GAO 

United States Government Accountability Office

Report to Congressional Committees

MILLENNIUM 

CHALLENGE 

CORPORATION 

MCC Has Addressed 

a Number of 

Implementation 

Challenges, but Needs 

to Improve Financial 

Controls and 

Infrastructure 

Planning 

November 2009 

GAO-10-52 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

November 2009

MILLENNIUM CHALLENGE CORPORATION

MCC Has Addressed a Number of Implementation 

Challenges, but Needs to Improve Financial Controls

Highlights of GAO-10-52, a report to and Infrastructure Planning

congressional committees 

Established in January 2004 with a 

mission to reduce poverty through 

economic growth, the Millennium 

Challenge Corporation (MCC) has 

committed $6.9 billion for 

compacts with 19 developing 

countries. MCC vests compact 

management with accountable 

entities in recipient countries, 

called Millennium Challenge 

Accounts (MCA). MCAs, with 

guidance from MCC, allocate 

resources, oversee and implement 

a financial plan, approve 

expenditures and procurements, 

and implement compact projects. 

This report, directed by the fiscal 

year 2008 Consolidated 

Appropriations Act, assesses MCC 

and MCA (1) financial controls; 

(2) procurement practices; and 

(3) development, implementation, 

and oversight of contracts and 

projects. GAO focused on financial 

and procurement transactions and 

projects at MCAs in Honduras, 

Georgia, and Cape Verde, countries 

with high disbursement totals as of 

the end of fiscal year 2008. 

What GAO Recommends

GAO recommends that the Chief 

Executive Officer of MCC 

(1) improve FAPs and ensure 

comprehensive policies for all MCA 

expenses, (2) reinforce MCC’s 

price reasonableness analysis 

guidance, and (3) improve project 

design reviews and cost estimates 

prior to issuing contract 

solicitations. MCC accepted the 

recommendations. 

As required by MCC guidelines, each of the three MCAs GAO reviewed had 

developed a Fiscal Accountability Plan (FAP) that documented policies and 

procedures related to internal control, such as funds control, documentation, 

and segregation of duties. However, each of the FAPs GAO reviewed, in place 

as of the end of fiscal year 2008, had gaps in certain areas, such as incomplete 

policies and procedures for some expenses. Although MCC agreements 

require that each country prepare a FAP, the initial guidance MCC provided to 

the three MCAs was general and did not contain sufficient information to help 

the countries develop sound internal control structures. For example, 

guidance stated that records must support transactions and that procedures 

must incorporate segregation of duties. However, specific guidance on 

payroll, travel, and inventory controls would have helped the MCAs develop 

comprehensive policies. To address this, MCC developed a FAP template in 

November 2008, but MCC allows the MCAs flexibility and does not require 

them to implement the template’s policies and procedures. In addition, GAO 

identified a significant number of the transactions tested that lacked adequate 

supporting documentation or were not properly approved by management. 

These deficiencies increase the risk of fraud, waste, and abuse of MCC 

program funding. 

MCC has increased standardization of the MCA procurement guidelines, 

which were initially developed on a country-by-country basis. The MCAs GAO 

assessed generally adhered to MCC’s procurement guidelines. GAO found 

that, in some cases, MCAs did not document a price reasonableness analysis 

of winning bids. GAO also found that when MCAs delegated procurement 

responsibility to outside entities, the procedures used by these entities were 

generally consistent with MCC’s procurement framework. 

MCC conducts oversight of MCA infrastructure contracts and projects, but 

insufficient planning of projects during compact development and cost 

escalation has undermined project implementation. As a result of insufficient 

planning, designs had to be revised, and project scopes have been reduced. 

Significant delays to project schedules—the result of undertaking additional 

planning and design—further compounded the escalation in construction 

costs experienced on projects and contributed to the restructuring of projects. 

For example, two of five planned roads in Cape Verde were eliminated, in part 

due to insufficient design and cost increases. In addition, the schedule for 

construction of the remaining three roads was extended by 11 months. MCC 

has worked with the MCAs to significantly restructure projects to keep them 

within their budgets and 5-year compact time frames. MCC also has taken 

steps to provide increased assistance to MCAs to help them conduct better 

planning for projects. However, these changes alone will not address the 

problems projects encountered with design development and cost escalation. 

Industry best practices and past GAO work have shown that conducting 

design reviews and updating cost estimates prior to contract solicitation help 

to ensure that projects can be successfully bid and constructed. 

View GAO-10-52 or key components.

For more information, contact David Gootnick 

at (202) 512-3149 or gootnickd@gao.gov. 
Page i GAO-10-52 

Contents 

Letter 1

Results in Brief 3 

Background 6 

MCC’s Accountability Framework Does Not Always Help Ensure 

Adequate Funds Controls in Compact Countries 18 

MCC Has Decreased Its Level of Procurement Review; Countries 

Generally Adhered to MCC Requirements 28 

MCC Conducts Oversight, but Insufficient Planning of Projects 

during Compact Development Has Undermined Project 

Implementation 35 

Conclusions 47 

Recommendations for Executive Action 48 

Agency Comments and Our Evaluation 49 

Appendix I Objectives, Scope, and Methodology 51 

Appendix II Reductions in MCC Procurement Review 

Thresholds 64 

Appendix III Documentation of Compliance with MCC 

Procurement Criteria 67 

Appendix IV Comments from the Millennium Challenge 

Corporation 70 

Appendix V GAO Contact and Staff Acknowledgments 78 

Tables 

Table 1: Estimated Percentage of Country Procurements Meeting 

MCC Procurement Criteria 31 

Table 2: Sample of Disbursements Tested and Dollar Value for 

Each MCA 53 

 Millennium Challenge Corporation 
Table 3: MCA Procurements by Population and Sample Sizes 55 

Table 4: Measures of Compliance with MCC Procurement 

Guidelines 57 

Table 5: Detailed Estimated Percentage of Country Procurements 

Meeting MCC Procurement Criteria 67 

Figures 

Figure 1: Honduras Compact Obligations, as of April 2009 8 

Figure 2: Georgia Compact Obligations, as of April 2009 9 

Figure 3: Cape Verde Compact Obligations, as of April 2009 10 

Figure 4: MCC Fiscal Accountability Framework 12 

Figure 5: Compact Procurement Process Established by MCC 

Guidelines 15 

Figure 6: MCC’s Contract Management Structure for Infrastructure 

Projects 17 

Figure 7: MCC Compact Development and Implementation before 

2008 42 

Figure 8: MCC Compact Development and Implementation Process 

as of 2008 42 

Figure 9: Rerouting of Pipeline at the Naniani Landslide Site in 

Georgia 45 

Figure 10: Honduras CA-5 Highway Project 59 

Figure 11: Georgia North-South Gas Pipeline Rehabilitation Project 60 

Figure 12: Samtskhe-Javakheti Roads Rehabilitation Project 

Procurements 61 

Figure 13: MCC-Funded Roads Project and Port of Praia Project on 

Santiago Island, Cape Verde 62 

Figure 14: MCC Approval Requirements from the Program 

Procurement Guidelines of July 21, 2008 (Goods, Works, 

and Nonconsultant Services) 64 

Figure 15: MCC Approval Requirements from the Program 

Procurement Guidelines of July 21, 2008 (Consultant 

Services) 65 

Page ii GAO-10-52 Millennium Challenge Corporation
Abbreviations 

CNFA Citizens Network for Foreign Affairs 

DCI data collection instrument 

FAP Fiscal Accountability Plan 

GRDF Georgia Regional Development Fund 

IAR interim activity review 

IST Implementation Support Team 

MCA Millennium Challenge Account 

MCC Millennium Challenge Corporation 

MDF Municipal Development Fund (of Georgia) 

MIT Ministry of Industry and Transport (of Cape Verde) 

PPR Procurement Performance Report 

RCD resident county director 

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Page iii GAO-10-52 Millennium Challenge Corporation
Page 1 GAO-10-52 

 

United States Government Accountability Office

Washington, DC 20548 

 

November 6, 2009 

The Honorable Patrick Leahy 

Chairman 

The Honorable Judd Gregg 

Ranking Member 

Subcommittee on State, Foreign Operations, 

 and Related Programs 

Committee on Appropriations 

Unites States Senate 

The Honorable Nita M. Lowey 

Chair 

The Honorable Kay Granger 

Ranking Member 

Subcommittee on State, Foreign Operations, 

 and Related Programs 

Committee on Appropriations 

House of Representatives 

Established in January 2004 with the mission of reducing poverty through 

economic growth, the Millennium Challenge Corporation (MCC) has 

committed approximately $6.9 billion from the Millennium Challenge 

Account (MCA) for compacts with 19 developing countries as of August 

2009.1

 MCC compacts are limited by U.S. law to extend for no more than 

5 years.2

 During the 5-year compact implementation period, MCC vests 

responsibility for day-to-day management—including financial controls, 

procurement functions, and contract management—to accountable 

entities in recipient countries, commonly called “MCA-[country name],” in 

keeping with the MCC principle of country ownership. MCC provides the 

frameworks and guidance for financial controls, procurement, and 

contract management that MCAs are to use in implementing compact 

projects. The statute establishing MCC requires that each compact include 

(1) a plan to ensure fiscal accountability for the use of compact funds and 

(2) a requirement for open, fair, and competitive procedures in the 

1

As of August 2009, MCC had signed compacts with Madagascar, Honduras, Cape Verde, 

Nicaragua, Georgia, Benin, Vanuatu, Armenia, Ghana, Mali, El Salvador, Mozambique, 

Lesotho, Morocco, Mongolia, Tanzania, Burkina Faso, Namibia, and Senegal. 

2

22 U.S.C. § 7708(j). 

 Millennium Challenge Corporation 
 

administration of grants or cooperative agreements or the procurement of 

goods and services for the accomplishment of compact objectives.3

In the fiscal year 2008 Consolidated Appropriations Act, Congress directed 

GAO to review the financial controls and procurement practices of MCC 

and its accountable entities.4

 For this report, we examined MCC’s 

(1) financial controls; (2) procurement practices; and (3) development, 

implementation, and oversight of contracts and projects.5

 Our previous 

analysis found that the MCA pace in implementing compacts within the 

required 5-year time frame consistently lagged behind MCC’s initial 

projections, placing the MCAs and MCC at risk of not achieving compact 

goals within the time limit.6

We focused our analysis on MCC’s compacts with Honduras,7

 Georgia, and 

Cape Verde, which, as of September 30, 2008, accounted for approximately 

 

3

22 U.S.C. 7708(b)(1)(G) and (I). 

4

Consolidated Appropriations Act, 2008, Pub. L. No. 110-161 § 668(d)(1)(A). The act also 

required us to examine the results achieved by MCC’s compacts. We will respond to this 

requirement separately. 

5

We first reported on the fiscal accountability, procurement structures, and implementation 

of early MCC compacts—including those with Honduras and Cape Verde—in Millennium 

Challenge Corporation: Compact Implementation Structures Are Being Established; 

Framework for Measuring Results Needs Improvement, GAO-06-805 (Washington, D.C.: 

July 28, 2006). 

6

According to GAO analysis, as of the end of the first quarter of fiscal year 2009, MCC had 

disbursed $437 million in compact assistance—32 percent of initially planned 

disbursements—for the 16 compacts that had entered-into-force. The 16 compacts have a 

total value of approximately $5.7 billion. Although MCC began reestimating planned project 

disbursements quarterly in January 2008, MCAs have generally not met these reduced 

projections. 

7

On June 28, 2009, Honduras experienced a coup and the elected president was forcibly 

exiled. In September 2009, MCC terminated $11 million of its assistance under the compact 

and placed a hold on an additional $4 million. 

Page 2 GAO-10-52 Millennium Challenge Corporation
 

39 percent of MCC’s total disbursements.8 For objective 1, we assessed 

MCA policies and procedures and reviewed in-country file documentation 

that focused on 689 financial transactions completed during fiscal year 

2007 or 2008. For objective 2, we reviewed MCC’s framework and assessed 

compliance by reviewing in-country file documentation for a statistically 

selected sample of 138 procurements conducted in fiscal year 2008. For 

both objectives, if we identified missing or incomplete documentation, we 

brought it to the attention of MCA staff and gave them an opportunity to 

provide the missing documentation. For objective 3, we focused on the 

three largest infrastructure construction contracts in each country and the 

largest consultant services contract associated with construction services, 

including a review of contractor reporting and site visits to projects in 

Honduras and Georgia. See appendix I for a complete description of our 

objectives, scope, and methodology. 

We conducted this performance audit from June 2008 to October 2009 in 

accordance with generally accepted government auditing standards. Those 

standards require that we plan and perform the audit to obtain sufficient, 

appropriate evidence to provide a reasonable basis for our findings and 

conclusions based on our audit objectives. We believe the evidence 

obtained provides a reasonable basis for our findings and conclusions 

based on our audit objectives. 

Each of the three MCAs we reviewed had developed a Fiscal 

Accountability Plan (FAP) that documented its operational policies and 

procedures, including funds controls. However, our review of these 

policies and procedures showed that, at all three MCAs, the FAPs had gaps 

in certain areas, such as incomplete policies and procedures for some 

Results in Brief 

 

8

Our findings are not projectable to other countries. We initially planned to examine 

Georgia, Madagascar, and Honduras, the compacts with the first-, second-, and thirdhighest total disbursements as of the end of fiscal year 2008. Together, these three 

compacts accounted for approximately 46 percent of MCC’s total disbursements. However, 

our audit in Madagascar in January 2009 was interrupted by protests and instability in the 

country that ultimately led to the forced resignation of the country’s elected president. On 

March 20, 2009, MCC announced that it was placing a hold on its operations in Madagascar, 

and it terminated the program on May 19, 2009, because of the undemocratic change of 

government. We eliminated Nicaragua, the country with the fourth-highest disbursement 

total, from our consideration because MCC partially suspended the compact in December 

2008 due to concerns about the conduct of elections in the country. In June 2009, the MCC 

Board of Directors terminated the suspended portions of the Nicaragua compact. After 

removing Nicaragua from our consideration, we included Cape Verde, the country with the 

fifth-highest disbursements. 

Page 3 GAO-10-52 Millennium Challenge Corporation
 

operational expenses. MCC compact agreements require that each country 

prepare a FAP, which must clearly document policies and procedures 

related to internal control, such as funds control, documentation, and 

segregation of duties. However, financial guidance MCC provided to the 

three MCAs did not contain sufficiently detailed information to enable the 

countries to develop sound internal control structures that would help 

ensure adequate control over funds. For example, the guidance stated that 

procedures must be in place to ensure that disbursements are executed in 

accordance with the compact, records must be maintained to provide 

clear support of transactions, and procedures must incorporate 

segregation of duties and internal control. However, this guidance did not 

contain examples of the policies and procedures that the MCAs could 

implement to ensure an adequate fiscal accountability structure. For 

example, more specific or detailed guidance in payroll, travel, and 

inventory controls would have assisted the MCAs in developing 

comprehensive policies and procedures. To help address the FAPs’ 

shortcomings, MCC developed a FAP template in November 2008. 

However, MCC allows the MCAs flexibility and does not require compact 

countries to implement the policies and procedures included in the 

template. Additionally, our review of the implementation of established 

financial controls at three MCAs found that these MCAs did not 

consistently comply with established controls. During our testing, we 

identified a significant number of transactions that lacked adequate 

supporting documentation or were not properly approved by management 

officials. These internal control deficiencies increase the risk of fraud, 

waste, and abuse of MCC program funding. 

All three MCAs generally adhered to MCC’s evolving framework for 

ensuring open, fair, and competitive procurements. MCC has increased the 

specificity of its procurement guidance over time. MCC initially allowed 

countries to develop their own guidelines, but now requires standard MCC 

guidelines applied across all countries. Conversely, MCC has decreased its 

level of review of compliance with its guidance over time by reducing the 

number of required MCC reviews of country procurements. MCC now 

relies more heavily on post-reviews and independent audits to identify 

procurement problems. On the basis of our detailed review of stratified 

random samples of procurements at three MCAs, we estimated that these 

MCAs complied with most MCC requirements. However, the MCAs we 

reviewed did not consistently document their evaluation of the 

reasonableness of winning bid prices. When the MCAs delegated 

procurement responsibility to implementing entities outside of the MCA, 

those entities generally adhered to MCC’s procurement framework. 

Page 4 GAO-10-52 Millennium Challenge Corporation
 

MCC conducts oversight of MCA infrastructure contracts and projects, but 

insufficient planning of projects during compact development and cost 

escalation has undermined project implementation. During compact 

implementation, MCC conducts oversight of MCA projects by monitoring 

projects, establishing performance incentives and accountability 

structures, and using cross-functional teams. However, MCC-funded 

infrastructure projects have experienced delays, project scopes have been 

reduced, and contract costs have increased. As a result of insufficient 

planning, the MCAs have had to contract for and conduct additional 

engineering surveys, designs have had to be revised, and project scopes 

have been reduced. Significant delays to project schedules—the result of 

undertaking additional planning and design—further compounded the 

escalation in construction costs experienced on projects and contributed 

to the restructuring of projects. MCC has taken action to work with the 

MCAs to significantly restructure projects to keep them within their 

budgets and the 5-year compact time frames. MCC also has taken steps to 

revise the compact development process to provide increased MCC 

assistance to the MCAs to help them conduct better planning for projects. 

However, these changes alone will not address the problems that the 

projects have encountered with design development and cost escalation. 

Industry best practices and GAO past work have shown that conducting 

design reviews and updating cost estimates—to include assessing risks—

prior to contract solicitation help to ensure that projects can be 

successfully bid and constructed. 

We are recommending that the Chief Executive Officer of the Millennium 

Challenge Corporation (1) revise MCC guidance to require that MCA FAPs 

include comprehensive policies and procedures that are in accordance 

with best practices, (2) revise MCC guidance to require that FAPs 

incorporate policies and procedures related to monitoring and evaluating 

implementing entities’ compliance with contract agreements, (3) reinforce 

existing guidance to MCAs on conducting and documenting price 

reasonableness analyses, (4) establish a programmatic goal that MCAs 

conclude all project planning efforts prior to the point at which MCAs 

issue contract solicitations, and (5) require MCAs to obtain detailed 

reviews of project cost estimates and project designs before contract 

solicitation for large construction projects. 

We received written comments on a draft of this report from MCC. MCC 

accepted our recommendations and outlined steps it had taken to address 

them, but also commented on some of GAO’s specific findings. We have 

reprinted MCC’s comments, with our responses, in appendix IV. We also 

Page 5 GAO-10-52 Millennium Challenge Corporation
 

incorporated technical comments from MCC in our report where 

appropriate. 

Background 

MCC Compact 

Development and 

Implementation 

MCC undertakes a process each fiscal year to identify countries as 

candidates for MCA assistance. MCC uses per capita income data to 

identify two pools of countries as eligible candidates: low-income 

countries and lower-middle-income countries. Candidate countries also 

must not be statutorily barred from receiving U.S. assistance. MCC’s Board 

of Directors then uses quantitative indicators to assess a candidate 

country’s policy performance. To be eligible for MCA assistance, a country 

must pass the indicator for control of corruption and at least one-half of 

the indicators in each of the following three categories: ruling justly, 

investing in people, and encouraging economic freedom. To pass an 

indicator test, a country must score better than at least one-half of the 

other candidates (above the median) in its income group. If the policy 

performance of a country implementing a compact declines, the board can 

suspend or terminate the compact. 

Eligible countries may develop and propose projects, with guidance from 

MCC, with the goal of achieving economic growth and poverty reduction. 

MCC conducts an initial peer review of the country’s proposal, including 

an examination of proposed accountability and procurement structures, 

project scope, preliminary cost estimates, and the feasibility of 

implementing projects within the 5-year compact period.9

 MCC also may 

provide 609(g) funds10 to the country to assist in compact development. If 

MCC accepts the proposal, it negotiates and signs a compact with the 

eligible country, committing the full amount of the compact. After 

compact signature, the MCA completes additional agreements, budgets, 

 

9

MCC also reviews, among other things, the economic analysis of project benefits, the 

consultative process used to develop the compact, monitoring and evaluation plans, donor 

coordination, and environmental and social safeguards. 

10Section 609(g) of the Millennium Challenge Act of 2003 gives MCC the authority to make 

grants to facilitate the development and implementation of compacts. If certain conditions 

are met, MCC may fund an eligible country’s request for “management support payments” 

for salaries, rent, and equipment for the country’s technical team prior to compact 

signature. 

Page 6 GAO-10-52 Millennium Challenge Corporation
 

and plans prior to entry-into-force. At entry-into-force, MCC obligates and 

begins disbursing compact funds, and compact implementation begins. 

Following MCC’s internal reorganization in October 2007, MCC revamped 

its compact development process to include greater up-front engagement 

with eligible countries and assistance in conducting needed studies and 

establishing management structures.11 MCC’s 2010 Congressional Budget 

Justification notes that it revised the phases of compact development in an 

effort to address the challenges and problems it encountered with current 

compacts.12

MCC Compacts in 

Honduras, Georgia, and 

Cape Verde 

The three compacts we selected for review vary in the type and size of 

projects funded, but each devotes more than one-half of compact funds to 

infrastructure projects, such as roadways, bridges, and ports. Figures 1, 2, 

and 3 provide compact obligations by country. As of August 2009, these 

three compacts were in their 4th year of 5 years of compact 

implementation. 

 

11MCC used its previous compact development process for compacts with the three 

countries in which we performed fieldwork. 

12Previous GAO reports assessed various aspects of MCC’s compact development, 

including eligibility determinations, due diligence, and economic analyses. See GAO, 

Millennium Challenge Corporation: Independent Reviews and Consistent Approaches 

Will Strengthen Projections of Program Impact, GAO-08-730 (Washington, D.C.: 

June 17, 2008); Millennium Challenge Corporation: Vanuatu Compact Overstates 

Projected Program Impact, GAO-07-909 (Washington, D.C.: July 11, 2007); Millennium 

Challenge Corporation: Compact Implementation Structures Are Being Established; 

Framework for Measuring Results Needs Improvement, GAO-06-805 (Washington, D.C.: 

July 28, 2006); and Millennium Challenge Corporation: Progress Made on Key Challenges 

in First Year of Operations, GAO-05-455T (Washington, D.C.: Apr. 26, 2005). 

Page 7 GAO-10-52 Millennium Challenge Corporation
 

Figure 1: Honduras Compact Obligations, as of April 2009 

Source: GAO analysis of MCC data.

Dollars in millions

Program Administration, $11.8

Rural Development Project, $74.6

2%

Monitoring and Evaluation, $5.0

Transportation Project, $123.6

CA-5 construction contracts: $48.4, $23.2 and $16.2

Transportation Project Management contract: $2.9 

6%

57%

35%

Total: $215.0

Entry-into-Force: September 29, 2005 

Note: Contract values (shown in italics) are initial values and do not include subsequent change 

orders. 

Page 8 GAO-10-52 Millennium Challenge Corporation
 

Figure 2: Georgia Compact Obligations, as of April 2009 

Source: GAO analysis of MCC data.

Total: $395.3 

Entry-into-Force: April 7, 2006

Enterprise Development Project, $47.4

Dollars in millions

Road Rehabilitation Activity, $184

Samtskhe-Javakheti Road Rehabilitation Project

 (SJRRP) construction contracts: $65.0 and $33.1

Engineering and Design Services: $3.2

Program Administration, $23.9

2%

Monitoring and Evaluation, $8.5

Energy Rehabilitation Activity, $62.5

North-South Gas Pipeline Phase II Rehabilitation

 Project contract: $6.2 

Regional Infrastructure

Development Activity, $69.5

12%

6%

18%

46%

16%

Notes: 

After conflict erupted between Russia and Georgia in August 2008, the United States announced a 

$1.0 billion aid package to Georgia in September 2008. As part of this assistance, MCC provided 

$100.0 million in additional compact funding on November 20, 2008, increasing the compact to its 

current value of $395.3 million. 

Contract values (shown in italics) are initial values and do not include subsequent change orders. 

Page 9 GAO-10-52 Millennium Challenge Corporation
 

Figure 3: Cape Verde Compact Obligations, as of April 2009 

Watershed Management and

Agricultural Support Project, $11.0

Dollars in millions

Infrastructure Project, $83.2

Contracts: 

Phase I Port Construction: $42.3

Road Construction: $11.2

Bridge Construction: $3.3

Port Project Management: $3.2

Program Administration, $10.2

2%

Private Sector Development Project, $2.1

3%

Monitoring and Evaluation, $3.6

9%

10%

76%

Total: $110.1

Entry-into-Force: October 17, 2005

Source: GAO analysis of MCC data.

Note: Contract values (shown in italics) are initial values and do not include subsequent change 

orders. 

Page 10 GAO-10-52 Millennium Challenge Corporation
 

MCC has developed management and control guidance and structures to 

implement the statutory requirements for fiscal accountability and for 

open, fair, and competitive procurements. MCC and MCAs have 

established processes for controls over compact funds; the procurement 

of required goods, works, and services; and the development and 

management of contracts after award. 

MCC compacts and related documents include sections on fiscal 

accountability that describe the agreement between MCC and the recipient 

country in areas such as financial management and procurement practices. 

According to MCC’s Fiscal Year 2007 Guidance for Compact-Eligible 

Countries,

13 two key entities are generally involved in fiscal accountability. 

First, the country must authorize an accountable entity to oversee the 

MCC program and its components, allocate resources, oversee and 

implement a financial plan, approve expenditures and procurements, and 

be accountable for MCC program results. Second, the compact typically 

will require a fiscal agent for MCC-funded activities that is responsible for 

certain aspects of fiscal accountability, such as funds controls and, in 

some cases, procurement management. The MCC fiscal accountability 

framework is depicted in figure 4. 

MCC Financial Controls, 

Compact Procurement 

Structure, and Contract 

and Project 

Implementation Oversight 

Financial Controls 

 

13Millennium Challenge Corporation, Fiscal Year 2007 Guidance for Compact-Eligible 

Countries, Chapter 30, Fiscal Accountability Guidelines. 

Page 11 GAO-10-52 Millennium Challenge Corporation
 

Figure 4: MCC Fiscal Accountability Framework 

Accounting records

Financial and/or procurement management

Funds

Source: GAO analysis of MCC data.

Millennium Challenge Corporation

 (Washington, D.C.)

MCA 

permitted 

bank 

account(s)

Procurement 

Agent

(if used)

• Documents obligations

• Initiates disbursements and 

redisbursements

• Initiates procurement

• Manages program implementation

• Collects and reports monitoring and 

evaluation data

• Prepares Fiscal 

Accountability Plan 

• Provides funds control

• Maintains accounting 

records

• Produces reports

Accountable Entity (MCA)

Submits for review and approval:

• Budget

• Quarterly disbursement requests

• Financial and monitoring and evaluation reports

• Procurement plans, reports, and some actions

• Allocates budgets

• Approves disbursements and redisbursements

• Provides accounting records

• Approves certain 

contract actions

Fiscal Agent

Redisbursementa Disbursement 

Disbursement 

Implementing

Entity/

Project 

Managerb

Implementing

Entity/

Project 

Managerb

Implementing

Entity/

Project 

Managerb

Vendor/

Contractor

Vendor/

Contractor

Vendor/

Contractor

• Administers/

certifies procurement process

• Instructs to 

issue payment

U.S. Treasury 

Common 

Payment 

System

$

$

$ $

$

Note: Audits and MCC reviews can occur anywhere within the framework. 

a

MCC can directly disburse compact funds through the Department of the Treasury’s system to MCAcontracted parties, such as vendors, suppliers, or project managers, upon the MCA’s approval. 

Alternatively, MCC can disburse funds to the MCA’s permitted accounts from which the MCA can 

redisburse funds to its contractors. 

Page 12 GAO-10-52 Millennium Challenge Corporation
 

b

Implementing entities or project managers are contracted by the MCA to perform oversight functions. 

An implementing entity is a government agency or nongovernmental agency or other public- or 

private-sector entity or persons to which an MCA may provide MCC funding, directly or indirectly, 

through an outside project manager, to implement and carry out the projects or any other activities to 

be carried out in furtherance of a compact. 

To address financial management, MCC requires each MCA to adopt a FAP 

that clearly documents the policies and procedures, including internal 

controls, that will help ensure appropriate fiscal accountability over the 

use of MCC-provided funds. In its Fiscal Year 2007 Guidance for 

Compact-Eligible Countries, MCC provided the MCAs with information 

that the MCAs should consider when developing their policies and 

procedures. For example, the MCAs should ensure that, in developing 

procedures for their disbursements, they consider funds control and 

documentation (i.e., procedures for authorizing, verifying, and recording a 

transaction); separation of duties and other internal controls (i.e., 

procedures for segregating approval and processing duties); and 

procedures related to the reconciliation of funds. MCC, as a component of 

this framework, is responsible for reviewing and approving certain policy 

documents and for ensuring that financial controls are adequately 

structured and implemented for each country. 

MCC assesses the status of financial management at the compact country 

through the review of reports, in particular annual financial audits of the 

MCA financial statements and Quarterly Disbursement Reports. MCC 

requires annual financial audits of the resources managed by the MCAs to 

assess whether funds received and costs incurred are recorded in 

conformity with the terms of the compact agreement and generally 

accepted accounting principles. MCC also requires Quarterly 

Disbursement Requests and Reports from the MCAs, which describe the 

funds used in the past quarter and the estimated expenses requiring MCC 

funding for the next quarter and beyond. After reviewing and approving 

the quarterly disbursement requests, MCC authorizes disbursement of the 

funds for the next quarter. 

Prior to fiscal year 2008, MCC requested that the Department of the 

Treasury (Treasury) transfer compact funds into the MCA bank accounts 

(e.g., permitted bank accounts) for redisbursement by the MCAs to their 

contractors. According to MCC officials, in September 2008, MCC started 

using the Treasury’s Common Payment System to make direct payments to 

the MCA contractors. However, as shown in figure 4, countries still 

maintain permitted bank accounts that are used to redisburse funds 

received from MCC. Thus, the MCAs may continue to internally process 

and manage project or program payments through the use of the country’s 

Page 13 GAO-10-52 Millennium Challenge Corporation
 

permitted bank account, which receives funds during MCC’s quarterly 

disbursements. 

As part of the country’s proposal for compact funding, the MCAs identify 

their approach to procurement. Prior to May 2007, the guidelines used by 

the MCAs were negotiated and documented in a procurement agreement—

a supplemental agreement to the compact. MCC currently uses standard 

procurement guidelines, based on World Bank guidelines, and requires 

their use in compacts, unless it specifically permits alternative procedures. 

MCC also has developed several guidance papers that assist countries in 

implementing the standard procurement guidelines.14 The MCAs may 

contract with a procurement agent to perform key procurement 

functions.15 Figure 5 summarizes MCC’s compact procurement process. 

Compact Procurement 

Structure 

 

14Examples of MCC-developed guidance include procedures for verifying excluded parties, 

technical evaluation panels, procurement performance reports, procurement 

implementation plans, the bid challenge system, and price reasonableness analyses. 

15According to MCA officials, MCAs in Honduras and Georgia originally used procurement 

agents as part of their compact management systems. However, both MCAs have since 

chosen to discontinue this practice and use MCA employees to conduct procurements. 

MCA-Cape Verde has never used a procurement agent. 

Page 14 GAO-10-52 Millennium Challenge Corporation
 

Figure 5: Compact Procurement Process Established by MCC Guidelines 

Advertisement Short-list

Bid opening

Planning Prequalification

(if used) 

Bidding

Bid evaluation 

Procurement Process Reporting and Post-reviews

Milestones

Documents that may require review

Procurement and post-review phases

• Semiannual plans

• Bid documents

and advertisement

• General 

procurement 

notices

• Procurement 

implementation 

plans

• Evaluation reports

• Award 

recommendation

• Contractor 

eligibility 

determination

• Price 

reasonableness

• Prequalification 

documents

• Short-list selection

• Bidding 

documents

(terms of 

reference)

• Change orders

• Documentaton 

of receipt of 

goods, works, 

or services

• Procurement 

Performance Reports

• Auditor reviews

• Bid challenges

• Interim Activity Reviews

Contract 

management 

Contract 

award

Source: GAO analysis of MCC data.

Note: This graphic illustrates some key documents and terms and will not apply to every 

procurement. For example, prequalification is usually used only for large or complex procurements. 

Noncompetitive procurements will omit portions of this process; sole source procurements will not be 

advertised or competed; and shopping and limited bidding procurements are directed to a preselected 

list of potential bidders, rather than openly advertised. 

Page 15 GAO-10-52 Millennium Challenge Corporation
 

The MCAs manage compact procurements, but MCC retains review 

authority at points in the process, including procurement planning, 

prequalification, bid evaluation, and proposed contract award. MCC’s 

guidelines require both MCA and MCC approvals at up to three levels: 

(1) the MCA procurement director, (2) the MCA governing body, and 

(3) MCC. The level of review depends on the value and method of the 

procurement. Higher-value procurements and those using less-competitive 

methods generally require more second- and third-level reviews and 

approvals. Before MCC published standardized guidelines, the Honduras, 

Georgia, and Cape Verde procurement agreements required the first 

approval to be by the MCA management, and the second approval to be by 

the MCC governing body, or in the case of Cape Verde, by a special 

Procurement Review Commission consisting of Cape Verde government 

officials. 

To conduct oversight of large infrastructure projects managed by the 

MCAs, MCC reviews key documents, such as bidding packages, contract 

documents, technical project requirements, and work plans. In general, 

MCC’s implementation process for infrastructure contracts and projects 

requires that the MCAs have individual project directors—for example, a 

roads director—who oversee outside implementing entities and project 

management consultants. MCC also requires the MCAs to engage the 

services of a project management firm or an implementing entity to help 

manage compact projects before receiving project funding. MCA 

independent construction supervisors conduct oversight of day-to-day 

construction and the activities of the construction contractors to ensure 

compliance with contract requirements. MCC’s Implementation Support 

Team (IST) and resident country director, aided by MCC’s own 

independent engineers, monitor progress of the construction works as 

managed by the MCAs and executed by their contractors. To report 

progress, the MCAs prepare quarterly reports to MCC. MCC’s deputy vice 

presidents hold quarterly country portfolio reviews during which the IST 

reports on implementation progress as well as issues and concerns. Figure 

6 depicts the oversight, management, and contractual relationships 

between MCC, the MCA, and their contractors for infrastructure projects. 

Contract and Project 

Implementation Oversight 

Page 16 GAO-10-52 Millennium Challenge Corporation
 

Figure 6: MCC’s Contract Management Structure for Infrastructure Projects 

MCC

MCC’s

independent

engineers

MCA

Implementing

entity

Project

construction

contractor

Project

management

consultant

Independent

construction

supervisor

(engineer)

Oversight

Collaborative

Contractual

Supervisory

Source: GAO interpretation of contract and project management structures for large infrastructure projects.

Depending on contract requirements, the implementing entity or project management consultant 

may only be contracted as an advisor to the MCA and may not supervise the independent 

construction supervisor

Page 17 GAO-10-52 Millennium Challenge Corporation
 

The MCAs have made progress in implementing polices and procedures 

for managing their administrative and operating expenses. However, our 

review of these policies and procedures, as documented in each country’s 

FAP, found gaps in the design of the policies and procedures, which 

prevented the establishment of an adequate internal control structure. In 

addition, our tests of transactions at the three MCAs showed that 

processed financial transactions did not consistently comply with the 

MCAs’ established controls, resulting in transactions that lacked proper 

approvals and adequate documentation. 

MCC’s Accountability 

Framework Does Not 

Always Help Ensure 

Adequate Funds 

Controls in Compact 

Countries 

MCA Fiscal Accountability 

Plans Had Gaps and Did 

Not Address Certain Key 

Controls 

During our review of the three MCAs we visited, we found that each entity 

had documented policies and procedures in their FAPs as required by 

MCC. However, travel and payroll policies in two of the three countries we 

visited were incomplete or did not address key procedures or controls. In 

addition, the FAPs in all three countries lacked policies and procedures 

related to disbursements for each MCA’s main project or program 

expenses. The lack of adequate and comprehensive policies contributes to 

internal control structures that increase the risk of fraud, waste, and abuse 

in MCC-funded projects. For example: 

• Travel policies in Honduras and Cape Verde lacked key requirements for 

supporting documentation. For example, in Honduras, travel policy 

allowed employees to be paid for lodging and per diem for local or 

international travel prior to the trip but did not require staff to submit 

detailed documentation related to hotel or airline flight receipts upon 

return to document the completion of travel. In addition, the policy did not 

address certain key issues, such as a business class airfare policy. 

Similarly, Cape Verde’s travel policies and procedures did not require staff 

to submit documentation related to hotel expenditures.16 Furthermore, 

Cape Verde’s FAP authorized business class airfare for travel of 9 hours or 

more, regardless of whether stops were made overnight for business or 

personal reasons. 

• Payroll policies in Honduras and Cape Verde did not include a requirement 

for staff to prepare individual time sheets or other documentation that 

 

16According to our Standards for Internal Control in the Federal Government, 

GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999), internal control and other 

significant events should be clearly documented in management directives and other 

policies. Clear and complete policies should help ensure that transactions are properly 

documented and substantiated. 

Page 18 GAO-10-52 Millennium Challenge Corporation
 

could be used by direct supervisors to verify actual hours worked before 

payroll was processed. Although payroll at these countries is based on 

contracted salaries, we could not determine from the documentation 

available whether staff members had actually worked the compensated 

hours.17

• The FAPs in all three countries lacked policies and procedures for 

authorizing and paying major program expenses, such as payment for road 

resettlement, investments, grants, and credit line transactions. These 

program expenses are often managed by an implementing entity and 

comprised some of the largest disbursements for the MCAs we reviewed. 

For example, in Honduras the credit line and grant disbursements totaled 

$9.9 million, or 29 percent of the total disbursement amount of $33.8 

million for the period we reviewed. Specific program or project 

requirements could be found through extensive reviews of various 

agreements between the MCAs and their implementing entity or other 

external guidance. However, key controls related to the disbursement 

approval process and documentation requirements for these transactions 

were not documented in the countries’ FAPs.18 It is important to include 

the relevant controls for these activities in the FAP to ensure that the 

MCAs have an adequate structure in place to efficiently manage their 

projects and provide a central point of reference for all documentation and 

approval requirements. 

The lack of comprehensive policies and procedures at the MCAs is the 

result of limitations in the initial guidance that MCC provided to the three 

MCAs. MCC’s initial Guidance for Compact-Eligible Countries consisted 

primarily of outlining the responsibilities of MCC and the recipient 

government in matters related to financial management and provided 

general guidance about the foundation of the policies and procedures to 

be developed. For example, the guidance stated that (1) procedures must 

be in place to ensure that disbursements are executed in accordance with 

 

17GAO, Maintaining Effective Control over Employee Time and Attendance Reporting, 

GAO-03-352G (Washington, D.C.: January 2003), states that effective controls over payroll 

information should provide reasonable assurance that time and attendance information 

reflects actual work performed and is sufficiently detailed to allow for verification. In 

addition, supervisory authorization and approval is a key part of ensuring the propriety of 

time and attendance information. 

18GAO, Internal Control Management and Evaluation Tool, GAO-01-1008G (Washington, 

D.C.: August 2001), describes best practices for adequate documentation of internal 

controls and states that internal control activities should appear in administrative policies 

or accounting manuals. 

Page 19 GAO-10-52 Millennium Challenge Corporation
 

the compact or related documents, (2) records must be maintained that 

provide clear support of a transaction, and (3) procedures must 

incorporate the principle of segregation of duties and internal controls. 

However, this guidance did not contain examples of the policies and 

procedures that the MCAs could implement to ensure an adequate fiscal 

accountability structure. For example, more specific or detailed guidance 

in payroll, travel, and inventory controls would have assisted the MCAs in 

developing comprehensive policies and procedures. According to MCC, to 

help the MCAs comply with their responsibility for developing their FAPs, 

MCC’s fiscal accountability directors often worked hand-in-hand with the 

MCAs and fiscal agents while drafting their initial guidance. The directors 

also collaborated with colleagues who worked on other countries’ FAPs to 

help ensure that the major internal controls and critical FAP elements 

were addressed. 

To help address shortcomings in the FAPs, in November 2008, MCC 

developed a FAP template with suggested policies and procedures to help 

compact countries strengthen their FAPs. The FAP template provides 

suggested policies and procedures regarding segregation of duties and 

asset management, as well as examples of financial controls in areas such 

as travel and payroll. According to MCC officials, the template is designed 

to be a guidance document that provides examples of how controls could 

be structured for different expense types. For example, the template 

requires employees to submit time sheets for supervisory approval and 

travelers to submit hotel receipts for travel expenses. MCC management 

does not require compact countries to model their policies and procedures 

on the guidance provided in this template FAP or adopt its provisions 

because MCC delegates responsibility for implementing internal control to 

the countries’ accountable entity, which can tailor their FAPs to meet their 

needs. Rather, the MCC-developed FAP template serves as a reference 

point that can be used by compact countries when drafting their FAPs. 

Page 20 GAO-10-52 Millennium Challenge Corporation
 

For controls provided in the FAP and other MCA documents to be 

effective in preventing unauthorized or improper disbursements, the MCA 

management must ensure that control activities established in its policies 

and procedures are properly applied. However, our review of the MCAs’ 

compliance with established control activities in operational areas—such 

as travel, payroll, program- or project-related expenses,19 and inventory—

identified instances where the MCAs did not consistently comply with 

established controls. These control deficiencies and inadequate 

monitoring of the MCAs’ implementing entities, increase the risk of fraud, 

waste, and abuse of MCC program funding. 

A random sample of travel disbursement transactions for each of the three 

MCAs we reviewed showed instances in which management failed to 

consistently comply with the controls described in the FAP’s travel 

policies and procedures, which resulted in improperly documented or 

approved travel disbursements. For example, trip reports, which the MCA 

management requires as evidence of travel completion, were not always 

provided in Honduras and Cape Verde. Specifically, all of the 33 prepaid 

travel disbursements we tested in Honduras lacked such supporting 

documentation. In Cape Verde—which also requires other supporting 

documentation, such as boarding passes—we found that 19 of the 30 travel 

transactions we tested lacked documentation to support trip completion. 

Therefore, we could not determine whether the trips were completed or 

complied with the applicable authorization for these transactions.20

MCAs Did Not 

Consistently Apply 

Internal Controls 

Established in the FAPs 

and Other Documents 

Travel Expenses 

Travel policies for MCA-Honduras and MCA-Georgia require employees to 

obtain travel authorizations and provide receipts upon completion of 

travel for reimbursement transactions.21 In Honduras, for 9 of the 22 travel 

reimbursements we tested, the supporting documentation lacked certain 

required documents, such as boarding passes and hotel receipts. Three of 

the 22 travel reimbursements were made even though the travel 

 

19Program- and project-related expenses include disbursements for construction 

resettlements, grant expenses, investments, technical and construction services, and other 

miscellaneous expenses. 

20According to our Standards for Internal Control in the Federal Government, 

documentation for transactions and other significant events should be complete and 

accurate and facilitate tracing transactions and related information from authorization 

through processing. 

21In Honduras, travel reimbursements are made to employees if the trip is not planned 

enough in advance to process the advance payment. In Georgia, all travel disbursements 

are reimbursements because MCA-Georgia policies do not allow advance payments. 

Page 21 GAO-10-52 Millennium Challenge Corporation
 

authorizations did not have all of the required information.22 For these 

3 transactions, documentation showed management approval, even though 

all required trip details were not properly documented. For MCA-Georgia, 

8 of the 35 travel reimbursements we tested did not have certain 

documentation, such as hotel receipts or boarding passes, as evidence that 

the trips had taken place. 

Our MCA-Georgia sample also included one travel disbursement for a 

board member of the Georgia Regional Development Fund (GRDF), which 

did not reflect a reasonable effort to minimize costs charged to the 

investment fund.23 According to the GRDF travel guidelines, board 

members can travel in business class if the total length of the flights—

including layovers, but excluding stopovers—exceeds 14 hours. According 

to the policy, a board member may add the time of a flight before a 

stopover to the time of a flight after a stopover to determine the flight’s 

total length. During our testing, we identified a transaction in which a 

board member booked two round-trip tickets for a board meeting in 

Tbilisi—one from his residence in Washington, D.C., to London, where he 

also has a residence, and one from London to Tbilisi. The trip included a 

36-day stopover in London after the board meeting, but before the board 

member traveled back to Washington, D.C. The ticket from London to 

Tbilisi, a 5-hour flight, was booked in premium class, and the total cost of 

the ticket was $3,640, justified by the 14-hour exception. However, a 

36-day stopover in London should make the traveler ineligible for business 

class travel under the 14-hour rule. Although this travel was made in 

accordance with the GRDF guidelines that we have previously mentioned, 

it did not reflect a reasonable effort to minimize anticipated costs to the 

investment fund.24

 

22MCA-Honduras’s FAP requires that all travel authorizations contain the origin and 

destination of the trip, the trip duration, and estimated cost. For these two sample items, 

the authorizations were approved and funds were disbursed, even though the 

authorizations did not contain travel dates or origin and destination information. 

23The Georgia Regional Development Fund, LLP, was established by and capitalized by the 

Millennium Challenge Georgia Fund. The GRDF is a $30-million risk capital investment 

fund that focuses on long-term growth-oriented investments in growing and dynamic smalland medium-size enterprises. The fund focuses particularly on businesses operating in the 

regions beyond Tbilisi and those operating in agribusiness and tourism. 

24MCC officials stated that this practice has already been identified as problematic, and 

GRDF travel guidelines require flight costs with significant variations above coach class 

due to stopovers to be borne by the individual traveler. 

Page 22 GAO-10-52 Millennium Challenge Corporation
 

Our review of the implementation of payroll controls, using a random 

sample of disbursements, identified several instances in which payroll 

disbursements were made without adequate documentation or approvals 

as required in the FAPs. Our testing in Georgia determined that 4 of the 

62 payroll transactions we tested lacked direct supervisor approval on the 

time sheets, and 59 of 62 transactions lacked the approval and certification 

of the human resources manager, as required by MCA-Georgia’s FAP. For 

Cape Verde, we were unable to trace disbursements to the contracted 

salary amount for 4 of our 15 sample items because employee files were 

not always updated to reflect annual cost-of-living increases. 

Payroll Expenses 

Program- and project-related expenses include payments disbursed by the 

MCAs for grant expenses, resettlement expenses, investment funds, and 

other operating expenses.25 Many program- and project-related expenses 

are often managed by an implementing entity hired by the MCAs to 

oversee project implementation. During our testing, we identified issues 

related to incomplete documentation and a lack of management approval 

of these expenses. The lack of adequate management reviews and a poor 

control environment in these areas resulted in unsupported and 

questionable costs related to disbursements at the three countries we 

tested. 

Program- and Project-Related 

Expenses 

Grant expenses. During our testing of grants made by the MCAs, we 

observed payments to beneficiaries that lacked adequate evidence that 

certain prerequisites were met. We also identified inconsistencies in the 

documentation provided as support for the transactions.26 During our 

testing in Honduras, we identified 20 instances from a random sample of 

53 grant disbursements where the forms provided to the MCA as evidence 

of receipt by the beneficiary of the agricultural equipment items were not 

signed by the beneficiary or were signed by the contractor responsible for 

delivering the goods to the beneficiary.27 Thus, we could not determine 

 

25Other operating expenses include disbursements for technical assistance, construction 

services, and office-related expenses. 

26MCA grant programs in the three countries we visited aim to reduce poverty in rural 

regions of the country by stimulating economic growth in the agricultural sector. A 

contractor for the MCA often manages these grant programs. Grant funds in these 

programs can be used to purchase agricultural equipment or provide technical training to 

farmers. 

27The delivery of goods receipt provides evidence that the grant items were provided and 

should be signed by the recipients. MCA-Honduras officials stated that the contractor may 

have signed for the grant recipients if they were not present when the equipment was 

delivered. However, we could not substantiate this explanation. 

Page 23 GAO-10-52 Millennium Challenge Corporation
 

whether the beneficiary had received the goods. In Georgia, our testing 

identified 7 instances from a random sample of 54 grant disbursements in 

which beneficiaries did not certify, as required by the grant agreements, 

that certain milestones were met before they received funds. Furthermore, 

several of the samples we tested had different beneficiary signatures on 

the payment request form and the grant agreement documents. The most 

recent audit of MCA-Georgia, performed by their independent audit firm, 

also identified significant shortcomings in the supporting documentation 

for grant disbursements.28

Resettlement expenses. Resettlement payments compensate 

landowners for property used for the MCA projects, such as road and 

pipeline construction.29 During our testing of resettlement disbursements 

in Honduras, we identified transactions that lacked the documentation 

required to support the disbursement amount and the recipient’s eligibility 

to receive the funds. In 6 of the 25 transactions we selected in Honduras, 

the files had inadequate documentation to provide evidence that the 

beneficiary had received funds and did not include the beneficiary’s 

signature. In some cases, the beneficiary’s signature was not the same as 

that on other documents in the file. Several files had different signatures 

on documents that (1) evidenced acceptance of the resettlement offer by 

the beneficiary and (2) acknowledged that the beneficiary received the 

funds from MCA-Honduras. These control deficiencies occurred due to the 

absence of an MCA policy requiring confirmation of these signatures. 

According to MCA-Honduras officials, in some cases the officials were 

familiar with the beneficiaries and with those who had signed for them. 

Investment funds. MCA-Georgia established a fund that made 

investments in businesses that met certain criteria to further their 

development. The GRDF management agreement describes processes, 

such as board authorizations, investment fund goals, and documentation 

 

28U.S. Agency for International Development, Office of Inspector General, Audit of the 

Millennium Challenge Corporation (MCC) Resources Managed by Millennium Challenge 

Fund Georgia (MCG), Under the Compact Agreement Between the MCC and the 

Government of Georgia From June 30, 2008 to December 31, 2008, Audit Report 

No. M-000-09-018-N (Washington, D.C.: June 2009). 

29A resettlement is the result of an economic or physical displacement of individuals and 

may involve land or other property acquisition. Compensation for resettlement is provided 

to families or individuals affected by a project who lose land, assets, or access to resources 

due to the project. Compensation can be monetary, in kind, or replacement of the lost 

asset. 

Page 24 GAO-10-52 Millennium Challenge Corporation
 

requirements, that should be met before investment payments are 

requested and approved.30 Our review of 5 investment transfers, totaling 

$3.7 million, showed that 2 transactions were processed without adequate 

documentation of the required board approvals. Also, 3 of the 

5 investments did not have fully completed investment proposals before 

approval by the GRDF Board of Directors.31 Furthermore, two of the five 

payment requests made to the MCA fiscal agent lacked supporting 

documentation and required follow-up to ensure that GRDF personnel had 

provided the required documentation. In its semiannual audit covering the 

last 6 months of 2008, the MCA-Georgia auditor also reported that 

transactions related to the GRDF investment fund lacked adequate 

documentation. 

Other operating expenses. Other operating expenses include MCA 

disbursements for technical services, construction services, and officerelated expenses. During our testing of these expenses, we found 

instances of inadequate documentation and approvals. For example, in 

Honduras, we identified 23 of 58 operating expense transactions that did 

not have the required supporting documentation, such as a Certificate of 

Delivery of Goods Report.32 As a result, for these items, there was no 

evidence that the goods or services were provided before the invoices 

were processed and payments were made to the contractors. We were able 

to verify the existence of 17 of the 23 items that did not have a certificate 

in the financial files. However, we were unable to verify the existence of 

the remaining 6 items.33

 

30SEAF Management, LLC, a global investment firm, is the contractor charged with 

managing the fund. The GRDF Board of Directors approves the investments before funds 

are made available to the recipient. 

31During our review of the GRDF disbursement transactions, we found inconsistencies 

between the initial investments in businesses and the program goals. For example, we 

noted that all 5 initial investments were made to two businesses where the main place of 

business was inside the Tbilisi area, contrary to the program goal of providing 80 percent of 

investment funds to businesses outside the city. In addition, because of the calculation 

method used by the fund manager to calculate revenue, we noted it was difficult to 

determine whether one of the businesses complied with the investment guidelines. 

32According to MCA-Honduras’s FAP, project directors and the relevant executing units are 

responsible for certifying that goods and services are provided and received according to 

the terms and conditions of the applicable contract. A certification of the delivery of goods 

is submitted along with the invoice for payment processing. 

33These 6 items were primarily services rendered by MCA contractors; without the 

certificates, there was no evidence that the services were provided to MCA-Honduras. 

Page 25 GAO-10-52 Millennium Challenge Corporation
 

In Georgia, MCA procurement officials had not properly approved 3 of the 

58 transactions we tested.34 In addition, 8 of the 58 transactions were not 

supported by adequate documentation. For these 8 transactions, we could 

not determine whether payments were made in accordance with the 

applicable contracts because the invoices were insufficiently detailed. For 

example, one invoice requested payment for “fourth quarter . . . under 

services agreement,” with no additional information provided. In addition, 

in its June 2009 report, the MCA-Georgia auditor reported $1.2 million in 

questioned costs due to a similar lack of supporting documentation for 

one road construction project. The auditor also noted significant 

shortcomings in the supporting documentation for interim payment 

applications of the civil works performed by the contractor.35

In Cape Verde, we found that, in 4 of the 37 technical services transactions 

tested, amounts disbursed to a contractor did not agree with the 

provisions of the applicable contract. For these transactions, 4 payments 

were made on one contract that did not have a payment schedule that 

listed the deliverables to be provided for MCA-Cape Verde to initiate 

payment. As a result, we could not determine whether the correct amounts 

were paid for services rendered for the invoices we examined. 

Our testing of a random selection of assets included in inventory identified 

several instances where documentation was not in compliance with 

inventory policy and procedures, as required in the FAPs. As a result, we 

could not always determine whether the items provided were the same as 

the items in the asset listing. For example, of the 39 inventory items we 

tested in Georgia, we were unable to determine whether 15 of these items 

were the same as the items described in the inventory list due to poor 

Inventory

 

34In Georgia, the procurement department is responsible for certifying that goods and 

services are provided in accordance with the applicable contract. Certification by the 

procurement department is a key control and serves as evidence that the goods and 

services were received before payment is made to the contractor. As a result, payments 

should not be processed by the finance department unless the procurement department’s 

certification is received. The failure of the finance department to comply with this 

provision of the FAP increases the possibility that MCA-Georgia will make payments to 

contractors without evidence that the goods and services were delivered in accordance 

with the contract, resulting in an increased risk of improper payments. 

35Interim payments are submitted to the supervising consultant for approval and 

subsequently billed to MCA-Georgia. However, the auditor also noted significant 

shortcomings in the procedures performed by the supervising consultant to verify volumes 

and other measures of civil works that the contractor claims as performed and bills the 

MCA. The auditor stated that documents were either missing or lacked sufficient detail. 

Page 26 GAO-10-52 Millennium Challenge Corporation
 

recordkeeping, such as incomplete asset information, lack of asset tags, 

and inadequate serial number tracking. These 15 items included 

7 computers and 1 cell phone. MCA-Georgia auditors also reported that 

inventory and asset management was a problem in their semiannual 

financial audits citing shortcomings in recordkeeping, tagging of assets, 

and inaccurate or incomplete recording of asset movements and changes 

in custody.36 Auditors recommended that the MCA fully implement the 

asset management procedures described in MCA-Georgia’s Asset 

Management Manual. In addition, MCA-Georgia and MCA-Cape Verde 

reported instances of lost or stolen inventory items, such as laptops or 

other electronic equipment, indicating the need for improved property 

safeguarding controls.37 The MCA-Georgia fiscal agent stated it could not 

identify 16 items in its last MCA-wide inventory process in December 2008. 

Among the 16 items were 4 computers and 4 cell phones.38 Subsequent to 

our visit, the MCA fiscal agent performed another inventory count in May 

2009 and located some of missing items. Furthermore, MCA-Cape Verde 

officials stated that after-hours thefts had resulted in a number of missing 

laptops and a projector, which were still missing at the time of our 

fieldwork in May 2009.39

 

36Audit of the Millennium Challenge Corporation (MCC) Resources Managed by 

Millennium Challenge Fund Georgia (MCG).

37According to our Standards of Internal Control in the Federal Government, an agency 

must establish physical control to secure and safeguard vulnerable assets. Assets that are 

particularly vulnerable to loss, theft, damage, or unauthorized use—such as inventory or 

equipment—should be physically secured and access-controlled. Assets also should be 

periodically counted and compared with control records. 

38Our population of inventory items excluded the 16 items that were missing as a result of 

the fiscal agent’s last annual inventory count. 

39According to MCC, MCA-Cape Verde officials informed the local police of the thefts and 

filed insurance claims for the stolen items. 

Page 27 GAO-10-52 Millennium Challenge Corporation
 

MCC has increased standardization of the MCA procurement guidelines, 

which were initially determined on a country-by-country basis. In the most 

recent version of its procurement guidelines, released in July 2008, MCC 

reduced the number of approvals required from MCC and the MCA while 

at the same time requiring postprocurement reviews to supplement MCC 

oversight. The MCAs we assessed generally adhered to MCC’s 

procurement guidelines, although they did not fully comply with some 

requirements, such as contractor eligibility and price reasonableness 

determinations. In addition, we found that when the MCAs delegated 

procurement responsibility to outside entities, the procedures used by 

these entities were generally consistent with MCC’s procurement 

framework. 

MCC Has Decreased 

Its Level of 

Procurement Review; 

Countries Generally 

Adhered to MCC 

Requirements 

MCC Has Increased 

Standardization of 

Procurement Guidelines 

and Reduced Its Level of 

Review 

MCC has increased standardization of the MCA procurement guidelines. In 

its initial compact country procurement agreements, MCC permitted 

countries to select their own procurement guidelines but reviewed them to 

determine whether they met MCC requirements for open, fair, and 

competitive procurement. In May 2007, MCC issued standardized 

procurement guidelines to simplify country processes, according to MCC 

officials. MCC reviews and now requires their use in all new compacts.40

MCC officials also said that using a standardized procurement framework 

encourages more firms to bid on MCA procurements, because they 

become familiar with MCC requirements and do not have to adjust to new 

ones for different MCAs. 

MCAs in each of the three countries we examined have modified the 

procurement framework they used while implementing compacts. The 

MCAs in Honduras, Georgia, and Cape Verde all began their compacts 

using country-specific procurement guidelines. MCC officials told us that 

Honduras and Georgia switched to MCC’s standard guidelines in May 2007 

and August 2008, respectively. MCA-Cape Verde has continued to use its 

own procurement guidelines because most of their large procurements 

were complete, according to MCC and MCA-Cape Verde officials.41

 

40MCC based these guidelines on the same World Bank guidelines that many countries had 

previously used. See World Bank, Guidelines: Procurement under IBRD Loans and IDA 

Credits (May 2004, revised Oct. 1, 2006). 

41Of all compact countries, the MCAs in Madagascar, Cape Verde, and Vanuatu continued to 

use country-specific procurement systems. 

Page 28 GAO-10-52 Millennium Challenge Corporation
 

According to MCC officials, MCC’s initial level of involvement in 

procurement development and review was unsustainable, especially as 

MCC’s compact portfolio grew. According to MCC officials, they were 

getting “bogged down” looking at smaller procurements, and they 

concluded that the MCAs’ governing bodies were likewise required to 

review too much detail within individual procurements. MCA country 

officials with whom we spoke also stated that the initial review process 

delayed procurement and thus the project schedule. For example, as early 

as 2006, MCA-Cape Verde was concerned about the mismatch between the 

number of reviews required of the Procurement Review Commission and 

the time frame of projects. 

MCC Has Reduced Its 

Involvement in Approving 

Procurements 

In the most recent version of its procurement guidelines, released in July 

2008, MCC introduced the “Implementation Model Framework” as the 

standard procurement model for all compact countries and reduced the 

number of required approvals by MCC. This model formalizes the extent to 

which MCC is involved in procurements and further reduces the number 

of points at which MCC approvals are required. Although the MCAs’ 

procurement procedures do not change, for those countries transitioning 

to this model, MCC plays more of an oversight role. MCC’s July 2008 

version of the procurement guidelines also establishes a 2-tier system of 

approvals that allows for even fewer reviews of procurement actions for 

those countries with a good procurement record.42 Schedule A of the 2-tier 

system represents the initial level of review for most countries, which is 

referred to as implementation support.43 As countries gain experience and 

MCC gains confidence that they are implementing MCC procurement 

guidelines, MCC permits the country to transition to Schedule B, which is 

referred to as oversight.44

 

42In addition to procurement experience, other factors that determine the level of MCC 

oversight include the likelihood of corruption and fraud, the degree of project completion 

risk, and the maturity of the compact. 

43Schedule A in the July 2008 procurement guidelines reduced the level of MCC approvals 

in 20 of 61 potential procurement actions for different procurement methods. Of these 

20 cases, 9 no longer require any advance approval from MCC; in the remaining 11 cases, 

the threshold for MCC approval has been increased to procurements of more than 

$500,000. 

44As of October 2008, five countries have transitioned to Schedule B. In 13 of 61 potential 

procurement actions, Schedule B reduces the level of MCC review below that of 

Schedule A—in all 13 cases by removing MCC review altogether. 

Page 29 GAO-10-52 Millennium Challenge Corporation
 

See appendix II for a discussion of the oversight model and a comparison 

of the review required under Schedule A and Schedule B to the review 

required in previous procurement guidelines. 

When it reduced the number of required pre-approvals, MCC also 

formalized a separate postprocurement review process to supplement its 

oversight of the MCA procurements. In July 2008, MCC began to conduct 

yearly interim activity reviews (IAR) of compact countries. The IARs 

assess a nongeneralizable random sample of procurements from each 

country for compliance with procurement and contract administration 

processes. As of August 2009, MCC had conducted IARs of eight compact 

countries. In the three IARs for the countries we examined, MCC officials 

reported that the procurement files were in “excellent,” “good,” and 

“acceptable” condition. These three IARs reviewed a total of 29 

procurements.45 In the case of Cape Verde, critical issues identified by the 

IARs included failure to create a Procurement Implementation Plan and to 

conduct price reasonableness analyses. During our fieldwork, we 

discussed the IAR findings with the procurement director in Cape Verde, 

who reported that the MCA was addressing the issues identified in the IAR 

and provided documentation of additional processes. 

MCC Conducts 

Postprocurement Reviews and 

Requires Procurement Audits 

MCC guidelines for audits of accountable entities require that the MCA 

auditors assess and report on procurement compliance. According to the 

guidelines, the audit’s specific objectives should include testing 

compliance with the procurement agreement, procurement guidelines, and 

the FAP. We reviewed 7 audit reports for Georgia, Honduras, and Cape 

Verde and found no reporting of material procurement-related findings, 

although some audit reports did not clearly state that they included 

procurement within the scope of the audit. In all, we reviewed 24 audit 

reports for MCA countries—3 reports had procurement-related findings. 

One of these 3 audit reports had seven findings, another had five, and the 

last had one. The other 21 audit reports did not contain any reporting 

related to procurement. 

 

45One procurement reviewed in Georgia included multiple shopping purchases. 

Page 30 GAO-10-52 Millennium Challenge Corporation
 

MCAs we assessed generally adhered to MCC Procurement Guidelines but 

have not documented that they fully complied with some requirements. On 

the basis of our review of a stratified random sample of 138 procurement 

files,46 we estimate that the three MCAs we reviewed obtained almost all of 

the required approvals from MCC in the procurement process, and that 

they obtained approvals from the MCA governing body in most cases. We 

also estimate a high rate of MCA compliance with MCC procurement 

requirements for 

MCAs We Assessed 

Generally Adhered to MCC 

Procurement Guidelines 

• advertising prequalification; 

• using a competitive bidding process to conduct procurements; 

• advertising procurements and preparing bid documents; 

• using MCC procedures for opening bid documents, documenting the 

reasons for disqualified bids, and selecting the winning bidder; and 

• documenting receipt of the good or service procured. 

Table 1 provides additional details on the procurement requirements we 

tested and our estimated results. Appendix III provides more information 

on the specific findings for the procurement criteria we tested. 

Table 1: Estimated Percentage of Country Procurements Meeting MCC Procurement Criteria 

Percentage of country procurements, by MCA 

Procurement criteria Cape VerdeaGeorgiabHondurasa

Documentation of overall approvals 

Obtained all required MCC approvalsc100% 96% 100%

Obtained all required MCA governing body approvalsd100 86 92

Documentation of prequalification 

Advertised prequalification for procurement in English 100 100 100

Advertised prequalification in required locations 94 96 100

 

46We reviewed stratified random samples of 47 procurement files in Cape Verde, 63 

procurement files in Honduras, and 28 procurement files in Georgia. All percentage 

estimates from the samples presented in this report have a margin of error of plus or minus 

10 percentage points or less, unless otherwise noted. The number of procurement files we 

reviewed in each country was based upon the number of procurements completed in that 

country in fiscal year 2008. Appendix I contains a complete discussion of our scope and 

methodology. 

Page 31 GAO-10-52 Millennium Challenge Corporation
 

Percentage of country procurements, by MCA 

Procurement criteria Cape Verdea

Georgiab Hondurasa

Documentation of invitation for bid 

Justified use of another procurement method if the MCA did 

not use competitive bidding 100 100 97

Advertised procurement in English 100 100 100

Published bidding documents in English 99 100 93

Circulated procurement advertisement in required locations 99 82 98

Documentation of bid evaluation 

Documented bid opening 100 100 100

Provided a detailed report on evaluation and comparison of 

bids in procurement file 100 100 100

Documented reason for disqualification when bids were 

disqualified 100 100 100

Documented contractor eligibility 98 25 74

Documented impartiality of the evaluation panel 74 86 80

Documentation of contract management 

Had procured item or record of receipt of item 100 100 99

Items matched contract specifications 100 100 99

Source: GAO analysis of MCA procurement files. 

Note: MCC’s requirements vary by the size and type of procurement; therefore, not all procurements 

we examined had to meet each requirement we tested. For more information on these procurements, 

see appendix III. 

a

The percentages listed for Cape Verde and Honduras are estimates based on our review of a 

stratified random sample of procurements. These estimates have a margin of error of less than plus 

or minus 9 percentage points at the 95 percent confidence level. 

b

In Georgia, we reviewed all 24 procurements conducted by the MCA and 4 procurements by the 

Georgian Municipal Development Fund during fiscal year 2008; thus, the percentages reflect actual 

procurements reviewed, rather than estimates. 

c

This variable represents a summation of all instances where MCC approvals might be required (eight 

approval steps). 

d

This variable represents a summation of all instances where MCA governing body approvals might 

be required (seven approval steps). 

Despite general compliance with MCC procurement guidelines, the MCAs 

did not document contractor eligibility and evaluation panel impartiality in 

all cases, as follows: 

Page 32 GAO-10-52 Millennium Challenge Corporation
 

• Contractor eligibility: In Georgia, 25 percent of procurements in fiscal 

year 2008 documented contractor eligibility.47 In addition, we estimate that 

MCA-Honduras documented contractor eligibility in about 74 percent of 

the procurements it conducted in fiscal year 2008. MCC requires that the 

MCAs conduct contractor eligibility reviews for all procurements. Parties 

to be excluded from MCC contracts include firms declared ineligible under 

World Bank anticorruption policies and U.S. antiterrorist policies.48 MCC 

has taken steps to improve eligibility verification and documentation by 

issuing guidance for contractor eligibility in February 2008. MCC’s 

guidance was prompted by a U.S. Agency for International Development, 

Office of Inspector General, assessment of procurement that found that 

MCAs had not fully complied with guidance on determining contractor 

eligibility.49

• Impartiality of the evaluation panel: We found that all three MCAs we 

reviewed documented the impartiality of the bid evaluation review panel 

less than 90 percent of the time. For example, we estimate that MCA-Cape 

Verde documented the impartiality of the technical evaluation panel for 

74 percent of all procurements in fiscal year 2008, and that MCA-Honduras 

documented technical evaluation panel impartiality for 80 percent of 

procurements. Our review of all procurements in Georgia in fiscal year 

2008 found that MCA-Georgia documented impartiality of the technical 

evaluation panel 86 percent of the time. Although MCA compliance was 

below 90 percent for evaluation panel impartiality, the margin of error on 

our estimates for MCA-Honduras and MCA-Cape Verde may bring them 

close to 90 percent compliance. 

Additionally, we found that the MCAs we reviewed did not consistently 

document their evaluation of the reasonableness of prices contained in the 

winning bid. MCC guidance states that the MCAs should conduct and 

document price reasonableness analysis for all procurements to ensure 

that no more than a commercially reasonable price is paid to procure 

 

47In a number of cases, the MCA procurement director or another document in the file 

stated that the MCA had assessed contractor eligibility, but this was not documented in the 

file. 

48More information on firms that are excluded from MCA entity program procurements can 

be found in the following document: MCC, Millennium Challenge Corporation Program 

Procurement Guidance: Guidance on Excluded Parties Verification Procedures in MCA 

Entity Program Procurements (Feb. 15, 2008). 

49U.S. Agency for International Development, Office of Inspector General, Audit of 

Compliance with Procurement Requirements by the Millennium Challenge Corporation 

and its Compact Countries (Mar. 3, 2008). 

Page 33 GAO-10-52 Millennium Challenge Corporation
 

goods, works, and services. While MCC guidance states that competitive 

bids or bids close to the budget, among other criteria, may be used to 

identify a price as reasonable, MCC’s procurement directors generally did 

not document this determination in their files or the evaluation reports. 

MCA procurement directors believed that they did not need to document 

price reasonableness if they received multiple competitive bids for a 

procurement or if bids were within the planned budget. An MCC review of 

an MCA-Cape Verde procurement, conducted in February 2009, also found 

that the MCA had not conducted a price reasonableness analysis. 

When the MCAs delegated procurement responsibility, procurement 

procedures used by the outside entities were generally consistent with 

MCC procurement principles and guidance. For all three MCAs we visited, 

procurements were generally conducted by the MCA procurement staff or 

its contracted procurement agent. We found examples of instances where 

the MCA had used alternate guidelines or delegated procurement 

responsibility to an outside entity. 

When MCAs Delegated 

Procurement Responsibility, 

the Procedures Used Were 

Generally Consistent with 

MCC’s Procurement 

Framework 

For procurement of small works, MCA-Cape Verde used procurement 

guidelines developed by the Cape Verde Ministry of Industry and 

Transport (MIT) that did not use the same standard for price 

reasonableness as MCC. These differing standards led MIT to 

automatically discard bids that it considered “unreasonably low” but that 

would have been evaluated under MCC guidelines. In Cape Verde, 

procurements for road and bridge construction began before the compact 

entered-into-force. Although MCC reviewed and accepted the results of 

these MIT procurements, the MCA file did not contain a full record of the 

procurement procedure for the $3.4-million bridge procurement. 

MCA-Georgia used two outside entities to conduct procurements. 

Procurement responsibility for Regional Infrastructure Development 

projects was delegated to the Municipal Development Fund (MDF) of 

Georgia, and procurement responsibility for most procurements 

conducted for Agricultural Development Activity grant programs was 

given to the Citizens Network for Foreign Affairs (CNFA), the nonprofit 

organization managing the grant program. 

• In the case of MDF, a March 2006 collaboration agreement between MDF 

and MCC lays out the procurement procedures that MDF is required to 

follow in conducting procurements financed entirely or in part by MCC. 

These procurement guidelines have the same requirements as the March 

2006 MCA-Georgia procurement guidelines. However, MCC issued updated 

procurement guidance in 2007 and 2008 and did not modify the 

Page 34 GAO-10-52 Millennium Challenge Corporation
 

collaboration agreement to encompass these new requirements. For 

example, we found that MDF procurements did not meet the requirements 

for advertising and contractor eligibility that MCC issued in 2007 and 2008. 

• In the case of grants administered by CNFA, we found that MCA-Georgia 

has created a separate procurement process. CNFA relies on grantees to 

identify suppliers for goods and to provide price quotes from multiple 

suppliers showing that their chosen supplier has the lowest price. 

According to CNFA officials, CNFA staff check with the identified 

suppliers to verify that the prices provided by grantees to CNFA are 

accurately reported. However, CNFA staff do not conduct independent 

market research to ensure that the price estimates provided by grantees 

are reasonable and comparable with market prices. According to MCAGeorgia, grant recipients often live in rural areas and need to procure 

secondhand equipment, and thus they are often best equipped to identify 

existing suppliers. 

Project status reports of MCC and MCA consultants indicate that the MCA 

projects have encountered problems, which include delays, scope 

reductions, and cost increases. These problems are due, in part, to 

insufficient planning, escalation of construction costs, and insufficient 

MCC review. MCC is conducting oversight during implementation by 

monitoring project performance, establishing incentives for 

accountability, and using cross-functional teams to oversee and support 

the projects. 

MCC Conducts 

Oversight, but 

Insufficient Planning 

of Projects during 

Compact 

Development Has 

Undermined Project 

Implementation 

illennium Challenge Corporation

On the basis of our review of contractor reports in the three countries we 

assessed, we found that MCC-funded infrastructure projects were 

substantially delayed. For example: 

• After receiving initial contractor bids in excess of the planned budget, 

MCA-Georgia restructured what it had planned to award as three large 

contracts for the road projects into six smaller planned contract lots, 

leading to a delay of at least 6 months to rebid and award the contracts. 

Under the second procurement, MCA-Georgia was able to award contract 

lots 2, 3, and 4 and parts of lots 5 and 6—rather than six full lots—within 

the available project budget. At the time of our site visit in March 2009, the 

road construction contractors were behind 3 to 4 months on a schedule of 

MCA Projects We Assessed 

Have Encountered 

Problems Due to 

Insufficient Planning of 

Projects 

Page 35 GAO-10-52 M
 

24 to 30 months in part due to contractor delays in getting labor, 

equipment, and field offices operational. One contractor also experienced 

delays due to issues related to the need to revise the designs, delayed 

preparation of construction working drawings, and slow coordination of 

the utility relocations. In July 2009, subsequent to our visit to Georgia, 

MCA-Georgia removed one roadway lot from one of the contractor’s 

contracts and awarded it to another contractor. The action was taken 

following MCA-Georgia’s assessment that one contractor’s performance 

was unacceptable based on the contractor’s failure to make sufficient 

progress on the road. MCA-Georgia awarded that roadway lot to another 

contractor in an attempt to complete the road projects within the compact 

time frame.50

• Delays of up to 9 months occurred in constructing approximately 100 

kilometers of the CA-5 highway project in Honduras. The delays were in 

part due to the MCA having to contract for additional topographic surveys 

that were needed to update the designs, revising designs to add additional 

travel lanes and road intersections, realigning the road to minimize 

property resettlement requirements, and addressing contractor 

performance issues. At the time of our visit in December 2008, the 

construction contractor for two sections of the road was about 3 months 

behind schedule on contracts of 24 months in duration due to slow 

progress during the rainy season. 

• In Cape Verde, phase I of the port project was delayed 9 months. In 

addition, the construction contractor for the roads project was granted an 

11-month extension on a 30-month contract. The Cape Verde bridges 

project was extended from 12 to 30 months. The reasons for delays varied 

across the three projects and included in some instances procurement 

delays, the inability of the MCA to provide site access for the contractor to 

begin work, and having to improve designs that were not ready for 

implementation. 

Our review of contractor reports indicated that these MCAs reduced the 

scope of projects, including the following: 

 

50U.S. Agency for International Development, Office of Inspector General, Audit of the 

Millennium Challenge Corporation’s Regional Infrastructure Rehabilitation Project in 

Georgia, Audit Report No. M-000-09-007-P (Washington, D.C.: Sept. 30, 2009). 

Page 36 GAO-10-52 Millennium Challenge Corporation
 

• MCA-Georgia reduced the original compact scope for the award of 

245 kilometers of road construction contracts to just over 170 kilometers 

because the full scope of the contracts could not be awarded within the 

initial compact budget.51

• In Honduras, MCC was no longer exclusively funding the construction of 

the CA-5 highway project as planned under the compact. One of the four 

road sections of the CA-5 highway could not be awarded within the 

funding available through the compact, nor could construction be 

completed within the 5-year window.52 As a result, the scope of the 

roadwork as funded by MCC was reduced and, at the time of our review, 

compact funding covered the cost of approximately 65 kilometers along 

portions of three sections of road. The section not funded by MCC was 

being funded through a loan from the Central American Bank for 

Economic Integration to the government of Honduras. 

• Two of five roads in Cape Verde were eliminated from the contractor’s 

project scope due to increased costs. In addition, the construction of 

phase II of the MCA-Cape Verde port project could no longer be funded 

under the available compact budget and, at the time of our review, was on 

hold until outside donor assistance could be used.53

Examples of MCA contract cost increases in the three countries we 

reviewed include the following: 

• In MCA-Georgia, the independent construction supervisor estimated that 

the final contract price for one road contract, originally awarded at 

$65.0 million, would rise by 15 percent, or nearly $10.0 million; another 

contract, originally awarded at $33.1 million, would rise by nearly 

18 percent or about $6.0 million. 

 

51In November 2008, an additional $100 million in compact assistance was made available 

to Georgia. Of this amount, $60 million was programmed for the award of additional road 

contracts under a third procurement that funds much of the original scope that had to be 

cut. 

52MCC funded the preparation of the final design documents, the environmental impact 

assessment, and the development and implementation of resettlement action plans for the 

entire 110-kilometer CA-5 highway project. MCC also continues to fund MCA-Honduras 

management resources. 

53MCA-Cape Verde reported that funding for phase II was secured from the government of 

Portugal, and that phase II was expected to start this year. 

Page 37 GAO-10-52 Millennium Challenge Corporation
 

• Changes in contract costs totaling about $2.0 million—an approximately 

17 percent increase—were approved on the Cape Verde roads project, 

which was originally awarded at about $11.0 million.54

• Contract cost changes on the Cape Verde bridges contract have been 

approved for a total of about $750,000—approximately 23 percent—on a 

contract initially awarded at $3.3 million. 

Our review of the three MCAs found that projects had to be redesigned 

and restructured due to insufficient planning before implementation, 

which led to delays in implementation. Our past work found that it is 

critical to set appropriate time frames to conduct planning, design, and 

construction activities.55

Insufficient Planning, Cost 

Escalation, and MCC’s 

Insufficient Design Review 

Have Contributed to the Need 

to Restructure Projects 

Insufficient planning. Insufficiently developed project designs led to 

redesign and delays in contract award and implementation in each of the 

three compact countries. For example, in five of the six projects we 

reviewed (six contracts for roads projects in each of the three countries, 

and two contracts for the port and bridges projects in Cape Verde), we 

found that insufficient planning—principally due to poor topographic 

surveys—led to inadequate designs. The redesign of projects delayed the 

bid process while designs were revised and, in other cases, resulted in 

significant modification of designs after contract award. Industry experts 

have found that actual costs for projects with limited planning can range 

from 20 to 30 percent higher than estimated.56 The following examples 

highlight some of the problems our review found that were reported by 

MCC, the MCAs, and their consultants:57

 

54The roads and bridges are currently being redesigned to a higher standard than originally 

planned, and this redesign is one of the reasons for the cost increases. 

55Our work also indicates that a number of factors influence the time needed to complete 

road construction projects. See GAO, Highway Infrastructure: Preliminary Information 

on the Timely Completion of Highway Construction Projects, GAO-02-1067T (Washington, 

D.C.: Sept. 19, 2002). 

56GAO, Afghanistan Reconstruction: Progress Made in Constructing Roads, but 

Assessments for Determining Impact and a Sustainable Maintenance Program Are 

Needed, GAO-08-689 (Washington, D.C.: July 8, 2008). 

57We did not assess the topographic surveys and project designs but are reporting on the 

problems that MCC, the MCAs, and their consultants identified that have led to the 

issuance of contract variation orders. 

Page 38 GAO-10-52 Millennium Challenge Corporation
 

• MCA-Georgia issued contract variation orders to address identified 

shortcomings in the project design. After beginning construction, the 

contractor found discrepancies between the design and the existing 

roadway conditions. This discrepancy required additional topographic 

engineering surveys, more-developed designs, and additional construction 

work. In addition, trees between 8.0 and 15.9 centimeters are legally 

required under Georgian law to be cut rather than uprooted with heavy 

equipment, but this requirement was not identified as a payable item in 

contract documents. Furthermore, the extent of the work required to 

relocate utilities was not sufficiently addressed in the design, according to 

the contractor. MCC officials noted that MCA-Georgia had contracted 

separately for a utility relocation survey that proved to be deficient. 

• MCA-Honduras had to undertake additional topographic engineering 

surveys because earlier surveys were not sufficiently detailed or were 

unavailable. This issue contributed to a 41⁄2-month delay in awarding 

contracts. In addition, fundamental planning decisions, such as adding 

travel lanes, interchanges, and safety features, were still under review 

during the design stage, which took time to resolve and resulted in 

significant changes in scope. 

• MCA-Cape Verde, after construction award, found that road designs, 

accepted by the government of Cape Verde, were of poor quality and 

inadequate as a basis for construction.58 The topographic information in 

the design was inadequate, and thus the designs inaccurately represented 

the extent of the work required.59

• MCA-Cape Verde found that bridge designs had to be revised after the 

award of the construction contract because the initial designs were not 

sufficiently adequate for construction. 

• MCA-Cape Verde’s port project faced potential delays due to differences 

between the actual topographic and seafloor conditions and the conditions 

represented in the design drawings for required shore protection and the 

coastal road serving the port. 

 

58The Cape Verde roads and bridges were originally designed under a World Bank-funded 

road program that predated the compact. 

59U.S. Agency for International Development, Office of Inspector General, Audit of the 

Millennium Challenge Corporation Programs in Cape Verde, Audit Report 

No. M-000-09-002-P (Washington, D.C.: Mar. 31, 2009). The Office of Inspector General for 

MCC noted that the problems with roadway designs were the result of an unclear compact 

development policy governing the conduct of prefeasibility studies. 

Page 39 GAO-10-52 Millennium Challenge Corporation
 

Cost escalation. We found that cost escalation of construction materials 

and schedule delays associated with project redesigns also contributed to 

the need to restructure projects.60 For example, three road projects (six 

contracts) and the port project experienced cost escalation of 

construction material prices—especially oil, which heavily affects 

roadway construction costs. In its oversight role, MCC is not directly 

responsible for the development of cost estimates. However, our review of 

MCC Standards of Clearance61 indicated that MCC has a role in ensuring 

that the MCAs properly update—to include adjusting for the escalation of 

construction costs—and revalidate cost estimates before contract 

solicitation and throughout the project life cycle. 

Although MCC officials stated that the MCC project teams are 

knowledgeable about the MCA cost estimates and schedules, MCC does 

not have a formal policy governing their development and review and does 

not centrally track updates over a project’s life cycle. In addition, MCC 

does not issue guidance to the MCAs on assessing the extent to which cost 

escalation should be considered a risk factor and assessing its potential 

impact on planning, design, and construction schedules. MCC requires the 

MCAs to include an “owner’s contingency” in project cost estimates to 

cover unforeseen conditions and risks, such as cost escalation. MCC also 

reviews cost estimates of MCA projects quarterly as part of the 

disbursement request review process. 

Evidence we reviewed suggested that the MCAs’ initial cost estimates 

were not realigned when project scopes were revised or as prevailing 

market conditions changed. For example, the budget and cost estimates 

supporting the first MCA-Georgia road procurement—canceled because 

bids exceeded available project funding—were largely based on planning 

 

60Industry experts note that cost escalation is a major concern on construction projects and 

has the potential to affect scope and schedule. The National Academies has reported that 

many state transportation agencies do not focus on management of cost estimates, failed to 

understand the risk of cost escalation posed by market conditions, and did not track 

changes in market conditions on their project estimates and budgets. See National 

Academies, Transportation Research Board, Guidance for Cost Estimation and 

Management for Highway Projects During Planning, Programming, and 

Preconstruction (Washington, D.C.: 2007).

61MCC Standards of Clearance govern MCC approvals of compact development and 

implementation documents, such as work plans, contract bidding documents, and 

engineering documents. The standards state that MCC should review these documents to 

ensure that estimates are current (e.g., time, conditions, applicable standards, and 

guidance). 

Page 40 GAO-10-52 Millennium Challenge Corporation
 

estimates that were 2 years old. In addition, the estimates did not 

sufficiently account for (1) cost escalation, (2) changes in scope and 

standards that occurred after the feasibility study, (3) weakening of the 

U.S. dollar, and (4) an increase in construction work worldwide that 

resulted in less competition.62

Design review. We found that MCC consultants’ reviews of designs 

before award of contract were insufficient. For example, one of MCC’s 

consultants characterized its design review as “big picture in nature” and 

“not to be considered a detailed review,” stating specifically that “building 

drawings were not completed and not reviewed,” and that “the cost 

estimate was not reviewed.” In contrast, our review of industry leading 

practices indicates that a well-organized, detailed review can ensure that 

design plans and specifications are sufficient for construction and will 

provide the contractor with sufficient information to prepare a 

competitive and cost-effective bid.63 MCC has taken some steps to modify 

its compact development process by increasing its assistance to support 

MCA planning for projects before implementation. Previously, final 

feasibility studies, environmental assessments, and detailed project 

planning were typically not completed until after entry-into-force. Under 

the new process, that type of planning is more likely to be completed 

before entry-into-force. See figures 7 and 8, which show MCC’s prior and 

current compact development and implementation processes. 

 

62GAO’s Cost Estimating and Assessment Guide notes that updating cost estimates 

throughout a project life cycle results in higher quality estimates to support various phases 

of a project. The guide also notes that estimates, actual costs, and associated schedule data 

should be tracked centrally to inform lessons learned that can be applied to future project 

schedules and cost estimates. See GAO, Cost Estimating and Assessment Guide, 

GAO-09-3SP (Washington, D.C.: Mar. 2, 2009). 

63American Association of State Highway and Transportation Officials, Constructability 

Review Best Practices Guide (Washington, D.C.: August 2000). 

Page 41 GAO-10-52 Millennium Challenge Corporation
 

Figure 7: MCC Compact Development and Implementation before 2008

1.

Country proposal

2.

Due diligence

3.

Program set-up

4.

Implementation and monitoring

• Countries submit proposals to 

MCC

• MCC conducts analysis of 

project viability and works with 

partner countries to refine 

proposed projects

• Completion of prefeasibility 

studies:

- Preliminary engineering

- Cost estimates

- Assessment of environmental 

and social impact

• Establishment of Program 

Management Units

• Initiation of comprehensive 

feasibility/design studies:

- Environmental impact 

assessments

- Initial assessment of the need 

to acquire land and conduct 

resettlement

• MCAs are responsible for 

implementation

• Project preparation for 

infrastructure includes:

- Completion of assessments and 

feasibility studies (6-12 months)

- Detailed project planning, design, 

and bid document preparation 

(9-24 months)

- Competitive procurement (6-9 

months)

• Project execution - construction of 

infrastructure projects (2-3 years)

• MCC conducts oversight and 

performance monitoring

Process Prior to 2008 Compact signed

End of

compact Entryinto-force

Source: GAO summary of MCC publications.

Figure 8: MCC Compact Development and Implementation Process as of 2008

Current Process

1. Start up and

preliminary analyses

2.

Project definition

3. Project development

and appraisal

5.

Pre-EIF activities

Getting started: Identifying priorities:

• Eligible country 

establishes Core 

Team - responsible 

for completing 

compact

• MCC provides

guidance on results

focused project 

design principles and 

tools

• Country develops a

Concept Paper for 

each potential project

• MCC conducts a

“peer review” of the 

proposed projects

• MCC provides formal 

response identifying 

suitable project 

candidates

• MCC provides 609(g) 

funding if needed for 

project development

• Eligible country further 

develops projects

• MCC disburses 609(g) 

funding and assists with 

needed preparatory 

studies - feasibility 

studies, environmental 

impact assessments, 

resettlement plans, 

preliminary designs, etc.

• MCC conducts formal 

appraisal of developed 

projects, including 

second “peer review”

• MCC and country 

sign the compact - 

at this point, funds

are obligated, 

program objectives

are defined, and 

total dollar amount is

set

• Completion of 

stand-up of MCA 

Accountable Entity

• Completion of 

Implementing Entity 

agreements

• Completion of Terms

of Reference and 

work plans for 

implementation and 

procurement

• Compact “Enters

Into Force” and 

5-year clock starts

• Accountable entity 

is responsible for 

overseeing 

implementation of 

projects

Developing the

program:

Negotiating the terms

of the compact:

Getting ready for

implementation:

The clock starts:

Implementation preparations

6.

Implementation

End of

compact Entryinto-force

Preparing for implementation: Country sets up its Project Management 

Unit structures (Accountable Entity, Fiscal Agent, Procurement Agent, 

and Implementing Entities are established and trained)

Source: GAO summary of MCC publications.

Compact signed 4. Compact

 negotiation and signing

Page 42 GAO-10-52 Millennium Challenge Corporation
 

MCC officials stated that they are making greater use of MCC 609(g) 

funding authority and Compact Implementation Funds64 to support these 

activities earlier in the process for more recent compacts. MCC also noted 

that it expects to make greater use of Compact Implementation Funds to 

assist the countries in preparing their procurement processes and begin 

final project design in cases when planning feasibility studies are 

completed. 

MCC Conducts Oversight 

during Implementation 

In all nine contracts that we examined—the three road projects (six 

contracts), the port project, the bridges project, and the pipeline project—

we found that MCC’s Implementation Support Team (IST) conducts 

oversight and monitors project performance during compact 

implementation. We also found that MCC has a resident country director 

(RCD) in each compact country. The RCD monitors MCA management and 

project implementation as MCC’s representative to the government in the 

compact country and at the board meetings of accountable entities. The 

RCD is not a voting member, but provides oversight over MCA decisions 

about contract awards and contract changes affecting cost, schedule, and 

scope. 

MCC requires the MCAs to prepare implementation plans that include 

program and project work plans and uses independent consultants to 

monitor MCA reporting status against those plans. MCC also reviews key 

documents, such as bidding packages, contract documents, and technical 

project requirements. We found that MCC staff in-country and in 

Washington, D.C., visit projects firsthand to confirm MCA reporting and 

assessment of status of projects. MCC officials stated that, to integrate 

oversight efforts, they schedule consultant site visits to coincide with 

those of headquarters staff, to the extent possible. 

According to MCC officials, communication occurs daily between the 

RCD, the deputy RCD, their counterparts in the MCAs, and the MCAs’ 

individual project directors. The MCAs prepare quarterly progress reports 

for MCC. The RCDs discuss project performance—usually weekly—with 

the MCAs, including discussions about scope, cost, schedule, and other 

project-related issues. The RCD’s monitoring is reported informally to 

 

64Compact Implementation Funds represent a portion of the funds agreed to in a compact 

and are made available at the time of compact signing for the purposes of speeding 

implementation between compact signing and entry-into-force. 

Page 43 GAO-10-52 Millennium Challenge Corporation
 

MCC headquarters on an ongoing basis and formally in quarterly country 

portfolio reviews with MCC’s deputy vice presidents. During those 

reviews, the IST also reports on implementation progress. 

Under the compact model of country ownership, MCC does not have the 

authority to direct MCA contractors that implement MCA projects but 

works with the MCAs, which direct contractors to take corrective actions. 

MCC, through provisions in the compacts and MCC Program Procurement 

Guidelines—and outlined in MCC Standards of Clearance—has the right to 

review and approve MCA projects and contract documents and may direct 

the MCAs to ensure that (1) appropriate design standards and 

specifications are used, (2) schedules and cost estimates are prepared, 

(3) environmental and social assessments are made and incorporated into 

projects’ scopes, and (4) changes to contracts that increase the value by 

10 percent or more are justified. In Georgia, MCC’s engineers raised 

significant design and environmental concerns about the Naniani landslide 

site and potential risk to the pipeline project at the site. MCC’s engineers 

reported that the existing pipeline ruptured in December 2006 due to a 

landslide, and that a reoccurrence could damage the MCC-funded repairs. 

MCC’s consultant reviewed the geotechnical information and 

recommended rerouting the pipeline and that it be included in the project 

scope of the Georgian Oil and Gas Corporation.65 The recommendation 

was accepted and incorporated, and MCC and its consultant continued to 

monitor the project, conducting a follow-up inspection of the site in July 

2008. MCC’s consultant reported that the pipeline was completed and at a 

location far better than the original location. The rerouting of the pipeline 

is shown in figure 9. 

 

65The Georgian Oil and Gas Corporation is a limited liability company that is under the full 

state ownership of the government of Georgia. 

Page 44 GAO-10-52 Millennium Challenge Corporation
 

Figure 9: Rerouting of Pipeline at the Naniani Landslide Site in Georgia 

Source: MCA-Georgia.

The new pipeline route runs down and under the small hill shown and is less susceptible to

landslides.

New pipeline being laid and rerouted to avoid steep hillside areas that are susceptible to landslides.

Source: GAO.

Page 45 GAO-10-52 Millennium Challenge Corporation
 

MCC’s compact framework sets out conditions that the MCAs must meet 

before receiving funds that act as incentives for establishing accountable 

organizational structures to implement country compacts. We found that, 

in all nine projects in the three countries in our review, MCC required that 

the MCAs engage the services of a project manager or an implementing 

entity to help the MCAs manage the infrastructure projects outlined in 

their compacts before they received project funding. In some instances, 

the MCAs contracted with a commercial project management consultant 

to act as a project manager on the MCAs’ behalf. In other instances, the 

MCA entered into a formal agreement with another government entity that 

acted as the implementing entity. For example, for its road construction 

projects, MCA-Georgia contracted with an international project 

management firm. 

MCC Conditions the 

Disbursement of Funds on the 

MCAs Meeting Certain 

Requirements 

MCC also ensures that the MCAs have accountable individuals, to meet 

another condition for receiving project funding, to oversee the 

management of large infrastructure projects. MCC requires the MCAs to 

assign “project directors,” such as a roads director, to monitor 

implementing entities and outside project management contractors. In 

Georgia and Cape Verde—where the infrastructure projects reviewed 

included roads and bridges, a pipeline, and a port project—we found that 

MCC required the MCAs to have project directors for the different types of 

projects. In addition, we found that MCC required the MCAs to use 

independent construction supervisors to conduct oversight of day-to-day 

construction, including overseeing construction progress and the actions 

of the construction contractor to ensure compliance with contract 

requirements. In the case of the pipeline project in Georgia, the 

implementing entity acted as both the project manager and the 

independent construction supervisor. 

MCC also requires the MCAs to conduct oversight of their project 

management units and projects through an MCA supervisory board 

generally comprising high-level government officials and representatives 

of the business sector and civil society. The board places additional highlevel oversight and accountability on the performance of the project 

management units, the projects, and MCA contractors. The supervisory 

board must be briefed on challenges that require changes to the project 

scope, contract cost, schedule, or contractor. MCC also works with the 

MCAs’ supervisory boards to restructure projects when needed to keep 

them within their budgets and compact time frames. The board is required 

to approve changes that the MCA project management unit proposes and 

decisions about hiring or replacing staff when performance and 

accountability issues warrant a change. In one of the three countries we 

Page 46 GAO-10-52 Millennium Challenge Corporation
 

reviewed, MCC took action when it had concerns about the effectiveness 

of the MCA’s top-level management officer and worked with the 

supervisory board to see that the compact country changed the leadership 

of the MCA’s project management unit. 

We found that MCC uses integrated cross-functional project teams—

comprising headquarters’ IST and its independent engineering 

consultants—to provide technical expertise and operational support to 

MCC’s oversight and to the MCAs in implementing infrastructure projects. 

MCC headquarters personnel who support oversight include contracting, 

financial, legal, environmental, and engineering staff. MCC also has about 

24 engineering and environmental consultants that it uses to support MCC 

project oversight reviews. 

MCC Uses Cross-Functional 

Teams to Oversee Projects 

On the basis of evidence contained in MCC’s independent engineers’ 

reports, MCC conducts reviews of project scope, cost, schedule, design 

and specifications, contractor performance, and environmental and safety 

issues. In cases where individuals must be moved and property acquired to 

accommodate projects, MCC also conducts reviews to ensure that the 

MCAs comply with MCC resettlement policies. In addition to conducting 

technical reviews of projects, MCC independent consultants also report on 

the performance of MCA project management consultants and 

construction supervisors in conducting effective project and construction 

management. 

MCC works in challenging and resource-poor countries and has provided 

them with ownership and flexibility in the ways they can meet MCC’s 

statutorily mandated requirement to ensure fiscal accountability and open, 

fair, and competitive procurements. While the MCAs we examined have 

made progress in implementing policies and procedures for financial 

management, some gaps remain. Without additional specificity from MCC 

in its financial guidance, the MCAs may continue to use inadequate 

policies and procedures that do not reflect best practices in their internal 

financial management and in monitoring the financial control activities of 

their implementing entities. In addition, although the MCAs generally 

adhered to MCC procurement requirements, absent their consistent 

adherence to guidance on conducting and documenting price 

reasonableness analysis, MCC will not be able to ensure that it receives 

the best value in procurements. Finally, MCC is conducting oversight and 

has taken steps to advance planning for infrastructure projects. However, 

the process changes MCC has made will not address problems caused by 

shortcomings in the designs that were not discovered until after contract 

Conclusions 

Page 47 GAO-10-52 Millennium Challenge Corporation
 

award and by cost estimates that did not sufficiently account for cost 

escalation associated with project delays and construction prices. 

Planning should be completed earlier so that the MCAs have more time to 

conduct effective design reviews and independent cost reviews. 

Otherwise, MCC risks funding MCA projects that cannot be completed 

within the 5-year compact time frame and within the allotted compact 

budgets. Earlier project planning and design and cost reviews will likely 

add to the cost and time required for planning and design, but should 

result in better designs, help to control costs, and reduce the challenges 

encountered during implementation. 

To improve MCC’s financial controls, procurement practices, and contract 

management, we recommend that the Chief Executive Officer of the 

Millennium Challenge Corporation take the following five actions: 

Recommendations for 

Executive Action 

1. Revise MCC guidance to MCAs to require that MCA FAPs include 

comprehensive policies and procedures related to the MCAs’ financial 

transactions that are in accordance with best practices covering 

procedures such as authorizations, approvals, and key documentation 

of all transaction types. 

2. Revise MCC guidance to MCAs to require that MCA FAPs incorporate 

policies and procedures related to disbursements of the MCAs’ primary 

project- or program-related expenses, including oversight procedures 

and responsibilities for MCA personnel in charge of monitoring and 

evaluating the implementing entities’ compliance with contract 

agreements. 

3. Reinforce existing MCC guidance to MCAs on conducting and 

documenting price reasonableness analyses. 

4. Establish a programmatic goal that MCAs conclude all project planning 

efforts—to include MCC final approvals of the MCAs’ final feasibility 

surveys, engineering surveys, environmental surveys, and resettlement 

studies—prior to entry-into-force, but not later than the point at which 

the MCAs issue contract solicitations. 

5. Require MCAs to obtain detailed reviews of project cost estimates—to 

include the extent that risks to projects, such as cost escalation, 

schedule delays, and other issues, have been considered—and of 

project designs before contract solicitation for large construction 

projects to better ensure that projects can be successfully bid and 

built. 

Page 48 GAO-10-52 Millennium Challenge Corporation
 

We received written comments on a draft of this report from MCC. In 

commenting on the draft, MCC accepted GAO’s recommendations and 

provided additional comments on some of our findings. 

Agency Comments 

and Our Evaluation 

Regarding MCA financial controls, MCC accepted our recommendations 

and commented that some MCA travel and payroll policies did not require 

the documentation we looked for to verify expenses. However, without 

such documentation, we could not verify that travel actually occurred for 

the travel transactions or that employees worked the necessary number of 

hours for the payments made. Finally, MCC clarified certain aspects of the 

GRDF investment guidelines; accordingly, we have adjusted the report to 

reflect this clarification. 

Regarding procurement, MCC accepted our recommendation and stated 

that it had now incorporated its existing guidance on price reasonableness 

analyses and contractor eligibility into MCC Procurement Guidelines so 

that they carry the weight of MCC policy. Furthermore, MCC procurement 

directors have been directed to reject any evaluation reports received 

from an MCA that do not include these determinations. 

Regarding infrastructure planning and oversight, MCC stated that it 

accepted our recommendation that they conclude planning efforts prior to 

contract solicitation—ideally, prior to entry-into-force of the compact—

and modified its processes beginning in fiscal year 2008 to require 

completion of feasibility studies and environmental assessments before 

compact signing. We are in the process of assessing the specific actions 

MCC has taken that address our findings. 

MCC also accepted our recommendation that they obtain detailed reviews 

of project designs and cost estimates but stated that it conducts a number 

of reviews in due diligence and prior to the release of design and bidding 

documents. While MCC conducts reviews, our assessment of the compacts 

we examined, all of which had significant design, cost, and schedule 

issues, indicates that the project review process can still be improved. For 

example, MCC could expand its reviews by soliciting specialized project 

management experience in risk analysis and scheduling. 

We have reprinted MCC’s comments, with our responses, in appendix IV. 

We also incorporated technical comments from MCC in our report where 

appropriate. 

Page 49 GAO-10-52 Millennium Challenge Corporation
 

We are sending copies of this report to interested congressional 

committees, the Chief Executive Officer of the Millennium Challenge 

Corporation, and other parties. In addition, this report will be available at 

no charge on the GAO Web site at http://www.gao.gov. 

If you or your staffs have any questions about this report, please contact 

David Gootnick at (202) 512-3149 or gootnickd@gao.gov. Contact points 

for our Offices of Congressional Relations and Public Affairs may be found 

on the last page of this report. GAO staff who made major contributions to 

David Gootnick 

this report are listed in appendix V. 

ffairs and Trade Issues 

Kay Daly 

Director, Financial Management and Assurance Issues 

Terrell G. Dorn 

Director, Physical Infrastructure Issues 

Director, International A

Page 50 GAO-10-52 Millennium Challenge Corporation
Appendix I: Objectives, Scope, and 

Methodology 

Page 51 GAO-10-52 

Appendix I: Objectives, Scope, and 

Methodology 

The fiscal year 2008 Consolidated Appropriations Act, Public Law 110-161, 

mandated that GAO review the financial controls and procurement 

practices of the Millennium Challenge Corporation (MCC) and its 

accountable entities and the results achieved by its compacts. For the 

purpose of this initial engagement, we focused on financial controls and 

procurement practices for MCC compacts and on the development, 

implementation, and oversight of contracts and projects at MCC and its 

accountable entities. 

We assessed MCC’s overall framework for financial controls, procurement 

practices, and contract management through a detailed review of these 

areas at three MCC compact countries: Honduras, Georgia, and Cape 

Verde. While we cannot statistically project our findings to other countries 

on the basis of these three countries, we chose these countries because 

they totaled approximately 39 percent of MCC’s disbursements at the end 

of fiscal year 2008. Intervening political events in other MCC countries also 

affected the selection of countries.1

To determine whether MCC’s financial controls help ensure accountability 

over compact country funding, we obtained an understanding of MCC 

financial requirements imposed on the country when compact agreements 

were signed. MCC delegates much of the development and implementation 

of internal control procedures and the fiscal oversight of its federal 

funding to the country’s Millennium Challenge Account (MCA) 

accountable entity. As a result, we focused our work on policies and 

procedures at the three selected MCAs, including internal controls related 

to their financial transactions and on MCC’s oversight of this process. 

 

1

We initially planned to examine Georgia, Madagascar, and Honduras, the compacts with 

the first-, second- and third-highest total disbursements as of the end of fiscal year 2008. 

Together, these three compacts accounted for approximately 46 percent of MCC’s total 

disbursements. However, our audit in Madagascar in January 2009 was interrupted by 

protests and instability in the country that ultimately led to the forced resignation of the 

country’s elected president. On March 20, 2009, MCC announced that it was placing a hold 

on its operations in Madagascar, and it terminated the program on May 19, 2009, because of 

the undemocratic change of government. We eliminated Nicaragua, the country with the 

fourth-highest disbursement total, from our consideration because MCC partially 

suspended the compact in December 2008 due to concerns about the conduct of elections 

in the country. In June 2009, the MCC Board of Directors terminated the suspended 

portions of the Nicaragua compact. After removing Nicaragua from our consideration, we 

included Cape Verde, the country with the fifth-highest disbursements. In June 2009, 

Honduras experienced a coup, and the elected president was forcibly exiled. In September 

2009, MCC terminated $11 million of its assistance under the compact and placed a hold on 

an additional $4 million. 

 Millennium Challenge Corporation 
Appendix I: Objectives, Scope, and 

Methodology 

To assess the extent to which the MCAs had adequate policies and 

procedures for managing their operations effectively, we used MCC’s 

financial guidance and our Standards for Internal Control in the Federal 

Government.

2

 Specifically, we (1) obtained relevant policies and 

procedures as documented in the country Fiscal Accountability Plan 

(FAP) and determined whether the policies were comprehensive; 

(2) interviewed each MCA’s financial management staff to discuss 

additional control procedures not documented in the country FAP or other 

agreements; and (3) obtained additional documents, such as compact 

agreements or service contracts, to determine whether additional internal 

control information was included in these agreements. While our internal 

control standards for the federal government are not binding for the 

MCAs, they are a statement of best practices, and adherence to these 

standards provides reasonable assurance that fraud, waste, abuse, and 

mismanagement will be prevented or promptly detected.3

To determine the extent to which the MCAs were effectively implementing 

their internal controls as described in their FAPs’ policies and procedures 

or other agreements, we gained an understanding of each MCA’s overall 

financial management structure, and policies and processes by 

interviewing MCA officials. Specifically, we: 

• Conducted walk-throughs and interviews with each MCA’s financial 

management officials to identify relevant policies and procedures, 

including key internal control activities for its financial transactions. 

• Performed tests of those control activities that we considered key in 

providing reasonable assurance that transactions were correct and proper, 

including 

• segregation of duties related to the approval and authorization of 

payments: dividing key duties and responsibilities among different 

people to reduce the risk of error or fraud, 

 

2

GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1 

(Washington, D.C.: November 1999). 

3

Internal control standards give management the responsibility and discretion to develop 

and implement the mechanisms for internal control necessary for providing reasonable 

assurance that the objectives of the agency are achieved with regard to effective and 

efficient operations, reliable financial reporting, and compliance with applicable laws and 

regulations. 

Page 52 GAO-10-52 Millennium Challenge Corporation
Appendix I: Objectives, Scope, and 

Methodology 

• adequate supporting documentation: supporting the disbursements 

through documentation to provide a basis for reconciling payment 

amounts and authorizations to disbursement of funds, 

• proper execution of transactions and events: authorizing and executing 

transactions by persons acting within the scope of their authority to 

ensure that only valid transactions are initiated and approved, and 

• physical control over assets: securing assets and periodically counting 

and comparing totals with control records. 

We tested MCA transactions using data collection instruments (DCI) and 

criteria described in the MCA’s policies and procedures as documented in 

the MCA’s FAP or other documentation, such as project- or programrelated contracts or agreements with third parties hired to manage or 

oversee implementation of the project activities. If transactions were not 

properly supported, we queried MCA officials to determine whether the 

required documentation could be located. 

To perform tests of internal controls included in the MCA’s policies and 

procedures, we selected stratified random samples of disbursement 

transactions for fiscal years 2007 and 2008. Given the variation in the 

programs and projects conducted by the three countries selected, we 

divided our work into strata that included operational expenses such as 

travel; payroll; and project-related expenses, such as credit lines, 

resettlements, grants, and investments. See table 2 for additional details on 

the number and dollar value of transactions tested. 

Table 2: Sample of Disbursements Tested and Dollar Value for Each MCA 

MCA 

Number of 

strata 

Sample 

 size 

Total number of 

transactions in the 

population

Total dollar 

value of sampled 

transactions 

Total dollar value of 

transactions in the 

population

Cape Verde 7 166 1,789 $2,273,420 $22,529,469 

Georgia 7 283 2,507 4,694,281 55,416,097 

Honduras 6 240 2,318 10,092,713 33,799,980 

Source: GAO analysis of MCC data. 

The MCAs often contract out the management or oversight of some 

program- or project-related activities to implementing entities that have 

more specialized knowledge or needed skills. For some of these 

implementing entities, we selected additional transactions and tested 

controls at their site to determine whether transactions were properly 

Page 53 GAO-10-52 Millennium Challenge Corporation
Appendix I: Objectives, Scope, and 

Methodology 

documented and to assess the MCAs’ oversight of those activities. We 

selected items from the country’s inventory list to test whether the MCA 

had established an adequate system to ensure physical control over assets. 

Disbursements for each country were randomly selected within each 

stratum to ensure an objective selection. 

Our initial methodology for transaction testing included the selection of a 

statistical sample of transactions at each MCA; however, as our countries 

changed, we found that inconsistencies between the countries’ financial 

management reporting systems did not always allow us to select an 

individual transaction to trace. For example, certain MCA systems 

processed transactions, such as payroll, in a batch process, and a payment 

selected from the database could be an entire monthly payroll, rather than 

a payment involving an individual. In addition, for some credit line and 

resettlement programs, the MCAs transferred large balances to credit 

institutions that would be divided and paid to specific recipients. In these 

cases, we selected additional transactions to test other key controls that 

could not be tested with the large transfers. Because of this limitation, we 

decided to use a random sample selection and to present results for the 

selected samples, rather than projecting to the entire population. 

We assessed the reliability of the financial data provided by the three 

countries we reviewed by (1) performing electronic testing of required 

data elements, (2) reviewing existing information about the data and the 

system that produced them, and (3) interviewing agency officials 

knowledgeable about the data. We determined that the data were 

sufficiently reliable for the purposes of this report. 

To describe MCC’s procurement framework and its evolution, we 

reviewed MCC compact agreements, current and previous editions of 

MCC’s procurement guidelines, procurement agreements, procurement 

guidance papers, and implementation letters. We did not independently 

assess the adequacy of the World Bank procurement guidelines upon 

which MCC procurement guidelines are based. We assumed after 

discussion with internal GAO procurement experts that fully implementing 

World Bank/MCC guidelines would constitute open, fair, and competitive 

procurement. 

We also interviewed MCC officials in Washington, D.C., and compact 

countries, and MCA procurement officers and procurement agents in 

compact countries, to further our understanding of how MCC and the 

MCAs have managed and overseen procurement activities and to identify 

any issues with implementing MCC’s framework in practice. We analyzed 

Page 54 GAO-10-52 Millennium Challenge Corporation
Appendix I: Objectives, Scope, and 

Methodology 

current and previous editions of MCC guidance and agreements to identify 

how MCC’s requirements and procedures have evolved. We further 

reviewed MCC interim activity reviews and audits of the MCAs to 

document MCC’s post-review and audit processes. 

To assess the adherence of MCA compact countries to MCC’s procurement 

framework, we examined a stratified random sample of completed fiscal 

year 2008 MCA entity procurements for our three focus countries. As 

shown in table 3, we divided these procurements into the following four 

strata: (1) sole source procurements, (2) the five largest dollar value 

procurements, (3) procurements requiring MCC review, and 

(4) procurements that did not require MCC review. We identified the 

universe of procurements in each country using MCC’s Procurement 

Performance Report (PPR) for each country. To ensure that the PPR 

sufficiently reflected the procurements in each country, we interviewed 

staff at the MCAs and checked reported procurement dates and 

descriptions in the files against those reported in the PPRs. We found a 

high degree of accuracy in the data reported in the PPRs, which provided 

us with reasonable assurance that the PPRs were sufficiently reliable for 

the purposes of our analysis. 

Table 3: MCA Procurements by Population and Sample Sizes 

Procurement, by stratum 

MCA 

Sole 

source 

Five-largest 

non-sole 

source

With 

MCC 

review 

Without MCC 

review Total

Honduras 

Population size 7 5 10 83 105

Sample size 7 5 10 41 63

Cape Verde 

Population size 2 5 1 64 72

Sample size 2 5 1 39 47

Georgia 

Population size 5 5 2 16 28

Sample size 5 5 2 16 28

Source: GAO analysis of MCA Procurement Performance Reports. 

Page 55 GAO-10-52 Millennium Challenge Corporation
Appendix I: Objectives, Scope, and 

Methodology 

We reviewed all sole source procurements in each country during fiscal 

year 2008 because of their high risk for abuse, as outlined in the U.S. 

Agency for International Development, Office of Inspector General’s Fraud 

Indicators. We also reviewed the five largest dollar value procurements in 

each country because of the dollars involved and their importance for 

compact implementation. We divided the remaining procurements into 

those with and without MCC review to determine whether MCC 

involvement in procurement changed the level of compliance with MCC’s 

guidelines. Because of the small number of procurements with MCC 

review in each country, we selected all of these procurements in our 

sample. In addition, because the number of procurements with MCC 

review was so small relative to those without MCC review in each country, 

we could not make a valid comparison between the two strata. In Cape 

Verde and Honduras, we selected a stratified random probability sample 

for each country large enough to generate percentage estimates with a 

margin of error of at most plus or minus 10 percentage points at the 

95 percent confidence level. We selected 63 of the 105 procurements from 

Honduras and 47 of the 72 procurements from Cape Verde. With this 

probability sample, each procurement in the population had a known, 

nonzero probability of being included in the sample. Each procurement in 

the sample was subsequently weighted in the analysis to account 

statistically for all procurements in the population, including those that 

were not selected. All percentage estimates from these samples presented 

in this report have a margin of error of plus or minus 10 percent or less, 

unless otherwise noted. 

In Georgia, we reviewed all 28 procurements conducted in fiscal year 2008 

because the relatively small number of procurements conducted in the 

country over that time period made sampling unnecessary. 

We examined the selected procurements using a DCI to determine 

whether procurements were conducted according to MCC’s procurement 

criteria.4

 We assessed the MCA procurement process on compliance with 

MCC procurement guidelines, as outlined in table 4. 

 

4

MCC’s procurement criteria are outlined in the MCC Procurement Guidelines and the 

Procurement Agreements between MCC and each compact country. For each procurement 

we reviewed, we ascertained compliance with guidelines outlined in the MCA Procurement 

Agreement and the MCC Procurement Guidelines that were in place at the time of the 

procurement. 

Page 56 GAO-10-52 Millennium Challenge Corporation
Appendix I: Objectives, Scope, and 

Methodology 

Table 4: Measures of Compliance with MCC Procurement Guidelines 

MCC requirements Compliance elements assessed 

MCC oversight or approval of a 

procurement action 

MCC approvals, when required, at up to eight points in the procurement process, 

including approval of procurement method, prequalification and bidding documents, 

short-listed contractors, the technical evaluation report, the proposed award, the final 

contract, and any modifications to the contract after it has been signed. 

MCA governing body oversight or 

approval of a procurement action 

MCA approvals, when required, at up to seven points in the procurement process, 

including approval of prequalification and bidding documents, short-listed contractors, 

the technical evaluation report, the proposed award, the final contract, and any 

modifications to the contract after it has been signed. 

Choice of procurement process Whether the MCA used a competitive bidding process to secure the contract. In cases 

where the MCA used a noncompetitive procedure, we assessed whether the MCA 

provided appropriate justification to do so. 

Prequalification procedures Whether the MCAs followed MCC guidelines for advertising for prequalification. 

Advertising procedures Whether the MCAs followed MCC guidelines for advertising procurements and 

preparing bidding documents. 

Bid evaluation procedures MCA compliance with nine bid evaluation requirements, including documenting the 

independence of the technical evaluation panel, preparation of the technical evaluation 

report, selection of the winning bidder, vetting of contractors to comply with MCC 

requirements, and determination of price reasonableness. 

Documentation of receipt of goods, 

works, or services contracted under 

the procurement 

Whether the MCAs had received goods, works, or services and whether the received 

goods matched specifications outlined in the contract. 

Source: GAO analysis of MCC requirements. 

We reviewed each file to assess whether it contained documentation that 

the MCA had followed the required procedures. If required documentation 

was not present in the file, we queried MCA officials to determine whether 

the required document could be located elsewhere. We did not, however, 

assess the quality of these required documents. In addition, our review 

included only a limited number of procurements that were completed 

following the introduction of MCC’s implementation model and Schedule 

B approvals matrix. Therefore, our findings do not assess the effectiveness 

of the implementation model. 

In addition to the statistical selection of the procurements for review using 

our DCI, we also judgmentally selected procurements whose reporting in 

the PPR exhibited potential indicators of fraud, such as multiple contract 

awards to a single entity, contracts awarded in multiple lots where 

awarding as one lot would have required additional reviews, and contracts 

awarded on a sole source basis. Some of these procurements were 

selected for inclusion in our DCI analysis; the remainder were assessed 

through interviews or document review to determine whether these 

potential fraud indicators could be explained by other circumstances. In 

Page 57 GAO-10-52 Millennium Challenge Corporation
Appendix I: Objectives, Scope, and 

Methodology 

addition, because canceled procurements represent lost time and effort 

spent in developing the procurement or contract, we identified canceled 

procurements in each country in fiscal year 2008. Although we did not do a 

formal review of these procurements using the DCI, we interviewed the 

MCA staff about these procurements to understand the reasons for 

cancellation. 

To assess the time frames required for MCC procurements, we identified 

key procurements in each of our three focus countries. We defined key 

procurements as those with a contract award amount greater than or equal 

to $1 million for goods, works, or consultant services. We then reviewed 

Procurement Implementation Plans for those procurements, where 

available, and compared the time frames anticipated in those plans with 

the actual procurement time frames provided to MCC in the PPR to 

determine the difference between planned and actual time frames. We 

further reviewed associated reporting documents and discussed these key 

procurements with the MCA procurement directors to determine the 

causes for any delays in these key procurements. 

To assess MCC’s development, implementation, and oversight of 

contracts, we examined the three infrastructure construction contracts 

with the largest dollar value and the largest consultant services contract 

associated with construction services in each of our three sample 

countries. 

We reviewed the following MCAs: 

• Honduras: The Honduras compact called for the improvement of 

approximately 110 kilometers of the CA-5 highway comprising the “North 

Segment” (sections 3 and 4) and a “South Segment” (sections 1 and 2), 

both of which are located north of Tegucigalpa. We reviewed three MCCfunded road construction contracts associated with the CA-5 highway 

project in Honduras. The contracts are identified as roadway sections 

2, 3, and 4, with contract awards of $48.4 million, $16.2 million, and 

$23.2 million, respectively. Other roadway sections of the highway are 

being improved by other funding sources. (See fig. 10.) 

Page 58 GAO-10-52 Millennium Challenge Corporation
Appendix I: Objectives, Scope, and 

Methodology 

Figure 10: Honduras CA-5 Highway Project 

Puerto Cortes

Taulabe

Tegucigalpa

San Pedro

Sula

Honduras

Existing road, previously upgraded

Inter-American

Development Bank

Inter-American

Development Bank

World Bank

Millennium Challenge

Corporation

Road sections funded by MCC (110 km)

Other road sections (labels indicate funding source)

Cities

Capital

Sources: GAO synthesis of MCA-furnished project maps; Map Resources (base map).

Central American 

Bank for Economic 

Integration & Nordic 

Development Fund

Central American

Bank for Economic

Integration

Taulabe

Comayagua

Tegucigalpa

North

 segment

South

 segment

Taulabe

Tegu

rican

ent Bank ent

Millenniu

Corporati

Section 4 

Section 3

Section 2

Section 1

(Construction

of Section 1 is 

funded by CABEI)

• Georgia: We reviewed one MCC-funded construction contract, awarded 

for 8.7 million Georgian Lari—valued at more than $6.2 million at the 

time—for phase II of the North-South Gas Pipeline Rehabilitation Project 

at nine sites along the pipeline. (See fig. 11.) 

Page 59 GAO-10-52 Millennium Challenge Corporation
Appendix I: Objectives, Scope, and 

Methodology 

Figure 11: Georgia North-South Gas Pipeline Rehabilitation Project 

T u r k i s h b o r d e r

A r m e n i a n b o r d e r

Tbilisi

Capital

Gasline rehabilitation funded by MCC

Georgia

R u s s i a n b o r d e r

Black Sea

A z e r b a i j a n b o r d e r

Sources: GAO synthesis of MCA-furnished project maps; Map Resources (base map).

• We also reviewed two road construction contracts associated with the 

Samtskhe-Javakheti Roads Rehabilitation Project—for rehabilitation of 

approximately 171 kilometers of roads in the Samtskhe and Javakheti 

regions—that were awarded under what is identified as the “2nd 

procurement.” The first contract under that procurement was awarded in 

March 2008 for $65.0 million; the second was awarded in May 2008 for 

$33.1 million. An earlier procurement effort—identified as the “1st

Procurement”—intended to award three contracts to rehabilitate 245 

kilometers was canceled in June 2007 after contractor bids exceeded the 

available budget. When Georgia received an additional $100 million in 

compact funding, it allowed for a “3rd procurement” that enabled MCAGeorgia to award three additional road contracts, two in April 2009 and 

the third in June 2009, totaling about 46 kilometers. (See fig. 12.) 

Page 60 GAO-10-52 Millennium Challenge Corporation
Appendix I: Objectives, Scope, and 

Methodology 

Figure 12: Samtskhe-Javakheti Roads Rehabilitation Project Procurements 

Sources: GAO synthesis of MCA-furnished project maps; Map Resources (base map).

T u r k i s h b o r d e r

Contract 3 Contract 2 Contract 1

A r m e n i a n b o r d e r

Satkhe

Ninotsminda

Tbilisi

Cities

Capital

Georgia

R u s s i a n b o r d e r

Black Sea

A z e r b a i j a n b o r d e r

Akhalkalaki

Khertvisi

Tbilisi

Tsalka

Manglisi

Teleti

Ninotsminda

Akhalkalaki

1st Procurement (245 km)

Canceled in June 2007

2nd and 3rd procurements

Vardzia

d e r

A r m e n i a n

Satkhe

Ninotsminda

Akhalkalaki Ak

Khertvisi

Vardzia

2nd procurement (171 km)

Awarded under original compact 

3rd procurement (46 km)

Awarded under additional

$100 million compact assistance

Teleti

• Cape Verde: In the case of Cape Verde—which consists of 10 separate 

islands—we reviewed three contracts valued at more than $56.6 million to 

improve Cape Verde’s port, roads, and bridges. The contract for the phase 

I port project, to upgrade and expand the port of Praia on Santiago Island, 

was awarded for $42.3 million. The roads contract, to rehabilitate five 

roads on Santiago Island, was awarded for more than $11.0 million. Two of 

five roads were eliminated (identified as roads 3 and 5) from the contract 

scope due to cost increases. The contract for reconstruction of four 

bridges, on Santo Antão Island (not shown), was awarded for roughly 

$3.3 million. (See fig. 13.) 

Page 61 GAO-10-52 Millennium Challenge Corporation
Appendix I: Objectives, Scope, and 

Methodology 

Figure 13: MCC-Funded Roads Project and Port of Praia Project on Santiago Island, Cape Verde 

Ribeira de Prata

Praia

Pedra Badejo

Cacheta de Sao Miguel

Road 2

(13.7 km)

Road 5

(8.4 km)

Road 4

(15.6 km)

Assomada

Road 3

(14.5 km)

Road 1

(10 km)

Sources: GAO synthesis of MCA-furnished project maps; Map Resources (base map).

Cape Verde

Port of Praia

Road sections funded by MCC

Road sections previously but no longer funded by MCC

Other road sections

Cities

We also examined MCC’s use of its independent engineers in supporting 

MCC’s oversight efforts related to the previously discussed infrastructure 

contracts and projects. To conduct our work, we reviewed project reports 

prepared by (1) the MCAs, (2) MCA implementing entities, (3) MCA 

project management consultants, (4) MCA independent construction 

supervisors, (5) MCA construction contractors, (6) MCC independent 

engineers, and (7) MCC. Those project reports generally report on project 

status, including scope, cost, schedule, engineering, environmental, and 

health and safety issues. To further understand and corroborate these 

reports, we interviewed MCC officials in Washington, D.C., and MCC 

resident country directors working in the compact countries. We also 

interviewed MCA management in the compact countries, MCA project 

Page 62 GAO-10-52 Millennium Challenge Corporation
Appendix I: Objectives, Scope, and 

Methodology 

management consultants, MCA independent construction supervisors, 

MCA design engineers, and MCA construction contractors. 

We compared MCC’s oversight with GAO’s Executive Guide: Leading 

Practices in Capital Decision-Making5

 to assess MCC’s activities against 

best practices. Our assessment of planning, design, schedule, and cost 

status of projects was informed by our review of MCC and MCA reports 

and those of their contractors. Our evaluation of the sufficiency of MCC’s 

oversight documents was guided by lessons learned from past GAO work 

on infrastructure projects and industry best practices. Lastly, we made 

field visits to select projects in Honduras and Georgia to confirm some of 

the information reported within contractor progress reports. Because a 

recent U.S. Agency for International Development, Office of Inspector 

General, audit of Cape Verde compact implementation included field visits 

to projects, our findings for this objective did not rely on a site visit in 

Cape Verde. 

We conducted this performance audit from June 2008 to October 2009 in 

accordance with generally accepted government auditing standards. Those 

standards require that we plan and perform the audit to obtain sufficient, 

appropriate evidence to provide a reasonable basis for our findings and 

conclusions based on our audit objectives. We believe the evidence 

obtained provides a reasonable basis for our findings and conclusions 

based on our audit objectives. 

 

5

GAO, Executive Guide: Leading Practices in Capital Decision-Making, AIMD-99-32 

(Washington, D.C.: Dec. 1, 1998). 

Page 63 GAO-10-52 Millennium Challenge Corporation
Appendix II: Re

Rev

ductions in MCC Procurement 

iew Thresholds 

Page 64 GAO-10-52 

Appendix II: Reductions in MCC 

Procurement Review Thresholds 

MCC’s most recent version of its procurement guidelines, released in July 

2008, established a 2-tier system of approvals that allows for less MCC 

review of procurement actions. Schedule A under these guidelines 

represents the initial level of review for most countries and is a reduction 

in review from all previous versions of the procurement guidelines. As 

countries gain experience and MCC gains confidence that they are 

implementing MCC procurement guidelines, MCC permits the country to 

transition to Schedule B. 

Figure 14: MCC Approval Requirements from the Program Procurement Guidelines of July 21, 2008 (Goods, Works, and 

Nonconsultant Services) 

Source: GAO analysis of MCC data.

Decision

— Indicates no change

Schedule A Schedule B

(for MCC-approved compacts)

Procurement procedure 

or method

MCC procurement 

review thresholds

Reductions in MCC review thresholds from previous versions

May 2007 – June 2008 versions July 2008 version

Pre-qualification documents and advertising 

procedures

Report with proposed list of entities qualified

Record of bid challenges

Bidding documents

Technical evaluation or review report 

with proposed award

Final contract

Record of bid challenges

Short list report

Bidding documents

Technical evaluation or review report 

with proposed award

Final contract

Record of bid challenges

Short list report 

Record of purchases

Record of bid challenges

Proposed award

Final contract

Record of bid challenges

Selection of using equipment owned by or 

employees of Government for performing works

Proposed contract

Final contract

Contract modifications and change orders

Goods > $1,000,000

Works above $5,000,000

Above $500,000 Above $500,000

Above $100,000

Above $500,000

Above $1,000,000

Above $1,000,000

Quarterly record of decisions

Above $50,000

If increases value of 

contract by 10% or more

Above $50,000

I. Goods, works and non-consultant services

Pre-qualification 

Competitive bidding

Limited bidding

Shopping

Direct contracting

Force account

All procurement 

actions

Review all

Review all

Review all

Review all

Review all

No review required No review required

No review required No review required

No review required

No review required

No review required

No review required

No review required

Review all

Review all

Above $1,000,000

Above $500,000

Above $250,000

Above $250,000

— — 

— — 

— — 

— — 

— — 

— — 

— — 

— — 

— — 

— — 

— — 

— — 

— 

— 

— 

— — 

— — 

— — 

— 

— 

— 

— 

 Millennium Challenge Corporation 
Appendix II: Reductions in MCC Procurement 

Review Thresholds 

Figure 15: MCC Approval Requirements from the Program Procurement Guidelines of July 21, 2008 (Consultant Services) 

Request for expression of interest

Technical evaluation panel

Technical evaluation report

Short list report

Proposal documents

Proposed award

Final contract

Record of bid challenges

Technical evaluation report

Technical evaluation report

Proposed award

Final contract

Record of bid challenges

Proposed award

Final contract

Record of bid challenges

Proposed award

Final contract

Record of bid challenges

Proposed award

Final contract

Record of bid challenges

Proposed award

Final contract

Record of bid challenges

Request for expression of interest

Technical evaluation panel

Short list report

Short list report

Proposal documents

Technical evaluation panel

Short list report

Proposal documents

Technical evaluation report for QBS only

Request for expression of interest 

Technical evaluation panel

Technical evaluation panel

Short list report

Standard solicitation documents

Request for expression of interest 

Source: GAO analysis of MCC data.

Decision

Quality and cost 

based selection

Quality based 

selection and 

selection under 

fixed budget

Least-cost selection

Selection based on 

consultant’s

qualifications

Sole-source 

selection

Selection of 

individual 

consultants

No review required

No review required

No review required

No review required

No review required No review required

No review required No review required

No review required No review required

No review required No review required

No review required

No review required

No review required

No review required

No review required

Indicates no change

— — 

— — 

— — 

— — 

— — 

— — 

— — 

— — 

— — 

— — 

— 

— 

— 

— — 

— — 

— — 

— — 

— — 

— — 

— 

— 

— 

— — 

— 

— 

— 

— — 

No review required

No review required

No review required

Above $500,000

Above $500,000

Above $500,000

Above $500,000

Above $500,000

Above $500,000 Above $500,000

Above $500,000

Above $500,000

Above $500,000 No review required

No review required

No review required

No review required

Above $500,000 No review required

Above $500,000 No review required

Above $500,000

Above $500,000

Above $500,000

Review all

Review all

Review all

Review all

Review all

Review all

Above $500,000

Above $500,000

Above $100,000

No review required

No review required

No review required

No review required

No review required

No review required

No review required

No review required

No review required

Above $100,000

Above $100,000

Above $100,000

Above $100,000

Above $100,000

Above $50,000

Above $50,000

Above $50,000

Above $50,000

Above $100,000

Above $500,000

Above $100,000

Above $50,000

Above $50,000

Above $100,000

Above $100,000

Above $50,000

II. Consultant services

Schedule A Schedule B

(for MCC-approved compacts)

Procurement procedure 

or method

MCC procurement 

review thresholds

Reductions in MCC review thresholds from previous versions

May 2007 – June 2008 versions July 2008 version

Page 65 GAO-10-52 Millennium Challenge Corporation
Appendix II: Reductions in MCC Procurement 

Review Thresholds 

MCC uses professional judgment and its implementation model framework 

to identify countries that may graduate from Schedule A to Schedule B. 

Among other things, the framework addresses the MCA’s (1) capability 

and experience, (2) successful execution of previous procurements, 

(3) appropriate and qualified procurement advisors, and (4) maturity of 

the compact. 

Schedule A reduced the level of MCC approvals in 20 of 61 potential 

procurement actions, entirely eliminating MCC review in 9 cases. In 13 of 

61 potential procurement actions, Schedule B reduced the level of MCC 

review below that of Schedule A—in all 13 cases by removing MCC review 

altogether. As of October 2008, five countries have transitioned to 

Schedule B. 

Page 66 GAO-10-52 Millennium Challenge Corporation
Appendix III: Documentation of Compliance 

with MCC Procurement Criteria 

This appendix provides a more detailed breakout of the results of our 

procurement requirement testing contained in table 1 of this report. 

Table 5: Detailed Estimated Percentage of Country Procurements Meeting MCC Procurement Criteria 

Percentage (number of reviewed procurements) 

Procurement criteria Cape VerdeaGeorgiabHondurasa

Overall approvals 

Obtained all required MCC approvalsc100% (47) 96% (28) 100% (63)

Obtained all required approvals 23 32 15

Approvals not required 77 64 85

One or more approval missing 0 4 0

Obtained all required MCA governing body approvalsd100% (47) 86% (28) 92% (63)

Obtained all required approvals 17 29 10

Approvals not required 83 57 82

One or more approval missing 0 14 8

Prequalification 

Advertised prequalification for procurement in English 100% (47) 100% (27) 100% (63)

Met requirement to advertise prequalification in English 9 11 7

Not required to advertise prequalification in English 91 89 93

Did not meet requirement to advertise prequalification in English 0 0 0

Advertised prequalification in required locations 94% (47) 96% (28) 100% (63)

Met requirement to advertise prequalification in required locations 4 11 7

Not required to advertise prequalification in required locations 90 86 93

Did not meet requirement to advertise prequalification in required 

locations 6 4 0

Invitation for bid 

Justified use of another procurement method if the MCA did not 

use competitive bidding 100% (47) 100% (28) 97% (63)

Justified use of another procurement method 5 21 5

Justification not required 95 79 92

Did not justify use of another procurement method 0 0 3

Advertised procurement in English 100% (47) 100% (28) 100% (63)

Met requirement to advertise procurement in English 13 39 13

Not required to advertise procurement in English 87 61 87

Did not meet requirement to advertise procurement in English 0 0 0

Published bidding documents in English 99% (47) 100% (28) 93% (63)

Met requirement to publish bidding documents in English 13 36 7

Not required to publish bidding documents in English 86 64 87

Appendix III: Documentation of Compliance 

with MCC Procurement Criteria 

Page 67 GAO-10-52 Millennium Challenge Corporation 
Appendix III: Documentation of Compliance 

with MCC Procurement Criteria 

 Percentage (number of reviewed procurements) 

Procurement criteria Cape Verdea

 GeorgiabHondurasa

Did not meet requirement to publish bidding documents in English 1 0 7

Circulated procurement advertisement in required locations 99% (47) 82% (28) 98% (63)

Met requirement to circulate procurement advertisement in specified 

publications 68 7 5

Not required to circulate procurement advertisement in specified 

publications 30 75 93

Did not meet requirement to circulate procurement advertisement in 

specified publications 1 18 2

Bid evaluation 

Documented bid opening 100% (47) 100% (28) 100% (63)

Met requirement to document bid opening 70 39 15

Not required to document bid openinge30 61 85

Did not meet requirement to document bid opening 0 0 0

Procurement file contained a detailed report on evaluation and 

comparison of bids 100% (47) 100% (28) 100% (63)

Met requirement to have a detailed report on evaluation and 

comparison of bids 97 86 94

Not required to have a detailed report on evaluation and comparison 

of bidsf

3 14 6

Did not meet requirement to have a detailed report on evaluation and 

comparison of bids 0 0 0

Documented reason for disqualification when bids were 

disqualified 100% (47) 100% (28) 100% (63)

Met requirement to document reason for disqualification when bids 

were disqualified 54 21 10

Not required to document because no bids were disqualified 46 79 90

Did not meet requirement to document reason for disqualification 

when bids were disqualified 0 0 0

Documented contractor eligibility 98% (47) 25% (28) 74% (63)

Met requirements to verify and document contractor eligibility 98 25 74

Not required to verify and document contractor eligibility 0 0 0

Did not meet requirements to verify and document contractor 

eligibility 2 75 26

Documented impartiality of the evaluation panel 74% (47) 86% (28) 80% (63)

Met requirements to document impartiality of the evaluation panel 71 71 72

Not required to document impartiality of the evaluation panelf 3 14 8

Did not meet requirements to document impartiality of the evaluation 

panel 26 14 20

Page 68 GAO-10-52 Millennium Challenge Corporation
Appendix III: Documentation of Compliance 

with MCC Procurement Criteria 

 Percentage (number of reviewed procurements) 

Procurement criteria Cape Verdea

 GeorgiabHondurasa

Contract management 

Had procured item or record of receipt of item 100% (46) 100% (27) 99% (62)

Met requirement to have procured item or record of receipt of item 93 78 87

Not required to have item or record of receipt of itemg7 22 13

Did not meet requirement to have item or record of receipt of item 0 0 1

Procured items matched contract specifications 100% (47) 100% (27) 99% (63)

Procured items matched contract specifications 73 74 85

Not requiredh27 26 14

Procured items did not match contract specifications 0 0 1

Source: GAO analysis of MCA procurement files. 

Note: MCC’s requirements vary by the size and method of the procurement; therefore, not all 

procurements we examined had to meet each requirement we tested. For more information on these 

procurement methods, see appendix II. 

a

The percentages listed for Cape Verde and Honduras are estimates based on our review of a 

stratified random sample of procurements. These estimates have a margin of error of less than plus 

or minus 9 percentage points at the 95 percent confidence level. 

b

In Georgia, we reviewed all 24 procurements conducted by the MCA and 4 by the Georgian 

Municipal Development Fund during fiscal year 2008; thus, the percentages reflect actual 

procurements reviewed, rather than estimates. 

c

This variable represents a summation of all instances where MCC approvals might be required (8

approval steps). 

d

This variable represents a summation of all instances where MCA governing body approvals might 

be required (7 approval steps). 

e

We did not check for a record of bid openings for sole source contracts and shopping procurements. 

f

We did not check for an evaluation and comparison of bids for sole source contracts. 

g

We did not check for the item or record of receipt of item for contracts that were ongoing at the time 

of our review. 

h

We did not check if procured items matched contract specifications in cases where the contract was 

ongoing. 

Page 69 GAO-10-52 Millennium Challenge Corporation
Appendix IV: Comments from the Millennium Appendix IV: Comments from the Millennium Challenge Corporation 

Challenge Corporation 

Note: GAO comments 

supplementing those in 

the report text appear at 

the end of this appendix. 

Page 70 GAO-10-52 Millennium Challenge Corporation 
Appendix IV: Comments from the Millennium 

Challenge Corporation 

See comment 1. 

See comment 1. 

Page 71 GAO-10-52 Millennium Challenge Corporation
Appendix IV: Comments from the Millennium 

Challenge Corporation 

See comment 2. 

See comment 3. 

Page 72 GAO-10-52 Millennium Challenge Corporation
Appendix IV: Comments from the Millennium 

Challenge Corporation 

Page 73 GAO-10-52 Millennium Challenge Corporation
Appendix IV: Comments from the Millennium 

Challenge Corporation 

See comment 4. 

See comment 5. 

Page 74 GAO-10-52 Millennium Challenge Corporation
Appendix IV: Comments from the Millennium 

Challenge Corporation 

Page 75 GAO-10-52 Millennium Challenge Corporation
Appendix IV: Comments from the Millennium 

Challenge Corporation 

Page 76 GAO-10-52 

Following are GAO’s comments on the Millennium Challenge 

Corporation’s letter dated October 23, 2009. 

1. In its comments, MCC pointed out that for the purposes of travel, 

MCA-Honduras and MCA-Cape Verde generally pay travelers a daily 

subsistence allowance for each day of the travel to cover travelers’ 

expenses related to lodging, meals, and incidental expenses. The 

allowance is calculated using specified per diem rates. As MCC stated, 

not every country requires the submission of receipts for such 

expenses. However, if the MCA does not receive such supporting 

documentation for travel expenses, the MCA has no proof that the 

travel actually occurred. As a case in point, even though Cape Verde’s 

FAP lists a number of supporting documents that travelers should 

provide after returning from a trip, we found that 19 of the 30 travel 

transactions we tested lacked such documentation. Therefore, we 

could not confirm that travel was completed. Furthermore, the 

required trip reports were not always provided in Honduras and Cape 

Verde to substantiate that the travel occurred. 

GAO Comments 

2. MCC noted that the FAP for MCA-Honduras calls for a monthly payroll 

sheet to confirm payments to staff. However, we found that the 

information on the monthly payroll sheet only included personnel 

information, such as names and payment amounts. Without individual 

time sheets, we were unable to verify that employees worked the 

necessary number of hours for the payments made. We view this as a 

key control in the payroll process. Additionally, MCC developed a FAP 

template in November 2008 that provides examples of how controls 

could be structured. For example, the template requires employees to 

submit time sheets for supervisory approval. Taking actions to adopt 

these procedures would help ensure the propriety of these 

transactions. 

3. MCC pointed out that the Georgia Regional Development Fund 

investments met guidelines that permit such investments. MCC also 

stated that one investee was not a subsidiary of a larger company that 

fell outside of the investment guidelines. Based on MCC’s comments, 

we reevaluated the evidence previously provided and agree with MCC 

regarding the subsidiary, but reconfirmed the principal place of 

business for the two companies as Tbilisi. We modified footnote 31 to 

reflect this information. Also, as stated in footnote 31, the fund 

manager used calculation methods that made it difficult to determine 

whether one of the businesses complied with the investment 

guidelines. Having clear supporting documentation and guidance are 

 Millennium Challenge Corporation 
Appendix IV: Comments from the Millennium 

Challenge Corporation 

critical to ensuring that these investments, and the other areas we had 

concerns with, adhere to the guidelines. We appreciate that MCC 

stated it plans to work with the MCAs to strengthen compliance with 

documentation requirements where needed as part of a review of the 

FAPs. 

4. MCC reports that, as of fiscal year 2008, it requires the completion of 

full feasibility and environmental assessments, including resettlement 

plans, before compact signature. We support MCC’s efforts to take 

action to finalize those project planning activities prior to compact 

signing and are in the process of assessing the specific actions MCC 

has taken to implement the recommendation. According to MCC, while 

it instituted the process change in fiscal year 2008, the revised process 

has thus far only been applied to the Senegal compact, signed in 

September 2009, and to due diligence for a proposed compact with 

Moldova. 

5. We recognize that MCC is using its independent engineers, the MCA’s 

project consultants, and the compact country’s project stakeholders to 

review designs. However, our assessment of the compacts we 

reviewed, all of which had significant design issues, cost growth, and 

schedule delays, indicates that the project review process can still be 

improved before contract solicitation. For example, MCC could 

expand its review of final designs, cost estimates, and risk 

assumptions by soliciting services of a technical specialist with project 

management experience in project risk analysis and project 

scheduling. Based on the projects we reviewed and the problems we 

found, we believe that outside expertise would benefit the project 

review process and avoid the expense of addressing issues related to 

the lack of planning. 

Page 77 GAO-10-52 Millennium Challenge Corporation
Appendix V: 

A

GAO Contact and Staff 

cknowledgments 

Page 78 GAO-10-52 

Appendix V: GAO Contact and Staff 

Acknowledgments 

David B. Gootnick, 202-512-3149 or gootnickd@gao.gov

In addition to the person named above, Emil Friberg, Jr. (Assistant 

Director), Mike Armes, John Bauckman, Lynn Cothern, Lucia DeMaio, Tim 

DiNapoli, Mattias Fenton, Jordan Hamory Holt, Elizabeth Martinez, 

Heather Rasmussen, Donell Ries, Michael Simon, Susan Tieh, Patrick 

Tobo, and Matt Wood made key contributions to this report. Also, Jehan 

Abdel-Gawad, Jim Ashley, C. Etana Finkler, Ernie Jackson, Amanda Miller, 

Charlotte Moore, Josh Ormond, and Jena Sinkfield provided technical 

assistance. 

 Millennium Challenge Corporation 

GAO Contact 

Staff 

Acknowledgments 

(320598) 
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