing the primary route for import and export traffic between  Puerto Cortes and the major production and consumption centers in and  around San Pedro Sula, Comayagua, and Tegucigalpa. Figure 5 shows  the locations of the CA-5 highway activities.
MCC disbursed $90.3 million for the CA-5 highway reconstruction activity  by contract completion. MCC did not meet its target for kilometers of  highway upgraded, completing 49.5 kilometers, or 45 percent of the target  (see table 14 for key performance results for the CA-5 highway activity).
MCC originally planned to fund all reconstruction included in four  contracts for the four sections of the CA-5 highway. However, while  completing final design, acquiring right-of-way, and beginning to award  contracts, MCC determined that, because estimated costs had increased,  it would be unable to complete the 109 kilometers within the 5-year  compact timeframe and within the funding allocation of $96.4 million.  Consequently, the Honduras government, working with MCC, arranged  for a loan from the Central American Bank for Economic Integration  (CABEI) to fund up to $130 million of the CA-5 reconstruction, and MCC  reduced its allocation to $89.3 million. This brought total funding for the  CA-5 reconstruction to $219 million, more than double the original  estimate. The $219 million MCC and CABEI allocated for the CA-5  reconstruction included $20.2 million—$19 million from MCC and $1.2  million from CABEI—for land acquisition and relocation costs; $195  million—$70.3 million from MCC and $124.8 million from CABEI—for  construction supervision and construction contract costs; and $3.4 million  from CABEI for other consulting and administrative costs.
Varying amounts of the $195 million in construction supervision and  construction contract work were completed in each section of the highway  by the end of the compact.    Section 1. After completing the design for section 1 of the CA-5  highway, MCC lacked sufficient funding to construct the 24.3-kilometer  section. Construction began in June 2010 with about $75 million in  CABEI funds and was about 5 percent complete when the compact  ended. MCC expects section 1 to be completed by June 2012.
However, in March 2011, MCC officials stated that additional work  added to the contract may require MCA-Honduras to extend that date.    Section 2. Construction began in February 2009 on the $68 million,  33.3-kilometer section 2 of the CA-5 highway and was about half  completed when the compact ended. MCC allocated about $21 million  (31 percent) and CABEI allocated about $47 million (69 percent) for  section 2, with MCC’s allocation covering the cost of about 10  kilometers of constructed road. Construction was scheduled to be  completed by March 2011, but MCA-Honduras is considering  extending the completion date to September 2011 because of  additional construction work, rain, and other delays.    Sections 3 and 4. Reconstruction is 100 percent complete for 49.5  kilometers of the highway’s two northernmost sections—sections 3  and 4—with about $52 million allocated to the activities. This amount  included MCC funding of about $49 million (94 percent) and CABEI  funding of about $3 million (6 percent). See figure 11 for before and  after pictures of section 4.
Contract bid amounts, land acquisition costs, and contract modification  costs exceeded MCC’s estimates, causing overall costs for reconstructing  the CA-5 highway to exceed allocations for the activity and preventing  MCC from achieving its original target, according to MCA-Honduras  officials.    Construction contract bid amounts. Construction contract bid  amounts for reconstructing each section of the CA-5 highway were  significantly higher than MCC’s initial estimates, owing in part to  requests from the Honduras government for changes in scope and  changes in design, according to MCA-Honduras officials.
Section 1. The construction contract bid for section 1 exceeded  estimated costs by 15 percent.
Section 2. The construction contract bid for section 2 exceeded  estimated costs by 112 percent. The original design was to increase  the road from two to three lanes in some areas. However, the  Honduras government requested that the entire section have four  lanes, increasing the travel lane pavement area by 43 percent.
Section 3. The construction contract bid for section 3 exceeded  estimated costs by 11 percent, after the Honduras government  requested a third lane for passing to improve traffic flow in a few areas  with steep inclines.
Section 4. The construction contract bid for section 4 exceeded  estimated costs by about 75 percent. The Honduras government  requested that four lanes be installed in some portions of the section  and that concrete, rather than asphalt, be used for the pavement. In  addition, according to MCA-Honduras officials, 12 kilometers of a  special base treatment were added to support the concrete  pavement.    Land acquisition costs. The additional costs of acquiring right-of- way for the additional lanes and relocating adjacent housing and  businesses exceeded initial estimates by almost 600 percent.  According to MCA-Honduras officials, the original estimate for land  acquisition and relocation was $3.1 million, but the final budgeted cost  was about $20.2 million. Officials said that due-diligence studies  conducted before the design phase had not included the costs of  resettling residents and business owners from acquired land. In  addition, the original land acquisition costs were estimated based on  the land’s official value for tax purposes rather than on its market  value (which is typically higher), in accordance with normal practice in  Honduras, and did not include relocation costs. MCA-Honduras  officials said that, to accelerate the acquisition of land for the CA-5,  they worked with the Honduras government to pass legislation that  allows citizens to be reimbursed for market value land costs and  relocation costs. According to MCC officials, relocation of the  businesses provided economic benefits by allowing the business  owners to retain their livelihood. In addition, businesses were grouped  together to reduce traffic congestion related to cars stopping along the  road and small chambers of commerce were developed to promote  the businesses (see fig. 12).    Contract modifications. Modifications of contracts during  construction for sections 2, 3, and 4 raised CA-5 costs by about 6  percent, according to our review of construction supervision reports. A  construction supervision official for section 2 stated that some of these  increases were the result of road design plans with insufficient detail,  which required the construction of additional retaining walls,  earthwork, and drainage pipes beyond those included in the contract  plans. The construction supervision official for section 4 stated that  the increases were due to the addition of drainage pipes and other  items.

		Secondary Roads Reconstruction Activity

			Secondary Roads: Objective

MCC planned to reconstruct 91 kilometers of secondary roads, which  connect rural roads to primary roads such as the CA-5 highway.
MCC disbursed $27.7 million to reconstruct 65.5 kilometers of secondary  roads by compact completion. MCC met the final target of 65.5 kilometers  of secondary road reconstructed after a reduction in the original target  from 91 kilometers (see table 15 for key performance results for the  secondary roads activity).
After accepting bids for the first secondary road construction contract,  MCC agreed to a reduction in the target for reconstructing secondary  roads because the cost of the reconstruction work greatly exceeded  original estimates, according to MCA-Honduras officials. The officials also  stated that the amount of planned MCC funding increased after the first  contract was let because the bid amounts were more than estimated.  According to the officials, the original estimated reconstruction cost was  about $235,000 per kilometer, but the actual cost was about $422,000 per  kilometer—an 80 percent increase.
For the reduced target, MCA- Honduras selected 65.5 kilometers of  secondary roads from among a group of roads expected to provide the  highest rate of economic return by increasing vehicle speeds and  reducing vehicle maintenance costs. The selected roads, located in three  different parts of the country, were constructed through three separate  contracts and were completed by the end of the compact. According to  MCA-Honduras officials, the reconstructed roads have brought benefits  such as improving the health of residents near the road by reducing  airborne dust, improving access to land near the roads, attracting new  farmers and laborers, and improving access to health clinics. Figure 13  shows the secondary roads before and after the reconstruction was  completed.
MCC allocated $4.7 million to facilitate the implementation of a weight  control system, including activities such as constructing eight truck weigh  stations and the purchase of ancillary equipment along the CA-5, to help  limit damage to the roads from overweight vehicles.
MCC disbursed about $90,000 for the weight control system activity.  MCC terminated funding for this activity in 2009 in response to the  country’s political situation (see table 16 for key performance results for  the weight control activity).
MCC officials stated that prior to the decision to eliminate the activity, they  worked with the Honduran government to enact legislation allowing Fondo  Vial—the Honduran road maintenance agency—to regulate and enforce  weight limits on Honduran roads. According to the Honduran government  and MCA-Honduras officials, the government is trying to develop a smaller  weight control activity, with one permanent weigh station and two portable  stations, to start enforcing weight limits on the CA-5. However, at the time  of our visit in November 2010, the government had not established a  definite plan or obtained funding for the activity, and MCC is no longer  monitoring the activity to provide us with an update.

		Transportation Project: Quality

To provide management control and ensure quality for the Honduras  transportation project, MCA-Honduras established an organization  consistent with MCC’s management structure for infrastructure projects.
The management organization for infrastructure projects included a MCA- Honduras transportation director and staff; contracted project  management consultant who also performed design engineer services;  and contracted independent construction supervisors, who reviewed the  work of the project construction contractors for the CA-5 highway and  secondary roads. MCC hired an independent engineering consultant to  provide them with independent reviews and recommendations of MCA- Honduras’ design and construction activities.
In addition, MCA-Honduras implemented a quality control process, with  independent construction supervisors and contractors ensuring that  construction of the CA-5 highway and secondary roads followed  designs. The contractors were responsible for the primary testing, or  quality control, and independent construction supervisors were  responsible for a smaller amount of testing to confirm that the contractor’s  tests were accurate. In our review of contracts, we found that to  implement the quality control plan, the independent construction  supervisors and contractors conducted testing on certified testing  equipment and kept records of daily activities and test results   (see fig. 14).
While the work on the CA-5 highway sections and secondary roads was  conducted with a quality control process in place, we observed instances  of roadside erosion, pavement roughness, surface slickness, landslides,  steep slopes, and limited use of roadside safety measures that raised  concerns about the quality of the completed works.    Roadside erosion. We found problems with erosion in some areas  that had not been adequately revegetated, resulting in drop-offs at the  edge of pavement, undermining of sidewalks, and filling of drainage  areas (see fig. 15). At one site, construction supervision officials  stated that revegetation was included in the contract to control  erosion, but they decided not to have the contractor install it because  it was dry season and the revegetation would not survive. At another  location, there was no erosion control included in the design of a  drainage way, resulting in erosion from rains. If these erosion  problems are not resolved during construction, they will present  maintenance challenges that will require additional funding.    Pavement roughness. Pavements on the CA-5 section 3, the CA-5  section 4, and secondary roads met contractual requirements for  pavement smoothness; however, these CA-5 sections and secondary  roads did not meet the International Roughness Index (IRI) targets  that MCC and MCA-Honduras had set (see table 17). The project  designer had not included the IRI measures in the contract documents  as a performance specification; thus, the contractor was not required  to meet IRI targets, which resulted in increased long-term  maintenance and user costs.    Surface slickness. On two of the completed secondary roads, we  observed some areas of asphalt seepage to the road surface—a  condition known as asphalt flushing, which can affect road safety by  reducing skid resistance, making the surface slick, or obscuring  pavement markings (see fig. 16). According to MCA-Honduras  officials, the contractor previously had taken action to mitigate the  deficiency on the road with the worst flushing and felt it was  satisfactorily repaired; however, it still existed at the time of our visit in  November 2010.    Landslides. Landslides were found along CA-5 in sections 2, 3, and  4. For example, in the unfinished section 2 of the CA-5, a large  landslide made the uncompleted road almost impassable and caused  delays in construction of section 2 (see fig. 17). The geotechnical  analysis identified by MCC as being those used to assess the risks of  landslides in the original CA-5 highway designs did not include  detailed analysis identifying how specific slopes would be stabilized,  prevention measures that could be included in the construction plans,  or an analysis of sections 3 and 4 of the CA-5. If such detailed  analysis had been conducted during the design of the highway, the  construction plans could have included such measures, thus reducing  landslides and maintenance costs.    Steep slopes. In several locations along one secondary road, we  observed that the contractor had excavated soil to construct the road  and left steeps slopes that were almost vertical, with soil eroding  along the face of the excavation and filling drainage areas (see fig.  18). Construction supervisor officials said that this type of design and  construction was typical in Honduras because there was limited right- of-way available to construct gentler slopes that were less subject to  erosion. However, we observed some locations where there appeared  to be sufficient right-of-way and the slope was still vertical. For  example, on one contract where right-of-way was available, the  construction supervision officials stated that the work was constructed  with a steep slope to save the cost of the excavation. Although the  decision to limit right-of-way acquisitions and reduce the amount of  excavation reduces costs and reconstruction time, it increases the  cost of long-term maintenance to ensure the pavement does not  deteriorate due to inadequate drainage.
Inadequate or inconsistent traffic safety measures. We found inadequate  or inconsistent use of traffic safety measures on the completed CA-5  sections and secondary roads:    Concrete barrier wall was installed along retaining walls with drop- offs, but guardrail was not generally installed along steep  embankments and drop-offs (see fig. 19).    Guardrail with safety end treatments or crash cushions to protect  motorists was not installed at the ends of most concrete barrier walls  and concrete bridges (see fig. 19).    Guardrail was installed to protect vehicles from concrete bridge railing  ends on one secondary road but not on another, in part due to limited  funding for the second road, according to MCC officials.    Solid pavement centerlines were installed in a different manner on  one secondary road than on the other two roads, with the one road  not following design standards that MCC officials said they generally  used for the activity. MCC officials attributed the lack of uniform  centerlines to one road contract having less detailed specifications  than the other two road contracts, resulting in the contractor using a  different standard supplied by the Honduran transportation ministry.  MCC asserted that motorist safety was not affected; however, this  approach differs from the traffic controls used in the United States,  where uniformity of traffic control devices, such as pavement  markings, is considered vital to their effectiveness, promoting highway  safety and efficiency and minimizing the occurrence of crashes.
MCC officials expressed confidence in the safety of the completed CA-5  sections and secondary roads, stating that the design of the road  reconstruction had met Central American standards; that the Honduras  transportation ministry had accepted and approved the proposed designs;  and that the traffic safety devices included in the reconstruction exceeded  those traditionally used on Honduran roads. However, MCC officials  acknowledged that they did not perform a cost-benefit analysis of  additional traffic control and traffic safety devices during the design of the  contracts and that funding limitations had affected the extent to which  safety improvements were included in the construction contracts.  According to MCC, additional safety improvements were installed when  funding was available.
Uncertainty over Honduras government funding for road maintenance  calls into question the likely sustainability of the MCC-funded roads.  According to the compact, the key issue for sustainability of the  transportation project is routine, periodic, and emergency road  maintenance, such as sealing cracks, repainting the pavement markings,  cleaning ditches and drainage structures, repairing potholes, resurfacing,  and clearing landslides. Several of the quality deficiencies we observed— erosion, roughness, slickness, and landslides—will increase the amount  and cost of maintenance needed over time, and failure to perform the  planned maintenance may result in escalating maintenance needs. For  example, without required maintenance,    erosion may block drainage, causing road deterioration and  undermining the sidewalks, pavements, or drainage structures,  causing them to fail;  increasingly rough pavement, as measured by the IRI, will likely  require the road to be resurfaced sooner than planned and raise road  user costs; and  landslides may close roads, produce unexpected safety hazards, or  block drainage, causing road deterioration.
However, several circumstances call into question the Honduran  government’s ability to provide the required maintenance over the 20-year  period specified in the compact. MCC expressed concerns about whether  the reconstructed roads would be maintained so as to sustain reductions  in road users’ travel costs. Contractors and construction supervisor  officials also expressed a concern that, unless the Honduras government  improved its level of road maintenance, the reconstructed roads would  likely not be maintained.
Although MCC officials worked with the Honduras government to increase  its funding of road maintenance from a precompact amount of $37 million  in 2005 to $64 million in 2010, this funding is for maintenance of all roads  on the official Honduran road network and not specifically for compact- funded roads. In addition, the commitment did not specifically address  road maintenance after 2010. With the increased funding, MCC officials  stated that they expect that the Honduran government will maintain the  MCC-funded sections of CA-5 and some of the key secondary roads, but  are concerned that it may not be at the level required to maximize the  road’s life span.
The amount that the Honduran government has committed for road  maintenance is less than required by law and needed for the roads.  According to officials from the Honduras transportation ministry and  documents prepared by Fondo Vial, the government’s allocation for 2010  represents less than half of the road maintenance allocation required by  Honduras law. These documents show that Honduras law requires the  government to allocate 40 percent of a fuel tax for road maintenance.  However, according to our analysis of Fondo Vial documents, the  percentage of fuel tax allocated for road maintenance has varied, from 27  percent in 2000 to 14 percent in 2006 to 19 percent in 2010, even though  Fondo Vial’s road maintenance plan recommends road maintenance be  funded at $210 million annually—or about 60 percent of the fuel tax.
MCC’s elimination of the vehicle weight control activity from the  Transportation Project and the extent to which the Honduran government  completes the activity in the future will affect the sustainability of the CA-5  road reconstruction. According to one Honduras government official,  there is currently no control of overweight trucks shipping goods, and a  large number of truckers exceed legal weight limits. Without  enforcement of weight limits on the CA-5 and other MCC-funded roads,  the roads will deteriorate faster, reducing transportation cost savings and  increasing road maintenance costs.

	Honduras Rural Development Project

		Farmer Training and Development Activity

MCC disbursed $26.6 million for the farmer training and development  activity, which was designed to improve the techniques and business  skills of farmers, assist farmers in improving agricultural productivity, and  achieve higher incomes from the production of high-value horticulture  crops.
MCC did not meet some of its original key targets, but it met or exceeded  three of its four final targets for the farmer training and development  activity (see table 18 for key performance results for the farmer training  and development activity). For example, 6,029 farmers harvested high- value horticulture crops, which is 82 percent of the original target of 7,340  and which exceeds the final target of 6,000. According to MCC, this  target was reduced to provide additional technical assistance to those  trained, to increase the sustainability of the assistance provided.
The farmer training activity provided a number of benefits for participating  farmers. The program provided farmers with improved skills in crop  choice and site selection, land preparation, soil and water management,  and crop protection. A number of farmers in Honduras stated that, as a  result of the training, they began growing different types of crops—for  instance, switching from corn and beans to new higher-profit crops such  as plantains, peppers, and onions—and using new agricultural  techniques. Several farmers said they increased crop volumes, quality,  and income. Figure 20 shows irrigation on a training participant farm.
According to the compact, the farmer training activity is to be sustained by  program farmers who are able to maintain their new level of productivity  and expand their business. In addition to providing technical assistance  directly to farmers, the farmer training and development activity involved  working with entities along the farm production value chain to enhance  the sustainability of the activity after compact completion. For instance,  the contractor emphasized involving the private sector in program  activities, including buyers, wholesalers, processors, and input and  equipment service providers. In addition, the farmer training activity also  helped farmers form associations for growing and selling their products to  increase the sustainability of techniques and production practices.  According to farmers we spoke with, forming associations helped them  sell to larger producers and encouraged certain producers to purchase  goods directly from these farms, which had not happened previously.
However, according to the contractor and farmers we spoke with in  Honduras, sustainability remains a concern for more than half of farmers  receiving assistance. In its final report submitted to MCA, the contractor  estimated that it takes approximately four to six production cycles for the  new skills farmers obtain to become sustainable. According to the report,  90 percent to 95 percent of program farmers who began receiving  assistance in the first 2 years of the program will continue using the new  technologies. However, of the farmers who were recruited late—more  than 50 percent of the total number of program farmers—half are  expected to reach sustainability. Farmers in Honduras stated that,  although they intended to continue using the new techniques, they were  concerned about the ability of some farmers to sustain their new skills  and overcome future challenges after the program ended. According to  MCC officials, both the contractor and the farmers have an incentive for  overstating potential sustainability challenges, as the contractor is  interested in receiving additional funding and the farmers are seeking  additional services.

		Farm-to-Market Roads Activity

MCC disbursed $20.1 million for the farm-to-market roads activity, which  was designed to improve rural roads that directly serve farms, providing  durable, all-weather access to secondary and primary roads and  ultimately improving access to markets and to social services.
MCC did not meet its original target but nearly achieved the revised target  for the farm-to-market roads activity (see table 19 for key performance  results for the farm-to-market roads activity). MCC funded the  reconstruction of 495 kilometers of farm-to-market roads, or 33 percent of  the original target of about 1,500. The target was reduced to 692  kilometers in the 2008 monitoring and evaluation plan and further reduced  to 499 in the 2010 plan. Ultimately, MCC achieved 99 percent of the final  revised target.
MCA-Honduras and MCC officials cited cost increases and compact  changes as the primary reasons for the reduction in kilometers of farm-to- market roads reconstructed. The partial termination of the Honduras  compact in 2009, in response to the country’s political situation, included  termination of the uncommitted portion of the farm-to-market roads  activity, representing approximately 93 kilometers of farm-to-market  roads. In addition, in generating the original target, MCC used a per- kilometer cost estimate of $14,300, based on Fondo Vial quality,  environmental, and social standards, but revised the estimate to $42,000  per kilometer because the Fondo Vial standards did not meet compact  requirements. Furthermore, according to MCC officials, MCC chose to  improve the durability of the roads built to increase the life of the roads  by, for instance, adding drainage structures that reduce water damage.  As a result, MCC funded fewer total kilometers of road.
The farm-to-market roads reconstructed were selected based on a list of  proposed roads with an estimated economic rate of return of at least 12  percent. The reconstructed roads included 38 stretches of roads in 29  different municipalities and 10 departments throughout Honduras. With  the completion of the roads, MCA-Honduras officials said that rural  residents’ travel times to more urbanized areas for access to markets and  health centers had been reduced from 6 hours to 1 hour in some cases  (see fig. 21).
Lack of equipment, expertise, and funding for road maintenance by the  municipalities where many reconstructed roads are located may affect the  sustainability of the roads. Although Fondo Vial is responsible for  maintaining some farm-to-market roads in Honduras, in many cases the  roads are maintained by municipalities. According to MCA-Honduras  officials, MCA-Honduras required municipalities to agree to co-finance a  percentage of the road reconstruction activities, based on the poverty  level of the community, as a condition for receiving funding. This co- financing could be made up of cash and in-kind contributions, such as  materials. In addition, the municipality had to agree to permanently  maintain the roadway.
However, the maintenance of the road and its associated benefits is a  concern. MCA-Honduras officials stated that, although some  municipalities may be acquiring additional equipment, the municipalities  generally lack the equipment and expertise to maintain the roads. We  found an example of this in one section of farm-to-market road where the  road had washed out in a low area and maintenance was being  performed by hand with little progress. MCA-Honduras had intended to  help improve the municipalities’ expertise in proper road maintenance  procedures through training. However, no funds were available for the  training after MCC funding was partially terminated partially as a result of  the country’s political situation.

		Farmer Access to Credit Activity

MCC disbursed $12.8 million for the farmer access to credit activity,  which consisted of three components—an agricultural credit trust fund,  technical assistance for financial institutions, and a national property  registry activity. This activity was designed to increase the supply of credit  to rural borrowers, including program farmers and other agribusiness  borrowers. The agricultural credit trust was a $6 million fund that was  designed to provide loans to financial institutions to improve the  availability of credit for rural lending. The technical assistance program  provided assistance to financial and nonfinancial institutions to strengthen  the institutions and assist them in developing products to more effectively  serve the horticulture industry. The expansion of the national property  registry activity was designed to create a new registry of movable  property and facilitate implementation of legislation required to institute  such a new system.
According to MCA-Honduras officials, implementation challenges led to  scope modifications and delays in the farmer access to credit activity. An  initial lack of interest in accessing the agricultural credit fund among  traditional banking institutions led MCA-Honduras and the contractors to  refocus these activities on smaller sources of credit, such as financial  intermediaries and input suppliers. These early challenges and resulting  modifications meant that the agricultural credit fund was not effectively  operating until late in the compact.
In addition, the agricultural credit fund, which was initially intended to  target program farmers, was modified to include horticulture producers  and businesses. According to MCC, small farmers making the transition  to high-value horticulture used existing resources and savings and did not  require access to credit until market opportunities expanded. Due to this  delay in demand for credit and an interest in enhancing the sustainability  of the lending activity, MCC and MCA-Honduras decided to expand the  scope to include nonprogram farmers. Additionally, according to MCA- Honduras and MCC officials, some initial opposition to reforming  collateral laws and a political transition in Honduras significantly  increased the time it took to enact the new law.
MCC met most key original and all final targets for the farmer access to  credit activity, following modifications and delays in implementation (see  table 20 for key performance results for the farmer access to credit  activity). For example, the total value of loans disbursed to farmers,  agribusinesses, and other producers in the horticulture industry was  $10.7 million—more than 170 percent of the revised target of $6 million  and 37 percent of the original target of $28.8 million. MCC noted that  the updated indicator reflected changes in the operational guidelines for  the use of loan fund resources that allowed nonprogram farmers,  agribusinesses, and vendors in the horticulture industry to access credit.  An MCC official noted that, as a result of rescoping the activity, MCA- Honduras was better able to reach beneficiary populations that likely  would not have been served under the original design.
Financial institutions participating in both the agricultural credit fund and  technical assistance activity also said that these activities helped them  increase the credit they provide to the agricultural sector in Honduras.  Representatives of one financial institution in particular said that the  training helped them develop special products, which they were  previously unfamiliar with, to provide credit to the agricultural sector.
MCC took steps to increase the sustainability of the farmer access to  credit activity through continuation of certain activities beyond the end of  the compact. According to MCA-Honduras officials, since the agricultural  credit fund activity started late, MCC arranged for the activity to continue  after the end of the compact to achieve the intended effects. The  agricultural credit fund will continue operating for 5 additional years after  the compact is complete, which will enhance the sustainability of these  loans to the horticultural industry. Since MCA-Honduras and MCC will no  longer oversee the agricultural credit fund after compact end, a committee  chaired by Honduras’s Ministry of Finance was set up to oversee the  administration of the agricultural credit fund. According to the contractor  of the technical assistance activity, many of the new financial tools  adopted by financial institutions as a result of the technical assistance are  self-sustaining, as they do not require external updates and are self- financing. In addition, we spoke with representatives of several financial  institutions in Honduras who stated their intentions to continue lending to  the agricultural sector and taking out loans with the agricultural credit fund  after compact completion.

		Agricultural Public Goods Grants Facility Activity

MCC disbursed $8.8 million for the agricultural public goods grants facility  activity, which funded 15 small competitive grants designed to support  activities that enhance and accelerate the development of market-based  commercial agriculture, particularly the horticultural sector.
MCC met or exceeded some original and most final targets for the  agricultural public goods grants facility activity (see table 21 for key  performance results for the agricultural public goods grants facility  activity). For example, irrigation systems reached more than 950 farmers,  or almost 250 percent of the target for the number of farmers connected  to the community irrigation system.
Agricultural public goods grants facility took longer than expected to  implement, but MCA-Honduras officials were positive about sustainability.  Public goods grants were planned for 18 months, but almost every activity  had to be extended beyond the end of the originally planned completion  date. Public goods grants were implemented by local organizations with  the support of the local community to improve sustainability. According to  some public goods grantees, local communities with irrigation systems  received training in the maintenance of such systems and help  establishing a user-fee structure that would fund maintenance costs.  According to those grantees and MCA-Honduras officials, such  arrangements will bolster the sustainability of the irrigation systems.

Appendix IV: Comments from the Millennium Challenge Corporation

Appendix V: GAO Contacts and Staff Acknowledgments

	GAO Contact

	Staff Acknowledgments

In addition to the contact named above, Emil Friberg Jr. (Assistant  Director), Michael Armes, Diana Blumenfeld, Lynn Cothern, Gergana  Danailova-Trainor, Miriam Carroll Fenton, Ernie Jackson, Leslie Locke,  Reid Lowe, Amanda Miller, and Suneeti Shah Vakharia made key  contributions to this report. Additional technical assistance was provided  by Lucas Alvarez, Juan Avila, Chloe Brown, Thomas Costa, Martin  DeAlteriis, Michael Derr, Kevin Egan, Vanessa Estevez, Etana Finkler,  Rachel Girshick, Kieran McCarthy, Lauren Membreno, Werner Miranda- Hernandez, Mark Needham, Nelson Olhero, Joshua Ormond, Marisela  Perez, Kyerion Printup, Cristina Ruggiero, Carla Rojas, Jena Sinkfield,  and Omar Torres.

Related GAO Products

Millennium Challenge Corporation: Summary Fact Sheet for 17  Compacts. GAO-10-797R. Washington, D.C.: July 14, 2010.
Millennium Challenge Corporation: MCC Has Addressed a Number of  Implementation Challenges, but Needs to Improve Financial Controls and  Infrastructure Planning. GAO-10-52. Washington, D.C.:   November 6, 2009.
Millennium Challenge Corporation: Summary Fact Sheets for 11  Compacts Entered into Force. GAO-08-1145R. Washington, D.C.:  September 26, 2008.
Millennium Challenge Corporation: Independent Reviews and Consistent  Approaches Will Strengthen Projections of Program Impact. GAO-08-730.  Washington, D.C.: June 17, 2008.
Millennium Challenge Corporation: Analysis of Compact Development  and Future Obligations and Current Disbursements of Compact  Assistance. GAO-08-577R. Washington, D.C.: April 11, 2008.
Management Letter: Recommendations for Improvements to MCC’s  Internal Controls and Policies on Premium Class Air Travel.  GAO-08-468R. Washington, D.C.: February 29, 2008.
Millennium Challenge Corporation: Projected Impact of Vanuatu Compact  Is Overstated. GAO-07-1122T. Washington, D.C.: July 26, 2007.
Millennium Challenge Corporation: Vanuatu Compact Overstates  Projected Program Impact. GAO-07-909. Washington, D.C.:   July 11, 2007.
Millennium Challenge Corporation: Progress and Challenges with  Compacts in Africa. GAO-07-1049T. Washington, D.C.: June 28, 2007.
Millennium Challenge Corporation: Compact Implementation Structures  Are Being Established; Framework for Measuring Results Needs  Improvement. GAO-06-805. Washington, D.C.: July 28, 2006.
Analysis of Future Millennium Challenge Corporation Obligations.  GAO-06-466R. Washington, D.C.: February 21, 2006.
Millennium Challenge Corporation: Progress Made on Key Challenges in  First Year of Operations. GAO-05-625T. Washington, D.C.:   April 27, 2005.
Millennium Challenge Corporation: Progress Made on Key Challenges in  First Year of Operations. GAO-05-455T. Washington, D.C.:   April 26, 2005.

Summary:
Why GAO Did This Study

The Millennium Challenge Corporation (MCC) was established in 2004 to help developing countries reduce poverty and stimulate economic growth through multiyear compact agreements. As of June 2011, MCC had signed compacts with 23 countries totaling approximately $8.2 billion in assistance. MCC asks countries to develop compacts with a focus on results and effective monitoring and evaluation. MCC sets targets, which may be revised, to measure the compact results. In late 2010, the Cape Verde and Honduras compacts reached the end of the 5-year implementation period. This report, prepared in response to a congressional mandate to review compact results, examines the extent to which MCC has (1) achieved performance targets and sustainability for projects in Cape Verde and Honduras and (2) assessed progress toward the goal of income growth and poverty reduction. GAO analyzed MCC documents and interviewed MCC officials and stakeholders in Washington, D.C., Cape Verde, and Honduras.

What GAO Found

In its first two completed compacts, Cape Verde and Honduras, MCC met some key original targets and many final targets, but the sustainability of some activities is uncertain. In Cape Verde, MCC altered the scope of its three projects, meeting some key original targets and many final targets by the compact's end. For example, an activity to upgrade and expand a major port in Cape Verde, which represented almost 50 percent of the $110.1 million compact at signature, faced inaccurate early planning assumptions and increased costs. As a result, MCC split the port activity into two phases, funding the completion of the first phase--which covered about one-third of total expected costs for the port activity. In Honduras, MCC met a key original target and most final targets by the end of the $205 million compact. For example, MCC constructed approximately half of the planned highway and all rescoped secondary roads. In addition, several compact activities in Cape Verde and Honduras face challenges to long-term sustainability. Although MCC took steps to provide for sustainability, the governments of both Cape Verde and Honduras may have difficulty maintaining the infrastructure projects in the long term due to lack of funding, among other challenges. For example, MCC included privatization of port operations and road maintenance funding as conditions of the Cape Verde compact. However, the government has had difficulty meeting these requirements, calling into question the long-term sustainability of some projects. In Honduras, both uncertain government funding for road maintenance and design decisions on construction projects may jeopardize the sustainability of MCC-funded roads. MCC impact evaluations for the Cape Verde and Honduras compacts are ongoing but delayed, and updated economic rate of return (ERR) analyses of the largest compact projects have not been well documented or linked to revised targets. MCC has taken steps to modify impact evaluation designs in response to implementation challenges and delays. For example, challenges in implementing the original evaluation design for the farmer training and development activity in Honduras led MCC to enhance the methodology by adding a supplemental design. Furthermore, updated ERR analyses of projects representing over 50 percent of compact funds have not been well documented or supported. For example, MCC updated its ERR analysis for the Honduras transportation project, but documentation for the underlying quantitative analysis supporting the updated ERR is not available. Additionally, ERR analyses updated in response to rescoping compact activities were not consistently linked to revised targets and indicators. For example, MCC updated the ERR analysis for the watershed management and agricultural support project in Cape Verde, but the analysis does not reflect the values and numerical ranges of key revised targets. In addition, although original ERRs are estimated for a 20-year period, MCC has not developed guidance for updating ERRs following compact completion. Re-estimated end-of-compact ERRs will likely be lower than predicted at compact signature.

What GAO Recommends

GAO recommends that MCC (1) work with countries to make decisions that reduce long-term maintenance needs, (2) ensure updated economic analyses are documented and consistent with monitoring targets, and (3) develop guidance for updating economic analyses following compact completion. MCC agreed with the intent of all three recommendations.