

Annual Report

Millennium Challenge Corporation

2006 Annual Report 

Table of Contents

Message from the Chair of the Board.....................................................................1

Message from the Chief Executive Officer............................................................. 3

MCC Board of Directors............................................................................................4

Key MCC Staff ............................................................................................................. 5

Mission and Milestones.............................................................................................6

MCC Engagement Worldwide ................................................................................23

The Year in Review....................................................................................................26

Assistance Programs: 

Compacts and Threshold Programs—Impact Underway.................................38

Beneficiaries in Profile ...................................................................................... 38

Compacts.............................................................................................................44

Threshold Agreements...................................................................................... 59

Financial Audit and Management’s Comments................................................. 66

Endnotes...................................................................................................................122
Millennium Challenge Corporation

ii 2006 Annual Report

U.S. Secretary of State Condoleezza Rice, Chair of the of MCC Board of 

Directors speaks at the Ghana Compact signing on August 1, 2006.
Millennium Challenge Corporation

2006 Annual Report 

A Message from 

Secretary Of State Condoleezza Rice

Chair of the Board, Millennium Challenge Corporation

Vision. Action. Results.

e goal of revolutionizing foreign development assistance to break the cycle of chronic 

poverty around the world inspired President Bush's bold vision for the Millennium Challenge 

Corporation (MCC). e President's vision has become an innovative approach to foreign aid, 

helping countries that have taken steps to begin governing democratically, fighting 

corruption, investing in health and education, opening markets, and promoting economic 

freedoms.

MCC is guided by the principle that transformative economic growth occurs and succeeds in 

reducing poverty when countries fully engage in and take responsibility for their own 

development. is approach is producing results in the  countries that have entered into 

compacts with MCC. From Benin, Cape Verde, Ghana, Madagascar, and Mali in Africa, to 

El Salvador, Honduras, and Nicaragua in Central America, to Armenia and Georgia in 

Eurasia, and to Vanuatu in the Pacific, these countries are pursuing a path of political, 

economic, and social reforms to remain eligible for MCC funding. It has also inspired other 

countries to enact the reforms needed to join the MCC family, producing a welcome catalyst 

for change.

Compact implementation is lifting communities out of poverty. Compact funds are 

rehabilitating roads and ports, promoting land tenure and soil conservation, improving 

agriculture and irrigation systems, building industrial parks, instituting micro-lending credit 

and business development programs, opening schools and health clinics, and upgrading 

water and sanitation services.

MCC and its dedicated staff are fulfilling the President's vision of poverty reduction through 

economic growth. I thank Congress and other 

MCC

U.S. Government agencies for their support of 

's efforts. Together, we can make the vision of a better life for the world's poorest 

countries a reality.

Condoleezza Rice

Chair
Millennium Challenge Corporation

2006 Annual Report

Ambassador John Danilovich just after being 

sworn-in as MCC Chief Executive Officer.
Millennium Challenge Corporation

2006 Annual Report 

A Message From

Ambassador John J. Danilovich,

Chief Executive Officer,

Millennium Challenge Corporation

In the three short years since its creation, the Millennium Challenge Corporation (MCC) has made tremendous 

strides in fulfilling its mission of poverty reduction through economic growth among the world’s poorest 

countries. Our focus on three critical and interconnected priorities is making this increasing momentum 

possible: our organizational strength, the focus on implementation, and the contagious MCC Effect.

First, continuous improvements are streamlining the effectiveness of our operations. As an organization, we are 

providing our departments and our teams with greater direction, enhancements in operational processes and 

procedures as well as training to enable the due diligence, signing, and implementation of our compacts to occur 

more efficiently while improving creativity and quality. Our staff in Washington is nearing its authorized level of 

 talented professionals, who operate within a “results” culture, focusing not only on identifying issues and 

problems, but more importantly on providing viable solutions. 

Second, our focus is not just on signing compacts but also timely compact implementation. With dedicated 

international development professionals recruited from the public, private, and not-for-profit sectors, MCC is 

prepared for and is moving ahead with compact implementation, where tangible results will improve the lives of 

the poor in our partner countries. We have concluded  compacts totaling  billion with countries in Africa, 

Central America, Eurasia, and the Pacific, and these compacts are now at various stages of implementation. We 

are encouraging our partner countries to pursue their consultation processes and their capacity-building efforts 

to bring their multi-year compacts to fruition, and we are working to predict and mitigate implementation risks 

before they occur. We are incorporating lessons learned in our ongoing compact development and 

implementation. 

ird, the incentive of MCC funding is so strong that countries continue to take it upon themselves to initiate 

the political, social, and economic reforms necessary to qualify for eligibility based on our performance 

indicators. We have seen a dramatic increase in the 

of our approach of rewarding well-performing countries committed to governing justly, investing in their 

MCC Effect at work this year. is is a powerful validation 

people, and promoting economic freedom. Some  million has been awarded in reshold programs to  

countries to further reforms addressing specific policy weaknesses on our selection criteria.

e MCC has a clear, positive policy effect in countries eager to partner with us. rough the expeditious 

implementation of our current compacts and the development of compacts with eligible countries, we will be 

able to ensure a truly transformative change among the poor around the world. To accomplish this mission, we 

rely not only on our core values, ever-growing operational strength, and our staff expertise, but also on valuable 

insights from Members of Congress, fellow agencies, nongovernmental organizations, and leaders in the 

development field. We will continue to rely upon this feedback as we chart the course ahead toward the ongoing 

fulfillment of MCC’s mission of poverty reduction through economic growth. 

John J. Danilovich

Chief Executive Officer
Millennium Challenge Corporation

 2006 Annual Report

Condoleezza Rice

Secretary of State

Chair

Henry M. Paulson, Jr.

Secretary of Treasury

Vice-Chair

Susan C. Schwab

United States 

Trade Representative

Randall Tobias

USAID Administrator

John J. Danilovich

MCC

Chief Executive Officer

Kenneth Hackett Christine Todd 

Whitman

MCC Board of Directors

The Millennium Challenge Corporation is managed by a Chief Executive Officer and is overseen by a public-private Board of Directors comprised of the 

Secretary of State, the Secretary of the Treasury, the U.S. Trade Representative, the USAID Administrator, and four individuals from the private sector 

appointed by the President with the advice and consent of the Senate. To 

date, two of these four individuals have been appointed.
Millennium Challenge Corporation

2006 Annual Report 

The Millennium Challenge Corporation recruits staff—diverse in knowledge, background, and talents—from other government agencies, the private 

sector, universities, international development agencies, non-government 

organizations, and the not-for-profit sector. Key staff members include:

Ambassador

John J. Danilovich

Chief Executive Officer

Rodney G. Bent

Deputy Chief Executive Officer

William G. 

Anderson, Jr.

Vice President and 

General Counsel 

Maureen Harrington 

Vice President

Department of Policy & 

International Relations

John Hewko

Vice President

Department of 

Operations

Frances C. McNaught

Vice President

Department of 

Congressional and 

Public Affairs

Michael Ryan

Vice President

Department of 

Administration 

and Finance

Charles O. Sethness

Vice President

Department of 

Accountability

Key MCC Staff 
Millennium Challenge Corporation

2006 Annual Report

The Millennium Challenge Account (MCA) is an innovative foreign assistance program designed to reduce poverty through sustainable economic 

growth in some of the poorest countries in the world. The Millennium 

Challenge Corporation (MCC) is an independent U.S. Government corporation established by an act of Congress in 2004 to administer the MCA. MCA

provides a strong incentive for policy reforms by offering grants to countries 

which have demonstrated through their policy performance their commitment to good governance. 

MCC’s Mission 

Reducing poverty through economic growth

The mission of the Millennium Challenge Corporation is to reduce poverty 

by supporting sustainable, transformative economic growth in developing 

countries that create and maintain sound policy environments. 

Reducing Pov 

Mission and Milestones
Millennium Challenge Corporation

2006 Annual Report 

erty Through Growth

Workers transplant onion 

seedlings in Honduras.

Pipeline repair in Georgia.
Millennium Challenge Corporation

 2006 Annual Report

Reward 

good policy.

We partner only with those 

countries that measure up—

and continue to measure 

up—to performance indicators 

taken from independent, nonU.S. Government sources 

validating that they rule justly, 

invest in their citizens, and 

support economic freedom.

Focus 

on results. 

We hold our partner 

countries accountable for 

the aid they receive from us. 

Grants go to those countries 

that have developed welldesigned programs with clear 

objectives, benchmarks to 

measure progress, procedures 

to ensure fiscal accountability 

for the funds’ use, and an 

extensive plan for effective 

monitoring and objective 

evaluation of final outcomes 

and of outputs along the way. 

Programs are designed to 

enable sustainable progress 

even after compact funding 

has ended.

MCC’s Three Core Values

Operate in partnership 

reinforced by “country 

ownership.”

We place a country in the 

driver’s seat of its own 

development by expecting its 

participation in, ownership 

of, and responsibility for its 

development path. Therefore, 

we ask countries to identify 

and prioritize their own 

barriers to poverty reduction 

and economic growth through 

a broad-based consultative 

process involving input 

from civil society, including 

women, the private sector, 

and non-governmental 

organizations. Then, we ask 

that they develop their own 

proposal for funding and take 

on primary responsibility for 

implementing it. MCC and 

the partner country define 

how to share their respective 

responsibilities toward 

realizing the country’s goals 

in a document referred to as 

a compact as well as various 

supplemental agreements. 
2002

March , 

MCC’s

History

March ,  

President Bush proposes the 

creation of the Millennium 

Challenge Account (MCA) at 

the Monterrey Summit on 

Financing for Development, 

calling for a “new compact 

for global development” to 

link greater contributions 

from developed nations to 

greater responsibility from 

developing nations.

Millennium Challenge Corporation

2006 Annual Report 
2004

January , 

February , 

May , 

February , May , 

January , 

Congress formally 

creates the MCA and 

establishes the 

Millennium Challenge 

Corporation (MCC) to 

administer it. With 

bipartisan support, 

Congress provides 

 million in initial 

funding for Fiscal Year 

(FY) .

February ,  

MCC’s Board of 

Directors holds its 

first meeting. e 

Board adopts the 

Corporation’s by-laws, 

announces the initial 

 candidate 

countries, and names 

an interim CEO,

Under Secretary of 

State Alan Larson.

February ,  

At the earliest possible 

date, MCC submits 

criteria and 

methodology for 

selecting eligible 

countries for FY .

May , 

Paul V. Applegarth is 

confirmed as MCC’s 

first CEO.

May , 

After the  day notification period 

expires, MCC’s Board of Directors selects 

 countries from among the  candidate 

countries to be eligible to submit 

proposals for FY  MCA assistance.

Millennium Challenge Corporation

10 2006 Annual Report
November , 

August , 

June August , 

December , 

June 

MCC staff travel to all  newly 

eligible countries to explain what 

MCA eligibility means, to 

articulate the process of compact 

development, and to invite them 

to submit a proposal.

August ,  

MCC receives the first 

compact proposal 

from Cape Verde, one 

of  countries chosen 

as eligible in .

August ,  

MCC submits criteria 

and methodology for 

selecting eligible 

countries for FY .

November , 

MCC’s Board of 

Directors selects  

countries to be eligible 

to submit proposals 

for FY  MCA

funds. ese include 

the  countries 

eligible for FY  

funds and one new 

addition.

December , 

Congress passes the Foreign 

Operations Appropriations bill 

including . billion for MCA 

funding for FY .

Millennium Challenge Corporation

2006 Annual Report 11
2005

February , 

April , 

July , 

July , 

June , July , 

February , 

e President submits 

his budget for FY  

funding including a 

request of  billion 

for MCA.

April , 

MCC signs a four-year 

 million Compact 

with Madagascar.

June , 

MCC signs a five-year 

 million Compact 

with Honduras.

July , 

MCC signs a five-year 

 million Compact 

with Nicaragua.

July ,  

MCC signs a five-year 

 million Compact 

with Cape Verde.

July , 

MCC signs the first 

reshold Program 

with Burkina Faso to 

improve girls’ primary 

education completion 

rates.

Millennium Challenge Corporation

12 2006 Annual Report
September , 

September , 

November , 

August , September , 

November , 

August , 

Charles O. Sethness is 

named interim CEO,

pending nomination 

and confirmation of 

new CEO.

September , 

MCC announces the 

criteria and 

methodology for 

selecting eligible 

countries for MCA 

assistance in FY .

September , 

MCC signs the second 

reshold Program 

with Malawi for  

million to reduce 

corruption and 

improve fiscal 

management.

September , 

MCC signs a five-year 

 million Compact 

with Georgia.

November ,  

MCC Board of 

Directors selects a 

total of  compact 

eligible countries, 

including  

previously selected. A 

total of  countries 

are selected eligible 

for reshold 

assistance; one 

reshold country is 

suspended. 

November ,  

John J. Danilovich is 

sworn in as MCC CEO.

Millennium Challenge Corporation

2006 Annual Report 13
2006

February , 

March , 

April , 

May , 

June , 

March , May , May , 

February ,  

MCC signs a five-year 

 million Compact 

with Benin.

March ,  

MCC signs a five-year 

 million Compact 

with Vanuatu.

March , 

MCC signs a five-year 

 million Compact 

with Armenia.

April , 

MCC signs a . 

million reshold 

Program with Albania 

to reduce corruption.

May , 

MCC signs an  

million reshold 

Program with 

Tanzania to reduce 

corruption. 

May , 

MCC signs a . 

million reshold 

Program with 

Paraguay to fight 

corruption and 

improve the business 

climate.

May , 

MCC signs a . 

million reshold 

Program with 

Zambia to reduce 

corruption and 

improve 

government 

effectiveness.

June , 

MCC’s Board 

suspends e 

Gambia from 

compact 

eligibility 

based on its 

pattern of 

actions 

inconsistent 

with MCC’s 

selection 

criteria.

Millennium Challenge Corporation

14 2006 Annual Report
November , 

Aug. , 

November , 

December , 

July , October , November , November , 

July , 

MCC signs a  

million reshold 

Program with the 

Philippines to fight 

corruption and 

improve revenue 

collection.

August , 

MCC signs a five-year 

 million Compact 

with Ghana.

October , 

MCC signs a  

million reshold 

Program with Jordan 

to strengthen 

democratic 

institutions. 

November , 

MCC’s Board of 

Directors selects  

additional eligible 

countries: Moldova, 

Jordan, and Ukraine. 

ree additional 

countries are selected 

for reshold funding: 

Niger, Peru, and 

Rwanda. ese new 

countries join those 

previously selected. 

November , 

MCC signs a five-year  

million Compact with Mali.

November , 

MCC signs a  million 

reshold Program with 

Indonesia to improve 

childhood 

immunization and curb 

corruption.

November , 

MCC signs a five-year  

million Compact with El 

Salvador.

December , 

MCC signs a . million 

reshold Program with 

Moldova to support 

anti-corruption initiatives.

December , 

MCC signs a  

million

reshold 

Program with 

Ukraine to fight 

corruption. 

Millennium Challenge Corporation

2006 Annual Report 15
Millennium Challenge Corporation

16 2006 Annual Report

MCC’s Record of Achievements: 2004-2006

In our brief history to date, MCC has developed an impressive track record 

of accomplishments. 

Changing the way foreign aid is administered 

While elements of MCC’s approach have been used before, the organization 

incorporates the best lessons learned during the last half-century of work in 

the development field into an integrated package:

MCC is focused. While most agencies have multiple mandates, MCC 

has a single mandate that ensures a long-term focus on reducing 

poverty through sustainable economic growth. 

MCC rewards performance, not promises. MCC works only with 

countries that have already shown they perform better than 

their peers on the policies that support growth and poverty 

reduction: ruling justly, investing in people, and encouraging economic freedom. By selecting countries based on transparent criteria 

using independent, non-U.S. Government indicators, MCC rewards 

countries which already have in place the policies that enable aid 

to be effective and thus provides an incentive for other countries to 

adopt sound policies.

MCC partners have input and take responsibility. Programs with a 

broad base of in-country support are more likely to succeed. Instead 

of telling a country what it needs, MCC asks partner countries to determine their own development goals in consultation with civil society and the private sector and then helps them develop their own 

investment programs.

MCC insists on mutual accountability. The partner country oversees implementation. MCC and its partner both have a stake in 

and a responsibility for program success. MCC monitors fiduciary 

responsibility.

MCC measures success by outcomes, not inputs. MCC integrates 

measures of success and procedures to monitor and evaluate results 

•

•

•

•

•
Millennium Challenge Corporation

2006 Annual Report 17

into the design and implementation of every compact. Failure to 

perform can result in reduction or loss of funding.

MCC assistance is an investment. MCC conducts an investment 

analysis and due diligence, much as a private sector investor would, 

to ensure a positive return on the investment of U.S. taxpayer dollars. The key difference is that MCC does not measure monetary return, but the poverty reduction and economic growth return.

MCC’s governance combines the best of public and private approaches. MCC’s high-level Board from the government and nongovernment sectors provides coherence across U.S. foreign policy, 

trade, finance, aid, and other policy areas critical to development, 

gives support and judgment to the MCC mission, and enables MCC

to operate in a business-like way. MCC staff is also drawn widely 

from the public, private, and not-for-profit sectors. In reviewing pro-

•

•

Impact Unfolding—Compact Accomplishments

More and more results will emerge as compacts are fully implemented, but 

early indications of progress include: 

In Madagascar, more than 361 land titles have been awarded, 1,800 local 

farmers have received technical assistance from local agricultural business 

centers, and 200 farmers have been trained to tap into microfinance credit 

thanks to MCC compact funding.

In Nicaragua, the property regularization component of the compact has 

resulted in the awarding of the first 26 “clean” titles to beneficiaries in 

León, many of which went to female landowners. These titles are the first 

of 43,000 to be delivered under the compact.

In Georgia, projects are underway to rehabilitate municipal water supplies 

in two cities that serve 230,000 Georgians and are expected to generate 

$67.5 million in economic benefits to those cities. Renovating regional 

infrastructure will help create 24,000 new jobs and increase household 

incomes by almost $60 million over the life of the compact.
Millennium Challenge Corporation

18 2006 Annual Report

posed programs, MCC consults with other federal agencies and taps 

the knowledge of relevant experts. 

Congress gave MCC operational flexibility so it can do its job. MCC

grant assistance is “non-earmarked,” so MCC can respond to country 

priorities, and it is “no-year” so MCC is not under pressure to fund 

programs before they are ready and can work with eligible countries 

to support truly strategic, transformative programs. 

Compact Accomplishments

Eleven compacts have been signed with Armenia ($236 million), Benin ($307 

million), Cape Verde ($110 million), El Salvador ($461 million), Georgia 

($295 million), Ghana ($547 million), Honduras ($215 million), Madagascar 

($110 million), Mali ($461 million), Nicaragua ($175 million), and Vanuatu 

($66 million). These 4- or 5-year compacts are all designed to lift communities out of poverty. Some partner countries are using compact funding to 

increase agricultural productivity, or improve roads, ports and airports, or 

reform justice ministries, while others are using our funds to promote private land ownership, to improve access to credit, and to enable farmers to 

grow cash crops and get those products to market more efficiently.

Threshold Accomplishments

Threshold programs are being implemented with Albania ($13.85 million), 

Burkina Faso ($12.9 million), Indonesia ($55 million), Jordan ($25 million), 

Malawi ($20.9 million), Moldova ($24.7 million), Paraguay ($34.65 million), 

Philippines ($21 million), Tanzania ($11 million), Ukraine ($45 million), and 

Zambia ($22.7 million). Most programs focus on improving governance, 

with an emphasis on fighting corruption. Others include education and 

health investments, with specific programs aimed at improving primary education rates among girls or increasing childhood immunization rates.

Global Beneficiaries 

Over 22 million people living in poverty are projected to benefit directly 

from the programs outlined in MCC’s first 11 compacts. 

•
Millennium Challenge Corporation

2006 Annual Report 19

Impact Unfolding—

Threshold Accomplishments

Though most Threshold programs are in early stages of implementation, 

key successes have been noted:

Paraguay’s Threshold Program, which seeks to reduce corruption and 

improve the business climate, met a critical goal within six months of 

implementation by reducing the number of days to start a business by 50 

percent.

Malawi’s Threshold Program, which seeks to reduce public sector 

corruption, spurred passage of important anti-money laundering 

legislation that had been lying dormant for nearly four years. 

Burkina Faso’s Threshold Program will improve girls’ primary education 

completion rates. The program is supporting the construction of new “girlfriendly” schools in different areas of the country with day care centers, 

on-site canteens, separate male and female bathrooms, mentoring, and 

teacher training. Some 132 schools are on schedule to be built, complete 

with teachers’ housing, by spring of 2007.

Albania’s Threshold Program, aimed at reducing public corruption, 

has already seen the passage of new procurement legislation that 

meets European Union (EU) standards.

the Threshold program will help Albania use this legislation to improve 

Assistance provided under 

procurement regulations and create a modern e-procurement system 

to reduce opportunities for corruption.

National Business Center to streamline business registration and remove 

 In addition, a law creating a 

opportunities for corruption has been drafted with broad input from the 

private sector, with the goal being to open the first Registration Center in 

2007.
Millennium Challenge Corporation

20 2006 Annual Report

Impact Unfolding—

MCC Effect

In the Dominican Republic: The Fernandez government has set up 

separate working groups to address the country’s performance in each 

of the MCA categories of ruling justly, investing in people, and economic 

freedom. Regarding the MCA selection criteria, Presidential Technical 

Secretary Temistocles Montás stated, “We are embracing these goals 

because they are the right thing to do. They will constitute part of this 

administration’s legacy to the Dominican people.” The government of the 

Dominican Republic plans to release an “MCA Action Plan” and launch 

an MCA-Dominican Republic website to document the reforms they are 

adopting to become MCA eligible.

In Cameroon: Cameroon has expressed a strong interest in becoming 

eligible for MCA and intensified its fight against corruption. The 

government has removed 3,000 “ghost workers” from its payroll, referred 

500 civil servants to a disciplinary council on charges of fraud or 

misappropriation, and promised to lift the secrecy surrounding its oil 

revenues. The Cameroon government has also established an MCA InterMinisterial Working Group and an MCA-Cameroon website to highlight 

the actions they are taking to come into compliance with MCA eligibility 

standards.

In the Philippines: In an unprecedented move, Philippine President 

Gloria Macapagal-Arroyo “matched” MCC’s $21 million Threshold program 

to fight corruption. The announcement of the MCA Threshold program 

appears to have given the Philippine government renewed vigor in fighting 

corruption. Corruption-related investigations and dismissals have stepped 

up significantly since the announcement of the Threshold program.
Millennium Challenge Corporation

2006 Annual Report 21

The MCC Effect

One of MCC’s accomplishments and strongest measures of success early on 

is our role as a catalyst for policy reform, known as the MCC Effect. Countries want to be deemed eligible for MCC funding and are taking it upon 

themselves to re-evaluate their policies, regulations, and legislation related 

to good governance, health and education, and their business climate. Thus, 

MCC is creating a powerful incentive, prompting countries to enact real economic, social, and political reforms. We are motivating policy changes before committing any funding. 

The MCC Effect has been well documented. According to the Doing Business

project at the International Finance Corporation, 24 countries specifically 

cited the Millennium Challenge Account as the primary motivation for their 

efforts to improve their business environment. Inter-ministerial committees and presidential commissions have been set up in at least a dozen countries—including El Salvador, Cameroon, Djibouti, Jordan, Kyrgyz Republic, 

Indonesia, Guatemala, the Dominican Republic, the Philippines, Papua New 

Guinea, Moldova, and Ukraine—to devise reform strategies that address 

MCC’s selection criteria. 

Performance Scorecards 

In MCC’s short history, we have dramatically improved our incentive-based 

approach to development assistance through an objective evaluation of 

country performance to determine eligibility for funding. Country performance is published annually through scorecards made available on MCC’s 

website. The quality and availability of vital data that we use to assess the political, social, and economic policies of countries are improving greatly and 

providing us with even better measures of performance.

The scorecard approach also allows MCC to act as a catalyst for policy reform and improvements. A number of trends from the latest round of data 

for the 2007 selection process—completed in the fall of 2006—reinforces the 

view that countries are indeed responding to MCC’s policy measurements by 

making vital political, economic, and social reforms.
Millennium Challenge Corporation

22 2006 Annual Report

Impact Unfolding—

Performance Scorecards

For instance: 

The “Days to Start a Business” median has fallen from 41 days to 33 

days for Lower Middle Income Candidate Countries. The median for 

Low Income Candidate Countries has fallen from 62 days in 2002 to 

43 days in 2006. The International Finance Corporation estimates this 

magnitude of business start-up reforms inspired by MCC “can add 

between a quarter and a half a percentage point to growth rates in 

the average developing economy.” 

According to the World Bank Institute, the third party indicator 

institution responsible for the Control of Corruption index, which 

countries must pass to meet Millennium Challenge Account (MCA) 

eligibility criteria, more than a dozen countries have contacted 

them in 2006 alone to learn about ways that they might improve 

their eligibility prospects. Citing MCA eligibility as an important 

motivation for their efforts, many countries are passing stronger 

anti-corruption laws, strengthening oversight institutions, opening up 

the public policy-making process to greater scrutiny, and stepping up 

corruption-related investigations and prosecutions. 
Millennium Challenge Corporation

2006 Annual Report 23

MCC Engagement Worldwide

Compact Eligible Countries 

At the end of 2006, 25 countries are eligible for MCA compact assistance: 

Armenia, Benin, Burkina Faso, Bolivia, Cape Verde, East Timor, El Salvador, 

Georgia, Ghana, Honduras, Jordan, Lesotho, Madagascar, Mali, Moldova, 

Mongolia, Morocco, Mozambique, Namibia, Nicaragua, Senegal, Sri Lanka, 

Tanzania, Ukraine, and Vanuatu. The MCC Board suspended The Gambia 

from participation in the program on June 16, 2006 due to a pattern of actions inconsistent with MCC’s selection criteria.

Approved Compact Countries 

Of the 25 countries eligible for compact assistance, MCC has approved 11 

compacts totaling nearly $3 billion with Madagascar, Honduras, Cape Verde, 

Nicaragua, Georgia, Benin, Vanuatu, Armenia, Ghana, Mali, and El Salvador. 

MCC is actively working toward finalizing compacts with the remaining eligible countries. 

Threshold Eligible Countries 

To provide further incentive for policy reform, MCC’s legislation established 

a Threshold program for countries that demonstrate a significant commitment to meeting the eligibility criteria but fall short on several indicators. 

Threshold assistance helps countries address specific areas of policy weakness identified in the MCA selection indicators. The following countries 

are currently eligible for Threshold program assistance: Albania, Burkina 

Faso, East Timor, Guyana, Indonesia, Kenya, Kyrgyz Republic, Jordan, Malawi, Moldova, Niger, Paraguay, Peru, Philippines, Rwanda, Saõ Tomé and 

Principe, Tanzania Uganda, Ukraine, and Zambia. Yemen was suspended in 

November 2005 from the Threshold program. Certain Threshold countries 

have also been selected as compact-eligible, and performance on any ongoing Threshold program will be considered by MCC’s Board of Directors in 

approving a possible future compact. 

Approved Threshold Countries 

MCC has approved 11 Threshold agreements totaling over $286 million with 

Burkina Faso, Malawi, Tanzania, Albania, Paraguay, Zambia, Philippines, 

Ukraine, Jordan, Indonesia, and Moldova. 
Millennium Challenge Corporation

24 2006 Annual Report

NICARAGUA

HONDURAS

MOROCCO

BURKINA FASO

BENIN

CAPE VERDE

GHANA

MALI

PARAGUAY

BOLIVIA

PERU

GAMBIA

GUYANA

SENEGAL

EL SALVADOR

MCC Engagement Worldwide
Millennium Challenge Corporation

2006 Annual Report 25

MOLDOVA

JORDAN

MALAWI

RWANDA

TANZANIA

KENYA

UGANDA

ALBANIA

UKRAINE

GEORGIA

MONGOLIA

KYRGYZ REPUBLIC

MOZAMBIQUE

SRI

LANKA

INDONESIA

PHILIPPINES

EAST TIMOR

ARMENIA

MADAGASCAR

YEMEN

SÃO TOMÉ

& PRINCIPE

NIGER

LESOTHO

VANUATU

NAMIBIA

ZAMBIA

Compact-Eligible Countries

Suspended Compact-Eligible Countries—1

Compacts Signed—11

reshold-Eligible Countries

reshold Agreements Signed—11

reshold Countries Suspended

Legend
Millennium Challenge Corporation

26 2006 Annual Report

The Year in Review

Overview

Under Ambassador John Danilovich’s leadership, MCC in Fiscal Year (FY) 

2006 worked with vision, enthusiasm, and experience to bring fresh ideas 

and renewed focus to creating a bolder, faster, and more results-oriented 

organization. 

MCC graduated from a “start-up” operation to one fully engaged in maximizing organizational capacity with the right staff in place to negotiate, 

conclude, and sign compacts expeditiously and with a commitment to quality—meaning that, when implemented, compacts will transform the lives of 

the poor. We are now fully prepared and organized to tackle the more challenging implementation phase, and compact implementation joins compact 

development as a core competency for MCC. Monitoring, evaluation, quality control, fiscal and procurement oversight, and performance assessments 

are among the activities that MCC is performing to ensure the success of our 

compacts. 

Department Highlights

Six departments, with streamlined processes, made significant strides during 

the past year in executing MCC’s work.

Department of Accountability reached full staffing levels and, as a 

result, formally separated Economic Analysis from Monitoring and 

Evaluation functions, while still preserving the close connections between the two. A new approach to Country Constraints analysis was 

developed, which will be used for the first time for Fiscal Year 2007 

selected countries. Accountability conducted training and produced 

improved country guidance and new reporting formats for MCC and 

MCA-unit staff in such areas as environmental and social guidelines, 

economic and beneficiary analysis, procurement, fiscal accountability, monitoring and evaluation, impact evaluation, as well as quarterly and annual financial and results reporting. Work continued on 

growth and poverty impact assessments of compact components in 

new proposals, and commenced on designing and initiating random-

•
Millennium Challenge Corporation

2006 Annual Report 27

ized and other rigorous impact evaluation approaches for many of 

the projects beginning implementation under signed compacts. 

Department of Administration and Finance, responsible for managing MCC’s human, financial, and information resources, took significant steps to build MCC’s organizational strength in FY 2006. This 

involved building a mission-driven workforce that increased 86 percent as a result of an aggressive hiring plan focused on MCC’s commitment to strategic diversity recruiting and outreach efforts. As a 

result, 63 percent of MCC’s full-time employees are female or represent minority ethnic backgrounds. The Department also worked to 

earn MCC a clean audit opinion on our annual financial statements, 

even as the volume of financial obligations increased. 

Department of Congressional and Public Affairs further cultivated 

critical legislative and media relationships so as to share details of 

MCC’s unfolding activities. Congressional and Public Affairs unveiled MCC’s new logo and created important branding guidelines. 

The website was redesigned and improved to more effectively communicate activities, policies, and progress to partner countries as 

well as to the public in general. A Speakers Bureau was launched to 

better match interest in MCC’s various topics with appropriate experts. Outreach events scheduled around Board meetings, compact 

signings, policy announcements, speeches, presentations, and visits 

from partner country officials created well-attended opportunities 

to discuss MCC’s work. Congressional and Public Affairs continues to play a pivotal role in ensuring organizational transparency by 

informing all interested constituencies and stakeholders, including 

Members of Congress, about MCC.

Office of the General Counsel is now fully staffed and the first department to implement FileSite, the electronic file management system 

that ultimately will be integrated organization-wide. Working in 

conjunction with the Department of Administration and Finance, 

the General Counsel’s Office was instrumental in drafting and implementing key policies so that MCC improved its internal controls. 

To ensure greater accountability in tying funding to performance 

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Millennium Challenge Corporation

28 2006 Annual Report

benchmarks, the General Counsel adapted legal requirements for 

the disbursement of compact funds to better reflect on-the-ground 

realities. 

Department of Operations, responsible for leading compact negotiations, development, and implementation, integrated Country 

Programs and Markets and Sectoral Analysis into a single, coherent 

function to more effectively manage relationships and provide technical expertise in assessing compact proposals and overseeing implementation. The Department also developed and tested uniform 

standards not only for conducting due diligence on proposed projects in eligible countries but also for collecting performance reports 

and other related information in our partner countries. Operations’ 

staff grew by 71 percent from 69 to 118 employees—with professionals hired and stationed in 5 partner countries—to assist with and 

monitor implementation of the nine total compacts signed by September 30, 2006 valued at just over $2.0 billion. 

Department of Policy and International Relations made considerable 

strides in FY 2006 toward facilitating stronger donor coordination, 

improving the country selection process, expediting the Threshold 

program, and establishing a Private Sector Initiatives unit to manage MCC’s relationships with the private sector. It helped harmonize MCC’s assistance with that of other U.S. and foreign donors to 

magnify impact in the field. It also assessed MCC’s performance on 

the Paris Declaration targets to improve overall aid effectiveness. It 

worked closely with third-party institutions to develop more granular, actionable, and timely policy indicators, integrate two new measures of natural resource management into MCC’s country selection 

process, and help dozens of governments better understand the reforms needed to improve their indicator performance. Policy and International Relations also led efforts to streamline MCC’s procedures 

for Threshold proposal development, including providing more detailed guidance. 

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Millennium Challenge Corporation

2006 Annual Report 29

Compacts

Four Compacts—with Armenia, Benin, Ghana, and Vanuatu—were signed 

in FY 2006, which join the five compacts previously signed since MCC’s inception in 2004 and the two additional Compacts with Mali and El Salvador 

signed during the first quarter of FY 2007. Nearly $3 billion has been committed to these 11 compacts. 

Threshold Agreements

Five Threshold agreements—with Tanzania, Albania, Zambia, Paraguay, and 

the Philippines—were signed in FY 2006. These join the Threshold agreements concluded in previous years with Burkina Faso and Malawi, as well as 

those signed with Jordan, Indonesia, Moldova, and Ukraine during the first 

Armenia Compact signing ceremony at the 

U.S. Department of State, March 27, 2006.
Millennium Challenge Corporation

30 2006 Annual Report

quarter of FY 2007. A total of $286 million has been committed to these 11 

Threshold programs. 

Staffing

As of September 30, 2006, MCC had 264 full-time employees, an increase 

of 86 percent during FY 2006 and only 36 below MCC’s planned corporate 

headquarters staffing level of 300. MCC used an aggressive hiring plan to 

keep pace with substantive organizational needs as we continue to provide 

funding to more countries. Because of our priority initiative and commitment to a diverse workforce, MCC increased minority hires 41 percent from 

June to December 2006, during which time overall staff grew by 23 percent. 

It is expected not only that staffing numbers will stabilize in calendar year 

(CY) 2007, but also that workload issues—determining what activities are 

kept as core competencies within MCC and what activities can be performed 

by outside entities, including our eligible countries—will be a key challenge 

in coming years. MCC continues to rely on personal service contractors, independent contractors, and innovative contract vehicles to address its mission-related personnel needs.

The MCC Effect

The MCC Effect is the positive impact of MCC’s approach to promoting policy reform that leads to poverty reduction through growth, on strengthening countries’ capacity, and on furthering development policy and practice, 

which is not a direct result of an MCC investment. The most significant 

MCC Effect—impact—to date is the incentive created for candidate countries 

to adopt legal, policy, regulatory, and institutional reforms related to MCC’s 

selection criteria. MCC’s dramatic effect on data quality and country coverage is also an important manifestation of the MCC Effect. In addition, the 

MCC Effect has been demonstrated by countries’ experiences and lessons 

learned in developing and implementing their compacts. It is also evident 

through our innovative approach to development assistance, namely the selection of our partner countries, our approach to country ownership, and 

Opposite page: our robust monitoring and accountability frameworks.

MCC staff from each of 

its seven departments.
Millennium Challenge Corporation

2006 Annual Report 31
Millennium Challenge Corporation

32 2006 Annual Report

Country Selection Process

During this reporting period, MCC carried out its third cycle of selecting 

countries eligible to apply for compact and Threshold program assistance for 

FY 2006. The Millennium Challenge Act of 2003, 22 U.S.C.A. 7701, 7707 (b) 

(the “Act”) requires MCC to take a number of steps in determining the countries that, based on their demonstrated commitment to just and democratic 

governance, economic freedom, and investing in their people, will be eligible 

for MCA assistance during the fiscal year. Reports submitted to Congress at 

each of the following three stages are available on MCC’s website. 

Stage 1: Identification of FY 2006 Candidate Countries: In accordance with the Act, MCC submitted its Report to Congress on July 

28, 2005 indicating the countries that were candidates for MCA assistance during FY 2006 based on their per capita income levels 

and their eligibility to receive assistance under U.S. law. This report 

•

Ruling Justly

1. Civil Liberties

2. Political Rights

3. Voice and 

Accountability

4. Government 

Effectiveness

5. Rule of Law

6. Control of 

Corruption

Investing in People

1. Public Expenditure 

on Health as percent 

of GDP

2. Immunization Rates: 

DPT3 and Measles

3. Public Primary 

Education Spending 

as percent of GDP

4. Girls’ Primary 

Education 

Completion Rate

Encouraging 

Economic Freedom

1. Cost of Starting a 

Business

2. 1-year Consumer 

Price Inflation

3. Fiscal Policy

4. Trade Policy

5. Regulatory Quality

6. Days to Start a 

Business 

The 16 Indicators Used for FY 2006
Millennium Challenge Corporation

2006 Annual Report 33

identified 69 candidate countries in the “low income” category and 

29 candidate countries in the “lower middle income” category for FY

2006.

“Low income” candidate countries have a per capita income equal to or less 

than $1575. “Lower middle income” candidate countries have a per capita 

income between $1575 and $3255. MCC legislation allowed for the consideration of the new “lower middle income” countries category for the first time 

in FY 2006. 

Stage 2: Selection Criteria and Methodology Report: In accordance 

with the Act, MCC submitted its Report to Congress on September 

6, 2005, indicating the criteria and methodology that MCC’s Board 

of Directors would use to measure and evaluate the candidate countries, consistent with the requirements of Section 607 of the Act, in 

order to select eligible countries from among them (Section 608(b) 

of the Act). Candidate countries compete against their income peer 

group on 16 policy indicators that assess the degree to which the political, social, and economic conditions in these countries promote 

poverty reduction and sustainable economic growth. These indicators—developed by independent, non-U.S. governmental sources—

are selected based on a number of factors, including their relationship to growth and poverty reduction, transparency and country 

coverage, analytical rigor and objectivity, applicability across countries, and broad consistency in results from year to year.

As a general practice, MCC continually reviews the indicators used to ensure 

they are the best possible measures of country performance on the MCA

criteria, consulting with experts across the U.S. Government, the development community, donors, and academia. For FY 2006, MCC substituted the 

World Bank Group’s Cost of Starting a Business indicator for Institutional 

Investor’s Country Credit Rating indicator. We believe there are potentially 

significant gains from this replacement. In addition to meeting all of MCC’s 

criteria for an indicator, including demonstration of a strong empirical relationship to economic growth, this additional measure of the entrepreneurial 

environment is easily understood by policy makers in recipient governments 

and is highly actionable. 

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Millennium Challenge Corporation

34 2006 Annual Report

Following submission of the selection criteria and methodology report to 

Congress and its publication on MCC’s website and in the Federal Register, 

MCC held a 30 day public comment period on it. We also published all candidate country performance rankings sheets—or scorecards—on the website. MCC staff met with many countries to discuss their individual country 

performance against the indicators and highlight areas where reforms could 

increase future chances of qualifying for MCA funds. 

Stage 3: MCC’s Board Names FY 2006 Eligible and Threshold Countries: The third and final step in the country selection process was 

the Board’s determination of FY 2006 eligible countries and Threshold countries. MCC submitted this list in its Report to Congress on 

November 10, 2005 (Section 608(d) of the Act). 

A total of 23 countries were selected as eligible to apply for MCA assistance 

for FY 2006. In making its selection, the Board considers whether countries 

perform above the median in relation to their peers on at least half of the 

indicators in each of the three policy categories of ruling justly, investing 

in people, and encouraging economic freedom as well as above the median 

on control of corruption. The Board may exercise discretion in considering 

additional information and adjusting for gaps, lags, or other weaknesses in 

the data. The Board also considers factors such as whether MCA assistance 

has the potential for transformational impact on poverty reduction and economic growth in a country as well as MCC resource constraints. 

The selected countries from the “low income” category were: Armenia, 

Benin, Bolivia, Burkina Faso, East Timor, The Gambia, Georgia, Ghana, 

Honduras, Lesotho, Madagascar, Mali, Mongolia, Morocco, Mozambique, 

Nicaragua, Senegal, Sri Lanka, Tanzania, and Vanuatu. Of these 20 eligible 

low income countries, 16 had been selected as MCA-eligible in prior years. 

Burkina Faso, East Timor, The Gambia (which was later suspended), and 

Tanzania became MCA-eligible for the first time in FY 2006. 

The MCC Board also selected three countries from FY 2006’s new “lower 

middle income” category. These included the two new countries of El Salvador and Namibia. The third country, Cape Verde, was previously selected as 

MCA-eligible in the low income category.

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Millennium Challenge Corporation

2006 Annual Report 35

A total of 13 countries were selected to participate in the Threshold program 

for FY 2006, including Guyana, Indonesia, Jordan, Kenya, Kyrgyz Republic, 

Malawi, Moldova, Paraguay, Philippines, São Tomé and Principe, Ukraine, 

Uganda, and Zambia.

Activities with Implications for the Future

New Performance Indicators: In addition to the 16 policy indicators currently in use, two more indicators—a Natural Resources Management Index and a Land Rights and Access Index—are expected to be presented for consideration and approval by the Board of Directors in FY 2007. The identification of these indicators was a result of considerable research 

and consultations, which took place in FY 2006. They will 

provide MCC with additional measures to determine how well 

a country is protecting its eco-regions, providing clean drinking water, expanding sanitation services, streamlining the 

property registration process, and making land rights accessible and secure for poor and vulnerable populations. These 

are critical considerations in eradicating barriers to poverty 

reduction and economic growth. 

Gender Policy: MCC recognizes gender inequality as a significant constraint to economic growth and poverty reduction. 

In FY 2006, much work went toward developing, as well as 

planning for the public announcement of and internal training on, a formal policy statement of MCC’s approach to including gender sensitivity throughout all phases of proposal 

and compact development and implementation. 

Challenges of Measuring MCC Performance 

Development of measures that show the impact of MCC programs is 

challenging for a number of reasons:

While total funding for compacts is obligated up front, funding is 

not disbursed to the recipient country until a country is actually 

ready to implement the programs agreed to in the compact. For 

•

•

•

“The MCC has 

shown tremendous 

global leadership by 

incorporating gender 

analysis that starts 

with project conception, 

consultation and 

program design, and 

follows through to all the 

steps of implementation 

and evaluation...This is 

the most comprehensive 

and practical U.S. policy 

on gender that I have 

seen.” 

—Ritu Sharma Fox, 

Co‐Founder and 

President of the 

Women’s Edge 

Coalition
Millennium Challenge Corporation

36 2006 Annual Report

this reason, even initial results are not likely to occur in the year in 

which funding is obligated. In addition, because compacts are normally implemented over a 5-year period, outcome data is often not 

available until well into this implementation period. To address this, 

compact countries are formulating activity level monitoring plans 

that will enable them to report on output and process level results.

Wherever possible, MCC uses third-party sources for outcome data 

in order to remove any possibility of reporting bias. However, the 

types of outcome measures used to determine whether programs 

funded through a compact are leading to economic growth and poverty reduction often rely on data that is not measured every year or 

for which there is a time lag. For other measures, such as the percentage of people who live on less than $2 per day, it is difficult to establish a baseline from which to measure because data is determined 

by national surveys that are conducted inconsistently.

Many of MCC’s partner countries also have limited capacity to measure outcome or output results. Because countries are the primary 

implementers of MCC compact projects, this lack of capacity can 

make it more difficult to measure results within the ambitious timeframes built into MCC monitoring and evaluation plans. MCC has 

provided technical assistance to a number of our partner countries 

to help them improve their technical capacity in these areas. We are 

also helping them identify and track activity level indicators and incorporate them into activity monitoring plans.

We are constantly reviewing our performance metrics to look for improvements in the way we measure our outcome, output, and input performance. 

For example, MCC is investigating measuring economic growth and poverty 

reduction at a level tailored more specifically to our programs. We are also 

planning to develop more explicit measures in areas such as recognition and 

support, country partnership, and staff effectiveness and satisfaction, where 

an independent survey will be conducted to measure results.

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Millennium Challenge Corporation

2006 Annual Report 37

Working with Other Donors

MCC has integrated donor coordination into every phase of compact development. Some MCA-funded activities have grown out of successful USAID

or other donor pilot projects, while numerous others have built off of, benefited from, or otherwise leveraged the contributions of our donor partners. 

For example, MCC joined with other donors in Honduras, Nicaragua, and El Salvador to finance the construction of roads that no one 

donor could do alone. 

In Benin, MCC worked with the EU and the French Agency for Development to ensure proposed Access to Justice activities complemented and leveraged their investments in court infrastructure and 

procedural code development. 

MCA Madagascar’s Land Tenure Project benefits from technical assistance provided by the French, World Bank sector work, and pilot 

initiatives supported by the International Fund for Agricultural Development, the Food and Agriculture Organization, and the International Land Coalition. 

As a final example, in several MCC countries, the United Nations 

Development Programme has helped facilitate and speed MCC compact development by funding necessary technical and proposal development expertise. 

In every country where we work, MCC donor coordination efforts have 

helped ensure that our investments magnify development impacts and are 

cost-effective.

•

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Millennium Challenge Corporation

38 2006 Annual Report

Assistance Programs: 

Compacts and 

Threshold Programs—

Impact Underway

Beneficiaries in Profile

There is no more tangible way of fulfilling and measuring the success of our 

mission to reduce poverty through economic growth than evaluating our 

impact on the very lives we are transforming. The ultimate return on our 

efforts and investment will be felt in the lives we lift out of poverty. As our 

11 current compacts mature through implementation and our 11 Threshold 

programs continue pushing reforms, the breadth and depth of MCC’s impact 

will materialize. Early on, we are seeing progress and results.

MCC’s compacts are designed to improve the lives of the poor by: 

Benefiting 75 percent of Armenia’s one million-plus rural poor and 

increasing their annual incomes by $36 million by 2010 by creating a 

more competitive agricultural sector. 

Upgrading transportation infrastructure and increasing the average 

per capita income of more than 65,000 of the poor in Vanuatu by 15 

percent within 5 years. 

Increasing the annual incomes of more than 125,000 of the poor in 

Cape Verde by at least $10 million through private sector-led growth. 

Assisting five million people, over half of Benin’s population, and lifting an estimated 250,000 of its citizens out of poverty by the year 

2015 by increasing access to land, financial services, justice, and 

markets.

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Millennium Challenge Corporation

2006 Annual Report 39

Impacting nearly 1.5 million people in Georgia and creating 

7,500 new jobs, particularly in rural regions through agribusiness 

development. 

Supporting those living in the Leon and Chinandega regions of Nicaragua by significantly increasing incomes of rural farmers and 

entrepreneurs. 

Increasing the incomes of thousands of farmers in Honduras, who 

will transition from corn and basic grains to higher-profit crops, 

such as squash and jalapenos, and supporting rural improvements 

that will enable these farmers to reach regional and international 

markets. 

Transforming the lives of the poorest farmers by focusing on property rights, the financial sector, and agricultural business investment 

to raise annual household incomes in Madagascar. 

Improving the standard of living of more than 40,000 farmers and 

laborers in Mali as well as 100,000 school-aged children and their 

family members, who will have greater access to education, health 

services, and markets. More than 50,000 workers will have formal 

employment because of improved opportunities in manufacturing 

and trade.

Alleviating directly the poverty of 230,000 individuals in Ghana and 

enhancing the livelihood and welfare of one million Ghanaians in 

total by raising farmer income through private-sector led agribusiness development.

Making strategic investments in education, public services, agricultural production, rural business development, and transportation 

infrastructure for 850,000 poor individuals in El Salvador that will 

increase incomes by 20 percent over the five-year life of the compact 

and by 30 percent within 10 years of the compact’s start. 

•

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Millennium Challenge Corporation

40 2006 Annual Report

Summary of Beneficiaries and Impacts Attributable to MCC Interventions

Compact Country Project Name

Compact 

Multi‐Year 

Net 

Investment 

in Projects7

Armenia

Compact Signed: 27 March 2006

Entry Into Force: 2 September 2006

$212,770,000

Rural Road Rehabilitation 360,000 $67,100,000 

Irrigated Agriculture 250,000 $145,670,000

Benin

Compact Signed: 22 February 2006

Entry Into Force: 06 October 2006

$259,387,000

Access to Land 712,537 $36,020,000

Access to Financial Services 216,859 $19,650,000

Access to Justice 2,377,312 $34,270,000

Access to Markets 4,031,250 $169,447,000

Cape Verde

Compact Signed: 04 July 2005

Entry Into Force: 17 October 2005

$96,808,838

Watershed Management & Agricultural Support 185,877 $10,848,630

Infrastructure Project 364,074 $78,760,208

Private Sector Development Project (a) $7,200,000

El Salvador

Compact Signed: 29 November 2006

Entry Into Force: Pending

$416,100,000

Human Development Project 484,000 $95,070,000

Productive Development Project 55,000 $87,470,000

Connectivity Project 600,000 $233,560,000

Georgia

Compact Signed: 12 September 2005

Entry Into Force: 17 April 2006

$259,200,000

Regional Infrastructure Rehabilitation Project 53,000 $211,700,000 

Enterprise Development Project 54,236 $47,500,000

Ghana

Compact Signed: 01 August 2006

Entry Into Force: Pending

$485,376,000

Agriculture Project 425,000– 

654,000

$240,984,000

Transportation Project 700,000 

(b)

$143,104,000 

Rural Development Project 30,000 

(c)

$101,288,000 

Number ofBeneficiaries6
Millennium Challenge Corporation

2006 Annual Report 41

Per Capita 

Income8 MCA Country Income Indicator9

Projected net Increase in Income Indicators 

Attributable to MCC at End of Compact21

$1,470 Change in real income from agriculture in rural 

areas (Index)10 

5% increase over index baseline

$510 Average household income in land and finance 

areas11

Estimated at 7% increase in treated areas compared 

to untreated areas (difference-in-differences)

$1,870 Increase in annual income (US$ millions)12 $10 million increase in annual income 

$2,450

Annual per capita income of Program 

beneficiaries in the Northern Zone 

(treatment group)13

Annual per capita income of Program 

beneficiaries in the Northern Zone 

(control group)13

Estimated at 20.6% increase in treated areas 

compared to untreated areas 

(difference-in-differences of $148 per capita)

$1,350

Incremental increase in financial benefits from 

Compact interventions (US$)14 

$41,977,000 increase

$450

Crop income (Northern Zone) 

(US$ per household)15 135% ($945 per household) increase over baseline

Crop income (Afram Basin Zone—East) 

(US$ per household)15 55% ($451 per household) increase over baseline 

Crop income (Afram Basin Zone—West) 

(US$ per household)15 142% ($767 per household) increase over baseline

Crop income (Southern Zone)

(US$ per household)15 33% ($614 per household) increase over baseline
Millennium Challenge Corporation

42 2006 Annual Report

Summary of Beneficiaries and Impacts Attributable to MCC Interventions

Compact Country Project Name

Compact 

Multi‐Year 

Net 

Investment 

in Projects7

Honduras

Compact Signed: 13 June 2005

Entry Into Force: 30 September 2005

$197,895,000

Rural Development Project 28,255 

(d)

$72,195,000

Transportation Project (e) $125,700,000

Madagascar

Compact Signed: 18 April 2005

Entry Into Force: 25 July 2005

$91,374,000

Land Tenure Project 204,000 

(f)

$37,803,000

Finance Project 125,905 

(g)

$35,888,000

Agricultural Business Investment Project 102,000 $17,683,000

Mali

Compact Signed: 13 November 2006

Entry Into Force: Pending

$418,506,164

Bamako-Sénou Airport Improvement Project (h) $89,631,177

Industrial Park Project 3,439 (i) $94,266,519 

Alatona Irrigation Project 11,903 (j) $234,608,468 

Nicaragua

Compact Signed: 14 July 2005

Entry Into Force: 26 May 2006

$153,000,000

Property Regularization Project 43,000 

(k)

$26,500,000

Transportation Project (l) $92,800,000

Rural Business Development Project 7,000 

(m)

$33,700,000

Vanuatu

Compact Signed: 02 March 2006

Entry Into Force: 28 April 2006

$60,690,000

Transport Infrastructure Project 65,227 $60,690,000 

Number of Beneficiaries6
Millennium Challenge Corporation

2006 Annual Report 43

Per Capita 

Income8 MCA Country Income Indicator9

Projected net Increase in Income Indicators 

Attributable to MCC at End of Compact21

$1,190

Increase in income of Beneficiaries 

(annual US$ millions)16 $69 million increase over baseline 

$290 Increase in household income in Zones17 Estimated at 5% of average land value for each of 

the Zones

$380

Total revenue of firms servicing the Airport 

(millions US$)18 13% ($1 million) increase over baseline

Total receipts of hotels and restaurants in 

Bamako (millions US$)18 31% ($41 million) increase over baseline 

Gross value-added of firms in the Industrial Park 

(millions US$)18 $33 million increase over baseline

Real income from irrigated agricultural 

production (US$ per capita)18 $316 per capita increase over baseline

$910 Total Expected Income Gains (millions US$)19 $20.94 million increase over baseline 

$1,600

Average cash income per capita of residents 

living within the catchment area of infrastructure 

sub-projects20

17% ($205 per capita) increase over baseline
Millennium Challenge Corporation

44 2006 Annual Report

Compacts

Explaining a Compact

The word “compact” means agreement or commitment, and an MCC compact is just that. It is a mutual promise between the U.S. Government and a 

partner country. The U.S. Government promises to fully fund the compact 

and to provide assistance necessary to develop, implement, and monitor the 

compact. A partner country promises to implement the program it has developed to achieve its priorities for sustainable economic growth and poverty reduction according to certain performance benchmarks throughout 

the life of the compact. To demonstrate that the United States is committed to funding the entire four- or five-year compact and providing needed 

certainty for complex, multi-year programs, we obligate all of the compact 

money up front. 

The Making of a Compact

The following chart illustrates the various stages of the MCC compact development process:

Proposal Development

and Program Design

Due Diligence and 

Program Refinement

Mobilization

and Start Up

In-Country

Implementation

Close

Out

Compact Development Compact Implementation

Country 

Eligible

Proposal 

Submission

Compact 

Signing

Entry 

into Force

Compact 

Completion

Proposal Submission

Upon a country’s selection as eligible based on its policy performance as reflected in 

the indicators MCC tracks, the country may submit its compact proposal for MCC 

funding. e country must engage in a comprehensive consultative process with all 

segments of its society—including non-governmental organizations, academia, the 

private sector, members of government—to identify and prioritize its barriers to 

poverty reduction and economic growth.

Proposal Due Diligence

An initial review of the submitted compact proposal determines whether it has 

promise and whether it reflects basic MCC principles such as poverty reduction, 

growth impact, consultative process, and measurable results. If it does, MCC then 

recommends conducting a full and detailed due diligence exercise on those elements 

of the proposal that merit it. Due diligence focuses on a country’s strategy for 

economic growth and poverty reduction; the consultative process; any policy reform 

plans; what is expected to be achieved; how progress will be measured; the merits and 

risks of each component of the program; fiscal accountability; monitoring and 

evaluation; donor coordination; the beneficiaries broken down by income level, gender 

and age, where practical; and environmental and social safeguards. 

Compact Negotiations

After a 15-day consultation period with Congress, MCC begins comprehensive 

negotiations with an eligible country whose proposal passes due diligence. Negotiations fine-tune the proposal, including outlining a detailed implementation plan and 

specifically defined results. e process better describes and analyzes the terms of the 

compact.

Compact Signing

When negotiations are completed to the mutual satisfaction of 

both MCC and the eligible country, the compact is presented to 

the Board for approval. With Board approval, the compact is 

ready to be officially signed. 

Compact Mobilization

With a signed compact in hand, the partner country works to 

ensure its entry into force and that an independent governing 

authority or entity is established in-country to manage all MCC 

activities. e compact and its related documents serve as the 

obligating agreement between MCC and our partner countries. 

e compact commits our partner country to meeting the 

development objectives that they have set. In exchange, MCC 

provides the funds to help achieve those objectives. 

Compact Implementation

Implementation begins with the first disbursement of MCC funds. 

Both MCC and the partner country monitor and evaluate progress 

toward achieving performance benchmarks, with ongoing 

disbursements based on progress. 
Millennium Challenge Corporation

2006 Annual Report 45

Success Story—

Burkina Faso

Safoura Bagnan was recruited last year in 

Koutoula Yarce, one of the 132 communities 

receiving elementary school funding from 

the Millennium Challenge Corporation (

in Burkina Faso. As a nine-year old, Safoura 

MCC) 

should already be in third grade. However, 

when she was seven, the age of enrollment in 

Burkina Faso, her village had no school, and her 

parents were reluctant to allow her to walk several 

kilometers to the nearest school.

In Burkina Faso fewer than half of all girls attend 

school. Long walking distances from schools, early 

and forced marriages, time-consuming household 

chores and lack of interest in educating girls are some of the barriers that keep 

thousands of girls like Safoura from going to school.

The two-year MCC project, called BRIGHT

and encourages increased enrollment and regular attendance of children in schools, 

, provides incentives to remove these barriers 

particularly girls. The program is simple, but grand in its scope: to build, equip, and 

support 132 schools in the 10 of the 45 provinces with the lowest girls’ education rates.

Three-classroom schools, boreholes for drinking water, latrines for girls and boys, and 

teacher housing are being constructed in remote communities that have no education 

infrastructure. Each school will be provided with sufficient desks to allow children to 

sit comfortably, free textbooks and school supplies, and a mid-day lunch program. An 

incentive will be provided to girls who have at least a 90% attendance rate in the form 

of a take home food ration worth $4 per month. An awareness raising campaign will be 

organized with students’ parents and community leaders during the two-year project 

period to fight the various obstacles that keep girls from attending school.

“Last year we had no class room. We were under temporary shelter. This year we are 

glad to have a brand new school. We also have desks and can sit properly. We have got 

notebooks and manuals for reading.” —Safoura Bagnan

Safoura Bagnon
Millennium Challenge Corporation

46 2006 Annual Report

Success Story—

Madagascar

Ampasimazava is a village situated on the east coast of Madagascar, where due to 

poor soil quality and poor agricultural infrastructure, few options existed for revenue 

generation. In the past, the principal economic activities of the villagers consisted of 

collecting firewood and producing charcoal. The average weekly revenue for a charcoal 

producer was less than $5. 

In October 2006, MCA-Madagascar’s Agricultural Business Investment Project began 

working with an association of 18 villagers from Ampasimazava in producing essential 

oil from niaouli leaves, commonly used in cosmetic and skin care products. MCAMadagascar assisted the association in developing a business plan, acquiring financing 

of $3,000 from a local micro-finance institution to set up a distilling plant, and linking 

the association to buyers in the capital. 

As a result of the villagers’ dynamism and MCA-Madagascar’s assistance, the 

association and its members have become successful almost overnight. Joseph, one 

member of the association, has managed to save $500 within the first two months 

of production, and is beginning to envision his family’s future in a whole new way. 

He began construction of a larger, cyclone-resistant house and decided to send his 

children to a private school that offers a better 

education. 

The association has generated over $1,000 of 

profit within the first two months of operations 

from member fees, which the members plan 

to use to make improvements to the village, 

including building wells to supply drinking 

water. They have begun to pay off their loan 

with the micro-finance institution, and are 

in the process of creating a tree nursery to 

begin production of eucalyptus essential oil. 

Joseph and his wife sending 

their children to school
Millennium Challenge Corporation

2006 Annual Report 47

Staff from the Departments of Operations and Accountability as well as the 

Office of the General Counsel work together on country-specific transaction teams to assist the countries in the compact development and implementation processes, to provide technical leadership to conduct due diligence, to negotiate compacts, and to maintain effective communications 

with partner countries. 

Women process pineapples for export at a 

nucleus farm in Ghana.
Millennium Challenge Corporation

48 2006 Annual Report

Summary

The five-year, $235 million MCC Compact with Armenia is focused on increasing economic performance in the agricultural sector. Investments are 

planned to upgrade 943 kilometers of roads, providing communities and rural residents with reduced transport costs and better access to jobs, markets, 

and social services; and increase the productivity of 250,000 farmer households through improved water supply, higher yields, higher-value crops, and 

a more competitive agricultural sector.

Results underway

Several road and irrigation procurements continue to advance.

Key Country Facts

Population ................. 3,016,312

GNI Per Capita................$1,470

Key Compact Facts

Signed.............March 27, 2006

Amount............$235.65 million

Duration ........................ 5 years

Obligations by Sector

Armenia

Program Administration &

Monitoring and Evaluation

Water-to-Market Activity

Infrastructure Activity

Rural Road Rehabilitation

$32.42 $67.1

$113.25

$22.87

in millions
Millennium Challenge Corporation

2006 Annual Report 49

Summary

The five-year, $307 million MCC Compact with Benin aims to increase investment and private sector activity. The Compact is comprised of four 

projects: increasing access to land through more secure and useful land 

tenure; expanding access to financial services through grants given to micro, small, and medium enterprises; providing access to justice by bringing 

courts closer to rural populations; and improving access to markets by eliminating physical and procedural constraints currently hindering the flow of 

goods through the Port of Cotonou.

Results underway

An engineering consulting firm is in the second stage of the initial technical 

studies for the reconstruction of the Port of Cotonou.

Program Administration

Monitoring and Evaluation

Port Infrastructure

Judicial Reform

Financial Services

Land Tenure

$34.27

$8.78

$39.13 $36.02

$169.45

$19.65

in millions

Key Country Facts

Population .................8,177,208

GNI Per Capita................... $510

Key Compact Facts

Signed.........February 22, 2006

Amount............. $307.3 million

Duration ........................ 5 years

Obligations by Sector

Benin
Millennium Challenge Corporation

50 2006 Annual Report

Summary

The five-year MCC Compact with Cape Verde is intended to help that country achieve its national development goal of transforming its economy from 

aid-dependency to sustainable, private sector-led growth. The $110 million 

dollar Compact seeks to increase rural incomes of the poor by increasing 

agricultural productivity, integrating internal markets, reducing transportation costs, and developing the private sector through greater private sector 

investment and financial sector reform. 

Results underway

Infrastructure projects are underway. 

For the rehabilitation of five roads in Santiago, contracts for construction and supervision have been signed. Procurement and contracts are finished for the construction of four bridges in Santiago. 

Consultants are being selected for the expansion and modernization 

of the Port of Praia. 

•

•

•

Program Administration

Monitoring and Evaluation

Private Sector

Infrastructure Rehabilitation

Agriculture and Watershed Management

$78.7

$37.8

$4.9 $8.4

$7.2

$10.8

in millions

Key Country Facts

Population ................... 506,807

GNI Per Capita................ $1,870

Key Compact Facts

Signed.................... July 4, 2005

Amount.................$110 million

Duration ........................ 5 years

Obligations by Sector

Cape Verde
Millennium Challenge Corporation

2006 Annual Report 51

Summary

In El Salvador, the five-year, $461 million Compact seeks to improve the lives 

of Salvadorans through strategic investments in education, public services, 

agricultural production, rural business development, and transportation infrastructure. The largest of the Compact’s components, the transportation 

project, intends to physically unify El Salvador’s Northern Zone with the rest 

of the country, enabling new economic opportunities for rural households, 

lower transportation costs, and decreased travel times to markets for more 

than 850,000 beneficiaries.

Results underway

The Compact has been signed and entry into force is forthcoming. El Salvador’s Compact development process included over 2,000 Salvadorans in the 

consultation process whose input will continue through implementation.

Accountability

Program Administration

Productive Development

Human Development 

and Social Infrastructure

Connectivity

$95.1

$233.6

$24.3

$20.6

$87.5

in millions

Key Country Facts

Population ................6,880, 951

GNI Per Capita................$2,450

Key Compact Facts

Signed......November 29, 2006

Amount................ $461 million

Duration ........................ 5 years

Obligations by Sector

El Salvador
Millennium Challenge Corporation

52 2006 Annual Report

Summary

The five-year, $295 million MCC Compact is intended to help Georgians reduce poverty by renovating key regional infrastructure and improving the 

development of regional enterprises. The Compact’s infrastructure projects 

seek to improve rural transportation, providing agricultural suppliers the 

opportunity to connect more easily with consumers and increase regional 

trade. By providing funding and technical assistance to targeted regional 

enterprises, the Compact aims to enhance productivity in farms, agribusinesses, and other enterprises that will increase jobs and rural income.

Results underway

The tendering process for municipal infrastructure development has 

started for the rehabilitation of the water supply system in the cities 

of Poti and Kutaisi.

Key contracts related to the North-South pipeline repairs have been 

signed and work has begun.

The finalization of bids is imminent for the roads project, creating an 

essential network to revitalize regional trade. 

•

•

•

Administration

Monitoring and Evaluation

Agribusiness Development Activity

Georgia Regional Development

Energy Sector Rehabilitation

Regional Infrastructure Development

Road Rehabilitation

$60 $49.5

$32.5

$102.2

$27.6

$8.45

$15

in millions

Key Country Facts

Population ................ 4,474,404

GNI Per Capita................. $1350

Key Compact Facts

Signed.......September 12, 2005

Amount............. $295.3 million

Duration ........................ 5 years

Obligations by Sector

Georgia
Millennium Challenge Corporation

2006 Annual Report 53

Summary

The five-year, $547 million MCC Compact aims to reduce poverty by raising farmer incomes through private sector-led, agribusiness development. 

Specifically, MCC investments are intended to increase the production and 

productivity of high-value cash and food staple crops in some of Ghana’s 

poorest regions and to enhance the competitiveness of Ghana’s agricultural 

products in regional and international markets.

Results underway

The Compact has been signed and entry into force is forthcoming. Key staff 

members for the MCA governing authority in Ghana have been recruited 

already.

Monitoring and Evaluation

Program Management and Oversight

Rural Services Development 

(education, water/sanitation, electricity)

Transport Development

Agriculture Development

$143

$241

$15

$47

$101

in millions

Key Country Facts

Population ...............22,112,800

GNI Per Capita...................$450

Key Compact Facts

Signed...............August 1, 2006

Amount.........$547.009 million

Duration ........................ 5 years

Obligations by Sector

Ghana
Millennium Challenge Corporation

54 2006 Annual Report

Summary

The five-year Compact with Honduras aims to reduce poverty by alleviating 

the two key impediments to economic growth: low agricultural productivity 

and high transportation costs. The $215 million Compact places an emphasis on increasing the productivity and business skills of farmers who operate 

small- and medium-sized farms and their employees and reducing transportation costs between targeted production centers and national, regional, and 

global markets.

Results underway

The first groups of the more than 8,000 farmers have begun receiving training in techniques for profitable production and commercialization of horticultural products. 

The Transportation Project Manager contract has been selected 

through an open and competitive process and has begun to prepare the bidding documents for the roads to be improved under the 

Transportation Project. 

As a condition precedent to disbursement, the Government of 

Honduras developed a comprehensive road maintenance plan that 

includes a commitment to increase funding for road maintenance 

from $37 million in 2006 to $45 million in 2007 and to $64 million in 

2010. 

•

•

•

Auditing

Program Administration

Monitoring and Evaluation

Rural Development Project

Transportation Project

$72.2 $125.7

$15

$47

$101

in millions

Key Country Facts

Population .................7,204,723

GNI Per Capita................ $1,190

Key Compact Facts

Signed..................June 13, 2005

Total Amount.......$215 million

Duration ........................ 5 years

Obligations by Sector

Honduras
Millennium Challenge Corporation

2006 Annual Report 55

Summary

The key goal of the four-year Compact with Madagascar is to help the island 

nation move from subsistence to a market-driven economy, particularly in 

agricultural production. The $110 million Compact will support a program 

designed to raise incomes in rural areas by enabling better land use, expansion of the financial sector, and increased investment in farms and other rural businesses. 

Results underway

Six pilot Agricultural Business Centers (ABCs) are operational, providing technical assistance to small- and medium-sized enterprises. 

The ABCs have received 1,822 visitors and conducted 31 information 

workshops.

The MCC-funded local land management office in Faratsiho has 

issued 361 land certificates as of December 31, 2006. More than 

69,000 of the existing land tenure documents have been inventoried. 

Over 352 microfinance institution personnel have been trained. 

Some 229 farmers have been trained in accessing microfinance 

services.

•

•

•

Program Administration

Monitoring and Evaluation

ABIP Project

Finance Project

Land Tenure Project

$35.9

$17.7

$15

$37.8

$3.4

in millions

Key Country Facts

Population .............. 18,605,920

GNI Per Capita.................. $290

Key Compact Facts

Signed.................April 18, 2005

Amount............. $109.8 million

Duration ........................4 years

Obligations by Sector

Madagascar
Millennium Challenge Corporation

56 2006 Annual Report

Summary

The five-year, $461 million Compact with Mali seeks to increase the productivity of the agriculture sector and regional enterprises. The Compact 

is intended to serve as a catalyst for sustainable economic growth and poverty reduction through key infrastructure investments that capitalize on 

two of Mali’s major assets, the Bamako-Sénou International Airport, gateway for regional and international trade, and the Niger River for irrigated 

agriculture.

Results underway

The Compact has been signed and entry into force is forthcoming.

Program Management and 

Monitoring & Evaluation

Agriculture Development

Airport Improvement

Industrial Park

$89.6 $234.6

$42.3

$94.3

in millions

Key Country Facts

Population ............... 13,518,420

GNI Per Capita...................$380

Key Compact Facts

Signed.......November 13, 2006

Amount............ $460.8 million

Duration ........................ 5 years

Obligations by Sector

Mali
Millennium Challenge Corporation

2006 Annual Report 57

Summary

In Nicaragua, the five-year Compact seeks to support those living in the 

Leon and Chinandega region by significantly increasing incomes of rural 

farmers and entrepreneurs. The Compact will provide $175 million to reduce 

transportation costs, improve access to markets, strengthen property rights, 

increase investment, and raise incomes for farms and rural businesses. 

Results underway

The property regularization component of the Compact has been 

launched with the awarding of the first 26 “clean” titles to beneficiaries in León. This includes 16 urban and 10 rural titles, many of 

which went to female landowners. These titles are the first of 43,000 

to be delivered under the compact.

Rural producers are receiving technical assistance and training that 

has resulted in achieving export contracts at a price double of what 

they usually obtain on the local market.

Investment promotion in the region has played a role in attracting a 

large investment from a Central American company.

•

•

•

Fiscal/Procurement Agent

Program Administration & 

Monitoring and Evaluation

Rural Business Development

Property Regularization

Transportation

$26.5

$33.7 $92.8

$10.6 $11.5

in millions

Key Country Facts

Population .................5,486,685

GNI Per Capita...................$910

Key Compact Facts

Signed..................July 14, 2005

Total Amount.......$175 million

Duration ........................ 5 years

Obligations by Sector

Nicaragua
Millennium Challenge Corporation

58 2006 Annual Report

Summary

The five-year, $65 million Compact addresses the country’s poor transportation infrastructure. Consisting of eleven infrastructure projects – including 

roads, wharfs, an airstrip, and warehouses – the program seeks to benefit 

poor, rural agricultural producers and providers of tourist related goods and 

services by reducing transportation costs and improving the reliability of access to transportation services. 

Results underway

Procurement notices have been published for various compact programs relating to infrastructure.

Monitoring and Evaluation

Program Management 

and Administration

Institutional Strengthening

Transportation

Infrastructure Upgrading

$1.37

$54.47

$6.22

in millions

$3.63

Key Country Facts

Population .................... 207,331

GNI Per Capita............... $1,600

Key Compact Facts

Signed...............March 2, 2006

Amount.............$65.69 million

Duration ........................ 5 years

Obligations by Key Sector

Vanuatu
Millennium Challenge Corporation

2006 Annual Report 59

Threshold Agreements

Explaining a Threshold Program 

MCC’s Board of Directors selects countries for Threshold status based on 

their performance on the 16 policy indicators tracked by MCC as well as 

their demonstrated commitment to undertake additional reforms to improve performance on one or more of the indicators. Threshold program 

assistance is used to help the selected countries address their specific policy 

weaknesses indicated by their policy indicators scores. It is intended to help 

countries on the “threshold” of fully qualifying on all MCC’s indicator criteria. MCC’s authorizing legislation allows up to 10 percent of MCC’s funding 

to be used for the Threshold program.

Threshold Programs

Explore on the following pages summaries of MCC’s 11 current Threshold 

programs. 

The Making of a Threshold Program

The following chart illustrates the various stages of developing a MCC

Threshold Country Plan:

Indicator

Analysis

Section I of the

reshold 

Country Plan

reshold

Country

Plan

Board Approval 

and Congressional

Notification

Signing In-Country

Implementation

reshold Program Development Implementation

Indicator Analysis

Once a reshold-eligible 

government indicates that 

it is interested in 

developing a reshold 

Country Plan, MCC 

initiates the process by 

conducting a comprehensive assessment of the 

country’s performance on 

our eligibility criteria.  e 

resulting Indicator 

Analysis is shared with the 

government to stimulate 

an extensive dialogue 

between reshold 

country officials and MCC 

on indicator performance 

and areas for improvement.

Section I of the 

reshold Country Plan

Based on the Indicator 

Analysis, the resholdeligible government is 

invited to submit a general 

summary of its proposed 

reshold Country Plan.  

Section I broadly states 

which specific indicators 

will be addressed in a 

reshold program and 

how this will advance 

policy reform in the 

country. 

reshold Country Plan

Once Section I is reviewed 

and approved by MCC’s 

Investment Committee, 

the reshold-eligible 

government is invited to 

more fully develop its 

reshold Country Plan 

through an iterative 

process.  is involves 

consultation with civil 

society and donors, as well 

as input from MCC and

other U.S. Government 

agencies.  Upon finalization, the reshold 

Country Plan is submitted 

to the MCC Investment 

Committee again for a 

recommendation for 

consideration by the Board 

of Directors. 

Board Approval and 

Congressional 

Notification

Once approved by MCC’s 

Board of Directors, 

Congress is notified of the 

reshold Country Plan.

Signing

After the 15-day 

Congressional notification 

of the Board’s decision has 

passed, a reshold 

agreement can be signed.

Implementation

e reshold program is 

implemented by a U.S. 

Government agency, 

working with one or more 

implementing partners, 

which may include eligible 

local, U.S. and other 

international firms, 

non-governmental 

organizations and 

international organizations.  e implementing 

partner(s), together with 

the primary U.S. 

Government implementing agency and MCC,

monitor and evaluate 

progress toward achieving 

performance benchmarks 

throughout the reshold 

program’s implementation.
Millennium Challenge Corporation

60 2006 Annual Report

Summary

Reducing corruption is the primary focus of the $13.9 million Albania 

Threshold program. Albania is receiving assistance from MCC for three programs aimed at reforming tax administration, public procurement, and business administration. The program is designed to increase the national tax 

base and combat the corruption and red tape that make it difficult to start a 

new business. 

USAID is administering this program on MCC’s behalf. 

Summary

Burkina Faso’s $12.9 million Threshold program seeks to improve performance on girls’ primary education completion rates. Specific interventions 

include the construction of girl-friendly schools, teacher training, providing 

take-home dry rations to girls who maintain a minimum 90 percent school 

attendance rate, and literacy training for mothers. 

USAID is administering this program on MCC’s behalf.

Burkina Faso

Albania
Millennium Challenge Corporation

2006 Annual Report 61

Summary

The $55 million Threshold program seeks to ensure that Indonesia immunizes at least 80 percent of children under the age of one for diphtheria, tetanus, and pertussis and 90 percent of all children for measles on a sustained 

basis. The Threshold program also is intended to help curb public corruption by reforming the judiciary and anti-corruption institutions and assisting 

with procurement reform. 

USAID is administering this program on MCC’s behalf. In addition, portions 

of the program are being implemented by the U.S. Department of Justice.

Summary

The $25 million Jordanian Threshold program aims to strengthen democratic institutions by supporting Jordan’s homegrown efforts to broaden 

public participation in the political and electoral process, increasing local 

government transparency and accountability, and enhancing the efficiency 

and effectiveness of customs administration. 

USAID is administering this program on MCC’s behalf. 

Jordan

Indonesia
Millennium Challenge Corporation

62 2006 Annual Report

Summary

Malawi is implementing 15 specific interventions over the two-year period 

of its $20.9 million Threshold program aimed at preventing corruption, 

enhancing oversight functions, and building enforcement and deterrence 

capacity. The interventions intend to create more effective legislative and 

judicial branches of government, provide support for lead anti-corruption 

agencies, strengthen independent media coverage, and expand and intensify 

the work of civil society organizations.

USAID is administering this program on MCC’s behalf. In addition, portions 

of the program are being implemented by the U.S. Department of Treasury 

and the U.S. Department of Justice.

Summary

The $24.7 million Moldovan Threshold program seeks to reduce corruption in the public sector through reforms to the judicial, health, tax, police, 

customs systems, and the national anti-corruption agency. The reforms will 

complement Moldova’s national strategy aimed at reducing corruption and 

will help civil society and the media monitor the government’s progress. 

USAID is administering this program on MCC’s behalf. In addition, portions 

of the program are being implemented by the U.S. Department of Justice.

Moldova

Malawi
Millennium Challenge Corporation

2006 Annual Report 63

Summary

The principal objective of the $34.6 million Paraguay Threshold program 

is to reduce corruption. The program aims to strengthen the rule of law by 

increasing penalties for corruption and to build a transparent business environment by confronting informal business transactions. The Threshold 

program also has a business development component aimed at reducing the 

number of days necessary to start a business. 

USAID is administering this program on MCC’s behalf. In addition, portions 

of the program are being implemented by the U.S. Department of Treasury.

Summary

The $20.7 million Philippines Threshold program aims at improving revenue 

administration and anti-corruption efforts in the Philippines. Specifically, 

the program is intended to reduce corruption by strengthening the Office of 

the Ombudsman and strengthening enforcement within specific offices of 

the Department of Finance. 

USAID is administering this program on MCC’s behalf. 

Philippines

Paraguay
Millennium Challenge Corporation

64 2006 Annual Report

Summary

The $11.2 million Tanzania Threshold program is focused on four specific 

anti-corruption initiatives: 1) building the nongovernmental sectors’ monitoring capacity; 2) strengthening the rule of law for good governance; 3) establishing a Financial Intelligence Unit; and 4) curbing corruption in public 

procurement. 

USAID is administering this program on MCC’s behalf. In addition, portions 

of the program are being implemented by the U.S. Department of Treasury 

and the U.S. Department of Justice.

Summary

MCC has signed a $45 million Threshold program with Ukraine that is intended to address corruption in higher education and the judiciary, create 

internal inspection divisions in government institutions, and help streamline 

government regulations in customs and other areas. This program also aims 

to strengthen civil society and the media’s ability to monitor and expose 

corruption. 

USAID is administering this program on MCC’s behalf. In addition, portions 

of the program are being implemented by the U.S. Department of Justice.

Ukraine

Tanzania
Millennium Challenge Corporation

2006 Annual Report 65

Summary

The $22.7 million Zambia Threshold program focuses on reducing corruption and improving government effectiveness. The program is funding three 

components aimed at increasing control of corruption within the public sector, improving public service delivery to the private sector, and strengthening border management of trade. 

USAID is administering this program on MCC’s behalf. 

Zambia
Millennium Challenge Corporation

66 2006 Annual Report

Financial Audit and 

Management’s Comments
Millennium Challenge Corporation

2006 Annual Report—Financial Audit and Management’s Comments 67

OFFICE OF INSPECTOR GENERAL 

for the Millennium Challenge Corporation 

AUDIT OF THE MILLENNIUM 

CHALLENGE CORPORATION’S 

FINANCIAL STATEMENTS, INTERNAL 

CONTROLS, AND COMPLIANCE FOR 

THE PERIOD ENDING SEPTEMBER 

30, 2006 AND 2005

AUDIT REPORT NO. M-000-07-001-F 

November 14, 2006 

WASHINGTON, DC 
Millennium Challenge Corporation

68 2006 Annual Report—Financial Audit and Management’s Comments

Office of Inspector General 

 for the 

Millennium Challenge Corporation 

November 14, 2006 

The Honorable John J. Danilovich

Chief Executive Officer

Millennium Challenge Corporation 

875 15TH Street, NW 

Washington, DC 20005-2203 

Subject: Audit of the Millennium Challenge Corporation’s Financial Statements, 

Internal Controls, and Compliance for the Period Ending September 30, 2006 

and 2005 Report No. M-000-07-001-F 

Dear Mr. Ambassador:

Enclosed is the final report on the subject audit. The Office of Inspector General (OIG) 

contracted with the independent certified public accounting firm of Williams, Adley & 

Company, LLP to audit the financial statements of the Millennium Challenge Corporation 

(MCC) for the period ending September 30, 2006. The contract required that the audit be 

performed in accordance with generally accepted government auditing standards (GAGAS), 

Office of Management and Budget (OMB) Bulletin 06-03, Audit Requirements for Federal 

Financial Statements, and the GAO/PCIE Financial Audit Manual.

In its audit of the MCC’s financial statements for the period ending September 30, 2006 the 

auditors found: 

x that the financial statements were fairly presented in conformity with generally 

accepted accounting principals (GAAP), 

x six reportable conditions in the internal controls over financial reporting and its 

operation. Five of the six reportable conditions are material weaknesses, and 

x three instances of material noncompliance with laws, regulations, contracts, and 

agreements.

U.S. Agency for International Development 

1300 Pennsylvania Avenue, NW 

Washington, DC 20523 

www.usaid.gov
Millennium Challenge Corporation

2006 Annual Report—Financial Audit and Management’s Comments 69

The material weaknesses identified in MCC’s internal controls process increases the need 

for MCC to develop written policies and procedures to streamline its financial operations. 

Under current operating procedures, the material weaknesses, increases the risk of 

improper recording, unauthorized transactions, omissions, potential funds control violations 

and noncompliance with laws, regulations, contracts and grant agreements. Williams Adley 

& Company LLP reported the following internal control weaknesses: 

1. MCC’s policies and procedures were not always complete and consistent. (material 

weaknesses)

2. MCC’s policies for disbursing advances to grantees do not accommodate effective 

cash management. (material weakness and noncompliance) 

3. MCC does not have a property management system. (material weakness) 

4. MCC did not properly record compact expenses during the fiscal year. (material 

weakness)

5. MCC’s Chief Financial Officer was not an integral part of the compact/grant 

processes. (material weakness). 

6. MCC’s travel disbursement controls and procedures do not permit effective and 

efficient management of travel. 

Williams, Adley & Company, LLP also reported instances of noncompliance with laws, 

regulations, contracts, and grant agreements, inclusive of those referred to in the Federal 

Financial Management Improvement Act of 1996 (FFMIA) and disclosed instances of 

noncompliance or other matters that are required to be reported under Government Auditing 

Standards, issued by the Comptroller General of the United States, and OMB Bulletin 06-03, 

Audit Requirements for Federal Financial Statements. The instances of noncompliance are: 

1. MCC did not fully comply with FFMIA and the Government Performance Results Act 

(GPRA). (material noncompliance) 

2. MCC did not fully comply with Federal Information Security Management Act 

(FISMA). (material noncompliance) 

3. MCC’s policies for disbursing advances to grantees do not accommodate effective 

cash management. (material noncompliance) 

In carrying out its oversight responsibilities, the OIG reviewed Williams, Adley & Company, 

LLP’s report and related audit documentation. This review, as differentiated from an audit in 

accordance with GAGAS was not intended to enable the OIG to express, and we do not 

express, opinions on MCC’s financial statements, or internal control; on whether MCC’s 

financial management systems substantially complied with FFMIA; or on MCC’s compliance 

with other laws and regulations. Williams, Adley & Company, LLP is responsible for the 

attached auditor’s report, dated November 14, 2006, and the conclusions expressed in the 
Millennium Challenge Corporation

70 2006 Annual Report—Financial Audit and Management’s Comments

report. However, our review disclosed no instances on where Williams, Adley & Company, 

LLP did not comply, in all material respects, with applicable standards. 

To address the internal control weaknesses and the noncompliance findings reported by 

Williams Adley & Company, LLP, we are making the following recommendations to MCC’s 

management: 

Recommendation No. 1: We recommend that the Millennium Challenge 

Corporation’s Department of Administration and Finance complete the 

Financial Management Policies and Procedures (FMPP) manual and implement 

the written policies and procedures for all areas that result in a financial event. 

Recommendation No. 2: We recommend that the Millennium Challenge 

Corporation: 

2.1 Develop and implement policies and procedures to ensure that the 

payment schedules and other agreements entered into with 

grantees are reflective of the U. S. Treasury requirements 

concerning advances and immediate cash advances. 

2.2 Develop and implement policies and procedures to ensure that 

disbursement requests from the accountable entity of the recipient 

countries follow the official format that documents the cash 

requirements for each month of the quarterly period. 

2.3 Make and document all payments to the recipient countries on a 

monthly basis instead of a quarterly basis. 

2.4 Establish and implement policies and procedures to ensure that any 

custodial liabilities, e.g. interest owed to the U.S. government 

resulting from the grantee advances, are properly recorded. 

Recommendation No. 3: We recommend that the Millennium Challenge 

Corporation develop and maintain appropriate fixed asset records to ensure 

accurate reporting and physical control. 

Recommendation No. 4: We recommend that the Millennium Challenge 

Corporation’s management: 

4.1 Require that the final quarterly disbursement requests received from 

the accountable entity of the recipient countries be made available 

to the Department of Administration and Finance and the Fiscal 

Accountability Office. 

4.2 Develop and implement policies and procedures that require 

compact expenses are properly and accurately recorded and 

reported on a quarterly basis. 

4.3 Implement written procedures requiring that appropriate and timely 

follow-up measures are performed and recorded on late and/or 

outstanding fund disbursements and/or advances requests. 
Millennium Challenge Corporation

2006 Annual Report—Financial Audit and Management’s Comments 71

4.4 Develop and implement policies and procedures that require the 

Department of Administration and Finance to perform a thorough 

review of the financial statements to ensure that costs are not 

omitted.

Recommendation No. 5: We recommend that the Millennium Challenge 

Corporation’s management revise their policies and procedures to invest the 

Office of the Chief Financial Officer with the level of responsibility, including 

role and all levels of authority established by the Chief Financial Officer Act.

Recommendation No. 6: We recommend that Millennium Challenge 

Corporation management develop and implement internal controls to reject 

travel expense reimbursement requests that exceed the allowable country per 

diem limits unless additional electronic authorization is provided.

Recommendation No. 7: We recommend that the Millennium Challenge 

Corporation’s management: 

7.1 Develop performance goal templates and follow-up training to 

ensure that Government Performance Results Act (GPRA) 

requirements are adequately addressed and consistent. We also 

recommend that baseline data be finalized or performance 

indicators reviewed and amended such that they can be measured 

against obtainable data.

7.2 Assess the automated options available to handle MCC operations 

and develop short range and long range plans for the 

implementation of the most appropriate information technology 

structure to address electronic integration of at least the payroll, 

procurement and travel functions and systems to increase the 

efficiencies and effectiveness of the processing of financial 

transactions and decrease the risk of errors. 

In finalizing the report, we have received and considered MCC’s response to the draft report 

and the recommendations included therein. 

In its comments, MCC accepted all of the report’s recommendations except for 2.1.

At the time of this report, MCC had not accepted recommendation 2.1 and no management 

decision has been made. Essential elements of a management decision include specific 

actions, estimated completion dates for implementation, or an explanation and justification 

regarding why a recommendation is not considered valid by MCC management officials. 

For recommendation 2.1, MCC has not clearly stated why the recommendation is not valid. 

MCC has agreed with recommendations 4 and 6 and has taken actions that implement the 

recommendation. Accordingly, we are closing these two recommendations upon issuance of 

the report. 
Millennium Challenge Corporation

72 2006 Annual Report—Financial Audit and Management’s Comments

Based on MCC’s response to the remaining recommendations, we consider that a 

management decision has been reached on recommendation no. 1. However, we believe a 

management decision has not been reached on recommendations nos. 2.2, 2.3, 2.4, 3, 5, 

7.1 and 7.2 because the decisions did not specifically identify the activities that MCC plans 

to conduct to implement the recommendation and/or the decision did not specify a target 

implementation date by which the recommendation will be implemented. Specifically: 

Recommendation: 2.2 --not specific and no target implementation date 

Recommendation: 2.3 --no target implementation date 

Recommendation: 2.4 --not specific and no target implementation date 

Recommendation: 3 --no target implementation date 

Recommendation: 5 --no target implementation date 

Recommendation: 7.1 --not specific and no target implementation date 

Recommendation: 7.2.--no target implementation date 

We discussed the lack of specificity and target dates in the management decisions with the 

MCC staff and they stated that they will study these decisions and revise them accordingly. 

Please forward to us within 30 days your revised management decisions for the above 

recommendations. 

Please inform us when you have taken final action on the recommendations. 

The OIG appreciates the cooperation and courtesies extended to our staff and the staff of 

Williams, Adley & Company, LLP during the audit. Please contact me or Mr. Manuel S. 

Avila, IG/MCC/FA at (202) 712-1897, if you have any questions concerning this report. 

Sincerely,

John M. Phee 

Assistant Inspector General/MCC 
Millennium Challenge Corporation

2006 Annual Report—Financial Audit and Management’s Comments 73

TABLE OF CONTENTS 

 Page

Independent Auditor’s Report 1 

 Opinion on the Financial Statements 2 

 Internal Control Over Financial Reporting 3 

 Compliance with Laws and Regulations 15 

 Status of Prior Year Findings – Appendix A 20 

 Management Comments and Our Evaluation – Appendix B 26 

 Management Comments – Appendix C 30 

Statements of Financial Position 35 

Statements of Operations and Changes in Net Position 36 

Statements of Functional Expenses 37 

Statements of Cash Flows 38 

Statements of Budgetary Resources 39 

Notes to Financial Statement 40 
Millennium Challenge Corporation

74 2006 Annual Report—Financial Audit and Management’s Comments

 Williams Adley & Company, LLP

Certified Public Accountants/Financial Management Consultants

Independent Auditors’ Report 

Inspector General 

United States Agency for International Development 

Board of Directors 

Millennium Challenge Corporation 

We have audited the accompanying Statements of Financial Position of the Millennium 

Challenge Corporation (MCC or Corporation) as of September 30, 2006 with summary totals 

for September 30, 2005, and the related Statements of Operations and Changes in Net 

Position, Cash Flows, and Budgetary Resources for the year ended September 30, 2006 with 

summary totals for September 30, 2005. These financial statements are the responsibility of 

Corporation management. Our responsibility is to express an opinion on these financial 

statements based on our audit. 

In connection with our audit, we also considered the MCC’s internal control over financial 

reporting and tested the MCC’s compliance with certain provisions of applicable laws, 

regulations, contracts and grant agreements that could have a direct and material effect on the 

financial statements. 

SUMMARY

As stated in our opinion, we concluded that the MCC’s financial statements as of and for the 

year ended September 30, 2006 with summary totals for September 30, 2005 are presented 

fairly, in all material respects, in conformity with accounting principles generally accepted in 

the United States of America. 

Our consideration of internal control over financial reporting and its operation resulted in six 

matters that we consider to be reportable conditions. We believe that five of the six 

reportable conditions are material weaknesses. 

1 MCC’s Policies and Procedures Were Not Always Complete and Consistent 

(material weakness) 

2. MCC Policies for Disbursing Advances to Grantees Do Not Accommodate Effective 

Cash Management (material weakness and noncompliance) 

1250 H Street, NW, Suite 1150 Ɣ Washington, DC 20005 Ɣ (202) 371-1397 Ɣ Fax: (202) 371-9161
Millennium Challenge Corporation

2006 Annual Report—Financial Audit and Management’s Comments 75

3. MCC Does Not Have a Property Management System (material weakness) 

4. MCC Did Not Properly Record Compact Expenses During the Fiscal Year (material 

weakness)

5. MCC’s Chief Financial Officer Was Not an Integral Part of the Compact/Grant 

Processes (material weakness) 

6. MCC’s Travel Disbursement Controls and Procedures Do Not Permit the Effective 

and Efficient Management of Travel (reportable condition) 

The results of our tests of compliance with certain provisions of laws, regulations, contracts, 

and grant agreements, inclusive of those referred to in the Federal Financial Management 

Improvement Act of 1996 (FFMIA), disclosed three instances of noncompliance or other 

matters that are required to be reported herein under Government Auditing Standards, issued 

by the Comptroller General of the United States, and Office of Management and Budget 

(OMB) Bulletin No. 06-03, Audit Requirements for Federal Financial Statements:

1. MCC did not fully comply with FFMIA and Government Performance and Results 

Act (GPRA) (material noncompliance) 

2. MCC did not fully comply with Federal Information Security Management Act 

(material noncompliance) 

3. MCC Policies for Disbursing Advances to Grantees Does Not Accommodate 

Effective Cash Management (material weakness and noncompliance) 

The following sections discuss our opinion on the MCC’s financial statements, our 

consideration of the MCC’s internal control over financial reporting, our tests of the MCC’s 

compliance with certain provisions of applicable laws, regulations, contracts, and grant 

agreements, and the distribution of our report. The status of prior year findings is included as 

Appendix A. Management’s response to the findings and our evaluation of said response is 

included as Appendix C and Appendix B, respectively. 

OPINION ON THE FINANCIAL STATEMENTS 

We have audited the accompanying Statements of Financial Position of the Corporation as of 

September 30, 2006 with summary totals for September 30, 2005, and the related Statements 

of Operations and Changes in Net Position, Cash Flows, and Budgetary Resources for the 

year ended September 30, 2006 with summary totals for September 30, 2005. These 

financial statements are the responsibility of Corporation management. Our responsibility is 

to express an opinion on these financial statements based on our audit. 

We conducted our audit in accordance with auditing standards generally accepted in the 

United States of America and standards applicable to financial statement audits contained in 

Page 2 of 48 
Millennium Challenge Corporation

76 2006 Annual Report—Financial Audit and Management’s Comments

Government Auditing Standards, issued by the Comptroller General of the United States, and 

the Office of Management and Budget (OMB) Bulletin No. 06-03, Audit Requirements for 

Federal Financial Statements. Those standards require that we plan and perform the audit to 

obtain reasonable assurance that the financial statements are free of material misstatement. 

An audit includes examining, on a test basis, evidence supporting the amounts and 

disclosures in the financial statements. An audit also includes assessing the accounting 

principles used and significant estimates made by management, as well as evaluating the 

overall financial statement presentation. We believe that our audit provides a reasonable 

basis for our opinion. 

In our opinion, the financial statements referred to above present fairly, in all material 

respects, the financial positions of the Corporation as of September 30, 2006 with summary 

totals for September 30, 2005, and changes in net position, cash flows and budgetary 

resources for the year ended September 30, 2006 with summary totals for September 30, 

2005, in conformity with accounting principles generally accepted in the United States of 

America. 

Our audit was made for the purpose of forming an opinion on the basic financial statements 

of the Corporation taken as a whole. The information contained in the Management’s 

Discussion and Analysis and Performance Section is not a required part of the financial 

statements, but is supplementary information required by the Federal Accounting Standards 

Advisory Board guidance. We have applied certain limited procedures, which consisted 

principally of inquiries of management regarding the methods of measurement and 

presentation of the information. However, we did not audit the information and do not 

express an opinion thereon.

The accompanying Statements of Functional Expenses for the year ended September 30, 

2006, and as summarized for year ended September 30, 2005, are presented for purposes of 

additional analysis and are not a required part of the basic financial statements. This 

statement is the responsibility of the management of the Corporation. The information in this 

statement has been subjected to the auditing procedures applied in our audit of the basic 

financial statements and, in our opinion, is fairly stated in all material respects when 

considered in relation to the basic financial statements taken as a whole. 

INTERNAL CONTROL OVER FINANCIAL REPORTING 

In planning and performing our fiscal year 2006 audit, we considered MCC’s internal control 

over financial reporting by obtaining an understanding of MCC’s internal control, determined 

whether internal controls had been placed into operation, assessed control risk, and 

performed tests of controls in order to determine our auditing procedures for the purpose of 

expressing an opinion on the financial statements. We limited our internal control testing to 

those controls necessary to achieve the objectives described in OMB Bulletin No. 06-03 and 

Government Auditing Standards. We did not test all internal controls relevant to operating 

objectives as broadly defined by the Federal Managers’ Financial Integrity Act of 1982 

(FMFIA), such as those controls relevant to ensuring efficient operations. The objective of 

Page 3 of 48 
Millennium Challenge Corporation

2006 Annual Report—Financial Audit and Management’s Comments 77

our audit was not to provide assurance on internal control; accordingly, we do not provide an 

opinion on internal control. 

Our consideration of internal control over financial reporting would not necessarily disclose 

all matters that might be reportable conditions. Under standards issued by the American 

Institute of Certified Public Accountants, reportable conditions are matters coming to our 

attention relating to significant deficiencies in the design or operation of the internal control 

over financial reporting that, in our judgment, could adversely affect MCC’s ability to record, 

process, summarize, and report financial data consistent with the assertions by management 

in the financial statements. 

Material weaknesses are reportable conditions in which the design or operation of one or 

more of the internal control components does not reduce to a relatively low level the risk that 

misstatements, in amounts that would be material in relation to the financial statements being 

audited, may occur and not be detected within a timely period by employees in the normal 

course of performing their assigned functions. Because of inherent limitations in internal 

controls, misstatements, losses or noncompliance may occur and not be detected. 

We noted six matters involving the internal control over financial reporting and its operation 

that we consider to be reportable conditions. We believe that five reportable conditions are 

material weaknesses. All material weakness and the reportable condition are described on 

pages 4-15. 

MATERIAL WEAKNESSES 

MCC’s Policies and Procedures Were Not Always Complete and Consistent (material 

weakness)

Condition:

During fiscal year (FY) 2006, the Millennium Challenge Corporation (MCC) used various 

processes to address the financial aspects of its operations. These processes evolved during 

the year as the organization grew in both number of personnel and span of operations. 

However, during this growth, the development and implementation of final written policies 

and procedures to guide MCC’s streamlined operational structure was not adequately 

addressed. During the fiscal year, MCC lacked final written policies and procedures. 

Written policies and procedures must be in place to ensure operational efficiencies, risk 

reduction, and consistent application. Several policies and procedures, i.e. advances, budget, 

and accruals, remained in draft form, throughout the year. Additionally, several procedures 

do not address the responsible positions at the various control levels for the processing of 

data/data entry functions, or submission and approval levels and procedures in the areas of 

fixed assets and the open obligations review required revision. 

While the current Department of Administration and Finance (A&F) management team has 

emphasized the preparation and issuance of a comprehensive financial management policies 

and procedures (FMPP) manual, as of the end of the FY, such a manual was being drafted. 

Page 4 of 48 
Millennium Challenge Corporation

78 2006 Annual Report—Financial Audit and Management’s Comments

MCC has hired contractors to assist in the production of the FMPP manual by December 31, 

2006.

Criteria: 

The GAO “Standards for Internal Control in the Federal Government” states that internal 

control and all transactions and other significant events need to be clearly documented and 

the documentation should be readily available for examination. The documentation should 

appear in management directives, administrative policies, or operating manuals. Also, 

information should be recorded and communicated to management and others within the 

entity who need it and in a form and within a timeframe that enables them to carry out their 

internal control and other responsibilities. 

Additionally, management and employees should establish and maintain an environment 

throughout the organization that sets a positive and supportive attitude toward internal 

control and conscientious management. A positive control environment is the foundation for 

all other standards. It provides discipline and structure as well as the climate which 

influences the quality of internal controls. 

Cause:

Division of Finance (within the Department of A&F) management stated that they have not 

had the available personnel to sufficiently dedicate to the development and issuance of final 

policies and procedures during the year.

Effect: 

The lack of sufficient detail and accountability in the procedures produced inconsistent 

application of controls and processes, and increased the risk of errors, improper recording, 

unauthorized transactions, omissions and potential funds control violations. Furthermore, the 

lack of formal procedures can result in noncompliance with laws and regulations. Also, the 

effective and efficient processing of financial transactions is diminished. Examples of the 

effect of the lack of final MCC policies and procedures include: 

3⁄4 The policy established for the proper recording of fixed assets was not followed 

during the year, thereby resulting in potentially incorrect posting of asset transactions.

3⁄4 Employees travel claims were greater than the approved per diem rates. 

3⁄4 Compact expenses were not reported in the third quarter financial statements. 

Recommendation #06-01: 

We recommend that Millennium Challenge Corporation’s Department of Administration and 

Finance complete the Financial Management Policies and Procedures (FMPP) manual and 

implement the written policies and procedures for all areas that result in a financial event. 

Page 5 of 48 
Millennium Challenge Corporation

2006 Annual Report—Financial Audit and Management’s Comments 79

Management Response: 

MCC accepts the recommendation and is currently implementing relevant corrective action. 

Specifically, the Division of Finance (within the Department of Administration and Finance) 

initiated an effort during the summer 2006 to develop and implement a comprehensive 

corporate Financial Management Policies and Procedures (FMPP) manual. The Division is 

utilizing contractor support in this endeavor. The initial version of the FMPP manual is 

slated to be completed and formally institutionalized by December 31, 2006. 

MCC Policies for Disbursing Advances to Grantees Do Not Accommodate Effective Cash 

Management (material weakness and noncompliance)

Condition:

MCC entered into various compacts and provided several advances during fiscal year 2006. 

MCC personnel indicated that monthly disbursements were made based upon the quarterly 

request. However, we noted that for most Millennium Challenge Authorities (MCAs), MCC 

disbursed funds on a quarterly basis based upon the disbursement request, rather than 

monthly. We noted that several disbursements were not used within 30 days nor the quarter. 

Country

Date of 

Disbursement 

Amount of 

Disbursement 

Projected

Cash Balance 

at September 

30, 2006 

Date when 

disbursement was 

completely 

expended

Madagascar July 28, 2005 $ 2,500,924 - March 30, 2006 

December 13, 2005 $ 1,755,506 - June 30, 2006 

May 31, 2006 $ 5,391,665 $2,311,342 Not expected to be 

expended by 

September 30, 2006 

Georgia May 2, 2006 $ 3,603,404 $221,594

September 15, 2006 $6,509,706 6,509,706

Not expected to be 

expended by 

September 30, 2006 

Honduras February 28, 2006 $ 1,646,545 $138,840

September 29, 2006 $1,369,849 $1,369,849

Not expected to be 

expended by 

September 30, 2006 

Cape Verde February 1, 2006 $ 7,526,864 $3,913,663 Not expected to be 

expended by 

September 30, 2006

Vanuatu June 30, 2006 $ 1,127,055 $1,023,658

August 9, 2006 $ 219,504 $219,504

September 6, 2006 $ 111,688 $111,688

Not expected to be 

expended by 

September 30, 2006

Page 6 of 48 
Millennium Challenge Corporation

80 2006 Annual Report—Financial Audit and Management’s Comments

Country

Date of 

Disbursement 

Amount of 

Disbursement 

Projected Date when 

Cash Balance disbursement was 

at September completely 

30, 2006 expended

September 18, 2006 $ 116,377 $116,377

Nicaragua June 30, 2006 $ 1,483,399 433,889

August 28, 2006 $ 378,550 378,550

August 31, 2006 $ 289,110 289,110

Not expected to be 

expended by 

September 30, 2006 

The Department of the Treasury’s Financial Management Service publications did not 

envision the inclusion of sovereign governments; however, in the analysis of cash 

management, we used the Treasury Financial Manual (TFM) as a valuable source of sound 

business practices. The TFM is the Department of the Treasury's official publication for 

financial accounting and reporting of all receipts and disbursements of the Federal 

Government. The purpose of the TFM is to provide policies, procedures, and instructions for 

Federal departments and agencies to follow in carrying out their fiscal responsibilities.

Also, through various OMB Circulars, OMB has attempted to address the need for advances 

to cover immediate cash needs or timely disbursements of an entity for direct program costs 

for carrying out the purpose of the approved program or project. Thus, funds paid to a 

grantee are not to be held, but are to be promptly applied to the grant purpose. Although the 

timeframe for immediate cash needs has not been clearly defined by OMB, the general rules 

employed by various Federal agencies are 30 days for non-governmental entities as outlined 

in the TFM. Based upon this definition, MCC has provided Federal funds in excess of 

immediate cash needs. 

Criteria: 

Per the Appropriations Law Volume II, advances under an assistance program are intended to 

accomplish the program purposes and not to profit the recipient other than in the manner and 

extent specified in the program. Section 2025 of the Treasury Financial Manual –Volume 1, 

Part 6-Chapter 2000, states that advances to a recipient organization will be limited to the 

minimum amounts necessary for immediate disbursement needs and will be timed to be in 

accordance with the actual immediate cash requirements of the recipient organization in 

carrying out the purpose of an approved program or project. The timing and amount of cash 

advances will be as close as is administratively feasible to actual disbursements by the 

recipient organization. 

Best business practice defines immediate cash needs as money used for the purpose of 

carrying out the Compact’s approved programs within a thirty day period. Also, when funds 

are drawn from Treasury before it is needed, or in excess of current needs, the government 

loses the use of the funds. 

Page 7 of 48 
Millennium Challenge Corporation

2006 Annual Report—Financial Audit and Management’s Comments 81

Cause:

The approved agreements entered into by MCC with MCA Madagascar and other compact 

grantees indicate that quarterly advances will be provided based upon their estimated costs. 

Although, MCC’s management has changed the policy, it has not been effectively 

implemented and monitored to ensure that it occurs. 

Effect: 

MCC received a total of $304,000 in interest from compact countries during the first three 

quarters of FY 2006 and remitted this amount to Treasury. As of the end of FY 2006 the 

additional $174,402 of interest is due to MCC. MCC has not adopted an approach that 

provides funds only for a grantee’s immediate cash needs and reduces the risk of 

misappropriation. 

Recommendation # 06-02: 

We recommend that Millennium Challenge Corporation:

(1) Develop and implement policies and procedures to ensure that the payment schedules 

and other agreements entered into with grantees are reflective of the U.S. Treasury 

requirements concerning advances and immediate cash needs. 

(2) Develop and implement policies and procedures to ensure that all disbursement 

requests from the accountable entity of the recipient countries follow the official 

format that documents the cash requirements for each month of the quarterly period. 

(3) Make and document all payments to the recipient countries on a monthly basis 

instead of a quarterly basis. 

(4) Establish and implement policies and procedures to ensure that any custodial 

liabilities, e.g. interest owed to the U.S. government resulting from the grantee 

advances, are properly recorded. 

Management Response: 

MCC Management accepts recommendations 2.2, 2.3, and 2.4. Regarding recommendation 

2.1, MCC intends to follow sound cash management practices, will disburse funds consistent 

with the GAO policy based upon what is needed to meet grant purposes in any given quarter, 

though the funds will be released in tranches following a monthly schedule. 

MCC has begun implementing needed corrective actions. The MCC FMPP manual 

(currently being developed – see above management response to recommendation 1) will 

contain definitive documentation and disbursement requirements for transferring funds to 

compact countries. Furthermore, the Division of Finance, in coordination with the National 

Business Center (MCC’s financial services provider) has already implemented procedures to 

disburse funds to compact countries monthly in accordance with identified funding needs per 

pertinent quarterly disbursement requests. 

Page 8 of 48 
Millennium Challenge Corporation

82 2006 Annual Report—Financial Audit and Management’s Comments

MCC Does Not Have a Property Management System (material weakness)

Condition:

We noted that MCC reported $5,656,567 in property as of June 30, 2006; however, they were 

unable to provide detailed records to support the amount reported. The MCC does not have a 

property management system that provides detail information on original cost, date of 

purchase, location, useful life, depreciation, and accumulated depreciation. 

For the year end financial statements, sufficient analysis was performed to ensure consistent 

application of the capitalization policy and to determine an appropriate measure of 

depreciation expense to ensure that fixed assets would be fairly stated. 

Criteria: 

OMB Circular A-127 “Policies and Standards for Financial Management Systems” states 

that financial management in the Federal government requires accountability of financial and 

program managers for financial results of actions taken, control over the Federal 

government's financial resources and protection of Federal assets. To enable these 

requirements to be met, financial management systems must be in place to process and 

record financial events effectively and efficiently, and to provide complete, timely, reliable 

and consistent information for decision makers and the public. 

The Joint Financial Management Improvement Program (JFMIP) standards require that 

property management systems assist managers in collecting and maintaining information for 

financial reporting in accordance with generally accepted accounting principles and 

managing the various types of property. Additionally, they should assist managers in 

ensuring that assets are safeguarded against improper use or disposition. 

Cause:

MCC did not create a property management system to support its property financial policy 

nor did management ensure that an accountable employee was assigned to ensure its 

implementation. 

Effect: 

The quarterly financial statements may be misstated due to the inaccurate recording and 

reporting of property and depreciation expense. In the June 30, 2006 financial statements, no 

depreciation expense was recorded. Lack of sufficient controls over property can result in 

loss, waste and abuse of federal resources. 

Recommendation #06-03: 

We recommend that Millennium Challenge Corporation develop and maintain appropriate 

fixed asset records to ensure accurate reporting and physical control. 

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2006 Annual Report—Financial Audit and Management’s Comments 83

Management Response: 

MCC management accepts the recommendation. The Department of Administration and 

Finance has begun planning and defining requirements for implementing a viable property 

management system and associated controls and processes, including periodic physical 

counts to verify the Corporation’s property holdings and ensure the propriety of perpetual 

property records and related financial balances. 

MCC Did Not Properly Record Compact Expenses During the Fiscal Year (material 

weakness)

Condition:

As a result of our review of the third quarter financial statements, we noted that MCC did not 

report any compact program costs. Although MCC had received disbursement requests that 

can be used to post the expenses incurred, nothing was recorded. According to the compact 

and disbursement agreement, each MCA is required to submit quarterly disbursement 

requests that include the expenses incurred to date. These requests are due regardless of the 

need for funding. The requests should provide the following: 

x Previous quarter advances; 

x Previous quarter disbursements; 

x Estimated expenses; and 

x Next quarter’s advance request. 

For the year end financial statements, MCC recorded compact expenses of $8,493,394. 

Additional analysis was performed utilizing the disbursement requests to increase expenses 

recorded and to ensure that advances and compact expenses were fairly stated. 

Criteria: 

OMB Circular A-136 “Financial Reporting Requirements”, Section II.4.4.3, Program Costs, 

states that the reporting entity should report the full cost of each program’s output, which 

consists of (a) direct cost and indirect costs of the output, and (b) the costs of identifiable 

supporting services provided by other segments within the reporting entity and by other 

reporting entities. The reporting entity should accumulate and assign costs in accordance 

with the costing methodology in Statement of Federal Financial Accounting Standard 

(SFFAS) No. 4. 

In Section 3.2 of the disbursement agreements, it states that the MCA shall deliver to MCC a 

completed MCC disbursement request in the form attached hereto as Exhibit A, and 

otherwise satisfactory to MCC in content. Exhibit A section E, commitment and expenditure 

report provides for the reporting of cumulative actual redisbursements and projected 

redisbursements. 

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84 2006 Annual Report—Financial Audit and Management’s Comments

Cause:

The Fiscal Accountability Office is responsible for the collection of the required quarterly 

expense/disbursement requests, and they have encountered many problems recovering the 

reports from the various MCAs. The requests are not sent directly to the Division of Finance 

and must be provided by the Fiscal Accountability Office. Additionally, MCC is not 

enforcing the requirement and the compact and disbursement agreements appear to lack 

sufficient strictures for noncompliance. 

MCC did not perform a sufficient review of the financial statements to address the omission 

of the compact expenses. 

Effect: 

As a result of the nonrecording of compact expense, the MCC quarterly financial statements 

were inaccurate and MCC management’s ability to rely on the financial statements to make 

informed decisions was impaired. 

Recommendation #06-04: 

We recommend that Millennium Challenge Corporation’s management: 

(1) Require that the final quarterly request received from the accountable entity of the 

recipient countries be made available to the Department of Administration and 

Finance and the Fiscal Accountability Office. 

(2) Develop and implement policies and procedures that ensure compact expenses are 

properly and accurately recorded and reported on a quarterly basis 

(3) Implement written procedures requiring that appropriate and timely follow-up 

measures are performed and are recorded for historical reference on incomplete, 

outstanding, or late disbursement requests. 

(4) Develop and implement policies and procedures that require the Department of 

Administration and Finance to perform a thorough review of the financial statements 

to ensure that costs are not omitted. 

Management Response: 

MCC management accepts the recommendations. The Division of Finance has already 

implemented quality assurance and review procedures to help ensure that compact 

disbursement requests/reports, which are to include compact expense information, are 

received timely, are complete, and that relevant financial information from such requests are 

properly included in quarterly financial statements and reports prepared by NBC. In the 

event of missing or late reports/requests, Division of Finance personnel will contact the 

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2006 Annual Report—Financial Audit and Management’s Comments 85

pertinent accountable officials to obtain the reports/requests, and document such. Relevant 

policies and procedures will be included in the FMPP manual. 

MCC’s Chief Financial Officer Was Not an Integral Part of the Compact/Grant Processes

(material weakness)

Condition:

Based on interviews and observations, we noted that MCC’s Division of Finance was not 

integrally involved in the compact/grant processes to ensure that the financial aspects are 

addressed, recorded and reported in their proper sequence and appropriate timing. The Chief 

Financial Officer or his designees should be integrally involved in all MCC operations that 

result in a financial transaction. The CFO should be integrally involved in the:

1. establishment of the compact amount to ensure that there is sufficient 

appropriations available,

2. development of grant policies and procedures to ensure that they are in 

compliance with Federal government laws and regulations and to ensure that 

sufficient financial information is provided to MCC to accomplish its 

responsibilities,

3. review of compacts in order to initiate accounting transactions in the system and 

budget transactions with OMB, and

4. establishment of the reporting structure to ensure that financial information is 

provided timely and in the format necessary for required financial reporting.

Criteria: 

According to the CFO Act of 1990, “An agency Chief Financial Officer shall oversee all 

financial management activities relating to the programs and operations of the agency.” 

Under the Act, an agency CFO’s responsibility will extend to every aspect of financial 

management related to operating agency programs. Government wide organizational change 

is needed to vest the CFOs with authority related to accounting, budget execution, and other 

financial management operations. This will ensure that one person, who is part of top 

management, has overall responsibility for establishing and implementing effective financial 

management policies, internal controls, and financial management systems. 

Cause:

During fiscal year 2005, MCC management developed the selected compacts based on 

informal procedures. Therefore, the Chief Financial Officer’s involvement was based on an 

informal basis, and was not included in the official procedures that were developed during 

fiscal year 2006. 

Effect: 

This condition can result in the lack of (1) control over pertinent financial management 

activities, (2) sufficient information to accurately report on compact expenses and advances, 

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86 2006 Annual Report—Financial Audit and Management’s Comments

and (3) control over disbursement to ensure compliance with Treasury cash management 

requirements. Additionally, it can result in confusion over the financial reporting required 

and the timeframe required. 

Recommendation #06-05: 

We recommend that Millennium Challenge Corporation’s management revise their policies 

and procedures to invest the Office of the Chief Financial Officer with the level of 

responsibility, role, and all levels of authority established by the Chief Financial Officer Act. 

Management Response: 

MCC management accepts the recommendation and will take necessary steps to establish and 

implement required policies, procedures, and organizational protocol to ensure that the 

Corporation’s CFO is appropriately involved with the financial management operations 

entity-wide. 

REPORTABLE CONDITION 

MCC’s Travel Disbursement Controls and Procedures Do Not Permit the Effective and 

Efficient Management of Travel (reportable condition)

Condition:

MCC follows the Federal Travel Regulations and has an overall policy related to travel. 

However, prior to February 2006, MCC was using blanket travel authorizations (TA) to serve 

as an approval for employee travel. Once MCC approved the blanket TA, it was submitted to 

National Business Center (NBC) to post an obligation within Oracle. After February, MCC 

modified the travel policy that instituted the individual TA’s that outlined the specific 

purpose of the employee’s travel. NBC no longer posts travel obligations in advance in 

Oracle but obligates and pays the travel vouchers, simultaneously. 

Similar to FY 2005, MCC requires all employees to post their travel expenses online in ETravel. Although the travel voucher process is electronic, E-Travel does not interface with 

Oracle Federal Financials. Therefore, an NBC accounting technician must manually enter 

each voucher. During our travel testing, we noted twenty-six instances totaling $97,802 for 

which employees’ receipts were not available. We also noted the following: 

1. Eleven of 115 (10%) travel vouchers totaling $869 exceeded per diem rates; 

2. Six of 115 (5%) vouchers equaling $557 consisted of expenses in excess of $75 and 

were not supported; and 

3. Four of 115 (3%) vouchers totaling $35,663 were not approved by the travel manager 

within E-Travel. 

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2006 Annual Report—Financial Audit and Management’s Comments 87

MCC enhanced its travel policy in August 2006. MCC management changed the 

Corporation’s supporting documentation requirements to require travelers to scan into the Etravel system and electronically attach to the pertinent travel vouchers receipts for claimed 

expenses of $75 or more. Division of Finance personnel are responsible for reviewing 

submitted vouchers to ascertain that required receipts are electronically attached to travelers’ 

vouchers. Travelers who do not scan and attach their required receipts to vouchers are 

contacted by Division of Finance staff to obtain “missing” receipts. 

Criteria: 

U.S. General Services Administration (GSA) Federal Travel Regulations Chapter 301 

“Temporary Duty (TDY) Travel Allowances” states that traveler is responsible for expenses 

over the reimbursement limits established in this chapter. The traveler’s agency will not pay 

for excess costs resulting from circuitous routes, delays, or luxury accommodations or 

services unnecessary or unjustified in the performance of official business. Also, receipts 

shall be required to support all lodging costs for which an allowance is claimed under the 

lodgings-plus per diem system except that a statement instead of a receipt may be accepted 

for the fee or service charge incurred for the use of Government quarters. 

Federal Travel Regulations Chapter 301-7.2 states that it is the responsibility of the head of 

each agency, or his/her designee, to authorize or approve only those per diem allowances that 

are justified by the circumstances affecting the travel and are allowable under the specific 

rules in this part. 

Additionally, the “Standards for Internal Control in the Federal Government” states that 

internal controls and all transactions and other significant events need to be clearly 

documented and the documentation should be readily available for examination. The 

documentation should appear in management directives, administrative policies, or operating 

manuals. Also, information should be recorded and communicated to management and 

others within the entity who need it and in a form and within a timeframe that enables them 

to carry out their internal control and other responsibilities.

Cause:

Prior to the finalized procedures distributed in August 2006, management worked from 

incomplete draft travel procedures. Additionally, the travel manager did not approve the 

online vouchers in E-travel consistently. Employees are required to retain all receipts that 

are $75 or greater and thus, are not required to submit their receipts to the agency. Therefore, 

for employees on travel during the time of testing, their receipts were unavailable for audit. 

Effect: 

The lack of sufficient detail and accountability in the procedures can produce inconsistent 

application of the travel policies and increase the risk of errors, improper recording, 

unauthorized transactions, omissions, potential funds control violations due to the lack of 

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88 2006 Annual Report—Financial Audit and Management’s Comments

obligations and noncompliance with laws and regulations. This also diminished the 

effectiveness and efficiency with which the financial transactions were being processed. 

Recommendation #06-06: 

We recommend that Millennium Challenge Corporation’s management develop and 

implement controls to reject travel expense reimbursement requests that exceed the allowable 

country per diem unless additional electronic authorization is provided. 

Management Response: 

MCC management accepts the recommendation. The Deputy Chief Financial Officer has 

instructed the Division of Finance staff not to approve any claimed travel expenses that 

exceed established limitations as defined by the Federal Travel Regulation (FTR). 

Furthermore, the Division has instituted procedures to require that a traveler’s responsible 

manger/supervisor be apprised of claimed expenses that are not in compliance with the FTR 

and/or MCC requirements, and that the manager/supervisor explicitly approve such expenses, 

but only if allowable per the FTR. 

The status of prior years findings is provided in Appendix A. Management’s response in its 

entirety is included in Appendix C. 

As required by OMB Bulletin No. 06-03, with respect to internal controls related to 

performance measures determined by management to be key and reported in the 

Management’s Discussion and Analysis, we obtained an understanding of the design of 

significant internal controls relating to the existence and completeness assertions. Our 

procedures were not designed to provide assurance on internal control over performance 

measures and, accordingly, we do not provide an opinion thereon. 

COMPLIANCE WITH LAWS AND REGULATIONS

MCC’s management is responsible for complying with laws and regulations applicable to 

MCC. As part of obtaining reasonable assurance that MCC’s balance sheet is free of 

material misstatements, we performed tests of its compliance with certain provisions of laws 

and regulations, noncompliance with which could have a direct and material effect on the 

determination of financial statement amounts, and certain other laws and regulations 

specified in OMB Bulletin No. 06-03, including the requirements referred to in the FFMIA. 

We limited our tests of compliance to these provisions and we did not test compliance with 

all laws, regulations, contracts, and agreements applicable to MCC. Providing an opinion on 

compliance with laws, regulations, contracts, and grant agreements was not an objective of 

our audit and, accordingly, we do not express such an opinion. 

Under OMB Bulletin No. 06-03 and FFMIA, we are required to report whether MCC’s 

financial management systems substantially comply with: (1) Federal financial management 

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2006 Annual Report—Financial Audit and Management’s Comments 89

systems requirements, (2) applicable Federal accounting standards, and (3) the United States 

Government Standard General Ledger at the transaction level. To meet this requirement, we 

relied on the results of a SAS 70 review of the Department of Interior’s Oracle Federal 

Financial System performed by an Independent Audit Firm. The results of that review have 

been presented to MCC in a separate report. Providing an opinion on compliance with those 

provisions was not, however, an objective of our audit and, accordingly, we do not express 

such an opinion. 

The results of our tests disclosed that the Corporation did not fully comply with the FFMIA, 

which is required to be reported under Government Auditing Standards or OMB Bulletin No. 

06-03.

Under FFMIA, we are required to report whether the Corporation’s financial management 

systems substantially comply with the Federal financial management systems requirements, 

applicable Federal accounting standards, and the United States Government Standard 

General Ledger at the transaction level. To meet this requirement, we performed tests of 

compliance with FFMIA section 803(a) requirements. 

The results of our tests disclosed three instances of noncompliance with laws and regulations. 

MATERIAL NONCOMPLIANCE 

MCC Did Not Fully Comply with FFMIA and GPRA 

Condition:

Millennium Challenge Corporation has not fully complied with the following laws and 

regulations:

x Government Performance and Results Act (GPRA) 

x Federal Financial Management Improvement Act (FFMIA) 

We noted that the agency performance plans provided to us did not fully comply with GPRA 

requirements, for example: human, capital and other resources needed to achieve 

performance goals were not quantified as required. Also, agency performance goals were not 

written in a manner that could be quantified in several instances and milestones were not 

included. Therefore, we could not directly link measurement of agency performance goals 

with the overall strategic plan. In addition, baseline data to be used as performance indicator 

measurement thresholds were not provided for some indicators. 

The FFMIA requires an integrated financial management system. MCC does not have an 

integrated financial management system. When MCC decided to outsource its accounting 

operations, MCC selected NBC from the available Federal Centers of Excellence as the best 

choice to meet its needs. In order to address the needs of MCC, multiple systems, i.e. EPage 16 of 48 
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90 2006 Annual Report—Financial Audit and Management’s Comments

Travel, procurement, and Federal Personnel and Payroll System (FPPS), are used, but these 

systems cannot exchange data electronically. The entry of the travel expenses and 

disbursements must be done manually. The entry of obligations and commitments requires a 

process of emails, scanning and manual entry into Oracle Federal Financial (OFF) System 

application. The payroll expenses and disbursements must be uploaded into OFF from FPPS. 

Additionally, we obtained and reviewed the Financial Management Controls and Assertion 

letter and noted the following assertion, “During FY 2006, NBC’s sytems were not in 

substantial compliance with FFMIA requirements. In its assurance statement as of June 30, 

2006, NBC asserted that ‘were in substantial non-compliance with FFMIA requirements’.” 

Subsequently, NBC instituted several corrective actions to address the issues raised and were 

in substantial compliance by September 30, 2006, per their representation. 

Criteria: 

The GPRA under United States Code Title 5, Chapter 3, section 306(a)(3) states that strategic 

plans shall contain, “a description of how the goals and objectives are to be achieved, 

including a description of the operational processes, skills and technology, and the human, 

capital, information, and other resources required to meet those goals and objectives.” In 

addition, under section 306(a)(4), it also requires “a description of how the performance 

goals included in the plan required by section 1115(a) of Title 31 shall be related to the 

general goals and objectives in the strategic plan.” Under section 4(b), “Annual 

Performance Plans and Reports,” it amends section 1115 of Title 31 to, “express such goals 

in an objective, quantifiable, and measurable form unless authorized to be in an alternative 

form under subsection (b).” Also, the performance report should evaluate the performance 

plan for the current fiscal year relative to the performance achieved toward the performance 

goals in the fiscal year covered by the report. 

The FFMIA requires MCC to implement and maintain a financial management system that 

complies substantially with Federal requirements for an integrated financial management 

system. 

Cause:

MCC is still developing the GPRA process and has not developed system-wide strategic plan 

implementation standards, formats or procedures at the departmental level. Also, 

performance measures baseline data is incomplete and as such, in some instances there are no 

indicators available to measure progress made. 

The MCC does not have its own financial system. The Corporation has contracted with NBC 

to provide accounting and IT services including usage of its OFF application. The MCC is 

required by government regulations to use Federal Centers of Excellence, of which NBC is 

one. According to MCC officials, the Corporation has been directed to use the systems 

available through NBC. MCC believes that in fiscal year 2006, it used the only options 

available. NBC is working with MCC to provide enhancement to the system to 

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2006 Annual Report—Financial Audit and Management’s Comments 91

accommodate MCC’s needs within the context of the OMB requirements for Centers of 

Excellence. 

Effect: 

Without a performance plan that meets key GPRA requirements MCC management may not 

have meaningful performance data linked to the strategic objectives and goals of the MCC. 

The reader of the financial statements is not provided with a clear picture of the 

accountability and achievements of the Corporation. 

Furthermore, because MCC does not have an integrated financial management system, the 

users may not receive complete, accurate, and timely financial information needed for 

decision-making purposes because of the inefficiencies caused by the manual processes. 

Recommendation #06-07: 

We recommend that MCC management: 

1. Develop performance goal templates and follow-up training to ensure that Government 

Performance and Results Act (GPRA) requirements are adequately addressed and 

consistent. We also recommend that baseline data be finalized or performance indicators 

reviewed and amended such that they can be measured against obtainable data. 

2 Assess the automated options available to handle MCC operations and develop short 

range and long range plans for the implementation of the most appropriate information 

technology structure to address electronic integration of at least the payroll, procurement 

and travel functions and systems to increase the efficiencies and effectiveness of the 

processing of financial transactions; and decrease the risk of errors. 

Management Decision: 

MCC accepts the recommendations. Relative to GPRA, the Department of Administration 

and Finance management is working with various corporate organizations to help ensure that 

strategic and operational performance goals, including financial management performance, 

and inter-related and resulting performance data is reliable and consistent. 

In regards to system integration, the Department of Administration and Finance is currently 

considering various potential options and alternatives for increasing the electronic 

integration, responsiveness, and efficiency of the financial management systems used by the 

Corporation. The Division of Finance is working with NBC to identify potential 

opportunities for various financial management systems functions, including enhanced 

automated financial reporting and cost accumulation. Since MCC outsources its financial 

management and administrative functions, the Corporation is highly dependent upon its 

financial and administrative services provider (NBC) to help ensure operation of effective 

financial systems. 

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92 2006 Annual Report—Financial Audit and Management’s Comments

MCC Does Not Fully Comply With The Federal Information Security Management Act 

(FISMA)

An OIG audit identified significant non-compliance with FISMA requirements. Also, MCC 

engaged an outside expert to perform an independent security audit. MCC acknowledged that 

it had not met the majority of the FISMA requirements and proposed a timetable for 

compliance. 

We are reporting this deficiency as required by the guidance issued by the Office of 

Management and Budget. However, because this deficiency was addressed in a prior OIG 

audit report, we are not making any recommendation in this report. 

MCC Policies for Disbursing Advances to Grantees Does Not Accommodate Effective 

Cash Management

The internal control finding “MCC Policies for Disbursing Advances to Grantees Does Not 

Accommodate Effective Cash Management” is also a noncompliance with laws and 

regulations.

The complete finding and recommendation for this finding is presented in the internal control 

section of this report. We are not making any recommendations for this finding because we 

reported and made recommendations for corrective actions in the internal control section. 

DISTRIBUTION 

This audit was performed pursuant to the Government Corporation Control Act, and is 

intended solely for the information and use of the United States Congress, the President, the 

Director of the Office of Management and Budget, Comptroller General of the United States, 

the Corporation and its Inspector General, and is not intended to be, and should not be, used 

by anyone other than these specific parties. 

October 25, 2006 

Washington, D.C. 

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2006 Annual Report—Financial Audit and Management’s Comments 93

Appendix A

STATUS OF PRIOR YEAR FINDINGS 

Review of Oracle Federal Financial System 

The Millennium Challenge Corporation (Corporation) does not have its own financial 

system. The Corporation contracted with the Department of Interior, National Business 

Center (NBC) to provide accounting and IT services including usage of its Oracle Federal 

Financial (OFF) System application. The NBC has not conducted an internal control review, 

such as a Statement of Auditing Standards (SAS) 70 review of the Oracle Federal Financials 

System nor has MCC directed NBC as its third-party servicer to have a review conducted in 

accordance with the federal system requirements. 

Recommendation 

We recommend that MCC direct the National Business Center to conduct an internal control 

review, such as a SAS 70 review to assess the control environment of the Oracle Federal 

Financial System. 

Status

The NBC performed a SAS 70 review of the Oracle Federal Financial System for the period 

March 1, 2005 to July 31, 2005. The independent auditors reported that the relevant aspects 

of the NBC’s controls that had been placed in operation are suitably designed to provide 

reasonable assurance that the specified control objectives would be achieved, except for the 

following two items: 

x OFF requires transactions exceeding a dollar threshold to be approved by certifying 

officers. The electronic workflow in OFF currently does not require the approval by 

certifying officers of all such transactions. 

x NBC is responsible for monitoring budgetary accounts for MCC. However, OFF 

limit edits are not designed to prevent obligations from exceeding the allotment. 

NBC provided a self-certification asserting no change in the system controls from August 1 

to September 30, 2005. No system review was performed for the period October 1, 2004 to 

February28, 2005 to assess operational efficiency, effectiveness and transparency 

In fiscal year 2006, NBC performed a SAS 70 review for the period October 1, 2005 to July 

31, 2006. The independent auditors reported that the relevant aspects of the NBC’s controls 

that had been placed in operation are suitably designed to provide reasonable assurance that 

the specified control objectives would be achieved, except for the following item: 

x OFF requires transactions exceeding a dollar threshold to be approved by certifying 

officers. The electronic workflow in OFF currently does not require the approval by 

certifying officers of all such transactions. 

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94 2006 Annual Report—Financial Audit and Management’s Comments

Appendix A

MCC’s Policies and Procedures Were Not Always Complete and Consistent 

During the fiscal year, the Millennium Challenge Corporation (MCC) has used various 

processes to address the financial aspects of their operations. These processes have evolved 

during the year as the organization has grown in personnel and operations. In this growth, 

however, the development of written policies and procedures to guide MCC’s streamlined 

operational structure has not been a high priority for MCC in several areas. However, 

written policies and procedures must be in place to ensure operational efficiencies, risk 

reduction, and consistent application. 

Recommendation 05-1: 

We recommend that MCC’s Office of Finance and Administration revise and reissue written 

policies and procedures that provide additional specificity in the areas noted above including 

the Fund Balance with Treasury, financial reporting, payroll processing, accrual generation 

and reporting, interagency reporting, fixed assets, travel, monitoring and internal grant 

processes. These policies and procedures should provide the following information at a 

minimum: 

x Position accountable for each step in the process, 

x Position responsible for approving/reviewing the information, 

x The acceptable internal and external timelines for each step in the process, and 

x The specific documentation required determining the authorization, timeliness and 

review of transaction.

Status

MCC had not issued final policies and procedures in several areas. Therefore, the finding is 

repeated but revised as finding # 06-1.

MCC’s Travel Disbursement Controls and Procedures Do Not Permit the Effective and 

Efficient Management of Travel

According to MCC’s management, MCC has adopted the Federal Travel Regulations as its 

overall policy related to travel. MCC's internal travel policies and procedures do not permit 

the effective and efficient management of travel. These procedures do not ensure that travel 

is adequately planned and managed. Because a blanket travel authorization is used, there is 

no record that individual travel has taken place and that accounting has occurred for each 

instance. Additionally, the policy does not require that appropriate coordination include the 

Office of Finance. For example, the Office of Finance should have knowledge of planned 

trips, the timing, exceptions to the standard travel policy, and the estimated costs in order to 

ensure that sufficient obligations have been recorded to cover expenses incurred by MCC 

travelers. Currently, an initial estimate is prepared annually to fund the blanket travel 

authorization and the estimate is adjusted quarterly by the controller based upon expense 

patterns. There are, however, no automated processes in place to ensure that the estimate is 

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2006 Annual Report—Financial Audit and Management’s Comments 95

Appendix A

sufficient to cover the travel expenses incurred. This problem is compounded by the 

untimely filing of travel vouchers thereby increasing the difficulty and reducing the accuracy 

of the estimation process performed by the controller. 

Recommendation #05-2: 

We recommend that MCC management: 

(1) Develop and disseminate explicit policies to ensure that employees are aware of and 

follow the Federal Travel Regulations. Any exception should be documented and 

approved by a manager/supervisor in writing. 

(2) Institute policies and procedures to ensure proper authorizations and approvals are 

obtained and coordination with the Office of Finance has occurred for each planned 

trip prior to travel to ensure that the information is properly captured in the financial 

management system. 

(3) Develop and institute controls to reject those expenses claimed that exceed the 

allowable country per diem unless explicit written authorization is provided prior to 

travel.

Status:

MCC issued a revised policies and procedures in fiscal year 2006. However, we found 

additional exceptions in fiscal year 2006 related to travel expenses that exceed per diem, and 

lacked documentation. Also, we noted that no obligations are recorded prior to processing 

the travel voucher for reimbursement. The finding has been revised. Recommendations 2 

and 3 were retained and a new recommendation was added. See recommendation #06-06 

MCC Policies for Disbursing Advances to Grantees Does Not Accommodate Effective 

Cash Management Nor the Appropriate Recording of Custodial Interest Receivable and 

Payable

MCC entered into a compact with Madagascar in April 2005. The Compact became 

effective in July 2005, and an immediate advance was provided to MCA Madagascar 

amounting to $2,500,924. Based upon information obtained at year-end, MCA Madagascar 

has expended $650,000 of the initial advance.

Through various OMB Circulars, OMB has attempted to address the need for advances to 

cover immediate cash needs or timely disbursements of an entity for direct program costs for 

carrying out the purpose of the approved program or project. Thus, funds paid to a grantee 

are not to be held but are to be promptly applied to the grant purpose. Although the 

timeframe for immediate cash needs has not been clearly defined by OMB, the general rules 

employed by various Federal agencies are 30 days for non-governmental entities. Based 

upon this definition, MCC has provided Federal funds in excess of immediate cash needs. 

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96 2006 Annual Report—Financial Audit and Management’s Comments

Appendix A

Recommendation #05-3: 

We recommend that management: 

(1) Develop policies and procedures to ensure that the payment schedules and other 

agreements entered into with grantees are reflective of the Treasury requirements 

concerning advances and immediate cash needs. 

(2) Establish policies and procedures to ensure that any custodial liabilities, e.g. interest 

owed to the U.S. government resulting from the grantee advances, are properly 

recorded. 

Status:

MCC’s policies and procedures have not changed in this area. In fiscal year 2006 more 

funds have been provided to various MCAs and the timelines between requesting the funds 

and their use has not improved but worsened. The finding was revised with additional data 

and recommendations. See recommendation #06-02. 

MCC’s Human Resources Responsible for Managing Its Financial Operations are 

Inadequate

During our internal control and substantive testing, we noted that the MCC relies solely on 

the Controller, with contract assistance, to perform the substantial duties of the Office of 

Financial Management (OFM). The current range of Controller responsibilities include, but 

are not limited to, the approval of miscellaneous obligations; monthly, quarterly and yearly 

financial information review; development of financial policies and procedures; financial 

statement review; audit coordination; coordination with other agencies including OMB, 

USAID/OIG, and NBC; and approval of funds availability. 

Recommendation #05-4: 

We recommend that MCC evaluate and document the need for additional employees in OFM 

to ensure that proper internal controls are in place to meet the agency’s objective and thus, 

providing the Controller with adequate delegation of authority. Additionally, the roles and 

responsibilities of the current Controller position and the new positions in OFM should be 

clearly delineated and communicated. 

Status:

MCC took significant steps to improve their human resources in the Office of Finance. They 

hired an additional five employees including a Chief Financial Officer, Deputy Chief 

Financial Officers and several accountants. The delineation of their roles and responsibilities 

will be outlined clearly in the newly revised policies and procedures. 

Page 23 of 48 
Millennium Challenge Corporation

2006 Annual Report—Financial Audit and Management’s Comments 97

Appendix A

MCC Did Not Fully Comply with FFMIA and GPRA 

Millennium Challenge Corporation has not complied with the following laws and 

regulations:

x Government Performance and Results Act (GPRA) 

x Federal Financial Management Improvement Act (FFMIA) 

MCC has not developed performance goals and objectives that comply with the requirements 

of the GPRA. Although MCC has several guiding objectives, they do not meet the 

requirements of GPRA. The information in Management’s Discussion and Analysis are not 

sufficient to meet GPRA requirements and the goals presented are on a calendar year basis 

rather than a fiscal year. 

The FFMIA requires an integrated financial management system. MCC does not have an 

integrated financial management system. When MCC decided to outsource its accounting 

operations, MCC selected NBC from the available Federal Centers of Excellence as the best 

choice to meet its needs. In order to address the needs of MCC, multiple systems, i.e. ETravel, procurement, and FPPS, are used but these systems cannot exchange data 

electronically. The entry of the travel expenses and disbursements must be done manually. 

The entry of obligations and commitments requires a process of emails, scanning and manual 

entry into OFF. The payroll expenses and disbursements must be uploaded into OFF from 

FPPS.

Recommendation #05-5: 

We recommend that MCC management: 

(1) Implement their intended corrective actions for preparation of a GPRA based 

performance goals and objectives by March 2006, as specified in its FMFIA 

assessment, specifically: 

x Complete the development of a strategic plan for the next six fiscal years that 

meets OMB requirements. 

x Involve MCC staff in the determination of corporate performance goals. 

x Articulate operational performance goals for FY 2006, that align with the defined 

strategic goals and submit to the Board and OMB. 

(2) Assess the automated options available to handle MCC operations and develop short 

range and long range plans for the implementation of the most appropriate 

information technology structure to address electronic integration of at least the 

payroll, procurement and travel functions and systems to increase the efficiencies and 

effectiveness of the processing of financial transactions; and decrease the risk of 

errors.

Page 24 of 48 
Millennium Challenge Corporation

98 2006 Annual Report—Financial Audit and Management’s Comments

Appendix A

Status:

MCC has made improvements in these areas. However, there are remaining issues and thus 

the finding has been repeated with a revision to the finding for GPRA. See recommendation 

# 06-07. 

MCC Does Not Fully Comply with The Federal Information Security Management Act 

(FISMA)

In a report issued June 2005, an OIG audit identified significant non-compliance with 

FISMA requirements. Subsequently, MCC completed its FISMA report to OMB as of 

September 30, 2005, where it acknowledged that it had not met the majority of the FISMA 

requirements and proposed a timetable for compliance. 

We are reporting this deficiency, as required by the guidance issued by the Office of 

Management and Budget. However, because this deficiency was addressed in a prior OIG 

audit report, we are not making any recommendation in this report. 

The OIG continues the report significant noncompliances with FISMA requirements in fiscal 

year 2006. 

Page 25 of 48 
Millennium Challenge Corporation

2006 Annual Report—Financial Audit and Management’s Comments 99

Appendix B

Management 

Comments and Our 

Evaluation

We received and evaluated MCC’s management comments to the 

recommendations made in this report. We considered their 

comments to be generally responsive except for specific exceptions 

detailed below. Management comments have been included in their 

entirety in Appendix C. 

In its response MCC’s management stated that it recognizes the 

importance of accountability, effective stewardship, and public 

disclosure related to the resources entrusted to it, and that their 

goal is to achieve and maintain excellence in financial 

management, financial reporting and internal control systems. 

Further, MCC’s management commented that it will implement 

the recommendations as soon as possible to strengthen their 

systems of internal controls and lend further credibility to their 

financial statements and overall financial operations. MCC’s 

management went on to address each recommendation. MCC’s 

management also recognized and thanked both the OIG and 

Williams, Adley & Company, LLP for working closely with them 

during the audit process and providing counseling and support 

throughout the year.

Based on MCC’s comments, we consider that a management 

decision has been reached on recommendations 1, 4, and 6 provided 

in this report but not on recommendations 2, 3, 5, and 7. These 

recommendations do not provide defined timelines for the corrective 

action implementation. Also, the corrective actions for 

recommendation 2.4 and 7.1 require additional details to ensure that 

the recommendations are appropriately addressed. On 

recommendation 2.1, management agreed to “the spirit” of the 

recommendation but has not agreed to the usage of the US Treasury 

requirements. MCC should report to the OIG when management 

decision has been reached on the four recommendations and when 

final action has been taken on the recommendations. The following 

is a brief summary of MCC’s management comments on the seven 

recommendations included in this report and our evaluation on those 

comments.

Recommendation No. 1 

MCC accepts the recommendation and is currently implementing 

relevant corrective action. Specifically, the Division of Finance 

(within the Department of Administration and Finance) initiated an 

effort during the summer 2006 to develop and implement a 

comprehensive corporate Financial Management Policies and 

Procedures (FMPP) manual. The Division is utilizing contractor 

Page 26 of 48 
Millennium Challenge Corporation

100 2006 Annual Report—Financial Audit and Management’s Comments

Appendix B

support in this endeavor. The initial version of the FMPP manual 

is slated to be completed and formally institutionalized by 

December 31, 2006. 

Auditor Evaluation: We conclude that management has adequately 

addressed this issue. 

Recommendation No. 2

MCC Management accepts recommendations 2.2, 2.3, and 2.4. 

Regarding recommendation 2.1, MCC intends to follow sound 

cash management practices, will disburse funds consistent with the 

GAO policy based upon what is needed to meet grant purposes in 

any given quarter, though the funds will be released in tranches 

following a monthly schedule. 

MCC has begun implementing needed corrective actions. The 

MCC FMPP manual (currently being developed – see above 

management response to recommendation 1) will contain 

definitive documentation and disbursement requirements for 

transferring funds to compact countries. Furthermore, the Division 

of Finance, in coordination with the National Business Center 

(MCC’s financial services provider) has already implemented 

procedures to disburse funds to compact countries monthly in 

accordance with identified funding needs per pertinent quarterly 

disbursement requests. 

Auditor Evaluation: We conclude that management has not 

adequately addressed this issue because the response does not 

address recommendation 2.4; and does not discuss the 

implementation of recommendation 2.2. Also, the management 

response does not specify an implementation date for any of the 

subparts of recommendation 2. 

Recommendation No. 3 

MCC management accepts the recommendation. The Department 

of Administration and Finance has begun planning and defining 

requirements for implementing a viable property management 

system and associated controls and processes, including periodic 

physical counts to verify the Corporation’s property holdings and 

ensure the propriety of perpetual property records and related 

financial balances. 

Page 27 of 48 
Millennium Challenge Corporation

2006 Annual Report—Financial Audit and Management’s Comments 101

Appendix B

Auditor Evaluation: We conclude that management has not 

adequately addressed this issue because no defined timetable has 

been stated for the corrective action. 

Recommendation No. 4 

MCC management accepts the recommendations. The Division of 

Finance has already implemented quality assurance and review 

procedures to help ensure that compact disbursement 

requests/reports, which are to include compact expense 

information, are received timely, are complete, and that relevant 

financial information from such requests are properly included in 

quarterly financial statements and reports prepared by NBC. In the 

event of missing or late reports/requests, Division of Finance 

personnel will contact the pertinent accountable officials to obtain 

the reports/requests, and document such. Relevant policies and 

procedures will be included in the FMPP manual. 

Auditor Evaluation: We conclude that management has adequately 

addressed this issue. 

Recommendation No. 5 

MCC management accepts the recommendation and will take 

necessary steps to establish and implement required policies, 

procedures, and organizational protocol to ensure that the 

Corporation’s CFO is appropriately involved with the financial 

management operations entity-wide. 

Auditor Evaluation: We conclude that management has not 

adequately addressed this issue because no defined timetable has 

been stated for the corrective action. 

Recommendation No. 6 

MCC management accepts the recommendation. The Deputy 

Chief Financial Officer has instructed the Division of Finance staff 

not to approve any claimed travel expenses that exceed established 

limitations as defined by the Federal Travel Regulation (FTR). 

Furthermore, the Division has instituted procedures to require that 

a traveler’s responsible manger/supervisor be apprised of claimed 

expenses that are not in compliance with the FTR and/or MCC 

requirements, and that the manager/supervisor explicitly approve 

such expenses, but only if allowable per the FTR. 

Page 28 of 48 
Millennium Challenge Corporation

102 2006 Annual Report—Financial Audit and Management’s Comments

Appendix B

Auditor Evaluation: We conclude that management has adequately 

addressed this issue. 

Recommendation No. 7 

MCC accepts the recommendations. Relative to GPRA, the 

Department of Administration and Finance management is 

working with various corporate organizations to help ensure that 

strategic and operational performance goals, including financial 

management performance, and inter-related and resulting 

performance data is reliable and consistent. 

In regards to system integration, the Department of Administration 

and Finance is currently considering various potential options and 

alternatives for increasing the electronic integration, 

responsiveness, and efficiency of the financial management 

systems used by the Corporation. The Division of Finance is 

working with NBC to identify potential opportunities for various 

financial management systems functions, including enhanced 

automated financial reporting and cost accumulation. Since MCC 

outsources its financial management and administrative functions, 

the Corporation is highly dependent upon its financial and 

administrative services provider (NBC) to help ensure operation of 

effective financial systems. 

Auditor Evaluation: We conclude that management has not 

adequately addressed this issue because no defined timetable has 

been stated for the corrective action. Also, the response to 

recommendation 7.1 does not provide enough detail information to 

conclude that the finalization of baseline data, review of performance 

indicators, the development of templates, or performance of followup training is part of the corrective action plan. 

Page 29 of 48 
Millennium Challenge Corporation

2006 Annual Report—Financial Audit and Management’s Comments 103

Appendix C

Page 30 of 48 

November 6, 2006 

TO: John Phee 

 Assistant Inspector General 

FROM: Michael Ryan /s/ 

 Vice President, Administration & Finance 

SUBJECT: Management Response to Draft Independent Auditor’s

Report on MCC’s Financial Statements for Fiscal Years 

Ended September 30, 2006 and 2005, Respectively 

We have received the subject draft report and are pleased to note that the independent 

auditors, Williams, Adley & Company, LLP, are issuing an unqualified opinion on our 

principal financial statements, namely the Statements of: 

x Financial Position; 

x Operations and Changes in Net Position; 

x Cash flows; 

x Functional Expenses; and 

x Budgetary Resources. 

The auditor’s unqualified opinion is being issued despite material internal control 

weaknesses and noncompliance with selected laws and regulations that have been identified.

The Millennium Challenge Corporation’s (MCC) management recognizes the importance of 

accountability, effective stewardship and public disclosure related to the resources entrusted 

to it. Our goal is to achieve and maintain excellence in our financial management, financial 

reporting and internal control systems. Accordingly, we will implement the 

recommendations as soon as possible to strengthen our systems of internal control and lend 

further credibility to our financial statements and overall financial operations.

We wish to recognize and thank you, your team and Williams, Adley & Company for 

working closely with us during the audit process. We look forward to working with you and 

your staff on the fiscal year (FY) 2007 financial audit. Any questions may be addressed to 

Mr. Gerald Thomas, Deputy Chief Financial Officer, or to me. 

Following are our management decisions and responses to Williams Adley’s audit 

recommendations. 
Millennium Challenge Corporation

104 2006 Annual Report—Financial Audit and Management’s Comments

Material Weakness 1: MCC’s policies and procedures were not always complete and 

consistent.

Recommendation 1: Williams, Adley & Company recommends that MCC’s Department of 

Administration and Finance complete the Financial Management Policies and Procedures 

(FMPP) manual and implement the written policies and procedures for all areas that result in 

a financial event. 

Management Decision: MCC management accepts the recommendation and is currently 

implementing relevant corrective actions. Specifically, the Division of Finance (within the 

Department of Administration and Finance) initiated an effort during the summer, 2006 to 

develop and implement a comprehensive corporate Financial Management Policies and 

Procedures (FMPP) manual. The Division is utilizing contractor support in this endeavor.

The initial version of the FMPP manual is slated to be completed and formally 

institutionalized by December 31, 2006. 

* * * * * 

Material Weakness 2: MCC policies for disbursing advances to grantees do not 

accommodate effective cash management. 

Recommendations: Williams, Adley & Company recommends that MCC management: 

2.1: Develop and implement policies and procedures to ensure that payment schedules 

and other agreements entered into with grantees are reflective of U.S. Treasury 

requirements concerning advances and immediate cash needs. 

2.2: Develop and implement policies and procedures to ensure that all disbursement 

requests from the accountable entity of the recipient countries follow the official format 

that documents the cash requirements for each month of the quarterly period. 

2.3: Make and document all payments to the recipient countries on a monthly basis 

instead of a quarterly basis. 

2.4: Establish and implement policies and procedures to ensure that any custodial 

liabilities, e.g. interest owed to the U.S. Government resulting from the grantee advances, 

are properly recorded. 

Management Decision: MCC management accepts recommendations 2.2, 2.3 and 2.4. 

Regarding recommendation 2.1, MCC intends to follow sound cash management practices, 

will disburse funds consistent with GAO policy based on an evaluation of what is needed to 

meet grant purposes in any given quarter, though the funds will be released in tranches 

following a monthly schedule. 

MCC has begun implementing needed corrective actions. The MCC FMPP manual 

(currently being developed – see above management response to recommendation 1) will 

contain definitive documentation and disbursement requirements for transferring funds to 

compact countries. Furthermore, the Division of Finance, in coordination with the National 

Business Center (MCC’s financial services provider) has already implemented procedures to 

Page 31 of 48 
Millennium Challenge Corporation

2006 Annual Report—Financial Audit and Management’s Comments 105

disburse funds to compact countries monthly in accordance with identified funding needs per 

pertinent quarterly disbursement requests. 

* * * * * 

Material Weakness 3: MCC does not have a property management system. 

Recommendation 3: Williams, Adley & Company recommends that MCC develop and 

maintain appropriate fixed asset records to ensure accurate reporting and physical control. 

Management Decision: MCC management accepts the recommendation. The Department 

of Administration and Finance has begun planning and defining requirements for 

implementing a viable property management system and associated controls and processes, 

including periodic physical counts to verify the Corporation’s property holdings and ensure 

the propriety of perpetual property records and related financial balances. 

* * * * * 

Material Weakness 4: MCC did not properly record compact expenses during the fiscal 

year.

Recommendations: Williams, Adley & Company recommends that MCC management: 

4.1: Require that the final quarterly disbursement requests received from the accountable 

entity of the recipient countries be made available to the Department of Administration 

and Finance and the Fiscal Accountability Office. 

4.2: Develop and implement policies and procedures that require compact expenses are 

properly and accurately recorded and reported on a quarterly basis. 

4.3: Implement written procedures requiring that appropriate and timely follow-up 

actions are performed and documented on late and/or outstanding fund disbursements 

and/or advance requests. 

4.4: Develop and implement policies and procedures that require the Department of 

Administration and Finance to perform a thorough review of the financial statements to 

ensure that costs are not omitted. 

Management Decision: MCC management accepts the recommendations. The Division of 

Finance has already implemented quality assurance and review procedures to help ensure that 

compact disbursement requests/reports, which are to include compact expense information, 

are received timely, are complete, and that relevant financial information from such requests 

are properly included in quarterly financial statements and reports prepared by NBC. In the 

event of missing or late reports/requests, Division of Finance personnel will contact the 

pertinent accountable officials to obtain the reports/requests, and document such. Relevant 

policies and procedures will be included in the FMPP manual. 

* * * * * 

Page 32 of 48 
Millennium Challenge Corporation

106 2006 Annual Report—Financial Audit and Management’s Comments

Material Weakness 5: MCC’s Chief Financial Officer was not an integral part of the 

compact/grant processes. 

Recommendation 5: Williams, Adley & Company recommends that MCC management 

revise its policies and procedures to invest the Office of the Chief Financial Officer (CFO) 

with the level of responsibility, including role and all levels of authority established by the 

Chief Financial Officers Act. 

Management Decision: MCC management accepts the recommendation and will take the 

necessary steps to establish and implement required policies, procedures and organizational 

protocol to ensure that the Corporation’s CFO is appropriately involved with financial 

management operations entity-wide. 

* * * * * 

Reportable Condition 1: MCC’s travel disbursement controls and procedures do not permit 

the effective and efficient management of travel. 

Recommendation 6: Williams, Adley & Company recommends that MCC management 

develop and implement controls to reject travel expense reimbursement requests that exceed 

the allowable country per diem limits unless additional electronic authorization is provided. 

Management Decision: MCC management accepts the recommendation. The Deputy Chief 

Financial Officer has instructed the Division of Finance staff not to approve any claimed 

travel expenses that exceed established limitations as defined by the Federal Travel 

Regulation (FTR). Furthermore, the Division has instituted procedures to require that a 

traveler’s responsible manager/supervisor be apprised of claimed expenses that are not in 

compliance with FTR and/or MCC requirements, and that the manager/supervisor explicitly 

approve such expenses, but only if allowable per the FTR. 

* * * * * 

Material Noncompliance 1: MCC did not fully comply with the Federal Financial 

Management Improvement Act (FFMIA) and the Government Performance and Results Act 

(GPRA).

Recommendations: Williams, Adley & Company recommends that MCC management: 

7.1: Develop performance goal templates and follow-up training to ensure that 

Government Performance and Results Act (GPRA) requirements are adequately 

addressed and consistent. Williams, Adley & Company and the OIG also recommend 

that baseline data be finalized or performance indicators reviewed and amended such that 

they can be measured against obtainable data. 

7.2: Assess the automated options available to handle MCC operations and develop 

short-range and long-range plans for implementation of the most appropriate information 

technology structure to address electronic integration of at least the payroll, procurement 

Page 33 of 48 
Millennium Challenge Corporation

2006 Annual Report—Financial Audit and Management’s Comments 107

Page 34 of 48 

and travel functions and systems to increase the efficiencies and effectiveness of the 

processing of financial transactions; and decrease the risk of errors. 

Management Decision: MCC accepts the recommendations. Relative to GPRA, 

Department of Administration and Finance management is working with the various 

corporate organizations to help ensure that strategic and operational performance goals, 

including financial management performance, and inter-related and resulting performance 

data is reliable and consistent. 

In regard to systems electronic integration, Department of Administration and Finance 

management is currently considering various potential options and alternatives for increasing 

the electronic integration, responsiveness and efficiency of the financial management 

systems used by the Corporation. The Division of Finance is working with NBC to identify 

potential automation opportunities for various financial management systems functions, 

including enhanced automated financial reporting and cost accumulation. Since MCC 

outsources its financial management and administrative functions, the Corporation is highly 

dependent upon its financial and administrative services provider (NBC) to help ensure 

operation of effective financial systems. 

* * * * * 

Material Noncompliance 2: MCC does not comply with the Federal Information Security 

Management Act (FISMA). Williams, Adley & Company makes no recommendation(s) 

relative to this material noncompliance since the deficiency was identified by the Office of 

Inspector General in a prior audit and MCC management has: 

x acknowledged that it has not fully met FISMA requirements; 

x hired an outside expert to perform an independent security audit; and 

x proposed a timetable for compliance. 
Millennium Challenge Corporation

108 2006 Annual Report—Financial Audit and Management’s Comments As of September 30, 2006 With Summary Totals for 2005 Statements of Financial Position 2006 Total Compacts Pre-Compact Funding Threshold Evaluation and Support Administrative Audit 2005 Total Current Assets Assets Fund Balance with Treasury (Note 2) 3,931,404,752 $ 3,610,671,774 $ 55,951,660 $ 193,230,000 $ 32,200,504 $ 37,567,478 $ 1,783,336 $ 2,358,547,000 $ Receivables/Advances/Prepayments (Note 3) 18,893,478 16,587,951 511,426 - 1,731,899 62,202 - 4,338,698 Fixed Assets Leasehold Improvements and Capital Equipment (Note 4) 4,632,785 - - - - 4,632,785 - 4,244,059 Total Assets 3,954,931,015 $ 3,627,259,725 $ 56,463,086 $ 193,230,000 $ 33,932,403 $ 42,262,465 $ 1,783,336 $ 2,367,129,757 $ Liabilities Accounts Payable 2,552,277 - 774,246 - 731,258 1,046,773 - 1,319,467 Other Liabilities (Note 5) 2,516,786 - - - (461,774) 2,978,560 - 2,522,803 Accrued Funded Annual Leave 2,698,070 - - - - 2,698,070 - 1,386,644 Total Liabilities 7,767,133 $ - $ 774,246 $ - $ 269,484 $ 6,723,403 $ - $ 5,228,914 $ Net Position Obligated Unexpended Appropriations 1,283,003,458 1,187,867,694 43,098,943 0 23,298,780 26,954,705 1,783,336 349,153,392 Commitments 856,804,162 842,399,600 5,052,595 0 8,495,391 856,576 0 606,634,745 Allotments - Realized Resources 1,802,661,275 1,596,992,431 7,537,302 193,230,000 1,868,748 3,032,794 - 1,401,835,873 Cumulative Results of Operations 4,694,987 - - - - 4,694,987 - 4,276,833 Total Net Position (Note 6) 3,947,163,882 $ 3,627,259,725 $ 55,688,840 $ 193,230,000 $ 33,662,919 $ 35,539,062 $ 1,783,336 $ 2,361,900,843 $ Total Liabilities and Net Position 3,954,931,015 $ 3,627,259,725 $ 56,463,086 $ 193,230,000 $ 33,932,403 $ 42,262,465 $ 1,783,336 $ 2,367,129,757 $ The notes are an integral part of these financial statements Millennium Challenge Corporation Page 35 of 48 
Millennium Challenge Corporation

2006 Annual Report—Financial Audit and Management’s Comments 109 Statements of Operations and Changes in Net Position For the Year Ended September 30, 2006 With Summary Totals for 2005 2006 Total Compacts Pre-Compact Funding Threshold Evaluation and Support Administrative Audit 2005 Total Financing Sources Appropriations Used 92,455,115 $ 16,747,194 $ 5,895,167 $ - $ 15,137,340 $ 54,055,700 $ 619,714 $ 39,312,758 $ Expenses 92,036,960 16,747,194 5,895,167 - 15,137,340 53,637,545 619,714 35,035,926 Excess of Financing Sources over Expenses 418,155 $ - $ (0) $ - $ 0 $ 418,155 $ - $ 4,276,832 $ Net Position Excess of Financing Sources over Expenses 418,155 - (0) - 0 418,155 - 4,276,832 Increase in Unexpended Appropriations Appropriated - - Obligated 933,850,067 863,789,695 36,954,637 - 14,498,520 17,054,929 1,552,286 346,388,202 Commitments 856,804,162 842,399,600 5,052,595 0 8,495,391 856,576 0 626,634,744 Allotments - Realized Resources (168,109,344) (358,233,833) (8,007,053) 193,230,000 1,868,748 3,032,794 - 407,664,296 Transfers In/(Out) (20,000,000) - - (20,000,000) - - - - Permanent Recission (17,700,000) (17,700,000) - - - - - (12,000,000) Total Increase in Unexpended Appropriations 1,585,263,040 1,330,255,462 34,000,179 173,230,000 24,862,659 21,362,454 1,552,286 1,372,964,074 Beginning Net Position 2,361,900,842 2,297,004,263 21,688,661 20,000,000 8,800,260 14,176,608 231,050 988,936,768 Ending Net Position 3,947,163,882 $ 3,627,259,725 $ 55,688,840 $ 193,230,000 $ 33,662,919 $ 35,539,062 $ 1,783,336 $ 2,361,900,842 $ The footnotes are an integral part of these financial statements Millennium Challenge Corporation Page 36 of 48 
Millennium Challenge Corporation

110 2006 Annual Report—Financial Audit and Management’s Comments For the Year Ended September 30, 2006 With Summary Totals for 2005 Statements of Functional Expenses 2006 Total Compacts Pre-Compact Funding Threshold Evaluation and Support Administrative Audit 2005 Total Salary and Benefits $27,587,426 - $ - $ - $ - $ 27,587,426 $ - $ 13,343,440 $ Travel 6,362,880 - - - 317,509 6,045,371 - 3,980,087 Rent/Lease 4,404,013 - - - - 4,404,013 - 718,546 Utilities 766,206 - - - - 766,206 - 207,704 Information Technology Services 2,562,575 - - - - 2,562,575 - 2,065,657 Accounting Services 4,244,677 - - - - 3,624,963 619,714 3,186,484 Interagency Agreements 4,636,977 - - - 4,636,977 - - 564,654 Other Services 13,563,769 - - - 9,755,703 3,808,066 - 6,082,697 Supplies and Equipment 2,211,918 - - - - 2,211,918 - 2,671,882 Grants 22,642,361 16,747,194 5,895,167 - - - - 1,024,133 Miscellaneous 3,054,158 - - - 427,151 2,627,007 - 1,190,642 Total Expenses 92,036,960 $ 16,747,194 $ 5,895,167 $ - $ 15,137,340 $ 53,637,545 $ 619,714 $ 35,035,926 $ The footnotes are an integral part of these financial statements Millennium Challenge Corporation Page 37 of 48 
Millennium Challenge Corporation

2006 Annual Report—Financial Audit and Management’s Comments 111 Statements of Cash Flows For the Year Ended September 30, 2006 With Summary Totals for 2005 2006 Total Compacts Pre-Compact Funding Threshold Evaluation and Support Administrative Audit 2005 Total Cash Flows from Operating Activities Excess of Financing Sources over Expenses 418,155 $ - $ - $ - $ - $ 418,155 $ - $ 4,276,832 $ Adjustments Affecting Cash Flow: Depreciation Expense 483,000 483,000 - $ Changes in Assets and Liabilities: Appropriated Capital Used (92,455,115) (16,747,194) (5,895,167) - (15,137,340) (54,055,700) (619,714) (39,312,758) Increase in Advances/Receivables/Prepayments (14,554,780) (14,782,027) (511,426) 768,101 (29,428) - (4,170,099) Increase in Accounts Payable 1,232,809 - 774,246 - 659,128 (200,565) - 1,295,584 Decrease in Other Liabilities (6,017) - (154,526) - (1,459,696) 2,059,014 (450,809) 1,668,178 Increase in Annual funded Leave Liabilities 1,311,427 - - - - 1,311,427 - 1,216,743 Total Adjustments (103,988,676) (31,529,221) (5,786,873) - (15,169,807) (50,432,252) (1,070,523) (39,302,352) Net Cash Used in Operating Activities (103,570,521) $ (31,529,221) $ (5,786,873) $ - $ (15,169,807) $ (50,014,097) $ (1,070,523) $ (35,025,520) $ Cash Flows from Investing Activities Purchase of Property (871,727) $ - $ - $ - $ - $ (871,727) $ - $ (4,244,059) $ Net Cash Used in Investing Activities (871,727) $ - $ - $ - $ - $ (871,727) $ - $ (4,244,059) $ Cash Flows from Financing Activities Appropriations received net of recissions 1,752,300,000 $ 1,347,002,655 $ 39,895,345 $ 248,230,000 $ 40,000,000 $ 75,000,000 $ 2,172,000 $ 1,488,000,000 $ Transfers Out (75,000,000) (75,000,000) (80,000,000) Net Cash Provided by Financing Activities 1,677,300,000 1,347,002,655 39,895,345 173,230,000 40,000,000 75,000,000 2,172,000 1,408,000,000 Net Increase in Cash 1,572,857,752 1,315,473,434 34,108,472 173,230,000 24,830,193 24,114,176 1,101,477 1,368,730,421 Fund Balance with Treasury, Beginning 2,358,547,000 2,295,198,340 21,843,188 20,000,000 7,370,311 13,453,302 681,859 989,816,579 Fund Balance with Treasury, Ending 3,931,404,752 $ 3,610,671,774 $ 55,951,660 $ 193,230,000 $ 32,200,504 $ 37,567,478 $ 1,783,336 $ 2,358,547,000 $ The footnotes are an integral part of these financial statements Millennium Challenge Corporation Page 38 of 48 
Millennium Challenge Corporation

112 2006 Annual Report—Financial Audit and Management’s Comments For the Year Ended September 30, 2006 With Summary Totals for 2005 Statements of Budgetary Resources 2006 Total Compacts Pre-Compact Funding Threshold Evaluation and Support Administrative Audit 2005 Total Budgetary Resources: Appropriations Budget Authority: 1,770,000,000 1,364,702,655 39,895,345 248,230,000 40,000,000 75,000,000 2,172,000 1,500,000,000 Unobligated Balance - Beginning of Period Net Transfer, Current Year Authority 2,053,722,184 1,972,926,264 15,544,354 65,251,566 986,171,577 Spending Authority from Offsetting Collections Unobligated Balance - Transferred

-

 Advances Received -

 Recoveries of Prior Years Obligations Adjustments:

-

 Permanently Not Available (Note 7) (17,700,000) (17,700,000) - - - - - (12,000,000)

 Total Budgetary Resources 3,806,022,184 $ 3,319,928,919 $ 55,439,699 $ 313,481,566 $ 40,000,000 $ 75,000,000 $ 2,172,000 $ 2,474,171,577 $

Status of Budgetary Resources:

 Obligations Incurred 1,109,535,594 $ 880,536,888 $ 42,849,803 $ 83,230,412 $ 29,635,861 $ 71,110,630 $ 2,172,000 $ 420,449,393 $ 

 Apportioned Unobligated Balance Available:

877,383,424 842,399,600 10,644,896 10,085,419 10,364,139 3,889,370 - 683,006,839

 Unobligated Balance Not Available: 1,819,103,166 1,596,992,431 1,945,000 220,165,735 - - - 1,370,715,345

 Total Status of Budgetary Resources 3,806,022,184 $ 3,319,928,919 $ 55,439,699 $ 313,481,566 $ 40,000,000 $ 75,000,000 $ 2,172,000 $ 2,474,171,577 $

Relationship of Obligations to Outlays:

 Obligated Balance, Net - as of October 1, 2005 384,862,005 $ 322,272,076 $ 6,298,834 $ 34,699,991 $ 7,370,311 $ 13,538,935 $ 681,859 $ 3,645,002 $ 

 Obligations Incurred 1,109,535,594 880,536,888 $ 42,849,803 $ 83,230,412 $ 29,635,861 $ 71,110,630 $ 2,172,000 $ 420,449,393 $ 

 Recoveries of Prior Years Obligations -

 Accounts Payable Obligated Balance, Net - End of Period Adjustments

(8,881,212) 0 (774,246) 0 (1,670,526) (6,436,440) 0 (5,335,899)

 Obligations (1,376,397,315) (1,171,279,742) (42,587,517) (112,225,132) (21,566,882) (26,954,705) (1,783,336) (379,526,106)

 Total Outlays 109,119,072 $ 31,529,222 $ 5,786,873 $ 5,705,271 $ 13,768,764 $ 51,258,420 $ 1,070,523 $ 39,232,390 $ 

 Disbursements Outlays:

109,119,072 31,529,222 5,786,873 5,705,271 13,768,764 51,258,420 1,070,523 39,232,390

 Collections / Refunds - -

 Net Outlays 109,119,072 $ 31,529,222 $ 5,786,873 $ 5,705,271 $ 13,768,764 $ 51,258,420 $ 1,070,523 $ 39,232,390 $ 

 The footnotes are an integral part of these financial statements

Millennium Challenge Corporation

Page 39 of 48 
Millennium Challenge Corporation

2006 Annual Report—Financial Audit and Management’s Comments 113

NOTES TO FINANCIAL STATEMENTS

(AS OF SEPTEMBER 30, 2006)

Note 1—Summary of Significant Accounting Policies 

A. Basis of Presentation 

The accompanying financial statements have been prepared to report the financial 

position, results of operations, cash flows, and budgetary resources for MCC (the 

Corporation), as required by Section 613 of the Millennium Challenge Act of 2003 

and the Government Corporation Control Act (31 U.S.C. §9106). These financial 

statements have been prepared from the books and records of the Corporation and are 

presented in accordance with the applicable requirements of OMB, the Secretary of 

the Treasury, and the Government Management and Reform Act of 1994. 

The Corporation’s accounting policies conform to and are consistent with generally 

accepted accounting principles for the Federal government, as promulgated by OMB 

and prescribed by the Federal Accounting Standards Advisory Board (FASAB). 

The Corporation’s principal financial statements are: 

` Statement of Financial Position; 

` Statement of Operations and Changes in Net Position; 

` Statement of Functional Expenses; 

` Statement of Cash Flows; and 

` Statement of Budgetary Resources. 

MCC has presented comprehensive statements for fiscal year 2006, with summary 

totals for 2005 for comparative purposes. These notes are considered an integral part 

of the financial statements. 

B. Reporting Entity 

The Corporation was formed in January 2004 pursuant to the Millennium Challenge 

Act of 2003 (Public Law 108-199). The Corporation’s mission is to provide United 

States assistance to eligible countries for global development. The assistance is 

intended to provide economic growth and the elimination of extreme poverty, 

strengthen good governance, encourage economic freedom, and promote investments 

in people. 

C. Budgets and Budgetary Accounting 

The Corporation’s programs and activities are funded through no-year appropriations. 

Such funds are available for obligation without fiscal year limitation and remain 

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Millennium Challenge Corporation

114 2006 Annual Report—Financial Audit and Management’s Comments

available until expended. MCC was provided total appropriations of almost $1.8 

billion and $1.5 billion in FY 2006 and FY 2005, respectively. OMB apportions 

MCC administrative funds on an annual basis pursuant to statutory limitations in the 

appropriations bill. In addition, MCC receives from OMB a separate apportionment 

for due diligence funds, which MCC uses for compact evaluations and support, 

compact programs, 609(g) funds, the Threshold Program, and audit funds. Because 

of the no-year status of MCC appropriations, unobligated administrative, audit and 

due diligence funds (apportioned on annual bases) are not returned to Treasury. 

MCC’s policy is to transfer any unobligated balances as of September 30, for these 

three categories of funds to compact funds at the beginning of the subsequent fiscal 

year.

D. Basis of Accounting 

Financial transactions are recorded on accrual and budgetary bases in accordance 

with pertinent Federal accounting and financial reporting requirements. Under the 

accrual method of accounting, financing sources are recognized when used and 

expenses are recognized when incurred, without regard to receipt or payment of cash. 

Budgetary accounting facilitates the Corporation’s compliance with legal constraints 

and controls over the use of Federal funds.

The accompanying Statements of Financial Position, Operations and Changes in Net 

Position, Cash Flows, and Functional Expenses have been prepared on the accrual 

basis. The Statement of Budgetary Resources has been prepared in accordance with 

budgetary accounting rules. The Statement of Cash Flows has been prepared to 

reconcile budgetary to financial (proprietary) accounting information. 

E. Fund Balance with Treasury 

The Corporation does not maintain cash in commercial bank accounts. Rather, the 

Corporation’s funds are maintained in Treasury accounts. The Department of the 

Treasury processes all cash receipts and disbursements for the Corporation. The 

Fund Balances with Treasury represent no-year funds, which are maintained in 

appropriated funds that are available to pay current and future commitments. 

F. Advances to Others 

The Corporation advances funds in response to compact countries and Federal agency 

drawdown requests in order to implement compact projects in an MCA country or 

inter-agency agreements. Funds advanced to compact countries are used to pay 

legitimate costs and expenses incurred per the formal compacts entered into by MCC 

and the countries. 

Page 41 of 48 
Millennium Challenge Corporation

2006 Annual Report—Financial Audit and Management’s Comments 115

G. Property and Equipment 

The Corporation’s accounting policies require that property and equipment with 

original cost of $25,000 or more and an estimated useful life of two or more years to 

be capitalized. Such assets include leasehold improvements, telephone equipment, 

computer systems equipment, copiers, computer software, furniture, and assets under 

capital leases. The assets are to be depreciated (or amortized) over their estimated 

useful lives.

H. Compacts and Pre-Compact (609(g))Funding Payable 

Compact funding, including 609(g) funds, are made to eligible countries with 

approved Compact or pre-Compact funding agreements. Upon formally entering into 

a compact with a country, the Corporation records a commitment of funds (i.e., 

administrative reservation) in its financial records for the total value of the compact. 

Once a compact enters into force, the value of the compact is obligated on MCC’s 

financial books (and the related commitment reduced/liquidated). At the end of the 

fiscal year, the Corporation records the total estimated amount of compact expenses 

incurred for work performed but not paid as liquidations of the advances. The 

estimated amount of such expenses at September 30, 2006 and September 30, 2005, 

were $1.956 million and $0, respectively. 

I. Accounts Payable 

The Corporation records as liabilities all amounts to others as a direct result of 

transactions or events that have occurred. Accounts payable represent amounts due to 

both Federal and non-federal entities for goods and services received by the 

Corporation, but not paid at the end of the fiscal year. 

J. Actuarial FECA Liability 

The Federal Employees’ Compensation Act (FECA) provides income and medical 

cost protection to covered Federal civilian employees injured on the job, employees 

who have incurred a work-related occupational disease, and beneficiaries of 

employees whose deaths are attributable to a job-related injury or occupational 

disease.

Claims incurred for benefits for Corporation employees under FECA are administered 

by the Department of Labor (DOL) and later billed to the Corporation. The 

Corporation’s actuarial liability for workers’ compensation includes any costs 

incurred but unbilled as of year-end, as calculated by DOL, and is not funded by 

current appropriations. 

The Corporation incurred no FECA liabilities during fiscal years 2006 and 2005.

Page 42 of 48 
Millennium Challenge Corporation

116 2006 Annual Report—Financial Audit and Management’s Comments

K. Other Liabilities 

Other liabilities include amounts owed, but not paid, at the end of the fiscal year for 

employee payroll and benefits and Federal Employees’ Compensation Act charges 

(see Exhibit 13). 

L. Accrued Annual Leave 

The value of employees’ unused annual leave at the end of the fiscal year is accrued 

as a liability. At the end of each fiscal year, the balance in the accrued annual leave 

account is adjusted to reflect current year pay rates and leave balances. Annual leave 

is funded from current appropriations. Sick leave and other types of non-vested leave 

are expensed when used and, in accordance with Federal requirements, no accruals 

are recorded for unused leave. 

M. Net Position 

Net position is composed of unexpended appropriations and cumulative results of 

operations. Unexpended appropriations are funds appropriated by the Congress to the 

Corporation that are still available for expenditure at the end of the fiscal year. 

Cumulative results of operations represent the net differences between financing 

sources and expenses from the Corporation inception. 

N. Financing Sources 

Per note 1.C, the Corporation funds its program and operating expenses through noyear appropriations. Appropriations are recognized as an accrual-based financing 

source at the time they are used to pay program or administrative expenses, except for 

expenses to be funded by future appropriations. 

O. Retirement Benefits 

The Corporation’s employees participate in either the Civil Service Retirement 

System (CSRS) or the Federal Employees Retirement System (FERS). FERS was 

established by Public Law 99-335. Pursuant to this law, most employees hired after 

December 31, 1983 are covered by FERS and Social Security. Employees hired prior 

to January 1, 1984, were allowed to elect whether they desired to participate in FERS 

(with Social Security coverage) or remain in CSRS. 

For employees covered by CSRS, the Corporation contributes seven percent of their 

gross pay towards their retirement benefits. For those employees covered by FERS, 

the Corporation contributes 11 percent of their gross pay towards retirement. 

Employees are also allowed to participate in the Federal Thrift Savings Plan (TSP). 

For employees under FERS, the Corporation contributes an automatic one percent of 

basic pay to TSP and matches employee contributions up to an additional four percent 

Page 43 of 48 
Millennium Challenge Corporation

2006 Annual Report—Financial Audit and Management’s Comments 117

of pay, for a maximum Corporation contribution amounting to five percent of pay. 

Employees under CSRS may participate in the TSP, but will not receive either the 

Corporation’s automatic or matching contributions. 

During FY 2006, the Corporation made retirement contributions of $761,000 to 

CSRS; $1.977 million to FERS; and $620,700 to TSP. In FY 2005 the Corporation 

made contributions of $30,000 to CSRS, $876,000 to FERS and $226,000 to TSP. 

P. Use of Estimates 

The preparation of financial statements requires management to make estimates and 

assumptions that affect the reported amounts of assets and liabilities, the disclosure of 

contingent assets and liabilities at the date of the financial statements, and the 

reported amounts of financing sources and expenses during the reporting period. 

Actual results could differ from such estimates. 

Q. Contingencies 

The Corporation can be a party to various routine administrative proceedings, legal 

actions, and claims brought by or against it, including threatened or pending litigation 

involving labor relations claims, some of which may ultimately result in settlements 

or decisions against the Corporation. In the opinion of the Corporation’s 

management and legal counsel, there are no proceedings, actions or claims 

outstanding or threatened, which would materially impact the Corporation’s financial 

statements. 

R. Judgment Fund 

Certain legal matters to which the Corporation can be named as a party may be 

administered and, in some instances, litigated and paid by other Federal agencies. In 

general, amounts paid in excess of $2,500 for Federal Tort Claims Act settlements or 

awards pertaining to these litigations are funded from a special appropriation 

administered by the Department of Treasury, called the Judgment Fund. Although 

the ultimate disposition of any potential Judgment Fund proceedings cannot be 

determined, management does not expect any liability or expense that might ensue 

would be material to the Corporation’s financial statements. 

S. Custodial Receivables and Liabilities 

Under current policy and procedures, the Corporation funds all Compacts with other 

countries by advancing funds to cover projected needs, generally for a forthcoming 

three-month period. Such funds provided to the countries are required to be deposited 

in interest-bearing accounts, if legally feasible, until disbursed. The interest earned 

on these accounts is remitted to the Corporation and deposited into an account at the 

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Millennium Challenge Corporation

118 2006 Annual Report—Financial Audit and Management’s Comments

U.S. Treasury. Such interest may not be retained or used by the Corporation, but 

periodically is returned to the Treasury’s general funds. As of September 30, 2006, 

receivables for amounts of interest to be remitted by the countries and the related 

liabilities are not reflected in these financial statements. As of September 30, 2006, 

the Corporation had outstanding advances related to compact financing of 

approximately $16.6 million. During FY 2006 the Corporation received and 

deposited $304,000 in interest remittances. At the end of FY 2006, approximately 

$174,000 of interest earned on compact advances to the MCAs was due to be remitted 

to MCC. At the end of FY 2005, the Corporation had advances of $1.8 million and 

received interest remittances of approximately $17,000 during the year. 

Note 2—Fund Balance with Treasury 

The U.S. Treasury accounts for all U.S. Government funds on an overall 

consolidated basis. The Fund Balance with Treasury line items on the Statements of 

Financial Position for FY 2006 and FY 2005 consisted of amounts presented in the 

following table. 

 Fund Balances with Treasury 

(in thousands) 

Appropriated

Funds 2006 2005

Unobligated $ 2,546,127 $ 1,973,685 

Obligated 1,385,278 384,862 

Total $ 3,931,405 $ 2,358,547 

Note 3—Advances/Accounts Receivable 

Advances reflect amounts provided to MCA compact countries and other Federal 

agencies, in accordance with formal compacts or inter-agency agreements, 

respectively. Accounts receivable reflect overpayments of payroll and travel 

expenses to current employees of the Corporation. As such, no allowance for 

doubtful accounts is necessary. As of September 30, 2006, the Corporation reported 

$18.9 million in advances and receivables, of which $18.8 million related to advances 

for compact implementation and approximately $62,000 for receivables.

Note 4—Fixed Assets 

The Corporation’s fixed (capital) assets are predominantly comprised of leasehold 

improvements related to the MCC headquarters offices located in Washington, DC. 

As of September 30, 2006, the Corporation reported $5.1 million of which $4.8 

million represented leasehold improvements and $280,000 represented capitalized 

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Millennium Challenge Corporation

2006 Annual Report—Financial Audit and Management’s Comments 119

equipment. At the end of the fiscal year, $483,000 of amortization and depreciation 

had been recorded for the two categories of assets.

Note 5—Other Liabilities 

The Corporation is liable for amounts owed to other parties, including employees and 

other Federal groups. The following table presents the amounts of such liabilities as 

of September 30, 2006 and 2005. 

Other Liabilities 

(in dollars) 

Type 2006 2005

Evaluation and Support $ (461,744)* $ 997,921 

Travel 300,000 747,143 

Office of the Inspector General 0 450,809 

Miscellaneous 1,566,695 326,935 

Payroll 1,111,865 0 

Total $ 2,516,786 $ 2,522,808 

* This amount represents the difference in funds drawn from MCC’s accounts by other Federal parties per 

inter-agency agreements (through the Department of the Treasury’s Intra-governmental Payment and 

Collection System (IPAC)) and the liability amounts recorded by MCC. In short, as of September 30, 2006, 

other Federal entities had drawn approximately $1.401 million from MCC’s accounts with Treasury. MCC 

had recorded liabilities of $.939 million for the pertinent charges—$.462 million less than the amounts 

“drawn” by the entities. At the end of the fiscal year, MCC and its financial services provider (the 

Department of Interior’s National Business Center) were researching the differences and reconciling 

supporting records. 

Note 6—Net Position 

The reported net position consists of unexpended appropriations and cumulative 

results of operations, which reflects the difference between financing sources and 

expenses since the Corporation’s inception. 

The following table presents total obligated and unobligated compact and 609(g) 

funds as of September 30, 2006 and 2005. 

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Millennium Challenge Corporation

120 2006 Annual Report—Financial Audit and Management’s Comments

Total Obligated and Unobligated Compact and 609(g) Funds (in dollars) 

2006 Compacts 609(g) Funding 2005

Obligations 

Armenia $ 235,646,17 $ 235,150,00 $ 49

Benin 1,062,985 1,062,985 

CapeVerde 106,077,520 106,014,782 62,738 $

Georgia 296,178,084 292,802,057 3,376,027 4,111,000 

Ghana 13,584,891 13,584,891 48,688 

Honduras 213,166,147 213,166,147 215,000,000 

Lesotho 902,934 902,934 600,000 

Madagascar 103,290,130 101,990,130 1,300,000 110,378,000 

Mali 4,421,534 4,421,534 

Mozambique 12,956,078 12,956,078 

Nicaragua 173,583,320 173,529,975 53,345 

Senegal 4,882,237 4,882,237 

Vanuatu 65,214,603 65,214,603 

Total Obligations $ 1,230,966,637 $ 1,187,867,694 $ 43,098,9 $ 330,222,30

Commitments

Benin $ 305,781,62 $ 305,761,55 $

CapeVerde – $ 110,078,48

Georgia – 295,300,000 

Ghana 536,638,050 536,638,050 2,870,502 

Mali 4,606,861 4,606,861 

Mozambique – 6,000,000 

Nicaragua – 175,000,000 

Senegal 425,658 425,658 6,528,299 

Total Commitments $ 847,452,19 $ 842,399,60 $ 5,052 $ 595,777,28

Note 7—Permanent Rescission 

In FY 2006 and FY 2005, respectively, $17.7 million and $ 12 million of amounts 

previously appropriated under the FY 2006 and FY 2005 Foreign Operations, Export 

Financing, and Related Programs Appropriations Acts (Public Law 109-148 and 

Public Law 108-447, respectively), were rescinded. The rescissions were part of the 

Across-the-Board Rescissions enacted for FY 2006 and FY 2005, respectively. 

Note 8—Inter-Agency Agreements 

MCC is party to various inter-agency agreements (IAA) with other Federal agencies 

for services to be provided by those entities. Such services include financial, travel 

management and other administrative functions; technical and engineering services, 

personnel background records checks; and information technology services. During 

FY 2006, MCC executed 20 IAAs with other Federal agencies totaling almost $9.1 

million. At the end of the year, approximately $6.8 million remained available for 

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Millennium Challenge Corporation

2006 Annual Report—Financial Audit and Management’s Comments 121

paying future services to be provided under the subject IAAs. The following table 

provides a summary of the IAAs by Federal entity. 

Fiscal Year 2006 Inter-agency Agreements 

AGENCY NUMBER

OF IAAs 

DOLLAR 

VALUE 

REMAINING FUNDS – 

END OF FY 

NBC, Dept. of Interior 6 $1,216,313 $ 0 

State Dept. 4 437,668 242,160 

U.S. Agency for International Development 1 140,000 140,000 

Dept. of Agriculture 1 228,478 44,820 

U.S. Army Corps of Engineers 3 5,441,379 5,004,390 

Dept. of Transportation 1 109,083 83,794 

Dept. of Health and Human Services 1 1,500,000 1,241,422 

Dept. of Labor 1 2,912 0

Government Printing Office 1 3,000 3,000

Office of Personnel Management 1 5,000 220

Total 20 $9,083,833 $6,759,806 

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Millennium Challenge Corporation

122 2006 Annual Report

Endnotes 

1The Gambia was previously selected as compact–eligible but is currently 

suspended.

2Previously selected as a Threshold program country and has an approved 

and/or on-going Threshold program.

3Previously selected as a Threshold program country.

4Yemen was previously selected as a Threshold program country but is 

currently suspended. Because of ongoing reforms, Yemen has asked for 

reinstatement.

5Cape Verde was a low income country at the time of its compact’s signing.

6 All beneficiary numbers or ranges of beneficiary numbers, except Armenia, 

are based on the MCC approved Monitoring and Evaluation Plans. Armenia’s 

beneficiary numbers are based on the Investment Memo. Beneficiary totals 

do not distinguish between direct and/or indirect beneficiaries. Target populations are likely to benefit from multiple project interventions. Accordingly, it is inadvisable to sum total beneficiaries across projects as the likelihood of double-counting will overstate the actual number benefited.

(a) Cape Verde—Private Sector Development Project: Beneficiaries are to 

be determined in June–July 2007 after project identification by the International Finance Corporation.

(b) Ghana—Transportation Project: Due Diligence minimal estimates for the 

improvement of the N1 Highway.

(c) Ghana—Rural Development Project: Likely to underestimate the total 

number of beneficiaries; a) Support for Community Services is expected to 

benefit several tens of thousands of households, b) Strengthening of Public 

Sector Procurement Capacity is expected to indirectly benefit all those affected by government efficiency, c) Strengthening of Rural Financial Services 

is expected to indirectly benefit all rural banking customers.
Millennium Challenge Corporation

2006 Annual Report 123

(d) Honduras—Rural Development Project: Number likely underestimates 

the total number of beneficiaries as a) the number of program participants 

to obtain a loan, b) the number of liens registered, and c) the population 

benefiting from farm-to-market road upgrades has not yet been determined.

(e) Honduras—Transportation Project: Roads benefits are based on the direct benefits derived from reduced travel time, reduced vehicle operating 

costs and increased traffic use. Number of beneficiaries is undetermined. 

Annual traffic volume at end of five years is projected at 4.5 million vehicles. 

(f) Madagascar—Land Tenure Project: Based on the total number of Land 

Offices (255) multiplied by the estimated average number of titles (800) to 

be issued by each Land Office by the end of Compact; assumes a one-to-one 

correspondence between land titles issued and beneficiaries.

(g) Madagascar—Finance Project: Indicator will measure number of savings accounts based on the difference between baseline numbers and endof-Project targets disaggregated by Financial Source; i.e., National Savings 

Bank, the Central Bank, Commission de Supervision Bancaire et Financiere, 

and Micro-Finance Institutions. 

(h) Mali—Airport Improvement Project: Beneficiary indicators, as opposed 

to a number of beneficiaries (individuals), include the total revenue of firms 

servicing the airport, real wage income of employees of firms servicing the 

airport, real wage income in the tourism industry, and total receipts of hotels and restaurants in the Bamako area.

(i) Mali—Industrial Park Project: Number likely underestimates the total 

number of beneficiaries as said number accounts only for jobs directly created by project activities. Total beneficiaries are people in Year 5 who have 

gained long-term employment in the firms located in the industrial park. 

Other beneficiary indicators include gross value-added of firms located in 

the industrial park and real wages of employees of companies in the industrial park. 

(j) Mali—Alatona Irrigation Project: Number likely underestimates the total number of beneficiaries as said number accounts only for jobs directly 
Millennium Challenge Corporation

124 2006 Annual Report

created by project activities. Number does not include those who will be affected by larger crop yields and/or lower cargo rates. 

(k) Nicaragua—Property Regularization Project: Based on the total number of rural (21,000) and urban (22,000) parcels which will have a registered 

title; assumes a one-to-one correspondence between land titles issued and 

beneficiaries.

(l) Nicaragua—Transportation Project: Roads benefits are based on the direct benefits derived from reduced travel time, reduced vehicle operating 

costs and increased traffic use. Number of beneficiaries is undetermined. 

Annual average daily traffic volume at the end of five years for N1 is projected at 4,061 vehicles. 

(m) Nicaragua—Rural Development Project Business: Number likely underestimates the total number of beneficiaries as said number refers to the 

number of jobs created at end of five years; does not include other indicators 

measuring number of program businesses (4,720), including farms, engaged 

in higher profit businesses at end of the Compact. 

7 Net Investment in Projects excludes Program Administration and Control/

Oversight, Monitoring and Evaluation, Procurement Agent, Fiscal Agent, 

and Audit budgets. Net Investment in Projects is based on the Multi-year 

Financial Plans of the approved Compact documents. Numbers expressed in 

USD.

8 Source: World Bank Gross National Income (GNI) Per Capita as the measure for “per capita income”. The World Bank Gross National Income (GNI) 

Per Capita is the same source data used to determine MCA eligibility. As of 

January 2007, World Bank data is not available for 2006. Accordingly, all 

listed “per capita” data are from 2005. In calculating Gross National Income 

(GNI—formerly referred to as GNP) and GNI per capita in US dollars, the 

World Bank uses the Atlas conversion factor in order to reduce the impact 

of exchange rate fluctuations in the cross-country comparison of national 

incomes. The Atlas conversion factor for any given year is the average of a 

country’s exchange rate (or alternative conversion factor) for that year and 

its average exchange rates for the two preceding years, adjusted for the difference between the rate of inflation in that country and that of the Euro 
Millennium Challenge Corporation

2006 Annual Report 125

Zone, Japan, United Kingdom, and the United States, as of 2001. A country’s 

inflation rate is measured by the change in its GDP deflator.

9 Values and percentages designate the projected increase in incomes, measured in terms of the corresponding indicator of income, that are assumed to 

result from given MCC interventions. Source: Compact Annex III.

10 Armenia—as measured by the change in real income from the sale of agricultural produce per household member as an index (2005 = 100); Source: 

Compact Annex III.

11 Benin—as measured by the average revenue and consumption level per 

household in access to land and access to finance measured through the National Living Standards Measurement Survey; Source: Compact Annex III

Description of the Monitoring and Evaluation Plan.

12 Cape Verde—as measured by the total increase in annual income from a) 

the Watershed Management and Agricultural Support Project, b) the Roads 

and Bridges Activity, c) the Port Activity, d) the Financial Sector Reform Activity and e) the Partnership to Mobilize Investment Activity; Source: Compact Annex III Description of the Monitoring and Evaluation Plan. The increase in annual income is approximately 1.2 percent of annual GDP in Year 5 

and 2.2 percent in Year 10, assuming a real GDP growth rate of 4 percent. 

13 El Salvador—as measured by the average annual per capita income of Program beneficiaries in the Northern Zone; Source: Compact Annex III Description of the Monitoring and Evaluation Plan.

14 Georgia—as measured by the financial benefits derived from pipeline rehabilitation and GRDF and ADA enterprise development activities. Note: this 

measure underestimates the impact of MCC interventions in Georgia as it 

does not take into account investments in roads and infrastructure. Source: 

Compact Annex III.

15 Ghana—as measured by a) net income per household from growing yams, 

sorghum and groundnuts (as proxies of the most likely crops grown) (Northern Zone: Savelugu Nanton, Tolon Kumbungu, Tamale, West Mamprusi and 

Karaga), b) net income per household from growing maize, yams and cas-
Millennium Challenge Corporation

126 2006 Annual Report

sava (as proxies of the most likely crops grown) (Afram Basin Zone-East: 

Fanteakwa and Kwahu South), c) net income per household from growing maize, yams and cassava (as proxies of the most likely crops grown) 

(Afram Basin Zone-West: Ejura Sekyedumasi, Afram Plains, Sekyere East 

and Sekyere West), and d) net income per household from growing pineapples and vegetables (as proxies of the most likely crops grown) (Southern 

Zone: Gomoa, Awutu Efutu Senya, Akuapim South, Manya Krobo, Dangme 

West, Yilo Krobo, North Dayi, Hohoe, Ketu, Keta, South Tongu and Akatsi). 

Source: Compact Annex III.

16 Honduras—as measured by the increase in income of beneficiaries of the 

Rural Development and Transportation Projects; Source: Compact Annex III

Description of the Monitoring and Evaluation Plan.

17 Madagascar—as measured by the National Statistical Institute’s National 

Household Income Survey that will enable the comparison of the intervention zones with similar non-intervention zones; Source: Compact Annex III

Description of the Monitoring and Evaluation Plan.

18 Mali—as measured by a) the total receipts of commercial concessions, 

flight kitchens, fuel suppliers, and baggage handling servicing the BamakoSenou Airport, b) total receipts of hotels and restaurants in Bamako, c) gross 

value-added of firms as well as total earnings including salaries and taxes of 

firms located in the industrial park, d) real income from irrigated agricultural production, e) real annual income from sale of agricultural production 

per household member in the Alatona zone. Data to be disaggregated by 

current residents and newly settled population to track whether resettled 

population’s incomes are restored as compared to their baseline incomes; 

Source: Compact Annex III Description of the Monitoring and Evaluation 

Plan. 

19 Nicaragua—as measured by the sum of the expected income gains from a) 

savings due to reduced vehicle operating costs and travel time, b) increased 

property value per property times the number of properties registered, c) the 

increase in value added to project firms, employees of project farmers and 

businesses as well as employees of businesses in value chain. Total income 

gains include: a) N-1 Road Upgrade equal to US$5.7million, b) Secondary 
Millennium Challenge Corporation

2006 Annual Report 127

Roads equal to US$8.6 million, c) Property Regulation equal to US$3.9 million, d) Rural Business Development is Post-Compact and, therefore equal 

to US$0 and e) Rural Business Development equal to US$2.7 million; Source: 

Compact Annex III Description of the Monitoring and Evaluation Plan. 

20 Vanuatu—as measured by the average cash income per capita of residents living within the catchments areas of the infrastructure sub-projects); 

Source: Compact Annex III Description of the Monitoring and Evaluation 

Plan.

21 Projected increases in incomes are measured in terms of the corresponding country-specific income indicator.
Millennium Challenge Corporation

128 2006 Annual Report

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