a

GAO

United States Government Accountability Office

Report to the Chairman, Committee on 

Foreign Relations, U.S. Senate

July 2006 MILLENNIUM 

CHALLENGE 

CORPORATION

Compact 

Implementation 

Structures Are Being 

Established; 

Framework for 

Measuring Results 

Needs Improvement

GAO-06-805
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

July 2006

MILLENNIUM CHALLENGE 

CORPORATION 

Compact Implementation Structures Are 

Being Established; Framework for 

Measuring Results Needs Improvement 

Highlights of GAO-06-805, a report to the 

Chairman, Committee on Foreign 

Relations, U.S. Senate 

In January 2004, Congress 

established the Millennium 

Challenge Corporation (MCC) to 

administer the Millennium 

Challenge Account. MCC’s mission 

is to reduce poverty by supporting

sustainable, transformative

economic growth in developing 

countries that create and maintain

sound policy environments. MCC 

has received more than $4.2 billion 

in appropriations, and, as of May 

2006, it had disbursed $22.4 million 

to four countries whose signed

MCC compacts have entered into 

force. For the first three countries 

with compact entry into force—

Madagascar, Cape Verde, and 

Honduras—GAO was requested to

examine (1) key aspects that MCC 

reviewed, and the criteria it used, 

in its due diligence assessments; 

and (2) the structures that have

been established for implementing 

the compacts.

What GAO Recommends

GAO recommends that the Chief 

Executive Officer of MCC 

(1) ensure that economic analyses 

of compact proposals better reflect 

country conditions and involve

country participation and 

(2) improve monitoring and 

evaluation by obtaining more

reliable baseline data, ensuring a 

clear linkage to economic analyses, 

developing criteria for establishing

and adjusting targets, and ensuring

timely development of evaluation 

designs. MCC generally agreed with 

GAO’s recommendations; State 

commented that some of GAO’s 

findings reflect transitory problems. 

MCC undertook a wide range of activities in its due diligence, including five 

key aspects of the Madagascar, Cape Verde, and Honduras proposals: 

(1) countries’ consultation with local groups in developing compact 

proposals, (2) projects’ coherence with compact goals, (3) environmental 

and social impacts, (4) institutional and financial sustainability, and 

(5) impact on economic growth and poverty reduction. MCC based its 

assessments on an evolving set of criteria: early, general guidance to the 

countries followed by later, more specific guidance. MCC’s analyses of the 

projects’ economic impact were limited in that some of the assumptions and 

data used may not reflect country conditions. As a result, the projects 

selected on the basis of the analyses may not achieve compact goals. In the 

two countries we visited, Madagascar and Cape Verde, MCC conducted the 

analyses with limited country participation, which resulted in countries’ 

having little understanding of the process. 

MCC and the three countries have made progress in establishing compact 

country structures for oversight and management, procurement, fiscal 

accountability, and monitoring and evaluation, although some of these 

structures are not yet complete. The oversight structures allow for country

management with MCC review, but some organizations were not fully staffed

for months after the compacts entered into force. Madagascar and Cape 

Verde have implemented fiscal accountability structures for MCC-funded 

projects, and established procurement structures with effective 

characteristics; however, these structures are still largely untested and some

are still under development. Finally, MCC and the countries have established 

monitoring and evaluation frameworks to track and account for program 

results. However, limitations in the baseline data collected, linkage to 

economic analyses, methods of addressing uncertainty associated with 

program results, and the timely design of randomized controlled trials may 

constrain MCC’s ability to monitor and evaluate program results. 

Status of MCC Compact Development and Appropriations 

Administration and other expenses

$0.4 billion

Committed for 8 countriesa

$1.5 billion

Source: GAO analysis of MCC information.

MCC budget allocation and disbursement status

Compact development and implementation status

7 7 2 6 

Signed 

compacts

not entered

into force

Signed compacts with 

entry into force 

MCC’s due

diligence review

Countries in proposal

development

Available for compacts

$2.3 billion

Total eligible countries: 22

Total appropriations: $4.2 billion

a

$22.4 million of the committed amount has been disbursed to begin compact implementation. 

www.gao.gov/cgi-bin/getrpt?GAO-06-805.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact David Gootnick 

at (202) 512-3149 or gootnickd@gao.gov. 
Page i GAO-06-805 Millennium Challenge Corporation

Contents

Letter 1

Results in Brief 3

Background 6

MCC Assessed Five Key Aspects of Proposals While Developing 

Guidance, but Limitations Affected the Accuracy of Economic 

Analyses 15

MCC-Approved Compact Implementation Structures Are Not Yet 

Complete; Weaknesses in Monitoring and Evaluation Framework 

May Limit Measurement of Results 30

Conclusions 56

Recommendations 57

Agency Comments and Our Evaluation 58

Appendixes

Appendix I: MCC Actions in Response to April 2005 GAO 

Recommendations 61

MCC Has Developed a Strategic Plan to Enhance Accountability and 

Completed a 2006 Performance Plan 61

MCC Has Made Significant Progress in Establishing Internal 

Controls 62

MCC Has Taken Steps to Develop Human Capital, but Does Not 

Track Allocation of Human Capital to Key Activities 66

MCC Has Taken Steps to Define Corporate Governance 68

Appendix II: Scope and Methodology 70

Appendix III: MCC Projects in Madagascar and Cape Verde 74

Appendix IV: Summary of MCC Procurement Agents, Standards, and 

Provisions in Madagascar, Cape Verde, and Honduras 78

Appendix V: Comments from the Millennium Challenge Corporation 81

GAO Comments 85

Appendix VI: Comments from the Department of State 86

GAO Comments 91

Appendix VII: GAO Contact and Staff Acknowledgments 94

Tables Table 1: Hiring Dates for Key Positions Identified in Madagascar, 

Cape Verde, and Honduras Compacts, as of April 2006 34
Contents

Page ii GAO-06-805 Millennium Challenge Corporation

Table 2: Status of MCA-Madagascar Internal Controls, as of 

February 2006 41

Table 3: Status of MCA-Cape Verde Internal Controls, as of 

February 2006 43

Table 4: MCC Response to GAO Recommendations for 

Corporatewide Accountability 62

Table 5: MCC Response to GAO Recommendations for Internal 

Controls over Program and Administrative Operations 65

Table 6: MCC Response to GAO Recommendations for Human 

Capital Infrastructure 68

Table 7: MCC Response to GAO Recommendations for Corporate 

Governance 69

Table 8: Procurement Agents and Standards in Madagascar, Cape 

Verde, and Honduras 78

Table 9: Procurement Provisions, Roles, and Responsibilities 

Stated in MCC Agreements with Madagascar, Cape Verde, 

and Honduras 79

Figures Figure 1: Summary of the MCC Compact Development and 

Implementation Process and Status of Countries Eligible 

to Apply for Compacts, as of June 2006 9

Figure 2: MCC-Eligible Countries with Signed Compacts, as of May 

2006 12

Figure 3: Number of Days Elapsed from Eligibility to Compact 

Signature or Entry into Force, as of May 2006 13

Figure 4: Timeline of MCC Guidance Issuance and Investment 

Memo Dates 14

Figure 5: Issuance of Key MCC Criteria for the Consultative 

Process Relative to Completion of Due Diligence for 

Madagascar, Honduras, and Cape Verde 18

Figure 6: Issuance of Key MCC Criteria for Project Coherence 

Relative to Completion of Due Diligence for Madagascar, 

Honduras, and Cape Verde 20

Figure 7: Issuance of Key MCC Criteria for Environmental Impact 

Relative to Completion of Due Diligence for Madagascar, 

Honduras, and Cape Verde 22

Figure 8: Issuance of Key MCC Criteria for Project Sustainability 

Relative to Completion of Due Diligence for Madagascar, 

Honduras, and Cape Verde 24

Figure 9: Illustration of MCC’s Methodology for Calculating an 

Economic Rate of Return: Advanced Crop Irrigation 

Project 26
Contents

Page iii GAO-06-805 Millennium Challenge Corporation

Figure 10: Issuance of Key MCC Criteria for Economic Analysis 

Relative to Completion of Due Diligence for Madagascar, 

Honduras, and Cape Verde 27

Figure 11: Compact Country Oversight and Management 

Structure 32

Figure 12: Elements of the MCC Fiscal Accountability 

Framework 38

Figure 13: Indicator Structure for Honduras’s Rural Development 

Project 50

Figure 14: Jatropha Plantation, outside Antsirabe, Madagascar, 

Targeted for Assistance by the MCA-Madagascar 

Agricultural Business Investment Project 74

Figure 15: Antananarivo Land Records Storage Room, Programme 

National Foncier Offices 75

Figure 16: Port of Praia, Cape Verde 76

Figure 17: The Road from Assomada to Rincao, Cape Verde 77

Abbreviations

CEO Chief Executive Officer

ERR economic rate of return

FAP Fiscal Accountability Plan

FISMA Federal Information Security Management Act of 2002

FMFIA Federal Managers Financial Integrity Act of 1982

GDP gross domestic product

GPRA Government Performance and Results Act of 1993

IG Inspector General

MCA Millennium Challenge Account

MCC Millennium Challenge Corporation

NBC National Business Center

NGO nongovernmental organization

OMB Office of Management and Budget

PIU Program Implementation Unit

SAS 70 Statement on Auditing Standards No. 70

USAID U.S. Agency for International Development
Contents

Page iv GAO-06-805 Millennium Challenge Corporation

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Page 1 GAO-06-805 Millennium Challenge Corporation

United States Government Accountability Office

Washington, D.C. 20548

A

July 28, 2006 Letr

The Honorable Richard G. Lugar

Chairman

Committee on Foreign Relations

United States Senate

Dear Mr. Chairman:

In January 2004, Congress established the Millennium Challenge 

Corporation (MCC) to administer the Millennium Challenge Account 

(MCA) for foreign assistance.1

 MCC’s mission is to reduce poverty by 

supporting sustainable, transformative economic growth in partnership 

with developing countries that create and maintain sound policy 

environments. MCC carries out its mission by funding projects or activities 

in developing countries that demonstrate a commitment to MCA 

objectives. MCC expects to raise incomes and lift thousands out of poverty 

in countries receiving MCC assistance. MCC has received appropriations 

for fiscal years 2004 to 2006 totaling more than $4.2 billion, about $3.8 

billion of which has been set aside for compact assistance; as of May 2006, 

it had committed $1.5 billion and disbursed $22.4 million in compact 

assistance.2

 The President has requested an additional $3 billion in MCC 

funding for fiscal year 2007.

In April 2005, we reported on MCC’s first year of operations, focusing on its 

process for determining country eligibility, progress in developing 

compacts, coordination with stakeholders, and progress in establishing 

management and accountability structures.3

 We made several 

recommendations to the Chief Executive Officer (CEO) of MCC and to the 

1

Millennium Challenge Act of 2003, Public Law 108-199, Division D, Title VI of the 

Consolidated Appropriations Act, 2004. Title II, Division D of this act established MCA for 

MCC appropriations.

2

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

monitoring and evaluation, threshold country program—which provides funding to 

candidate countries to help them become eligible for MCA assistance, and other costs. An 

MCC compact is an agreement between the U.S. government, acting through MCC, and the 

government of a country eligible for MCC assistance. Compacts have a maximum duration 

of 5 years.

3

GAO, Millennium Challenge Corporation: Progress Made on Key Challenges in First Year 

of Operations, GAO-05-455T (Washington, D.C.: Apr. 26, 2005) and GAO-05-625T

(Washington, D.C.: Apr. 27, 2005).
Page 2 GAO-06-805 Millennium Challenge Corporation

Secretary of State, in her capacity as board chair, on ways to improve 

MCC’s strategic planning, internal controls, and human capital and 

corporate governance policies. At that time, MCC’s assessment—“due 

diligence”—of eligible countries’ compact proposals4

 had resulted in its 

signing one compact for $110 million with Madagascar; by the end of May 

2006, MCC had signed compacts with seven more countries.5

 As of the end 

of May 2006, six compact countries—Madagascar, Cape Verde, Honduras, 

Georgia, Vanuatu, and Nicaragua—had signed the supplemental 

agreements that MCC requires before compacts can “enter into force,” 

when MCC begins to disburse funds for compact implementation. MCC has 

disbursed funds to four of these six countries—Madagascar, Cape Verde, 

Honduras, and Georgia—to begin implementing their compacts.

At your request, we examine in this report MCC’s procedures and 

structures for developing and implementing compacts. We focused our 

work on the first three countries to sign compacts: Madagascar, Cape 

Verde, and Honduras. Specifically, we reviewed 

• the key areas that MCC examined in its due diligence assessments of the 

three countries’ compact proposals and the criteria that MCC used in 

these assessments and

• the implementation structures that MCC and the three countries have 

established for oversight and management, fiscal accountability, 

procurement, and monitoring and evaluation of compacts. 

We also report on MCC’s response to our April 2005 recommendations (see 

app. I). In conducting our work, we analyzed MCC’s process for evaluating 

eligible country proposals, including MCC’s guidance documents for 

eligible countries, policies and procedures, economic analysis, and 

documentation of its assessment of proposals submitted by Madagascar, 

Cape Verde, and Honduras. In addition, we reviewed MCC’s compacts with 

the three countries and the supplemental agreements required for those

4

A compact proposal outlines, among other things, program objectives, related projects, 

project funding, and a program implementation framework.

5

Between April 2005 and May 2006, MCC signed compacts with Honduras, Cape Verde, 

Nicaragua, Georgia, Benin, Vanuatu, and Armenia.
Page 3 GAO-06-805 Millennium Challenge Corporation

compacts to enter into force.6 We also reviewed the countries’ 

implementation plans, such as those for monitoring and evaluation. We 

supplemented our evaluation of due diligence and implementation 

documents with interviews with MCC officials and site visits to Madagascar 

and Cape Verde, in January and February 2006. We selected these two 

countries because they had advanced further than Honduras in filling key 

positions and beginning compact implementation. These site visits 

provided us with a firsthand perspective of the status of the program and 

the challenges these countries faced in developing their compacts and in 

beginning to implement their programs. Furthermore, we examined MCC’s 

planning documents, policies, and procedures and interviewed senior MCC 

officials. We conducted our review from June 2005 through May 2006 in 

accordance with generally accepted government auditing standards. (See 

app. II for additional details of our scope and methodology.)

Results in Brief MCC undertook a wide range of activities in its due diligence of the 

Madagascar, Cape Verde, and Honduras proposals, while at the same time 

developing guidance on key aspects of the countries’ proposals. In 

conducting its assessments, MCC applied criteria from general guidance 

issued in 2004, which was shortly before the countries began developing 

their proposals, and from more specific guidance issued in 2005 and 2006. 

MCC’s analyses of the projects’ economic impact had limitations in their 

use of assumptions and data and degree of country involvement. We 

focused on MCC’s assessment of five key aspects: the consultative process 

during proposal development, project coherence, environmental impact, 

institutional and financial sustainability, and economic analyses of the 

projects’ impact on economic growth and poverty reduction:

• Consultative process. MCC obtained the views of government, civil 

society, and private sector officials to determine whether the countries’ 

consultative process had been timely, participatory, and meaningful. 

MCC officials told us that, on the basis of these assessments, they had 

returned proposals that were not sufficiently founded on the 

consultative process. However, in assessing the proposals, MCC used 

criteria contained in guidance issued after or shortly before the 

countries submitted their proposals. 

6

MCC’s compacts with Georgia, Vanuatu, and Nicaragua entered into force, respectively, on 

April 7, May 11, and May 26, 2006. However, because these compacts entered into force late 

in our review, we did not focus our analysis on these countries.
Page 4 GAO-06-805 Millennium Challenge Corporation

• Project coherence. MCC assessed whether the countries’ proposed 

projects were linked to their compact goals and whether the projects 

addressed key impediments to achieving those goals. MCC’s initial 

published guidance to the countries did not inform them that projects 

should be linked to compact goals. When MCC issued more specific 

guidance, in November 2005, it had already signed compacts with all 

three countries. Generally, projects were linked to compact goals in the 

three countries that we reviewed. 

• Environmental and social impact. MCC reviewed the probable 

environmental and social impact of proposed projects. For projects that 

MCC deemed likely to have a negative impact, it required further 

assessment as well as an impact management plan. In conducting its 

assessments, MCC used criteria in guidelines issued in March 2005.

• Project sustainability. MCC assessed whether projects could be 

sustained institutionally and financially after the compacts expired. 

MCC reviewed (1) the countries’ commitment to sustaining the projects 

by making policy changes and providing financial resources, (2) the 

countries’ institutional capacity to achieve project objectives, and

(3) the projects’ likelihood of being financially self-sustaining based on 

MCC’s economic analysis.

• Economic analyses. To predict the projects’ impact on economic 

growth, MCC calculated their economic rate of return—that is, for each 

dollar that it spent, the dollar benefit the country is likely to receive. 

MCC used an economic model that included data and assumptions 

about project beneficiaries’ expected behaviors. However, the data and 

assumptions used in some of MCC’s economic analyses may not 

accurately reflect the countries’ socioeconomic conditions. As a result, 

MCC cannot be assured that it has selected projects that will achieve the 

compacts’ goals. In the two countries we visited, Madagascar and Cape 

Verde, country representatives were not closely involved in MCC’s 

economic analyses. This limited involvement in the process resulted in 

countries’ having little understanding of the underlying economic 

framework on which the compacts were based.

MCC and the countries have made progress in implementing structures for 

oversight and management, fiscal accountability, and procurement for 

Madagascar, Cape Verde, and Honduras, but some of these structures are 

not yet complete. In addition, although MCC has established monitoring 
Page 5 GAO-06-805 Millennium Challenge Corporation

and evaluation frameworks, the frameworks have weaknesses that could 

affect MCC’s ability to ensure accountability for results. 

• Oversight and management. MCC and the countries have established 

structures that allow for country management with MCC review. MCC 

maintains a small staff in each country, which refers matters requiring 

approval to MCC headquarters in Washington, D.C. Country 

management structures include the following: a steering committee, a 

stakeholder committee, and a management unit. Staffing for all three 

country organizations remained incomplete for months after the 

compacts entered into force. This incomplete staffing at entry into force 

limits the ability of the countries to achieve their compact objectives 

within the fixed time period of the compact.

• Fiscal accountability. MCC has established a framework of internal 

controls to incorporate fiscal accountability into MCC-funded projects. 

In Madagascar, we found that underlying accountability systems, 

policies and procedures, and internal controls are less fully developed 

than those in Cape Verde, which built on existing government structures 

and systems. Because the accountability systems in both countries are 

still under development, both countries face risks in their key financial 

processes and activities. In January 2006, the MCC Inspector General 

(IG) issued guidelines for the countries’ financial audits, and 

Madagascar and Cape Verde are preparing for these audits. 

• Procurement. In each of the three countries, the MCC-approved systems 

have characteristics that typify effective procurement systems—for 

example, integrity, openness, and accountability. These systems are still 

largely untested, and some MCC and country staff and procedures are 

not yet in place.

• Monitoring and evaluation. Compact countries are required to prepare 

and implement a monitoring and evaluation framework, including plans 

that document the necessary data collection, data quality reviews, 

analysis, and interim and final reporting of results. MCC has conditioned 

some disbursements on the countries’ achieving performance targets. 

However, MCC’s ability to track and account for results may be limited 

by weaknesses in the frameworks related to the availability and quality 

of baseline data, ensuring linkage between the economic models and the 

monitoring and evaluation plans, and accounting for uncertainty in 

setting targets and measuring progress. In addition, although MCC has 

retained five U.S. research organizations to independently analyze the 
Page 6 GAO-06-805 Millennium Challenge Corporation

results of MCC compacts, MCC has not completed the research designs 

needed to use its preferred methodology of randomized controlled trials 

prior to project implementation. Not completing the designs prior to 

project implementation potentially limits MCC’s ability to perform 

randomized controlled trials.

We are recommending that the CEO of MCC (1) adopt procedures that 

ensure greater involvement of compact country stakeholders in developing 

the economic model used to assess projects’ likely impact and (2) to the 

extent practical and cost-effective, improve MCC’s monitoring and 

evaluation capabilities by obtaining more accurate and reliable baseline 

data, ensuring a clear linkage between MCC’s economic analyses and 

monitoring and evaluation frameworks, better accounting for uncertainty 

in setting targets and achieving outcomes, and ensuring the timely 

development of the needed research designs for randomized controlled 

trials prior to project implementation.

In commenting on a draft of this report, MCC generally agreed with our 

findings, conclusions, and recommendations. The Department of State 

commented that it considered some of the findings of our report as 

reflecting minor or transitory problems, and that the report should note the 

improvements that MCC made during and since the period it covers. 

Throughout this report, we have described MCC and compact progress 

through May 2006. We have reprinted MCC’s and State’s comments, with 

our responses, in appendixes V and VI. We also incorporated technical 

comments from MCC in our report where appropriate.

Background

MCC Principles In pursuit of its mission to reduce poverty by supporting economic growth, 

MCC has identified and defined the following three key principles to guide 

its actions:7

• Reward good policy. “Using objective indicators, countries are selected 

to receive assistance based on their performance in governing justly, 

investing in their citizens, and encouraging economic freedom.” 

7

MCC, 2005 Annual Report.
Page 7 GAO-06-805 Millennium Challenge Corporation

• Operate in partnership. “Countries that receive MCA assistance are 

responsible for identifying the greatest barriers to their own 

development, ensuring civil society participation, and developing a 

multi-year MCC compact.” 

• Focus on results. “MCA assistance goes to those countries that have 

developed well-designed programs with clear objectives, benchmarks to 

measure expected results, procedures to ensure fiscal accountability for 

the use of MCA assistance, and a plan for effective monitoring and 

objective evaluation of results. Programs are designed so that recipient 

countries can sustain progress after the funding under the compact has 

ended.” 

MCC Structure MCC is a government corporation that is managed by a CEO appointed by 

the President with the advice and consent of the Senate and is overseen by 

a Board of Directors (MCC Board). The Secretary of State serves as board 

chair, and the Secretary of the Treasury serves as vice-chair. Other board 

members are the U.S. Trade Representative, the Administrator of the U.S. 

Agency for International Development (USAID), the CEO of MCC, and up 

to four Senate-confirmed public members who are appointed by the 

President from lists of individuals submitted by congressional leadership. 

Eligibility for MCC 

Assistance

The Millennium Challenge Act of 2003 requires MCC to select countries as 

eligible for MCA assistance each fiscal year. Countries with per capita 

income at or below a set threshold may be selected as eligible for 

assistance if they pass MCC indicator criteria and are not statutorily barred 

from receiving U.S. assistance. MCC uses 16 indicators divided into three 

categories: Ruling Justly, Encouraging Economic Freedom, and Investing in 

People.8

 To be eligible for MCA assistance, countries must score above the 

8

These indicators are as follows: Ruling Justly: (1) political rights, (2) civil liberties,

(3) voice and accountability, (4) government effectiveness, (5) rule of law, and (6) control of 

corruption. Encouraging Economic Freedom: (1) cost of starting a business, (2) 1-year 

consumer price inflation, (3) fiscal policy, (4) trade policy, (5) regulatory quality, and 

(6) days to start a business. Investing in People: (1) public expenditures on health as a 

percentage of the gross domestic product (GDP), (2) immunization rates for DPT3 and 

measles, (3) public primary education spending as a percentage of the GDP, and (4) girls’ 

primary education completion rate. See MCC, Report on Criteria and Methodology for 

Determining the Eligibility of Candidate Countries for Millennium Challenge Account 

Assistance in FY 06 (Sept. 8, 2005).
Page 8 GAO-06-805 Millennium Challenge Corporation

median relative to their peers on at least half of the indicators in each 

category and above the median on the indicator for combating corruption. 

MCC used these quantitative indicators, as well as the discretion implicit in 

the Millennium Challenge Act, to select 17 countries as eligible to apply for 

MCA compact assistance for fiscal years 2004 and 2005. For fiscal year 

2006, MCC identified 23 countries9

 as eligible for assistance—the 17 

previously selected and 6 additional countries, which included lowermiddle-income countries eligible for the first time in fiscal year 2006.10

MCC’s Compact 

Development

After MCC selects eligible countries, they may begin a four-phase process 

that can lead to the entry into force of compacts (see fig. 1). Each phase of 

this process is discussed after figure 1.

9

The MCC Board suspended Gambia’s eligibility for assistance on June 16, 2006, citing a 

pattern of actions inconsistent with MCC’s selection criteria.

10The annual per capita income threshold for MCA assistance was $1,415 in fiscal year 2004 

and $1,465 in 2005. In fiscal year 2006, the threshold was $1,575 for low-income countries 

and $1,575 to $3,255 for lower-middle-income countries. In fiscal year 2006, MCC selected 

Cape Verde, El Salvador, and Namibia from its list of lower-middle-income countries. 
Page 9 GAO-06-805 Millennium Challenge Corporation

Figure 1: Summary of the MCC Compact Development and Implementation Process and Status of Countries Eligible to Apply for 

Compacts, as of June 2006

a

MCC must notify congressional appropriations committees 15 days prior to obligating funds. 

b

Compact negotiations begin after the MCC investment committee approves a Consultation 

Memorandum prepared by the MCC transaction team. The memorandum is based on the transaction 

team’s determination that the country proposal has sufficient information to justify entering into 

negotiations with the country. MCC must consult with and report to the appropriate congressional 

committees 15 days prior to the start of compact negotiations.

c

The names of newly eligible countries in fiscal year 2006 are italicized.

d

The MCC Board suspended Gambia’s eligibility on June 16, 2006.

Eligibility 

determination 

Compact 

development 

Compact 

implementation 

Finalize supplemental 

agreements

Opportunity 

memo 

Investment 

memo 

Compact 

signinga Entry into 

force 

Country proposal 

development 

MCC’s due 

diligence review 

Source: GAO analysis of MCC data. 

Compact negotiationb

and MCC Board 

approval

MCC and compact 

country complete 

entry-into-force 

requirements

MCC authorizes fund 

disbursement and oversees

country implementation of 

compact

• Disbursement agreement

• Procurement agreement

• Compact term sheets

• Certification of completion 

of requirements by MCC 

and compact country 

(e.g., compact ratification)

• Mali

• Mongolia

• Mozambique

• Senegal

• Sri Lanka

• El Salvadorc

• Ghana • Armenia

• Benin

• Cape Verde

• Georgia

• Honduras

• Madagascar

• Nicaragua

• Vanuatu

• Bolivia

• Lesotho

• Morocco

• Burkina Fasoc

• East Timorc

• Gambiac,d

• Namibiac

• Tanzaniac
Page 10 GAO-06-805 Millennium Challenge Corporation

1. Country proposal development. Eligible countries are invited to submit 

compact proposals, which are to be developed in consultation with 

members of civil society, including the private sector and 

nongovernmental organizations (NGO). The eligible country also 

identifies an “accountable entity” to manage the programs funded by 

MCC.11 Eligible countries submitting proposals are not guaranteed 

funding; instead, MCC assesses proposals through its due diligence 

review. As of May 2006, 14 of the 17 countries selected as eligible in 

fiscal year 2004 or 2005, and 1 of the 6 countries selected as eligible for 

the first time in fiscal year 2006, had submitted proposals accepted by 

MCC for due diligence review.

2. MCC’s due diligence review. MCC determines whether the proposal 

that an eligible country has submitted meets MCC criteria to ensure 

that proposed programs will be effective and funds will be well-used. 

Due diligence primarily occurs between MCC’s acceptances of an 

“opportunity memo” and an “investment memo.” MCC assembles a 

transaction team of MCC staff, personnel from other U.S. agencies, and 

consultants to conduct a preliminary assessment of a country’s 

proposal and reports the team’s findings in an opportunity memo to the 

MCC investment committee. The MCC investment committee consists 

of MCC’s CEO, vice presidents, and other senior officials. If the 

opportunity memo is approved, the transaction team launches a 

detailed due diligence review. The team assesses the country proposal, 

reports its findings, and makes recommendations based on its 

assessment in an investment memo to the MCC investment committee. 

As of May 2006, MCC was conducting due diligence analyses of seven 

eligible country proposals.

3. Compact negotiation and MCC Board approval. MCC may enter into 

compact negotiations with the eligible country before the investment 

memo is completed. If compact negotiations are successful, MCC staff 

formally submit the compact for MCC Board approval. Once the board 

approves the compact, MCC and the eligible country may sign it. As of 

March 2006, MCC had signed compacts with 8 of the 17 countries 

determined eligible in fiscal years 2004 and 2005. (See fig. 2.) MCC 

commits the full amount of the compact funding at signing but 

obligates and begins to disburse funds to implement projects only after 

11MCC refers to the accountable entity by combining “MCA” and the country’s name—for 

example, “MCA-Madagascar.” 
Page 11 GAO-06-805 Millennium Challenge Corporation

the compact has entered into force. Under the Millennium Challenge 

Act, compacts may remain in force no longer than 5 years. The 

compacts stipulate that, with limited exceptions, all funds must be 

spent during that time.

4. MCC and compact country complete entry-into-force requirements. 

MCC’s compact with each country identifies the following 

supplemental agreements that MCC and the country’s accountable 

entity must complete before the compact can enter into force.12

• The disbursement agreement sets out the “conditions precedent”13 and 

other requirements for disbursements from MCC and redisbursements 

to any person or entity. These conditions include performance targets 

for projects outlined in the compact.

• The procurement agreement sets forth guidelines for all procurements 

of goods, works, and services financed with MCC funding.

• Compact term sheets for supplemental agreements, which vary by 

country, and include documents such as a governance agreement, fiscal 

agent agreement, form of implementing entity agreement, and form of 

bank agreement.

After compacts enter into force, MCC may begin the disbursement of funds 

and countries may begin implementing projects. In the first eight compacts, 

approximately 53 percent of funding went to transportation and other 

infrastructure projects; 22 percent went to agriculture and rural 

development; 13 percent went to other project types; and 12 percent went 

to program management, monitoring, and evaluation. (See fig. 2.)

12In addition, MCC and the compact country must certify the completion of these 

requirements for entry into force and provide statements of the incumbency of their 

representatives with specimen signatures.

13“Conditions precedent” are specific steps that must be completed by the compact country 

prior to MCC’s providing a disbursement. 
Page 12 GAO-06-805 Millennium Challenge Corporation

Figure 2: MCC-Eligible Countries with Signed Compacts, as of May 2006

Note: Numbers may not add due to rounding of source data. See appendix III for photographs of 

projects we visited in Cape Verde and Madagascar.

a

The Access to Markets Project in Benin is a major construction project at the Port of Cotonou and 

includes associated studies and institutional strengthening. 

b

The Irrigated Agriculture Project in Armenia includes the repair of irrigation infrastructure.

c

The Justice Program in Benin includes institutional strengthening and infrastructure components 

(construction of new courthouses). 

 Honduras

Nicaragua 

Madagascar 

 Cape Verde 

Benin 

Armenia 

Georgia 

Vanuatu 

Sources: GAO analysis of MCC data and Map Resources (map).

Compact allocation Total

07/04/2005 

10/17/2005 

Compact signature date:

Entry-into-force date:

Country:

Transportation and 

other infrastructurea

Justice programsc

Agriculture and 

rural developmentb

Land tenure

Finance and private 

sector development

Program administration, 

monitoring, and evaluation

09/12/2005 

04/07/2006 

06/13/2005 

09/29/2005 

04/18/2005 

07/27/2005 

03/27/2006

 N/A

02/22/2006

N/A

07/14/2005 

05/26/2006 

03/02/2006 

04/28/2006 

$110.1

$7.5

$295.3

$3.6

$215.0 

$1.6

$109.8

$9.6

$235.7

–

$1,513.8

$22.4 

$307.3

–

$175.0 

–

$65.7

–

Madagascar Honduras Cape Verde Geor Nicaragua Vanuatu gia Benin Armenia

78.8 

10.8 

7.2 

0 

0 

13.3 

0 

17.7 

35.9 

37.8 

0 

18.4 

125.7 

72.2 

0 

0 

0 

17.1 

92.8 

33.7 

0 

26.5 

0 

22.1 

211.7

47.5 

0 

0 

0 

36.1 

169.4

0 

19.7 

36.0 

34.3 

47.9 

60.7 

0 

0 

0 

0 

5.0 

67.1 

145.7

0 

0 

0 

22.9 

$806.2

327.6

100.3

62.7

34.3

182.7

Total compact allocation 

Total disbursement 

U.S. dollars in millions
Page 13 GAO-06-805 Millennium Challenge Corporation

Compact Signature and 

Entry-into-Force Time 

Frames

The length of time from country eligibility selection to compact signature 

has varied, with proposal development and due diligence generally 

requiring the most time (see fig. 3). For the six countries whose compacts 

had entered into force as of the end of May 2006, completing the steps 

necessary for entry into force after compact signing took approximately 3 

to 4 months for Madagascar, Cape Verde, and Honduras; approximately 7 

months for Georgia; 2 months for Vanuatu; and about 101⁄2 months for 

Nicaragua. For the two countries whose compacts had not entered into 

force as of the end of May 2006, 3 months had elapsed since compact 

signature for Benin, and 2 months had elapsed for Armenia (see fig. 3). 

Figure 3: Number of Days Elapsed from Eligibility to Compact Signature or Entry into Force, as of May 2006

a

Benin and Armenia have not yet entered into force.

MCC Guidance MCC has issued guidance and policies for its compact development 

process in several stages. Before publishing its initial guidance in May 2004, 

MCC provided countries with preliminary guidance addressing fiscal 

accountability and monitoring and evaluation. Figure 4 shows the evolution 

Source: GAO analysis of MCC data.

0 100 200 300 400 500 600 700 800

Days

05/06/2004

(Country eligibility)

447 

Country Total days

511 

529 

a

a

750 

701 

657 

722 

690 

Proposal development Average = 227 days

Due diligence process Average = 195 days

Compact negotiation, board approval, and signature Average = 93 days

Entry into force Average = 149 days

Opportunity memo

Investment memo

Compact signature

Entry into force

Madagascar

Honduras

Cape Verde

Nicaragua

Georgia

Benin

Vanuatu

Armenia

1 

1

2

3

2 3 4 

1 2 3 

1 2 3 4 

1 2 3 4 

1 2 3 4 

4 

4 

1 2 3 

1 2 3 

1 2 3 

4
Page 14 GAO-06-805 Millennium Challenge Corporation

of MCC’s published guidance relative to the end of the due diligence 

process with the investment memo.

Figure 4: Timeline of MCC Guidance Issuance and Investment Memo Dates

a

MCC issued interim Environmental Guidelines on March 4, 2005, and final Environmental Guidelines

on January 23, 2006.

b

Economic analysis guidelines and compact assessment and approval guidelines were reissued on 

January 23, 2006. 

c

Consultative process guidance was reissued on January 6, 2006.

d

According to MCC officials, MCC provided an initial 2-page guidance to eligible countries in 

December 2004, but it did not publish the guidance on the MCC Web site. MCC issued an updated 

version of the guidance on January 6, 2006. 

Source: GAO analysis of MCC data.

Consultative 

processc 

Requirements

for consultation 

with citizens

during proposal 

development 

Guidance for 

developing proposals

Fiscal 

accountabilityd

Key elements to 

ensure proper 

accountability of 

funds

Compact assessment 

and approvalb 

Key areas of country 

proposal analyzed by 

MCC for decisionmaking purposes

Monitoring and 

evaluation plans

Steps to develop a

monitoring and 

evaluation plan and 

its key components

Working with 

MCC: Overview 

of steps and 

processes 

Compact 

Development 

Assistance Policy

Target dates for eligible 

country to appoint a point of 

contact, form a core team, 

and submit a proposal; 

outlines evaluation criteria

Interim Environmental 

Guidelinesa

Criteria to screen 

projects’

environmental 

impact

Economic analysisb

Criteria to assess

economic return 

and steps to 

calculate economic 

rate of return on 

projects

May June July Aug. Sept. Oct. Nov. Dec. Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. Jan. 2004 2005 2006 

Feb. Mar. Apr. May June July

Madagascar Honduras

Cape Verde 

Nicaragua Georgia

Armenia

Vanuatu Benin 

Investment memo date 

Guidance
Page 15 GAO-06-805 Millennium Challenge Corporation

MCC Assessed Five 

Key Aspects of 

Proposals While 

Developing Guidance, 

but Limitations 

Affected the Accuracy 

of Economic Analyses

MCC undertook a wide range of activities in its due diligence of the 

Madagascar, Cape Verde, and Honduras proposals, while at the same time 

developing guidance on key aspects of the countries’ proposals.14 During 

due diligence, MCC primarily considered criteria related to the proposals’ 

consultative process, project coherence, environmental impact, 

institutional and financial sustainability, and economic analyses.15 MCC 

generally approved proposals that were based on a consultative process 

and returned proposals that lacked adequate consultations; however, MCC 

did not publish detailed criteria for the consultative process until 1 year 

after selecting the countries as eligible for MCC assistance. In assessing 

project coherence, MCC approved projects that were linked to the overall 

proposal objectives and rejected projects that were not, although its 

assessments used criteria that it had not yet published in its guidance. 

Additionally, MCC screened projects for likely environmental impacts and 

considered factors important for institutional and financial sustainability. 

Finally, MCC conducted economic analyses to assess the projects’ likely 

impact on economic growth. However, limitations in assumptions and data 

may have affected the analyses’ accuracy and led MCC to select projects 

that would not achieve its goals. Also, a lack of country involvement in the 

analyses does not reflect the MCC principle of working in partnership with 

countries and may have limited the countries’ understanding of the 

process.

MCC Assessed the 

Consultative Process as 

Guidance Evolved 

MCC’s due diligence for Madagascar, Cape Verde, and Honduras assessed 

whether the countries had consulted with public and private sector and 

civil society stakeholders during proposal development. MCC officials told 

us that before beginning due diligence for the three countries, they 

assessed the consultative process in proposal drafts and, on the basis of 

this review, returned proposals that were not sufficiently founded on a 

consultative process. For example, according to the officials, MCC did not 

accept one country’s proposal because, although the country had consulted 

14In January 2006, MCC issued new guidance to better prepare countries at the start of the 

proposal development process by providing estimates of personnel and funds required for 

proposal development. According to MCC officials, MCC is engaging with countries earlier 

in the compact development process to ensure that countries develop better proposals. 

15In addition to assessing aspects related to project selection, MCC also assessed program 

oversight and management, fiscal accountability, procurement, and monitoring and 

evaluation structures to ensure the proper oversight and use of MCC funding. These 

structures are discussed later in this report in the context of compact implementation. 
Page 16 GAO-06-805 Millennium Challenge Corporation

with stakeholders, its proposal did not reflect the priorities identified 

during the consultative process.

MCC documents indicate that during its due diligence for two of the three 

countries, MCC obtained the views of government, civil society, and private 

sector officials on how the governments conducted the consultative 

process. In addition, MCC assessed any previous experience the country 

had had with a consultative process16 For all three countries, MCC also 

reviewed factors such as the date, frequency, and locations of the process. 

MCC’s documentation of these assessments in Madagascar, Cape Verde, 

and Honduras indicated that key stakeholders had generally agreed on the 

proposed compact priorities. However, the MCC assessments noted some 

weaknesses in the Madagascar and Honduras governments’ management of 

the process:

• In Madagascar, some groups expressed concern to MCC that the 

government had provided short notice (less than 10 days) for 

consultative meetings, and that this might have limited rural groups’ 

participation. Additionally, the government did not communicate to 

participants its rationale for accepting or rejecting projects. However, 

despite these shortcomings, MCC noted “widespread agreement and 

enthusiasm for the...primary components of [the] proposal” among the 

business community, local and international NGOs, civil society, and 

donors.

• In Honduras, MCC found, on the basis of discussions with local civil 

society organizations and international NGOs, that weaknesses—such 

as the large size of meetings—had limited effective participation in the 

consultative process for the poverty reduction strategy, which formed 

the basis of Honduras’s MCC proposal. MCC’s assessment also indicated 

that the government had not directly asked the consulted groups to 

identify obstacles to growth. However, MCC found that these groups 

concurred with the priorities identified in the country proposal. 

According to MCC officials, they followed up with the Honduran 

government to address the weakness noted by MCC in Honduras’s 

consultative process. As a result, according to MCC documentation, the 

16For example, Madagascar and Honduras participated in a World Bank-initiated poverty 

reduction strategy initiative that required countries to involve stakeholders in identifying 

national development priorities through a consultative process. 

Source: MCC.

1. Timely: Includes wide initial discussions, 

on-going feedback on decisions, and 

project-level consultations with potential 

beneficiaries.

2. Participatory: Takes into account a broad range 

of views, including representatives from the 

government, nongovernmental organizations, 

the private sector, and urban and rural 

organizations.

3. Meaningful: Allowing genuine input by ensuring 

timely distribution of materials, reflecting input 

from consultations in the proposal, and 

providing feedback.

MCC Definition of an Adequate

Consultative Process
Page 17 GAO-06-805 Millennium Challenge Corporation

Honduran government conducted additional consultative sessions with 

civil society organizations and donors.

MCC’s due diligence of the countries also noted requirements for additional 

consultations during project implementation. For example, in some cases, 

countries were to undertake consultations with local stakeholders to 

identify project sites and conduct environmental assessments.

Our discussions with representatives of civil society groups and donors in 

Madagascar and Cape Verde indicated that they generally concurred with 

the compact proposals.17 In Madagascar, a representative from a key civil 

society organization noted weaknesses in the government’s conduct of the 

consultative process similar to those recorded by MCC. Nevertheless, 

stakeholders on the Madagascar advisory council, which includes various 

civil society and other organizations, said that the compact proposal 

generally accounted for their views, especially in comparison with other 

donor programs.

As a relatively new organization, MCC conducted due diligence reviews 

while it was developing consultative process guidance:

• Evolving guidance. While developing their proposals, the countries had 

access to general criteria in MCC’s 2004 guidance; however, in assessing 

the proposals, MCC applied the more specific criteria contained in its 

detailed 2005 guidance. As figure 5 shows, the 2005 guidance was issued 

1 year after MCC announced the eligibility of Madagascar, Honduras, 

and Cape Verde. According to MCC’s Guidance for Developing 

Proposals for MCA Assistance in FY 2004, “...each proposal is 

expected to reflect the results of an open consultative process, 

integrating governmental interests with those of the private sector and 

civil society.” The 2004 guidance required that proposals include a 

description of the consultative process, such as how the proposal takes 

into account local-level perspectives of the country’s rural and urban 

poor, including women, and of private and voluntary organizations and 

the business community. Additionally, the guidance required the country 

17We did not conduct in-depth interviews into the nature of these representatives’ 

participation in the consultative process. Also, due to the limited number of people 

interviewed, this result is not representative of the entire set of consultative process 

participants in these countries.
Page 18 GAO-06-805 Millennium Challenge Corporation

to list all key participants, such as government and nongovernmental 

officials, who played a significant role in developing the proposal. 

MCC’s 2005 Guidance on the Consultative Process more specifically 

requires eligible country governments to involve their citizens in 

identifying obstacles to economic growth and developing and 

prioritizing the development strategies and programs that will be 

included in the compact proposal. The 2005 guidance further states that 

an adequate consultative process should be timely, participatory, and 

meaningful. MCC’s guidance also took into account the country’s 

experience in using a consultative process to develop other national or 

poverty reduction strategies. If the compact was built on these 

consultations, MCC required some additional consultations to provide 

justification of country priorities in the MCA proposal.

Figure 5: Issuance of Key MCC Criteria for the Consultative Process Relative to 

Completion of Due Diligence for Madagascar, Honduras, and Cape Verde

• Incomplete documentation. MCC’s documentation of its due diligence 

for the three countries presents summary findings, rather than an 

analysis of the extent to which the countries consulted with the rural 

and urban poor. For example, MCC’s due diligence documentation 

indicates that the countries’ governments included women’s groups and 

rural sector groups in their consultative process; however, the 

documentation does not indicate the extent to which these groups 

represented the poor. Additionally, in Madagascar and Honduras, MCC’s 

documentation does not indicate how MCC assessed the extent to 

which the consulted groups informed compact proposal priorities.

2004 2005 

May 6, 2005

Guidance on the Consultative Process

December 16, 2004

Madagascar 

investment memo 

February 14, 2005

Honduras

investment memo 

May 26, 2005

Cape Verde

investment memo

Source: GAO analysis of MCC data.

May 4, 2004

Guidance for Developing Proposals for 

MCA Assistance in FY 2004

May 6, 2004

Countries

determined

eligible
Page 19 GAO-06-805 Millennium Challenge Corporation

MCC Assessed Project 

Coherence While 

Developing Specific 

Guidance 

In keeping with MCC’s emphasis on results, due diligence for the three 

countries also assessed whether proposed projects were linked to one or 

more of the country’s compact goals, and whether the projects addressed 

key impediments or constraints to achieving these goals. On the basis of its 

due diligence assessment, MCC rejected projects that were not linked to 

key constraints in two of the three countries we reviewed. Specifically, 

MCC rejected tourism and preschool education projects proposed by 

Honduras because they were not linked to the impediments to growth that 

emerged from the consultative process.18 MCC also rejected projects to 

construct feeder roads, which connect some watershed areas to the 

markets, and provide access to electricity in the rural areas of Cape Verde, 

because MCC’s due diligence did not indicate that these projects addressed 

key constraints in Cape Verde.19

In reviewing MCC’s due diligence for the three countries, we found that 

MCC did not issue guidance stating that proposed projects should be linked 

to the compact goal until after it had concluded its due diligence 

assessments. MCC’s 2004 guidelines for proposal development broadly 

instruct eligible countries to identify priority areas, such as health or 

education, and their expected goals for each priority area over the term of 

the proposed compact. The guidance also asks the countries to show how 

these strategic goals are related to the economic growth and poverty 

reduction of the country. MCC’s November 2005 MCC Compact Assessment 

and Approval Guidelines more specifically indicates that MCC will assess 

how the project addresses compact goals. However, MCC issued the

18MCC also had various concerns about these projects, including who would likely benefit 

from them. MCC considered these projects appropriate for private sector funding. MCC also 

stated that some Honduran government officials had conflicts of interest related to these 

projects. For example, the then President of Honduras was the founder of a preschool 

foundation, and a cabinet minister had financial interests in the Tela Bay project.

19Additionally, according to MCC officials, MCC chose not to work on electricity in Cape 

Verde because of problems stemming from the privatization effort that had taken place in 

the electricity sector. MCC had asked the Cape Verde government to address these problems 

related to the privatization.

Source: GAO.

The Millennium Challenge Act of 2003 requires that 

MCC-funded activities be coordinated with other 

donors’ activities to the “maximum extent feasible.” 

Accordingly, during due diligence, MCC considered 

projects’ relationship to other donors’ efforts. For 

example, MCC used existing donor assessments

and studies for technical and environmental 

assessment of projects in Madagascar, Cape Verde, 

and Honduras. In addition, MCC conducted due 

diligence on projects that would complement or 

expand on other donor projects. For example, in 

Cape Verde, MCC will fund upgrading 5 of 11 roads

for which the World Bank has completed economic 

analyses, feasibility studies, and environmental 

impact assessments. In addition, MCC will use the 

existing World Bank management unit for oversight 

and management of this project. The photograph 

below shows one of these roads, which connects a

remote fishing town to a larger road network on the 

island of Santiago, in Cape Verde.

MCC Considered Other Donor Projects and 

Resources during Due Diligence
Page 20 GAO-06-805 Millennium Challenge Corporation

November 2005 guidance after completing its due diligence for the three 

countries.20 (See fig. 6.)

Figure 6: Issuance of Key MCC Criteria for Project Coherence Relative to 

Completion of Due Diligence for Madagascar, Honduras, and Cape Verde

MCC Screened Projects for 

Environmental and Social 

Impact, Conditioning 

Funding on Detailed 

Assessment

MCC’s due diligence for the three countries included a review of the 

probable environmental and social impact of projects that met its 

economic analysis and other criteria.21 For projects that it deemed likely to 

cause adverse environmental and social impact, MCC required impact 

assessments or environmental analyses, including an impact management 

plan. 

On the basis of its assessment, MCC assigned each project to category A, B, 

or C during due diligence to reflect its likely impact and assessments 

20MCC’s April 2005 Guidelines for Economic Analysis states MCC’s intention to “assess a 

project’s logic and potential impact on economic growth and poverty reduction [and] to test 

claims of the necessity and sufficiency of project components in achieving the overall 

objective and to examine critical linkages and dependencies.” However, this guidance was 

issued after MCC finished due diligence for Madagascar and Honduras and 1 month before it 

completed due diligence for Cape Verde. 

2004 2005 

May 4, 2004

Guidance for Developing Proposals for MCA Assistance 

in FY 2004

November 28, 2005

MCC Compact Assessment and Approval Guidelines

December 16, 2004

Madagascar 

investment memo

February 14, 2005

Honduras

investment memo

May 26, 2005

Cape Verde 

investment memo

Source: GAO analysis of MCC data.

May 6, 2004 

Countries

determined 

eligible 

21In its interim Environmental Guidelines, issued in March 2005, MCC defines 

“environmental impact” as the effects of a project on the surrounding natural environment 

and on the humans reliant on that environment, including the effects on cultural property, 

indigenous peoples, and involuntary resettlement, as well as impact on human health and 

safety. In its January 2006 Environmental Guidelines, MCC provides the same definition for 

“environmental and social impact.” MCC added that environmental impact may also include 

significant induced, indirect, and cumulative impact and reasonably foreseeable effects that 

may be associated with, or ancillary to the project.
Page 21 GAO-06-805 Millennium Challenge Corporation

required.22 For example, MCC assigned all projects in the Madagascar 

proposal to category C, because MCC determined that these projects were 

not likely to have adverse environmental and social impact. In contrast, 

MCC assigned infrastructure projects in Cape Verde’s and Honduras’s 

proposals to category A or B. For example, the highway expansion project 

in Honduras was assigned category A, because it involves the clearing of 

rights-of-way that will require compensation for more than 200 affected 

people. The port expansion project in the Cape Verde proposal was also 

assigned to category A, because it entails dredging and construction in and 

around an existing port. 

Additionally, MCC assessed whether environmental impact assessments 

had been conducted for category A or B projects. For projects lacking 

environmental impact assessments, MCC conditioned project funding on 

the completion of such assessments as well as on the development of 

mitigation plans in consultation with affected groups. For projects that 

other organizations had assessed for environmental impact, MCC used a 

U.S. agency or a contractor to evaluate the assessment and determine its 

adequacy. For example, in Honduras, another donor had already conducted 

the environmental impact assessment for the highway segments proposed 

for MCC funding. As part of MCC due diligence, the U.S. Army Corps of 

Engineers reviewed these assessments and made recommendations that 

were incorporated in the existing assessments. However, in Cape Verde, 

the MCC contractor conducting due diligence found another organization’s 

assessment of the port project’s environmental impact to be inadequate. As 

a result, MCC required a new environmental assessment, along with plans 

to manage adverse impact, as a precondition for funding the project. MCC 

has allocated funds for this analysis in the compact budget for Cape Verde.

MCC’s 2004 proposal development guidelines do not address projects’ 

environmental and social impact. In assessing environmental impact, MCC 

applied criteria from the Millennium Challenge Act of 2003, which prohibits 

MCC from funding projects that are “likely to cause a significant 

environmental, health, or safety hazard.” MCC also used criteria laid out in 

its March 2005 interim Environmental Guidelines, which state that MCC 

will not fund projects that lack the appropriate screening or analysis for

22MCC’s 2006 Environmental Guidelines assign proposed projects to category D if they 

involve an intermediate facility, such as a grant fund, that will be used later to finance 

activities that may have adverse environmental and social impact. 

In its interim Environmental Guidelines, MCC 

assigned the following categories to projects on the 

basis of their potential environmental impact:

Category A projects are likely to cause significant 

adverse environmental impacts that affect broad or 

sensitive areas. MCC requires an Environmental 

Impact Assessment to evaluate potential 

environmental risks and impacts for such a project. 

Category B projects are likely to cause 

environmental impacts that are site-specific, less

likely to be irreversible, and for which mitigation 

measures are more readily available. MCC may 

require specific environmental analyses, if needed. 

The scope of such work will be narrower than for 

category A projects.

Category C projects are unlikely to have adverse 

environmental impacts; however, MCC may require 

environmental analyses, if needed.

Source: MCC.

MCC’s Environmental Impact Categories
Page 22 GAO-06-805 Millennium Challenge Corporation

environmental impact.23The guidance also states that the country has 

primary responsibility for conducting and monitoring environmental 

assessments. (See fig. 7.)

Figure 7: Issuance of Key MCC Criteria for Environmental Impact Relative to 

Completion of Due Diligence for Madagascar, Honduras, and Cape Verde

MCC Evaluated Country 

Commitment and Capacity 

and Estimated Project 

Impact to Assess 

Sustainability

In keeping with its emphasis on sustainable progress, MCC’s due diligence 

examined whether the three countries’ proposed projects could be 

sustained after their compacts expired. In assessing project sustainability, 

MCC reviewed each country’s policy and regulatory environment and 

commitment to reforms and financing of future maintenance costs; it also 

reviewed expected results from MCC-funded projects. In addition, MCC 

considered the countries’ institutional capacity to sustain proposed 

projects as well as other donors’ roles in strengthening countries’ capacity.

• Country commitment. For specific projects in Madagascar, Honduras, 

and Cape Verde, MCC reviewed policy or regulatory reforms, and host 

country financial commitment, and required some changes or 

commitment as a precondition to funding. For example, MCC

determined that agricultural projects proposed by Cape Verde and 

Honduras would not be sustainable without the governments’ 

commitment to policy reform. To ensure adequate operations and 

maintenance of proposed irrigation systems, MCC required that the 

Cape Verde government implement fees that reflect the costs of scarce 

water resources and recommended that the Honduran government also 

23The final Environmental Guidelines were issued in January 2006.

2004 2005 

May 4, 2004

Guidance for Developing Proposals for MCA Assistance 

in FY 2004

March 4, 2005

Interim Environmental Guidelines

December 16, 2004

Madagascar 

investment memo

February 14, 2005

Honduras

investment memo

May 26, 2005

Cape Verde 

investment memo

Source: GAO analysis of MCC data.

May 6, 2004

Countries

determined

eligible
Page 23 GAO-06-805 Millennium Challenge Corporation

institute such reforms. In the case of Madagascar, MCC reviewed policy 

reforms in land management and financial sectors that would benefit 

MCC-funded activities. 

• Country capacity. In Madagascar, MCC determined that the government 

had limited institutional capacity to achieve the project objectives of 

increasing land security and promoting financial intermediation to 

increase rural savings and extension of credit. To build the government’s 

capacity, MCC budgeted funding for (1) staff recruitment and training at 

Madagascar’s land management department to support the land security 

project and (2) finance, management, and production training for rural 

producers and microfinance institutions to support the financial 

intermediation project. In addition, MCC considered the role of other 

donors in strengthening the countries’ institutional capacity. For 

example, while assessing road projects, MCC considered the World 

Bank’s road sector initiative, which includes institutional capacitybuilding in Cape Verde. In Honduras, MCC considered World Bankfunded and Inter-American Development Bank–funded programs 

intended to develop the transportation ministry’s management capacity 

and maintenance contracting capacity.

• Project impact. MCC also relied on the assumptions used in its analysis 

of projects’ economic impact to determine the sustainability of 

agricultural sector projects for all three countries we reviewed. For 

example, MCC expects that as a result of MCC-funded technical 

assistance or credit to farmers and rural entrepreneurs, recipients will 

be able to generate enough income to afford these services by paying 

fees to providers. In cases where sustainability depends on achieving 

MCC’s projected impact, the soundness of MCC’s economic analysis, 

discussed in the next section of this report, will also be an important 

factor.

In its sustainability assessments, MCC generally adhered to guidance 

issued in 2005, rather than to guidance from 2004. MCC’s May 2004 

proposal development guidance included a general requirement for a 

strategy to sustain progress after the compact’s expiration. MCC’s 

November 2005 MCC Compact Assessment and Approval Guidelines did 

not require such a strategy, but the guidelines required identification of 

factors contributing to institutional and financial sustainability for each 

project. (See fig. 8.)

Source: GAO.

USAID- and MCC-funded business centers are 

colocated in Antsirabe, Magadascar.

The USAID-funded program supports farmers’

access to markets and provides linkages to large 

businesses. The MCC-funded program will focus on 

technical assistance to farmers and make them 

creditworthy. These farmers may seek help from the 

USAID project later. The USAID project is expected 

to share its existing client list with and introduce 

these clients to the MCC program. Although USAID 

and MCC projects are considered complementary, 

there is a perception that MCC is replacing USAID. 

This perception is strengthened by the fact that 

USAID is losing about one-third of its employees in 

Madagascar, according to U.S. officials with whom 

we spoke.

USAID- and MCC-Funded Business Centers
Page 24 GAO-06-805 Millennium Challenge Corporation

Figure 8: Issuance of Key MCC Criteria for Project Sustainability Relative to 

Completion of Due Diligence for Madagascar, Honduras, and Cape Verde

Limitations in Assumptions 

and Data, as Well as Country 

Involvement, Affected the 

Accuracy of Economic 

Analyses

During its due diligence reviews for Madagascar, Cape Verde, and 

Honduras, MCC analyzed proposed projects’ probable impact on the 

country’s economic growth and poverty reduction.24 This analysis was 

intended both to assess whether these projects would achieve MCC’s goals 

and to provide a basis for monitoring their progress and evaluating their 

impact.

To predict each project’s impact on economic growth, MCC calculated an 

economic rate of return (ERR)—that is, the expected annual average 

return to the country’s firms, individuals, or sectors for each dollar that

2004 2005

May 4, 2004

Guidance for Developing 

Proposals for MCA Assistance in 

FY 2004

April 18, 2005

Guidelines for Economic 

Analysis

● In some cases, MCC 

may calculate the 

financial rate of return 

to ensure sustainability 

and viability of the 

proposed project

November 28, 2005

MCC Compact Assessment 

and Approval Guidelines

December 16, 2004

Madagascar 

investment memo

February 14, 2005

Honduras

investment memo

May 26, 2005

Cape Verde 

investment memo

Source: GAO analysis of MCC data. 

May 6, 2004 

Countries

determined 

eligible 

24MCC regards the promotion of economic growth as being closely linked to the reduction of 

poverty, its other key objective. MCC cites, as one source that investigates the two 

objectives’ relation, Pro-Poor Growth in the 1990s: Lessons and Insights from 14 

Countries, a study coauthored by Agence Française de Développement, Bundesministerium 

für Wirtschaftliche Zusammenarbeit und Enwicklung, U.K. Department for International 

Development and the World Bank (available at 

http://siteresources.worldbank.org/INTPGI/Resources/342674-1119450037681/Propoor_growth_in_the_1990s.pdf).
Page 25 GAO-06-805 Millennium Challenge Corporation

MCC spends on the project.25 In calculating projects’ ERRs,26 MCC used an 

economic model that includes the following elements (see fig. 9):

• MCC’s annual expenditures for the project,

• the project’s annual benefits to the country,

• predicted net benefits27 of the project, and

• the projected ERR.

25The following is a simplified example of how an ERR is calculated: If MCC spent $100,000 

on a project in year 1 and expected that the project would yield net benefits of $120,000 in 

year 2, the project’s ERR for year 1 would be (120,000-100,000)/100,000= 0.2, or 20 percent. 

Technically, the ERR of a project is the discount rate (interest rate) at which the present 

value of the cost stream is equal to the present value of the benefit stream. If ERR 

computations are not appropriate for a project—such as policy reform at the national 

level—MCC guidelines describe other methods that can be used to determine project 

impact. For example, impact on growth can be estimated with statistical analysis using data 

from other countries or with simulations.

26In the case of Madagascar, MCC performed an economic analysis for two out of the three 

projects, but calculated only a compact-level ERR.

27Net benefits include not only net income but also imputed benefits, such as spillovers.
Page 26 GAO-06-805 Millennium Challenge Corporation

Figure 9: Illustration of MCC’s Methodology for Calculating an Economic Rate of 

Return: Advanced Crop Irrigation Project

ERRs for the proposed projects in Madagascar, Cape Verde, and Honduras 

varied considerably, ranging from 116 percent for Madagascar’s land titling 

project to 10 percent for a watershed management and agriculture support 

project in Cape Verde;28 the median ERR for projects in the three countries 

was 14 percent. However, because MCC analyzed the Madagascar and 

Honduras proposals before publishing its first set of economic analysis 

guidelines, the ERRs did not significantly affect those countries’ overall 

choice of projects. (See fig. 10.)29 MCC’s finding of a low ERR for part of 

Cape Verde’s watershed management and agriculture support project 

resulted in the country’s dropping an irrigation activity on one island.

28Economic analyses of similar projects in two countries may have both common and 

country-specific elements. For instance, the analyses of transportation projects in Cape 

Verde and Honduras share some common elements—reduction in vehicle operating costs 

and increase in annual daily traffic. However, because the Cape Verde project was also 

aimed at alleviating bottlenecks caused by the absence of all-weather crossings, income loss 

from the transportation blockage, which would be eliminated with the new bridges, was 

included in a broader measure of net benefits.

29According to MCC officials, the ERR for all activities that were assessed during due 

diligence was above the threshold set in the guidelines.

Source: GAO analysis of MCC data.

Project predicted economic rate of return: 

Annual average expected rate of return on each dollar of MCC assistance

Predicted net benefits = annual benefits to the country – expenditures by MCC 

For example, expenditures by 

MCC to purchase and install 

an advanced irrigation system

Calculated using:

• variables, such as crop yield per cycle

• relationships among variables, such as

 profit = revenue – costs

• assumptions, such as willingness of farmers to adopt an 

advanced irrigation system, exchange rate movements, etc.

Annual expenditures by MCC Annual benefits to the country 
Page 27 GAO-06-805 Millennium Challenge Corporation

Figure 10: Issuance of Key MCC Criteria for Economic Analysis Relative to 

Completion of Due Diligence for Madagascar, Honduras, and Cape Verde 

Note: The 2006 guidance states that because of economic analyses’ confirmed tendency to be overly 

optimistic about project benefits, MCC prefers that evidence about project impact be based on 

evaluations of similar, completed projects. For a discussion of the accuracy of such economic 

analyses, see Gerhard Pohl and Dubravko Mihaljek, “Project Evaluation and Uncertainty in Practice: A 

Statistical Analysis of Rate-of-Return Divergences of 1015 World Bank Projects,” World Bank 

Economic Review, Volume 6 (1992): 255-277. With respect to poverty reduction, the guidelines state 

that poverty reduction should be measured by the expected decrease in the poverty gap, defined 

simply as the amount of money that, when transferred to poor people, brings everyone’s income up to 

the poverty line.

We found limitations in the assumptions and data that MCC used in its 

analyses as well as in the countries’ involvement in the analyses. These 

2004 2005 2006

May 4, 2004

Guidance for 

Developing Proposals 

for MCA Assistance 

in FY 2004:

● Guidance does not 

require proposals to 

include economic 

analysis for 

proposed projects.

April 18, 2005

Guidelines for Economic Analysis:

● MCC will calculate the economic 

rate of return (ERR) for each of the 

major compact components and, if 

possible, for the compact as a whole.

● MCC and/or the country should 

ensure that the real ERR exceeds

the average of the historical real 

growth rate for the previous 3 years.

● MCC would take into account not 

only the quantifiable impacts

(through the ERR), but also the 

qualitative economic and 

distributional impacts of each 

project.

● MCC should be working with eligible 

countries to ensure that they take 

ownership of opportunities with as

high priority and returns as available.

● The analysis should help the country 

identify the key issues, such as data

gaps, and should be refined 

iteratively in conjunction with the 

host country.

● MCC is seeking the highest possible 

economic return on its investments

while achieving poverty reduction 

and without voiding the principle of 

country ownership.

January 20, 2006

Guidelines for Economic Analysis 

(Revised):

● Countries should analyze the 

economic impact of several 

options.

● In partnership with MCC, countries

should select those proposals with 

the highest impact on economic 

growth and poverty reduction.

● Countries should analyze their 

own impediments to growth and 

propose how funds should be 

used.

● The impact on growth is measured 

by the ERR; the impact on poverty 

reduction is measured by the 

expected decrease in the poverty 

gap. 

● MCC seeks proposals with high 

ERR and broad impact, regardless

of the sector in the economy.

● MCC may reject projects on the 

basis of low or negative economic 

returns and low poverty reduction 

impact.

● Guidance includes steps to 

perform economic analysis.

December 16, 2004

Madagascar 

investment memo

February 14, 2005

Honduras

investment memo

May 26, 2005

Cape Verde 

investment memo

Source: GAO analysis of MCC data. 

May 6, 2004 

Countries

determined 

eligible 
Page 28 GAO-06-805 Millennium Challenge Corporation

limitations may negatively affect the accuracy of the analyses and the 

countries’ understanding of the analysis process, respectively. 

• Assumptions and data. Some of the assumptions and data that MCC 

used in its analyses do not fully reflect the countries’ socioeconomic 

environment. As a result, MCC cannot be assured that the projects it 

approved, partly on the basis of these analyses, will achieve the 

compacts’ goals. For example, in calculating the ERR for the 

Madagascar land titling project, MCC assumed that local small farmers 

would use newly titled land as collateral for loans, invest the borrowed 

funds in agricultural activities, and benefit from the increased income 

from those activities We discussed this assumption with focus group 

participants in Madagascar, including MCA and U.S. government 

officials, senior Madagascar government officials representing 

ministries affected by the compact, and bank representatives. Our 

discussions suggested that MCC’s analysis may have been overly 

optimistic in assuming that small farmers would mortgage 40 percent of 

their newly titled land in Madagascar’s uncertain market, which does not 

offer insurance.30 While MCC assumed that 40 percent of the newly titled 

land will be collateralized, focus group participants believed this was 

overly optimistic. As a result, MCC may have calculated an 

unrealistically high ERR for the land titling project. Furthermore, the 

project may be more likely to benefit farmers with large, secure

30In Madagascar, where prevailing land tenure practices do not provide the titles needed for 

mortgage transactions, 80 percent of the households own 20 percent of rural cultivated land, 

and 48 percent of the population is illiterate. In 1999, the poverty rate for individuals owning 

0.001 to 0.09 hectares of land was 91.7 percent. The richest families own 3.7 times more 

agricultural rural land than the poorer families. Furthermore, interest rates are high; for 

example, in December 2004, the Central Bank charged a base rate of 14 percent to 18 

percent.
Page 29 GAO-06-805 Millennium Challenge Corporation

landholdings and investors from outside the farming community, rather 

than the local small farmers it was intended to help.31

Similarly, MCC’s economic model for a part of Madagascar’s finance 

project, the modernization of the National Savings Institution, may not 

accurately reflect the institution’s financial condition. MCC’s model for 

the institution’s modernization uses the institution’s April 2003 net 

profits (1.4 billion Malagasy francs) as a baseline for estimating the 

benefits of computerizing the bank. However, according to institution 

officials, 2003 is not a representative year for the bank, and it 

experienced unusually large net losses (13 billion Malagasy francs) after 

an economic crisis in 2002. As a result, MCC may have inaccurately 

estimated the project’s likely impact on the banking system.

• Country involvement. In the two countries we visited, country 

representatives were not closely involved in MCC’s economic analyses 

of the proposed projects. This constrained the contribution of the 

analysis process to enhancing country partnership, and stakeholders’ 

understanding of MCC’s economic analysis—including the data 

analyzed, assumptions used in the analysis, and the expected outcomes. 

According to country officials in Madagascar and Cape Verde, MCC 

developed the economic models and selected data with little assistance 

from country representatives. According to the Cape Verde proposal 

team, they provided some data but did not participate in the actual 

analysis and did not have a clear understanding of the process and the 

criteria MCC used to assess proposed projects. We discussed these 

issues with MCC officials, who told us that the countries’ degree of 

involvement depended on the capability and willingness of the 

31Several studies suggest that, given a real threat of foreclosure and land loss and an 

uncertain environment without insurance markets, the impact of land titles on individual 

investment incentives and productivity is likely to be greater for the wealthy farmers whose 

landholdings and other assets will enable them to benefit from capital markets. In addition, 

customary land tenure most often provides security of tenure. However, major threats to 

such security often come from outside investors seeking land with the backing of the state. 

Thus, land titling, if misused, may become a tool for land grabbing by official elites. See 

Jolyne Melmed-Sanjak and Susana Lastarria-Cornhiel, “Land access, off-farm income and 

capital access in relation to the reduction of rural poverty,” Land Reform, Volume 1 (1998): 

4-18 (available at http://www.fao.org/sd/LTdirect/LTan0023.htm); M. Carter, K. Weibe, and B. 

Blarel, “Tenure security for whom? Differential impacts of land policy in Kenya,” Research 

Paper No. 106 (Madison, WI: University of Wisconsin (1991)); and John W. Bruce and Shem 

Migot-Adholla, eds. Searching for Land Tenure Security in Africa (Dubuque, IA: 

Kendal/Hunt Publishing Company (1994)).
Page 30 GAO-06-805 Millennium Challenge Corporation

countries’ proposal development team to actively participate in the 

analyses.

MCC-Approved 

Compact 

Implementation 

Structures Are Not Yet 

Complete; Weaknesses 

in Monitoring and 

Evaluation Framework 

May Limit 

Measurement of 

Results

MCC gave Madagascar, Cape Verde, and Honduras authority to propose and 

develop the implementation structures that they will use to manage 

compacts, although MCC retains authority over a number of management 

decisions. To govern their programs, the countries have created 

management units under the direction of a steering committee, but they 

have had difficulty in filling key positions. The countries also have 

established structures for ensuring fiscal accountability and for managing 

procurements that appear to be effective; however, implementation is still 

at a very early stage, and some required elements of these structures are 

not yet in place. Finally, the countries have established frameworks for 

monitoring and evaluating the performance of MCC projects. However, the 

frameworks have weaknesses related to the inadequacy of baseline data, 

linkage of monitoring plans with economic models, methods of addressing 

uncertainty in achieving stated targets, and the timeliness of research 

designs for randomized controlled trials. These weaknesses may limit 

MCC’s ability to track and account for program results.

Countries Manage Projects 

with MCC Review, but Have 

Faced Delays in Staffing 

Oversight and Management 

Structures

MCC has established a limited presence in Madagascar, Cape Verde, and 

Honduras and has approved oversight and management structures that 

allow the countries to direct their compact programs, subject to MCC 

review. However, these structures were not fully staffed until months after 

the countries’ compacts entered into force. According to MCC officials, the 

delay in staffing has shortened the available time in which to achieve 

compact goals. MCC has adopted a policy that implements its authority to 

provide funding to hire officials prior to compact signature, which may 

reduce delays in hiring in the future.

MCC Has Oversight Staff in Each 

Country, while Countries Retain 

Management Responsibility

Although MCC maintains a limited presence in each country and retains 

some review and approval authorities, the countries have authority to 

manage and oversee the compact program using MCC funds. In each 

country, MCC has directly hired a resident country director and a small 

staff. The director serves as MCC’s public face and manages its relationship 

with the compact country, guiding and overseeing the country’s efforts to 

complete needed plans and reports, implement accountability mechanisms, 

and make appropriate use of resources. The director also supervises 

management of the MCC office and staff, site visits by MCC staff and 
Page 31 GAO-06-805 Millennium Challenge Corporation

technical teams, and engagement with MCC headquarters. MCC retains 

authority and approval over several key elements, including quarterly 

disbursements, plans such as those for monitoring and evaluation, 

procurements above certain thresholds, and the hiring of key employees. 

According to MCC officials, resident country directors review matters that 

require MCC approval, sometimes making a recommendation, before 

forwarding the matters to MCC headquarters. 

Each of the three countries has established structures to provide oversight 

and management of their compact programs and to ensure stakeholder 

input (see fig. 11). Although these structures have most elements in 

common, the countries have the flexibility to design these structures to fit 

their needs. 
Page 32 GAO-06-805 Millennium Challenge Corporation

Figure 11: Compact Country Oversight and Management Structure

Note: This figure represents a composite of the Madagascar, Cape Verde, and Honduras oversight and 

management structures. However, in Honduras, stakeholder input is obtained through representatives 

on the steering committee, rather than through a stakeholder committee.

The three countries have generally included the following three key 

oversight and management entities in their structures:

• The steering committee represents the country government and 

interfaces directly with MCC. The committee is ultimately responsible 

Source: GAO analysis of MCC data.

Steering committee 

MCC (Washington, D.C.)

Stakeholder committee

MCA management unit

Implementing

entity

Implementing

entity

Implementing

entity

Vendor Vendor 

Government 

Vendor 

MCC Resident Country 

Director

Oversight

Accountable entity 

Feedback/Advice

Composed of representatives

from the relevant ministries, 

municipalities, the private 

sector, and nongovernmental 

organizations

• Managing Director

• Administration and Finance Director

• Monitoring and Evaluation Director

• Procurement Director

• Project managers

Such as:

• Key ministers

• MCC Resident Country Director

 (as a nonvoting member)

• Civil society representative(s)
Page 33 GAO-06-805 Millennium Challenge Corporation

for the oversight and results of the MCC compact, oversees management 

unit employees, and approves and signs off on key decisions and 

reporting to MCC. Steering committee members vary by country but 

have included government executives, such as representatives of the 

Prime Minister’s office; representatives of key ministries affected by 

compact projects; and representatives of stakeholder groups, such as 

civil society and the private sector. The MCC resident country director 

serves as a nonvoting member of the steering committee. According to 

MCC guidelines, MCC must approve the individual members of the 

steering committee. 

• In Madagascar and Cape Verde, a stakeholder committee meets 

periodically to advise and inform the steering committee regarding 

compact implementation and to serve as the official liaison between 

interested parties and the steering committee. Stakeholder committee 

members include representatives of civil society, the private sector, and 

NGOs. MCC approves the type of organization that should be 

represented on the committee (e.g., civil society) but does not approve 

the specific individuals. MCC reserves the right to approve all changes in 

the committee’s membership. 

• The management unit is directed by the steering committee and has 

principal responsibility for overall compact management and 

implementation.32 The compact lists key management positions 

responsible for daily program operations. The steering committee hires

32Several papers written by members of the development community have identified 

limitations to capacity development resulting from the use of project implementation units 

(PIU), which are similar to MCC’s management units. While PIUs seem to benefit from 

short-term efficiency in service delivery, the model does not fare well when it comes to 

building long-term capacity in developing countries. Critics view PIUs as parallel and insular 

structures that do not promote skills transfers to host governments. The skills and abilities 

that staff develop on one PIU-managed project tend to be lost to the host government when 

the staff accept positions with the next donor-funded project. See John Lawrence, Sarah 

Renner, and Jan Vandemoortele, The PIU Dilemma: How to Address Project 

Implementation Units, UN Development Program (September 2003); UN Development 

Program, Background Note on Preparation of Guidelines on Strengthening Country 

Capacity for Financing, Implementing, and Managing Development Programs (Feb. 7, 

2005); and World Bank, Guidance Note for Project Management: Strengthening 

Institutional Capacity during Project Implementation (October 2005).
Page 34 GAO-06-805 Millennium Challenge Corporation

employees for these positions, but MCC retains the authority to 

approve the country’s choices.33

Oversight and Management 

Entities Have Faced Staffing 

Delays

In each of the three countries, key compact management positions have 

remained unfilled after the compacts have entered into force. Madagascar 

and Cape Verde did not hire key officials until several months after their 

compacts’ entry into force in July and October 2005, respectively. As of 

April 2006, Honduras’s hiring of key officials was not yet complete, 

although the compact entered into force in September 2005. (See table 1.) 

This incomplete staffing at entry into force limits the ability of the 

countries to achieve their compact objectives within the fixed time period 

of the compacts.

Table 1: Hiring Dates for Key Positions Identified in Madagascar, Cape Verde, and Honduras Compacts, as of April 2006

33To date, MCC has objected only once to a country’s choice, during the hiring of an 

environmental and social assessment manager for one of the countries.

Hiring date

Key position

Madagascar

(entry into force 

July 27, 2005)

Cape Verdea

(entry into force 

Oct. 17, 2005)

Honduras

(entry into force 

Sept. 29, 2005)

Managing director:

Responsible for the overall operation of the 

management unit, including all communications 

with third-parties and the public, including other 

donors. Certifies all quarterly financial and 

performance reports, budgets, and any other 

documents presented to the steering committee.

Incumbent participated in 

compact development and 

served as interim director 

prior to being confirmed on 

November 22, 2005. 

January 1, 2006 The first person to hold this 

position, from November 2005 to 

March 2006, left after the change 

in ruling party from the January 

elections. The current managing 

director was hired March 6, 

2006.

Manager of administration and finance:

Responsible for ensuring that reporting is prepared, 

and that all accounting records are maintained in a 

form acceptable to MCC. 

November 22, 2005 March 1, 2006 April 10, 2006

Manager of procurement: b

Serves as a liaison with the procurement agent and 

for the preparation of periodic reporting to the 

steering committee regarding procurement 

activities.

November 22, 2005c January 1, 2006 Selection in progress.
Page 35 GAO-06-805 Millennium Challenge Corporation

Source: MCC compacts and hiring data.

a

According to MCC, in Cape Verde, some of the key staff “became engaged” shortly after Compact 

signature—though the hiring process was not complete. These positions, including the senior 

economist, project managers, and monitoring and evaluation manager, were retained through a 

provisional employment contractual arrangement made with the Ministry of Finance.

b

This position is referred to as the “procurement specialist” in Honduras.

c

Incumbent serves as manager of procurement and of administration and finance.

d

The Cape Verde compact, for example, defines an “implementing entity” as a government affiliate, 

nongovernmental organization, or other public or private sector entity or persons to which MCA-Cape 

Verde may provide funding, directly or indirectly, to implement or carry out the projects or any other 

activities in furtherance of the compact.

The apparent reasons for these difficulties in hiring key personnel vary by 

country. For example: 

• In Madagascar, according to U.S., MCC, and country officials, finding 

technically qualified candidates for key positions has presented a 

challenge compounded by competition for their availability. According 

Key position

Madagascar

(entry into force 

July 27, 2005)

Cape Verdea

(entry into force 

Oct. 17, 2005)

Honduras

(entry into force 

Sept. 29, 2005)

Manager of monitoring and evaluation:

Responsible for setting up the data collection, 

analysis, and reporting systems for the overall 

program, and, in turn, for training and assisting 

project managers in their implementation project 

monitoring systems for each project. 

January 19, 2006 January 1, 2006 Selection in progress.

Manager of environmental and social assessment:

Ensures that environmental and social mitigation 

measures are followed for all activities of the 

program, in accordance with the provisions set in 

the compact and other documents.

Position does not exist at 

MCA-Madagascar.

March 1, 2006 April 1, 2006

Managers of individual compact projects:

Project managers should have sectoral expertise 

relevant for their respective projects. Project 

managers are responsible for the day-to-day 

oversight and management of implementing 

entities.d 

Land Tenure: Incumbent 

participated in compact 

development and served 

as interim manager prior to 

being confirmed on 

November 22, 2005.

Finance:

November 22, 2005

Agricultural Business 

Investment: 

November 22, 2005.

A new manager took over 

this position on January 

19, 2006.

Watershed 

Management and 

Agricultural 

Support: 

January 1, 2006

Infrastructure: 

January 1, 2006

Private Sector 

Development: 

January 1, 2006

Rural Development: 

Selection in progress.

Transportation:

April 1, 2006

(Continued From Previous Page)

Hiring date
Page 36 GAO-06-805 Millennium Challenge Corporation

to the Managing Director of MCA-Madagascar, hiring her MCA team was 

difficult because “all the good people in Madagascar are taken.”

• In Honduras, a postelection change in government has delayed staffing 

the program management unit. After a recent national election, the 

director of the management unit resigned to allow the new 

administration to appoint a director. According to MCC, all other 

management unit staff appointed under the previous government have 

been retained.

• In Honduras, the monitoring and evaluation director position and one of 

the project director (Rural Development) positions have been difficult 

to fill. MCA-Honduras recompeted both of these positions because the 

first attempt did not produce suitable candidates.

In October 2005, after the signature of its first six compacts, MCC adopted 

a policy implementing the authority given it by section 609(g) of the 

Millennium Challenge Act of 2003 to make grants to facilitate the 

development and implementation of compacts. MCC’s policy includes a 

provision where, if certain conditions are met, it may fund an eligible 

country’s request for “management support payments” for salaries, rent, 

and equipment for the country’s MCA technical team prior to compact 

signature. MCC has used this authority in four countries. Experienced 

officials may therefore be hired and in place prior to compact signature and 

the delays in hiring may be reduced in the future.

MCC Has Made Progress in 

Ensuring Fiscal 

Accountability, Although 

Countries’ Systems Are Still 

Being Developed

MCC has established a framework of internal controls to incorporate fiscal 

accountability into compacts between MCC and recipient countries. The 

MCC fiscal accountability framework includes an accountable entity 

(MCA), which is responsible for internal control and at least an annual 

audit of the program’s financial and procurement transactions, with 

semiannual audits initially expected for countries starting 

implementation.34 MCA-Madagascar and MCA-Cape Verde both have made

34As defined for MCC programs, “fiscal accountability” is the assurance that funds are 

managed properly and procurements are undertaken in a fair, open, and transparent 

manner. “Internal control” is an integral component of an organization’s management that 

provides reasonable assurance that the following objectives are being achieved: 

effectiveness and efficiency of operations, reliability of financial reporting, and compliance 

with laws and regulations. See GAO, Standards for Internal Control in the Federal 

Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999). 
Page 37 GAO-06-805 Millennium Challenge Corporation

significant progress in implementing the framework’s internal controls.35

However, MCA-Madagascar’s newly formed system is somewhat less 

mature than that established by MCA-Cape Verde. While MCA-Madagascar 

has established internal control processes, some processes that are 

routinely practiced are not formally documented, and it has not yet 

converted to a fully automated financial management system. MCA-Cape 

Verde was established partly within the country’s Ministry of Finance, and 

it continues to develop internal controls, put in place key finance and 

administration personnel, and make use of existing information system 

platforms with the characteristics of advanced and integrated systems. 

Neither country has yet had an MCA unit in operation long enough to 

require an annual audit, but officials at both MCAs told us that they 

expected their first audits to be completed within the period established by 

the MCC IG.

MCC Has Made Progress in 

Fiscal Accountability at the 

Compact Level

MCC has made progress in defining the mechanisms and processes of 

internal control that provide reasonable assurance of fiscal accountability 

at the compact level. MCC incorporated these internal controls into a fiscal 

accountability framework for the compacts between MCC and recipient 

countries. To help countries implement this framework, MCC also 

developed guidance36 and a series of charts that identify the characteristics 

of each element of the framework, responsibilities of key personnel, and 

examples of alternative methods of achieving fiscal accountability. Figure 

12, which is based on these charts, provides an overall view of the 

framework. 

35We did not evaluate Honduras’s implementation of fiscal accountability.

36MCC, MCC Fiscal Accountability Guidelines (June 14, 2005).
Page 38 GAO-06-805 Millennium Challenge Corporation

Figure 12: Elements of the MCC Fiscal Accountability Framework

Although MCC identifies the country’s government as ultimately 

responsible for meeting its fiscal accountability requirements, the country’s 

accountable entity is responsible for ensuring that basic internal control 

functions—such as funds control and documentation, cash management, 

disbursement controls, and timely and meaningful reporting—are

Source: GAO analysis of MCC data.

Millennium Challenge Corporation

 (Washington, D.C.)

Government

Bank 

account

Procurement 

agent

Implementing

entity

Implementing

entity

Implementing

entity

Vendor Vendor Vendor

Accounting records

Financial management

Procurement management

Cash

• Document obligations

• Initiate redisbursements

• Initiate procurement

• Manage implementation

• Provide monitoring and evaluation data

Accountable entity

• Submit disbursement requests

• Provide budget

• Provide financial and monitoring 

and evaluation reports

• Allocate budgets

• Approve redisbursements

Provide accounting records

Approve certain contract 

actions

Administer/Certify

procurement process

Fiscal agent/

Funds control

MCC disbursement

Redisbursement 

Instruct to 

issue 

payment

Audits

$

$

$

$
Page 39 GAO-06-805 Millennium Challenge Corporation

established as specified in the country’s compact.37 The fiscal 

accountability framework also requires that the accountable entity obtain 

at least an annual audit of financial and procurement transactions. 

Each country’s compact requires the accountable entity to develop its own 

fiscal accountability plan (FAP), which typically includes a transparent 

process for ensuring that open, fair, and competitive procedures will be 

used to administer grants or cooperative agreements and procurement. 

Required elements of the FAP include funds control, internal controls, 

accounting standards and systems, reporting, public availability of financial 

information, cash management, procurement and contracting, the role of 

independent auditors, and the roles of fiscal and procurement agents. 

MCA-Madagascar and MCA-Cape 

Verde Have Implemented 

Internal Controls for Fiscal 

Accountability, but Their 

Systems Are Not Yet Fully 

Developed

MCA-Madagascar and MCA-Cape Verde have made significant progress in 

implementing internal controls for fiscal accountability, although their 

systems are not yet mature or fully developed. In line with their compacts 

and supplemental agreements with MCC, both countries have put in place 

such elements of the fiscal accountability framework as bank agreements, 

fiscal agents, procurement agents, and financial reporting mechanisms; 

however, controls called for in the framework, such as proper and 

consistent accounting and authorization of transactions, are still in 

development. Because the controls are not yet fully operational, we 

focused on those that have been put in place in relation to an internal 

control maturity model that provides a scale of development.38 We found 

that both MCAs differ in the maturity of their internal controls. Madagascar 

is using a newly formed entity; therefore, the maturity of MCAMadagascar’s internal control is still at a developing stage. MCA-Cape 

Verde used an existing government institution with established processes 

and systems as the accountable entity and, therefore, represents a higher 

level of internal control maturity. Neither country has yet been required to 

provide any financial statement audits, but officials at both MCAs told us 

that they expected their audits to be completed within the period specified 

in their compacts.

37MCC Fiscal Accountability Guidelines.

38The internal control maturity continuum developed by the independent risk consulting 

company, Protiviti, Inc., provides a scale for evaluating the sufficiency of an entity’s internal 

controls. The scale describes the attributes of controls at five levels: initial, repeatable, 

defined, managed, and optimizing. See Guide to the Sarbanes-Oxley Act: Internal Control 

Reporting Requirements, 3rd ed. (2004): 84 (www.protiviti.com).
Page 40 GAO-06-805 Millennium Challenge Corporation

MCA-Madagascar Although MCA-Madagascar has established important internal control 

processes, some have not been formally documented, and processes in 

several areas are in the early stages of development. (See table 2.) The 

government of Madagascar proposed, and MCC agreed, to establish MCAMadagascar as a new unit of government with the sole purpose of 

managing implementation of the MCC compact. The MCA has established 

finance and administrative operations based on the MCC fiscal 

accountability framework, with segregation of duties39 over such functions 

as work-order approval, vendor selection, and authorization to disburse 

funds. Standard operating procedures for these processes are outlined in 

the MCA’s FAP, which was approved by MCC in January 2006. However, the 

FAP includes limited detail on asset management, and sections in the 

management of tax exemption, information technology management, 

communications, and audits serve mainly as placeholders with information 

“to follow.” Although MCA-Madagascar acquired and is testing an 

automated accounting system, current use of a manually based system 

leaves operations vulnerable to human omission and error. The FAP makes 

reference to MCC’s procurement agreement guidelines but does not 

formally incorporate procurement processes. 

39Key duties and responsibilities of financial operations need to be divided, or segregated, 

among different members of the staff to reduce the risk of error or fraud. This should 

include separating the responsibilities for authorizing transactions, processing and 

recording them, reviewing the transactions, and handling any related aspects. No one 

individual should control all key aspects of a transaction or event. See GAO/AIMD-00-21.3.1.
Page 41 GAO-06-805 Millennium Challenge Corporation

Table 2: Status of MCA-Madagascar Internal Controls, as of February 2006

Source: GAO analysis of MCA-Madagascar systems and documents.

Although internal controls with and without formal documentation were in 

operation in MCA-Madagascar at the time of our review in February 2006, a 

risk assessment performed by the MCC IG in December 2005 found 

vulnerabilities in high-risk areas that could affect the MCA’s financial 

operations. The assessment was performed during MCA-Madagascar’s 

implementation phase to detect early-on any vulnerabilities that could 

prevent the MCA from establishing effective financial operations. The IG 

reported that the MCA had high vulnerabilities in several critical areas—

including procurement, cash management, and disbursements—that may 

adversely impact its financial operations, and that it had not implemented

Internal control Status

Key capability 

attributes

• Overall, a fiscal accountability framework is in place and 

functioning.

• The FAP was approved by MCC in January 2006. 

• Duties are segregated, with oversight of fiscal and procurement 

agent activities performed by MCA-Madagascar officials.

• Bank agreements have been established.

• Expenditure process is in place.

• MCC conducts quarterly visits to review fiscal activities.

• Staff has been hired.

Control efforts under 

way

• Formal documentation that covers the internal control structure 

for all significant transactions and events (i.e., standard 

operating procedures) is being developed on the basis of 

existing documents and practice.

• Procurement has not yet been formally incorporated into the 

FAP. At the time of our review, the procurement manual was 

considered to be an annex to the FAP.

Potential residual risks • Accounting system carries the inherent risks of a manually 

based system.

• The MCC IG risk assessment of the MCA-Madagascar’s 

financial operations identified high vulnerabilities in several 

critical areas—procurement, cash management, and 

disbursements—that may adversely impact financial operations.

• Lack of a disaster recovery or back-up plan could result in the 

loss of critical data. 

• Inadequately addressed data security could result in fraud, 

waste, and abuse.
Page 42 GAO-06-805 Millennium Challenge Corporation

all of the key controls described in its compact with MCC.40 The IG also 

reported that the MCA’s FAP was interim and not comprehensive in 

establishing the internal controls needed to effectively manage the funds 

provided by MCC. 

MCA-Madagascar’s internal controls are in development. It is putting in 

place a control framework defined in MCC’s fiscal accountability 

framework, but the MCA currently has basic internal control policies and 

processes that are not fully documented or implemented. Due to the 

developmental stage of MCA-Madagascar’s internal controls, residual risks 

currently exist in its key financial processes and activities. 

MCA-Cape Verde MCA-Cape Verde is developing its internal controls on the basis of the Cape 

Verde government’s existing structure and information system platforms, 

which have the characteristics of advanced and integrated systems (see 

table 3). The MCA was established in the Ministry of Finance, and 

management is focused on implementing its interim FAP, which was 

approved by MCC in December 2005. The MCA is using ministry staff, and 

most key finance and administration personnel are in place. To support the 

financial processing requirements set out in Cape Verde’s compact, the 

MCA is also using the ministry’s financial management information system 

and the basic accounting system that the Cape Verde government has used 

for several years. Cape Verde’s fiscal agent, which is responsible for the 

MCA’s financial processing, consists of Ministry of Finance staff with 

experience in the budget, treasury, and financial processes and in the use of 

the accounting system. The MCA’s expense transaction flows are 

documented, and key duties and responsibilities are segregated.

40USAID, Office of Inspector General for the Millennium Challenge Corporation, Risk 

Assessment of Millennium Challenge Corporation’s MCA Madagascar Financial 

Operations, Audit Report No. M-000-06-003-F (Washington, D.C.: Mar. 28, 2006).
Page 43 GAO-06-805 Millennium Challenge Corporation

Table 3: Status of MCA-Cape Verde Internal Controls, as of February 2006

Source: GAO analysis of MCA-Cape Verde systems and documents.

a

MCC officials have stated that they believe this risk is mitigated through clearly defined roles and 

responsibilities, autonomy of the ministries, and specific controls over procurement approvals.

MCA-Cape Verde had internal controls across the entity, documented 

transaction flows, sources of risk identified, and risk-mitigating control 

processes that were mostly documented at the time of our review. MCACape Verde also had several internal control efforts under way, including 

the development of policies and procedures manuals. As these efforts 

continue, the MCA continues to have some residual risks that are related to 

specific processes. 

Internal control Status

Key capabilities • Fiscal agent and key finance and administration personnel are 

mostly in place.

• Basic accounting system appears to be fully operational.

• The interim FAP is in place.

• Transparency of operations is enhanced by Cape Verde’s Web 

site and management oversight.

• Information system platform was preexisting in the Ministry of 

Finance and is fully operational. 

• Expenditure flows for MCA office transactions are documented.

• Procurement and payment authorizations are segregated.

Control efforts under 

way

• Currency conversion capability for accounting system is being 

implemented.

• Conversion to commitment-based budgeting system is under 

way.

• Accounting policies and procedures manuals are being 

formalized.

• Outside audit entity is yet to be contracted.

• The FAP is being updated and finalized.

• Enhanced transparency initiative is to be completed, which 

includes management tools.

Potential residual risks • Currency conversion calculations and some conversion 

schedules are being done manually, which could lead to 

potential errors or omissions.

• Complications may result from converting to an enterprisewide 

and commitment-based budgeting system. 

• Potential conflicts of interest could arise due to the different 

ministries that currently have operational responsibilities and 

may also participate in the oversight of the effectiveness and 

efficiency of MCA-Cape Verde’s operations.a

• Lack of a disaster recovery plan could result in the loss of 

critical data.
Page 44 GAO-06-805 Millennium Challenge Corporation

Financial Audits for MCAMadagascar and MCA-Cape 

Verde

MCA-Madagascar and MCA-Cape Verde are preparing for financial 

statement audits as required in their compacts. In January 2006, the MCC 

IG issued guidelines for MCA financial audits and a standard statement of 

work for the MCAs to use in their financial audits and posted lists of MCCapproved audit firms for Madagascar and Cape Verde.41 According to MCC 

IG revised guidance issued in January 2006, compacts are to have an audit 

completed no later than 90 days after the first anniversary of the entry into 

force of the compact or such other periods as parties may agree in writing. 

The MCC IG recently informed us that the audits for MCA-Madagascar and 

MCA-Cape Verde are to be completed by September 30, 2006, for the period 

from entry into force until June 30, 2006. The MCC IG also told us that it 

waived the first audit to be completed for MCA-Madagascar as stipulated in 

the compact documents because the MCA did not have any financial 

activity for the period to be audited.

Although we were able to assess the countries’ progress in establishing a 

system of internal controls to provide the financial accountability required 

by MCC, it is too early to assess the effectiveness of those controls over the 

funding provided to them. Each country has made progress, but they are at 

different stages of maturity in their underlying accountability systems, 

policies and procedures, and internal controls. Oversight mechanisms that 

support program effectiveness as compact projects disburse funds 

throughout multiple countries and promote the segregation of procurement 

and payment processes will be critical for the continual monitoring of 

progress, the development of key accountability mechanisms that function 

as intended, and the mitigation of risks to acceptable levels.

MCC-Approved Country 

Procurement Systems Have 

Effective Characteristics, 

but Are Early in Their 

Implementation

Consistent with MCC guidance, each of the three countries—Madagascar, 

Cape Verde, and Honduras—proposed its own procurement system, 

subject to MCC review and approval during due diligence. Although the 

approved systems have characteristics that we have found typical of 

effective procurement systems, their effectiveness has not yet been tested 

by many procurements. In addition, some of the staff and procedures 

needed to implement the systems are not yet in place at MCC headquarters 

or in compact countries.

41MCC IG, Guidelines for Financial Audits Contracted by MCA (revised January 2006); 

“Standard Statement of Work for Financial Audits of Accountable Entities” (revised January 

2006); and “Standard Statement of Work for Financial Audits of Covered Providers” (revised 

January 2006).
Page 45 GAO-06-805 Millennium Challenge Corporation

MCC Allowed Countries to 

Propose Procurement Agents 

and Systems, but Retained 

Approval Rights

To capitalize on existing country knowledge and experience, MCC has 

given the countries flexibility to choose their procurement agents and 

standards, with the choice subject to MCC approval during due diligence. 

Madagascar and Cape Verde are using private and public sector 

procurement agents, respectively, and Honduras is using a combination of 

public and private sector agents.42 (See app. IV.) In contrast to donors such 

as the World Bank, MCC also allowed the countries to propose their own 

standards for managing procurements.43 (See app. IV for details of the 

countries’ procurement agents and standards.) MCC required the countries 

to adhere to “procurement principles” that include equal access to 

procurements, competition for awards, and transparency of the process.44

Madagascar, Cape Verde, and Honduras have used either existing World 

Bank standards or their own laws to govern MCC procurements. In its 

procurement agreement with each country, MCC included modifications to 

the country’s selected standards to reconcile them with U.S. law and MCC 

principles. For example, MCC required that countries not include 

preferences for domestic suppliers in solicitations paid for with MCC 

funds. 

Although MCC’s agreements with the three countries give the countries a 

number of authorities over procurements, MCC retains certain approval 

rights. MCC’s fiscal accountability framework describes procurement as 

one of the highest-risk areas of fiscal accountability. MCC’s compact, 

disbursement agreement, and procurement agreement with each of the 

countries describe the relationship, roles, and authority of MCC, the 

procurement agent, and the compact country (see app. IV for details). 

Although these agreements have some common elements, each agreement 

is unique to the individual country. To determine when MCC approval of 

individual actions is appropriate, MCC included review thresholds in the 

procurement agreements keyed to procurement size and methods. Above 

cost thresholds, which vary among countries, MCC must approve items 

42Within the MCC fiscal accountability framework, the procurement agent is responsible for 

impartially administering and/or certifying a process for procurement, up to the point of 

selection, that adheres to a defined set of procurement standards.

43Procurement standards define technical language, provide instructions to participating 

vendors, and communicate the terms and conditions for vendor selection and process 

performance.

44The Millennium Challenge Act of 2003 requires MCC to ensure that open, fair, and 

competitive procedures are used in a transparent manner in the procurement of goods and 

services under the compact. 
Page 46 GAO-06-805 Millennium Challenge Corporation

such as the procurement method, terms of reference, and selection. Below 

thresholds, the compact country may conduct procurements in keeping 

with the procurement plan without additional MCC oversight. These 

thresholds are a risk management tool that maximizes MCC control for 

larger transactions but leaves discretion to the compact country for smaller 

transactions.45

Countries’ Procurement Systems 

Have Strengths, but MCC and 

Country Systems Are Not Fully 

Established

Although the three countries’ procurement systems vary, each has 

characteristics that we have previously identified as typical of effective 

international procurement systems.46 These characteristics are similar to 

the principles, such as equal access, competition, and transparency, that 

MCC applies in its review of the systems during due diligence. However, 

MCA officials in Madagascar and Cape Verde told us that they had 

completed few procurements that would test the systems in practice. 

Furthermore, MCC headquarters has not yet finished hiring its 

procurement staff, and procurement systems in Madagascar and Cape 

Verde are not yet fully established.

• Incomplete staffing. As of May 2006, MCC headquarters had hired its 

senior director of procurement but had not yet hired five director-level 

procurement staff in its Accountability Department. According to MCC 

officials, the function of these vacant positions is currently being filled 

by six intermittent personal service contractors, and MCC has offered 

one of these contractors a full-time position.47 During our site visits in 

January and February 2006, staff in Madagascar and Cape Verde 

reported that the time frames for MCC review of procurements had been 

satisfactory. However, if MCC staffing does not increase as the countries 

45According to MCC officials, Madagascar’s procurement law did not identify review 

thresholds. They stated that, because of the lack of thresholds in Malagasy law, MCC 

developed them in consultation with Madagascar representatives prior to compact signing. 

Although MCC officials stated that the thresholds were based on the best available 

knowledge of local practices, the thresholds had not yet been tested in practice prior to 

their adoption by MCC.

46These characteristics include integrity, openness, accountability, professional workforce, 

competition, and value. See GAO, United Nations: Progress of Procurement Reforms, 

GAO-NSIAD-99-71 (Washington, D.C.: Apr. 15, 1999); and United Nations: Preliminary 

Observations on Internal Oversight and Procurement Practices, GAO-06-226T

(Washington, D.C.: Oct. 31, 2005).

47MCC officials also stated that they have entered into blanket purchase agreements with 

other firms to supplement their procurement staff.
Page 47 GAO-06-805 Millennium Challenge Corporation

submit more procurement decisions for approval, MCC may have 

difficulty in conducting timely reviews of these decisions. 

• Incomplete systems. During our site visits, we found that some elements 

of the procurement systems documented in MCC’s agreements with 

Madagascar and Cape Verde were not yet in place or had not functioned 

smoothly. 

• Neither country had yet established the procurement bid protest 

body required by MCC or put in place automated systems for 

procurement tracking and management, although both reported 

plans to do so in 2006. Madagascar also had not established a process 

for reviewing contractor change order requests. 

• During our visit to Madagascar, a senior MCC official discovered that 

the country’s procurement plan for months 2 through 4 did not reflect 

current project work plans. As a result, the procurement agent was 

preparing for procurements that were no longer needed. Members of 

the Madagascar management team told us that they would establish 

new procedures to coordinate future work plan changes with the 

procurement agent.48

• In Cape Verde, the procurement review commission lacked office 

space and was concerned about being able to handle the number of 

reviews required of it once procurements begin in earnest. The 

commission is comprised of members who are fully employed 

elsewhere and are not permitted to delegate their work. The 

members have worked nights and weekends or have negotiated with 

their supervisors to be released from their other jobs to perform the 

commission’s work. According to MCC, subsequent to our site visit, 

48The MCC IG identified additional weaknesses in management practices in its Risk 

Assessment of Millennium Challenge Corporation’s MCA-Madagascar Financial 

Operations (Washington, D.C.: Mar. 28, 2006). The MCC IG found that MCA-Madagascar had 

not implemented procedures for validating the receipt of goods and services, recording 

goods in an inventory system, and tracking time and attendance. Furthermore, the MCC IG 

found that MCA-Madagascar was in the process of purchasing vehicles for MCA employees’ 

work-related and personal use. MCA-Madagascar canceled the procurement after this 

finding. MCC noted in its response to the audit that the provision of vehicles for personal 

use was an accepted practice in many parts of the world; but MCC adopted a policy 

reinforcing the compact provision against the personal use of MCC assets. On the basis of 

its findings, the MCC IG recommended that MCC establish and distribute a set of policies 

and procedures for managing assets purchased with MCC funds. MCC agreed with this 

recommendation.
Page 48 GAO-06-805 Millennium Challenge Corporation

Cape Verde has taken actions to mitigate the risks to the efficient 

operation of the commission.49

• Both Madagascar and Cape Verde reported difficulties with an MCC 

requirement that documents be in both English and the local 

language. Cape Verdean procurement review commission members 

are not required to speak English but are expected to review 

documents prepared in English. Cape Verde was considering hiring a 

full-time translator to address this need.50 In Madagascar, the 

translation of a French document prepared by the implementer of the 

finance project and requested by MCC delayed the approval of 

needed project procurement. 

MCC Has Established 

Country Monitoring and 

Evaluation Frameworks, but 

Weaknesses May Limit 

Measurement of Results

Each of the three countries’ (Madagascar, Cape Verde, and Honduras) 

programs includes a monitoring and evaluation framework that includes 

plans for data collection, data quality reviews, analysis, and interim and 

final reporting of results. We found several weaknesses in the monitoring 

and evaluation frameworks that could affect MCC’s ability to track and 

account for program results. 

Countries’ Programs Include 

Monitoring and Evaluation 

Frameworks

Each of the three countries’ programs includes detailed plans for 

monitoring and evaluating program results. MCC approved Madagascar’s 

and Cape Verde’s plans in November 2005 and April 2006, respectively, 

while Honduras’s plan existed in April as a detailed draft but had not yet 

been approved. According to MCC officials, Honduras’s plan is not final 

pending the staffing of the monitoring and evaluation director position to 

ensure country understanding and buy-in. In accordance with MCC

49These actions include working with the Ministry of Finance to provide adequate 

permanent facilities, changing the review process to reduce the number of actions required 

of the commission, developing a training plan for the members of the commission, and 

receiving additional technical assistance from MCC.

50According to MCC officials, MCA-Cape Verde subsequently hired a full-time translator to 

serve the procurement review commission and MCA-Cape Verde.
Page 49 GAO-06-805 Millennium Challenge Corporation

guidance, the countries’ plans include separate components for monitoring 

and evaluation: 51

• The monitoring component includes, among other things, key 

indicators that are linked as closely as possible to the variables 

identified in the economic analysis of the country’s proposed projects. 

These indicators are to be used throughout implementation to assess 

whether the program is likely to achieve the desired results. The 

monitoring component also identifies baseline and target values for 

each indicator and includes plans for periodic performance reports and 

data quality reviews. MCC guidelines state that monitoring can be on 

select indicators to minimize reporting requirements.52

• The evaluation component identifies, among other things, the 

methodology that will be used to assess the program’s impact, such as 

randomized controlled trials, and describes plans for collecting 

baseline, interim, and final data on program results. 

Countries’ monitoring and evaluation plans use, to varying degrees, the 

economic analysis of the proposed projects to identify indicators for 

monitoring progress toward project objectives, calculate targets for each 

indicator, and evaluate the achievement of compact goals. The economic 

relationships specified in the models, such as the relationship between 

improved infrastructure and farm output, provide a basis for tracking 

project success. The monitoring framework also includes setting target 

values for indicators. Figure 13 illustrates indicators at various levels for a 

rural development project in Honduras.

51According to MCC’s January 2006 Guidelines for Monitoring and Evaluation Plans, each 

plan is to include separate components for monitoring and evaluation as well as summarize 

the compact program and objectives, identify program beneficiaries, document assumptions 

and risks, identify country staff responsibilities for managing and implementing the plan, 

and provide a detailed annual monitoring and evaluation budget. Compact Disbursement 

Agreements also condition MCC’s periodic disbursement of compact funds on a country’s 

demonstrating that it is meeting the performance requirements outlined in its plan. Prior to 

January 2006, MCC provided very limited guidance to eligible countries for developing 

monitoring and evaluation plans. For instance, its Guidance for Developing Proposals for 

MCA Assistance in FY 2004 described the need for measurable goals and accountability for 

results. In addition, an attachment to the 2004 guidance required that a country’s proposal 

describe a plan, including progress indicators and baseline data, for monitoring progress 

toward compact goals. This guidance, however, provided few specifications.

52The Millennium Challenge Act of 2003 requires MCC to include regular benchmarks in its 

compacts to measure progress toward achieving compact objectives.
Page 50 GAO-06-805 Millennium Challenge Corporation

Figure 13: Indicator Structure for Honduras’s Rural Development Project 

Although the specifics of the countries’ plans vary, the monitoring 

component of each plan calls for the country’s MCA to submit periodic 

performance reports and data quality assessments to MCC. Performance 

reports will include quarterly assessments to alert the countries and MCC 

to any problems, periodic audits that analyze performance at all compact 

Final Project Objective

To increase the productivity and competitiveness of owners, operators, and employees of smalland medium-size farms

Final Objective Indicators

1. Number of program farmers harvesting high-value horticulture crops at year-end

2. Number of hectares harvesting high-value horticulture crops at year-end

Intermediate Outcome Indicators

1. Number of business plans prepared by program farmers with 

assistance of technical assistance provider

2. Value of loans to program farmers

3. Percentage of MCA-Honduras loan portfolio at risk

4. Number of liens registered 

Project Activity

1. Activity: Farmer Training and Development

Indicator: Hours of technical assistance delivered to program farmers

2. Activity: Farmer access to credit

Indicators: (1) Funds lent by MCA-Honduras to financial institutions, (2) hours of technical assistance to 

financial institutions, and (3) lien registry equipment installed 

3. Activity: Farm-to-market roads

Indicator: Kilometers of farm-to-market roads upgraded 

4. Activity: Agricultural Public Goods Grant Facility 

Indicator: N/A

Honduras MCC Compact Goal: Increased economic growth and reduced poverty

Compact Goal Indicator: Increase in the income of beneficiaries

Rural Development 

Source: GAO presentation of MCC data. 
Page 51 GAO-06-805 Millennium Challenge Corporation

levels, and annual reports that consolidate the quarterly reports and 

recommend adjustments. Most performance data will be gathered by 

project implementers, either country government employees or 

contractors; the plans allow for contracting with other entities to prepare 

the reports. In addition, each plan calls for third-party data quality reviews 

over the course of the compact. For example, in Madagascar, data quality 

assessments are planned to occur every 6 months during the first year and 

annually thereafter.53

Weaknesses in Monitoring and 

Evaluation Frameworks May 

Limit MCC’s Ability to Measure 

Results

In reviewing the frameworks for monitoring and evaluation in the three 

countries, we identified several challenges that MCC faces in ensuring 

accountability for results. These challenges include (1) ensuring the 

availability and quality of baseline data, (2) establishing clear links between 

the economic model and the monitoring and evaluation framework, 

(3) accounting for the degree of uncertainty in expected outcomes, and 

(4) using randomized controlled trials in compact countries. 

Ensuring Baseline Data 

Availability and Quality

Baseline data are essential to measuring the results of MCC-funded 

compact projects. Although MCC has taken steps to collect baseline data 

for monitoring and evaluation, problems with data availability and quality 

may lead to challenges in measuring the progress and impact of the 

countries’ projects over time. MCC officials told us that they worked with 

their country counterparts to set up a Management Information System 

that can meet the requirements for collecting performance data. In 

addition, MCC evaluated the technical capabilities of the country staff and 

the information system the country proposes to use for data management 

purposes. Finally, MCC budgeted funding for surveys in Madagascar and 

Cape Verde to collect baseline data when it was not available. However, we 

found that some of the baseline data in the countries’ monitoring plans 

were not complete, and that some of the data MCC collected were not 

reliable.

• Baseline data availability. In some instances, the countries’ monitoring 

and evaluation plans lack complete baseline data against which to 

measure progress. For example, two activity and final project indicators 

in Madagascar’s plan—“volume of production covered by warehouse 

receipts in zones” and “volume of microfinance institution lending in the 

zones”—currently lack baselines because the intervention zones have 

53The Madagascar, Cape Verde, and Honduras compacts show that each country will use $3 

million to $5 million in MCC funding for these monitoring and evaluation efforts.
Page 52 GAO-06-805 Millennium Challenge Corporation

not yet been selected. Moreover, although the collection of performance 

data is closely linked to project implementation, Madagascar’s plan 

contains no intermediate outcome indicators and target values, thereby 

making it difficult to effectively track project progress. (See fig. 13 for 

an example of the role of intermediate outcome indicators in the 

monitoring structure of Honduras.)

• Baseline data quality. MCC may face challenges in ensuring the quality 

of the baseline data that it uses to monitor and evaluate program impact 

and, as a result, may have difficulty in accurately measuring the impact 

of compact projects. MCC officials told us that it has been difficult to 

obtain accurate and reliable baseline data against which to measure 

program results. In some countries, MCC has funded surveys to obtain 

the needed baseline data. However, even with the additional resources 

provided by MCC, obtaining baseline data has been a challenge. For 

example, we found significant data quality problems associated with 

one of three surveys that MCC funded to collect baseline data in 

Madagascar. Our interviews with Madagascar and USAID officials who 

oversaw the survey revealed that the survey results, which were used to 

estimate average land values, are flawed in that they do not reflect 

recent significant changes in Madagascar’s currency.54 Madagascar’s 

compact goal is to increase household income, as measured by the 

percentage of increase in land values.55 Because of the survey error, the 

land value estimates may not be sufficiently reliable to evaluate the 

project impact and the compact as a whole.56

Linking Monitoring Plans to 

Economic Analyses

Linking the indicators used to monitor and evaluate progress to the data 

and assumptions used in MCC’s due diligence economic analyses will also 

54In January 2005, the Central Bank of Madagascar introduced monetary reform and a new 

currency with one-fifth the value of the prior currency. When the Agricultural Productivity 

Survey was conducted in April 2005, survey enumerators and respondents used both 

currencies when discussing land prices. However, in conducting the survey, enumerators 

did not clearly identify the currency in which they recorded land values. Madagascar’s 

Statistical Institute, which conducted the survey, found that 30 percent of the surveys 

contained errors.

55Household income is expected to increase by 5 percent of the average land values in 

targeted project zones. In addition, the impact of a land tenure project will be measured by 

the amount of total new investment in the zones, with a target of increasing the average land 

value by an estimated 27 percent by the end of the 4-year compact.

56MCC officials stated that they were aware of the survey problem, and that data from a 

household survey could be useful as an additional measure of land values.
Page 53 GAO-06-805 Millennium Challenge Corporation

present a challenge. In reviewing the draft plan for Honduras, we found 

consistent linkages between the indicators for monitoring and evaluation 

and the variables and assumptions used in the economic model. However, 

in the plans for Madagascar and Cape Verde—the first two plans that MCC 

approved—we found instances where MCC did not sufficiently link the 

monitoring plans to the economic models, which may hamper its ability to 

effectively measure project results. For example:

• After signing its compact with Cape Verde, MCC changed the interim 

targets for seven indicators. In two cases, neither MCC nor Cape Verde 

was able to identify the methodology used to select the indicators in the 

monitoring and evaluation plan.57 According to MCC officials, they 

decided that the assumptions in the economic analysis were a poor 

basis for constructing the monitoring indicators and, therefore, chose 

other indicators and estimated the targets. According to MCC officials, 

the inability to identify the methodology, in conjunction with updated 

baselines and revised work plans in the country resulted in MCC’s and 

Cape Verde’s agreeing to reduce the interim targets that had been 

established.

• MCC’s economic analysis for Madagascar’s Land Tenure Project, which 

is approximately one-third of the compact budget, did not identify the 

expected benefits from the separate project activities. Therefore, we 

could not track the linkage between the activities in the model to those 

in the monitoring and evaluation plan.

• MCC’s approved monitoring and evaluation plan does not include 

tracking the results of two finance project activities—modernizing the 

National Savings Institution and opening bank branches—although they 

were included in economic analysis calculations during due diligence. 

According to an MCC official, these two finance project activities will be 

tracked at a higher level of aggregation—the finance project level—and 

monitored by tracking the number and value of new accounts. However, 

this approach may not adequately capture the outputs and benefits from 

the institution’s modernization and could potentially confound the effect 

of one activity (modernizing the institution) with that of other activities. 

For example, while an increase in the number and value of new 

accounts could result from the two finance project activities, it could 

57MCC also reduced five interim indicators for the Watershed Management and Agriculture 

Support Project because of a delay in implementing the project.
Page 54 GAO-06-805 Millennium Challenge Corporation

also result from an overall increase in savings if customers invest in 

government savings bonds, issued recently and prior to the start of the 

MCC compact. 

Accounting for Uncertainty in 

Achieving Target Values 

Although the countries’ monitoring and evaluation plans acknowledge the 

uncertainty of achieving indicator target values, MCC project monitoring 

does not adequately address (1) the effect of potential variations in 

uncertainty on the range of acceptable target values or (2) the plausibility 

of target values. As a result, some targets specified in the countries’ 

monitoring plans may not be achieved. 

MCC disbursement agreements include as a condition precedent that, if an 

indicator value observed during compact implementation does not fall 

within 10 percent of the agreed-on target values, MCC may withhold 

disbursements. MCC applies this 10 percent margin to all projects, 

regardless of type (e.g., agriculture or infrastructure). However, our 

analysis suggests that several factors could cause indicator values for many 

projects to fall outside the 10 percent range. 

• External factors. Uncertainty associated with external factors varies by 

country and project. For example, according to previous GAO work, 

external factors that could affect project implementation might include 

political instability, the lack of commitment of political leaders to 

necessary reforms, the magnitude of assistance from other bilateral and 

multilateral donors, weather conditions that affect crop yields, and the 

instability of international markets. 58 These factors could cause 

indicator values to fall outside the 10 percent range used across all 

countries and projects.59

58GAO, Foreign Assistance: USAID’s Reengineering at Overseas Missions, GAO/NSIAD-97-

194 (Washington, D.C.: Sept. 12, 1997).

59The approved monitoring and evaluation plans for Madagascar and Cape Verde 

acknowledge that external factors, many of them beyond the control of program 

management, may directly affect progress toward project objectives. The countries’ plans 

and the draft monitoring and evaluation plan for Honduras each include a discussion that 

elaborates on the assumptions in the economic analyses and the uncertainties associated 

with those assumptions. Although MCC performs a limited sensitivity analysis that analyzes 

the response of the variables used in the economic model to changes in some of the external 

factors that could affect it, MCC does not perform this evaluation systematically for all 

countries and projects.
Page 55 GAO-06-805 Millennium Challenge Corporation

• Time factor. The 10 percent range also does not account for the increase 

in the uncertainty of targets over time—for example, target values for 

year 5 of a compact are likely to be less precise than those for year 1.

Therefore, to the extent that MCC bases its disbursement decisions on 

results falling within a common range, it may not fully account for 

variations in uncertainty across projects and over time. 

According to MCC guidelines, the economic analyses and monitoring and 

evaluation plans should, as much as possible, be clearly linked. However, 

limitations in (1) the economic analyses due to problems with data quality, 

assumptions, and lack of country involvement and (2) the consistency 

between the economic analyses and the monitoring and evaluation plans 

constrain MCC’s ability to set plausible targets. If targets are overly 

optimistic, countries may fail to reach them and MCC may not be justified 

in halting disbursements because the countries failed due to unattainable 

targets. Conversely, setting too conservative a target may not prompt the 

country to fully utilize MCC resources. A lack of plausible targets may lead 

to MCC’s making ad hoc decisions regarding the consequences of missing 

targets and applying judgment subjectively and inconsistently in setting or 

modifying targets. MCC officials told us that they would use a missed target 

as a cue to discuss with the country’s MCA its reasons for missing the 

target, and, on the basis of those discussions, they would determine 

whether to use their authority to withhold funding. According to MCC 

officials, senior management approval would be needed to significantly 

modify targets; however, MCC currently has no policy or documentation 

that defines a “significant modification” of targets, especially for targets 

used as conditions precedent to disbursements. 

Using Randomized Controlled 

Trials in Compact Countries

MCC has retained research organizations to help the countries evaluate 

program impact using, as appropriate, randomized controlled trials, but 

MCC’s involvement of these organizations after project implementation 

begins may limit their ability to evaluate impact accurately.60 These 

60As defined by the Office of Management and Budget (OMB), a randomized controlled trial 

is “a study that measures an intervention’s effect by randomly assigning individuals or other 

units into an intervention group, which receives the intervention, and into a control group, 

which does not. At some point following intervention, measurements are taken to establish 

the difference between the intervention group and the control group.” However, randomized 

controlled trials are not suitable for every program and generally can be employed only 

under special circumstances. See OMB, “What Constitutes Strong Evidence of a Program’s 

Effectiveness?” (http://www.whitehouse.gov/omb/part/2004_program_eval.pdf).
Page 56 GAO-06-805 Millennium Challenge Corporation

organizations’ scope of work may include training MCC and compact 

country staff; designing the trials and data collection; and proposing 

appropriate methodologies for, and analyzing results from, impact 

evaluations. According to MCC monitoring and evaluation officials, MCC 

has begun designing impact evaluations by identifying those program 

components that can and cannot be evaluated using randomized controlled 

trials, which MCC has indicated are its preferred method of impact 

evaluation.61 According to MCC officials, MCC considers evaluations using 

randomized controlled trials as “rigorous” and evaluations using other 

methodologies as “standard.” 

MCC has hired an independent consultant experienced in impact 

evaluations to work with compact countries to assess the appropriateness 

of using randomized trials to evaluate MCC’s projects. When these 

assessments are completed, the five research organizations will be invited 

to compete to conduct randomized trials after compact implementation 

begins.62 However, at that point, the organizations will not have had an 

opportunity to assess the design of the countries’ evaluation strategy, 

including the adequacy and reliability of the baseline data. Without the 

involvement of these organizations before implementation of the relevant 

project(s) begins, MCC may not be able to ensure that they have the 

necessary data and have established appropriate research designs for their 

work. MCC officials told us that they thus far had not involved the five 

organizations because rigorous evaluations were turning out not to be 

feasible in some cases, or because the tasks were not large enough to 

warrant the use of the five research organizations.63

Conclusions MCC continues to mature and evolve as an institution, taking on the 

ambitious task of creating new, country-managed organizations while 

developing processes to oversee what are expected to be relatively large 

amounts of foreign assistance. Toward that end, MCC has taken positive 

steps with regard to establishing policies and procedures for MCA 

organizations. However, it has taken time to complete the numerous 

61According to OMB, randomized controlled trials provide the highest-quality unbiased 

evaluation to demonstrate actual program impact.

62According to MCC officials, at that point, MCC also plans to invite other groups and 

individuals to compete for conducting randomized trials.

63As of May 2006, MCC had not awarded task orders for this work.
Page 57 GAO-06-805 Millennium Challenge Corporation

agreements necessary for compacts to enter into force. This could continue 

to present challenges, given that MCC is working simultaneously with a 

number of nations to develop and implement compacts.

As MCC moves forward, partnering with countries to develop well-founded 

economic assumptions will be crucial to establishing a foundation for the 

work of MCC and its partners. Furthermore, holding countries accountable 

for results requires, to the extent practical and cost-effective: collecting 

reliable and accurate baseline data, linking economic analyses to 

monitoring plans, addressing the uncertainty associated with program 

results, and ensuring the timely development of the research design for 

randomized controlled trials. 

Recommendations Because of the central role of reliable economic analyses and the 

importance of partnering with countries in achieving MCC goals and 

ensuring accountability for MCC programs, we recommend that the Chief 

Executive Officer of MCC take the following two steps:

• Ensure that MCC officials, in partnership with country representatives, 

perform economic analyses that more fully reflect the countries’ 

socioeconomic environment and are better understood by country 

public and private sector representatives.

• To the extent practical and cost-effective, improve MCC’s monitoring 

and evaluation capabilities by

• obtaining more accurate and reliable baseline data needed to permit 

tracking progress during compact implementation;

• ensuring a clear linkage between MCC’s economic analyses and 

monitoring and evaluation frameworks;

• developing policies, procedures, and criteria for establishing targets 

and for adjusting those targets if unforeseen events affect outcomes; 

and

• taking steps to ensure the timely development of the needed research 

design for randomized controlled trials, if they are undertaken, prior 

to project implementation.
Page 58 GAO-06-805 Millennium Challenge Corporation

Agency Comments and 

Our Evaluation

We received written comments on a draft of this report from MCC and the 

Department of State. In commenting on a draft of this report, MCC 

generally agreed with our findings, conclusions, and recommendations. 

MCC noted that our discussion of the evolving guidance provided to 

eligible countries in 2004 and 2005 was a result of the complex process of 

engaging with eligible countries while simultaneously developing policies 

and procedures. MCC stated that this criticism should not be valid beyond 

the initial instances covered in this report. We recognize that MCC was 

simultaneously addressing a number of issues during this period, but we 

felt it was important to discuss the evolving nature of guidance to provide a 

balanced perspective regarding the process eligible countries had to follow 

to sign compacts.

MCC also commented (1) that our characterization of data quality issues in 

Madagascar cited only a single survey and (2) that it differed with us on the 

appropriate level of aggregation in linking economic models and 

monitoring and evaluation plans. We note that there was one other instance 

of poor data quality in Madagascar, but that we focused on the Agricultural 

Productivity Survey because of the importance of accurately tracking land 

values to monitor results. We agree that disaggregation may not always be 

feasible, but note that aggregation poses some challenges that could limit 

the effectiveness of monitoring and evaluation. We reprinted MCC’s 

comments, with our responses, in appendix V. We also incorporated 

technical comments from MCC in our report where appropriate.

State commented that some of our findings reflect minor or transitory 

problems and provided specific observations regarding MCC’s evolving 

guidance, the assumptions used in MCC’s economic models, country 

participation, staffing delays, fiscal accountability structures, and the use 

of randomized controlled trials. 

State noted that MCC’s guidance could be expected to evolve, given the 

newness of the organization, and that informal guidance from MCC was 

always available to eligible countries. We agree that guidance could be 

expected to evolve, but we sought to provide a balanced perspective by 

noting instances where MCC’s verbal guidance may not have been 

sufficient to assist countries in submitting proposals that met MCC’s 

criteria.

State questioned the findings from our Madagascar focus groups and our 

finding that MCC conducted economic analyses with limited country 
Page 59 GAO-06-805 Millennium Challenge Corporation

involvement. Our focus groups resulted in discussions of the assumptions 

used in the Madagascar economic analysis with a broad range of country 

stakeholders representing U.S. and Malagasy agencies and organizations 

involved in implementing the compact. Furthermore, MCC agreed in its 

comments that, in some cases, the level of country engagement on 

economic analysis could be improved. MCC outlined specific steps that it 

had taken to increase country involvement in economic analyses.

Regarding staffing delays and fiscal accountability structures, State 

commented that we offered no suggestions to MCC for things they could 

have done differently. We added additional material to the report to 

elaborate on the steps MCC has taken to reduce delays in staffing key 

positions. In regard to fiscal accountability, we agree that different 

countries will differ in their maturity of internal control. However, 

evaluating maturity is key to properly assessing risk and establishing 

effective oversight mechanisms.

Finally, State disagrees with what it terms our “reliance” on randomized 

controlled trials to measure success. This comment misconstrues our 

findings. We did not rely on or advocate this methodology, but rather are 

commenting on MCC’s use of randomized controlled trials as its preferred 

method of impact evaluation. 

We have reprinted State’s comments, with our responses, in appendix VI. 

We are sending copies of this report to interested congressional 

committees as well as the Secretary of State, the Secretary of the Treasury, 

the CEO of MCC, and the Administrator of USAID. We will also make 

copies available to others upon request. In addition, this report will be 

available at no charge on the GAO Web site at http://www.gao.gov. 
Page 60 GAO-06-805 Millennium Challenge Corporation

If you or your staff has any questions about this report, please contact 

David Gootnick at (202) 512-3149 or gootnickd@gao.gov. Contact points for 

our Offices of Congressional Relations and Public Affairs may be found on 

the last page of this report. GAO staff who made major contributions to this 

report are listed in appendix VII. 

Sincerely yours, 

David Gootnick

Director

International Affairs and Trade 

Jeanette Franzel 

Director

Financial Management and Assurance
Page 61 GAO-06-805 Millennium Challenge Corporation

Appendix I

MCC Actions in Response to April 2005 GAO Apendxies

Recommendations ApendxiI

The Millennium Challenge Corporation (MCC) has taken a number of steps 

to address our April 2005 recommendations regarding its strategic 

planning, internal controls, and human capital and governance policies, 

although some aspects of its organizational structure are not yet complete. 

MCC has prepared a strategic plan for fiscal years 2006 through 2011, and 

an annual performance plan for fiscal year 2006. MCC also has 

strengthened its internal controls and taken steps to implement some fiscal 

accountability mechanisms, established an audit committee within its 

governing board, and completed several required audits and reviews. 

However, MCC has not documented all financial control activities and 

continues to face risks from the poor interfacing of its systems with those 

of the Department of the Interior’s National Business Center (NBC). MCC 

has reassessed its staffing model, developed a plan for recruitment, and 

implemented an improved performance management system; but, it does 

not systematically track the use of staff resources to verify its human 

capital model. Finally, MCC has approved a corporate governance policy 

and taken steps to improve board involvement in planning, management, 

and communication; but it has not yet fully addressed risk management for 

the corporation.

MCC Has Developed a 

Strategic Plan to 

Enhance 

Accountability and 

Completed a 2006 

Performance Plan

Consistent with our recommendation to enhance corporate accountability, 

MCC completed a strategic plan, approved by the Office of Management 

and Budget (OMB) in November 2005. In April 2006, MCC completed an 

annual performance plan that provides goals and benchmarks for assessing 

its performance in fiscal year 2006. This annual performance plan will 

enable MCC to report in the future on its progress in meeting its goals.1

 As 

part of the annual performance plan process, MCC also has developed 

goals and benchmarks for its individual departments that support the 

attainment of the corporate goals identified in the strategic plan. (See table 

4.)

1

As we noted in our April 2005 testimonies, strategic and performance planning and 

reporting processes that establish, measure, and report an organization’s progress in 

fulfilling its mission and meeting its goals are important for organizational accountability. 

See GAO, Millennium Challenge Corporation: Progress Made on Key Challenges in First 

Year of Operations, GAO-05-455T (Washington, D.C.: Apr. 26, 2005) and GAO-05-625T

(Washington, D.C.: Apr. 27, 2005).
Appendix I

MCC Actions in Response to April 2005 GAO 

Recommendations

Page 62 GAO-06-805 Millennium Challenge Corporation

Table 4: MCC Response to GAO Recommendations for Corporatewide Accountability

Sources: GAO interviews and analysis of MCC documents.

MCC Has Made 

Significant Progress in 

Establishing Internal 

Controls

In response to our April 2005 recommendations, MCC has made significant 

progress in establishing internal controls over program and administrative 

operations at both the MCC headquarters and compact levels.2

 MCC has 

made progress in each of the five components of internal controls 

discussed in our April 2005 testimony:3

 (1) control environment, (2) risk 

assessment, (3) control activities, (4) monitoring, and (5) reporting.

• Internal control environment. MCC has initiated several measures to 

establish a positive internal control environment, including 

documenting its organizational structure for the Administration and 

Finance and Accountability structures. The Fiscal Accountability area, 

which is a component of the Accountability structure, currently consists 

of a managing director and several directors; however, other positions 

to support the fiscal oversight of MCC compacts have yet to be filled. A 

formal ethics program has also been established for MCC headquarters. 

• Risk assessment. MCC is developing a process for assessing risks facing 

the corporation and its programs. To this end, MCC has hired a thirdparty consulting firm to support the implementation of processes, based 

on OMB A-123, Management’s Responsibility for Internal Control, 

Summary of GAO recommendation MCC actions completed MCC actions not completed or in progress

Implement a strategic plan ✔ Completed strategic plan, 

November 2005.

N/A

Establish annual performance plans and goals ✔ Annual performance plan 

completed in April 2006.

N/A

Use performance measures to monitor progress in 

meeting both strategic and annual performance goals

✔ Annual performance plan 

completed in April 2006.

N/A

Report internally and externally on progress in 

meeting strategic and annual performance goals

Completed annual performance plan provides 

benchmarks against which to measure MCC’s 

fiscal year 2006 performance.

2

Internal controls provide reasonable assurance that key management objectives—that is, 

efficiency and effectiveness of operations, reliability of financial reporting, and compliance 

with applicable laws and regulations—are being achieved.

3

GAO-05-455T and GAO-05-625T.
Appendix I

MCC Actions in Response to April 2005 GAO 

Recommendations

Page 63 GAO-06-805 Millennium Challenge Corporation

December 2004, criteria, to address risks associated with domestic and 

foreign operations. 

• Control activities. MCC has instituted several control activities to 

reduce risk. MCC has submitted its Strategic Plan under the 

Government Performance and Results Act (GPRA) of 1993 and has 

completed required audits and reviews, such as those required under the 

Federal Managers Financial Integrity Act (FMFIA) of 1982 and the 

Federal Information Security Management Act (FISMA) of 2002.4

 MCC is 

in the process of addressing the various material weaknesses, 

reportable conditions, findings, and recommendations identified in the 

audits. For example, MCC continues to address the formal 

documentation of control activities for the financial reporting process at 

MCC headquarters. MCC also contracted with a third-party serviceprovider, NBC, to maintain its accounting system and the recommended 

Statement on Auditing Standards No. 70 (SAS 70) review5

 was 

performed; however, MCC is still addressing issues reported as a result 

of the review, such as the need to address manual processes that present 

inherent risks associated with accounting systems and related 

processes. For example, MCC forwards daily to NBC a package 

containing source documentation that is used by NBC to record 

transactions to the general ledger. Similarly, information for MCC’s 

travel expenses is prepared at MCC headquarters office and daily 

communicated to NBC through manual processes. MCC is aware of the 

need to address these issues and is working with NBC to mitigate or 

eliminate the manual processes.

• Monitoring. MCC has taken steps to ensure ongoing monitoring and 

periodic testing of control activities. MCC’s investment committee 

embodies functions of monitoring and testing and operating as an 

integral part of MCC’s internal control program by overseeing the 

program units’ compliance with both the procedural and substantive 

elements required by its internal processes. Also, MCC conducted its 

first comprehensive survey of internal controls, performed by outside 

consultants, in conjunction with its annual audit. In addition, MCC has 

formed formal review panels to monitor the progress of addressing 

4

GPRA, Public Law 103-62; FMFIA, Public Law 97-255; and FISMA, Public Law 107-347.

5

SAS 70, “Reports on the Processing of Transactions by Service Organizations,” covers 

situations in which an organization has outsourced its financial operations. It is intended to 

provide a reasonable assurance that a service provider has adequate internal controls. 
Appendix I

MCC Actions in Response to April 2005 GAO 

Recommendations

Page 64 GAO-06-805 Millennium Challenge Corporation

findings from internal and external reviews. For example, consistent 

with OMB guidance, MCC formed an FMFIA Management Review Panel 

to assess the results of the internal control survey along with the 

findings of MCC’s independent financial auditors. Similarly, MCC 

implemented a specific procedure to address recommendations from 

reviews and audits performed by its Inspector General (IG).

• Reporting. MCC has made progress in establishing a process for 

assessing and reporting on the operating effectiveness of its internal 

controls. MCC established a formal board-level audit committee whose 

responsibilities include (1) financial controls; (2) the integrity of the 

reporting process; and (3) performance of the independent audit 

process. In addition, MCC’s FMFIA Management Review Panel assessed 

the results of the internal control survey, along with the findings of 

MCC’s independent financial auditors. The panel identified four material 

weaknesses and actions that MCC will be taking in future months to 

resolve them, which the acting Chief Executive Officer certified on 

November 7, 2005. 

MCC officials told us that the development of new internal control policies 

and procedures and the revision of those already in place is a continuing 

process as MCC continues to mature as an organization. Table 5 

summarizes MCC’s progress in addressing our April 2005 

recommendations.
Appendix I

MCC Actions in Response to April 2005 GAO 

Recommendations

Page 65 GAO-06-805 Millennium Challenge Corporation

Table 5: MCC Response to GAO Recommendations for Internal Controls over Program and Administrative Operations

Sources: GAO interviews and analysis of MCC documents.

Summary of GAO recommendation MCC actions completed MCC actions not completed or in progress

Complete the development and implementation of overall plans and related time frames for actions needed to establish the following:

A positive and supportive internal 

control environment

✔

✔

✔

✔

✔

✔

Documented the organizational 

structure.

Documented a corporate 

strategy.

Implemented a procedure for 

addressing IG audit findings.

Established formal ethics 

program, including training for all 

MCC employees.

Conducted audits required under 

FISMA and FMFIA.

Submitted Strategic Plan under 

GPRA.

• Positions within the accountability area remain vacant.

• Continued efforts to address audit findings of material 

weaknesses and reportable conditions.

A process for ongoing risk assessment ✔ Identified 14 priority internal 

control areas relating to 

administrative and program risks.

• Risk assessment process is still being developed.

• Outside consulting firm to support MCC risk analysis 

based partly on OMB A-123 criteria.

Control activities and procedures for 

reducing risk, such as measures to 

mitigate risk associated with contracted 

operational and administrative services

✔ Internal Controls Strategy Group 

identified 14 key internal control 

areas for MCC to focus efforts.

• MCC continues to work on implementing and formally 

documenting some procedures and control activities.

Ongoing monitoring and periodic testing 

of control activities

✔ Established formal review panels 

to monitor progress of efforts to 

address findings from internal 

and external reviews and formally 

documented a process for 

addressing MCC IG 

recommendations.

N/A

A process for assessing and reporting 

on the effectiveness of internal controls 

and addressing any weaknesses 

identified

✔ Created a board-level audit 

committee to monitor MCC’s 

financial controls, integrity of the 

financial reporting process, and 

performance of the audit process.

• MCC continues efforts to establish a comprehensive 

database to track recommendations.
Appendix I

MCC Actions in Response to April 2005 GAO 

Recommendations

Page 66 GAO-06-805 Millennium Challenge Corporation

MCC Has Taken Steps 

to Develop Human 

Capital, but Does Not 

Track Allocation of 

Human Capital to Key 

Activities

MCC has taken steps and is continuing to further develop its human capital 

systems by (1) assessing its staffing needs; (2) improving its recruitment, 

development, and retention systems; and (3) implementing a performance 

management system linking compensation to individual contributions 

toward corporate goals. However, despite having plans to increase its staff 

by an additional 38 percent between May and September 2006, MCC does 

not systematically assess its staffing needs, has not developed a human 

capital plan, and has not yet fully implemented its improved performance 

management system, as follows:

• Staffing. Although MCC has completed an assessment of its human 

capital needs since our April 2005 recommendation, it does not 

systematically track the use of staff time on an ongoing basis. MCC’s 

updated assessment of its human capital needs shows that it plans to 

increase its staffing from 218 staff, as of May 2006, to approximately 300 

staff, as of September 2006.6

 MCC also has created an organization chart 

that includes the specific approved positions for each department under 

the new 300-person staffing model, and it is hiring for many of these 

positions using limited-term appointments to provide greater flexibility 

in filling future needs.7

 According to MCC officials, MCC made its case 

to OMB for increasing staffing to 300 persons on the basis of an analysis 

of MCC staffs’ recollection of the amount of time they spent developing 

the Georgia compact, which was thought to have been the most 

complex compact development process to date. However, MCC officials 

felt that this analysis may not have fully captured the amount of time 

spent by some departments in developing the compact. Retrospective 

analysis was necessary because MCC does not track employees’ time on 

mission-related projects on an ongoing basis. Without such data, MCC 

management is not able to systematically assess the staffing 

requirements needed to carry out MCC’s mission and consistently align 

its human capital with its changing needs. 

• Recruitment and retention. MCC has identified priorities and 

committed resources for recruitment and is developing a human capital 

plan to address retention and training. To support its effort to hire 

6

In April 2005, we reported that MCC had 107 employees in place toward a target of no more 

than 200 employees at the end of December 2005.

7

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.
Appendix I

MCC Actions in Response to April 2005 GAO 

Recommendations

Page 67 GAO-06-805 Millennium Challenge Corporation

approximately 82 additional staff between May and September 2006, 

MCC has retained an outside consultant firm to work on-site and help 

with recruitment and has identified positions as first- or second-tier 

hiring priorities. MCC officials also told us that they are developing an 

overall human capital plan that will include planned activities and a time 

frame for identifying critical skills and competencies for MCC’s key 

positions. The officials stated that the human capital plan also will 

include a strategy for staff retention and will address staff training. 

Currently, MCC has developed procedures for providing employees with 

outside training. MCC intends to develop a comprehensive training plan 

following the completion of the human capital plan, a draft of which it 

expects to circulate to MCC senior staff for their review and comment 

by September 30, 2006. 

• Performance management. In keeping with our recommendation, MCC 

has established a performance-based compensation framework. MCC 

provided us with documentation of its employee ratings process, 

showing that employee expectations and performance reviews were 

keyed to organizational goals. However, according to MCC officials, 

MCC did not incorporate the departmental performance plans for the 

year into the performance framework for 2006 until March 2006, as the 

annual performance plan neared completion. MCC is shifting from a 

calendar year to a fiscal year performance evaluation schedule to better 

align employee compensation with its annual corporate goals. MCC 

anticipates that its strategic plan, annual performance plan, department 

plans, and individual performance goals will be fully synchronized 

beginning in fiscal year 2007. (See table 6.)
Appendix I

MCC Actions in Response to April 2005 GAO 

Recommendations

Page 68 GAO-06-805 Millennium Challenge Corporation

Table 6: MCC Response to GAO Recommendations for Human Capital Infrastructure

Sources: GAO interviews and analysis of MCC documents.

MCC Has Taken Steps 

to Define Corporate 

Governance

The MCC Board of Directors (MCC Board) has taken steps to define the 

scope of its corporate governance and oversight.8

 The MCC Board has 

approved a corporate governance policy developed by MCC with the 

involvement of staff from MCC Board agencies.9

 According to MCC 

officials, the policy incorporates guidance on governance matters provided 

by board members at their previous meetings, and the board participated in 

Summary of GAO 

recommendation MCC actions completed MCC actions not completed or in progress

Establish an effective human capital infrastructure, including:

A thorough and 

systematic assessment of 

the staffing requirements 

and critical skills needed 

to carry out MCC’s 

mission

✔

✔

MCC has reassessed its human capital needs at 

approximately 300 staff, and OMB has approved 

this model.

MCC has completed an updated organization 

chart identifying the positions to be filled under the 

new human capital model.

• MCC currently does not track the amount of time its 

employees spend on specific tasks. Without this 

information, MCC cannot systematically assess its 

staffing needs on an ongoing basis.

A plan to acquire, 

develop, and retain talent 

that is aligned with the 

corporation’s strategic 

goals

✔

✔

✔

MCC has identified priorities for hiring based on 

its 300-staff model.

MCC has retained an outside consultant firm in 

support of its effort to increase staff from 218 in 

May 2006 to approximately 300 at the end of 

September 2006.

MCC has developed a procedure for employee 

training.

• MCC has not completed an overall human capital 

plan but plans to circulate a draft to MCC senior 

staff for review and comment by September 30, 

2006.

• MCC plans to include a retention strategy and 

address training in the human capital plan.

• MCC also plans to develop a comprehensive 

training plan following the completion of the human 

capital plan.

A performance 

management system 

linking compensation to 

employee contributions 

toward the achievement 

of MCC’s mission and 

goals 

✔ MCC has established a performance framework 

that links compensation to employee expectations 

and performance reviews to MCC goals.

• MCC is shifting from a calendar year schedule to a 

fiscal year schedule of performance evaluation to 

better align employee compensation with its annual 

corporate goals.

• MCC anticipates that its strategic plan, annual 

performance plan, department plans, and individual 

performance goals will be fully synchronized 

beginning in fiscal year 2007.

8

Corporate governance can be viewed as the formation and execution of collective policies 

and oversight mechanisms to establish and maintain a sustainable and accountable 

organization, while achieving its mission and demonstrating stewardship over its resources.

9

Four of the nine board positions established in the Millennium Challenge Act of 2003 are to 

be filled based on nominations from the House and Senate majority and minority leaders. As 

of May 2005, two of these positions had not yet been filled.
Appendix I

MCC Actions in Response to April 2005 GAO 

Recommendations

Page 69 GAO-06-805 Millennium Challenge Corporation

formulating MCC’s strategic plan before approving it in December 2005. 

The board has established a board-level audit committee and a charter for 

that committee. According to MCC officials, to address risk, MCC is 

recruiting for the position of risk specialist and has used a contractor to 

support MCC risk analysis. Finally, to improve communication with 

stakeholders in eligible countries, MCC has published and distributed 

updated guidelines for compact development and eligibility. MCC also has 

developed a series of open forums where input is sought from groups with 

an interest in MCC. (See table 7.)

Table 7: MCC Response to GAO Recommendations for Corporate Governance

Sources: GAO interviews and analysis of MCC documents.

Summary of GAO 

recommendation MCC actions completed MCC actions not completed or in progress

Recommended that the Secretary of State ensure that the MCC Board considers and defines the scope of its responsibilities with respect 

to corporate governance and oversight of MCC...including oversight of the following:

Executive 

management

✔ The MCC Board has approved a corporate 

governance policy.

N/A

The formulation and 

execution of corporate 

strategies

✔ The board participated in formulating 

MCC’s strategic plan and approved the 

plan.

N/A

Risk management and 

audit and assurance 

processes

✔ The MCC Board has formed an audit 

committee and approved a charter for that 

committee.

MCC has not yet hired a risk specialist for the corporation but 

has used an outside consulting firm to support MCC risk 

analysis.

Communication and 

coordination with 

corporate 

stakeholders

✔

✔

MCC has published and distributed 

updated guidance on compact 

development and implementation.

MCC has developed an outreach program 

of open forums.

N/A
Page 70 GAO-06-805 Millennium Challenge Corporation

Appendix II

Scope and Methodology ApendxiI

At the request of the Senate Committee on Foreign Relations, we examined 

the structures and procedures MCC has developed in consultation with 

compact countries to manage compacts. Specifically, our work focused on 

(1) the key areas that MCC examined in its due diligence assessments of 

proposals for Madagascar, Cape Verde, and Honduras, and the criteria that 

MCC used in these assessments, and (2) the form and adequacy of the 

implementation structures that MCC and compact countries have put in 

place for governance, procurement, fiscal accountability, and monitoring 

and evaluation. In addition, we reviewed MCC’s progress in responding to 

our April 2005 recommendations on its corporate management and 

accountability structures (see app. I). 

To accomplish our objectives, we reviewed MCC’s documentation of its 

processes and agreements, supplemented by interviews with MCC officials. 

We focused our review for objectives 1 and 2 primarily on the first three 

countries with signed compacts—Madagascar, Cape Verde, and Honduras. 

These countries’ compacts were the first to enter into force. To further our 

analysis for objectives 1 and 2, we also visited Cape Verde and Madagascar 

in January and February 2006. We selected Cape Verde and Madagascar for 

our site visits because they had advanced further than Honduras in filling 

key positions and beginning compact implementation. While in Cape Verde 

and Madagascar, we interviewed a number of MCC, Millennium Challenge 

Account (MCA), and government officials and visited project sites.

To identify MCC’s evaluation criteria and process for evaluating eligible 

country proposals in due diligence, we reviewed MCC guidance and the 

record of MCC analysis contained in (1) MCC’s “due diligence books,” 

which are its internal records of how it assessed proposals submitted by 

Madagascar, Cape Verde, and Honduras, and (2) investment memos, which 

are MCC’s analyses based on due diligence and internal recommendations 

to its investment committee. These documents are restricted from public 

dissemination due to their sensitive nature, but MCC made them available 

to us for analysis. We have coordinated with MCC on describing the 

information from these books in general terms without disclosing sensitive 

information. We used MCC’s definition of the due diligence process as 

beginning with MCC’s opportunity memo and ending with the acceptance 

of the investment memo by MCC’s investment committee. Our review, 

therefore, may not capture some changes and decisions made by MCC or 

eligible countries during proposal development and compact negotiations. 

To evaluate MCC’s assessments of proposals’ consultative process, project 

coherence, environmental and social impact, and institutional and financial 

sustainability, we relied primarily on MCC’s data and analysis contained in 
Appendix II

Scope and Methodology

Page 71 GAO-06-805 Millennium Challenge Corporation

the due diligence books and, to some extent, in the investment memos. We 

compared MCC’s analysis in these documents with criteria outlined in 

MCC’s guidance. We were able to perform only limited independent 

verification of the use and adequacy of these criteria during our site visits. 

With regard to its economic analyses, MCC also made available to us the 

spreadsheet models it used to develop the economic rate of return 

calculations that formed the basis for its evaluations of the suitability of 

country-proposed projects for MCC funding. We independently analyzed 

these spreadsheets and validated their logic and conclusions on the basis of 

a review of economic literature and practices. In addition, in Madagascar, 

we conducted a series of focus groups with country officials to assess the 

data and logic used by MCC in developing their economic analysis. 

To assess MCC’s compact implementation structures, we reviewed the 

compacts with Madagascar, Cape Verde, and Honduras and the 

supplemental agreements required for those compacts to enter into force. 

We supplemented this review with our site visits to Madagascar and Cape 

Verde. In all cases, our ability to analyze the adequacy of these structures 

was limited by their relative newness and limited use in actual 

implementation. We addressed the following four areas of MCC’s 

implementation structures:

• To determine the form of governance structures and key positions in 

these three countries, we reviewed the requirements of MCC compacts 

and supplemental agreements. We determined the progress of the 

country organizations in Madagascar, Cape Verde, and Honduras in 

filling these positions and establishing these structures by analyzing 

MCC’s reported staffing and status information. We independently 

assessed MCC’s progress in our site visits to Madagascar and Cape 

Verde. We discussed factors affecting the filling of these positions 

through discussions with MCC and compact country officials. 

• To assess the adequacy of the countries’ fiscal accountability structures, 

we reviewed MCC’s overall fiscal accountability framework and the 

operations in place in Madagascar and Cape Verde. We assessed the 

adequacy of these structures according to the criteria contained in 

GAO’s Standards for Internal Control in the Federal Government.

1

 We 

assessed MCC’s and the countries’ implementation of these structures 

1

GAO, Standards for Internal Control in the Federal Government, AIMD-00-21.3.1 

(Washington, D.C.: November 1999).
Appendix II

Scope and Methodology

Page 72 GAO-06-805 Millennium Challenge Corporation

by using criteria in the Internal Controls Capability Maturity 

Continuum developed by the independent risk consulting company, 

Protiviti, Inc. We independently verified the existence of the structures 

described in the plan and discussed its strengths and weaknesses during 

the site visits. 

• To assess MCC’s procurement structures, we reviewed the MCC fiscal 

accountability framework, and the implementing procurement 

documents for the first three compact countries. We then assessed the 

adequacy of MCC’s framework, using criteria identified in previous GAO 

reports on international procurement. To determine the status and 

factors affecting the implementation of this framework in Cape Verde 

and Madagascar, we interviewed compact country officials and obtained 

documentation of procurement procedures. 

• To determine the form of monitoring and evaluation structures in the 

three countries with entry into force, we reviewed the requirements of 

MCC compacts and supplemental agreements. We assessed the status of 

the country organizations in Madagascar, Cape Verde, and Honduras to 

establish these structures by analyzing the staffing and status 

information provided to us by MCC. We independently assessed MCC’s 

progress in our site visits to Madagascar and Cape Verde. Additionally, 

we reviewed the scope of work of the independent U.S. evaluation 

contractors retained by MCC, and closely reviewed the monitoring and 

evaluation plan for Madagascar—the only plan approved by MCC prior 

to April 2006. We also reviewed the plan for Cape Verde and the draft 

plan for Honduras. We assessed the adequacy of the Madagascar plan 

against the criteria of data quality, and consistency with the economic 

model and logic identified in MCC’s due diligence review of projects. We 

also applied general principles of economic logic, such as treatment of 

uncertainty in data, to assess how uncertainty was incorporated into 

MCC’s monitoring and evaluation framework.

To review MCC’s progress in responding to GAO’s April 2005 

recommendations (see app. I), we examined MCC documents, such as its 

strategic plan, planning documents, policies, procedures, and human 

capital documents. In December 2005, MCC provided us with a letter 

outlining the steps that the corporation had taken in response to our 

recommendations. Using this as a basis for discussion, we held additional 

meetings with MCC officials and received additional documentation of 

MCC’s responses. We also reviewed the findings of the MCC IG analysis of 

the functions of the Corporation and met with the IG to determine the steps 
Appendix II

Scope and Methodology

Page 73 GAO-06-805 Millennium Challenge Corporation

that MCC had taken in response to IG findings related to our 

recommendations. 

We conducted our review from June 2005 through May 2006 in accordance 

with generally accepted government auditing standards.
Page 74 GAO-06-805 Millennium Challenge Corporation

Appendix III

MCC Projects in Madagascar and Cape Verde ApendxiI

Figure 14: Jatropha Plantation, outside Antsirabe, Madagascar, Targeted for 

Assistance by the MCA-Madagascar Agricultural Business Investment Project

Source: GAO. 
Appendix III

MCC Projects in Madagascar and Cape Verde

Page 75 GAO-06-805 Millennium Challenge Corporation

Figure 15: Antananarivo Land Records Storage Room, Programme National Foncier 

Offices

Note: Digitization of these land records is being supported by MCA funds.

Source: GAO. 
Appendix III

MCC Projects in Madagascar and Cape Verde

Page 76 GAO-06-805 Millennium Challenge Corporation

Figure 16: Port of Praia, Cape Verde 

Note: The quay of the current port can only accommodate one large international vessel. Under the 

MCA program, the quay will be expanded to almost double its current length, enabling three ships to 

dock at a time.

Source: GAO. 
Appendix III

MCC Projects in Madagascar and Cape Verde

Page 77 GAO-06-805 Millennium Challenge Corporation

Figure 17: The Road from Assomada to Rincao, Cape Verde

Note: Using MCA funds, about half of the road will be converted from cobblestone to asphalt. The 

cobblestones from the first half will be used to pave the second section of the road leading up to 

Rincao.

Source: GAO. 
Page 78 GAO-06-805 Millennium Challenge Corporation

Appendix IV

Summary of MCC Procurement Agents, 

Standards, and Provisions in Madagascar, 

Cape Verde, and Honduras ApendxiIV

Table 8: Procurement Agents and Standards in Madagascar, Cape Verde, and Honduras

Source: GAO analysis of MCC procurement documents.

a

Deutsche Gesellschaft für Technische Zusammenarbeit is a private company owned by the German 

federal government.

b

National Fund for Sustainable Rural Development.

Country

Type of procurement 

agent Procurement agent Procurement standards

Madagascar Nongovernmental GTZa Madagascar Law Number 2004-009 Dated July 26, 2004 on 

Public Contracts subject to listed exceptions in Procurement 

Agreement.

Cape Verde Governmental Cape Verde accountable 

entity

World Bank Guidelines: Procurement Under International 

Bank for Reconstruction and Development Loans and 

International Development Association Credits, May 2004, as 

modified for nonconsultant services, works and goods. 

World Bank Guidelines: Selection and Employment of 

Consultants by World Bank Borrowers, May 2004, as 

modified, for consultants.

Ministry of Infrastructure and Transportation rules apply to 

procurements below $55,000 for transportation projects.

Honduras Hybrid governmental 

and nongovernmental

An outside project 

manager for the 

transportation project, 

and a government 

agency, the Fondo 

Nacional de Desarollo 

Rural Sostenible, for the 

Rural Development 

Project.b

World Bank Guidelines: Procurement Under International 

Bank for Reconstruction and Development Loans and 

International Development Association Credits, May 2004, as 

modified for nonconsultant services, works, and goods. 

World Bank Guidelines: Selection and Employment of 

Consultants by World Bank Borrowers, May 2004, as 

modified, for consultants. 
Appendix IV

Summary of MCC Procurement Agents, 

Standards, and Provisions in Madagascar, 

Cape Verde, and Honduras

Page 79 GAO-06-805 Millennium Challenge Corporation

Table 9: Procurement Provisions, Roles, and Responsibilities Stated in MCC Agreements with Madagascar, Cape Verde, and 

Honduras

Source: GAO analysis of MCC documents.

a

In Cape Verde, MCC compact funding is also supporting the creation of an electronic procurement 

system. First, MCC is funding the establishment and implementation of a public e-procurement system 

for use in compact procurements. Second, it is funding the expansion of this system to all other units of 

the government.

Procurementrelated 

provisions Compact Disbursement agreement Procurement agreement

Document Outlines MCC’s approval 

rights and documents the 

responsibility of compact 

country governments to 

ensure oversight of 

procurement. 

Includes conditions precedent to 

disbursements of funds from MCC to the 

compact country that MCC can use to 

enforce the requirements in the 

procurement agreement and compact.

Lists specific rules and procedures that the 

procurement agent will follow in managing 

procurement for the compact country.

Compact 

country roles 

and 

responsibilities

• Provide oversight, ensure 

the removal or disclosure 

of any conflicts of interest, 

and conduct audits on at 

least an annual basis.

• Ensure transparency by 

establishing a Web site for 

the program and posting 

procurement documents 

online.a

• Create procurement 

review bodies in both Cape 

Verde and Honduras. 

• Submit a report comparing actual 

procurement activity with procurement 

plans for the second most recent 

disbursement period as a condition 

precedent to disbursements. 

• In Madagascar, provide a semiannual 

review report on compliance with the 

procurement guidelines for MCC 

review. 

• In Cape Verde, establish a procurement 

review commission and its charter, prior 

to receiving MCC disbursements.b

• MCA-Honduras must create and 

approve a bid challenge system 

acceptable to MCC prior to receiving 

funds for the second quarter of 

operations.

• Submit reports; and obtain MCC approvals 

before undertaking procurements above 

thresholds.

• Report deviations from approved 

procurement plan to MCC. Cape Verde and 

Madagascar to report deviations valued at 

more than $10,000. Honduras to report all 

deviations.

• Provide a procurement plan semiannually.

MCC role and 

approval 

authority

• Approve the members of 

Cape Verde’s procurement 

review commission and 

Honduras’s procurement 

supervisor agreement.c

• Authority to terminate the 

compact if the compact 

country government or 

another party materially 

breaches the compact or 

any supplemental 

agreement, such as a 

procurement agreement. 

• Requires the signing of a 

procurement agreement 

prior to entry into force.

• Review and approve periodic plans and 

reports.

• Approve procurements above thresholds.

• Review and approve any deviations from 

approved plan above certain thresholds. 

• Review and approve the compact country’s 

procurement plan, including proposed 

procurements and methods of procurement.
Appendix IV

Summary of MCC Procurement Agents, 

Standards, and Provisions in Madagascar, 

Cape Verde, and Honduras

Page 80 GAO-06-805 Millennium Challenge Corporation

b

As conditions precedent to any disbursements for procurement management, MCC has required that 

the government of Cape Verde will (1) request, as a matter of national interest that requires urgent 

resolution of the National Assembly, that the passage of a harmonized public procurement law, with a 

supporting regulatory framework, be placed on the legislative agenda and (2) establish a long-term 

program, with support in the national budget, for the establishment of local procurement training 

capacity (facilities and personnel), which will be sustainable without donor funding within a period of 5 

years.

c

In Honduras, the compact also requires MCC approval of a procurement operations manual.
Page 81 GAO-06-805 Millennium Challenge Corporation

Appendix V

Comments from the Millennium Challenge 

Corporation ApendxiV

Note: GAO comments 

supplementing those in 

the report text appear 

at the end of this 

appendix.
Appendix V

Comments from the Millennium Challenge 

Corporation

Page 82 GAO-06-805 Millennium Challenge Corporation

See comment 1.
Appendix V

Comments from the Millennium Challenge 

Corporation

Page 83 GAO-06-805 Millennium Challenge Corporation

See comment 2.

See comment 3.
Appendix V

Comments from the Millennium Challenge 

Corporation

Page 84 GAO-06-805 Millennium Challenge Corporation
Appendix V

Comments from the Millennium Challenge 

Corporation

Page 85 GAO-06-805 Millennium Challenge Corporation

The following are GAO’s comments on the Millennium Challenge 

Corporation letter dated July 7, 2006.

GAO Comments 1. MCC stated that “MCC's mandate to engage directly with eligible 

countries shortly after its creation did not allow for the possibility of 

developing and vetting policies and procedures in advance of such 

engagement.” We recognize that MCC was simultaneously addressing a 

number of issues during its initial years of operation—selecting eligible 

countries, setting up MCC as an organization, and developing guidance 

and policies while also working with countries to finalize compacts. In 

the context of MCC as an evolving organization, we felt it was 

important to discuss the evolving nature of guidance to provide a 

balanced perspective regarding the process that eligible countries had 

to follow to sign compacts.

2. MCC stated that our concern regarding baseline data quality stems 

from one survey in Madagascar. However, we found issues with data 

reliability in Madagascar with both the Agricultural Productivity Survey 

and Household Survey. In the second survey, the error was smaller; 

therefore, we focused on the Agricultural Productivity Survey to 

illustrate the more significant example.

The measurement of land values is very important for Madagascar's 

monitoring and evaluation plan. Both the compact-level goal of 

increasing household income and the program objective of increasing 

investment in rural Madagascar are measured in terms of land values. 

In each of the zones, the expected increase in household income is 

estimated at 5 percent of the average land value, and the expected 

increase in investment is estimated at 27 percent of the average land 

value. With a large error in baseline data, it will be difficult to 

accurately track progress toward the compact-level goal and program 

objective.

3. MCC noted that not every benefit can be isolated and measured during 

implementation, and that disaggregating may not be feasible. We 

recognize that not all outcomes of the economic analysis can be 

directly tracked with indicators at different levels of monitoring or for 

impact evaluation. There are trade-offs between cost and level of detail. 

However, as we note in this report, aggregation poses some challenges 

that could limit the effectiveness of monitoring and evaluation.
Page 86 GAO-06-805 Millennium Challenge Corporation

Appendix VI

Comments from the Department of State ApendxiVI

Note: GAO comments 

supplementing those in 

the report text appear 

at the end of this 

appendix.
Appendix VI

Comments from the Department of State

Page 87 GAO-06-805 Millennium Challenge Corporation

See comment 1.
Appendix VI

Comments from the Department of State

Page 88 GAO-06-805 Millennium Challenge Corporation

See comment 2.

See comment 3.

See comment 4.

See comment 5.
Appendix VI

Comments from the Department of State

Page 89 GAO-06-805 Millennium Challenge Corporation

See comment 6.

See comment 7.

See comment 8.

See comment 9.
Appendix VI

Comments from the Department of State

Page 90 GAO-06-805 Millennium Challenge Corporation
Appendix VI

Comments from the Department of State

Page 91 GAO-06-805 Millennium Challenge Corporation

The following are GAO’s comments on the Department of State letter dated 

July 10, 2006.

GAO Comments 1. In referring to our discussion about MCC’s guidance on project 

coherence, State Department commented that it would be erroneous to 

indicate that countries were wholly unaware of the need to design their 

compact programs to target compact goals, and that informal guidance 

from MCC could have been received at any time. We agree that 

countries could have requested informal guidance from MCC. 

According to MCC, they did provide verbal guidance to countries 

regarding the need to link projects to compact goals. 

However, MCC rejected tourism and preschool education projects 

proposed by Honduras because they were not linked to the 

impediments to growth that emerged from the consultative process.

MCC also rejected projects in Cape Verde because MCC’s due diligence 

did not indicate that these projects addressed key constraints in Cape 

Verde. Given that these two countries submitted projects that did not 

meet project coherence criteria, MCC’s verbal guidance may not have 

been sufficient to direct countries to submit proposals meeting these 

criteria.

We recognize that MCC was simultaneously addressing a number of 

issues during its initial years of operation—selecting eligible countries, 

setting up MCC as an organization, and developing guidance and 

policies while also working with countries to finalize compacts. In the 

context of MCC as an evolving organization, we felt it was important to 

discuss the evolving nature of guidance to provide a balanced 

perspective regarding the process that eligible countries had to follow 

to sign compacts. 

2. State noted that we did not detail the methodology and composition of 

our Madagascar focus groups. We summarized the composition of the 

focus groups in the letter of this report. We met with these 29 

individuals, including representatives of MCA-Madagascar and 

Madagascar ministries, during the course of our week in Madagascar 

and reviewed with them the assumptions used in MCC’s economic 

model for its projects. As previously discussed in this report, we found 

that these officials were not closely involved in MCC’s economic 

analysis. According to MCC and Madagascar officials, an MCC 

economist met with four Madagascar representatives in Paris, France, 
Appendix VI

Comments from the Department of State

Page 92 GAO-06-805 Millennium Challenge Corporation

during compact negotiations and reviewed the model with them at that 

time. (MCC officials did travel to Madagascar during due diligence to 

assess proposed projects.) When we discussed this with MCC officials, 

they stated that not traveling to Madagascar to develop the model was a 

mistake, and one that has not been repeated.

3. State commented that we do not rebut MCC’s point that countries’ 

degree of involvement depended on their capability and willingness to 

participate. (See comment 2.)

In its letter, which is reprinted in appendix V, MCC agreed that in some 

cases, the level of country engagement on economic analysis could be 

improved. MCC also now requires that countries engage an economist 

on the core country team, provides examples of the economic rate of 

return analysis, and has MCC economists make early technical 

guidance trips to work with the core country team and the core country 

team economist. These procedures were not in place when MCC 

conducted the economic analysis for Madagascar, Cape Verde, or 

Honduras.

By not thoroughly involving the countries in this analysis, MCC risks 

not meeting its stated principle of focusing on results. In MCC’s resultsbased framework, the economic model is the basis for determining 

performance targets against which funding is conditioned. MCAMadagascar may find that the targets are unrealistic if the targets have 

not been thoroughly discussed with, and understood by, Madagascar 

officials.

4. State noted that the time for the in-country MCA organizations to hire 

staff compares favorably with general government hiring. Management 

unit officials are hired by a compact country’s MCA program steering 

committee, not the U.S. government. As such, it is not “general 

government hiring” and should not be compared with it. 

5. State correctly observed that we did not offer MCC a recommended 

alternative to its taking the time to find good candidates for positions. 

We did not make a recommendation for addressing this issue because 

MCC has adopted a policy implementing the authority given it by 

section 609(g) of the Millennium Challenge Act of 2003 to make grants 

to facilitate compact development and implementation. MCC’s current 

policy includes a provision where, if certain conditions are met, it may 

fund an eligible country’s request for “management support payments” 
Appendix VI

Comments from the Department of State

Page 93 GAO-06-805 Millennium Challenge Corporation

for salaries, rent, and equipment for the country’s team prior to 

compact signature. We have added a discussion of this policy in the 

letter of this report to clarify this point.

6. In referring to our discussion about the different maturity of internal 

control between Madagascar and Cape Verde, State pointed out that 

differences in the maturity of internal control between the countries 

are to be expected, given that some countries have historically more 

well-developed systems. We agree that different countries will differ in 

their maturity of internal control due to historical differences in the 

underlying systems and accountability infrastructures. The current 

maturity of internal control in each country, however, is a key 

consideration in assessing risk and establishing effective oversight 

mechanisms to deal with the unique risks in the key financial processes 

and activities of each country.

7. State referred to “GAO’s reliance on project evaluation criteria that 

make use of randomized controlled trials to measure success.” This 

comment misconstrues our findings on the use of randomized 

controlled trials. We do not rely on these criteria. We are commenting 

on MCC’s use of randomized controlled trials, which MCC has indicated 

are its preferred method of impact evaluation, and on the potential 

challenges to the use of this approach. State’s comments regarding 

cost-benefit analysis would be more appropriately addressed to MCC.

8. State correctly noted that we did not capture the change to one 

indicator for fiscal year 2006. We have updated the list of MCC 

indicators in footnote 8. 

9. State suggested rewording MCC’s expected results to “MCC expects to 

permanently raise incomes....” We did not use the word “permanently” 

because in the three compacts that we focused on for this report, it was 

not used to describe MCC’s expected results at the country level.
Page 94 GAO-06-805 Millennium Challenge Corporation

Appendix VII

GAO Contact and Staff Acknowledgments ApendxiVI

GAO Contact David B. Gootnick, Director, 202-512-3149

Staff 

Acknowledgments

In addition to the person named above, Phil Herr (Assistant Director), 

Claude Adrien, Cara Bauer, Gergana Danailova-Trainor, Jeanette Franzel, 

Keith Kronin, Reid Lowe, Norma Samuel, Mona Sehgal, and Michael Simon 

made key contributions to this report. Also, Tim DiNapoli, David Dornisch, 

Etana Finkler, Ernie Jackson, Debra Johnson, Bruce Kutnick, Janice 

Latimer, Charlotte Moore, and Celia Thomas provided technical assistance.

(320370)
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