2). The compact and the  congressional notification also state that the compact will provide benefits  to approximately 65,000 poor, rural inhabitants (see fig. 3). MCC used the estimated benefits and costs to calculate the compact’s ERR  and impact on Vanuatu’s GDP and per capita income. MCC projects several  direct and induced benefits from the compact’s infrastructure  improvement projects over a 20-year period, beginning in full in 2008 or  2009 and increasing by at least 3 percent every year. MCC projects that direct benefits will include, for  example, construction spending, reduced transportation costs, and time  saved in transit on the improved roads. MCC’s Data Do Not Support Its Portrayal of Compact Benefits

MCC’s public portrayal of the Vanuatu compact’s projected effects on per  capita income and on GDP suggest greater impact than its analysis  supports. In the compact and the congressional  notification, MCC states that the transportation infrastructure project is  expected to increase “average income per capita (in real terms) by  approximately $200, or 15 percent of current income per capita, by 2010.”  MCC’s investment memo states that the compact will cause per capita  income to increase by $488, or 37 percent, by 2015. However, MCC’s underlying data show that these  percentages represent the sum of increases from per capita income in 2005  that MCC projects for each year. Our analysis of  MCC’s data shows that actual gains in per capita income, relative to  income in 2005, would be $51, or 3.9 percent, in 2010 and $61, or 4.6  percent, in 2015 (see fig. 5). In the compact and the 2006 congressional  notification, MCC states that the compact will have a transformational  effect on Vanuatu’s economy, causing GDP to “increase by an additional 3  percent a year.” Given the GDP growth rate of about 3 percent that MCC  expects in Vanuatu without the compact, MCC’s statement of a  transformational effect suggests that the GDP growth rate will rise to  about 6 percent. 7). MCC’s portrayal of the compact’s projected impact on  poverty does not identify the proportion of the financial benefits that will  accrue to the rural poor. However, MCC does not establish the proportion of local- population benefits that will go to the 65,000 poor, rural beneficiaries. Several Risks May Lead to Reduced Project Benefits

Our analysis shows that risks related to construction costs, timing of  benefits, project maintenance, induced benefits, and efficiency gains may  lessen the Vanuatu compact’s projected impact on poverty reduction and  economic growth. Although MCC considered the risk of construction  cost increases, the contingencies used in its calculations may not be  sufficient to cover actual construction costs. Timing of benefits. Although MCC’s analysis assumes compact benefits  from 2008 or 2009—shortly after the end of project construction—we  found that benefits are likely to accrue more slowly. Project maintenance. The compact’s induced benefits depend on the response  of Vanuatu tourism providers and agricultural producers. MCC counts efficiency gains—such as time saved  because of better roads—as compact benefits. Recommendations

In our report, we recommend that the CEO of MCC take the following  actions:  revise the public reporting of the Vanuatu compact’s projected impact to  clearly represent the underlying data and analysis;   assess whether similar statements in other compacts accurately reflect the  underlying data and analysis; and improve its economic analysis by phasing the costs and benefits in  compact ERR calculations and by more fully accounting for risks such as  those related to continuing maintenance, induced benefits, and monetized  efficiency gains as part of sensitivity analysis.
Why GAO Did This Study

In January 2004, Congress established the Millennium Challenge Corporation (MCC) for foreign assistance. Congress has appropriated almost $6 billion to MCC. As of March 2007, MCC had signed almost $3 billion in compacts with 11 countries, including a 5-year, $65.7 million compact with Vanuatu. MCC states that the Vanuatu compact will have a transformational effect on the country's economy, increasing per capita income and GDP and benefiting 65,000 poor, rural people. This testimony summarizes a July 2007 report (GAO-07-909) examining (1) MCC's methods of projecting economic benefits, (2) MCC's portrayal and analysis of the projected benefits, and (3) risks that may affect the compact's impact. To address these objectives, GAO reviewed MCC's analyses and met with officials and business owners in Vanuatu as well as with other donors. In its July 2007 report, GAO recommended that the Chief Executive Officer of MCC revise the public reporting of the Vanuatu compact's projected impact; assess whether similar reporting in other compacts accurately reflects underlying analyses; and improve its economic analyses by more fully accounting for risks to project benefits. MCC did not directly address GAO's recommendations but commented that it had not intended to make misleading statements and that its portrayal of projected results was factual and consistent with underlying data.

What GAO Found

MCC projects that the Vanuatu compact's transportation infrastructure projects will provide direct benefits such as reduced transportation costs and induced benefits from growth in tourism and agriculture. MCC estimated the costs and benefits over 20 years, with benefits beginning in full in 2008 or 2009 and growing each year, and it counted poor, rural beneficiaries by defining the area where benefits were likely to accrue. Using projected benefits and costs, MCC calculated the compact's economic rate of return (ERR) and its effects on Vanuatu's gross domestic product (GDP) and per capita income. MCC's portrayal of the projected impact does not reflect its underlying data. MCC states that per capita income will increase by approximately $200, or 15 percent, by 2010 and by $488, or 37 percent, by 2015. However, MCC's underlying data show that these figures represent the sum of individual years' gains in per capita income relative to 2005 and that actual gains will be $51, or 3.9 percent, in 2010 and $61, or 4.6 percent, in 2015. MCC also states that GDP will increase by an additional 3 percent a year, but its data show that after GDP growth of 6 percent in 2007, the economy's growth will continue at about 3 percent, as it would without the compact. MCC states that the compact will benefit approximately 65,000 poor, rural inhabitants, but this statement does not identify the financial benefits that accrue to the rural poor or reflect its own analysis that 57 percent of benefits go to others.We identified five key risks that could affect the compact's projected impacts. (1) Cost estimate contingencies may not be sufficient to cover project overruns. (2) Compact benefits will likely accrue more slowly than MCC projected. (3) Benefit estimates assume continued maintenance, but MCC's ability to ensure maintenance will end in 2011, and Vanuatu's maintenance record is poor. (4) Induced benefits depend on businesses' and residents' response to new opportunities. (5) Efficiency gains, such as time saved in transit, may not increase per capita income. Our analysis of these areas of risk illustrates the extent that MCC's projections are dependent on assumptions of immediate realization of benefits, long-term maintenance, realization of induced benefits, and benefits from efficiency gains.