In pursuit of its mission to reduce poverty by supporting economic growth, MCC has identified and defined the following three key principles to guide its actions: Reward good policy. “Using objective indicators, countries are selected to receive assistance based on their performance in governing justly, investing in their citizens, and encouraging economic freedom.” Operate in partnership. “Countries that receive MCA assistance are responsible for identifying the greatest barriers to their own development, ensuring civil society participation, and developing a multi-year MCC compact.” Focus on results. “MCA assistance goes to those countries that have developed well-designed programs with clear objectives, benchmarks to measure expected results, procedures to ensure fiscal accountability for the use of MCA assistance, and a plan for effective monitoring and objective evaluation of results. Programs are designed so that recipient countries can sustain progress after the funding under the compact has ended.” MCC is a government corporation that is managed by a CEO appointed by the President with the advice and consent of the Senate and is overseen by a Board of Directors (MCC Board). The Secretary of State serves as board chair, and the Secretary of the Treasury serves as vice-chair. Other board members are the U.S. Trade Representative, the Administrator of the U.S. Agency for International Development (USAID), the CEO of MCC, and up to four Senate-confirmed public members who are appointed by the President from lists of individuals submitted by congressional leadership. The Millennium Challenge Act of 2003 requires MCC to select countries as eligible for MCA assistance each fiscal year. Countries with per capita income at or below a set threshold may be selected as eligible for assistance if they pass MCC indicator criteria and are not statutorily barred from receiving U.S. assistance. MCC uses 16 indicators divided into three categories: Ruling Justly, Encouraging Economic Freedom, and Investing in People. To be eligible for MCA assistance, countries must score above the median relative to their peers on at least half of the indicators in each category and above the median on the indicator for combating corruption. MCC used these quantitative indicators, as well as the discretion implicit in the Millennium Challenge Act, to select 17 countries as eligible to apply for MCA compact assistance for fiscal years 2004 and 2005. For fiscal year 2006, MCC identified 23 countries as eligible for assistance—the 17 previously selected and 6 additional countries, which included lower- middle-income countries eligible for the first time in fiscal year 2006. After MCC selects eligible countries, they may begin a four-phase process that can lead to the entry into force of compacts (see fig. 1). Each phase of this process is discussed after figure 1. 1. Country proposal development. Eligible countries are invited to submit compact proposals, which are to be developed in consultation with members of civil society, including the private sector and nongovernmental organizations (NGO). The eligible country also identifies an “accountable entity” to manage the programs funded by MCC. Eligible countries submitting proposals are not guaranteed funding; instead, MCC assesses proposals through its due diligence review. As of May 2006, 14 of the 17 countries selected as eligible in fiscal year 2004 or 2005, and 1 of the 6 countries selected as eligible for the first time in fiscal year 2006, had submitted proposals accepted by MCC for due diligence review. 2. MCC’s due diligence review. MCC determines whether the proposal that an eligible country has submitted meets MCC criteria to ensure that proposed programs will be effective and funds will be well-used. Due diligence primarily occurs between MCC’s acceptances of an “opportunity memo” and an “investment memo.” MCC assembles a transaction team of MCC staff, personnel from other U.S. agencies, and consultants to conduct a preliminary assessment of a country’s proposal and reports the team’s findings in an opportunity memo to the MCC investment committee. The MCC investment committee consists of MCC’s CEO, vice presidents, and other senior officials. If the opportunity memo is approved, the transaction team launches a detailed due diligence review. The team assesses the country proposal, reports its findings, and makes recommendations based on its assessment in an investment memo to the MCC investment committee. As of May 2006, MCC was conducting due diligence analyses of seven eligible country proposals. 3. Compact negotiation and MCC Board approval. MCC may enter into compact negotiations with the eligible country before the investment memo is completed. If compact negotiations are successful, MCC staff formally submit the compact for MCC Board approval. Once the board approves the compact, MCC and the eligible country may sign it. As of March 2006, MCC had signed compacts with 8 of the 17 countries determined eligible in fiscal years 2004 and 2005. (See fig. 2.) MCC commits the full amount of the compact funding at signing but obligates and begins to disburse funds to implement projects only after the compact has entered into force. Under the Millennium Challenge Act, compacts may remain in force no longer than 5 years. The compacts stipulate that, with limited exceptions, all funds must be spent during that time. 4. MCC and compact country complete entry-into-force requirements. MCC’s compact with each country identifies the following supplemental agreements that MCC and the country’s accountable entity must complete before the compact can enter into force. The disbursement agreement sets out the “conditions precedent” and other requirements for disbursements from MCC and redisbursements to any person or entity. These conditions include performance targets for projects outlined in the compact. The procurement agreement sets forth guidelines for all procurements of goods, works, and services financed with MCC funding. Compact term sheets for supplemental agreements, which vary by country, and include documents such as a governance agreement, fiscal agent agreement, form of implementing entity agreement, and form of bank agreement. After compacts enter into force, MCC may begin the disbursement of funds and countries may begin implementing projects. In the first eight compacts, approximately 53 percent of funding went to transportation and other infrastructure projects; 22 percent went to agriculture and rural development; 13 percent went to other project types; and 12 percent went to program management, monitoring, and evaluation. (See fig. 2.) The length of time from country eligibility selection to compact signature has varied, with proposal development and due diligence generally requiring the most time (see fig. 3). For the six countries whose compacts had entered into force as of the end of May 2006, completing the steps necessary for entry into force after compact signing took approximately 3 to 4 months for Madagascar, Cape Verde, and Honduras; approximately 7 months for Georgia; 2 months for Vanuatu; and about 10½ months for Nicaragua. For the two countries whose compacts had not entered into force as of the end of May 2006, 3 months had elapsed since compact signature for Benin, and 2 months had elapsed for Armenia (see fig. 3). MCC has issued guidance and policies for its compact development process in several stages. Before publishing its initial guidance in May 2004, MCC provided countries with preliminary guidance addressing fiscal accountability and monitoring and evaluation. Figure 4 shows the evolution of MCC’s published guidance relative to the end of the due diligence process with the investment memo. MCC undertook a wide range of activities in its due diligence of the Madagascar, Cape Verde, and Honduras proposals, while at the same time developing guidance on key aspects of the countries’ proposals. During due diligence, MCC primarily considered criteria related to the proposals’ consultative process, project coherence, environmental impact, institutional and financial sustainability, and economic analyses. MCC generally approved proposals that were based on a consultative process and returned proposals that lacked adequate consultations; however, MCC did not publish detailed criteria for the consultative process until 1 year after selecting the countries as eligible for MCC assistance. In assessing project coherence, MCC approved projects that were linked to the overall proposal objectives and rejected projects that were not, although its assessments used criteria that it had not yet published in its guidance. Additionally, MCC screened projects for likely environmental impacts and considered factors important for institutional and financial sustainability. Finally, MCC conducted economic analyses to assess the projects’ likely impact on economic growth. However, limitations in assumptions and data may have affected the analyses’ accuracy and led MCC to select projects that would not achieve its goals. Also, a lack of country involvement in the analyses does not reflect the MCC principle of working in partnership with countries and may have limited the countries’ understanding of the process. MCC’s due diligence for Madagascar, Cape Verde, and Honduras assessed whether the countries had consulted with public and private sector and civil society stakeholders during proposal development. MCC officials told us that before beginning due diligence for the three countries, they assessed the consultative process in proposal drafts and, on the basis of this review, returned proposals that were not sufficiently founded on a consultative process. For example, according to the officials, MCC did not accept one country’s proposal because, although the country had consulted with stakeholders, its proposal did not reflect the priorities identified during the consultative process. MCC documents indicate that during its due diligence for two of the three countries, MCC obtained the views of government, civil society, and private sector officials on how the governments conducted the consultative process. In addition, MCC assessed any previous experience the country had had with a consultative process For all three countries, MCC also reviewed factors such as the date, frequency, and locations of the process. MCC’s documentation of these assessments in Madagascar, Cape Verde, and Honduras indicated that key stakeholders had generally agreed on the proposed compact priorities.