MCC: The latest challenges and opportunities

Ghanaian school children benefitting from MCC’s investment to fund the building of 310 schools. Photo by: MCC

It was on March 14, 2002, just months after 9/11, when then U.S. President George W. Bush announced a “new compact for global development, defined by new accountability” that would soon provide an additional $5 billion in annual funding for overseas assistance. The vehicle for this compact would be the Millennium Challenge Corp. (MCC), a funding agency for developing countries committed to good governance. Nearly a decade later and as the US government tries to cut spending, the future of this new U.S. foreign assistance agency is being debated.

For Devex readers who might not be familiar with the agency, the MCC was founded on the premise that policies do matter in development. Since the 1980s, portions of U.S. development assistance have been allocated on the basis of policy performance. President Bush’s initiative broke new ground because all MCC grants, known as compacts, would only be within reach of a select group of poor countries that had taken some command of its own policies that would induce its own development.

Here’s how the MCC works: to qualify for large, five-year, untied grants for poverty reduction and economic growth, poor countries must perform better than their peers on 17 indicators that measure good governance, economic openness, and social sector investment. Once a country qualifies and is selected by the MCC, it must identify its funding priorities and develop a program proposal in consultation with civil society. Before implementation, a compact is signed between the MCC and the recipient country that records mutually agreed objectives and benchmarks. The MCC provides guidance and oversight throughout the process.

Since its establishment in 2004, the MCC has signed compacts with 23 countries totaling $8.2 billion, well below President Bush’s $5 billion annual commitment. Yet while funding for the MCC has fallen far short of expectations, there is broad agreement in the development community that the agency has nonetheless been a worthwhile experiment and effective aid delivery model. From the Philippines to Lesotho, in what has been called the “MCC effect,” an assortment of countries have enacted meaningful reform in order to join the ranks of compact countries. And beyond creating incentives for policies widely believed to support development, the MCC is also producing results on the ground. According to MCC CEO Daniel W. Yohannes, in testimony before Congress, MCC programs have trained over 150,000 farmers and supported construction of more than 890 kilometers of road.

All the more important is that the MCC appears to be living up to its promise of more effective aid. The 2011 peer review of the OECD’s Development Assistance Committee (DAC) commended the agency: “Through the MCC, the US has shown that it can deliver development co-operation that is in line with the principles on effective aid.” And in the 2010 Quality of Official Development Assistance (QuODA), a joint effort of the Brookings Institution and the Center for Global Development, the MCC was the only large U.S. aid agency to score in the top third of all aid agencies on three of its four measures of aid effectiveness. President Barack Obama appears to be heeding these findings, with his administration’s global development policy adopting many of the principles that have underpinned the MCC’s work.

In Washington, the conversation continues on how the MCC can build on its progress in a budget-constrained environment. These are just some of the issues that have figured in the discussion.

Funding

From a high of $1.75 billion in fiscal 2007, MCC’s budget in fiscal 2011 approached just $900 million – the second lowest in its history. For fiscal 2012, the Obama administration has requested $1.125 billion, a number that is unlikely to hold as both the House and Senate have proposed a budget of roughly $900 million. The August deal to raise the debt ceiling – which reclassified foreign assistance as security spending – may very well translate into more cuts during congressional budget negotiations later this year. Paul O’Brien of Oxfam warns that if the MCC budget stays below $1 billion, then the agency could be “budgeted out of existence.” But with almost six in 10 Americans favoring a reduction in foreign aid, the MCC might consider itself fortunate especially in view of the severe cuts the House has put on the table for the rest of the international affairs budget. The questions swirling around MCC and its funding have led to some thought-provoking proposals, including the one co-written by Devex’s president and published in the Washington Post: transform MCC into a multilateral agency. For the foreseeable future, however, the MCC will have to continue to make do with less.

Compact Concurrence and Length

The Obama administration has called upon Congress to grant the MCC authority to sign concurrent compacts as well as compacts longer than 5 years. Proponents of concurrent compact authority argue that once a country signs a compact, it has less of an incentive to perform knowing that it will not be able to secure further MCC assistance in the near future. And as pointed out in a Center for Global Development blog piece, concurrent compact authority would enable the MCC to sign a compact in one year while anticipating additional funding through another compact the following year, affording the agency some space to adapt to budget uncertainty. Meanwhile, longer compact authority would provide the MCC and compact countries the ability to adjust their time frames in response to challenges during implementation. Only the Senate has backed longer and concurrent compact authority. Assuming no further legislative action is taken, the MCC will have to make tough choices about when it can sign compacts with potentially major partner countries such as Indonesia.

Corruption Indicators

To become eligible for MCC funding, a country must pass the control of corruption indicator, the only one among 17 indicators that is “pass-fail.” The MCC can also suspend eligibility or terminate compacts for countries whose commitment to good governance deteriorates significantly, authority that it has exercised. These, among other safeguards, have been insufficient to quiet concerns that MCC funds might still be misused. In particular, reports of the Senegalese president shelling out $27 million for a 164-foot monument have cast doubt among some members of Congress over the wisdom of the MCC’s $540 million compact with Dakar. Interestingly, House Democrats have recently challenged the accuracy of the control of corruption indicator, even attempting to waive the pass-fail requirement for this indicator in fiscal 2012. It is not secret that the least developed countries are frequently the most corrupt so it will be interesting to see how the MCC treats those countries that desperately need help, but have failed to commit to anti-corruption. In these times of austerity, the last thing any foreign aid agency needs is to be linked to a corrupt government. Historically, the MCC has exercised discretion in its selection of compact countries and also regularly revises its indicators in response to its own internal evaluations as well as consultations with key stakeholders.

Relationship with USAID

With enthusiasm for the MCC in more conservative quarters of Washington predicated on defunding the U.S. Agency for International Development (USAID), it is not surprising that the two agencies are often pitted against one another. Others have even suggested that the two agencies will be merged in some form or fashion. Advocates for USAID emphasize that the MCC and its selective approach was intended to complement USAID’s work rather than substitute for it. For instance, USAID has significant disaster relief or and post-conflict capabilities while MCC has none. But in countries where both USAID and theMCC operate, as far back as 2007, questions have been raised over just how effectively the MCCcoordinates with USAID to ensure that their programs are complementary. While the Obama administration has made more effective interagency coordination a top priority in its global development policy, House Republicans appear less than convinced. Rep. Kay Granger (R-Texas), who chairs the influential House Appropriations Subcommittee on Foreign Operations and generally supports the MCC, is skeptical of the need for multiple funding streams in MCC compact countries.

Procurement Policy

In August 2010, Sen. Jim Webb (D-Va.) expressed concerns over MCC contracts in Africa being awarded to Chinese state-owned enterprises (SOEs). Twelve of the 23 compacts signed to date by the MCC have been with sub-Saharan African countries and Chinese firms continue to win major infrastructure contracts across the continent. Senator Webb singled out the Sinohydro Corporation, accusing the state-owned engineering and construction firm of advancing Beijing’s economic and political interests. Just two months later, with the aim of leveling the playing field, the MCC revised its procurement guidelines to prohibit most SOEs from competing for contracts with the agency. Some argue that what could be a politically motivated overhaul of the MCC’s procurement policies flies in the face of its longstanding commitment to untied aid. A May 2011 MCC Office of the Inspector General (OIG) review of MCC’s contracts with Sinohydro in Mali, which found no major issues in the quality of the firm’s construction or its health and safety practices, opens the door to even more questions over whether the exclusion of SOEs is in fact an improvement in the MCC’s procurement policies.

About the author

  • Piccio

    Lorenzo Piccio

    Lorenzo is a former contributing analyst for Devex. Previously Devex's senior analyst for development finance in Manila.