Summary

The Millennium Challenge Corporation (MCC), now in its fourth year of operations, provides aid to developing countries that have demonstrated a commitment to ruling justly, encouraging economic freedom, and investing in people. MCC provides monetary assistance to eligible countries through multiyear compact agreements to fund specific programs targeted at reducing poverty and stimulating economic growth. MCC has received appropriations for fiscal years 2004 to 2008 totaling more than $7.5 billion, and has set aside about $6.4 billion of this amount for compact assistance. The President has requested an additional $2.225 billion for MCC for 2009, of which MCC plans to use $1.88 billion for compact assistance with countries currently eligible for compacts. MCC compact development is a four-phase process: (1) an eligible country submits a compact proposal; (2) MCC conducts a due diligence review of the proposed projects; (3) MCC and the country negotiate and sign the compact; (4) MCC and the country complete preparations, including developing disbursement plans, for the compact to enter into force. After the compact enters into force, compact implementation begins, and funds are obligated and disbursed. As of March 2008, MCC had selected 28 countries as eligible for compact assistance and had signed compacts with 16 of these countries. Eleven of these compacts have entered into force. Ten countries have not signed compacts and remain in the compact development process. We conducted this performance audit on the initiative of the Comptroller General. This report assesses (1) the current status and pace of compact development; (2) projected time frames for the commitment and obligation of MCC's existing (2004 to 2008) and requested (2009) appropriations; and (3) MCC's progress in disbursing compact assistance.

The 10 countries without signed compacts are in the first or second phase of compact development. Since MCC made its first eligibility selections, the length of time required for compact development has increased substantially. For example, the first 11 countries to sign compacts completed compact development an average of 25 months after being selected as eligible. Assuming the next 5 signed compacts enter into force as MCC projects, the average length of compact development for all 16 countries with signed compacts will increase to 32 months. MCC attributed the slowing pace of compact development to several factors, such as the increased size of more recent compacts, and estimates that future compact development will take an average of 36 months. Assuming that MCC signs two additional compacts for $858 million by the end of 2008, as planned, and that compact development continues at the pace observed to date (32 months), we project that MCC could obligate the balance of its existing (2004 to 2008) appropriations by the end of 2009. Similarly, at the observed pace of compact development, and assuming MCC funds four compacts with currently eligible countries, we project that MCC could commit and obligate its entire 2009 request for compact assistance by the end of 2010. However, several factors could lengthen this projected time frame. For example, if the pace of compact development slows or MCC funds compacts with countries newly eligible in 2009, it would not commit and obligate all of its requested 2009 appropriation until 2011. MCC's actual disbursements substantially lag behind planned disbursements for all 11 countries with compacts in force because initial compact disbursement plans underestimated the time required for compact countries to establish the structures, agreements, and capabilities to begin implementing compact projects. The slow rate of disbursements is most critical for Madagascar, Cape Verde, and Honduras, which are in the third year of compact implementation. For example, as of December 2007, MCC was 29 months (61 percent) into the 48-month Madagascar compact but had disbursed only $22.7 million (21 percent) of the $109.8 million compact. Unless disbursements for these countries increase significantly, MCC could have significant obligated, but undisbursed, balances when the compacts expire and may not be able to fully achieve compact goals for economic growth and poverty reduction. MCC reports that it is taking steps to increase disbursements of compact assistance. In commenting on a draft of this report, MCC generally agreed with our factual analysis but disagreed with some of the report's emphasis and conclusions. MCC concurred with our analysis that the length of time required for compact development has increased, and attributed this increase to four primary factors. With regard to our analysis of MCC's commitment and obligation of funds, MCC commented that our report underemphasized the link between available appropriations and signing new compacts and that it planned to commit the President's entire request by the end of 2009, slightly earlier than we projected. We believe that our report clearly projects the timing of both the commitment and obligation of funds. Finally, MCC concurred with our analysis that actual disbursements lag behind original disbursement projections.