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United States Government Accountability Office: 

Washington, DC 20548: 

February 21, 2006: 

The Honorable Richard G. Lugar: 
Chairman, Committee on Foreign Relations: 
United States Senate: 

Subject: Analysis of Future Millennium Challenge Corporation 
Obligations: 

Dear Chairman Lugar: 

The Millennium Challenge Corporation (MCC)--intended to provide aid to 
developing countries that have demonstrated a commitment to ruling 
justly, encouraging economic freedom, and investing in people--has 
received appropriations for fiscal years (fy) 2004-06 totaling more 
than $4.2 billion. About $3.8 billion of this amount has been set aside 
for compact assistance.[Footnote 1] As of January 2006, MCC had signed 
or approved eight compacts[Footnote 2] obligating about $1.5 
billion,[Footnote 3] leaving an unobligated balance of about $2.3 
billion. To assist in this year's budget deliberations, this letter 
provides a range of estimates under two scenarios of how quickly MCC 
could obligate this balance and three possible levels of fy 2007 
appropriations at the current pace of compact award. The President has 
requested an additional $3 billion for MCC for fy 2007. 

To address this objective, we analyzed MCC's fy 2005 and 2006 budget 
presentations and other corporation records. We selected two 
illustrative scenarios for future MCC obligations: (1) a "higher cost" 
scenario in which the average size of future compacts is consistent 
with MCC projections and (2) a "lower cost" scenario in which future 
compacts are consistent with the average compact size to date. For both 
of these scenarios, we assumed that MCC would sign an average of two 
compacts per quarter--the actual rate observed since April 2005. We 
discussed our estimates with MCC officials and have incorporated their 
comments as appropriate. We conducted our work in December 2005 through 
February 2006 in accordance with generally accepted government auditing 
standards. 

Summary: 

Under the higher-cost scenario, MCC would obligate the balance of its 
fy 2004-06 appropriations in the second quarter of fy 2007. Assuming 
that subsequent compact size remains consistent with MCC projections, 
an fy 2007 appropriation of $1, $2 or $3 billion will support the 
funding of compacts through, respectively, the third quarter of fy 
2007, the fourth quarter of fy 2007, or the second quarter of fy 2008. 
The cumulative number of compacts under this scenario ranges from 18 to 
23. 

Under the lower-cost scenario, MCC would obligate the balance of its fy 
2004-06 appropriations during the fourth quarter of fy 2007 (about 6 
months later than under the first scenario). Assuming that subsequent 
compact size remains consistent with the average to date, an 
appropriation of $1, $2 or $3 billion will support the funding of 
compacts through, respectively, the third quarter of fy 2008, the first 
quarter of fy 2009, or the third quarter of fy 2009. The cumulative 
number of compacts under this scenario ranges from 25 to 34. 

Assumptions Used in Our Analysis: 

For the higher-cost scenario, we assumed an average size of (a) $300 
million for compacts funded with MCC's fy 2006 appropriations and (b) 
$345 million for compacts funded with its fy 2007 appropriations.These 
figures are consistent with recent MCC projections. For the lower-cost 
scenario, we assumed an average compact size of $190 million. This 
amount is consistent with MCC's fy 2006 budget presentation and the 
actual average for the eight compacts signed or approved to date. For 
these compacts, MCC ranks among the top three donors in five of the 
eight countries and among the top 10 donors in the remaining three 
countries.[Footnote 4] According to its fy 2005 and 2006 budget 
presentations and recent comments by the corporation's Chief Executive 
Officer, MCC seeks to be among the largest donors in each country that 
receives compact assistance. Table 1 summarizes some key 
characteristics of the compacts signed or approved from April 2005 
through January 2006. 

Table 1: Characteristics of MCC Compacts Signed or Approved, April 2005 
to January 2006. 

[See PDF for image] 

[End of table] 

For both scenarios, we assumed that over the next several years MCC 
would sign an average of two compacts per quarter--the actual rate 
observed. From April 2005 through January 2006, MCC signed or approved 
compacts with eight countries, or two compacts per quarter. This rate 
is the lower bound of the target range of two to four compacts per 
quarter established in MCC's fy 2006 budget presentation. 

Analysis of Future MCC Obligations: 

Under the higher-cost scenario, the corporation would obligate the 
balance of its fy 2004-06 appropriations by the second quarter of fy 
2007. Assuming subsequent compact size remains consistent with MCC 
projections, an fy 2007 appropriation of $1, $2 or $3 billion would 
fund compacts through, respectively, the third quarter of fy 2007, the 
fourth quarter of fy 2007, or the second quarter of fy 2008.[Footnote 
5] The cumulative total of compacts funded under this scenario would be 
18, 20 or 23. 

Under the lower-cost scenario, the corporation would obligate the 
balance of its fy 2004-06 appropriations by the fourth quarter of fy 
2007 (or about 6 months later than under the first scenario). Again 
assuming that subsequent compact size remains consistent with the 
average to date, an appropriation of $1, $2 or $3 billion would fund 
compacts through, respectively, the third quarter of fy 2008, the first 
quarter of fy 2009, or the third quarter of fy 2009. The cumulative 
number of compacts funded under this scenario would be 25, 30 or 34. 

Figure 1 presents our estimate of MCC's cumulative obligations and 
number of compacts signed under these two scenarios, as well as MCC's 
obligations to date. 

Figure 1: Estimated MCC Obligations and Numbers of Compacts under 
Higher-and Lower-Cost Scenarios and Current Obligations as of January 
2006: 

[See PDF for image] 

[End of figure] 

Some Implications of Our Analysis: 

Over the period covered by our analysis, the substantial expansion in 
the number of compacts--and thus the number of countries in which MCC 
would operate[Footnote 6]--suggested by MCC's current and target rates 
for signing compacts could present several challenges for the 
corporation. First, such an expansion could exhaust the pool of 
candidate countries that meet MCC's quantitative eligibility criteria. 
Our analysis of MCC data suggests that 34 candidate countries--8 lower- 
middle income and 26 low income--met MCC's fy 2006 quantitative 
indicator criteria. We previously reported that 19 and 24 low income 
candidate countries met MCC's criteria in fy 2004 and 2005, 
respectively.[Footnote 7] 

Second, such an expansion could significantly challenge MCC's ability 
to make eligibility determinations; review and assist in proposal 
development; conduct due diligence reviews; negotiate, sign, complete 
entry into force requirements; and assist in the development of compact 
implementation structures for a large number of additional countries. 
For the eight countries in table 1, an average of 484 days elapsed from 
eligibility determination to compact signing or approval. It took, on 
average, an additional 112 days for three of these countries to advance 
from compact signing to entry into force. 

Third, monitoring and evaluating the implementation of complex, multi- 
million-dollar compacts in a large number of countries could strain 
MCC's management and oversight capabilities. Several development 
experts have stated that MCC's proposed staffing level (300) is very 
lean for an organization planning to disburse $2 billion or more per 
year. 

Comments from MCC: 

Overall, MCC officials characterized our analysis as unbiased and fact 
based. With regard to the implications of our analysis, MCC officials 
stated that the corporation was taking steps to reduce the time 
required to develop, review, and start implementing compacts. These 
steps include (1) developing guidance to assist eligible countries in 
developing proposals that will require limited revision; (2) reducing 
the time required to conduct due-diligence reviews by increasing 
staffing and resources devoted to this task;[Footnote 8] and (3) 
implementing policies intended to reduce the time between compact 
signing and entry into force by requiring MCC teams and countries to 
resolve key implementation details and issues earlier in the compact 
development process. Consistent with recent public remarks made by the 
corporation's Chief Executive Officer, MCC officials recognized that 
implementing compacts in developing countries will present substantial 
challenges. MCC officials also provided updated information about 
projected compacts and several technical comments, which we have 
incorporated as appropriate. 

If you or your staff have any questions about this letter, please 
contact me at 202-512-4128 or gootnickd@gao.gov. Phil Herr and Michael 
Rohrback made significant contributions to this letter. 

Sincerely yours, 

Signed by: 

David B. Gootnick: 
Director, International Affairs and Trade: 

FOOTNOTES 

[1] About $400 million has been set aside for MCC's threshold country 
program, administrative expenses, due diligence, monitoring and 
evaluation, and other costs. 

[2] The Millennium Challenge Act of 2003 (Public Law 108-199, Division 
D, Section 605) authorizes MCC to provide assistance to countries that 
enter into public compacts with the United States. MCC has negotiated 
compacts with countries that contain agreed assistance objectives, 
responsibilities, implementation schedules, expected results, and 
evaluation strategies. 

[3] Through January 2006, MCC had expended about $12 million of the 
$1.5 billion obligated for compact assistance. 

[4] To make this determination, we compared the average annual size of 
each compact with the gross official development assistance (average 
for 2003-04) provided by the top 10 donors in each country. 

[5] Our estimates assume that about 10 percent of the corporation's fy 
2007 appropriations would be set aside for MCC's threshold country 
program, administrative expenses, due diligence, monitoring and 
evaluation, and other costs, leaving the remaining 90 percent to 
finance compacts. 

[6] Under the Millennium Challenge Act, countries may have only one 
Millennium Challenge compact in effect at a time. 

[7] See U.S. Government Accountability Office, Millennium Challenge 
Corporation: Progress Made on Key Challenges in First Year of 
Operations, GAO-05-455T (Washington, DC: April 26, 2005). 

[8] MCC plans to increase its staff from about 170 to 300 between 
January and September 2006.