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entitled 'Millennium Challenge Corporation: MCC Has Addressed a Number 
of Implementation Challenges, but Needs to Improve Financial Controls 
and Infrastructure Planning' which was released on November 6, 2009. 

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Report to Congressional Committees: 

United States Government Accountability Office: 
GAO: 

November 2009: 

Millennium Challenge Corporation: 

MCC Has Addressed a Number of Implementation Challenges, but Needs to 
Improve Financial Controls and Infrastructure Planning: 

GAO-10-52: 

GAO Highlights: 

Highlights of GAO-10-52, a report to congressional committees. 

Why GAO Did This Study: 

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 Found: 

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. 

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. 

View [hyperlink, http://www.gao.gov/products/GAO-10-52] or key 
components. For more information, contact David Gootnick at (202) 512-
3149 or gootnickd@gao.gov. 

[End of section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

MCC's Accountability Framework Does Not Always Help Ensure Adequate 
Funds Controls in Compact Countries: 

MCC Has Decreased Its Level of Procurement Review; Countries Generally 
Adhered to MCC Requirements: 

MCC Conducts Oversight, but Insufficient Planning of Projects during 
Compact Development Has Undermined Project Implementation: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: Reductions in MCC Procurement Review Thresholds: 

Appendix III: Documentation of Compliance with MCC Procurement 
Criteria: 

Appendix IV: Comments from the Millennium Challenge Corporation: 

Appendix V: GAO Contact and Staff Acknowledgments: 

Tables: 

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

Table 2: Sample of Disbursements Tested and Dollar Value for Each MCA: 

Table 3: MCA Procurements by Population and Sample Sizes: 

Table 4: Measures of Compliance with MCC Procurement Guidelines: 

Table 5: Detailed Estimated Percentage of Country Procurements Meeting 
MCC Procurement Criteria: 

Figures: 

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

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

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

Figure 4: MCC Fiscal Accountability Framework: 

Figure 5: Compact Procurement Process Established by MCC Guidelines: 

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

Figure 7: MCC Compact Development and Implementation before 2008: 

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

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

Figure 10: Honduras CA-5 Highway Project: 

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

Figure 12: Samtskhe-Javakheti Roads Rehabilitation Project 
Procurements: 

Figure 13: MCC-Funded Roads Project and Port of Praia Project on 
Santiago Island, Cape Verde: 

Figure 14: MCC Approval Requirements from the Program Procurement 
Guidelines of July 21, 2008 (Goods, Works, and Nonconsultant Services): 

Figure 15: MCC Approval Requirements from the Program Procurement 
Guidelines of July 21, 2008 (Consultant Services): 

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: 

[End of section] 

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.[Footnote 1] MCC compacts are limited by U.S. law to extend for no 
more than 5 years.[Footnote 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 administration of grants or cooperative 
agreements or the procurement of goods and services for the 
accomplishment of compact objectives.[Footnote 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.[Footnote 4] For this report, we 
examined MCC's (1) financial controls; (2) procurement practices; and 
(3) development, implementation, and oversight of contracts and 
projects.[Footnote 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. 
[Footnote 6] 

We focused our analysis on MCC's compacts with Honduras,[Footnote 7] 
Georgia, and Cape Verde, which, as of September 30, 2008, accounted for 
approximately 39 percent of MCC's total disbursements.[Footnote 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. 

Results in Brief: 

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 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. 

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 
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. 
[Footnote 9] MCC also may provide 609(g) funds[Footnote 10] 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, 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.[Footnote 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.[Footnote 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. 

Figure 1: Honduras Compact Obligations, as of April 2009 (dollars in 
millions): 

[Refer to PDF for image: pie-chart] 

Transportation Project, $123.6; CA-5 construction contracts: $48.4, 
$23.2 and $16.2; Transportation Project Management contract: $2.9: 57%; 
Rural Development Project, $74.62: 35%; 
Program Administration, $11.8: 6%; 
Monitoring and Evaluation, $5.0: 2%. 

Total: $215.0 million. 
Entry-into-Force: September 29, 2005. 

Source: GAO analysis of MCC data. 

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

[End of figure] 

Figure 2: Georgia Compact Obligations, as of April 2009 (dollars in 
millions): 

[Refer to PDF for image: pie-chart] 

Road Rehabilitation Activity, $184; Samtskhe-Javakheti Road 
Rehabilitation Project (SJRRP) construction contracts: $65.0 and $33.1; 
Engineering and Design Services: $3.2: 46%; 
Regional Infrastructure Development Activity, $69.5%; 
Energy Rehabilitation Activity, $62.5; North-South Gas Pipeline Phase 
II Rehabilitation Project contract: $6.2: 16%; 
Enterprise Development Project, $47.4: 12%; 
Program Administration, $23.9: 6%; 
Monitoring and Evaluation, $8.5: 2%. 

Total: $395.3 million. 
Entry-into-Force: April 7, 2006. 

Source: GAO analysis of MCC data. 

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. 

[End of figure] 

Figure 3: Cape Verde Compact Obligations, as of April 2009 (dollars in 
millions): 

[Refer to PDF for image: pie-chart] 

Infrastructure Project, $83.2; Contracts: Phase I Port Construction: 
$42.3; Road Construction: $11.2; Bridge Construction: $3.3; Port 
Project Management: $3.2: 76%; 
Watershed Management and Agricultural Support Project, $11.0: 10%; 
Program Administration, $10.2: 9%; 
Monitoring and Evaluation, $3.6: 3%; 
Private Sector Development Project, $2.1: 2%. 

Total: $110.1 million. 
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. 

[End of figure] 

MCC Financial Controls, Compact Procurement Structure, and Contract and 
Project Implementation Oversight: 

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. 

Financial Controls: 

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,[Footnote 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. 

Figure 4: MCC Fiscal Accountability Framework: 

[Refer to PDF for image: illustration] 

Millennium Challenge Corporation (Washington, D.C.): 
* Submits for review and approval: 
* Budget; 
* Quarterly disbursement requests; 
* Financial and monitoring and evaluation reports; 
* Procurement plans, reports, and some actions. 

Accountable Entity (MCA): 
* Documents obligations ; 
* Initiates disbursements and redisbursements; 
* Initiates procurement; 
* Manages program implementation; 
* Collects and reports monitoring and evaluation data. 

Fiscal Agent: 
* Prepares Fiscal Accountability Plan; 
* Provides funds control; 
* Maintains accounting records; 
* Produces reports. 

Procurement Agent(if used): 
* Approves certain contract actions from Accountable Entity (MCA). 

Accountable Entity (MCA) to and from Fiscal Agent: 
* Allocates budgets; 
* Approves disbursements and redisbursements; 
* Provides accounting records. 

Procurement Agent(if used): 
* Administers/certifies procurement process; 
With Accountable Entity (MCA), interacts with: 
* Implementing Entity/Project Manager[B]; 
- Vendor/Contractor. 

Fiscal Agent: 
* instructs U.S. Treasury Common Payment System to issue payments. 

U.S. Treasury Common Payment System: 
* Disbursement to MCA permitted bank accounts(s). 

MCA permitted bank accounts(s): 
* Redisbursement[A] to Vendor/Contractor. 

Source: GAO analysis of MCC data. 

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 MCA-contracted 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. 

[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. 

[End of figure] 

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 
permitted bank account, which receives funds during MCC's quarterly 
disbursements. 

Compact Procurement Structure: 

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.[Footnote 14] The MCAs may contract with a procurement agent 
to perform key procurement functions.[Footnote 15] Figure 5 summarizes 
MCC's compact procurement process. 

Figure 5: Compact Procurement Process Established by MCC Guidelines: 

[Refer to PDF for image: illustration] 

Procurement Process: 

Planning (Procurement and post-review phase): 
* Semiannual plans; 
* Bid documents and advertisement; 
* General procurement notices; 
* Procurement implementation plans. 

Prequalification(if used): 
* Prequalification documents; 
* Short-list selection. 

Advertisement (milestone)/Short-list (milestone). 

Bidding (Procurement and post-review phase): 
* Bidding documents (terms of reference). 

Bid opening (milestone). 

Bid evaluation (Procurement and post-review phase): 
* Evaluation reports; 
* Award recommendation; 
* Contractor eligibility determination; 
* Price reasonableness. 

Contract Award (milestone). 

Contract Management (Procurement and post-review phase): 
* Change orders; 
* Documentation of receipt of goods, works, or services. 

Reporting and Post-reviews: 
* Procurement Performance Reports; 
* Auditor reviews; 
* Bid challenges; 
* Interim Activity Reviews. 

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. 

[End of figure] 

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. 

Contract and Project Implementation Oversight: 

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. 

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

[Refer to PDF for image: illustration] 

MCC: 
* MCC's independent engineers; 
- Oversight and collaboration with MCA; 

MCA: 
Collaborative and contractual relationship with: 
* Implementing entity; 
* Project management consultant; 
Contractual relationship with: 
* Independent construction supervisor (engineer); 
*Project construction contractor. 

Implementing entity and Project management consultant: 
Supervisory relationship with: 
* Independent construction supervisor (engineer). 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. 

Independent construction supervisor (engineer): 
Supervisory relationship with: 
*Project construction contractor. 

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

[End of figure] 

MCC's Accountability Framework Does Not Always Help Ensure Adequate 
Funds Controls in Compact Countries: 

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. 

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.[Footnote 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 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.[Footnote 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.[Footnote 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 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. 

MCAs Did Not Consistently Apply Internal Controls Established in the 
FAPs and Other Documents: 

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, 
[Footnote 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. 

Travel Expenses: 

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.[Footnote 20] 

Travel policies for MCA-Honduras and MCA-Georgia require employees to 
obtain travel authorizations and provide receipts upon completion of 
travel for reimbursement transactions.[Footnote 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 authorizations did not have all of the required 
information.[Footnote 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.[Footnote 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. 
[Footnote 24] 

Payroll Expenses: 

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. 

Program-and Project-Related Expenses: 

Program-and project-related expenses include payments disbursed by the 
MCAs for grant expenses, resettlement expenses, investment funds, and 
other operating expenses.[Footnote 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. 

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.[Footnote 
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. 
[Footnote 27] Thus, we could not determine 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.[Footnote 28] 

Resettlement expenses. Resettlement payments compensate landowners for 
property used for the MCA projects, such as road and pipeline 
construction.[Footnote 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 requirements, 
that should be met before investment payments are requested and 
approved.[Footnote 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.[Footnote 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 office-
related 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.[Footnote 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. 
[Footnote 33] 

In Georgia, MCA procurement officials had not properly approved 3 of 
the 58 transactions we tested.[Footnote 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.[Footnote 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. 

Inventory: 

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 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.[Footnote 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. 
[Footnote 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.[Footnote 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.[Footnote 39] 

MCC Has Decreased Its Level of Procurement Review; Countries Generally 
Adhered to MCC Requirements: 

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 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.[Footnote 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.[Footnote 
41] 

MCC Has Reduced Its Involvement in Approving Procurements: 

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. 

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.[Footnote 42] 
Schedule A of the 2-tier system represents the initial level of review 
for most countries, which is referred to as implementation support. 
[Footnote 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.[Footnote 44] 

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. 

MCC Conducts Postprocurement Reviews and Requires Procurement Audits: 

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.[Footnote 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 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. 

MCAs We Assessed Generally Adhered to MCC Procurement Guidelines: 

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,[Footnote 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: 

* 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: 

Procurement criteria: Documentation of overall approvals; Obtained all 
required MCC approvals[C]; 
Percentage of country procurements, by MCA: Cape Verde[A]: 100%; 
Percentage of country procurements, by MCA: Georgia[B]: 96%; 
Percentage of country procurements, by MCA: Honduras[A]: 100%. 

Procurement criteria: Documentation of overall approvals; Obtained all 
required MCA governing body approvals[D]; 
Percentage of country procurements, by MCA: Cape Verde[A]: 100; 
Percentage of country procurements, by MCA: Georgia[B]: 86; 
Percentage of country procurements, by MCA: Honduras[A]: 92. 

Procurement criteria: Documentation of prequalification; Advertised 
prequalification for procurement in English; 
Percentage of country procurements, by MCA: Cape Verde[A]: 100; 
Percentage of country procurements, by MCA: Georgia[B]: 100; 
Percentage of country procurements, by MCA: Honduras[A]: 100. 

Procurement criteria: Documentation of prequalification; Advertised 
prequalification in required locations; 
Percentage of country procurements, by MCA: Cape Verde[A]: 94; 
Percentage of country procurements, by MCA: Georgia[B]: 96; 
Percentage of country procurements, by MCA: Honduras[A]: 100. 

Procurement criteria: Documentation of invitation for bid; Justified 
use of another procurement method if the MCA did not use competitive 
bidding; 
Percentage of country procurements, by MCA: Cape Verde[A]: 100; 
Percentage of country procurements, by MCA: Georgia[B]: 100; 
Percentage of country procurements, by MCA: Honduras[A]: 97. 

Procurement criteria: Documentation of invitation for bid; Advertised 
procurement in English; 
Percentage of country procurements, by MCA: Cape Verde[A]: 100; 
Percentage of country procurements, by MCA: Georgia[B]: 100; 
Percentage of country procurements, by MCA: Honduras[A]: 100. 

Procurement criteria: Documentation of invitation for bid; Published 
bidding documents in English; 
Percentage of country procurements, by MCA: Cape Verde[A]: 99; 
Percentage of country procurements, by MCA: Georgia[B]: 100; 
Percentage of country procurements, by MCA: Honduras[A]: 93. 

Procurement criteria: Documentation of invitation for bid; Circulated 
procurement advertisement in required locations; 
Percentage of country procurements, by MCA: Cape Verde[A]: 99; 
Percentage of country procurements, by MCA: Georgia[B]: 82; 
Percentage of country procurements, by MCA: Honduras[A]: 98. 

Procurement criteria: Documentation of bid evaluation; Documented bid 
opening; 
Percentage of country procurements, by MCA: Cape Verde[A]: 100; 
Percentage of country procurements, by MCA: Georgia[B]: 100; 
Percentage of country procurements, by MCA: Honduras[A]: 100. 

Procurement criteria: Documentation of bid evaluation; Provided a 
detailed report on evaluation and comparison of bids in procurement 
file; 
Percentage of country procurements, by MCA: Cape Verde[A]: 100; 
Percentage of country procurements, by MCA: Georgia[B]: 100; 
Percentage of country procurements, by MCA: Honduras[A]: 100. 

Procurement criteria: Documentation of bid evaluation; Documented 
reason for disqualification when bids were disqualified; 
Percentage of country procurements, by MCA: Cape Verde[A]: 100; 
Percentage of country procurements, by MCA: Georgia[B]: 100; 
Percentage of country procurements, by MCA: Honduras[A]: 100. 

Procurement criteria: Documentation of bid evaluation; Documented 
contractor eligibility; 
Percentage of country procurements, by MCA: Cape Verde[A]: 98; 
Percentage of country procurements, by MCA: Georgia[B]: 25; 
Percentage of country procurements, by MCA: Honduras[A]: 74. 

Procurement criteria: Documentation of bid evaluation; Documented 
impartiality of the evaluation panel; 
Percentage of country procurements, by MCA: Cape Verde[A]: 74; 
Percentage of country procurements, by MCA: Georgia[B]: 86; 
Percentage of country procurements, by MCA: Honduras[A]: 80. 

Procurement criteria: Documentation of contract management; Had 
procured item or record of receipt of item; 
Percentage of country procurements, by MCA: Cape Verde[A]: 100; 
Percentage of country procurements, by MCA: Georgia[B]: 100; 
Percentage of country procurements, by MCA: Honduras[A]: 99. 

Procurement criteria: Documentation of contract management; Items 
matched contract specifications; 
Percentage of country procurements, by MCA: Cape Verde[A]: 100; 
Percentage of country procurements, by MCA: Georgia[B]: 100; 
Percentage of country procurements, by MCA: Honduras[A]: 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). 

[End of table] 

Despite general compliance with MCC procurement guidelines, the MCAs 
did not document contractor eligibility and evaluation panel 
impartiality in all cases, as follows: 

* Contractor eligibility: In Georgia, 25 percent of procurements in 
fiscal year 2008 documented contractor eligibility.[Footnote 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.[Footnote 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.[Footnote 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 
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 MCAs Delegated Procurement Responsibility, the Procedures Used 
Were Generally Consistent with MCC's Procurement Framework: 

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. 

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 
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 MCA- 
Georgia, grant recipients often live in rural areas and need to procure 
secondhand equipment, and thus they are often best equipped to identify 
existing suppliers. 

MCC Conducts Oversight, but Insufficient Planning of Projects during 
Compact Development Has Undermined Project Implementation: 

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. 

MCA Projects We Assessed Have Encountered Problems Due to Insufficient 
Planning of Projects: 

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 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.[Footnote 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: 

* 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.[Footnote 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.[Footnote 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.[Footnote 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. 

* 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. 
[Footnote 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. 

Insufficient Planning, Cost Escalation, and MCC's Insufficient Design 
Review Have Contributed to the Need to Restructure Projects: 

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.[Footnote 55] 

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.[Footnote 56] The following examples highlight some of 
the problems our review found that were reported by MCC, the MCAs, and 
their consultants:[Footnote 57] 

* 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 4˝-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.[Footnote 58] The topographic 
information in the design was inadequate, and thus the designs 
inaccurately represented the extent of the work required.[Footnote 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. 

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.[Footnote 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 Clearance 
[Footnote 61] 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 
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.[Footnote 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.[Footnote 
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. 

Figure 7: MCC Compact Development and Implementation before 2008: 

[Refer to PDF for image: illustrated table] 

Process Prior to 2008: 

1. Country proposal: 
* Countries submit proposals to MCC. 

2. Due diligence: 
* 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. 

Compact signed. 

3. Program set-up: 
* 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. 

Entry-into-force. 

4. Implementation and monitoring: 
* 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. 

End of compact. 

Source: GAO summary of MCC publications. 

[End of figure] 

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

[Refer to PDF for image: illustrated table] 

Current Process: 

1. Start up and preliminary analyses: 
Getting started: 
* Eligible country establishes Core Team - responsible for completing 
compact; 
* MCC provides guidance on results focused project design principles 
and tools. 

2. Project definition: 
Identifying priorities: 
* 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 

3. Project development and appraisal (Implementation preparations): 
Developing the program: 
* 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.”
Preparing for implementation: Country sets up its Project Management 
Unit structures (Accountable Entity, Fiscal Agent, Procurement Agent, 
and Implementing Entities are established and trained). 

4. Compact negotiation and signing (Implementation preparations): 
Negotiating the terms of the compact: 
* MCC and country sign the compact - at this point, funds are 
obligated, program objectives are defined, and total dollar amount is 
set. 
Preparing for implementation: Country sets up its Project Management 
Unit structures (Accountable Entity, Fiscal Agent, Procurement Agent, 
and Implementing Entities are established and trained). 

Compact signed. 

5. Pre-EIF activities Implementation preparations): 
Getting ready for implementation: 
* 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. 
Preparing for implementation: Country sets up its Project Management 
Unit structures (Accountable Entity, Fiscal Agent, Procurement Agent, 
and Implementing Entities are established and trained). 

Entry-into-force. 

6. Implementation: 
The clock starts: 
* Compact “Enters Into Force” and 5-year clock starts; 
* Accountable entity is responsible for overseeing implementation of 
projects. 

Source: GAO summary of MCC publications. 

End of compact. 

[End of figure] 

MCC officials stated that they are making greater use of MCC 609(g) 
funding authority and Compact Implementation Funds[Footnote 64] 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 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.[Footnote 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. 

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

[Refer to PDF for image: two photographs] 

New pipeline being laid and rerouted to avoid steep hillside areas that 
are susceptible to landslides. 

Source: MCA-Georgia. 

The new pipeline route runs down and under the small hill shown and is 
less susceptible to landslides. 

Source: GAO. 

[End of figure] 

MCC Conditions the Disbursement of Funds on the MCAs Meeting Certain 
Requirements: 

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 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 high-level 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 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. 

MCC Uses Cross-Functional Teams to Oversee Projects: 

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. 

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. 

Conclusions: 

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 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. 

Recommendations for Executive Action: 

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: 

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. 

Agency Comments and Our Evaluation: 

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. 

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. 

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 [hyperlink, 
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 this report are listed in appendix V. 

Signed by: 

David Gootnick: 
Director, International Affairs and Trade Issues: 

Signed by: 

Kay Daly: 
Director, Financial Management and Assurance Issues: 

Signed by: 

Terrell G. Dorn: 
Director, Physical Infrastructure Issues: 

[End of section] 

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. 
[Footnote 66] 

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. 

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.[Footnote 67] 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.[Footnote 68] 

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, 

- 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 program- 
related 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: Cape Verde; 
Number of strata: 7; 
Sample size: 166; 
Total number of transactions in the population: 1,789; 
Total dollar value of sampled transactions: $2,273,420; 
Total dollar value of transactions in the population: $22,529,469. 

MCA: Georgia; 
Number of strata: 7; 
Sample size: 283; 
Total number of transactions in the population: 2,507; 
Total dollar value of sampled transactions: $4,694,281; 
Total dollar value of transactions in the population: $55,416,097. 

MCA: Honduras; 
Number of strata: 6; 
Sample size: 240; 
Total number of transactions in the population: 2,318; 
Total dollar value of sampled transactions: $10,092,713; 
Total dollar value of transactions in the population: $33,799,980. 

Source: GAO analysis of MCC data. 

[End of table] 

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 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 
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: 

MCA: Honduras; Population size; 
Procurement, by stratum: Sole source: 7; 
Procurement, by stratum: Five-largest non-sole source: 5; 
Procurement, by stratum: With MCC review: 10; 
Procurement, by stratum: Without MCC review: 83; 
Total: 105. 

MCA: Honduras; Sample size; 
Procurement, by stratum: Sole source: 7; 
Procurement, by stratum: Five-largest non-sole source: 5; 
Procurement, by stratum: With MCC review: 10; 
Procurement, by stratum: Without MCC review: 41; 
Total: 63. 

MCA: Cape Verde; Population size; 
Procurement, by stratum: Sole source: 2; 
Procurement, by stratum: Five-largest non-sole source: 5; 
Procurement, by stratum: With MCC review: 1; 
Procurement, by stratum: Without MCC review: 64; 
Total: 72. 

MCA: Cape Verde; Sample size; 
Procurement, by stratum: Sole source: 2; 
Procurement, by stratum: Five-largest non-sole source: 5; 
Procurement, by stratum: With MCC review: 1; 
Procurement, by stratum: Without MCC review: 39; 
Total: 47. 

MCA: Georgia; Population size; 
Procurement, by stratum: Sole source: 5; 
Procurement, by stratum: Five-largest non-sole source: 5; 
Procurement, by stratum: With MCC review: 2; 
Procurement, by stratum: Without MCC review: 16; 
Total: 28. 

MCA: Georgia; Sample size; 
Procurement, by stratum: Sole source: 5; 
Procurement, by stratum: Five-largest non-sole source: 5; 
Procurement, by stratum: With MCC review: 2; 
Procurement, by stratum: Without MCC review: 16; 
Total: 28. 

Source: GAO analysis of MCA Procurement Performance Reports. 

[End of table] 

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. 
[Footnote 69] We assessed the MCA procurement process on compliance 
with MCC procurement guidelines, as outlined in table 4. 

Table 4: Measures of Compliance with MCC Procurement Guidelines: 

MCC requirements: MCC oversight or approval of a procurement action; 
Compliance elements assessed: 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. 

MCC requirements: MCA governing body oversight or approval of a 
procurement action; 
Compliance elements assessed: 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. 

MCC requirements: Choice of procurement process; 
Compliance elements assessed: 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. 

MCC requirements: Prequalification procedures; 
Compliance elements assessed: Whether the MCAs followed MCC guidelines 
for advertising for prequalification. 

MCC requirements: Advertising procedures; 
Compliance elements assessed: Whether the MCAs followed MCC guidelines 
for advertising procurements and preparing bidding documents. 

MCC requirements: Bid evaluation procedures; 
Compliance elements assessed: 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. 

MCC requirements: Documentation of receipt of goods, works, or services 
contracted under the procurement; 
Compliance elements assessed: 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. 

[End of table] 

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 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 MCC- 
funded 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 figure 10.) 

Figure 10: Honduras CA-5 Highway Project: 

[Refer to PDF for image: illustration] 

Map indicating: 
* Road sections funded by MCC (110 km); 
* Other road sections (labels indicate funding source); 
* Cities; 
* Capital (Tegucigalpa). 

Sources: GAO synthesis of MCA-furnished project maps; Map Resources 
(base map). 

[End of figure] 

* 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 figure 11.) 

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

[Refer to PDF for image: illustration] 

Map indicating: 
* Gasline rehabilitation funded by MCC; 
* Capital (Tbilisi). 

Sources: GAO synthesis of MCA-furnished project maps; Map Resources 
(base map). 

[End of figure] 

* 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 
"2NDprocurement." 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 
"1sSTProcurement"--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 "3rRDprocurement" that enabled MCA-
Georgia to award three additional road contracts, two in April 2009 and 
the third in June 2009, totaling about 46 kilometers. (See figure 12.) 

Figure 12: Samtskhe-Javakheti Roads Rehabilitation Project 
Procurements: 

[Refer to PDF for image: illustration] 

Map indicating: 
* 2nd procurement (171 km) Awarded under original compact; 
* 3rd procurement (46 km) Awarded under additional$100 million compact 
assistance; 
* Cities; 
* Capital (Tbilisi). 

Sources: GAO synthesis of MCA-furnished project maps; Map Resources 
(base map). 

[End of figure] 

* 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 Antăo Island (not shown), was 
awarded for roughly $3.3 million. (See figure 13.) 

Figure 13: MCC-Funded Roads Project and Port of Praia Project on 
Santiago Island, Cape Verde: 

[Refer to PDF for image: illustration] 

Map indicating: 
* Road sections funded by MCC; 
* Road sections previously but no longer funded by MCC; 
* Other road sections; 
* Cities. 

Sources: GAO synthesis of MCA-furnished project maps; Map Resources 
(base map). 

[End of figure] 

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 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-Making[Footnote 70] 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. 

[End of section] 

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): 

[Refer to PDF for image: illustrated table] 

I. Goods, works and non-consultant services: 

Procurement procedure or method: Prequalification; 
Decision: Pre-qualification documents and advertising procedures; 
May 2007 – June 2008 versions, MCC procurement review thresholds: Above 
$1,000,000; 
July 2008 version, Schedule A: [Empty]; 
July 2008 version, Schedule B (for MCC-approved compacts): No review 
required. 

Procurement procedure or method: Prequalification; 
Decision: Report with proposed list of entities qualified; 
May 2007 – June 2008 versions, MCC procurement review thresholds: 
Above $500,000
July 2008 version, Schedule A: [Empty]; 
July 2008 version, Schedule B (for MCC-approved compacts): No review 
required. 

Procurement procedure or method: Prequalification; 
Decision: Record of bid challenges; 
May 2007 – June 2008 versions, MCC procurement review thresholds: 
Review all; 
July 2008 version, Schedule A: [Empty]; 
July 2008 version, Schedule B (for MCC-approved compacts): [Empty]. 

Procurement procedure or method: Competitive bidding; 
Decision: Bidding documents; 
May 2007 – June 2008 versions, MCC procurement review thresholds: Goods 
> $1,000,000; Works above $5,000,000; 
July 2008 version, Schedule A: [Empty]; 
July 2008 version, Schedule B (for MCC-approved compacts): [Empty]. 

Procurement procedure or method: Competitive bidding; 
Decision: Technical evaluation or review report with proposed award; 
May 2007 – June 2008 versions, MCC procurement review thresholds: Above 
$250,000; 
July 2008 version, Schedule A: Above $500,000; 
July 2008 version, Schedule B (for MCC-approved compacts): Above 
$500,000. 

Procurement procedure or method: Competitive bidding; 
Decision: Final contract; 
May 2007 – June 2008 versions, MCC procurement review thresholds: Above 
$250,000; 
July 2008 version, Schedule A: No review required; 
July 2008 version, Schedule B (for MCC-approved compacts): No review 
required. 

Procurement procedure or method: Competitive bidding; 
Decision: Record of bid challenges; 
May 2007 – June 2008 versions, MCC procurement review thresholds: 
Review all; 
July 2008 version, Schedule A: [Empty]; 
July 2008 version, Schedule B (for MCC-approved compacts): [Empty]. 

Procurement procedure or method: Limited bidding; 
Decision: Short list report; 
May 2007 – June 2008 versions, MCC procurement review thresholds: Above 
$100,000; 
July 2008 version, Schedule A: [Empty]; 
July 2008 version, Schedule B (for MCC-approved compacts): No review 
required. 

Procurement procedure or method: Limited bidding; 
Decision: Bidding documents; 
May 2007 – June 2008 versions, MCC procurement review thresholds: Above 
$500,000; 
July 2008 version, Schedule A: [Empty]; 
July 2008 version, Schedule B (for MCC-approved compacts): [Empty]. 

Procurement procedure or method: Limited bidding; 
Decision: Technical evaluation or review report with proposed award; 
May 2007 – June 2008 versions, MCC procurement review thresholds: Above 
$1,000,000; 
July 2008 version, Schedule A: [Empty]; 
July 2008 version, Schedule B (for MCC-approved compacts): [Empty]. 

Procurement procedure or method: Limited bidding; 
Decision: Final contract; 
May 2007 – June 2008 versions, MCC procurement review thresholds: Above 
$1,000,000; 
July 2008 version, Schedule A: No review required; 
July 2008 version, Schedule B (for MCC-approved compacts): No review 
required. 

Procurement procedure or method: Limited bidding; 
Decision: Record of bid challenges; 
May 2007 – June 2008 versions, MCC procurement review thresholds: 
Review all; 
July 2008 version, Schedule A: [Empty]; 
July 2008 version, Schedule B (for MCC-approved compacts): [Empty]. 

Procurement procedure or method: Shopping; 
Decision: Short list report; 
May 2007 – June 2008 versions, MCC procurement review thresholds: No 
review required; 
July 2008 version, Schedule A: [Empty]; 
July 2008 version, Schedule B (for MCC-approved compacts): [Empty]. 

Procurement procedure or method: Shopping; 
Decision: Record of purchases; 
May 2007 – June 2008 versions, MCC procurement review thresholds: No 
review required; 
July 2008 version, Schedule A: [Empty]; 
July 2008 version, Schedule B (for MCC-approved compacts): [Empty]. 

Procurement procedure or method: Shopping; 
Decision: Record of bid challenges; 
May 2007 – June 2008 versions, MCC procurement review thresholds: 
Quarterly record of decisions; 
July 2008 version, Schedule A: [Empty]; 
July 2008 version, Schedule B (for MCC-approved compacts): [Empty]. 

Procurement procedure or method: Direct contracting; 
Decision: Proposed award; 
May 2007 – June 2008 versions, MCC procurement review thresholds: Above 
$50,000; 
July 2008 version, Schedule A: [Empty]; 
July 2008 version, Schedule B (for MCC-approved compacts): [Empty]. 

Procurement procedure or method: Direct contracting; 
Decision: Final contract; 
May 2007 – June 2008 versions, MCC procurement review thresholds: Above 
$50,000; 
July 2008 version, Schedule A: [Empty]; 
July 2008 version, Schedule B (for MCC-approved compacts): [Empty]. 

Procurement procedure or method: Direct contracting; 
Decision: Record of bid challenges; 
May 2007 – June 2008 versions, MCC procurement review thresholds: 
Review all; 
July 2008 version, Schedule A: [Empty]; 
July 2008 version, Schedule B (for MCC-approved compacts): [Empty]. 

Procurement procedure or method: Force account; 
Decision: Selection of using equipment owned by or employees of 
Government for performing works; 
May 2007 – June 2008 versions, MCC procurement review thresholds: 
Review all; 
July 2008 version, Schedule A: [Empty]; 
July 2008 version, Schedule B (for MCC-approved compacts): [Empty]. 

Procurement procedure or method: Force account; 
Decision: Proposed contract; 
May 2007 – June 2008 versions, MCC procurement review thresholds: 
Review all; 
July 2008 version, Schedule A: [Empty]; 
July 2008 version, Schedule B (for MCC-approved compacts): [Empty]. 

Procurement procedure or method: Force account; 
Decision: Final contract; 
May 2007 – June 2008 versions, MCC procurement review thresholds: 
Review all; 
July 2008 version, Schedule A: [Empty]; 
July 2008 version, Schedule B (for MCC-approved compacts): [Empty]. 

Procurement procedure or method: All procurement actions; 
Decision: Contract modifications and change orders; 
May 2007 – June 2008 versions, MCC procurement review thresholds: If 
increases value of contract by 10% or more; 
July 2008 version, Schedule A: [Empty]; 
July 2008 version, Schedule B (for MCC-approved compacts): [Empty]. 

Source: GAO analysis of MCD data. 

[End of figure] 

Figure 15: MCC Approval Requirements from the Program Procurement 
Guidelines of July 21, 2008 (Consultant Services): 

[Refer to PDF for image: illustrated table] 

II. Consultant services: 

Procurement procedure or method: Quality and cost based selection; 
Decision: Request for expression of interest; 
May 2007 – June 2008 versions, MCC procurement review thresholds: Above 
$500,000; 
July 2008 version, Schedule A: No review required; 
July 2008 version, Schedule B (for MCC-approved compacts): No review 
required. 

Procurement procedure or method: Quality and cost based selection; 
Decision: Technical evaluation panel; 
May 2007 – June 2008 versions, MCC procurement review thresholds: Above 
$500,000; 
July 2008 version, Schedule A: No review required; No review required; 
July 2008 version, Schedule B (for MCC-approved compacts): No review 
required. 

Procurement procedure or method: Quality and cost based selection; 
Decision: Short list report; 
May 2007 – June 2008 versions, MCC procurement review thresholds: Above 
$100,000; 
July 2008 version, Schedule A: Above $500,000; 
July 2008 version, Schedule B (for MCC-approved compacts): No review 
required. 

Procurement procedure or method: Quality and cost based selection; 
Decision: Proposal documents; 
May 2007 – June 2008 versions, MCC procurement review thresholds: Above 
$500,000; 
July 2008 version, Schedule A: [Empty]; 
July 2008 version, Schedule B (for MCC-approved compacts): [Empty]. 

Procurement procedure or method: Quality and cost based selection; 
Decision: Technical evaluation report; 
May 2007 – June 2008 versions, MCC procurement review thresholds: Above 
$100,000; 
July 2008 version, Schedule A: Above $500,000;
July 2008 version, Schedule B (for MCC-approved compacts): Above 
$500,000. 

Procurement procedure or method: Quality and cost based selection; 
Decision: Proposed award; 
May 2007 – June 2008 versions, MCC procurement review thresholds: Above 
$100,000; 
July 2008 version, Schedule A: Above $500,000; No review required. 
July 2008 version, Schedule B (for MCC-approved compacts): No review 
required. 

Procurement procedure or method: Quality and cost based selection; 
Decision: Final contract; 
May 2007 – June 2008 versions, MCC procurement review thresholds: Above 
$100,000; 
July 2008 version, Schedule A: No review required; 
July 2008 version, Schedule B (for MCC-approved compacts): No review 
required. 

Procurement procedure or method: Quality and cost based selection; 
Decision: Record of bid challenges; 
May 2007 – June 2008 versions, MCC procurement review thresholds: 
Review all; 
July 2008 version, Schedule A: [Empty]; 
July 2008 version, Schedule B (for MCC-approved compacts): [Empty]. 

Procurement procedure or method: Quality based selection and selection 
under fixed budget; 
Decision: Request for expression of interest; 
May 2007 – June 2008 versions, MCC procurement review thresholds: Above 
$500,000; 
July 2008 version, Schedule A: No review required; 
July 2008 version, Schedule B (for MCC-approved compacts): No review 
required. 

Procurement procedure or method: Quality based selection and selection 
under fixed budget; 
Decision: Technical evaluation panel; 
May 2007 – June 2008 versions, MCC procurement review thresholds: Above 
$500,000; 
July 2008 version, Schedule A: No review required; No review required; 
July 2008 version, Schedule B (for MCC-approved compacts): No review 
required. 

Procurement procedure or method: Quality based selection and selection 
under fixed budget; 
Decision: Short list report; 
May 2007 – June 2008 versions, MCC procurement review thresholds: Above 
$100,000; 
July 2008 version, Schedule A: Above $500,000; 
July 2008 version, Schedule B (for MCC-approved compacts): No review 
required. 

Procurement procedure or method: Quality based selection and selection 
under fixed budget; 
Decision: Proposal documents; 
May 2007 – June 2008 versions, MCC procurement review thresholds: Above 
$500,000; 
July 2008 version, Schedule A: [Empty]; 
July 2008 version, Schedule B (for MCC-approved compacts): [Empty]. 

Procurement procedure or method: Quality based selection and selection 
under fixed budget; 
Decision: Technical evaluation report for QBS only; 
May 2007 – June 2008 versions, MCC procurement review thresholds: Above 
$100,000; 
July 2008 version, Schedule A: Above $500,000;
July 2008 version, Schedule B (for MCC-approved compacts): Above 
$500,000. 

Procurement procedure or method: Quality based selection and selection 
under fixed budget; 
Decision: Proposed award; 
May 2007 – June 2008 versions, MCC procurement review thresholds: Above 
$100,000; 
July 2008 version, Schedule A: Above $500,000; No review required. 
July 2008 version, Schedule B (for MCC-approved compacts): No review 
required. 

Procurement procedure or method: Quality based selection and selection 
under fixed budget; 
Decision: Final contract; 
May 2007 – June 2008 versions, MCC procurement review thresholds: Above 
$100,000; 
July 2008 version, Schedule A: Above $500,000; 
July 2008 version, Schedule B (for MCC-approved compacts): No review 
required. 

Procurement procedure or method: Quality based selection and selection 
under fixed budget; 
Decision: Record of bid challenges; 
May 2007 – June 2008 versions, MCC procurement review thresholds: 
Review all; 
July 2008 version, Schedule A: [Empty]; 
July 2008 version, Schedule B (for MCC-approved compacts): [Empty]. 

Procurement procedure or method: Least-cost selection; 
Decision: Request for expression of interest; 
May 2007 – June 2008 versions, MCC procurement review thresholds: No 
review required. 
July 2008 version, Schedule A: [Empty]; 
July 2008 version, Schedule B (for MCC-approved compacts): [Empty]. 

Procurement procedure or method: Least-cost selection; 
Decision: Technical evaluation panel; 
May 2007 – June 2008 versions, MCC procurement review thresholds: No 
review required. 
July 2008 version, Schedule A: [Empty]; 
July 2008 version, Schedule B (for MCC-approved compacts): [Empty]. 

Procurement procedure or method: Least-cost selection; 
Decision: Short list report; 
May 2007 – June 2008 versions, MCC procurement review thresholds: Above 
$100,000; 
July 2008 version, Schedule A: Above $500,000; 
July 2008 version, Schedule B (for MCC-approved compacts): No review 
required. 

Procurement procedure or method: Least-cost selection; 
Decision: Proposal documents; 
May 2007 – June 2008 versions, MCC procurement review thresholds: No 
review required; 
July 2008 version, Schedule A: [Empty]; 
July 2008 version, Schedule B (for MCC-approved compacts): [Empty]. 

Procurement procedure or method: Least-cost selection; 
Decision: Proposed award; 
May 2007 – June 2008 versions, MCC procurement review thresholds: Above 
$100,000; 
July 2008 version, Schedule A: Above $500,000; 
July 2008 version, Schedule B (for MCC-approved compacts): No review 
required. 

Procurement procedure or method: Least-cost selection; 
Decision: Final contract; 
May 2007 – June 2008 versions, MCC procurement review thresholds: No 
review required. 
July 2008 version, Schedule A: [Empty]; 
July 2008 version, Schedule B (for MCC-approved compacts): [Empty]. 

Procurement procedure or method: Least-cost selection; 
Decision: Record of bid challenges; 
May 2007 – June 2008 versions, MCC procurement review thresholds: 
Review all; 
July 2008 version, Schedule A: [Empty]; 
July 2008 version, Schedule B (for MCC-approved compacts): [Empty]. 

Procurement procedure or method: Selection based on consultant’s 
qualifications; 
Decision: Request for expression of interest; 
May 2007 – June 2008 versions, MCC procurement review thresholds: No 
review required; 
July 2008 version, Schedule A: [Empty]; 
July 2008 version, Schedule B (for MCC-approved compacts): [Empty]. 

Procurement procedure or method: Selection based on consultant’s 
qualifications; 
Decision: Technical evaluation panel; 
May 2007 – June 2008 versions, MCC procurement review thresholds: No 
review required; 
July 2008 version, Schedule A: [Empty]; 
July 2008 version, Schedule B (for MCC-approved compacts): [Empty]. 

Procurement procedure or method: Selection based on consultant’s 
qualifications; 
Decision: Technical evaluation report; 
May 2007 – June 2008 versions, MCC procurement review thresholds: Above 
$50,000; 
July 2008 version, Schedule A: Above $500,000; 
July 2008 version, Schedule B (for MCC-approved compacts): No review 
required. 

Procurement procedure or method: Selection based on consultant’s 
qualifications; 
Decision: Short list report; 
May 2007 – June 2008 versions, MCC procurement review thresholds: No 
review required; 
July 2008 version, Schedule A: [Empty]; 
July 2008 version, Schedule B (for MCC-approved compacts): [Empty]. 

Procurement procedure or method: Selection based on consultant’s 
qualifications; 
Decision: Proposal documents; 
May 2007 – June 2008 versions, MCC procurement review thresholds: No 
review required; 
July 2008 version, Schedule A: [Empty]; 
July 2008 version, Schedule B (for MCC-approved compacts): [Empty]. 

Procurement procedure or method: Selection based on consultant’s 
qualifications; 
Decision: Proposed award; 
May 2007 – June 2008 versions, MCC procurement review thresholds: No 
review required; 
July 2008 version, Schedule A: [Empty]; 
July 2008 version, Schedule B (for MCC-approved compacts): [Empty]. 

Procurement procedure or method: Selection based on consultant’s 
qualifications; 
Decision: Final contract; 
May 2007 – June 2008 versions, MCC procurement review thresholds: Above 
$50,000; 
July 2008 version, Schedule A: Above $500,000; 
July 2008 version, Schedule B (for MCC-approved compacts): No review 
required. 

Procurement procedure or method: Selection based on consultant’s 
qualifications; 
Decision: Record of bid challenges; 
May 2007 – June 2008 versions, MCC procurement review thresholds: 
Review all; 
July 2008 version, Schedule A: [Empty]; 
July 2008 version, Schedule B (for MCC-approved compacts): [Empty]. 

Procurement procedure or method: Sole-source selection; 
Decision: Proposed award; 
May 2007 – June 2008 versions, MCC procurement review thresholds: Above 
$50,000; 
July 2008 version, Schedule A: [Empty]; 
July 2008 version, Schedule B (for MCC-approved compacts): [Empty]. 

Procurement procedure or method: Sole-source selection; 
Decision: Final contract; 
May 2007 – June 2008 versions, MCC procurement review thresholds: Above 
$50,000; 
July 2008 version, Schedule A: [Empty]; 
July 2008 version, Schedule B (for MCC-approved compacts): [Empty]. 

Procurement procedure or method: Sole-source selection; 
Decision: Record of bid challenges; 
May 2007 – June 2008 versions, MCC procurement review thresholds: 
Review all; 
July 2008 version, Schedule A: [Empty]; 
July 2008 version, Schedule B (for MCC-approved compacts): [Empty]. 

Procurement procedure or method: Selection of individual consultants; 
Decision: Short list report; 
May 2007 – June 2008 versions, MCC procurement review thresholds: Above 
$50,000; 
July 2008 version, Schedule A: [Empty]; 
July 2008 version, Schedule B (for MCC-approved compacts): No review 
required. 

Procurement procedure or method: Selection of individual consultants; 
Decision: Technical evaluation panel; 
May 2007 – June 2008 versions, MCC procurement review thresholds: Above 
$50,000; 
July 2008 version, Schedule A: No review required; 
July 2008 version, Schedule B (for MCC-approved compacts): No review 
required. 

Procurement procedure or method: Selection of individual consultants; 
Decision: Technical evaluation report; 
May 2007 – June 2008 versions, MCC procurement review thresholds: No 
review required; 
July 2008 version, Schedule A: [Empty]; 
July 2008 version, Schedule B (for MCC-approved compacts): [Empty]. 

Procurement procedure or method: Selection of individual consultants; 
Decision: Proposed award; 
May 2007 – June 2008 versions, MCC procurement review thresholds: No 
review required; 
July 2008 version, Schedule A: [Empty]; 
July 2008 version, Schedule B (for MCC-approved compacts): [Empty]. 

Procurement procedure or method: Selection of individual consultants; 
Decision: Final contract; 
May 2007 – June 2008 versions, MCC procurement review thresholds: Above 
$50,000; 
July 2008 version, Schedule A: [Empty]; 
July 2008 version, Schedule B (for MCC-approved compacts): No review 
required. 

Procurement procedure or method: Selection of individual consultants; 
Decision: Record of bid challenges; 
May 2007 – June 2008 versions, MCC procurement review thresholds: Above 
$50,000; 
July 2008 version, Schedule A: [Empty]; 
July 2008 version, Schedule B (for MCC-approved compacts): [Empty]. 

[Empty]: Indicates no change. 

All other Schedule A and Schedule B listings are reductions in MCC 
review thresholds from previous versions. 

Source: GAO analysis of MCC data. 

[End of figure] 

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. 

[End of section] 

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: 

Overall approvals: 

Procurement criteria: Obtained all required MCC approvals[C]; 
Percentage (number of reviewed procurements): Cape Verde[A]: 100% (47); 
Percentage (number of reviewed procurements): Georgia[B]: 96% (28); 
Percentage (number of reviewed procurements): Honduras[A]: 100% (63). 

Procurement criteria: Obtained all required approvals; 
Percentage (number of reviewed procurements): Cape Verde[A]: 23; 
Percentage (number of reviewed procurements): Georgia[B]: 32; 
Percentage (number of reviewed procurements): Honduras[A]: 15. 

Procurement criteria: Approvals not required; 
Percentage (number of reviewed procurements): Cape Verde[A]: 77; 
Percentage (number of reviewed procurements): Georgia[B]: 64; 
Percentage (number of reviewed procurements): Honduras[A]: 85. 

Procurement criteria: One or more approval missing; 
Percentage (number of reviewed procurements): Cape Verde[A]: 0; 
Percentage (number of reviewed procurements): Georgia[B]: 4; 
Percentage (number of reviewed procurements): Honduras[A]: 0. 

Procurement criteria: Obtained all required MCA governing body 
approvals[D]; 
Percentage (number of reviewed procurements): Cape Verde[A]: 100% (47); 
Percentage (number of reviewed procurements): Georgia[B]: 86% (28); 
Percentage (number of reviewed procurements): Honduras[A]: 92% (63). 

Procurement criteria: Obtained all required approvals; 
Percentage (number of reviewed procurements): Cape Verde[A]: 17; 
Percentage (number of reviewed procurements): Georgia[B]: 29; 
Percentage (number of reviewed procurements): Honduras[A]: 10. 

Procurement criteria: Approvals not required; 
Percentage (number of reviewed procurements): Cape Verde[A]: 83; 
Percentage (number of reviewed procurements): Georgia[B]: 57; 
Percentage (number of reviewed procurements): Honduras[A]: 82. 

Procurement criteria: One or more approval missing; 
Percentage (number of reviewed procurements): Cape Verde[A]: 0; 
Percentage (number of reviewed procurements): Georgia[B]: 14; 
Percentage (number of reviewed procurements): Honduras[A]: 8. 

Prequalification: 

Procurement criteria: Advertised prequalification for procurement in 
English; 
Percentage (number of reviewed procurements): Cape Verde[A]: 100% (47); 
Percentage (number of reviewed procurements): Georgia[B]: 100% (27); 
Percentage (number of reviewed procurements): Honduras[A]: 100% (63). 

Procurement criteria: Met requirement to advertise prequalification in 
English; 
Percentage (number of reviewed procurements): Cape Verde[A]: 9; 
Percentage (number of reviewed procurements): Georgia[B]: 11; 
Percentage (number of reviewed procurements): Honduras[A]: 7. 

Procurement criteria: Not required to advertise prequalification in 
English; 
Percentage (number of reviewed procurements): Cape Verde[A]: 91; 
Percentage (number of reviewed procurements): Georgia[B]: 89; 
Percentage (number of reviewed procurements): Honduras[A]: 93. 

Procurement criteria: Did not meet requirement to advertise 
prequalification in English; 
Percentage (number of reviewed procurements): Cape Verde[A]: 0; 
Percentage (number of reviewed procurements): Georgia[B]: 0; 
Percentage (number of reviewed procurements): Honduras[A]: 0. 

Procurement criteria: Advertised prequalification in required 
locations; 
Percentage (number of reviewed procurements): Cape Verde[A]: 94% (47); 
Percentage (number of reviewed procurements): Georgia[B]: 96% (28); 
Percentage (number of reviewed procurements): Honduras[A]: 100% (63). 

Procurement criteria: Met requirement to advertise prequalification in 
required locations; 
Percentage (number of reviewed procurements): Cape Verde[A]: 4; 
Percentage (number of reviewed procurements): Georgia[B]: 11; 
Percentage (number of reviewed procurements): Honduras[A]: 7. 

Procurement criteria: Not required to advertise prequalification in 
required locations; 
Percentage (number of reviewed procurements): Cape Verde[A]: 90; 
Percentage (number of reviewed procurements): Georgia[B]: 86; 
Percentage (number of reviewed procurements): Honduras[A]: 93. 

Procurement criteria: Did not meet requirement to advertise 
prequalification in required locations; 
Percentage (number of reviewed procurements): Cape Verde[A]: 6; 
Percentage (number of reviewed procurements): Georgia[B]: 4; 
Percentage (number of reviewed procurements): Honduras[A]: 0. 

Invitation for bid: 

Procurement criteria: Justified use of another procurement method if 
the MCA did not use competitive bidding; 
Percentage (number of reviewed procurements): Cape Verde[A]: 100% (47); 
Percentage (number of reviewed procurements): Georgia[B]: 100% (28); 
Percentage (number of reviewed procurements): Honduras[A]: 97% (63). 

Procurement criteria: Justified use of another procurement method; 
Percentage (number of reviewed procurements): Cape Verde[A]: 5; 
Percentage (number of reviewed procurements): Georgia[B]: 21; 
Percentage (number of reviewed procurements): Honduras[A]: 5. 

Procurement criteria: Justification not required; 
Percentage (number of reviewed procurements): Cape Verde[A]: 95; 
Percentage (number of reviewed procurements): Georgia[B]: 79; 
Percentage (number of reviewed procurements): Honduras[A]: 92. 

Procurement criteria: Did not justify use of another procurement 
method; 
Percentage (number of reviewed procurements): Cape Verde[A]: 0; 
Percentage (number of reviewed procurements): Georgia[B]: 0; 
Percentage (number of reviewed procurements): Honduras[A]: 3. 

Procurement criteria: Advertised procurement in English; 
Percentage (number of reviewed procurements): Cape Verde[A]: 100% (47); 
Percentage (number of reviewed procurements): Georgia[B]: 100% (28); 
Percentage (number of reviewed procurements): Honduras[A]: 100% (63). 

Procurement criteria: Met requirement to advertise procurement in 
English; 
Percentage (number of reviewed procurements): Cape Verde[A]: 13; 
Percentage (number of reviewed procurements): Georgia[B]: 39; 
Percentage (number of reviewed procurements): Honduras[A]: 13. 

Procurement criteria: Not required to advertise procurement in English; 
Percentage (number of reviewed procurements): Cape Verde[A]: 87; 
Percentage (number of reviewed procurements): Georgia[B]: 61; 
Percentage (number of reviewed procurements): Honduras[A]: 87. 

Procurement criteria: Did not meet requirement to advertise procurement 
in English; 
Percentage (number of reviewed procurements): Cape Verde[A]: 0; 
Percentage (number of reviewed procurements): Georgia[B]: 0; 
Percentage (number of reviewed procurements): Honduras[A]: 0. 

Procurement criteria: Published bidding documents in English; 
Percentage (number of reviewed procurements): Cape Verde[A]: 99% (47); 
Percentage (number of reviewed procurements): Georgia[B]: 100% (28); 
Percentage (number of reviewed procurements): Honduras[A]: 93% (63). 

Procurement criteria: Met requirement to publish bidding documents in 
English; 
Percentage (number of reviewed procurements): Cape Verde[A]: 13; 
Percentage (number of reviewed procurements): Georgia[B]: 36; 
Percentage (number of reviewed procurements): Honduras[A]: 7. 

Procurement criteria: Not required to publish bidding documents in 
English; 
Percentage (number of reviewed procurements): Cape Verde[A]: 86; 
Percentage (number of reviewed procurements): Georgia[B]: 64; 
Percentage (number of reviewed procurements): Honduras[A]: 87. 

Procurement criteria: Did not meet requirement to publish bidding 
documents in English; 
Percentage (number of reviewed procurements): Cape Verde[A]: 1; 
Percentage (number of reviewed procurements): Georgia[B]: 0; 
Percentage (number of reviewed procurements): Honduras[A]: 7. 

Procurement criteria: Circulated procurement advertisement in required 
locations; 
Percentage (number of reviewed procurements): Cape Verde[A]: 99% (47); 
Percentage (number of reviewed procurements): Georgia[B]: 82% (28); 
Percentage (number of reviewed procurements): Honduras[A]: 98% (63). 

Procurement criteria: Met requirement to circulate procurement 
advertisement in specified publications; 
Percentage (number of reviewed procurements): Cape Verde[A]: 68; 
Percentage (number of reviewed procurements): Georgia[B]: 7; 
Percentage (number of reviewed procurements): Honduras[A]: 5. 

Procurement criteria: Not required to circulate procurement 
advertisement in specified publications; 
Percentage (number of reviewed procurements): Cape Verde[A]: 30; 
Percentage (number of reviewed procurements): Georgia[B]: 75; 
Percentage (number of reviewed procurements): Honduras[A]: 93. 

Procurement criteria: Did not meet requirement to circulate procurement 
advertisement in specified publications; 
Percentage (number of reviewed procurements): Cape Verde[A]: 1; 
Percentage (number of reviewed procurements): Georgia[B]: 18; 
Percentage (number of reviewed procurements): Honduras[A]: 2. 

Bid evaluation: 

Procurement criteria: Documented bid opening; 
Percentage (number of reviewed procurements): Cape Verde[A]: 100% (47); 
Percentage (number of reviewed procurements): Georgia[B]: 100% (28); 
Percentage (number of reviewed procurements): Honduras[A]: 100% (63). 

Procurement criteria: Met requirement to document bid opening; 
Percentage (number of reviewed procurements): Cape Verde[A]: 70; 
Percentage (number of reviewed procurements): Georgia[B]: 39; 
Percentage (number of reviewed procurements): Honduras[A]: 15. 

Procurement criteria: Not required to document bid opening[E]; 
Percentage (number of reviewed procurements): Cape Verde[A]: 30; 
Percentage (number of reviewed procurements): Georgia[B]: 61; 
Percentage (number of reviewed procurements): Honduras[A]: 85. 

Procurement criteria: Did not meet requirement to document bid opening; 
Percentage (number of reviewed procurements): Cape Verde[A]: 0; 
Percentage (number of reviewed procurements): Georgia[B]: 0; 
Percentage (number of reviewed procurements): Honduras[A]: 0. 

Procurement criteria: Procurement file contained a detailed report on 
evaluation and comparison of bids; 
Percentage (number of reviewed procurements): Cape Verde[A]: 100% (47); 
Percentage (number of reviewed procurements): Georgia[B]: 100% (28); 
Percentage (number of reviewed procurements): Honduras[A]: 100% (63). 

Procurement criteria: Met requirement to have a detailed report on 
evaluation and comparison of bids; 
Percentage (number of reviewed procurements): Cape Verde[A]: 97; 
Percentage (number of reviewed procurements): Georgia[B]: 86; 
Percentage (number of reviewed procurements): Honduras[A]: 94. 

Procurement criteria: Not required to have a detailed report on 
evaluation and comparison of bids[F]; 
Percentage (number of reviewed procurements): Cape Verde[A]: 3; 
Percentage (number of reviewed procurements): Georgia[B]: 14; 
Percentage (number of reviewed procurements): Honduras[A]: 6. 

Procurement criteria: Did not meet requirement to have a detailed 
report on evaluation and comparison of bids; 
Percentage (number of reviewed procurements): Cape Verde[A]: 0; 
Percentage (number of reviewed procurements): Georgia[B]: 0; 
Percentage (number of reviewed procurements): Honduras[A]: 0. 

Procurement criteria: Documented reason for disqualification when bids 
were disqualified; 
Percentage (number of reviewed procurements): Cape Verde[A]: 100% (47); 
Percentage (number of reviewed procurements): Georgia[B]: 100% (28); 
Percentage (number of reviewed procurements): Honduras[A]: 100% (63). 

Procurement criteria: Met requirement to document reason for 
disqualification when bids were disqualified; 
Percentage (number of reviewed procurements): Cape Verde[A]: 54; 
Percentage (number of reviewed procurements): Georgia[B]: 21; 
Percentage (number of reviewed procurements): Honduras[A]: 10. 

Procurement criteria: Not required to document because no bids were 
disqualified; 
Percentage (number of reviewed procurements): Cape Verde[A]: 46; 
Percentage (number of reviewed procurements): Georgia[B]: 79; 
Percentage (number of reviewed procurements): Honduras[A]: 90. 

Procurement criteria: Did not meet requirement to document reason for 
disqualification when bids were disqualified; 
Percentage (number of reviewed procurements): Cape Verde[A]: 0; 
Percentage (number of reviewed procurements): Georgia[B]: 0; 
Percentage (number of reviewed procurements): Honduras[A]: 0. 

Procurement criteria: Documented contractor eligibility; 
Percentage (number of reviewed procurements): Cape Verde[A]: 98% (47); 
Percentage (number of reviewed procurements): Georgia[B]: 25% (28); 
Percentage (number of reviewed procurements): Honduras[A]: 74% (63). 

Procurement criteria: Met requirements to verify and document 
contractor eligibility; 
Percentage (number of reviewed procurements): Cape Verde[A]: 98; 
Percentage (number of reviewed procurements): Georgia[B]: 25; 
Percentage (number of reviewed procurements): Honduras[A]: 74. 

Procurement criteria: Not required to verify and document contractor 
eligibility; 
Percentage (number of reviewed procurements): Cape Verde[A]: 0; 
Percentage (number of reviewed procurements): Georgia[B]: 0; 
Percentage (number of reviewed procurements): Honduras[A]: 0. 

Procurement criteria: Did not meet requirements to verify and document 
contractor eligibility; 
Percentage (number of reviewed procurements): Cape Verde[A]: 2; 
Percentage (number of reviewed procurements): Georgia[B]: 75; 
Percentage (number of reviewed procurements): Honduras[A]: 26. 

Procurement criteria: Documented impartiality of the evaluation panel; 
Percentage (number of reviewed procurements): Cape Verde[A]: 74% (47); 
Percentage (number of reviewed procurements): Georgia[B]: 86% (28); 
Percentage (number of reviewed procurements): Honduras[A]: 80% (63). 

Procurement criteria: Met requirements to document impartiality of the 
evaluation panel; 
Percentage (number of reviewed procurements): Cape Verde[A]: 71; 
Percentage (number of reviewed procurements): Georgia[B]: 71; 
Percentage (number of reviewed procurements): Honduras[A]: 72. 

Procurement criteria: Not required to document impartiality of the 
evaluation panel[F]; 
Percentage (number of reviewed procurements): Cape Verde[A]: 3; 
Percentage (number of reviewed procurements): Georgia[B]: 14; 
Percentage (number of reviewed procurements): Honduras[A]: 8. 

Procurement criteria: Did not meet requirements to document 
impartiality of the evaluation panel; 
Percentage (number of reviewed procurements): Cape Verde[A]: 26; 
Percentage (number of reviewed procurements): Georgia[B]: 14; 
Percentage (number of reviewed procurements): Honduras[A]: 20. 

Contract management: 

Procurement criteria: Had procured item or record of receipt of item; 
Percentage (number of reviewed procurements): Cape Verde[A]: 100% (46); 
Percentage (number of reviewed procurements): Georgia[B]: 100% (27); 
Percentage (number of reviewed procurements): Honduras[A]: 99% (62). 

Procurement criteria: Met requirement to have procured item or record 
of receipt of item; 
Percentage (number of reviewed procurements): Cape Verde[A]: 93; 
Percentage (number of reviewed procurements): Georgia[B]: 78; 
Percentage (number of reviewed procurements): Honduras[A]: 87. 

Procurement criteria: Not required to have item or record of receipt of 
item[G]; 
Percentage (number of reviewed procurements): Cape Verde[A]: 7; 
Percentage (number of reviewed procurements): Georgia[B]: 22; 
Percentage (number of reviewed procurements): Honduras[A]: 13. 

Procurement criteria: Did not meet requirement to have item or record 
of receipt of item; 
Percentage (number of reviewed procurements): Cape Verde[A]: 0; 
Percentage (number of reviewed procurements): Georgia[B]: 0; 
Percentage (number of reviewed procurements): Honduras[A]: 1. 

Procurement criteria: Procured items matched contract specifications; 
Percentage (number of reviewed procurements): Cape Verde[A]: 100% (47); 
Percentage (number of reviewed procurements): Georgia[B]: 100% (27); 
Percentage (number of reviewed procurements): Honduras[A]: 99% (63). 

Procurement criteria: Procured items matched contract specifications; 
Percentage (number of reviewed procurements): Cape Verde[A]: 73; 
Percentage (number of reviewed procurements): Georgia[B]: 74; 
Percentage (number of reviewed procurements): Honduras[A]: 85. 

Procurement criteria: Not required[H]; 
Percentage (number of reviewed procurements): Cape Verde[A]: 27; 
Percentage (number of reviewed procurements): Georgia[B]: 26; 
Percentage (number of reviewed procurements): Honduras[A]: 14. 

Procurement criteria: Procured items did not match contract 
specifications; 
Percentage (number of reviewed procurements): Cape Verde[A]: 0; 
Percentage (number of reviewed procurements): Georgia[B]: 0; 
Percentage (number of reviewed procurements): Honduras[A]: 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. 

[End of table] 

[End of section] 

Appendix IV: Comments from the Millennium Challenge Corporation: 

Note: GAO comments supplementing those in the report text appear at the 
end of this appendix. 

Millennium Challenge Corporation: 
United States Of America: 
Darius Mans: 
Acting Chief Executive Officer: 
875 Fifteenth Street NW: 
Washington, DC 20005-2221: 
p: (202) 521-3570: 
f: (202) 521-3572: 
[hyperlink, http://www.mcc.gov] 

October 23, 2009: 

Mr. Emil Friberg: 
Assistant Director: 
Government Accountability Office: 
441 G Street N.W. 
Washington D.C. 20548: 

Dear Mr. Friberg: 

This letter is in response to the Government Accountability Office's 
(GAO) request for comments on GAO's draft report (GAO-10-52) titled MCC 
Has Addressed a Number of Implementation Challenges but Needs to 
Improve Financial Controls and Infrastructure Planning, dated October 
2009. I appreciate GAO's recognition of the Millennium Challenge 
Corporation's (MCC) operational challenges with partner countries and 
of the steps that MCC has already taken to strengthen financial 
controls and implementation oversight, which includes standardizing a 
fiscal accountability plan (FAP) template, standardizing MCC Program 
Procurement Guidelines, and improving the development of infrastructure 
projects in new compacts. 

Please find below MCC's comments on the recommendations for executive 
action and certain other findings as set forth in the draft report: 

GAO Recommendation #1: Revise MCC guidance to Millennium Challenge 
Accounts (MCAs) to require that MCA fiscal accountability plans include 
comprehensive policies and procedures related to its financial 
transactions that are in accordance with best practices covering 
procedures such as authorization, approvals, and key documentation of 
all transaction types. 

MCC Response: MCC accepts the recommendation. Documented policies and 
procedures are in place for project and program expenses in FAPs, 
program implementation agreements, and implementing entity agreements. 
MCC agrees that it would be useful to have all policies and procedures 
in one source document and will work with the MCAs to incorporate 
separate internal control documents as annexes to the FAP. Based on the 
findings in the draft report, MCC will work with the MCAs to tighten up 
policies and procedures related to travel, payroll, and authorization 
of major program expenditures where deficiencies were noted. 

Comments on specific GAO Endings: 

* Travel policies in Honduras and Cape Verde lacked key requirements 
for supporting documentation. 

Honduras: Honduras uses a modified version of the United Nations travel 
policy that, in most cases, does not require submission of receipts for 
lodging, meals, and incidental expenses. Transportation costs are 
generally paid in advance by MCAs on behalf of the traveler. The 
Honduras FAP sets forth this policy and also states per diem amounts 
for all destinations. In some cases, however, travelers may claim 
actual expenses for travel and, in those cases, receipts arc required 
for expenses exceeding $35.00. The Honduras FAP does not expressly 
prohibit business class air travel, nor does it make allowances for it. 
All travel must be approved by the general director of MCA-Honduras, 
who assesses the request based on the need and purpose of travel. [See 
comment 1] 

Cape Verde: The Cape Verde FAP provides that, for purposes of travel 
outside and inside Cape Verde, MCA-Cape Verde will pay its travelers a 
daily subsistence allowance for each day of the mission outside the 
main office to cover travelers' expenses related to meals, hotel 
accommodations, and communication. The allowance is calculated using 
rates provided by the United Nations Funds and Programs Office in Cape 
Verde. [See comment 1] 

Further, within ten business days after returning from the mission the 
traveler must submit: 

i. A mission report containing the principal findings of the mission, 
the deliverables accomplished, the actions to be taken, and the entity 
responsible for these actions. 

ii. A financial report showing the actual cost of the mission against 
the planned cost, accompanied by the following documents: 

a. Original travel voucher/document;
b. Boarding pass stub or valid receipt for hotel stays; and
c. Receipts for other expenses not foreseen and supported by the 
traveler. 

Also, in the event that the mission duration was shorter than 
originally planned, the traveler must refund the corresponding portion 
of the daily subsistence allowance. 

MCC agrees with the finding concerning Cape Verde business class travel 
and the FAP language in this area will be improved. 

* Payroll policies in Honduras and Cape Verde did not include a 
requirement for staff to prepare individual timesheets or other 
documentation that could be used by direct supervisors to verify actual 
hours worked before payroll was processed. 

Honduras: The Honduras FAP states that, "The MCA-Honduras 
Administration and Finance Director shall receive from Executing Units 
a monthly payroll sheet properly prepared and authorized, and invoices 
for all required payments of staff." This "monthly payroll sheet" would 
be considered either a timesheet or other documentation. MCC's fiscal 
accountability directors will affirm adherence to these procedures as 
part of their next site visit and, if necessary, recommend an 
improvement to the FAP. [See comment 2] 

Cape Verde: MCC acknowledges the finding and agrees that Cape Verde FAP 
language in this area needs to be improved. 

GAO Recommendation #2: Revise MCC guidance to MCAs to require that MCA 
FAPs incorporate policies and procedures related to disbursements of 
the MCA's 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 
contractual agreements. 

MCC Response: MCC has not examined the samples cited by GAO as a basis 
for their findings and therefore has no comments on the specific 
deficiencies noted in the draft report. MCC accepts the recommendation, 
and will work with the MCAs to strengthen compliance with documentation 
requirements where needed as part of a review of the FAPs (see MCC's 
response to recommendation #1). 

Comment on specific GAO finding: 

* During our review of the GRDF disbursement transactions, we found 
inconsistencies between the initial investments and the program goals, 
as defined by the GRDF operating guidelines. (Footnote #31) 

The draft report states that the Georgia Regional Development Fund 
(GRDF) has invested in two businesses located in Tbilisi. In fact, GRDF 
has invested in only one such entity (a furniture retailer located in 
Tbilisi). Moreover, GRDF's investment guidelines permit (i) up to 20 
percent of GRDF's invested capital to be invested in businesses within 
Tbilisi, and (ii) a fraction of the investments to go to businesses not 
engaged in agriculture or tourism. This investment is therefore 
consistent with the investment guidelines. [See comment 3] 

GAO also notes that one GRDF investee was a subsidiary of a company 
whose revenues exceeded the $5 million limit for investment 
eligibility. In fact, the investee is not a subsidiary of this company 
and the investee had revenues of less than $5 million. Therefore this 
investment is also consistent with the investment guidelines. 

GAO Recommendation #3: Reinforce existing guidance to MCAs on 
conducting and documenting price reasonableness analyses. 

MCC Response: MCC accepts the recommendation and has already undertaken 
efforts to address this concern. MCC is pleased by the GAO finding that 
the three MCAs reviewed obtained nearly all required approvals for 
procurement actions and that each MCA showed a high rate of compliance 
with MCC's procurement requirements. 

Prior to GAO's visits, MCC's interim activity reviews identified that 
for some procurements MCAs may have had difficulty finding price 
reasonableness information, or, alternatively, the MCAs may have 
misunderstood the requirement. MCC takes price reasonableness of all 
contract awards seriously and, based on the interim activity reviews, 
has implemented corrective actions in the countries where issues were 
identified. The lessons learned from the interim activity reviews have 
also been disseminated to other MCAs as a guide for "best practices." 
MCC's existing guidance paper, Guidance on the Price-Reasonableness 
Analysis, describes in detail the methods for conducting the price 
reasonableness analysis. The guidance has been incorporated into the 
MCC Program Procurement Guidelines to ensure that the price 
reasonableness determination requirement carries the weight of being 
part of MCC policy rather than solely as guidance. All MCC procurement 
directors have been directed to reject any evaluation report received 
from an MCA that does not include a price reasonableness determination. 
In addition, MCC procurement directors have provided training to 
several MCAs on this subject. MCC will ensure that MCA and MCC compact 
implementation staffs have training in this specific area and in 
procurement practices generally to ensure uniformity of procurement 
training at the MCAs and MCC. 

Comment on specific GAO finding: 

* Despite general compliance with MCC procurement guidelines, MCAs did 
not document contractor eligibility and evaluation panel impartiality 
in all cases. 

Documentation of both contractor eligibility and evaluation panel 
impartiality is required in the evaluation reports. Upon receipt, MCC 
procurement staff ordinarily review an evaluation panel report for 
approval. It is clear from the draft report that evidence of such a 
review was missing from some evaluation reports. MCC will reinforce in 
a letter to all staff and MCAs that both eligibility checks and 
evidence of evaluation panel impartiality must be completed, and that 
results of the review must be included in the evaluation reports. All 
MCC procurement directors have been directed to reject any evaluation 
report received from an MCA that does not include a contractor 
eligibility determination and/or documentation of the impartiality of 
the evaluation panels. MCC's existing guidance paper, Guidance on 
Excluded Parties Verification Procedures in MCA Entity Program 
Procurements, describes in detail the methods for conducting the 
contractor eligibility determination. This guidance has been 
incorporated into the MCC Program Procurement Guidelines to ensure that 
the contractor eligibility determination requirement carries the weight 
of being part of MCC policy rather than solely as guidance. In addition 
to the contractor eligibility determination guidance, MCC procurement 
directors have provided training to the MCAs on this subject. MCC will 
ensure that all MCAs and MCC compact implementation staff have training 
in this specific area and in procurement practices generally to ensure 
uniformity of procurement training at the MCAs and MCC. 

GAO Recommendation #4: Establish a programmatic goal that MCAs conclude 
all project planning efforts -- to include MCC final approvals of MCAs 
final feasibility surveys, engineering surveys, environmental surveys, 
and resettlement studies -- prior to entry into force, but not later 
than the point at which MCAs issue contract solicitations. 

MCC Response: MCC accepts the recommendation, and has already 
implemented changes to address the concern. In early compacts, 
infrastructure projects were approved, for the most part, based on 
studies and designs that were at a relatively early stage -- pre-
feasibility studies and preliminary designs. Full feasibility studies, 
environmental impact assessments, resettlement action plans, final 
designs, and design reviews were undertaken following compact signing, 
either using 609(g) grant funds or compact funds. Project costs and 
scope often changed as a result of that process, with the consequences 
noted in the draft report. Recognizing the implications of this early 
approach, beginning in fiscal year 2008, MCC modified its internal 
processes to require completion of full feasibility studies and 
environmental impact assessments (including resettlement plans) prior 
to compact signing. [See comment 4] 

GAO Recommendation #5 Require MCAs to obtain detailed reviews of 
project cost estimates -- to include the extent risks to projects such 
as cost escalation, schedule delays, and other issues have been 
considered -- and project designs before contract solicitation for 
large construction projects to better ensure that projects can be 
successfully bid and built. 

MCC Response: MCC accepts this recommendation and has already 
undertaken efforts to address the concern. Under MCC's revised compact 
development process, full feasibility studies and environment impact 
assessments are completed prior to compact signing. MCC conducts 
independent due diligence on this work and then cost contingencies are 
included based on industry standards; this additional up-front work 
will help ensure that projects can be successfully completed within 
five years and within budget. In all cases of design-bid-build 
infrastructure projects, full engineering designs are completed before 
construction bidding is initiated. 

Through internationally competitive procurements, MCAs procure the 
services of design firms that prepare the detailed designs and bidding 
documents for infrastructure projects (including engineering drawings, 
specifications, bills of quantity, and contractual documents). In 
addition, it is standard practice for the same design firms to prepare 
confidential cost estimates following completion of the design process 
and prior to the release of the bidding documents for these projects. 
These confidential cost estimates serve to update the earlier, 
feasibility-level cost estimates prepared by the same or another firm 
and are based on the detailed bill of quantities for the contract. 

In addition, there are numerous parties that typically review designs 
and bidding documents prior to their release, including MCA staff, 
representatives of the implementing entity and/or beneficiary 
organization, the MCA project management consultant and/or construction 
supervisor, government design review commissions, environmental 
permitting agencies, MCC staff, and MCC's independent engineer. [See 
comment 5] 

The revised process cannot, however, guard against all unforeseen site 
conditions and unanticipated price spikes. For example, cost increases 
experienced by the Cape Verde, Georgia, and Honduras projects resulted 
from a number of factors, including design changes and quality changes, 
coupled with the unprecedented worldwide run-up in material and 
construction costs that hit this group of countries and projects 
particularly hard prior to the global financial crisis. 

Therefore, project budgets must, and now do, incorporate appropriate 
contingencies to address these physical risks as well as price 
adjustments. 

I appreciate the opportunity to comment on the draft report. 

Sincerely, 

Signed by: 

Darius Mans: 
Acting Chief Executive Officer: 

cc: Mr. David Gootnick, GAO: 

Following are GAO's comments on the Millennium Challenge Corporation's 
letter dated October 23, 2009. 

GAO Comments: 

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. 

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 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. 

[End of section] 

Appendix V: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

David B. Gootnick, 202-512-3149 or gootnickd@gao.gov: 

Staff Acknowledgments: 

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. 

[End of section] 

Footnotes: 

[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). 

[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, [hyperlink, 
http://www.gao.gov/products/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. 

[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 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. 

[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. 

[10] Section 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. 

[11] MCC used its previous compact development process for compacts 
with the three countries in which we performed fieldwork. 

[12] Previous 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, [hyperlink, 
http://www.gao.gov/products/GAO-08-730] (Washington, D.C.: June 17, 
2008); Millennium Challenge Corporation: Vanuatu Compact Overstates 
Projected Program Impact, [hyperlink, 
http://www.gao.gov/products/GAO-07-909] (Washington, D.C.: July 11, 
2007); Millennium Challenge Corporation: Compact Implementation 
Structures Are Being Established; Framework for Measuring Results Needs 
Improvement, [hyperlink, http://www.gao.gov/products/GAO-06-805] 
(Washington, D.C.: July 28, 2006); and Millennium Challenge 
Corporation: Progress Made on Key Challenges in First Year of 
Operations, [hyperlink, http://www.gao.gov/products/GAO-05-455T] 
(Washington, D.C.: Apr. 26, 2005). 

[13] Millennium Challenge Corporation, Fiscal Year 2007 Guidance for 
Compact-Eligible Countries, Chapter 30, Fiscal Accountability 
Guidelines. 

[14] Examples 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. 

[15] According 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. 

[16] According to our Standards for Internal Control in the Federal 
Government, [hyperlink, http://www.gao.gov/products/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. 

[17] GAO, Maintaining Effective Control over Employee Time and 
Attendance Reporting, [hyperlink, 
http://www.gao.gov/products/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. 

[18] GAO, Internal Control Management and Evaluation Tool, [hyperlink, 
http://www.gao.gov/products/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. 

[19] Program-and project-related expenses include disbursements for 
construction resettlements, grant expenses, investments, technical and 
construction services, and other miscellaneous expenses. 

[20] According 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. 

[21] In 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. 

[22] MCA-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. 

[23] The 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 small-and medium-size 
enterprises. The fund focuses particularly on businesses operating in 
the regions beyond Tbilisi and those operating in agribusiness and 
tourism. 

[24] MCC 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. 

[25] Other operating expenses include disbursements for technical 
assistance, construction services, and office-related expenses. 

[26] MCA 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. 

[27] The 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. 

[28] U.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). 

[29] A 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. 

[30] SEAF 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. 

[31] During 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. 

[32] According 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. 

[33] These 6 items were primarily services rendered by MCA contractors; 
without the certificates, there was no evidence that the services were 
provided to MCA-Honduras. 

[34] In 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. 

[35] Interim 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. 

[36] Audit of the Millennium Challenge Corporation (MCC) Resources 
Managed by Millennium Challenge Fund Georgia (MCG). 

[37] According 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. 

[38] Our population of inventory items excluded the 16 items that were 
missing as a result of the fiscal agent's last annual inventory count. 

[39] According to MCC, MCA-Cape Verde officials informed the local 
police of the thefts and filed insurance claims for the stolen items. 

[40] MCC 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). 

[41] Of all compact countries, the MCAs in Madagascar, Cape Verde, and 
Vanuatu continued to use country-specific procurement systems. 

[42] In 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. 

[43] Schedule 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. 

[44] As 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. 

[45] One procurement reviewed in Georgia included multiple shopping 
purchases. 

[46] We 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. 

[47] In 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. 

[48] More 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). 

[49] U.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). 

[50] U.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). 

[51] In 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. 

[52] MCC 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. 

[53] MCA-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. 

[54] The 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. 

[55] Our 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, [hyperlink, 
http://www.gao.gov/products/GAO-02-1067T] (Washington, D.C.: Sept. 19, 
2002). 

[56] GAO, Afghanistan Reconstruction: Progress Made in Constructing 
Roads, but Assessments for Determining Impact and a Sustainable 
Maintenance Program Are Needed, [hyperlink, 
http://www.gao.gov/products/GAO-08-689] (Washington, D.C.: July 8, 
2008). 

[57] We 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. 

[58] The Cape Verde roads and bridges were originally designed under a 
World Bank-funded road program that predated the compact. 

[59] U.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. 

[60] Industry 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). 

[61] MCC 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). 

[62] GAO'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, [hyperlink, 
http://www.gao.gov/products/GAO-09-3SP] (Washington, D.C.: Mar. 2, 
2009). 

[63] American Association of State Highway and Transportation 
Officials, Constructability Review Best Practices Guide (Washington, 
D.C.: August 2000). 

[64] Compact 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. 

[65] The Georgian Oil and Gas Corporation is a limited liability 
company that is under the full state ownership of the government of 
Georgia. 

[66] 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. 

[67] GAO, Standards for Internal Control in the Federal Government, 
[hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1] 
(Washington, D.C.: November 1999). 

[68] 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. 

[69] 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. 

[70] GAO, Executive Guide: Leading Practices in Capital Decision- 
Making, [hyperlink, http://www.gao.gov/products/AIMD-99-32] 
(Washington, D.C.: Dec. 1, 1998). 

[End of section] 

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