Millennium Challenge Corporation:

Compacts in Cape Verde and Honduras Achieved Reduced Targets

GAO-11-728: Published: Jul 25, 2011. Publicly Released: Jul 25, 2011.

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The Millennium Challenge Corporation (MCC) was established in 2004 to help developing countries reduce poverty and stimulate economic growth through multiyear compact agreements. As of June 2011, MCC had signed compacts with 23 countries totaling approximately $8.2 billion in assistance. MCC asks countries to develop compacts with a focus on results and effective monitoring and evaluation. MCC sets targets, which may be revised, to measure the compact results. In late 2010, the Cape Verde and Honduras compacts reached the end of the 5-year implementation period. This report, prepared in response to a congressional mandate to review compact results, examines the extent to which MCC has (1) achieved performance targets and sustainability for projects in Cape Verde and Honduras and (2) assessed progress toward the goal of income growth and poverty reduction. GAO analyzed MCC documents and interviewed MCC officials and stakeholders in Washington, D.C., Cape Verde, and Honduras.

In its first two completed compacts, Cape Verde and Honduras, MCC met some key original targets and many final targets, but the sustainability of some activities is uncertain. In Cape Verde, MCC altered the scope of its three projects, meeting some key original targets and many final targets by the compact's end. For example, an activity to upgrade and expand a major port in Cape Verde, which represented almost 50 percent of the $110.1 million compact at signature, faced inaccurate early planning assumptions and increased costs. As a result, MCC split the port activity into two phases, funding the completion of the first phase--which covered about one-third of total expected costs for the port activity. In Honduras, MCC met a key original target and most final targets by the end of the $205 million compact. For example, MCC constructed approximately half of the planned highway and all rescoped secondary roads. In addition, several compact activities in Cape Verde and Honduras face challenges to long-term sustainability. Although MCC took steps to provide for sustainability, the governments of both Cape Verde and Honduras may have difficulty maintaining the infrastructure projects in the long term due to lack of funding, among other challenges. For example, MCC included privatization of port operations and road maintenance funding as conditions of the Cape Verde compact. However, the government has had difficulty meeting these requirements, calling into question the long-term sustainability of some projects. In Honduras, both uncertain government funding for road maintenance and design decisions on construction projects may jeopardize the sustainability of MCC-funded roads. MCC impact evaluations for the Cape Verde and Honduras compacts are ongoing but delayed, and updated economic rate of return (ERR) analyses of the largest compact projects have not been well documented or linked to revised targets. MCC has taken steps to modify impact evaluation designs in response to implementation challenges and delays. For example, challenges in implementing the original evaluation design for the farmer training and development activity in Honduras led MCC to enhance the methodology by adding a supplemental design. Furthermore, updated ERR analyses of projects representing over 50 percent of compact funds have not been well documented or supported. For example, MCC updated its ERR analysis for the Honduras transportation project, but documentation for the underlying quantitative analysis supporting the updated ERR is not available. Additionally, ERR analyses updated in response to rescoping compact activities were not consistently linked to revised targets and indicators. For example, MCC updated the ERR analysis for the watershed management and agricultural support project in Cape Verde, but the analysis does not reflect the values and numerical ranges of key revised targets. In addition, although original ERRs are estimated for a 20-year period, MCC has not developed guidance for updating ERRs following compact completion. Re-estimated end-of-compact ERRs will likely be lower than predicted at compact signature. GAO recommends that MCC (1) work with countries to make decisions that reduce long-term maintenance needs, (2) ensure updated economic analyses are documented and consistent with monitoring targets, and (3) develop guidance for updating economic analyses following compact completion. MCC agreed with the intent of all three recommendations.

Recommendations for Executive Action

  1. Status: Open

    Comments: GAO is monitoring agency effects to address the recommendation.

    Recommendation: To maximize the sustainability of MCC-funded infrastructure projects and to reduce the amount of maintenance required after compact completion, the MCC Chief Executive Officer should work with partner countries to make project planning, design, and construction decisions that reduce long-term maintenance needs and costs.

    Agency Affected: Millennium Challenge Corporation

  2. Status: Open

    Comments: GAO is monitoring agency effects to address the recommendation.

    Recommendation: To enhance the accuracy of MCC's ERR projections, the MCC Chief Executive Officer should ensure, during compact implementation, that updated ERR analyses are well-documented and supported and that key revised indicators and targets are reflected in updated ERR analyses

    Agency Affected: Millennium Challenge Corporation

  3. Status: Closed - Implemented

    Comments: MCC agreed with the recommendations in the GAO report, and in response to our recommendation, has strengthened its guidance around ERRs. More specifically, in January 2012, MCC revised and implemented Guidelines for Country Team and Peer Review of Cost-Benefit Analysis, which established the process for Country Team and Peer review of cost-benefit analyses and the resulting estimates of ERR. Furthermore, these guidelines state that all cost-benefit analysis models are updated at closeout (within 90 days of the end of the closure period). These steps support closing GAO's recommendation as implemented.

    Recommendation: To enhance the accuracy of MCC's ERR projections, the MCC Chief Executive Officer should develop guidance for re-estimating ERRs at compact completion and during the long-term period when compact benefits are realized to ensure that updated estimates reflect the most recent and reliable information available for MCC's compact investments and outcomes.

    Agency Affected: Millennium Challenge Corporation

 

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