Overcoming corruption: A litmus test for MCC

Millennium Challenge Corp. CEO John Danilovich and Philippine President Gloria Arroyo appear at a press conference at the MCC headquarters in Washington, D.C. The Philippine government partners with MCC on anti-corruption initiatives. Photo by: MCC

In 2006, the Millennium Challenge Corp. armed the Philippines with $21 million to combat corruption, which has long tarnished the image of this Southeast Asian country in the eyes of its own people and the world’s.

With a score of 2.3, the Philippines ranked 141st among 180 countries in Transparency International’s 2008 Corruption Perception Index. The index measures perceived levels of public sector corruption based on business and expert surveys. Countries are scored from a scale of zero, or highly corrupt, to 10, or highly clean.

MCC bases its corruption indicator on the World Bank Institute’s Control of Corruption Index. Its data report on the Philippines shows that by 2007, the country belonged within the 25th to 30th percentile. In percentile ranking, higher values indicate better performance.

Bolstering anti-corruption fight in the Philippines

The MCC grant enabled the Philippines to fight corruption by bolstering key government institutions - the Office of the Ombudsman and the Department of Finance - through a technical assistance program focused on strengthening investigation and surveillance capabilities, improving information management, training staff and procuring some equipment.

The ombudsman investigates and prosecutes high-level government officials for graft and corruption. Meanwhile, three units under the Finance Department - the Revenue Integrity Protection Service, Run After Tax Evaders and Run After the Smugglers - support revenue collection efforts of a central government struggling with chronic fiscal deficits.

“Indications are that program has been relatively successful and in some cases has exceeded expectations,” said Troy Wray, MCC’s associate country director and transaction team leader.

Shortly after MCC approved the threshold assistance for the Philippines, President Gloria Macapagal Arroyo committed to matching the $21 million fund one-for-one.

“I think that was a big statement that MCC was impressed with,” remarked Maria Longi, director of non-African threshold programs.

The threshold program provided extensive training to the staff of the ombudsman on trial advocacy and case management, resulting in a 35 percent conviction rate by the end of 2007. The target was an increase to 40 percent, from 30 percent.

It also launched an alternative dispute mechanism that substantially cut back the backlog of pending cases at the ombudsman.

Under the program, the number of corruption and anti-smuggling cases filed by RIPS and RATS went up from about half a dozen to 21 by December 2007. Likewise, revenue district offices of the Bureau of Internal Revenue were computerized to strengthen tax administration.

In August 2008, the ombudsman launched the Center for Asian Integrity with the support of MCC’s threshold program and the U.S. Agency for International Development through the Asia Foundation.

“This center, the first in Asia, is meant to serve as an effective mechanism in integrity and accountability building of public personnel and anti-corruption advocates,” Ombudsman Merceditas Gutierrez explained.

Once established, the center will develop training programs on anti-corruption know-how and values, as well as courses on how to improve integrity and governance.

Longi noted that corruption is “definitely the most common” indicator threshold countries are addressing. Activities vary from country to country but generally deal with corruption in the public sector and tax administration.

“In many of these [countries] what you see is that implementationwise you get a high level of government commitment to address the issue,” Longi said. “When you get down to the implementation, there’s resistance, which you would expect. Those are things you need to educate, get the high-level government to communicate with their working level folks.”

Is a technical assistance program that trains people and sets up computer systems truly capable of curtailing corrupt practices that are unfortunately engrained and, to an extent, tolerated socially? Longi said stakeholders are under no illusions.

“I would agree that there is an aspect of corruption that is definitely rooted in practices, culture and generation and it’s a long-term thing to fix. I think putting in computers and systems that make government systems more transparent do help reduce corruption. It’s not all that’s needed, but it helps an aspect of the fight against corruption,” Longi said.

She stressed that MCC does not expect to eliminate corruption through the program.

“But what a government commits to doing in a threshold program is something that is public,” Longi noted. “Anybody who reads those can make their government accountable for commitments they’re making.”

Threshold countries come to grip with corruption

Of the 19 countries MCC is supporting through threshold programs, 13 are fighting corruption, indicating how big an obstacle corruption is to accessing sizable grants from the U.S. government corporation.

“Corruption undermines every aspect of sustainable development” and is “the single most important determinant to access hundreds of millions of dollars in MCC grant assistance,” it stated in a working paper.

John Danilovich, MCC chief executive, said in 2007: “Because corruption suffocates development, reduces aid effectiveness and undermines the conditions for sustainable progress through private enterprise activities, we see it as a fierce impediment to poverty reduction and economic growth. And, we are addressing it with fierce determination and priority importance.”

To date, MCC has given $440 million to these 19 countries on the verge of qualifying for larger funding under a Millennium Challenge Account compact.

MCC evaluates a country’s performance in the areas of ruling justly, investing in people and encouraging economic freedom through 17 policy indicators developed by independent third-party institutions including the World Bank Institute, Freedom House, International Monetary Fund and UNESCO.

To qualify for threshold assistance, a country should demonstrate remarkable commitment to reform particularly in areas where they fall short of MCC’s eligibility criteria.

Albania, Indonesia, Kenya, Kyrgyz Republic, Malawi, Moldova, Niger, Paraguay, Peru, the Philippines, Uganda, Ukraine and Zambia are all trying to crack down on corruption. The other MCC threshold countries are Burkina Faso, Guyana, Jordan, Rwanda, Tanzania, and São Tomé and Príncipe.

The road to a compact

In March 2008, MCC judged the Philippines eligible for compact funding because of its consistent performance on the indicators and the successful implementation of the threshold program.

Wray noted: “The government has indicated that notwithstanding the early successes of that program, they want to continue reforms under RATE, RATS, RIPS, and indicated to us that they are interested in continuing some of those activities under a compact.”

Arroyo appointed economist Dante Canlas executive director of the core team responsible for putting together a compact proposal. He is a professor at the University of the Philippines and a former Cabinet member, having served as director-general of the National Economic and Development Authority.

How long is the road to an MCA compact? The rigorous process has five stages: eligibility; compact design and development of country proposal; due diligence; negotiation, approval and signing; entry into force and implementation. The Philippines is in the second phase.

In addition, a country has to remain eligible throughout the period it is applying for a compact, as MCC evaluates eligibility annually.

The first step toward a proposal is to identify constraints to growth. MCC and the core team agreed to base this on “Philippines: Critical Development Constraints,” a technical study funded by the Asian Development Bank.

Canlas said the core team and MCC agreed on four critical areas that hinder the Philippines’ growth: lack of fiscal space to finance needed public investment, inadequate spending on infrastructure, poor investment climate, and issues of governance, particularly corruption and political stability.

The team has also considered emerging priorities in the country’s medium-term development plan that overlap with the identified constraints. In connection with the burning issue of the global food crisis, some projects addressing food security are also being evaluated.

Canlas’s team has been gathering project ideas that address the constraints to growth and poverty eradication from public and private sector stakeholders. Some national government agencies have presented proposals that would be appraised based on several fundamental criteria.

Projects will be ranked according to economic and social effectiveness, hence those with the best rates of return will likely make the cut, Canlas indicated. Likewise, projects in relatively advanced states of development, meaning those which at least have completed technical analysis, will be prioritized.

Canlas added: “A project has to be completed and implemented in five years after signing. With that in mind, we develop projects that have very minimal implementation risks” such as right-of-way or land issues.

“Promising” proposals Canlas mentioned were in the areas of food security, transport, building rural roads and providing power in the countryside. Wray said the government has also “indicated its willingness to continue anti-corruption and governance reforms under the compact.”

Wray said projects should have “the greatest impact on people” in line with MCC’s mission of alleviating poverty through sustainable growth. He expects his team to be back in Manila before year-end to evaluate candidate projects with the Philippine government.

“From that point forward, we engage in a collaborative and iterative process to develop concepts to the point where we can appraise them and ultimately take them to our board,” Wray said.

Canlas expects to complete a compact proposal within a self-imposed deadline of six to 12 months from his appointment in June this year.

For the government, “sooner is preferred than later,” Canlas remarked. Arroyo will be stepping down from office in 2010 and a multimillion-dollar grant from MCC is a legacy her administration is eager to leave behind. Even with the clock ticking, however, Canlas denied there is political pressure on his team.

“My consideration is project quality,” he said.

While he believed the Philippines to be “on the right path” so far, Wray said the timeline should not be the supreme concern.

“I think it’s important at this point in time to get the process right … Trying to take shortcuts and short-circuit the process could inevitably delay things,” he said, acknowledging, though, that he had not seen signs that these would happen.

If the frank exchange between MCC and the Philippine team is of any indication, Canlas has reason to be optimistic.

He said: “The area for convergence is quite huge [in terms of] the preferred approaches of MCC in formulating development projects and shepherding them to their final implementation form and how we do it here.”

About the author

  • News placeholder image

    Josefa Cagoco

    Sef Cagoco served as one of Devex's international development correspondent from mid-2008 to mid-2009. Her writing focused on social entrepreneurship and multilateral agencies such as the U.N. and Asian Development Bank. She previously worked as senior reporter for the national daily BusinessWorld and a production journalist for the Financial Times.