MCC's next chapter: How funding, second compacts will shape the debate

Tomorrow, the Millennium Challenge Corp.’s board of directors will hold their much anticipated fourth quarter meeting in Washington. Board members are expected to tackle, among other issues, which countries will be eligible for compact assistance in fiscal 2014. MCC’s board meets at a critical time of transition for the agency. Tapped by U.S. President Barack Obama as the next U.S. ambassador to the Organization for Economic Cooperation and Development, MCC CEO Daniel Yohannes is stepping down after four years at the helm. Dana Hyde, associate director for general government programs in the U.S. Office of Management and Budget, has been nominated by Obama to replace Yohannes. For Devex readers who might not be familiar with MCC, the agency pioneered a more performance-based aid model within the U.S. foreign aid regime. In order to qualify for large, five-year, untied grants for poverty reduction and economic growth, poor countries must perform better than their peers on 20 indicators that measure good governance, economic openness and social sector investment. Since its establishment by the Bush administration in 2004, MCC has approved 28 compacts, as the agency’s grant agreements are called, valued at more than $9.6 billion. (See map above). Despite early skepticism of MCC’s performance-based aid model, there is now broad agreement in the development community that the agency has proven to be an effective aid program. Most notably, in what has been called the “MCC effect,” an assortment of countries, including Lesotho and Sierra Leone, have enacted meaningful reform in order to join the ranks of compact countries. “Through the MCC, the US has shown that it can deliver development co-operation that is in line with the principles on effective aid,” reads the OECD Development Assistance Committee’s 2011 peer review of the U.S. aid program. Beyond creating incentives for policies widely believed to support development, the MCC is also producing results on the ground. According to the agency, its programs have trained more than 210,000 farmers and supported construction of at least 1,712 kilometers of road. Bolstered by its reputation for results, MCC has managed to sustain a broad base of bipartisan support over the past decade — an impressive feat amid the partisan rancor and budget-constrained environment in Washington. Drawing lessons from MCC, the Obama administration has even integrated performance-based approaches into the U.S. Agency for International Development’s engagement with El Salvador, Ghana, the Philippines and Tanzania through its Partnership for Growth program. Nearly entering its second decade, the conversation is now focused on how the MCC can build on its progress and continue to improve development outcomes in compact countries. These are just some of the issues that have recently figured in the discussion. Click on the chart to view a larger version. Funding Back when MCC was first conceived, Bush set an ambitious funding target for the agency — $5 billion per year by 2006. Despite MCC’s broad base of bipartisan support, it has struggled to attract anywhere near that level of funding. MCC’s budget has stagnated at roughly $900 million a year, down from a high of $1.75 billion in fiscal 2007. Further belt-tightening could be in store for MCC as the fiscal 2014 U.S. foreign aid budget makes its way through Congress. While both the Obama administration and the Democratic-controlled Senate have proposed roughly $900 million for MCC, House Republicans have signed off on only $702 million. MCC’s final fiscal 2014 budget will likely be in the $800 million to $900 million range, according to Sarah Rose, senior policy analyst at the Center for Global Development. MCC officials have warned that the agency may not have enough funding to follow through with its plans to help Liberia, Morocco, Niger, Sierra Leone and Tanzania develop their compacts in fiscal 2014. Amid MCC’s budgetary challenges, Yohannes told Devex earlier this year that MCC was increasingly turning to the private sector to co-finance its programming. Others have called for MCC to restructure its operations — perhaps along the lines of the Overseas Private Investment Corp. — in order to attract private capital for its compacts. Second compacts In 2011, MCC announced plans to pursue second, five-year compacts with its partner countries. “In some cases, the greatest opportunity for impact may be in deepening partnerships with existing MCC partner countries,” Yohannes clarified at the time. Since then, three of the six compacts which MCC has approved have been with previous partners: Cape Verde, El Salvador and Georgia. Four of the seven MCC compacts under development are also in support of previous partners: Benin, Ghana, Morocco and Tanzania. Some in the U.S. aid community — as well as in Congress — make the case that instead of awarding second compacts, MCC should focus its limited resources on extending the agency’s reach to new partner countries. They contend that the prospect of a second compact could weaken incentives for MCC’s partner countries to perform well the first time around. “Does this alter the fundamental concept of the Millennium Challenge Corporation of providing targeted, time-limited support if they say well, we’re almost there but we just need to go again?” Senator John Barrasso (R-Wyo.) asked Hyde during her November confirmation hearing. Hyde reassured Barrasso that she was sensitive to concerns that MCC assistance might become open-ended and suggested that she would be open to instituting stricter terms for countries seeking second compacts. According to MCC, its board considers a country’s track record on its first compact before awarding a second compact. Corruption indicator To become eligible for MCC funding, a country must pass the control of corruption indicator — the only one among the 20 indicators that has been “pass-fail” throughout the agency’s history. MCC’s control of corruption indicator is produced annually by the Brookings Institute and the World Bank. MCC was the first donor agency to tie eligibility for assistance to performance on a publicly available, third-party measure of corruption. Yet while MCC’s control of corruption indicator has been described as “state of the art” by some aid experts, members of Congress have been far more skeptical. In particular, widely publicized allegations of corruption in Senegal — recipient of a $540 million MCC compact — have prompted members on both sides of the aisle to cast doubt on the accuracy of the control of corruption indicator. Concerned that the control of corruption indicator “may not be sufficiently timely or effective,” the Senate Appropriations Committee recently directed MCC to more closely coordinate its evaluation of corruption in candidate countries with the Department of State, including its bureau of democracy, human rights and labor. Even as they largely stand by the control of corruption indicator, MCC officials emphasize that it is only one of a number of anti-corruption safeguards which the agency uses. In an October report issued to Congress, MCC sought to reassure members that the agency has established a range of measures designed to prevent, detect and mitigate corruption over the course of compact implementation. Moreover, MCC has the authority to suspend eligibility or terminate compacts for countries whose anti-corruption commitment deteriorates significantly. Relationship with USAID With enthusiasm for MCC in more conservative quarters of Washington predicated on slashing funding for USAID, it is not surprising that the two agencies are often pitted against one another. Most notably, the 2012 Republican nominee for vice president and House Budget Chairman Paul Ryan has called for USAID to eventually be consolidated under an MCC-led and performance-based aid agency. Advocates for USAID make the case that MCC and its selective approach was intended to complement USAID’s work rather than substitute for it. Even MCC officials concede that the agency’s five-year compact timeline means that the agency may be ill-suited for the longer-term “soft” capacity-building programs that are commonplace at USAID. Tellingly, MCC projects have overwhelmingly been in the infrastructure sector — a stark contrast to USAID’s more diverse portfolio. Given USAID’s size and standing, few expect conservative proposals to bring MCC under USAID’s roof to gain much traction anytime soon. For the foreseeable future, MCC and USAID will remain separate entities, which raises the question: How effectively are the two agencies coordinating their programming? In his 2010 presidential policy directive on global development, Obama had pledged to improve interagency coordination across the U.S. aid regime. Despite lingering questions in Congress, there are some signs that the administration’s efforts are bearing fruit as far as USAID and MCC are concerned. For instance, in Georgia, MCC’s second compact with Tbilisi has been facilitating USAID Georgia’s planned exit from the basic education sector. USAID operates missions in the vast majority of MCC compact countries. Devex published a version of this article in October 2011. Join the Devex community and gain access to more in-depth analysis, breaking news and business advice — and a host of other services — on international development, humanitarian aid and global health.