Eligible countries may develop and propose projects, with guidance from  MCC, with the goal of achieving economic growth and poverty reduction. 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. 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. 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 shortcomings in the FAPs, in November 2008, MCC  developed a FAP template with suggested policies and procedures to help  compact countries strengthen their FAPs. These control deficiencies and inadequate  monitoring of the MCAs’ implementing entities, increase the risk of fraud,  waste, and abuse of MCC program funding. 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. 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. The  MCAs in Honduras, Georgia, and Cape Verde all began their compacts  using country-specific procurement guidelines. 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. Two of five roads in Cape Verde were eliminated from the contractor’s  project scope due to increased costs. 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. Cost escalation. 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. MCC also reviews key  documents, such as bidding packages, contract documents, and technical  project requirements. In some instances,  the MCAs contracted with a commercial project management consultant  to act as a project manager on the MCAs’ behalf. MCC also works with the  MCAs’ supervisory boards to restructure projects when needed to keep  them within their budgets and compact time frames. Finally, MCC is conducting oversight and  has taken steps to advance planning for infrastructure projects. 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. 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.
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.