These analyses include  establishing the minimum ERR that the compact should achieve,  projecting the compact’s ERR, and estimating the compact’s impact on  income and growth. 1). Economic Analyses

For each compact proposal, MCC and the eligible country conduct  economic analyses, which MCC uses to inform its decisions to fund  compacts and report to Congress and the public. 2). 3.) MCC Used Different Time Frames and Methods to Calculate ERRs but Is Taking Steps to Increase Consistency

MCC used different time frames to calculate project-level ERRs; these  differences did not affect the ERR significantly in 18 of the 20 compact  projects we examined, but two ERRs would fall below the minimum ERR  if MCC applied the 20-year time frame it used for other compacts and  similar projects. In addition, we found that MCC used varying  methods to account for the costs of same-sector projects, although its  approaches to determining benefits were generally similar. MCC also used  two different methods to calculate compact-level ERR; however, the  choice of method did not change the ERRs significantly. MCC  has recently taken steps to standardize elements of its economic analyses  and improve its records management and plans to implement additional  measures. MCC Used Different Time Frames for Project and Compact ERRs

In its ERR calculations for 20 projects included in the four compacts we  reviewed, MCC used a 20-year time frame for 9 projects and used different  time frames for 11 projects. For these three compacts, MCC’s records management did not fully  preserve the information and analysis used to support the investment  decision. MCC also used different methods to estimate numbers of  compact beneficiaries, but stated that it is taking steps to provide more  detailed guidance for estimating number of beneficiaries. MCC Identified and Corrected Analytic Errors for Three Compacts

In responding to our questions about its impact analyses for Armenia, El  Salvador, and Mozambique, MCC identified a number of analytic errors in  its projections of impact on income and poverty. MCC subsequently  corrected these errors, generally reducing the projected impacts on  income and poverty for each compact. MCC also  used the wrong baseline in projecting poverty effects. In  correcting these errors, MCC lowered its projections of income and poverty impact. Mozambique. Revised Projections Would Not Have Changed Funding Decisions, but Future Compact Impact Projections Will Undergo Review

According to MCC officials, the revisions to its initial calculations of  compact impact on income and poverty for Armenia, El Salvador, and  Mozambique would not have changed MCC’s decision to recommend each  compact to the MCC Board. However, MCC has not documented its procedures for conducting these  reviews, so it is unclear what criteria and level of detail the peer review  includes. MCC Used Varying Methods to Project Compact Impact on Income and Poverty

MCC used different methods to project the four compacts’ impact on  income and poverty, limiting the estimates’ comparability and replicability. Although the method chosen can affect the results, MCC has not provided  preferred methods, or guidelines for selecting a method, for these  calculations. This method  entailed summing the total benefits of individual compact projects and  adding them to the income that would have prevailed without MCC. For Lesotho, MCC estimated the impact of the compact on the country’s  GDP growth rate using the published results from a World Bank  simulation model. For one revised projection,  MCC used its initial elasticity based on cross-country data. The transaction team’s choice of  method for defining beneficiaries, in turn, affects the compact-level  projections of impact on income and poverty. Appendix I: Objectives, Scope, and Methodology

At the request of the chairman of the House Committee on Foreign Affairs,  we assessed the Millennium Challenge Corporation’s (MCC) economic  analyses, including its projections of the compact’s economic rate of  return (ERR), changes in income and poverty, and the number of  beneficiaries. We also reviewed  MCC’s guidance on projecting these economic impacts. 2.
Why GAO Did This Study

In January 2004, Congress established the Millennium Challenge Corporation (MCC) for foreign assistance. Eligible countries submit compact proposals for MCC funding for projects aimed at reducing poverty through economic growth. To assess the proposed compacts' likely impact, MCC performs economic analyses estimating the compacts' economic rate of return (ERR) and effects on income and poverty as well as the number of compact beneficiaries. MCC uses these analyses to inform its decisions to fund proposed compacts and to inform Congress and the public about its progress in achieving its mission of poverty reduction through economic growth. GAO was asked to examine MCC's projections of (1) ERR and (2) compacts' impact on income and poverty as well as numbers of beneficiaries. GAO reviewed MCC's stated impacts and analyses for four MCC compacts that represented 41 percent of MCC's compact assistance and met with MCC officials.

What GAO Found

MCC used different time frames and methods to calculate ERRs for its compacts with Armenia, El Salvador, Lesotho, and Mozambique. In calculating ERR for 20 projects within the compacts, MCC used a 20-year time frame for 9 projects and used different time frames for the other 11. In 2 of the 11 projects, using a 20-year time frame, as MCC used for similar projects, would reduce the ERR below the level MCC set as the minimum acceptable ERR. At the compact level, MCC's use of varying time frames did not affect the ERRs significantly. MCC used varying methods to account for the costs of same-sector projects, although its approaches to determining project benefits were generally similar. MCC also used two different methods to calculate compact-level ERR; however, the choice of method did not reduce it below the minimum ERR. In three of the four compacts that we reviewed, MCC did not retain documentation of the economic analyses used to support the investment decision, but continued to modify the analyses. MCC has recently begun to standardize elements of its economic analyses and centralize its records management. MCC identified and corrected analytic errors in its projections of impact on income and poverty. MCC also used varying methods to project these impacts. In responding to GAO's questions about its published projections of impact on income and poverty, MCC identified analytic errors for three of the four compacts and, in correcting these errors, generally lowered the projected impacts. Correcting these errors raised one projection by 5 percent but reduced others by 3 percent to 96 percent. According to MCC officials, the revised projections would not have affected MCC's decision to recommend signing the compacts. The officials noted that, in the future, compact impact projections will undergo peer review. However, MCC has not documented procedures for these reviews. MCC used varying methods for its projections of impact on income and poverty, limiting comparability and replicability across compacts. To project impact on income for Armenia, El Salvador, and Mozambique, MCC estimated the compacts' impact by summing the total benefits of individual compact projects and adding them to the income that would have prevailed without MCC. However, for Lesotho, MCC estimated the impact on income based on the published results of a World Bank model based on elements different from those of the MCC compact. In response to our questions, MCC revised its initial estimate of the effect of income growth on poverty for Mozambique by presenting two estimates, based on Mozambique-specific and cross-country data, respectively. Although a number of methods for projecting poverty impact are valid, the method chosen can affect the results, and MCC's guidelines do not identify preferred methods for these calculations. MCC also used varying methods to estimate numbers of beneficiaries for the compacts and has not provided specific criteria for defining beneficiaries; however, MCC officials reported they are taking steps to provide more detailed guidance.