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Millennium Challenge Corporation

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Order Code RL32427 CRS Report for Congress Received through the CRS Web Millennium Challenge Account: Implementation of a New U.S. Foreign Aid Initiative Updated June 2, 2006 Larry Nowels Updated August 1, 2006 Curt Tarnoff Specialist in Foreign Affairs Foreign Affairs, Defense, and Trade Division Congressional Research Service ˜ The Library of Congress Millennium Challenge Account: Implementation of a New U.S. Foreign Aid Initiative Summary In a speech on March 14, 2002, President Bush outlined a proposal for a major new U.S. foreign aid initiative. The program, referred to as the Millennium Millennium Challenge Account (MCA), is managed by the Millennium Challenge Corporation (MCC) and provides assistance, through a competitive selection process, to developing nations that are pursing political and economic reforms in three areas: ruling justly, investing in people, and fostering economic freedom. If fully implemented, the initiative would represent one of the largest increases in foreign aid spending in half a century, outpaced only by the Marshall Plan following World War II and the Latin America-focused Alliance for Progress in the early 1960s. The MCC differs in several respects from past and current U.S. aid practices: ! ! ! ! the size of the $5 billion commitment; the competitive process that rewards countries for past and current actions measured by 16 objective performance indicators; the pledge to segregate the funds from U.S. strategic foreign policy objectives that often strongly influence where U.S. aid is spent; and the requirement to solicit program proposals developed solely by qualifying countries with broad-based civil society involvement. The Administration sought a combined $6.8 billion for MCA program, FY2004FY2006, while Congress appropriated $4.2 billion, or roughly two-thirds of the total sought. For FY2007, the MCC requests $3 billion and the House Appropriations Committee recommends $2, the House approved $2 billion, and the Senate Appropriations recommends $1.9 billion. As announced by the President in March 2002, the initial plan had been to fund the MCC annually at $5 billion by FY2006. Congress authorized the MCC in P.L. 108-199 (January 23, 2004). Since that time, the MCC’s Board of Directors has selected 23 eligible countries for FY2004 — FY2006, and signed eight Compacts with Madagascar (April 18, 2005), Honduras June 13, 2005), Cape Verde (July 4, 2005), Nicaragua (July 14, 2005), Georgia (September 12, 2005), Benin (February 22, 2006), Vanuatu (March 2, 2006), and Armenia (March 27,2006). A ninth Compact has been approved with Ghana (July 2006). Other MCA implementation matters continue to unfold, including the relationship of MCA and USAID, how to support “threshold” countries, and the country programs. A growing question raised by some Members of Congress concerns the level of funding to support MCC programs. Some, noting that proposals received by the Corporation in 2004 totaled more than $4.2 billion, fear that insufficient funds might force the MCC to reduce the number of recipients or the size of the grants. Others, however, believe that the slower-than-anticipated pace of Compact agreements means that the Corporation has or will have enough resources, and have supported reductions in MCC budget requests. This report will be updated as events unfold. Contents Most Recent Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 MCC Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 MCC Implementation Steps and Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Establishing the Millennium Challenge Corporation . . . . . . . . . . . . . . . . . . 5 Naming FY2004 Candidate Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Publishing the Selection Criteria and Methodology . . . . . . . . . . . . . . . . . . . 6 Country Selection — FY2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Naming Candidate Countries — FY2005 . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Country Selection — FY2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Continuity in the FY2005 Selection Round . . . . . . . . . . . . . . . . . . . . . 12 Excluding More Countries that Qualified . . . . . . . . . . . . . . . . . . . . . . 12 Naming Candidate Countries — FY2006 . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Country Selection — FY2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Greater Board Selectivity? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Selection of Lower Middle-Income Countries was Less Clear . . . . . . 16 MCA Compacts and Program Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Initial MCA Compacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 “Threshold” Countries and U.S. Assistance . . . . . . . . . . . . . . . . . . . . . . . . 2523 Role of USAID and the Future of Agency Programs in MCA Countries . . 26 Funding Issues — Previous and in the 109th Congress . . . . . . . . . . . . . . . . 27 MCA Request and Congressional Action for FY2007 . . . . . . . . . . . . 27 Pending Authorizing Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Modifies the Criteria for Determining the Income Grouping of Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Strengthens Local Country Input in Compact Development . . . . . . . . 28 Assists Countries in the Preparation of Compacts . . . . . . . . . . . . . . . . 28 Sets a More Precise Timetable for Compact Preparation and Signing . . . . . . . .28 Authorizes Appropriations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Allows Compacts to Cover a Longer Period . . . . . . . . . . . . . . . . . . . . 2928 Permits Multiple Compacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Expands Consultation Requirements with Congress . . . . . . . . . . . . . . 29 Strengthens Transparency Requirements . . . . . . . . . . . . . . . . . . . . . . . 29 Recommends Larger Staff .28 Adds New Notification Requirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 List of Tables Table 1. Status of MCA Compacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2324 Table 2. MCA Candidate, Eligible, and Threshold Countries — FY2004 . . . . 30 Table 3. MCA Candidate, Eligible, and Threshold Countries — FY2005 . . . . 31 Table 4A. MCA Low-Income Candidate, Eligible, and Threshold Countries — FY2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Table 4B. MCA Lower Middle-Income Candidate and Eligible Countries — FY2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Table 5. MCC Performance Indicators for FY2006 . . . . . . . . . . . . . . . . . . . . . . 34 Table 6. Comparison of MCA Authorization Legislation . . . . . . . . . . . . . . . . . 35 Millennium Challenge Account: Implementation of a New U.S. Foreign Aid Initiative Most Recent Developments On May 25, 2006, the House Appropriations Committee approved $2 billion for the Millennium Challenge Corporation in FY2007 (Foreign Operations Appropriations, FY2007, not introduced or reported). This represents a $1 billion reduction from the President’s $3 billion request, but an increase over the $1.75 billion provided for FY2006. In recent months, the MCC has taken several steps that appear to respond to concerns raised over the relatively slow speed of its operations, whether the programs were of sufficient size to have a “transformational” impact, and whether the Corporation was willing to suspend programs for non-performance: ! In early 2006, the MCC signed three new Compacts with Armenia, Vanuatu, and Benin, and says it will sign 12-15 more by the end of FY2007; ! The Compacts for Vanuatu and Benin represent significant increases in U.S. assistance to the countries and will make the MCC one of the top donors each nation; ! In approving the Compact with Armenia, the MCC cautioned that it was concerned over allegations of fraud and other irregularities during the November Constitutional referendum, factors that could jeopardize continuation of the program if not addressed. In addition, the Corporation suspended Yemen’s eligibility for assistance under the Threshold Program due to Yemen’s declining rankings on performance indicators Millennium Challenge Account Most Recent Developments1 On July 13, 2006, the House International Relations Committee reported H.R. 4014, the Millennium Challenge Reauthorization Act of 2006 (H.Rept. 109-563). In addition to authorizing appropriations, the legislation would permit Compacts of longer duration than the current five year limit, and would allow up to two Compacts to occur concurrently. The bill adds the requirement that the MCC Board notifies congressional authorizers and appropriators 15 days prior to the signing of a Compact. On July 12, 2006, the MCC Board approved a five-year $547 million Compact with Ghana. The Compact would focus on agriculture, transportation, and rural development needs. On June 29, 2006, the Senate Appropriations Committee approved its version of the FY2007 State/Foreign Operations appropriations, providing $1.9 billion for the Millennium Challenge Corporation, $1.1 billion below the Administration request. On June 16, 2006, the MCC Board suspended The Gambia from eligibility for MCA assistance due to “a disturbing pattern of deteriorating conditions” in half of the 16 conditions that are used to determine candidate countries. The Gambia had been selected in November 2005 for eligibility in FY2006. Among the problems cited in this case were human rights abuses, restrictions on civil liberties and press freedom, and worsened anti-corruption efforts. On June 9, 2006, the House approved H.R. 5522 (H.Rept. 109-486), the Foreign Operations Appropriations, FY2007, providing $2 billion for the Millennium Challenge Corporation in FY2007. This represents a $1 billion reduction from the President’s $3 billion request, but an increase over the $1.75 billion provided for FY2006. Overview In a speech on March 14, 2002, President Bush outlined a proposal for the United States to increase foreign economic assistance beginning in FY2004 so that by FY2006 American aid would be $5 billion higher than three years earlier. The funds, referred to as the Millennium Challenge Account (MCA), is managed by a new Millennium Challenge Corporation (MCC) providing assistance, through a 1 This report was originally written by Larry Nowels, who retired from CRS in June 2006. CRS-2 competitive selection process, to developing nations that are pursing political and economic reforms in three areas: ! ! ! Ruling justly — promoting good governance, fighting corruption, respecting human rights, and adhering to the rule of law. Investing in people — providing adequate health care, education, and other opportunities promoting an educated and healthy population. Fostering enterprise and entrepreneurship — promoting open markets and sustainable budgets. If fully implemented, the initiative would represent one of the largest increases in foreign aid spending in half a century, outpaced only by the Marshall Plan following World War II and the Latin America-focused Alliance for Progress in the early 1960s. It would also represent a fundamental change in the way the United States invests and delivers economic assistance. While the program was established and initially funded during the 108th Congress, the 109th Congress has been and will continue to debate MCC funding issues, as well as conduct oversight hearings on operations of the Corporation. In 2006, Congress may consideris also considering changes to the authorizing legislation, including thoseas proposed in H.R. 4014 or other bills that might be introduced during the second session. MCC Background1. MCC Background2 The concept is based on the premise that economic development succeeds best where it is linked to free market economic and democratic principles and policies, and where governments are committed to implementing reform measures in order to achieve such goals. The MCC differs in several fundamental respects from past and current U.S. aid practices: ! ! ! ! the size of the $5 billion commitment; the competitive process that will reward countries for past actions measured by 16 objective performance indicators; the pledge to segregate the funds from U.S. strategic foreign policy objectives that often strongly influence where U.S. aid is spent; and the requirement to solicit program proposals developed solely by qualifying countries with broad-based civil society involvement. The new initiative, which Congress authorized in January 2004 (Division D of P.L. 108-199),23 was scheduled to phase in over a three-year period, beginning in 12 For a more in-depth discussion of the original MCA proposal and issues debated by Congress in 2003, see CRS Report RL31687, The Millennium Challenge Account: Congressional Consideration of a New Foreign Aid Initiative, by Larry Nowels. 23 Table 2, found at the end of this report, provides a summary of major MCA issues and compares positions approved by the House, Senate, and Conference Committee during the (continued...) CRS-3 FY2004. During the first year, MCC participation was limited to the 74 poorest nations with per capita incomes below $1,415 and that were eligible to borrow from the World Bank’s International Development Association. The list expanded in FY2005 to include all countries with a per capita income below $1,465 (adding another 13 nations). Beginning in FY2006 and beyond, all lower middle-income countries with per capita incomes between $1,575 and $3,255 may compete for MCC resources (adding another 29 countries in FY2006). Country selection is based largely, but not exclusively, on the nation’s record measured by 16 performance indicators related to the three categories, or “baskets,” of good governance, economic freedom, and investing in people. Countries that score above the median on half of the indicators in each of the three areas qualify. Emphasizing the importance of fighting corruption, the indicator for corruption is a “pass/fail” test: should a country fall below the median on the corruption indicator, it will be disqualified from consideration unless other, more recent trends suggest otherwise. (See Table 1 below for a complete list of the 16 performance indicators.) Administration officials, since announcing the MCC initiative in 2002, said that the selection process would be guided by, but not necessarily bound to the outcomes of the performance indicators. Missing or old data, general trends, and recent steps taken by governments might also be taken into account when annual decisions are made. Eligibility to receive MCA assistance, however, does not necessarily result in an aid grant. Once selected, countries are required to submit program proposals — referred to as MCA Compacts — that have been developed through a broad-based, national discussion that includes input from civil society. The focus of program submissions may vary among countries in size, purpose, and degree of specificity, and are evaluated by the Corporation for, among other things, how well the Compact supports a nation’s economic growth and poverty reduction goals. Only those Compacts that meet the MCC criteria will be funded. It is expected that successful Compacts will support programs lasting three to five years, providing a level of resources roughly equivalent to the largest providers of assistance in the country. In most cases, this will likely result in a significant increase of U.S. economic assistance to MCA participant countries. To manage the new initiative, the Administration proposed and Congress authorized the creation of a Millennium Challenge Corporation (MCC), an independent government entity separate from the Departments of State and the Treasury and from the U.S. Agency for International Development (USAID). The MCC plans for an eventual staff of about 300, up significantly from initial estimates, drawn from various government agencies, non-governmental organizations, and the private sector, and led by a CEO confirmed by the Senate. A Board of Directors, chaired by the Secretary of State and composed of the Secretary of the Treasury, the USAID Administrator, the U.S. Trade Representative, and the Corporation’s CEO, oversees operations of the MCC and makes the country selections. Four additional 2 (...continued) compares positions approved by the House, Senate, and Conference Committee during the 2003 debate. CRS-4 Board members, two of which have yet to be confirmed by the Senate, are individuals 3 (...continued) 2003 debate. CRS-4 from the private sector drawn from lists of proposed nominees submitted by Congressional leaders.34 The decision to house the MCA in a new organization was one of the most debated issues during early congressional deliberations of the President’s foreign aid initiative. The Administration argued that because the MCA represents a new concept in aid delivery, it should have a “fresh” organizational structure, unencumbered by bureaucratic authorities and regulations that would interfere in effective management. Critics, however, contended that if the MCA is placed outside the formal U.S. government foreign aid structure, it would lead to further fragmentation of policy development and consistency. Some believed that USAID, the principal U.S. aid agency, should manage the MCA, while others said that the MCA should reside in the State Department where more U.S. foreign policy entities have been integrated in recent years. At least, some argued, the USAID Administrator should be a member of the MCC Board, which had not been proposed in the initial Administration request. It appears that the MCC’s status will remain unchanged under Secretary Rice’s realignment of foreign aid authorities, announced on January 19, 2006. Randall Tobias, the new USAID Administrator, also serves concurrently in the newly created State Department position of Director of Foreign Assistance. While gaining policy and budget authority over nearly all USAID and State Department foreign aid programs, the Director will play a more limited role in other agency activities, by developing an overall U.S. government development strategy and providing “guidance” to foreign aid programs delivered through other agencies like the MCC. For FY2004, the Administration sought $1.3 billion for the MCA’s first year, a level reduced by Congress to $994 million. The FY2005 budget proposed $2.5 billion while Congress approved $1.488 billion. Congressional reductions continued in FY2006, as lawmakers trimmed the $3 billion request to roughly $1.75 billion (after adjusting for a 1% across-the-board rescission). For FY2007, the Administration again seeks $3 billion for the MCC. In the first congressional action on the request, the HouseOn June 9, 2006, the House approved $2 billion for the MCC in the Foreign Operations bill (H.R. 5522). On June 29, 2006, the Senate Appropriations Committee approved $2 billion on May 25, 2006its version of the FY2007 State/Foreign Operations appropriations, providing $1.9 billion for the MCC. MCC Implementation Steps and Issues The passage of legislation on January 23, 2004 authorizing and funding the MCC for FY2004 (Division D of P.L. 108-199) launched a period of 90 days during which the new Corporation formed, issued required reports, consulted with Congress and the public, and selected first year participant countries. Within 10 days of enactment, the Board of Directors held its initial meeting to establish the program, 3 4 On July 13, 2004, the Senate confirmed two of the four new Board members: Kenneth Hackett, President and CEO of Catholic Relief Services, and Christine Todd Whitman, former Governor of New Jersey and former head of the Environmental Protection Agency, 2001-2003. No further nominees have been submitted by the White House. CRS-5 enactment, the Board of Directors held its initial meeting to establish the program, and over the following weeks the Corporation identified “candidate” countries for FY2004, published the criteria and methodology to be used for country selection, solicited public comments, issued guidelines for Compact proposals, and, on May 6, 2004, selected 16 countries to participate in the MCA’s first year of operations. This was followed on November 10 with the selection of FY2005 eligible MCA countries, an action that added one new participant to the FY2004 list. The MCA Board issued its third round of selections on November 8, 2005, choosing 23 countries, six of which are new for FY2006. In addition, 18 countries have been named as threshold nations — those that just missed qualifying as eligible countries — for FY2005 and FY2006. Implementation matters that continue to unfold in 2006 include the relationship of MCC programs with those operated by USAID, how the Corporation and USAID will support threshold countries to better prepare for future performance reviews, the awarding of MCA grants — in the form of Compacts — to MCA eligible countries, funding for FY2007, and the selection of FY2007 eligible countries. Establishing the Millennium Challenge Corporation On February 2, 2004, the Board of Directors met, agreed to Corporation bylaws, and approved then-Under Secretary of State Larson as the interim CEO. Subsequently, the President nominated Paul Applegarth to be the permanent MCC CEO, an individual confirmed by the Senate on May 5.45 Naming FY2004 Candidate Countries Also on February 2, the MCC Board issued a list of 63 “candidate” countries that would be reviewed for possible selection as MCA participants in FY2004. These countries, according to authorizing legislation, must be eligible for assistance from the World Bank’s International Development Association, have a per capita income of $1,415 or less, and not be otherwise ineligible to receive U.S. assistance. The latter condition eliminated twelve countries — Burma, Burundi, Cambodia, Central African Republic, Cote d’Ivoire, Guinea-Bissau, Liberia, Serbia, Somalia, Sudan, Uzbekistan, and Zimbabwe — that were statutorily barred from receiving American aid.5 46 5 CEO Applegarth resigned his position, effective August 8, 2005. President Bush has nominated John Danilovich, currently the U.S. Ambassador to Brazil, as the new CEO. 56 Various types of aid restrictions applied to these countries. For several — Burundi, Central African Republic, Cote d’Ivoire, Guinea-Bissau, and Sudan — U.S. aid was blocked because an elected head of government had been deposed by a military coup. For Cambodia and Uzbekistan, legislation banned FY2004 assistance to the central governments of these countries. Aid restrictions imposed on nations not cooperating in counter-narcotics efforts (Burma), that are on the terrorist list (Sudan), or in arrears on debt owed the United States (Liberia, Somalia, and Zimbabwe) also applied. Serbia could not receive aid in FY2004 unless the President issued a determination stating, among other things, that the government was cooperating with the International Criminal Tribunal. Notwithstanding these restrictions, each country remained eligible for humanitarian assistance from the United (continued...) CRS-6 Publishing the Selection Criteria and Methodology Pursuant to reporting requirements set in the MCC legislation, the Corporation on March 5, 2004 sent to Congress an overview of the criteria and methodology that would be used to determine the eligibility of the 63 candidate countries in FY2004. The report suggested that there would be relatively few and only minor changes to the criteria and methodology that had been outlined 15 months earlier. The same 16 performance indicators, as listed in Table 1 below, would be utilized. In a few cases, data sources shifted from international institutions to national governments. This was especially true in cases where existing data for an indicator were old or incomplete. Although the Corporation did not alter any of the original 16 performance indicators, it attempted to address additional criteria added by Congress in P.L. 108199 through the use of supplemental data and qualitative information. While the legislative authorities broadly match criteria proposed by the Administration, lawmakers included four additional matters on which to evaluate a country’s performance. These relate to the degree to which a country: ! ! ! ! recognizes the rights of people with disabilities; supports a sustainable management of natural resources; respects worker rights; and makes social investments, especially in women and girls. For an evaluation of the rights of people with disabilities, the MCC reported that it would draw on information in the State Department’s annual Human Rights Report, which includes a discussion of discrimination based on disability. Regarding natural resource management, the Corporation would also use the Human Rights Report as supplemental information on such issues as access to sanitation, deforestation, conservation of land and marine resources, land tenure institutions, and protection of threatened and endangered species. The State Department’s Human Rights Report would also be used for additional information regarding worker rights, while statistics on girls’ primary enrollment rates would supplement the four social investment performance indicators. The MCC also noted that it would use the most recent release (then October 2003) of Transparency International’s Corruption Perception Index to update and supplement the World Bank’s survey data on which corruption performance indicator is based. This was necessary because the World Bank information was last published in March 2003. Since the corruption indicator is a “pass/fail” measure, the quality and timeliness of the data are especially important. Given the range and diversity of suggestions offered throughout the public and congressional debate of the MCC, many observers were surprised that the Corporation did not propose more substantive changes to the criteria and 6 (...continued) restrictions, each country remained eligible for humanitarian assistance from the United States. CRS-7 methodology. Some questioned how seriously the Administration considered 5 (...continued) States. CRS-7 alternative approaches and whether the Corporation would be open to future revisions.67 During the public comment period and at congressional oversight hearings, some suggested that existing data sources needed to be refined or new surveys created in order to specifically measure a country’s commitment on the four criteria added by Congress. After further study of the criteria and methodology, the Corporation announced on August 26, 2004, a revised set of performance indicators that were used for the FY2005 selection process. The MCC lowered the inflation rate threshold from 20% to 15%, making it somewhat more difficult to pass this test (only 6 of the 63 candidate countries failed this test for FY2004). An indicator measuring girls’ primary education completion rates replaced a broader measure used in FY2004 that did not disaggregate primary education graduation by gender. As noted above, including the means to measure country performance on key women and girls issues was one of the requirements added by Congress during deliberation on MCC authorizing legislation. For FY2006, the Corporation made further changes in the criteria and methodology. The most notable was the addition of a new indicator — the Cost of Starting a Business — that replaced the Country Credit Rating, a measure that was used in the FY2004 and FY2005 evaluation process. Data for the Cost of Starting a Business are drawn from the World Bank’s Doing Business report, the same source for another MCC indicator of Days to Start a Business. The Corporation believes that not only does the new indicator have a strong correlation with economic growth, but that it is a measurement that may encourage governments to take action in order to improve their scores. Since the initial use of the indicator Days to Start a Business, MCA candidates countries have introduced many business start-up reforms, the results of which have been reflected in a lowered median for this category. MCC officials hope that adding an indicator for the Cost of Starting a Business will stimulate additional policy improvements. They believe that the Country Credit Rating indicator is not as well linked to policy reforms and that it has a greater income bias than other MCC indicators. The Corporation also modified the principal, in selected cases, that countries must score above the median in order to pass a hurdle, with a rule that scores at the median will represent a passing grade. This comes into play especially for those indicators (civil liberties, political rights, and trade policy) where performance is measured on a relatively narrow scale of 1-5 or 1-7. A number of countries fall exactly on the median of these indicators and the methodology change allows the MCC to make a more refined determination of whether a country passes or fails these hurdles. The MCC further indicated that it will explore additional criteria and methodology changes for the future. Under consideration are options to: 67 See, for example, Steve Radelet, et al., A Comment on the Millennium Challenge Account Selection Process, Center for Global Development, March 9, 2004. CRS-8 ! ! ! identify a measurement related to natural resource management; the MCC has created a working group to study possibilities. review other possible indicators that would better measure trade barriers that are linked with economic growth. consider additional gender-relation indicators; the MCC looked closely at the indicator of Skilled Attendants at Birth (a proxy for maternal mortality) but decided for now that the data lack the necessary quality and coverage.78 After releasing on January 20, 2006, a set of guidelines the Corporation will use in evaluating proposals for their environmental and social impact, CEO Danilovich announced that a new indicator for natural resources will be forthcoming in the near term for use in the selection of FY2007 qualified countries.89 Country Selection — FY2004 On May 6, the MCC Board of Directors determined that 16 countries would be eligible for FY2004 MCA funding and invited each to submit program proposals: Armenia Benin Bolivia Cape Verde Georgia Ghana Honduras Lesotho Madagascar Mali Mongolia Mozambique Nicaragua Senegal Sri Lanka Vanuatu As expected, the selection process raised a number of questions and concerns. The Administration had previously said that the Board would be guided by, but not entirely bound to, the outcome of the performance indicator review process; that Board members could apply discretion in their selection. Performance trends, missing or old data, and recent policy actions might come into play during selection deliberations, officials noted. The final selection reflected decisions that both strictly followed the performance indicator outcomes and applied Board discretion to take into account other factors. Ten of the countries complied with the stated criteria: performing above the median in relation to their peers on at least half of the indicators in each of the three policy “baskets” and performing above the median on corruption. The Board also examined whether a country performed substantially below average on 78 For a complete discussion of this issue, see Report on the Criteria Methodology for Determining Eligibility of Candidate Countries for Millennium Challenge Account Assistance in FY2006, at [http://www.mcc.gov], Congressional Reports. 89 See remarks of John Danilovich at conference held by the American Enterprise Institute on January 23, 2006. Available at http://www.mcc.gov/public_affairs/events/012306_2nd_anniversary_AEI_trans.shtml CRS-9 any single indicator and whether their selection was supported by supplemental information. Each of the ten countries also passed these additional tests. For ten other countries, however, some discretion was applied by the Board. In three cases, countries which met the criteria but fell significantly below average on one indicator were still selected by the Board due to recent policy changes or positive trend lines. Cape Verde, for example, scored poorly on the Trade Policy indicator, but the Board took into account the country’s progress towards joining the World Trade Organization and implementing a value added tax that will reduce reliance on import tariffs. Lesotho did not score well on the measurement for Days to Start a Business. The MCC Board, however, took note of Lesotho’s creation of a central office to facilitate new business formation and saw positive performance on other factors related to business start-ups. Sri Lanka scored far below the median on Fiscal Policy, but the most recent trends suggested that the government was making progress in reducing its budget deficit. For three other countries — Bolivia, Georgia, and Mozambique — the Board deviated from a strict application of the selection criteria because of evidence that the governments were taking corrective actions in the deficient areas. Bolivia fell at the median (as opposed to above the median) on the corruption indicator, something that would eliminate it from consideration. The Board, however, noted that President Mesa, who took office in October 2003, had created a cabinet position to coordinate anti-corruption activities and an office to investigate police corruption. Georgia, with a newly elected government that had created an anti-corruption bureau and taken other steps to fight corruption, was also selected despite scoring below the median on corruption and three other “ruling justly” indicators. Mozambique, which failed on corruption and each of the four “investing in people” indicators, was chosen based on supplemental data that was more current than information available from the primary data sources. This evidence, the Board felt, demonstrated Mozambique’s commitment to fighting corruption and improving its performance on health and education. On the other hand, the MCC Board chose not to select four countries that technically met the performance criteria but fell substantially below the median on one or more indicator. In each of these cases, the Board did not believe that the government was taking any action to improve its performance. Although Bhutan, Mauritania, and Vietnam passed the corruption hurdle and half of the “ruling justly” indicators, they scored very low on the measurements for Political Rights and Civil Liberties, and in Vietnam’s case, on the Voice and Accountability indicator. A fourth country — Guyana — was also not selected despite passing the necessary hurdles. It scored particularly low on the Fiscal Policy measurement.910 It has been long assumed by MCC officials and close observers of the MCA initiative that when the country selections were announced, there would be disagreements and possible surprises in the final list, especially if the Board exercised 910 For a complete statement regarding the Board’s rationale, see Report on the Selection of MCA Eligible Countries for FY2004, found at [http://www.mcc.gov], “Congressional Reports.” CRS-10 its discretionary authority as it did for FY2004 participants. Representative Lowey, for example, expressed her view at a May 13, 2004 House Appropriations Committee hearing that East Timor, which failed to pass the “economic freedom” hurdle in part due to missing data on two of the indicators, should have been selected. CEO Applegarth responded that East Timor is a new nation and that it was premature to conclude that it was a “high-performing” country. He acknowledged, however, that East Timor should be given close consideration in the future if the current trend lines continue. Besides East Timor, some suggested that Kenya should have been included because of its new government’s commitment to education and anti-corruption efforts. USAID Administrator Natsios acknowledged at the May 13 hearing that Albania was a “close call,” failing because it scored slightly below the median on corruption. Like Albania, Malawi and Moldova would have qualified on the basis of performance if not for slightly failing scores on corruption. Several small island states, including Kiribati, Sao Tome, and Tonga, were not selected even though the absence of data for several categories may have played a role.1011 Despite these questions over specific country eligibility, the selection process appeared to have satisfied two major concerns that have been consistently expressed over the past year. Based on earlier analysis, some argued that Africa would be under-represented in the final selection process, with perhaps as few as three regional states participating. In fact, eight, or half of the first year qualifying nations are from Africa. Selection of countries that would give the appearance of geostrategic considerations was an additional concern of many who view the absence of securityrelated factors from MCA decision-making as one of the most attractive features of the initiative. For the most past, the Board appeared to have avoided this concern. Had the Board used its discretionary powers to select Indonesia, for example, some critics would have likely charged that the decision stemmed more from Jakarta’s role in the war on terrorism than on strict policy performance. Indonesia passed all necessary hurdles except for corruption. Some, nevertheless, have questioned whether Georgia’s selection was driven by broad U.S. foreign policy objectives of assisting a smooth political transition in the country rather than a choice based on performance.1112 Likewise, Bolivia, a country in which the United States maintains strong counter-narcotics goals, had been experiencing a period of instability despite strong performance prior to October 2003. Both Georgia and Bolivia were selected despite not strictly meeting the MCA performance criteria. 1011 As noted below, East Timor, Albania, and Sao Tome were subsequently selected as three of the seven “threshold” countries that will receive assistance to help the country meet the MCA requirements. 1112 See Steve Radelet, A Note on the MCC Selection Process for 2005, September 23, 2004, found at [http://www.cgdev.org]. CRS-11 Naming Candidate Countries — FY2005 On July 20, 2004, the MCC Board of Directors launched the initial step in the FY2005 selection process by naming 70 candidate countries, 7 more than were reviewed for FY2004. After adjusting the per capita income upward to $1,4651246513 and dropping the requirement that a country must be an IDA-eligible borrower from the World Bank, 11 new countries were added to the list: China, Egypt, Equatorial Guinea, Iraq, Morocco, Paraguay, Philippines, Swaziland, Turkmenistan, Tuvalu, and Ukraine. Four countries fell off the FY2005 list that had qualified in FY2004 — Albania, Bosnia and Herzegovina, Cape Verde, and Tonga — because their per capita income grew beyond the $1,465 cutoff. Thirteen other nations were excluded because they were ineligible for other U.S. economic assistance.1314 Country Selection — FY2005 Meeting on November 8, the MCC Board of Directors made its selection of FY2005 eligible countries: Armenia Benin Bolivia Georgia Ghana Honduras Lesotho Madagascar Mali Mongolia Morocco Mozambique Nicaragua Senegal Sri Lanka Vanuatu The Board chose one new country for FY2005 — Morocco — while 15 of the 16 nations included for FY2004 were determined eligible again for FY2005. Cape Verde was not selected due to the fact that its per capita GNI exceeded the $1,465 ceiling. Cape Verde, however, remained eligible for MCA support using FY2004 funds. Board selections represented both a high degree of continuity between FY2004 decisions as well as a sharp difference in the degree to which it applied its discretionary authority for qualifying or denying countries for FY2005. 1213 The MCC plans to adjust the per capita income threshold each year to correspond to the per capita income cutoff of the “historic ceiling” of IDA lending, a calculation made by the World Bank. In future years when all lower middle-income countries will be eligible to compete, the MCC also will adjust that threshold — which grew from $2,975 in 2003 to $3,035 in 2004 and to $3,255 in 2005 — in the consideration of determining candidate countries. 1314 Eleven of these countries were also excluded in FY2004. Serbia, which was barred from consideration for FY2004, exceeded the per capita income limit for FY2005 so was not under consideration. Syria and Cuba, which became potential candidate countries beginning in FY2005, were excluded because of a ban on direct aid to the countries. See Footnote 5, above, for a complete list of countries and aid restrictions. CRS-12 Continuity in the FY2005 Selection Round. The fact that each country (except Cape Verde) selected for FY2004 MCA participation was also declared eligible for FY2005 should not be surprising, given the nature of the MCA concept. The Board identified in May 2004 what it determined to be the 16 “best performers” based on the assumption that these countries had, and would continue to express, a strong commitment to the types of economic, governance, and social policy reforms measured by the MCC. Absent a substantial negative development since May, there was a presumed expectation that these same countries would score well in a subsequent performance comparison with their income peers. Moreover, except in some extreme situations, evidence of a slide in policy performance as measured through the various data sources would likely lag behind the actual policy shift and not be reflected in the immediate data updates. In addition, two other factors that may not apply in future years seem to have affected the outcome for FY2005. First, with the selection dates for FY2004 and FY2005 coming only six months apart — rather than one year, as should be the case in the future — it was likely that the data would indicate less change than might be the case if the comparisons occurred over a longer period. Between May and November, several of the data sources upon which the 16 performance indicators are based did not update or revise their figures.1415 As a result, the review of countries for FY2005 was based on much of the same data and rankings as had been the case for the FY2004 selection. Moreover, the addition of 13 new countries for consideration in the FY2005 round had the effect for at least six of the indicators of lowering the median against which countries were compared. Because of this, if a country scored well — above the median — in the FY2004 selection decision, it was likely that it would score the same or better in the review for FY2005 where medians declined. For example, in May Bolivia fell exactly at the median on the corruption indicator. But in November, when the median for corruption dropped somewhat after new countries were added, Bolivia scored above the median even though Bolivia’s score on corruption did not change. This phenomena is unlikely to be repeated again to the same extent since countries in the low-income group will be added or subtracted only if their economy grows beyond the per capita income ceiling or U.S. foreign aid sanctions are applied or lifted since the last review. The net effect is that the core set of low-income countries competing for MCA selection is unlikely to change as much as it did in FY2005, thereby reducing the extent to which the median will be altered simply because of the addition of new countries. Excluding More Countries that Qualified. Despite the degree of continuity between FY2004 and FY2005 in the selection of eligible countries, the MCC Board departed somewhat from the previous round by not selecting a large 1415 This is not true for the performance indicators of Inflation and Primary Girls Graduation Rate, which were modified for the FY2005 selection, or for the indicators measuring Days to Start a Business, Civil Liberties, and Political Freedom which were updated in 2004. For some of the other economic and social investment indicators where data were drawn from national sources, revised figures were used in the FY2005 selection, but only where available. World Bank data for six governance-related indicators and the Trade Policy measurement, however, were not revised between May and November 2004. CRS-13 number of countries that technically met the MCA performance criteria. Many observers raised questions over the FY2005 selections regarding the countries that were not selected rather than those that were. As noted above, in May 2004, the Board chose not to select four countries — Bhutan, Guyana, Mauritania, and Vietnam — although each passed the minimum number of indicators. The Board decided to exclude these four because they scored “substantially below” the median on one or more measurements, although without defining precisely what represented a mark “substantially below”the median. For FY2005, the Board did not select 10 countries that met the criteria, including three of the four left out of the FY2004 round (Mauritania did not meet the minimum qualifications). In addition, for FY2005 Burkina Faso, China, Djibouti, Egypt, Nepal, the Philippines, and Swaziland met the minimum standards but were not selected. The Corporation offered little explanation as to why these countries were not chosen.1516 It appears, however, that scoring “substantially below” — perhaps in the lowest 25th percentile — has become a de-facto criteria for exclusion. For example, the Corporation’s CEO Paul Applegarth commented that the Philippines, a country that passed 13 of the 16 indicators, did not qualify because Manilla scored “substantially below” the median on tests for health expenditures and fiscal policy, and that more recent trends indicated the fiscal policy situation was deteriorating further.1617 Each of the other nine nations that met the minimum qualifications but were not selected also had one score in the 25th percentile, although the Corporation has not commented on whether this was the reason for not choosing them. Another possible reason for limiting the number of qualifying countries in the FY2005 round might be due to funding reductions that were anticipated in early November. The Administration had requested combined FY2004/FY2005 appropriations of $3.8 billion, but was more likely, at the time of selection, to have available 25%-35% less, depending on the outcome of congressional debate on the FY2005 budget. Corporation officials have said that reduced funding would lead to fewer countries assisted and/or smaller grants per country, a situation that would be complicated further by qualifying additional nations. Instead, the Board of Directors invited three of these 10 countries — Burkina Faso, Guyana, and the Philippines — to participate in the Threshold Program, intended to help “near-miss” nations take steps to strengthen areas that would help them qualify for full MCA assistance in the future. Burkina Faso became the first to sign a Threshold Agreement on July 22, 2005. 1516 The MCC’s authorizing legislation (section 608(d)) requires the Corporation’s CEO to provide justification to Congress regarding only those countries declared as eligible for MCA assistance and for those selected for Compact negotiation. Otherwise, there is no statutory requirement for the MCC to comment on its decision-making process, including the rationale for not selecting specific countries. 1617 Comments by Paul Applegarth at a State Department Foreign Press Center Briefing, November 9, 2004. CRS-14 Another Board departure in the FY2005 selection process was to avoid using its discretionary authority to qualify countries that did not meet the minimum performance indicators. In May, the Board chose three nations — Bolivia, Georgia, and Mozambique — that did not pass the so-called “hard-hurdle” of corruption. The latter two again qualified despite falling below the median on corruption, while Bolivia did not require an exemption after the median dropped below its score with the addition of new countries. For FY2005, five nations — Malawi, Moldova, Paraguay, Tanzania, and Ukraine — passed the required number of performance indicators, except corruption. Although Malawi, Paraguay, and Tanzania are Threshold Countries, none of the five were chosen for full MCA status. Naming Candidate Countries — FY2006 On August 5, 2005, the MCC released a list of 69 low-income countries and 29 lower middle-income nations that were evaluated for MCA grants in FY2006. The number of low-income nations — those with a per capita GNI of less than $1,575 — was one less than the previous year (Equatorial Guinea was dropped) while all of the lower middle-income group, with per capita GNI between $1,575 and $3,255, were new to the MCA selection process.1718 Fifteen nations were excluded from the FY2006 candidate country list because they are ineligible under existing law to receive U.S. economic aid. Most had been barred in prior years as well.1819 Country Selection — FY2006 On November 8, 2005, the MCC Board of Directors made its selection of FY2006 eligible countries, and, for the first time, selected participants in both the low-income and lower middle-income groups: 1718 Each year, the MCC adjusts the low-income country per capita income threshold to correspond to the per capita income cutoff of the “historic ceiling” of IDA lending, a calculation made by the World Bank. The range of per capita GNI for the lower middleincome group is also drawn from the World Bank. 1819 For several — Burundi, Central African Republic, Cote d’Ivoire, and Sudan — U.S. aid is blocked because an elected head of government has been deposed by a military coup. For Cambodia and Uzbekistan, legislation bans FY2005 assistance to the central governments of these countries. Aid restrictions imposed on nations not cooperating in counter-narcotics efforts (Burma), that are on the terrorist list (Cuba, Iran, North Korea, Sudan, and Syria), not complying with minimum trafficking in persons standards (Burma and Sudan), or in arrears on debt owed the United States ( Somalia, and Zimbabwe), also apply. Serbia and Bosnia and Herzegovina are not eligible for aid in FY2005 unless the President issues a determination stating, among other things, that the governments are cooperating with the International Criminal Tribunal. CRS-15 Low-Income Countries Armenia Benin Bolivia Burkina Faso* East Timor* The Gambia* Georgia Ghana Honduras Losotho Madagascar Mali Mongolia Morocco Mozambique Nicaragua Senegal Sri Lanka Tanzania* Vanuatu Lower Middle-Income Countries Cape Verde El Salvador* Namibia * New for FY2006. All 17 countries previously selected in FY2004 or FY2005, or both years, again qualified in FY2006. Four new low-income countries arewere added for FY2006 — Burkina Faso, East Timor, The Gambia, and Tanzania — plus two new lower middle-income nations — El Salvador and Namibia.1920 None areof the four lowincome low-income nations arewere surprising. Three — Burkina Faso, East Timor, and Tanzania — were were chosen last year as Threshold countries, meaning they were “near-misses” in FY2005. The Gambia improved its scores significantly between FY2005 and FY2006, including those for inflation, fiscal policy, controlling corruption, and other governance indicators. The rationale for selecting any lower middle-income countries, on the other hand, and El Salvador and Namibia in particular, is less clear, as discussed below. Although selected only seven months previously, The Gambia’s eligibility for MCA assistance was suspended by the MCC Board on June 16, 2006, due to “a disturbing pattern of deteriorating conditions” in half of the 16 conditions that are used to determine candidate countries. Among the problems cited in this case were human rights abuses, restrictions on civil liberties and press freedom, and worsened anti-corruption efforts. Greater Board Selectivity? Given the likelihood that the MCC would have substantially less appropriated funds for FY2006 than it had requested, a number of observers argued that now was not the time to expand the list of eligible countries to a great extent, especially for cases where Board discretion would be necessary to qualify a country that did not pass a sufficient number of indicators. Instead, many asserted, the Board should be more selective, keeping the number of new participants 20 Cape Verde was also selected in the new lower middle-income country grouping. Cape Verde, however, had been previously chosen in FY2004 when its income placed it in the low-income grouping, and signed an MCA Compact on July 4, 2005. CRS-16 to a few so that future Compacts could be larger and emphasize “transformational” development opportunities as the MCA program envisioned. The Board seemed to heed this advice for the low-income group by not choosing eight countries that qualified and not using its discretionary powers to select any new 19 Cape Verde was also selected in the new lower middle-income country grouping. Cape Verde, however, had been previously chosen in FY2004 when its income placed it in the low-income grouping, and signed an MCA Compact on July 4, 2005. CRS-16 nations that failed to meet the minimum requirements.2021 Bhutan, China, and Vietnam passed enough hurdles but did not qualify, as was the case the past two years, based on very low scores on political rights, civil liberties. Kiribati, the Philippines, and India were not selected most likely because some of their scores were substantially below the median, which has become a marker used by the Board previously. India also presents a challenging case for the Board in that despite qualifying, it is a country with a significantly large poor population which would require a sizable MCA Compact in order to produce a reasonable degree of impact on poverty reduction. It is also a nation with the means to attract capital and investment from other sources. Egypt, also not selected, falls into a somewhat different category as the second largest recipient of annual U.S. assistance based on a strategic rationale. The reason for not selecting Uganda, despite having passed 12 of the 16 indicators and not falling significantly below the median on the other 4, is less obvious. Selection of Lower Middle-Income Countries was Less Clear. Whether to include relatively more wealthy nations — those with a per-capita income higher than $1,575 — in the MCA program has been debated since the launch of the initiative. A number of analysts have argued that especially given the less-thananticipated budget available to the MCC, the Board should refrain from selecting any lower middle-income countries (LMICs), at least in the FY2006 round.2122 Of the eight LMICs (out of 32 total) that passed sufficient performance hurdles, the Board chose two to participate in FY2006. In addition, the Board also selected Cape Verde, a country that passed only two of the six economic performance indicators and therefore, did not technically qualify.2223 It appears, however, that the Board could have decided to select none of the lower middle-income nations by using criteria it had applied consistently in the two previous rounds. Moreover, it was not clear why the Board chose the two that did qualify and exclude others. All eight LMICs that passed the performance indicator test fell significantly below the median on at least one of the indicators. El Salvador and Namibia, the two that were selected, both had low scores on fiscal policy. El Salvador also scored well below the median on the costs of starting a business, while Namibia also did poorly on days to start a business and immunization rates. The other six that were not chosen — Brazil, Bulgaria, Jordan, Samoa, Thailand, and Tunisia — also performed substantially below the median in at least one area, although Jordan was selected to participate in the Threshold program. What separated these latter six from El Salvador and Namibia, however, was not explained by the Board. 2021 Georgia and Senegal were selected despite not passing the necessary hurdles, but both had been chosen in FY2004 and FY2005. 2122 See, for example, Steve Radelet, Kaysie Brown, and Bilal Siddiqi, “Round Three of the MCA: Which Countries are Most Likely to Qualify in FY 2006?” Center for Global Development, October 27, 2005. 2223 Cape Verde had been classified as an eligible low-income country in FY2004 and signed a Compact in July 2005. The Cape Verde case, however, also points out a limitation in using the system of 16 performance indicators. For two of the economic categories, no data are available for Cape Verde, resulting in a failing score on those hurdles. CRS-17 chosen — Brazil, Bulgaria, Jordan, Samoa, Thailand, and Tunisia — also performed substantially below the median in at least one area, although Jordan was selected to participate in the Threshold program. What separated these latter six from El Salvador and Namibia, however, was not explained by the Board. MCA Compacts and Program Proposals Once declared as eligible, countries may prepare and negotiate program proposals with the MCC. The proposals are referred to as MCA Compacts. Only those Compacts that demonstrate a strong relationship between the program proposal and economic growth and poverty reduction will receive funding. Not all qualified MCA countries may submit successful Compacts. While acknowledging that Compact contents likely will vary, the Corporation expects each to discuss certain matters: ! ! ! ! ! ! ! a country’s strategy for economic growth and poverty reduction, impediments to the strategy, how MCA aid will overcome the impediments, and the goals expected to be achieved during implementation of the Compact.; why the proposed program is a high priority for economic development and poverty reduction and why it will succeed; the process through which a public/private dialogue took place in developing the proposal; how the program will be managed, monitored, and sustained after the Compact expires; the relationship of other donor activities in the priority area; examples of projects, where appropriate; a multi-year financial plan; and a country’s commitment to future progress on MCA performance indicators. Initial MCA Compacts.2324 The Corporation did not set hard deadlines for Compact Compact submissions in order to allow countries adequate time to conduct a national dialogue dialogue over the contents of the program proposal.2425 By December 1, 2004, the MCC had received proposals and “concept papers” from 15 of the 16 FY2004 eligible eligible countries, and began the next phase — negotiating formal Compacts — with several several countries. The MCC signed its first Compact, with Madagascar, on April 18, 2005, an event that has beenwas followed by four other signings in 2005 — with Honduras (June 13), Cape Verde (July 4), Nicaragua (July 14), and Georgia (September 12). The pace of Compact approval accelerated in early 2006 as In 2006, three more agreements were signed: Benin (February 22), Vanuatu (March 2), and Armenia (March 27). The next Compact is expected to be signed with Ghana, perhaps in late July. Two features of the first series of Compacts have drawn particular attention. First, most of the Compacts include a similar sector concentration, focusing on 23 24 Details on each of the negotiated Compacts can be found at the MCA website: [http://www.mcc.gov]. 2425 H.R. 4014, introduced on October 7, 2005, expresses the sense of Congress that the MCC should encourage countries to submit Compact proposals within one year of being declared eligible, enter into a Compact within two years, and to consider removing countries from the status of eligibility if they do not comply with these guidelines in a timely and good faith manner. CRS-18 Armenia (March 27), and one with Ghana was approved by the MCC Board on July 12. Two features of the first series of Compacts have drawn particular attention. First, most of the Compacts include a similar sector concentration, focusing on agriculture and transportation infrastructure projects. While these activities are well justified, the similarity across Compacts is somewhat surprising. Given the wide diversity of conditions in each of the countries, plus the Corporation’s willingness to support all types of programs, many observers had expected to see a greater degree of variation among the Compacts. Some believe that social sectors, including those in health and education, should be receiving greater attention in Compact design. Others had expected greater variety in aid delivery mechanisms, and are concerned that the MCC is reluctant to approve sector grants and other types of budget support assistance. While there can be greater accountability risks associated with this kind of aid, countries that qualify for MCA support are selected because they have already demonstrated stronger performance in managing resources and fighting corruption.2526 As subsequent Compacts are signed, the issue of sector focus is likely to be closely watched. A second closely examined characteristic of the early Compacts has been the dollar size of the grants; or more specifically, the lower-than-anticipated funding level for the first several Compacts. While Administration officials have said repeatedly that Compacts will be funded at various levels depending on the nature and potential impact of the proposal, the presumption has been that the MCA grant would represent a sizable increase in U.S. assistance to the eligible country. In order to realize its potential as a “transformational” aid program and to provide sufficient incentives to countries requesting “breakthrough” projects, the MCC says that the size of its grants must place MCA assistance among the top aid donors in a country.2627 Some had estimated that once the Corporation’s budget reached $5 billion, each Compact would be supported with annual resources in the $150-$200 million range.2728 These levels could vary up or down depending on many factors, such as the number of people living in poverty, the size of the economy, and the scope of the proposed projects. Most of the first several Compacts, however, do not appear to meet the anticipated financial allocation thresholds. Madagascar’s four-year, $110 million Compact roughly doubles U.S. assistance to the country, but does not place MCA assistance among the top donors. France is the largest bilateral donor, disbursing on average $189 million per year, 2001-2004. The European Commission’s aid program, 2001-2004, averaged $82 million per year, while the World Bank’s International Development Association has been Madagascar’s largest source of concessional assistance of about $209 million lent in each of 2001 through 2004.28 The $110 million Compact for Madagascar is also not very large relative to the country’s population. Of the 16 qualified countries for FY2004, Madagascar has the 25 26 James Fox and Lex Rieffel, The Millennium Challenge Account: Moving Toward Smarter Aid. The Brookings Institution, July 14, 2005, p. 24. 2627 See, for example, Millennium Challenge Corporation FY2005 Budget Justification, p. 7. Found at [http://www.mcc.gov/about_us/key_documents/index.shtml]. 2728 Prepared statement of Steve Radelet, Senior Fellow at the Center for Global Development, before a hearing of the House International Relations Committee, April 27, 2005. 28 Organization for Economic Cooperation and Development (OECD), Geographical Distribution of Financial Flows to Aid Recipients, 2000/2004: 2006 edition. CRS-19 CRS-19 concessional assistance of about $209 million lent in each of 2001 through 2004.29 The $110 million Compact for Madagascar is also not very large relative to the country’s population. Of the 16 qualified countries for FY2004, Madagascar has the fourth largest population (16.4 million), and might have been expected to receive one of the larger MCA grants given its population size and its per capita income ($230, second lowest among the 16 MCA countries). For Honduras (a $215 million MCA program over five years), Georgia ($295 million over five years), and Armenia ($236 million over five years), the United States has been the top bilateral donor in recent years without the MCA program, and will likely remain in that position once the MCA grants begin to disburse. But the MCA Compact for Honduras calls for only a slightly higher annual amount than current U.S. economic assistance provides, while Georgia’s Compact will average only about three-fourths and the Armenia Compact only about two-thirds of the annual level of present American aid. While these are not insignificant amounts of new resources, they are far less than Administration officials had suggested previously.2930 In contrast, the threefour five-year Compacts with Cape Verde ($110 million), Benin ($307 million), Vanuatu ($66 million), and Ghana ($547 and Vanuatu ($66 million) represents a substantial investment by the United States, relative to the current size of American aid and the size of their economies. USAID, which last provided direct bilateral assistance to Cape Verde in the mid-1990s, does not maintain a mission presence, allocating small amounts of aid through regional programs. The Compact’s $22 million annual average will place the United States second to Portugal, Cape Verde’s former colonial power, as the leading donor, and represent more than a quarter of total bilateral development aid grants from all sources compared with figures for 2003 and 2004. Likewise, the United States does not maintain a bilateral program with Vanuatu, limiting direct aid through the Peace Corps. The $13 million annual average of the Vanuatu program will place the United States as the country’s top aid donor, along with Australia. In Benin, USAID manages an annual bilateral economic aid program of about $15 million, compared with the $61 million annual size of the MCC Compact. The Compact appears likely to place the MCC as the top aid donor, together with France, for Benin.3031 This issue has been a priority of Ambassador Danilovich since his September 27, 2005 confirmation hearing to be the MCC’s new CEO. He noted that the MCC was “meant to create transformative programs,” and to do so he said that “future Compacts will generally need to be larger than those signed thus far.” Ambassador Danilovich cautioned, however, that with limited resources but larger Compacts, fewer countries will receive funding if MCC is to achieve its transformational goal.31 His record since assuming the CEO position appears to be moving towards larger Compacts and placing the MCC as the largest donor in recipient countries. 29 29 Organization for Economic Cooperation and Development (OECD), Geographical Distribution of Financial Flows to Aid Recipients, 2000/2004: 2006 edition. 30 For example, USAID Administrator Natsios remarked in an October 22, 2002 speech at the American Embassy in London that “we estimate in most countries the MCA will provide funding 5 to 10 times higher than existing levels” of U.S. assistance. 3031 Geographical Distribution of Financial Flows to Aid Recipients, 2000/2004: 2006 edition. 31 Prepared statement of John J. Danilovich, before the Senate Committee on Foreign Relations, September 27, 2005. CRS-20 CRS-20 fewer countries will receive funding if MCC is to achieve its transformational goal.32 His record since assuming the CEO position appears to be moving towards larger Compacts and placing the MCC as the largest donor in recipient countries. Madagascar Compact. The Madagascar Compact is a four year, $110 million program, focusing on rural agriculture development and poverty reduction. Specifically, the project has three objectives: 1) to increase land titling and land security ($36 million); 2) to expand the financial sector and increase competition ($36 million); and 3) to improve agricultural production technologies and market capacity in rural areas ($17 million). According to the MCC, the Compact is designed to assist Madagascar’s rural poor, which account for 80% of the nation’s impoverished population, and generate income by expanding opportunities to own land, to access credit, and to gain technical training in agriculture and market identification. Elements of the design, negotiation, and completion of the Madagascar Compact met several of the key criteria of the MCA process. For example, discussions regarding the scope and purpose of the MCA grant occurred at the regional and national level in Madagascar that included broad representation of civil society. Management and oversight of the Compact will be handled by a new entity, MCAMadagascar, whose Steering Committee will include government and nongovernment officials. Both of these steps underscore the “country-ownership” and broad participatory nature of MCA programs. The Compact also includes fiscal accountability requirements concerning audits, monitoring, and evaluation that support the transparency concept of the MCA. While the $110 million MCA grant will be fully obligated when the Compact enters into force, resources will be transferred periodically following a determination that performance continues satisfactorily. This funding plan emphasizes the MCA principles of accountability and results. Honduras Compact. The five-year, $215 million MCA Compact with Honduras focuses on two objectives — rural development and transportation. The rural development project, representing $72.2 million of the Compact, will assist small and medium-size farmers enhance their business skills and to transition from the production of basic grains to horticultural crops, such as cucumbers, peppers, and tomatoes. According to the MCC, these vegetable crops will generate about $2,000 to $4,000 in annual income per hectare, compared with roughly $500 for basic grains. The project intends to provide farmers with the appropriate infrastructure and necessary training for producing and marketing these different crops. The transportation project, totaling $125.7 million of the Compact, will improve the major highway linking Honduran Atlantic and Pacific ports, and major production centers in Honduras, El Salvador, and Nicaragua. Rural roads will also be upgraded, helping farmers transport their goods to markets at a lower cost. Specific results sought in the Compact are: ! ! ! ! 32 double productivity in 15,000 hectares in rural areas Prepared statement of John J. Danilovich, before the Senate Committee on Foreign Relations, September 27, 2005. CRS-21 ! ! ! expand access to credit for farmers by over 20% upgrade the major road that links Honduras with commercial centers upgrade about 1,500 kilometers of rural roads Cape Verde Compact. The MCC and Cape Verde have signed a five-year, $110 million Compact focused largely on improving the country’s investment climate, transportation networks, and agriculture productivity. The program’s goal CRS-21 is to increase the annual income in Cape Verde by at least $10 million. The Compact evolves around three projects: ! Private Sector Development — with $7.2 million and additional participation with the International Finance Corporation, the project aims to remove constraints to private sector investment. ! Infrastructure — the project will invest $78.7 million in road and bridge construction to help link the nine inhabited islands and improve transportation links to social services, employment opportunities, local markets, and ports and airports. ! Watershed Management and Agriculture Support — by investing $10.8 million to increase the collection, storage, and distribution of rainfall water, the project hopes to increase agricultural production and double the household income of farmers. Nicaragua Compact. The five-year, $175 million Compact with Nicaragua will focus on the promoting economic growth primarily in the northwestern region of the country where potential opportunities exist due to the area’s fertile land and nearby markets in Honduras and El Salvador. The Compact has three components: 1) to strengthen property registration ($26.5 million); 2) to upgrade primary and secondary roads between Managua and Leon and to provide technical assistance to the Ministry of Transportation ($92.8 million); and 3) to promote higher-profit agriculture activities, especially for poor farmers, and to improve water supply in support of higher-value sustainable agriculture. Georgia Compact. The $295 million, five-year agreement with Georgia focuses on reducing poverty and promoting economic growth in areas outside of the capital where over half the population lives in poverty. The Compact is divided into two projects. The first and the largest component ($211.7 million) concentrates on infrastructure rehabilitation, including roads, the north-south gas pipeline, water supply networks, and solid waste facilities. The Enterprise Development Project ($47.5 million) will finance an investment fund aimed at providing risk capital and technical assistance to small and medium-sized businesses, and support farmers and agribusinesses that produce commodities for the domestic market. The program expects to: ! ! ! ! reduce in the incidence of poverty by 12% in the Samtskhi-Javakheti region; provide direct benefits to 500,000 people and indirectly benefit over 25% of Georgia’s population; CRS-22 ! ! reduce the travel time by 43% to Tbilisi, the capital, from regional areas, thereby cutting transportation costs for farmers, businesses, and individuals needing health and other social services; and lower the risk of a major gas pipeline accident and improve the reliability of heat and electricity to over one million Georgians. Armenia Compact. The five-year, $236 million Compact concentrates on the agricultural sector, investing in the rehabilitation of rural roads ($67 million) and CRS-22 improving irrigation ($146 million). The program anticipates that it will benefit about 750,000 people, 75% of Armenia’s rural population, by improving 943 kilometers of rural roads and increasing the amount of land under irrigation by 40%. In signing the Compact, however, the MCC issued a cautionary note, signaling Armenia that it must maintain its commitment to the performance indicators on which the country was selected, or risk suspension or termination of the Compact. In September 2005, the MCC expressed concerns with Armenian officials regarding slippage on two of the governance indicators and matters raised by international groups concerning political rights, political freedom, and an independent media in the country. Moreover, the MCC Board delayed final approval following the November 27 constitutional referendum after allegations of fraud, mismanagement, limited access by the press, and abuse of individuals were raised.3233 Vanuatu Compact. The $65.7 million, five-year Compact targets improvements broadly in multiple types of infrastructure, including roads, wharfs, an airstrip, and warehouses. The objective is to increase the average per capita income by 15%, by helping rural agricultural producers and providers of tourismrelated goods and services. The Compact further aims to help strengthen Vanuatu’s Public Works Department in order to enhance capacity to maintain the country’s entire transport network. Benin Compact. Benin, one of the world’s poorest countries with the lowest Human Development Index ranking of any MCC Compact nation, has been approved for a $307 million, five year program focused on four sectors: ! ! ! ! Land rights, reducing the time and cost of obtaining property title; Financial services, helping micro, small, and medium-sized businesses; Justice reform, assisting the judicial systems capacity to resolve business and investment claims; and Market access, improving the Port of Cotonou. The Compact’s goal is to benefit five million people, bringing 250,000 of the population out of poverty by 2015. 32 See letter of John Danilovich to Armenia President Robert Kocharyan on December 16, 2005. CRS-23 Ghana Compact. The five-year $547 million Compact focuses on agriculture and rural development. Poverty rates in the three targeted geographic areas are above 33 See letter of John Danilovich to Armenia President Robert Kocharyan on December 16, 2005. CRS-23 40%. The agriculture component ($241 million) will provide training for farmerbased organizations, improve irrigation, provide greater access to credit, and rehabilitate local roads. The transport component ($143 million) will seek to reduce transport costs to farmers by improving key roads, such as the one between the capital and the airport, and an important ferry service. Rural development programs ($101 million) will construct and rehabilitate education, water, and electric facilities, among other activities. “Threshold” Countries and U.S. Assistance In order to encourage non-qualifying countries to improve in weak areas, the United States will help governments that are committed to reform to strengthen performance so that they would be more competitive for MCA funding in future years. Congress provided in authorizing legislation that not more than 10% of MCA appropriations ($99.4 million in FY2004) could be used for such purposes, stating that the funding could be made available through USAID. The MCC set aside up to $40 million for countries that just missed qualifying for FY2004 funding and projects an additional $90 million for FY2005, subject to the quality of submitted proposals.34 Of the 18 countries selected to participate as Threshold Countries, the Corporation has approved six programs for Albania, Burkina Faso, Malawi, Paraguay, Tanzania, and Zambia. According to the Threshold Program Policy guidance issued by the Corporation,35 the program will assist countries make policy reforms and institutional changes in areas where they failed to meet the MCA performance criteria. In order to qualify, countries must submit concept papers identifying: ! where and why the country failed to pass specific indicators; ! proposals for policy, regulatory, or institutional reforms that would improve the country’s performance on these indicators; and ! types of assistance, over a two-year maximum period, required to implement these reforms. 34 Initially, assistance for Threshold countries was authorized only for FY2004. The FY2005 Foreign Operations Appropriations (Division D of P.L. 108-447, the Consolidated Appropriations Act for FY2005, makes 10%, or $149 million of the new appropriation available Threshold assistance. H.R. 4014, as introduced on October 7, 2005, would make the 10% set-aside for threshold programs permanent. 35 Found at [http://www.MCC.gov]. CRS-24 Table 1. Status of MCA Compacts Country Armenia Compact Signed Mar. 27, 2006 GNI per capita Population Living Below $2 p/day (%) Human Development Index Ranking1 FY06 US Econ. Aid (millions) $1,060 49.0% 83 Compact Size (millions) Compact Focus $76.0 $236 5 years -Agriculture/irrigation -Rural roads -Land and property -Financial services -Judicial improvement -Port rehabilitation Benin Feb. 22, 2006 $450 NA 162 $15.1 $307 5 years Cape Verde July 4, 2005 $1,720 NA 105 $1.8 $110 5 years - Agriculture - Transport/roads - Private sector - Infrastructure/gas - Transport/roads - Agriculture/business Georgia Sept. 12, 2005 $1,060 15.7% 100 $68.1 $295 5 years Honduras June 13, 2005 $1,040 44.0% 116 $35.3 $215 5 years -Agriculture -Transport/roads Madagascar April 18, 2005 $290 85.1% 146 $23.8 $110 4 years - Land titling - Financial sector - Agriculture Nicaragua July 14, 2005 $830 79.9% 112 $34.5 $175 5 years - Land titling - Transport/roads - Agriculture Vanuatu March 2, 2006 $1,390 NA 118 $2.2 $66 5 years -Transport rehab -Public Works Dept. CRS-2425 Sources: Population Living Below $2 Per Day — data from the World Bank, World Development Indicators, 2005; Gross National Income per capita — 2004 data from the World Bank, World Development Indicators, 2005. Human Development Index Rank — from UNDP, Human Development Report, 2005. U.S. Economic Aid — Department of State. MCA Compact information — Millennium Challenge Corporation. 1. The Human Development Index (HDI) is compiled by the U.N. Development Program and is published annually in the UNDP Human Development Report. It is a composite index that measures the average achievements in a country in three basic dimensions of human development: a long and healthy life, as measured by life expectancy at birth; knowledge, as measured by the adult literacy rate and the combined gross enrolment ratio for primary, secondary and tertiary schools; and a decent standard of living, as measured by GDP per capita in purchasing power parity (PPP) US dollars. The most recent report (2005) evaluates 177 countries, with number 1 having the best HDI and number 177 scoring the worst in the Index. CRS-25 “Threshold” Countries and U.S. Assistance In order to encourage non-qualifying countries to improve in weak areas, the United States will help governments that are committed to reform to strengthen performance so that they would be more competitive for MCA funding in future years. Congress provided in authorizing legislation that not more than 10% of MCA appropriations ($99.4 million in FY2004) could be used for such purposes, stating that the funding could be made available through USAID. The MCC set aside up to $40 million for countries that just missed qualifying for FY2004 funding and projects an additional $90 million for FY2005, subject to the quality of submitted proposals.33 Of the 18 countries selected to participate as Threshold Countries, the Corporation has approved six programs for Albania, Burkina Faso, Malawi, Paraguay, Tanzania, and Zambia. According to the Threshold Program Policy guidance issued by the Corporation,34 the program will assist countries make policy reforms and institutional changes in areas where they failed to meet the MCA performance criteria. In order to qualify, countries must submit concept papers identifying: ! where and why the country failed to pass specific indicators; ! proposals for policy, regulatory, or institutional reforms that would improve the country’s performance on these indicators; and ! types of assistance, over a two-year maximum period, required to implement these reforms. 26 If the Corporation, in consultation with USAID, determines that the concept paper paper shows sufficient commitment to reform and a promise of success, the country will will prepare a Threshold Country Plan that specifically establishes a program schedule, the means to measure progress, and financing requirements, among other considerations. USAID is charged with overseeing the implementation of Threshold Country Plans, including working with countries to identify appropriate implementing partners such as local, U.S., and international firms; NGOs; U.S. government agencies; and international organizations. Like regular MCA Compacts, funding is not guaranteed for each country selected for the Threshold Program, but will be based on the quality of the Country Plan. The MCC signed the first Threshold Agreement with Burkina Faso on July 22, 2005. The $12.9 million plan is designed to improve girls’ primary education, targeting areas of the country with the lowest primary completion rates. Although Burkina Faso “passed” enough performance indicators to qualify for a regular MCA 33 Initially, assistance for Threshold countries was authorized only for FY2004. The FY2005 Foreign Operations Appropriations (Division D of P.L. 108-447, the Consolidated Appropriations Act for FY2005, makes 10%, or $149 million of the new appropriation available Threshold assistance. H.R. 4014, as introduced on October 7, 2005, would make the 10% set-aside for threshold programs permanent. 34 Found at [http://www.MCC.gov]. CRS-26 program in FY2005, the Corporation’s Board did not select the country, presumably because its scores on girls’ primary education completion and days to start a business fell significantly below the median level. Subsequently, the MCC has signed fiveseven other Threshold programs — with Malawi (September 23, 2005), Tanzania (February 1, 2006), Albania (February 8, 2006), Paraguay (February 16, 2006), and Zambia (April 18Zambia (April 18, 2006), Philippines (June 16, 2006), and Ukraine (June 16, 2006) — each aimed at curbing corruption. Role of USAID and the Future of Agency Programs in MCA Countries As noted above, how USAID would participate in the MCA initiative has been a continuing concern of Congress and various policy analysts. Legislation authorizing the MCC requires the Corporation’s CEO to coordinate with USAID and directs the Agency to ensure that its programs play a primary role in helping candidate countries prepare for MCA consideration. Corporation and USAID officials have said there will be close collaboration between the two entities, although the precise nature of the relationship has yet to be made public. USAID maintains missions in 17 of the 23 eligible countries and might be expected to support MCC programs, through contracting, procurement, and monitoring tasks. Another question is how USAID will adjust its own programs in MCA countries, especially where the Agency maintains relatively small activities in relation to other donors. Since the goal is to provide resources that will make MCA programs among the largest aid operations in a country, it was anticipated that USAID spending would fall well below amounts provided through MCC Compacts. For example, in Mongolia, where U.S. aid programs have totaled $10-$12 million annually in recent years, the United States was the fourth largest bilateral donor in 2002, representing less than a quarter of the size of Japan’s economic aid disbursements. In Ghana, Senegal, and Sri Lanka, USAID maintains larger programs but spends far less than other countries and multilateral agencies. But in the case of the first Compacts for Madagascar, Honduras, and Nicaragua, the MCA grants are only somewhat larger on a per-year average ($28 million for Madagascar, $43 million for Honduras, and $35 million for Nicaragua) than USAID’s “core” economic aid CRS-27 programs (about $24 million for Madagascar, $35 million for Honduras, and $34 million for Nicaragua). For Georgia, the Compact’s average level of $59 million is below USAID’s $68 million allocation for FY2006. Like other issues involving USAID, this question remains under review. USAID Administrator Natsios told the House Appropriations Committee on May 9, 2004 that the Agency would not withdraw from or cut programs in MCA countries, but would not increase spending either. He said, however, that USAID would work to ensure that its programs operate in an integrated way with MCA-funded activities. The FY2007 USAID budget request offers the first look at how funding and sector distribution levels may be affected by MCA Compacts. For each of the six Compact countries where USAID maintainsmaintained a mission presence at the time of the request, “core” economic assistance would be reduced under the FY2007 budget plan. In most cases, the reductions would be taken in the sector of economic growth, not for health or education programs. Nonetheless, some critics continue to express concern that CRS-27 MCA funding is not always additive, as had been the pledge, but will substitute for portions of previous USAID bilateral development aid programs. Funding Issues — Previous and in the 109th Congress As mentioned above, Congress appropriated $994 million for FY2004 MCC programs, $1.488 billion for FY2005, and $1.75 billion for FY2006. The enacted appropriations for FY2005 and FY2006 were well below the President’s $2.5 billion and $3 billion requests, respectively. In each year, the MCC proposal was by far the largest increase sought by the Administration in the Foreign Operations appropriations bill and viewed by many observers as one of the most vulnerable items in an increasingly difficult budget environment. For some time, some Members of Congress have raised questions regarding whether sufficient funds will be available to support MCC programs in every country selected, especially if the Board continues its practice of selecting more countries than meet the strict criteria. MCC officials point out that qualification for the program does not mean that a government will receive funding. That decision will be based on the quality of the Compact proposals and it is possible that the Corporation will not finalize agreements with all eligible countries. MCA Request and Congressional Action for FY2007. The Administration seeks $3 billion appropriation for FY2007. The MCC estimates that it will exhaust all existing appropriations from FY2004-FY2006 by the second quarter of FY2007, leaving nine currently eligible countries, plus any new nations selected for FY2007 to be funded out of the FY2007 appropriation. In testimony before the House Foreign Operations Appropriations Subcommittee on March 29, 2006, CEO Danilovich argued that a funding level less than $3 billion would require the MCC to delay the negotiation and approval process for new Compacts. He further asserted that without full funding, the ability of the MCC to leverage reforms and provide incentives to eligible countries would be diminished. Some, including Subcommittee Kolbe, questioned whether the MCC could pick up the pace of signing new Compacts to the degree required to utilize the full $3 CRS-28 billion request for FY2007. Ambassador Danilovich said the Corporation has learned from its first two years of operations and has accelerated several steps in the evaluation and approval process. Congressional Action. The House Appropriations Committee voted on May 25, 2006, to reduceOn June 9, 2006, the House approved the FY2007 Foreign Operations appropriations, H.R. 5522, reducing the FY2007 MCA funding level to $2 billion. The Appropriation Committee’s draft report on the legislation (H.Rept. 109-486) said that the panel continued to strongly support the MCC and that the proposed reduction stemmed solely from the constrained budget environment and the need to allocate resources to other Presidential and congressional priorities. Pending Authorizing Legislation While there is no “sunset” provision in the Millennium Challenge Act of 2003, the initial MCA statute only authorized appropriations through FY2005. Although CRS-28 funding for FY2006 and beyond is not necessarily contingent on an authorization — annual Foreign Operations appropriation bills routinely waive the requirement of authorization of foreign aid programs — Representatives Hyde and Lantos, Chairman and the ranking Member of the House International Relations Committee, introduced H.R. 4014 on October 7, 2005, that among other things, would authorize the MCA through FY2008. Beyond this, the bill further proposes a number of policy modifications to the original legislation and to the operations of the Corporation. Modifies the Criteria for Determining the Income Grouping of Countries. Instead of classifying a country as low-income, lower middle-income, or above the lower middle-income range based on the most current per capita income figures released annually by the World Bank, H.R. 4014 proposes to use an average of the three most current years for making such determinations. This would largely have the affect of avoiding an abrupt reclassification of a country from one income group to another. Cape Verde, for example, moved from the low-income group to the lower middle-income group in FY2005, at which time it could no longer compete, and remains in this higher income category for FY2006 where it will face stiff competition from countries with nearly twice the per capita income. Under the three-year average formula recommended in H.R. 4014, Cape Verde would remain in the low-income group at least through FY2006. Likewise, several countries such as South Africa, Russia, and Turkey, that previously fell in the lower middle-income group and were assumed to be part of the FY2006 competition, are not because of a sharp rise in per capita income. Had the MCC applied a three-year average, each would have been a candidate country for FY2006. Strengthens Local Country Input in Compact Development. A continuing concern expressed in public meetings on MCA implementation is that Compacts have been developed with broad national participation of civil society. H.R. 4014 would require each Compact to describe how the government met local input requirements for the creation of the Compact and how local input will be reflected in Compact projects. The bill further adds a specific need for national legislatures of eligible countries to be consulted during the Compact development phase. Assists Countries in the Preparation of Compacts. One reason for the delay in finalizing Compacts with eligible countries has been the lack of country capacity to draft solid proposals. Although original MCA legislation authorized grants for the purpose of aiding Compact development, H.R. 4014 would expand such assistance by allowing the MCC to provide its own staff on a temporary basis for such purposes. Sets a More Precise Timetable for Compact Preparation and Signing. A key frustration by many lawmakers during the early period of MCA implementation has been long delays in the submission of program proposals and the actual completion of Compact documents. Although not mandating a specific schedule, H.R. 4014 expresses a sense of Congress that countries should be encouraged to submit proposals within a year of their selection and that it should be a goal to enter into Compacts within two years of their eligible status. CRS-29 Presidential and congressional priorities. On June 29, 2006, the Senate Appropriations Committee approved its version of the FY2007 State/Foreign Operations appropriations, providing $1.9 billion for the Millennium Challenge Corporation, $1.1 billion below the Administration request. Like the House, the Senate Committee report (S.Rept. 109-277) offered strong support to the MCC and noted that, in allocating funds, it was restricted by broader budget constraints. The Committee directs the Director of Foreign Assistance at State to submit a report no later than 15 days after the signing of a compact assessing its place within the context of the overall foreign aid program in a country and noting any possible resulting duplication of programs. It also suggests that judicial reform should be part of MCC compacts and raises a concern that education has not yet been a major part of compacts. The Committee directs that the MCC submit a report regarding steps it is taking to address social and environmental costs resulting from infrastructure investments. Authorizing Legislation On July 13, 2006, the House International Relations Committee reported a measure, H.R. 4014 (H.Rept. 109-563), introduced by Representatives Hyde and Lantos, Chairman and the ranking Member of the House International Relations Committee, that would make a number of policy modifications to the original legislation and to the operations of the Corporation. These include: Authorizes Appropriations. H.R. 4014 authorizes “such sums as may be necessary” for fiscal years 2007 through 2009. The initial MCA statute only authorized appropriations through FY2005. Annual Foreign Operations appropriations bills routinely waive the requirement of authorization of foreign aid programs, as the FY2006 Foreign Operations measure did in the case of currently unauthorized foreign aid programs, including the MCA. Allows Compacts to Cover a Longer Period. Currently, Compacts cannot last for more than five years. H.R. 4014 would permit Compacts that cannot be completed in that period to be approved for up to 10 years. Permits Multiple Compacts. Under current law, a country cannot maintain more than one Compact. H.R. 4014 would allow the Corporation to enter into two concurrent Compacts with an eligible country, so long as the country is making “considerable and demonstrable progress” in meeting the terms of the original Compact. Likewise, when a country applies for a subsequent Compact, the MCC must determine that the country has “substantially met” the goals of prior Compacts. Expands Consultation Requirements with Congress. H.R. 4014 includes several provisions that would require more extensive consultation with Congress, especially on matters for which policy changes are proposed. For example, when negotiating concurrent or subsequent Compacts, the MCC would need to notify Congress that the country had met the requirements of existing or previous Compacts. In addition, the bill would require the Corporation to consult and provide copies of Compacts to congressional committees 15 days prior to Board meetings to approve Compacts and 15 days prior to signing a Compact. H.R. 4014 further expands information the MCC must supply in its annual report. Strengthens Transparency Requirements. The initial concept of the MCA program was to make the selection process and MCC operations an open and transparent system. H.R. 4014 builds on existing legislation by requiring that the MCC post the texts of Compacts on its website; that the Corporation publish in the Federal Register its criteria for deciding whether or not to terminate assistance to a country with which a Compact is in effect; and by making the MCC and its staff subject to the Freedom of Information Act. Recommends Larger Staff. A concern voiced by many has been that the MCC, with a 200-staff target, would be too small to adequately conduct oversight and monitoring of Compacts. Compared with other U.S. and international foreign aid agencies, the ratio of staff to funds-managed is very low for the Corporation. H.R. 4014 recommends, as a sense of Congress, that the MCC maintain a staff of about 300. The Corporation has subsequently revised its projected staff size upward to approximately 300 CRS-29 Adds New Notification Requirement. Current law requires that the MCC consult with “appropriate committees” prior to negotiating a Compact. H.R. 4014 adds language requiring notification 15 days prior to signing a Compact. By requiring that the process of prior notification be followed in accordance with the procedures of reprogramming notifications under section 634A of the Foreign Assistance Act, H.R. 4014 makes explicit the requirement that the MCC Board notifies congressional authorizers as well as appropriators. CRS-30 Table 2. MCA Candidate, Eligible, and Threshold Countries — FY2004 Criteria: IDA-eligible, per capita income $1,415 and below, and not prohibited from receiving other U.S. economic assistance. Eligible Countries are in Bold. Threshold Countries are followed with (TC) Africa Income* East Asia/Pacific Income* Latin America Bolivia Guyana Haiti Honduras Nicaragua Angola $660 East Timor (TC) $430 $390 Indonesia $680 Benin Burkina Faso $220 Kiribati $810 Cameroon $560 Laos $310 $1,290 $440 Cape Verde Mongolia Chad $220 Papua New Guinea $580 Comoros $390 Solomon Islands $570 Congo, Dem Rep of $90 Tonga $1,410 Congo, Rep of $700 $1,080 Vanuatu Eritrea $160 Vietnam $430 Ethiopia $100 Gambia $280 South Asia Income* Mid-East $270 Afghanistan ** Djibouti Ghana Guinea $410 Bangladesh $360 Yemen (TC) Kenya (TC) $360 Bhutan $590 $470 India $460 Lesotho $240 Nepal $230 Madagascar Malawi $160 Pakistan $420 $240 $840 Mali Sri Lanka Mauritania $340 $210 Mozambique Eurasia Income* Europe Niger $170 $790 Albania(TC) Armenia Nigeria $290 Azerbaijan $650 Bosnia Rwanda $230 $720 Georgia Sao Tome & $290 Kyrgyz Rep. $290 Principe (TC) $470 Moldova $460 Senegal Sierra Leone $140 Tajikistan $180 Tanzania (TC) $280 Togo $270 Uganda (TC) $240 Zambia $330 * Gross National Income, dollars per capita, 2002. World Bank Annual Report, 2003. ** Precise data unavailable. Income* $940 $840 $440 $920 ** Income* $900 $490 Income* $1,380 $1,270 CRS-31 Table 3. MCA Candidate, Eligible, and Threshold Countries — FY2005 Criteria: Per capita income $1,465 and below, and not prohibited from receiving other U.S. economic assistance. Eligible Countries are in Bold. Threshold Countries are followed with (TC) Africa Income* East Asia/Pacific Income* Angola Benin Burkina Faso (TC) Cameroon Chad Comoros Congo, Dem Rep Congo, Rep of Equatorial Guinea Eritrea Ethiopia Gambia Ghana Guinea Kenya (TC) Lesotho Madagascar Malawi (TC) Mali Mauritania Mozambique Niger Nigeria Rwanda Sao Tome & Principe (TC) Senegal Sierra Leone Swaziland Tanzania (TC) Togo Uganda (TC) Zambia (TC) $740 $440 $300 $640 $250 $450 $100 $640 ** $190 $90 $310 $320 $430 $390 $590 $290 $170 $290 $430 $210 $200 $320 $220 China East Timor (TC) Indonesia Kiribati Laos Mongolia Papua New Guinea Philippines (TC) Solomon Islands Tuvalu Vanuatu Vietnam $1,100 $430 $810 $880 $320 $480 $510 $1,080 $600 ** $1,180 $480 $320 Azerbaijan $550 $150 $1,350 $290 $310 $240 $380 Latin America Bolivia Guyana(TC) Haiti Honduras Nicaragua Paraguay(TC Income* $890 $900 $380 $970 $730 $1,100 South Asia Afghanistan Bangladesh Bhutan India Nepal Pakistan Sri Lanka Income* ** $400 $660 $530 $240 $470 $930 Mid-East Djibouti Egypt Iraq Morocco Yemen (TC) Income* $910 $1,390 ** $1,320 $520 Eurasia Armenia Income* $950 Europe Income* Georgia Kyrgyz Rep. Moldova Tajikistan Turkmenistan Ukraine $810 $830 $330 $590 $190 $1,120 $970 * Gross National Income, dollars per capita, 2003. World Bank Annual Report, 2004. ** Precise data unavailable. CRS-32 Table 4A. MCA Low-Income Candidate, Eligible, and Threshold Countries — FY2006 Criteria: Per capita income $1,575 and below, and not prohibited from receiving other U.S. economic assistance. Eligible Countries are in Bold. Threshold Countries are followed with (TC) Africa Income* East Asia/Pacific Income* Latin America Income* Angola $1,030 China $1,290 $960 Bolivia $530 $550 Guyana (TC) $990 Benin East Timor $360 Indonesia (TC) $1,140 Haiti $390 Burkina Faso Cameroon $800 Kiribati $970 $1,030 Honduras Chad $260 Laos $390 $790 Nicaragua Comoros $530 $590 Paraguay (TC) $1,170 Mongolia Congo, Dem Rep of $120 Papua New Guinea $580 Congo, Rep of $770 Philippines (TC) $1,170 Djibouti $1,030 Solomon Islands $550 Eritrea $180 $1,340 Vanuatu Ethiopia $110 Vietnam $550 $290 Gambia $380 Ghana Guinea $460 South Asia Income* Mid-East Income* Guinea-Bissau $160 Afghanistan ** Egypt $1,310 Kenya (TC) $460 Bangladesh $440 Iraq ** $740 Bhutan $760 $1,520 Lesotho Morocco Liberia $110 India $620 Yemen $570 $300 Nepal $260 Madagascar Malawi (TC) $170 Pakistan $600 $360 $1,010 Mali Sri Lanka Mauritania $420 $250 Mozambique Eurasia Income* Niger $230 $1,120 Armenia Nigeria $390 Azerbaijan $950 Rwanda $220 $1,040 Georgia Sao Tome&Principe $370 Kyrgyz Rep. (TC) $400 (TC) $670 Moldova (TC) $710 Senegal Sierra Leone $200 Tajikistan $280 $330 Turkmenistan $1,340 Tanzania Togo $380 Ukraine (TC) $1,260 Uganda (TC) $270 Zambia (TC) $450 * Gross National Income, dollars per capita, 2004. World Bank, World Development Indicators, On Line, 2005. ** Precise data unavailable. CRS-33 Table 4B. MCA Lower Middle-Income Candidate and Eligible Countries — FY2006 Criteria: Per capita income between $1,575 and $3,255, and not prohibited from receiving other U.S. economic assistance. Eligible Countries are in Bold Threshold Countries are followed with (TC) Africa Cape Verde Namibia Swaziland Income* East Asia/Pacific $1,770 Fiji $2,370 Marshall Islands $1,660 Micronesia Samoa Thailand Tonga Tuvalu Income* $2,690 $2,370 $1,990 $1,860 $2,540 $1,830 ** Latin America Brazil Colombia Dominican Rep Ecuador El Salvador Guatemala Jamaica Peru Suriname Income* $3,090 $2,000 $2,080 $2,180 $2,350 $2,130 $2,900 $2,360 $2,250 South Asia Maldives Income* $2,510 Mid-East Algeria Jordan (TC) Tunisia Income* $2,280 $2,140 $2,630 Eurasia Belarus Kazakhstan Income* $2,120 $2,260 Europe Income* Albania $2,080 Bulgaria $2,740 Macedonia $2,350 Romania $2,260 * Gross National Income, dollars per capita, 2004. World Bank, World Development Indicators On Line, 2005. ** Precise data unavailable. CRS-34 Table 5. MCC Performance Indicators for FY2006 Ruling Justly Investing in People Economic Freedom Control of Corruption Source: World Bank Institute [http://www.worldbank.org/wbi/governance/govdat a2002/index.html] Public Primary Education Spending as % of GDP Sources: National governments Inflation (must be below 15%) Source: Multiple Voice and Accountability Source: World Bank Institute [http://www.worldbank.org/wbi/governance/govdat a2002/index.html] Primary Girls’ Education Completion Rate Sources: World Bank and UNESCO Fiscal Policy Source: National governments and IMF World Economic Outlook Government Effectiveness Source: World Bank Institute [http://www.worldbank.org/wbi/governance/govdat a2002/index.html] Public Expenditure on Health as % of GDP Sources: National governments Trade Policy Source: The Heritage Foundation, Index of Economic Freedom [http://www.heritage.org/research/features/index/] Rule of Law Source: World Bank Institute [http://www.worldbank.org/wbi/governance/govdat a2002/index.html] Immunization Rates: DPT and Measles Sources: World Health Organization Regulatory Policy Source: World Bank Institute [http://www.worldbank.org/wbi/governance/govdat a2002/index.html] Civil Liberties Source: Freedom House [http://www.freedomhouse.org/research/freeworld/ 2004/table2004.pdf] Days to Start a Business Source: World Bank [http://rru.worldbank.org/DoingBusiness/ExploreT opics/StartingBusiness/CompareAll.aspx] Political Freedom Source: Freedom House [http://www.freedomhouse.org/research/freeworld/ 2004/table2004.pdf] Cost of Starting a Business Source: World Bank [http://rru.worldbank.org/DoingBusiness/ExploreT opics/StartingBusiness/CompareAll.aspx] CRS-35 Table 6. Comparison of MCA Authorization Legislation Issue Administration Senate (S. 925)a House (H.R. 1950)a Conference (H.R. 2673) MCA oversight Board of Directors, chaired by Secretary of State, with Treasury and OMB Board of Directors, chaired by the Secretary of State, with Treasury, USAID, USTR, and the MCA’s Chief Executive Officer (CEO) Board of Directors, chaired by Secretary of State, with Treasury, USTR, USAID, MCC CEO, and four others nominated by the President from a Congressional list. Non-voting members include OPIC, OMB, Peace Corps, and TDA. Board of Directors, chaired by Sec. of State, with Treasury, USTR, USAID, MCC CEO, and four others nominated by the President that may come from list submitted by Congressional leaders. MCA organization Independent Millennium Challenge Corporation Independent Millennium Challenge Corporation whose CEO reports to and be under the direct authority and foreign policy guidance of the Secretary of State Independent Millennium Challenge Corporation Independent Millennium Challenge Corporation MCA coordinator CEO of Corporation CEO “manages” the Corporation, reporting to and under the direct authority and foreign policy guidance of the Secretary of State CEO “heads” the Corporation, reporting to the President CEO “manages” the Corporation, reporting to and under the direct authority and foreign policy guidance of the Board of Directors. Interim CEO Selection of countries — Board of Directors — Board of Directors — CEO of Corporation Board of Directors may appoint a confirmed U.S. Government official to serve as interim CEO until a CEO has been confirmed by the Senate. Board of Directors CRS-36 Issue Senate (S. 925)a Administration House (H.R. 1950)a Conference (H.R. 2673) MCC Advisory Council None None Nine members named by the CEO to advise on MCA policy, review eligibility criteria, evaluate the MCC, assess MCC capabilities, and make recommendations to the CEO. None Country income eligibility FY2004 - IDA eligible and per capita GNI less than historical IDA level for the year ($1,415 in FY2004) FY2004 - IDA eligible FY2004 - IDA eligible and per capita GNI less than historical IDA level for the year ($1,415 in FY2004) FY2004 - IDA eligible and per capita GNI less than historical IDA level for the year ($1,415 in FY2004) FY2005 - per capita GNI less than historical IDA level for the year ($1,465 in FY2005) FY2005 - per capita GNI less than historical IDA cutoff for the year ($1,465 in FY2005) FY2005 - per capita GNI less than historical IDA level for the year ($1,465 in FY2005) FY2005 - per capita GNI less than historical IDA level for the year ($1,465 in FY2005) FY2006 - per capita GNI less than historical IDA level for the year ($1,465 in FY2005), plus low-middle income countries as defined in the World Bank Development Report ($3,035 in FY2005) FY2006 - per capita GNI less than historical IDA cutoff for the year ($1,465 in FY2005), plus, if appropriation exceeds $5 billion, low-middle income countries as defined in the World Bank Development Report ($3,035 in FY2005); low-middle income countries capped at 20% FY2006 - per capita GNI less than historical IDA level for the year ($1,465 in FY2005), plus low-middle income countries as defined in the World Bank Development Report ($3,035 in FY2005); low-middle income countries capped at 20% FY2006 - per capita GNI less than historical IDA level for the year ($1,465 in FY2005), plus low-middle income countries as defined in the World Bank Development Report ($3,035 in FY2005); low-middle income countries capped at 25% None stated A government, including a local or regional government, or an NGO or private entity. A national government, regional or local government, an NGO, an international organization and trust funds. A national government, regional or local government, or an NGO or private entity. Eligible entity CRS-37 Issue Administration Senate (S. 925)a House (H.R. 1950)a Conference (H.R. 2673) Aid to “threshold” countries General support 10% of MCA funds available for countries failing to qualify because of inadequate data or missing one indicator 15% of MCA funds available for countries demonstrating a development commitment but fail to meet a sufficient number of performance indicators 10% of MCA funds available for countries showing a commitment to MCA criteria but fail to qualify Oversight and reports MCA contracts and performance posted on the Internet. Disclosure in Federal Register and on the Internet of eligible countries, programs supported, and performance; proposed performance indicators open to public comment; annual report to Congress CEO consultation with Congress on eligibility criteria; notification 15 days in advance on grants exceeding $5 million; “Compacts” with countries published in Federal Register and on the Internet; advance notification of aid termination; annual reports to Congress from the CEO and Advisory Council Establishes a period of at least 95 days during which Congress will receive the list of “candidate countries,” the eligibility criteria and methodology for making a final selection, and the list of “eligible” countries (those that will receive MCA assistance). Consultation with congressional committees will occur during this period and the information will be published in the Federal Register. “Compacts” with countries will be reported to Congress and published in Federal Register. Annual report by March 31. Funding FY2004 - $1.3 billion FY2005 - no decision FY2006 - $5 billion FY2004 - $1 billion FY2005 - $2.3 billion FY2006 - $5 billion FY2004 - $1.3 billion FY2005 - $3 billion FY2006 - $5 billion Such sums as may be necessary for FY2004 and FY2005. a. The Senate position is based on S. 925, the Foreign Affairs Act, Fiscal Year 2004, as amended, but not passed during debate on July 9 and 10, 2003. The House position is taken from H.R. 1950, an omnibus foreign policy authorization measure which passed the House on July 16, 2003.