United States Government Accountability Office

Washington, DC 20548 

February 21, 2006 

The Honorable Richard G. Lugar 

Chairman, Committee on Foreign Relations 

United States Senate 

Subject: Analysis of Future Millennium Challenge Corporation Obligations 

Dear Chairman Lugar: 

The Millennium Challenge Corporation (MCC)—intended to provide aid to developing countries 

that have demonstrated a commitment to ruling justly, encouraging economic freedom, and 

investing in people—has received appropriations for fiscal years (FY) 2004-06 totaling more than 

$4.2 billion. About $3.8 billion of this amount has been set aside for compact assistance.1

 As of 

January 2006, MCC had signed or approved eight compacts2

 obligating about $1.5 billion,3 leaving 

an unobligated balance of about $2.3 billion. To assist in this year’s budget deliberations, this 

letter provides a range of estimates under two scenarios of how quickly MCC could obligate this

balance and three possible levels of FY 2007 appropriations at the current pace of compact 

award. The President has requested an additional $3 billion for MCC for FY 2007. 

To address this objective, we analyzed MCC’s FY 2005 and 2006 budget presentations and other 

corporation records. We selected two illustrative scenarios for future MCC obligations: (1) a 

“higher cost” scenario in which the average size of future compacts is consistent with MCC 

projections and (2) a “lower cost” scenario in which future compacts are consistent with the 

average compact size to date. For both of these scenarios, we assumed that MCC would sign an 

average of two compacts per quarter—the actual rate observed since April 2005. We discussed 

our estimates with MCC officials and have incorporated their comments as appropriate. We 

conducted our work in December 2005 through February 2006 in accordance with generally 

accepted government auditing standards. 

Summary 

Under the higher-cost scenario, MCC would obligate the balance of its FY 2004-06 appropriations 

in the second quarter of FY 2007. Assuming that subsequent compact size remains consistent with 

MCC projections, an FY 2007 appropriation of $1, $2 or $3 billion will support the funding of 

compacts through, respectively, the third quarter of FY 2007, the fourth quarter of FY 2007, or the 

second quarter of FY 2008. The cumulative number of compacts under this scenario ranges from 

18 to 23. 

 1

About $400 million has been set aside for MCC’s threshold country program, administrative expenses, due diligence, 

monitoring and evaluation, and other costs. 

2

The Millennium Challenge Act of 2003 (Public Law 108-199, Division D, Section 605) authorizes MCC to provide

assistance to countries that enter into public compacts with the United States. MCC has negotiated compacts with 

countries that contain agreed assistance objectives, responsibilities, implementation schedules, expected results, and 

evaluation strategies. 

3

Through January 2006, MCC had expended about $12 million of the $1.5 billion obligated for compact assistance. 

 GAO-06-466R MCC Obligations 
Under the lower-cost scenario, MCC would obligate the balance of its FY 2004-06 appropriations 

during the fourth quarter of FY 2007 (about 6 months later than under the first scenario). 

Assuming that subsequent compact size remains consistent with the average to date, an 

appropriation of $1, $2 or $3 billion will support the funding of compacts through, respectively, 

the third quarter of FY 2008, the first quarter of FY 2009, or the third quarter of FY 2009. The 

cumulative number of compacts under this scenario ranges from 25 to 34. 

Assumptions Used in Our Analysis 

For the higher-cost scenario, we assumed an average size of (a) $300 million for compacts 

funded with MCC’s FY 2006 appropriations and (b) $345 million for compacts funded with its FY

2007 appropriations.These figures are consistent with recent MCC projections. For the lowercost scenario, we assumed an average compact size of $190 million. This amount is consistent 

with MCC’s FY 2006 budget presentation and the actual average for the eight compacts signed or 

approved to date. For these compacts, MCC ranks among the top three donors in five of the eight 

countries and among the top 10 donors in the remaining three countries.4

 According to its FY 2005 

and 2006 budget presentations and recent comments by the corporation’s Chief Executive 

Officer, MCC seeks to be among the largest donors in each country that receives compact 

assistance. Table 1 summarizes some key characteristics of the compacts signed or approved 

from April 2005 through January 2006. 

Table 1: Characteristics of MCC Compacts Signed or Approved, April 2005 to January 2006 

Dollars in millions 

Country Status

Month 

signed or

approved

Total

amount 

Length 

(years) 

Average 

amount 

per year 

Donor

rank 

Madagascar Entry into force aApril 2005 110 4 28 8

Honduras Entry into force aMay 2005 215 5 43 5

Nicaragua Signed June 2005 175 5 35 10

Cape Verde Entry into force aJuly 2005 110 5 22 3

Georgia Signed Sept. 2005 295 5 59 2

Armenia Approved b Dec. 2005 236 5 47 3

Vanuatu Approved bJan. 2006 66 5 13 2

Benin Approved bJan. 2006 307 5 61 2

Total 1,514 308.2

Average 189

Source: GAO analysis of MCC records and data from the Organization for Economic Cooperation and Development. 

a

Signed compacts in which MCC and partner countries have negotiated additional agreements covering disbursement of funds,

governance, procurement, fiscal and procurement agents, and other implementation matters. 

b

Compact approved by MCC Board of Directors but not yet signed by corporation and country officials.

For both scenarios, we assumed that over the next several years MCC would sign an average of 

two compacts per quarter—the actual rate observed. From April 2005 through January 2006, 

MCC signed or approved compacts with eight countries, or two compacts per quarter. This rate is 

the lower bound of the target range of two to four compacts per quarter established in MCC’s FY

2006 budget presentation. 

 4

To make this determination, we compared the average annual size of each compact with the gross official 

development assistance (average for 2003-04) provided by the top 10 donors in each country. 

2 GAO-06-466R MCC Obligations 
Analysis of Future MCC Obligations 

Under the higher-cost scenario, the corporation would obligate the balance of its FY 2004-06 

appropriations by the second quarter of FY 2007. Assuming subsequent compact size remains 

consistent with MCC projections, an FY 2007 appropriation of $1, $2 or $3 billion would fund 

compacts through, respectively, the third quarter of FY 2007, the fourth quarter of FY 2007, or the 

second quarter of FY 2008.

5

 The cumulative total of compacts funded under this scenario would 

be 18, 20 or 23. 

Under the lower-cost scenario, the corporation would obligate the balance of its FY 2004-06

appropriations by the fourth quarter of FY 2007 (or about 6 months later than under the first 

scenario). Again assuming that subsequent compact size remains consistent with the average to

date, an appropriation of $1, $2 or $3 billion would fund compacts through, respectively, the third 

quarter of FY 2008, the first quarter of FY 2009, or the third quarter of FY 2009. The cumulative 

number of compacts funded under this scenario would be 25, 30 or 34. 

Figure 1 presents our estimate of MCC’s cumulative obligations and number of compacts signed 

under these two scenarios, as well as MCC’s obligations to date. 

Figure 1: Estimated MCC Obligations and Numbers of Compacts under Higher- and Lower-Cost Scenarios 

and Current Obligations as of January 2006 

 5

Our estimates assume that about 10 percent of the corporation’s FY 2007 appropriations would be set aside for MCC’s

threshold country program, administrative expenses, due diligence, monitoring and evaluation, and other costs,

leaving the remaining 90 percent to finance compacts. 

3 GAO-06-466R MCC Obligations 
Some Implications of Our Analysis 

Over the period covered by our analysis, the substantial expansion in the number of compacts—

and thus the number of countries in which MCC would operate6

—suggested by MCC’s current 

and target rates for signing compacts could present several challenges for the corporation. First, 

such an expansion could exhaust the pool of candidate countries that meet MCC’s quantitative 

eligibility criteria. Our analysis of MCC data suggests that 34 candidate countries—8 lowermiddle income and 26 low income—met MCC’s FY 2006 quantitative indicator criteria. We 

previously reported that 19 and 24 low income candidate countries met MCC’s criteria in FY 2004 

and 2005, respectively.

7

Second, such an expansion could significantly challenge MCC’s ability to make eligibility 

determinations; review and assist in proposal development; conduct due diligence reviews; 

negotiate, sign, complete entry into force requirements; and assist in the development of 

compact implementation structures for a large number of additional countries. For the eight 

countries in table 1, an average of 484 days elapsed from eligibility determination to compact 

signing or approval. It took, on average, an additional 112 days for three of these countries to 

advance from compact signing to entry into force.

Third, monitoring and evaluating the implementation of complex, multi-million-dollar compacts 

in a large number of countries could strain MCC’s management and oversight capabilities. 

Several development experts have stated that MCC’s proposed staffing level (300) is very lean for 

an organization planning to disburse $2 billion or more per year. 

Comments from MCC 

Overall, MCC officials characterized our analysis as unbiased and fact based. With regard to the 

implications of our analysis, MCC officials stated that the corporation was taking steps to reduce 

the time required to develop, review, and start implementing compacts. These steps include (1) 

developing guidance to assist eligible countries in developing proposals that will require limited 

revision; (2) reducing the time required to conduct due-diligence reviews by increasing staffing 

and resources devoted to this task;8

 and (3) implementing policies intended to reduce the time 

between compact signing and entry into force by requiring MCC teams and countries to resolve 

key implementation details and issues earlier in the compact development process. Consistent 

with recent public remarks made by the corporation’s Chief Executive Officer, MCC officials 

recognized that implementing compacts in developing countries will present substantial 

challenges. MCC officials also provided updated information about projected compacts and 

several technical comments, which we have incorporated as appropriate. 

 6

Under the Millennium Challenge Act, countries may have only one Millennium Challenge compact in effect at a time. 

7

See U.S. Government Accountability Office, Millennium Challenge Corporation: Progress Made on Key Challenges

in First Year of Operations, GAO-05-455T (Washington, DC: April 26, 2005). 

8

MCC plans to increase its staff from about 170 to 300 between January and September 2006. 

4 GAO-06-466R MCC Obligations 
- - - - - 

If you or your staff have any questions about this letter, please contact me at 202-512-4128 or 

gootnickd@gao.gov. Phil Herr and Michael Rohrback made significant contributions to this letter.

Sincerely yours, 

David B. Gootnick 

Director, International Affairs and Trade 

5 GAO-06-466R MCC Obligations 
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