Millennium Challenge Corporation: Overview and Issues

Summary

The Millennium Challenge Corporation (MCC) provides economic assistance through a competitive selection process to developing nations that demonstrate positive performance in three areas: ruling justly, investing in people, and fostering economic freedom.

Established in 2004, the MCC differs in several respects from past and current U.S. aid practices:

• the competitive process that rewards countries for past actions measured by objective performance indicators;
• its mandate to seek poverty reduction through economic growth, not encumbered with multiple sector objectives;
• the requirement to solicit program proposals developed solely by qualifying countries with broad-based civil society involvement;
• the responsibility of recipient countries to implement their own MCC-funded programs, known as compacts;
• a compact duration limited to five years, with funding committed up front;
• the expectation that compact projects will have measurable impact; and
• an emphasis on public transparency in every aspect of agency operations.

Most Recent Developments

On March 28, 2016, the MCC Board suspended its relationship with Tanzania, including further development of a second compact, due to a pattern of actions inconsistent with MCC's governance criteria. The decision was taken largely in response to Tanzania's nullification of October 2015 election results in Zanzibar and its use of a Cybercrimes Act of 2015 to limit freedom of expression and association.

On February 24, 2016, the MCC released a strategy entitled NEXT: A Strategy for MCC's Future. The document reviews and reaffirms the MCC model and establishes several priority goals.

On February 9, 2016, the Administration proposed its FY2017 budget, including $1 billion for the MCC, 11% higher than the FY2016 level.

On December 18, 2015, the Consolidated Appropriations Act, 2016, was signed into law (P.L. 114-113, H.R. 2029), providing $901 million for the MCC, $1.5 million more than was provided in FY2015 and $349 million less than the Administration request.

On December 16, 2015, the MCC Board selected Cote d'Ivoire and Kosovo as eligible to develop their first compacts and chose Senegal as eligible for a second compact. The board also selected Sri Lanka and Togo for threshold programs. Nepal, Niger, and the Philippines were reselected to continue developing their compacts. The board expressed support for continued development of a compact with Mongolia using funds from before FY2016 when it moved to upper-middle income status before its compact could be finalized (decision pending a legal determination by the Government Accountability Office). A decision on whether to reselect both Tanzania and Lesotho was postponed pending resolution of governance concerns.

On December 8, 2015, the Senate Foreign Relations Committee held a hearing on the MCC.¹

The Millennium Challenge Corporation (MCC), established in 2004, arose out of a widespread frustration with then-existing foreign aid programs and represented a significant change in the way the United States delivered economic assistance. The MCC 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 concept differs in several fundamental respects from past and current U.S. aid practices:

• a competitive selection process that rewards countries for their commitment to free market economic and democratic policies as measured by 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;
• a mandate to seek poverty reduction through economic growth, not encumbered with multiple sector objectives or congressional directives;
• the requirement to solicit program proposals developed solely by qualifying countries with broad-based civil society involvement;
• the responsibility of recipient countries to implement their own MCC-funded programs, known as compacts;
• a compact duration limited to five years, with funding committed up front;
• the expectation that compact projects will have measurable impact; and
• an emphasis on public transparency in every aspect of agency operations.

The original proposal, made by President George W. Bush in a speech on March 14, 2002, also differed from previous aid efforts in the size of its commitment to reach an annual level of $5 billion within a few years, an aim never even approximately met.

Congress approved the new initiative in January 2004 in the Millennium Challenge Act of 2003 (Division D of P.L. 108-199).² It established the MCC as an independent government entity separate from the Departments of State and the Treasury and from the U.S. Agency for International Development (USAID).³ The MCC headquarters staff level is currently about 254, with a total of 22 additional U.S. direct hire employees in compact countries.⁴ In May 2014, Dana J. Hyde became the new Chief Executive Officer (CEO) of the MCC. A Board of Directors oversees the MCC and makes the country selections. It is chaired by the Secretary of State and composed of the Secretary of the Treasury, the USAID Administrator, the U.S. Trade Representative, the Corporation's CEO, and four individuals from the private sector appointed by the President drawn from lists submitted by congressional leaders.⁵

Since its inception, Congress has closely followed MCC implementation. The 114^th Congress will likely consider MCC funding, a possible reauthorization, and operational issues.

One of the distinctive features of the MCC is the manner in which it selects the countries that receive its assistance. No other aid agency, U.S. or foreign, has adopted a similar methodology.

Country selection moves chronologically through a number of steps: candidate countries are identified, eligibility criteria are formulated and applied, compact and threshold program-eligible countries are selected. Elements in this process are discussed below.

The pool of possible candidate countries is limited by the authorizing statute to those falling under the threshold for the World Bank's classification for upper-middle income countries.⁶ For FY2016, this limit is a Gross National Income (GNI) per capita of $4,125. As a result, the pool of possible candidates is 81 countries for FY2016.⁷

Apart from the necessity to be under the income ceiling to be broadly considered for candidacy, income level status—in particular, the division of candidate countries between lower-income and lower-middle income—is important in both the financing and competitive selection processes and, since FY2012, has been treated differently in each case. See "Weighing Country Performance" below for competitive performance selection discussion.

For funding purposes, a country's income level is important because, under the MCC legislative authority, 75% of total MCC compact assistance in any year is available for lower-income country compacts. Only 25% of compact assistance is available for lower-middle-income country compacts, severely limiting the possibility that such countries can be funded and therefore discouraging the MCC Board from selecting them.

It is MCC practice that low-income countries "compete" with other low-income countries and lower-middle income countries with other lower-middle income countries. With regard to the competitive selection process that determines compact eligibility, the original income level definitions in the MCC authorization still apply, not those introduced in FY2012 for funding purposes.¹⁴ The eight countries excluded from candidacy due to legislative prohibitions on assistance are included in the pool of competing countries strictly for comparative performance purposes. In the FY2016 selection process, there are 47 low-income candidate countries, (excluding the 6 low-income aid-prohibited countries) competing with each other, and 26 lower-middle income countries (excluding 2 aid-prohibited countries) competing with each other, a total of 73 candidate countries from which compact-eligible countries may be chosen.

The MCC provides assistance to developing nations through a competitive selection process, judged by country performance 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.
• Economic freedom—fostering enterprise and entrepreneurship and promoting open markets and sustainable budgets.

Pursuant to reporting requirements set in the MCC legislation, each year the Corporation sends to Congress an overview of the criteria and methodology that would be used to determine the eligibility of the candidate countries in that fiscal year.¹⁵ The choice of criteria on which to base the eligibility of countries for MCC programs is one of the most important elements in MCC operations. They are a key statement of MCC development priorities as they ultimately determine which countries will receive U.S. assistance. Perhaps of equal significance, raising indicator scores has become a prominent objective of some developing countries in what former CEO Danilovich called the "MCC effect."¹⁶ Countries seeking eligibility are said to be moving on their own to enact reforms and take measures to improve performance scores that would enable them to meet MCC criteria. (See the "Compact Outcomes and Impact" section for further discussion of the MCC effect.)

Periodically, the MCC introduces new indicators and modifies or replaces old ones in an effort to improve their quality and identify indicators better reflecting congressional intent. Beginning with the FY2005 selection process, for example, 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). For FY2006, the MCC replaced a "country credit rating" with a new indicator on the "cost of starting a business" that it believed had a stronger correlation with economic growth and was a measurement that might encourage governments to take action in order to improve their scores. Since the initial use of the indicator "days to start a business," MCC candidate countries had introduced many business start-up reforms, the results of which were reflected in a lowered median for this category. MCC officials hoped that adding an indicator for the "cost of starting a business" would stimulate additional policy improvements. In FY2008, the MCC collapsed the "days to start a business" and "cost of starting a business" indicators into one "business start-up" indicator.

In addition to criteria originally proposed by the Bush Administration, lawmakers in the 2004 MCC authorizing legislation included four other 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; respects worker rights; supports a sustainable management of natural resources; and makes social investments, especially in women and girls. For each of these, the MCC sought to use supplemental data and qualitative information to inform its decisions on compact eligibility. The latter two factors led to the development of new indicators. In FY2005, an indicator measuring girls' primary education completion rates replaced a broader measure used in FY2004 that did not disaggregate primary education graduation by gender. In FY2008, two indicators assessing a country's commitment to policies that promote sustainable management of natural resources were adopted.

In September 2011, the MCC Board adopted for the FY2012 process perhaps the most significant changes to its selection methods since the agency was established. These continue to be applied in FY2016. The MCC modified or added new indicators under all three baskets. Under the Ruling Justly basket, a "freedom of information" indicator, including a measure of efforts to restrict Internet content, replaced the "voice and accountability" indicator. Under Investing in People, a measure of "natural resource management" was split into two indicators, one focusing on "natural resource protection" that assesses whether countries are protecting up to 10% of their biomes, and the other on "child health," which captures the earlier indicator's data on access to improved water, sanitation, and child mortality. The indicator on girls' education was amended solely for lower-middle-income countries to weigh the number of female students enrolled in secondary school, rather than those completing primary school, which remains the indicator for low-income countries. Two new indicators were added to the Economic Freedom category of performance measures. An "access to credit" indicator reflects the importance of credit in stimulating private sector growth. A "gender in the economy" indicator measures a government's commitment to promote equal economic legal rights for both men and women.

Shortly after release of the performance criteria, the MCC publishes a scorecard of candidate country performance. Sometime later, the MCC Board meets to select countries eligible to apply for compact assistance.

For most performance indicators, each country is judged against its peers in its income group, requiring a score just above the median to pass that indicator. For several of the indicators, there is an absolute threshold that must be met in order to pass that indicator. The absolute threshold indicators include an "inflation rate" under 15%, "political rights" requiring a score above 17, "civil liberties" requiring a score above 25, and, for lower-middle-income countries only, an "immunization coverage" of above 90%.

The board is guided by, but not entirely bound to, the outcome of the performance indicator review process; board members can apply discretion in their selection. Performance trends, missing or old data, and recent policy actions might come into play during selection deliberations. For countries being considered for second compacts, the history and success of implementation of the first compact is a significant factor.

Because it is MCC practice to judge the performance of countries within their income status cohort, countries that move from one year to the next from low-income to lower-middle income status may be affected negatively by being compared to countries longer established at a higher level of development. Seeking to mitigate the negative consequences of income change on the selection process, in September 2009, the MCC Board announced that henceforth, for countries that move from low to lower-middle income status, it would consider their performance relative to both their old income group and the newer one for a period of three years. But it only does this as supplemental information and, to date, has only considered the previous status of those countries it is considering for reselection.

Just because a country passes the requisite number of qualifying indicators does not mean that it will be selected for compact eligibility. This can be due to a variety of reasons, not least of which is the limited funding available to support compacts. The board is not required to give a reason for its selections and only occasionally offers one. Most often it appears that a country has passed the requisite number of qualifying indicators but is not selected because it scores very poorly—perhaps in the lowest 25^th percentile—in one or more of the remaining indicators. For example, in FY2005, the Philippines passed 13 of the then-16 indicators, but was not made eligible, because it scored "substantially below" the median on tests for health expenditures and fiscal policy, and more recent trends indicated the fiscal policy situation was deteriorating further.¹⁷ In FY2006, Bhutan, China, and Vietnam passed enough hurdles but were not chosen based on very low scores on political rights and civil liberties; Uganda passed 12 of the 16 indicators and did not fall significantly below the median on the other four, but was not selected for unexplained reasons.

At times, countries have been deemed compact eligible without meeting a sufficient number of qualifying factors or with weak scores in some qualifying areas. In most such cases, the board takes into consideration recent policy changes or positive trend lines. For example, in FY2004, the program's first year, several countries (Georgia, Mozambique, and Bolivia) were selected despite having failed the so-called "pass-fail" corruption indicator. Mozambique, which failed on corruption and each of the four "investing in people" indicators, was chosen based on supplemental data that were 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. In FY2004, Cape Verde 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 to 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. In FY2011, Georgia was invited to submit a proposal for a second compact despite failure in the "investing in people" basket; supplemental information attributing an insufficient score in immunization rates to a temporary shortage of one vaccine helped the board toward a positive decision.

Even prior to its selection in FY2007, the possible choice of Jordan had come in for severe criticism from some quarters. Freedom House, the organization whose annual Index of Freedom is drawn upon for two of the "ruling justly" indicators, had urged the MCC Board to bypass countries that had low scores on political rights and civil liberties. It argued that countries like Jordan that fell below 4 out of a possible 7 on its index should be automatically disqualified. Jordan, however, did well on three of the other indicators in this category. Several development analysts further argued that Jordan should not be selected, because it is one of the largest recipients of U.S. aid, has access to private sector capital, and is not a democracy.¹⁸ In selecting Jordan, the MCC Board appears not to have been swayed by these arguments.

The board has, at times, selected a country and then, in future years, and prior to approval of a compact, de-selected it if its qualifying scores worsened or other factors interceded. Although the Gambia was selected in FY2006, its eligibility for MCC assistance was suspended by the MCC Board in June 2006 because of "a disturbing pattern of deteriorating conditions" in half of the 16 qualifying factors. Among the problems cited in this case were human rights abuses, restrictions on civil liberties and press freedom, and worsened anti-corruption efforts.¹⁹ For the 2008 selection process, the MCC Board eliminated Sri Lanka because of the resurgent civil strife that would make a compact problematic. In the FY2009 selection round, the board decided not to reselect several countries that had been eligible in previous years—Bolivia, Timor-Leste, and Ukraine. In FY2008 and FY2009, both Ukraine and Timor-Leste failed the corruption indicator. Timor-Leste, in addition, failed the "investing in people" basket in those years. Bolivia, however, had passed its indicator test in every year. A hold put on MCC consideration of Bolivia's compact proposal in FY2008 and its exclusion from eligibility in FY2009 appeared likely due to the political tensions existing between it and the United States rather than its performance in development-related matters. In the FY2014 selection round, both Benin and Sierra Leone were not reselected for compact eligibility, because they failed the "control of corruption" indicator. In the FY2016 round, Tanzania, selected in FY2013, 2014, and 2015, was suspended from further consideration of a second compact due to a pattern of behavior that put in question its adherence to democratic principles.

Some countries have remained eligible despite failing performances in years following their selection. For example, Indonesia, selected in FY2009, failed the corruption indicator, half the indicators, and the investing in people basket in FY2010 and FY2011. It remained compact-eligible and signed a compact in 2011, because Congress allowed it to be judged and funded as a lower income country, in which case it passed the selection requirements. In FY2014, the board continued the eligibility of Liberia and Morocco, although both failed slightly more than half the 20 indicators (11). While compact development could go forward, the board indicated that it expected both to pass the scorecard before a compact would be approved. And both did pass in FY2015 and FY2016.

Except in certain extreme circumstances, described in the "Compact Suspension and Termination" section below, countries that are already implementing compacts are generally unaffected by a decline in performance indicators. Nine of the 19 countries implementing compacts as of December 2010 would not have qualified in the FY2011 selection round. Up to that point, Georgia and Vanuatu had failed three years in a row; Armenia, El Salvador, Mali, and Mozambique had failed four years in a row. Morocco had failed for five years straight.²⁰ Since then, this picture has changed; only 2 of 16 active compacts would have failed in December 2011, 5 of 15 in 2012, 3 of 10 in 2013, and 2 of 11 in 2014. In December 2015, only Indonesia of 12 compact countries failed the FY2016 indicators.²¹

In not strictly following the rule of the performance indicators, the MCC has argued that the indicators themselves are imperfect measures of a country's policies and performance. The indicators often suffer from lag time, reflecting when the raw data were derived as much as a year or more previously. A country's position vis-à-vis its peers may also fluctuate considerably from year to year without reflecting any significant change in the country's policies. Countries following reasonable policies may fall behind the performance criteria when other countries are improving faster—thereby raising the bar. A shift in position from the low income to lower-middle income group can similarly alter a country's scores as it competes with countries more likely to achieve better indicators than ones in the lower income group. They may also fail when new criteria are introduced which countries have not had an opportunity to address and when institutions measuring performance refine or revise their indicators.

Low-Income Countries

Lower-Middle-Income Countries

Cote d'Ivoire

Nepal

Niger

Senegal II

Kosovo

Philippines II

In its FY2016 selection round on December 16, 2015, the MCC Board chose Cote d'Ivoire and Kosovo as eligible to develop their first compacts and Senegal as eligible for a second compact. The board also selected Sri Lanka and Togo for threshold programs. Nepal, Niger, and the Philippines were reselected to continue developing their compacts. The board expressed support for continued development of a compact with Mongolia using funds from before FY2016 when it moved to upper-middle income status before its compact could be finalized. However, appropriators have asked that GAO assess the legality of funding compacts for countries that graduate to upper-middle income status, and the status of Mongolia's compact will likely hinge on its views. A board decision on whether to reselect both Tanzania and Lesotho was postponed pending resolution of governance concerns. On February 28, 2016, the board suspended Tanzania from further development of a compact due to pattern of behavior contrary to MCC governance standards.

The MCC operates two types of assistance programs: a long-term, large-scale investment in a country-developed and country-implemented set of projects, known as a compact, and a short-term, more narrowly defined, donor-managed effort to help prepare possible candidates for compact eligibility, termed a threshold program. These programs are discussed below.

Signed MCC Compacts

2005

Madagascar, Honduras, Cape Verde I, Nicaragua, Georgia I

2006

Benin I, Vanuatu, Armenia, Ghana I, Mali, El Salvador I

2007

Mozambique, Lesotho, Morocco I, Mongolia

2008

Tanzania, Burkina Faso, Namibia

2009

Senegal I

2010

Moldova, the Philippines, Jordan

2011

Malawi, Indonesia

2012

Cape Verde II, Zambia

2013

Georgia II

2014

Ghana II, El Salvador II

2015

Benin II, Liberia, Morocco II

Typically, by the time of compact signing, the entity that was established as point of contact during program development segues into the compact management and oversight body, the "accountable entity" usually known as the MCA. Its board is usually composed of government and non-government officials, including representatives of civil society. The government representatives are usually ministers most closely associated with compact project sectors. The MCA itself may take a variety of forms. In Tanzania, it was a government parastatal established by presidential decree under the Ministry of Finance. In Namibia, it is a separate unit within the ministry-level government National Planning Commission.

MCA staff will include fiscal and procurement agents, in many cases duties contracted out and in some cases, where the capacity is available, undertaken in-house. In the case of Namibia, for example, procurement started as a contracted function, and, when capacity improved, the contractor was replaced by an MCA-staffed procurement office. The MCA is also responsible for ensuring that accountability requirements concerning audits, monitoring, and evaluation take place. Environmental, gender, and other social requirements embedded in the compact agreement are its responsibility as well. Held to a strict five-year timetable and limited budget, the MCA faces a daunting challenge for most developing countries. For many countries, the process of getting the MCA set up, staffed, and operating was very time consuming and difficult, in some cases causing delays in implementation.

As, perhaps, the most important aspect of compact implementation, MCC procurement processes are a good example of how the MCC is building government capacity at the same time that it provides development project assistance and maintains accountability oversight for the use of U.S. funds. In the course of implementing compacts, the MCA signs hundreds of contracts each year to procure equipment, construct infrastructure, or obtain technical expertise. Under MCC rules, compact procurement processes are based on World Bank procedures, not U.S. federal acquisition requirements or the compact country's own rules. To counter corruption, build capacity, and achieve the maximum value for the cost of goods and services, MCC-approved rules feature transparent, competitive bidding from all firms, regardless of national origin. According to the MCC, companies from 89 countries have won MCC-funded procurement contracts, with U.S. firms winning the most, roughly 15% of the total value of contracts.³⁰

MCC-supported procurements are fixed-price contracts, putting the burden on the contractor to get the work done to meet the agreed price. The MCC has a set of standards and guidelines for all its project contracting. The MCC requires that procurements are preceded by a price reasonableness analysis to ensure that bids are realistic. An independent evaluation panel is selected for each discrete procurement, with all members requiring MCC approval to ensure that appropriate technical expertise is represented. The panel's report is also vetted by the MCC.

Reportedly, several countries have adopted this methodology for their procurements. Cape Verde is applying it to all public procurements. Honduras said it would maintain the program management unit to deal with projects funded by other donors and would apply MCC guidelines for procurement.³¹

The MCC itself has only a very small staff located in-country, composed chiefly of a Resident Country Director and a deputy. To assist in oversight of infrastructure projects, which account for more than half of MCC activities, MCC will often hire an independent engineering consultant. Close cooperation and guidance is also provided by MCC Washington headquarters expert staff at all points of implementation, on procedure as well as on sector technical support. MCC has to sign off on all major steps during implementation, including each disbursement. To reduce the risk of corruption, funding is transferred periodically and directly to contractors following a determination that project performance has continued satisfactorily. An appealing feature of MCC contracts to international contractor firms is that payment is made by the U.S. Treasury, not the compact country.

Following completion of a compact, the MCC conducts impact or performance evaluations using independent evaluators. Results of the evaluations are being made public. As of mid-January 2016, 47 evaluations had been completed and 97 were planned or ongoing.

As projects are implemented, events may require that changes be made to compact plans.³² In 2007 and 2008, for example, the convergence of a depreciating U.S. dollar and rising costs for the machines and material necessary for the many infrastructure projects conducted by MCC meant that MCC projects were faced with having less funding than envisioned to meet the agreed-on objectives. At the time, at least six projects were scaled-back from original plans or supplemented by financing from other sources. In 2010, increased costs due to design changes and higher construction costs led to the reallocation of nearly $40 million for a Ghana transportation project. A reallocation of project resources was made unnecessary when bids on Tanzania's rural roads came in higher than budgeted, because the Tanzanian government committed funds to make up for the shortfall. The number of boreholes to be drilled under a rural water supply project in Mozambique was reduced from 600 to 300-400 because the amount allocated for construction was insufficient. Although the MCC is trying to address potential changes by requiring more frequent portfolio reviews and early identification of high risk projects, projects planned for a five-year life span are likely to undergo revision at some point. Changes in country policy performance, however, are less foreseeable and may carry more serious consequences. These are discussed below.

Throughout the entire process from candidacy to eligibility through development and implementation of a threshold program or compact, countries are expected to maintain a level of performance on the criteria reasonably close to that which brought them to their MCC threshold or compact-eligible status. On more than one occasion and for a variety of reasons, MCC programs have been suspended or terminated.

Section 611(a) of the Millennium Challenge Act of 2003 provides that, after consultation with MCC's Board of Directors (Board), the CEO may suspend or terminate assistance in whole or in part if the CEO determines that (1) the country or other entity receiving MCC aid is engaged in activities which are contrary to the national security interests of the United States; (2) the country or entity has engaged in a pattern of actions inconsistent with the criteria used to determine the eligibility of the country or entity; or (3) the country or entity has failed to adhere to its responsibilities under its compact. This policy applies to MCC assistance provided through a compact, for compact development and implementation, and assistance through a threshold agreement.³³ All compacts contain language providing that MCC may terminate the compact if the government engages in a pattern of action inconsistent with the criteria used to determine the eligibility of the country for assistance. This is the standard compact language that has been cited in most, if not all, prior MCC compact terminations.

In addition, all countries at all points of the process are affected by certain strictly applied foreign assistance restrictions in the Foreign Assistance Act of 1961 and in annual appropriations legislation. For example, restrictions on aid to countries whose governments are deposed by a military coup prevent countries from being considered for MCC candidacy, eligibility, or continued threshold or compact implementation.³⁴

Application of legislative restrictions varies according to circumstances. The MCC has four steps available to it as responses to any perceived violations of its performance rules. It may warn a country of its concerns and potential consequences. It may place a program or part of a program on hold. These actions are both preliminary steps that can be taken by management without immediate concurrence of the board. The two further steps, suspension and termination, must be made by the Board of Directors.

In all cases when some possible violation of MCC standards has been brought to the attention of the agency, the MCC Department of Policy and Evaluation conducts a review of the evidence and presents it with a recommendation to the board. The board does not uniformly follow the recommendation made. If a determination is made to hold, suspend, or terminate, it may be further determined to affect a whole or only part of the compact.

The MCC has suspended or terminated programs in the following cases:

• Threshold programs have been suspended in Niger (December 2009, reinstated in June 2011), due to undemocratic actions taken by its leadership contrary to the MCC's governance criteria; suspended in Yemen (November 2005, reinstated February 2007, but never implemented) due to a pattern of deterioration in its performance criteria; and terminated in Mauritania (2008) due to aid prohibitions on governments deposed by a coup.
• Compact eligibility was suspended in the Gambia (June 2006) because of "a disturbing pattern of deteriorating conditions" in half of the 16 qualifying factors. Eligibility for a second compact for Tanzania, expected to have been worth $473 million, was suspended (March 2016) due to governance concerns.³⁵
• Portions of compacts have been terminated in Nicaragua (June 2009), because of the actions of the government inconsistent with the MCC eligibility criteria in the area of good governance; and in Honduras (September 2009), because of an undemocratic transfer of power contrary to the Ruling Justly criteria. The compact in Madagascar was terminated due to a military coup (May 2009). In Armenia (2008), MCC put a hold on a portion of the compact due to poor performance in a range of governance indicators, but the board did not formally vote to suspend. The Mali compact, put on operational hold in March 2012 after a military coup, was terminated in August 2012.
• Most recently, in March 2012, the MCC Board suspended the Malawi compact. This followed the placing of an operational hold on the Malawi compact in July 2011, only a few months after the compact was signed, both steps taken as a result of a pattern of actions by the Malawi government "inconsistent with the democratic governance criteria" of the MCC. The Malawi suspension was lifted in June 2012 when democratic behavior significantly improved.

The number of holds, suspensions, or terminations suggests that the MCC takes seriously its legislative mandate by moving to address violations of its performance standards. These prior instances of MCC program suspension and termination indicate that the MCC is most likely to apply Section 611(a) in response to an undemocratic transfer/retention of power, a violation of the Ruling Justly eligibility criteria. Despite these efforts by MCC, observers have noted instances in the past in which MCC has not taken action to restrict eligibility to countries with questionable records on political rights and civil liberties, for instance Jordan.³⁶ And, as noted above, a number of compact countries have failed one or more of their qualifying indicators for one or more years in a row during the period of compact implementation without serious consequences.

The MCC expects that as yet unobligated funds combined with future FY2017 appropriations will support compacts in several of the existing pool of six to possibly nine compact-eligible countries. According to the MCC, Board consideration is most likely to occur in FY2016 for the following:

• Niger. Niger's first compact is under development. A constraints analysis has been completed and a large-scale irrigated agriculture infrastructure project and a community-based livestock and agriculture project are being designed. A compact would likely be funded at $450 million.

• Lesotho. Like Tanzania, Lesotho's reselection for compact eligibility also awaits resolution of governance concerns. The June 2015 board meeting noted that the MCC had communicated to Lesotho its concerns regarding the state of the rule of law in that country. The December 2015 meeting deferred a decision on reselection due to continued concerns regarding governance and awaited a report on the issue from the Southern Africa Development Community. The required constraints analysis has been completed for Lesotho's second compact, and a compact would likely focus on health, job skills, land rights, and/or the regulatory and policy environment. Due diligence has been conducted on some of these potential projects. A compact would likely be funded at around $210 million.
• Mongolia. Mongolia's second compact eligibility is also in abeyance pending a decision on whether its recent move from lower-middle income to upper-middle income status excluded it from compact eligibility using fiscal year funds prior to that move. Its constraints analysis identified the weak macroeconomic environment and policies negatively affecting business, air pollution impacts on health, and access to water and sanitation in poor communities as possible compact targets. A compact would likely be funded at $260 million.
• Nepal. Nepal's first compact, estimated at $301 million, is expected to address the energy and/or transport sectors, identified as key constraints to growth.
• Philippines. The constraints analysis for the Philippines' second compact, estimated at $430 million, highlighted government coordination and implementation capacity, the high costs of transport logistics and electricity, and problems in rural markets as likely targets of MCC assistance.

In addition to compacts, the MCC has supported "threshold" programs—smaller, more short-term (two to three years) programs designed to assist promising candidate countries to become compact-eligible.

Up to 2010, threshold programs addressed shortcomings in a country's qualifying indicators—most focusing on corruption concerns, as this pass/fail indicator prevented numerous candidates from compact eligibility. In 2010, the threshold program underwent an extensive review in part because some Members of Congress and others had raised questions regarding its efficacy; an explanatory statement accompanying the FY2009 Omnibus appropriations suggested that an assessment of the programs be undertaken before more were approved.³⁷ Accordingly, the MCC did not select any new countries for threshold eligibility for FY2010 and did not request funding for the program in its FY2011 budget.

The MCC announced a new approach to these programs in September 2010. Now threshold programs focus less on specific qualifying indicator scores and more on resolving policy constraints to economic growth that are preventing countries from becoming compact-eligible. According to the agency, these allow MCC to begin work on reforms in problem sectors that would likely be among those addressed in compact projects, and they initiate a relationship in which the MCC can better judge a country's capacity to implement a possible compact in the future.

On February 24, 2016, the MCC released a document entitled NEXT: A Strategy for MCC's Future.⁴⁰ The strategy reviews and reaffirms the MCC model and the principles on which that model is based. It also establishes several priority goals, including in the words of the MCC:

• "Help countries choose evidence-based priorities in growth and poverty reduction strategies that reflect new learning and new opportunities." Among other action items, the MCC is promising to improve its analysis during compact development, including a constraints analysis that better assesses impacts on women and marginalized groups and incorporates public and private donors as partners in addressing constraints, and an economic analysis that considers regional integration opportunities. The MCC will also seek better integration of environmental and social factors in selection of poverty reduction strategies.
• "Strengthen reform incentives and accountability." The MCC plans to push for partner government reforms that will have greater systemic impact, including prioritizing those that support sustainability and address corruption. It will use the threshold program more as a tool for promoting reform.
• "Broaden and deepen public and private partnerships for more impact and leverage." The MCC is intent on exploring multi-country investments; working more with local governments, including subnational partnerships; and collaborating more with other U.S. government agencies. It also will seek to foster public-private partnerships, leverage more private sector involvement, engage more partnerships with foundations and corporations, and encourage U.S. companies to participate in compact procurements.
• "Lead on data and results measurement, learning, transparency, and development effectiveness." The MCC will work to improve its ability to measure systemic impacts and track gender and social inclusion goals. It will seek data to accurately identify countries with high poverty rates. It will take steps to share its data-driven approach with other development organizations.
• "Maximize internal efficiency and productivity and maintain and motivate a world class, high functioning staff." The MCC promises to improve its efficiency and effectiveness, designing better compacts faster with stronger outcomes, by strengthening its staff and management capabilities.

Concerns regarding the MCC have been expressed at various points in time on its level of funding, its operations, and its ability to ensure project sustainability; aspects of procurement; and the risk of corruption. These and other issues are discussed below.

When the MCC was proposed, it was expected that, within a few years, the level of funding would ramp up to about $5 billion per year. For a variety of reasons, not least of which is the limitation on available funding for foreign aid, the MCC never achieved anywhere near that level of funding. In fact, in most years since the MCC was established, its enacted appropriation has been well below the President's request.

On February 9, 2016, the Administration issued its FY2017 budget request, proposing $1 billion for the MCC, an 11% increase from the FY2016-appropriated level.

(in $ millions)

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17 req.

Request

1,300

2,500

3,000

3,000

3,000

2,225

1,425

1,280

1,125

898

898

1,000

1,250

1,000

Enacted Approp.

994

1,488

1,752

1,752

1,544

875

1,105

900

898

898

898

899

901

—

Post-Rescission Approp.

989

1,480

1,751

1,746

1,484

871

1,081

898

898

853

898

899

901

—

At its December 2014 meeting, the MCC Board stated its support for possible efforts by the agency to consider developing regionally oriented partnerships, especially in South Asia. Regional compacts, MCC argues, could provide higher rates of return on MCC investments, benefitting from economies of scale and supporting trade between nations. In support of this approach, in its FY2016 and FY2017 budget presentations, the MCC has proposed legislation authorizing concurrent compacts—more than one in a country at the same time—justified as overcoming a major barrier to regional programs. A bill supporting regional compacts and containing the concurrent compact authorization language was introduced in the 114^th Congress as S. 1605 (Cardin) on June 18, 2015, and language authorizing concurrent compacts is contained in H.R. 2845, the AGOA Enhancement Act of 2015, which was reported out of the House Foreign Affairs Committee on November 5, 2015.

The argument for concurrent compacts as a condition for regional programs is that, as compacts are bilaterally based and awarded to countries only rarely, the opportunity to initiate compacts at the same time in two contiguous countries is unlikely to arise. The most probable scenario would be one in which a compact already exists in one country and another, contiguous country is subsequently awarded a compact. At that point, it might be possible to then add another project to the first compact country while simultaneously developing a compact with a regional element in the second. To add another project to an existing compact, concurrent compacts must be permitted.

Nepal, currently developing its first compact, is a possible candidate for a regional concurrent compact. Its close relationship with India—which passes the performance indicators, but has not been offered compact eligibility—opens the door to exploring power or transport sector themed compacts whose economic impact might be strengthened by having a regional element. Similarly, there are regional possibilities that might be explored with Cote d'Ivoire, Ghana, Benin and Niger in West Africa and with Malawi and Zambia, which are all currently compact-eligible and at different stages of compact implementation or development.

A few further challenges remain. Development of regional compacts would still depend on the right timing and coincidence of contiguous countries. MCC's budget for multiple compact activities is limited. The existence of a regional compact might raise the possibility that a misbehaving country's suspension or termination would also force suspension or termination of a compact benefitting the partner country with an unblemished policy performance record. In making regional compacts operational, the MCC reports that it would still have to find potential investments to be cost beneficial, countries would still have to want such investments to be made (and not just because MCC wanted to do them), and the investments would still have to address economic constraints to growth as do all other compacts.

The MCC places considerable weight on demonstrating measurable results. During project development, it predicts a set of outcomes—using cost-benefit analyses and calculated economic rates of return—that help determine which projects will be funded. During implementation, it gathers data to establish baselines and monitor performance. And, at project completion, it supports independent evaluations of achievements. It promises to release these findings to the public, regardless of the results, with the intention of improving the agency's performance in meeting its purpose of reducing poverty through economic growth.

Project Outputs. Foreign assistance programs have multiple levels of results, some more measurable than others. On the most elementary level, assistance program inputs—financing, technical expertise, construction, etc.—produce outputs. The MCC tracks these throughout program implementation and reports quarterly on progress made in achieving performance indicators.⁴¹ Cumulatively since 2004, the agency claims that its programs have trained 275,094 farmers, built 746 educational facilities, completed 1,787 miles of roads, formalized 311,785 land rights, and constructed 2,675 miles of electricity lines.⁴²

Project Outcomes. Some of these outputs have led to medium-term outcomes, such as an increase by 20,000 in the number of new registered businesses in Albania as a result of administrative reforms made in business licensing under its threshold program. An independent analysis of the Burkina Faso threshold program found that construction of 132 primary schools led to increased enrollment for both boys and girls by about 20% and for girls over boys by 5%.⁴³ Among the outcomes of its Port of Cotonou modernization project under the Benin compact, according to MCC, are annual savings of $2.1 million in dredging and maintenance costs and a decrease in average customs clearance time.⁴⁴

Project Impact. The most important measure of MCC activity is the long-term impact compacts can have on poverty reduction through increased incomes among poor people—the legislative mandate of the agency. Independent post-compact impact evaluations are meant to explore the relationship between an MCC investment and such an outcome, if any, so as to provide lessons for future compacts.

Eleven independent impact evaluations of compacts (and another 3 of threshold programs) have been completed as of mid-January 2016, and another 37 (and 1 threshold) are planned or ongoing.⁴⁵ In addition, 26 performance evaluations of compacts (and 7 of threshold programs) have been completed and another 49 are planned or ongoing. While impact evaluations focus on changes that are directly attributable to project interventions, performance evaluations review how the program was implemented and other questions related to program design, achievements, management, and operational decision-making. The decision to choose one type or the other may depend on whether expected accountability and learning is worth the extra cost of impact evaluations.

The first impact evaluations were published in October 2012. Examining farmer training programs conducted in five compact countries, the evaluations affirmed that the average of individual outputs anticipated for a country, such as the number of farmers trained and hectares under production with MCC support, met or exceeded their targets in all five cases (although for two countries a number of indicators had no targets). While the evaluations found increases in farm income in three countries—no measurements could be undertaken in a fourth country—in no case was it able to identify increases in household incomes. This finding may be due to a household reallocating other income sources to farming or because household income is too difficult to measure. In any case, MCC is looking for alternative methods for measuring household income for application to future compacts.

A 2013 impact evaluation of road construction in Georgia found a significant increase in industrial investment in communities near the improved road, but no evidence of impact on household-level income, consumption, or utilization of health and education services. The varied reasons for the lack of impact suggest the difficulties of impact evaluation in general—these include a possible poor choice of comparison road; a too short timeframe for measuring change as the data was derived in some cases less than a year after construction; and a focus on beneficiaries living adjacent to the project road, whereas beneficiaries may live far from the roads where they transport their goods.⁴⁶ The MCC has indicated that these early impact evaluations have taught it to better design projects as well as future impact evaluations.

The "MCC Effect." Above and beyond the standard measures of results, the MCC claims for itself an impact made by the MCC process itself. Under the so-called "MCC effect," countries are said to be establishing reforms in an effort to qualify under the 20 performance indicators. Yemen has been cited in this regard because, following its suspension from the threshold program in 2005, it approved a number of reforms to address indicators where its performance had lapsed (and subsequently was reinstated and then later suspended for different reasons). Niger passed the Natural Resources Protection indicator in FY2013 as a consequence of establishing a large new protected area. House- and Senate-approved resolutions in 2007 (H.Res. 294 and S.Res. 103) noted the role the MCC played in encouraging Lesotho to adopt legislation improving the rights of married women. It can also be argued that the establishment of local compact implementation mechanisms—the MCAs—has served a capacity building function and influenced some governments' procurement policies. These extra-ordinary results are reported only anecdotally, but if documented and measured appropriately, might prove to be of significant development value.

GAO Observations. On occasion, GAO has reviewed and commented on the MCC record in predicting and achieving compact outcomes. A 2007 GAO report highlighted a concern that, in the case of Vanuatu, projected impacts had been overstated. The GAO noted that the MCC estimated a rise from 2005 per capita income in Vanuatu of about 15% ($200) by 2015 when the data suggest it would rise by 4.6%. Although the MCC stated that the compact would benefit 65,000 poor, rural inhabitants, the data, according to the GAO, did not establish the extent of benefit to the rural poor. Further, the MCC projections assumed continued maintenance of projects following completion, whereas the experience of previous donors is that such maintenance has been poor.⁴⁷ The MCC response was that, although there may be varying views on the degree of benefit, both agencies agree that the underlying data show that the compact would help Vanuatu address poverty reduction.⁴⁸

A September 2012 GAO report called into question the quality of data used to determine beneficiary numbers in seven transportation projects in seven countries, pointing to mistakes made in formulas used, a failure to apply a methodology to all compacts, and a failure to update numbers in public documents.⁴⁹ A June 2012 GAO report questioned the quality of work done on a road construction project in Georgia and noted an array of problems that have kept part of a port constructed by MCC in Benin from full operability.⁵⁰ Sustainability concerns were raised for both projects (see below for discussion).

An important factor in assessing the success of development assistance programs, one strongly emphasized by the MCC, is the extent to which assistance efforts are sustainable after donor support ends. This question is of particular significance in the case of the MCC as most of its assistance is in the form of infrastructure, which developing countries, historically, have had difficulty maintaining due to lack of funds for physical upkeep or lack of trained technical personnel for regular maintenance.

The MCC often conditions compact aid on country adoption of policy reforms that enhance sustainability. In Tanzania, for example, the government electric power services were required to reform their tariff schedules in order to fully recover their costs, and, in those countries with road projects, provisions have been included to ensure establishment or improvement of a road fund to pay for upkeep.

GAO reports on completed compacts, however, have questioned the effectiveness of MCC sustainability efforts in the cases it examined. In Cape Verde, the road fund reportedly met only half of maintenance requirements, and water fees, established to fund infrastructure maintenance for the watershed and agricultural support project, were not being collected in one of the three watersheds. In Honduras, a required increase in the national road maintenance budget was believed to be insufficient to meet needs. Further, farm-to-market roads provided under the Honduras compact were the responsibility of municipalities that, reportedly, lacked equipment, expertise, and funds for road maintenance.⁵¹ GAO noted that, while the MCC included conditions precedent in its compact with Georgia requiring the government to maintain a level of funding for road maintenance, the government "shows limited ability to keep the road operational and well maintained." It has also questioned the ability of Benin's port authority to operate key components.⁵²

The statement of conferees of the FY2016 State, Foreign Operations appropriations required the MCC to submit a report (by mid-March 2016) on progress made to strengthen the application of the "control of corruption" indicator. This follows report language and other congressional statements in previous years expressing concerns on the corruption issue.⁵³

With developing countries themselves implementing MCC-funded programs, corruption is a major concern of the MCC, in the selection process, in threshold programs, and in compact implementation. Aiming to safeguard U.S. aid dollars, MCC programs are designed to prevent corrupt contracting. Among other things, MCC requires a transparent and competitive process and mandates separation of technical and financial elements of a bid. The MCC reviews each decision made by the procurement entity and must register approval for many of them, and it provides funds directly to contractors rather than through the government implementing entity. MCC argues that, in following this process, recipient governments learn how to do procurement in a corruption-free way.

The degree to which a country controls corruption is one of the performance indicators that help determine whether a country should be eligible for compact funding. In fact, it is a "pass-fail" indicator. Passing the indicator, however, does not mean there is little or no corruption—an unrealistic expectation for most developing countries. It only demonstrates that a country's performance is above the median relative to other countries at the same economic level.

As suggested in the discussion of country selection, the MCC board does not depend on indicator scores alone to determine the selection process. These scores change from year to year, depending on fresh data and the relative scores of competing countries. Taking this into account, the MCC board uses discretion by looking at a number of factors, including the many underlying data sources that make up indicators, as well as recent steps taken by the government in question to address corruption (or, in some cases, recent increased allegations of corruption). Accordingly, a country can be selected that technically falls near or below the median if mitigating factors occur. Alternatively, countries that pass the corruption indicator may be the subject of intense debate over incidences of alleged corruption. Because of data lags, countries passing the indicator may fail a year or two later, once a compact is in place. This can be true of all the indicators, particularly when a country "graduates" into a higher income category, thereby changing the medians. The MCC attempts to address this concern by looking for a pattern of behavior on the part of the government in order to judge the severity of any proposed corrective action.

Country

Compact Signed

Entry Into Force

Compact Completion

Compact Focus

Armenia

Mar. 27, 2006

$236

Sept. 29, 2006

September 2011

Benin I

Feb. 22, 2006

$307

Oct. 6, 2006

October 2011

Benin II

Sept. 9, 2015

$375

—

—

Electric power

Burkina Faso

July 14, 2008

$481

July 31, 2009

July 2014

Cape Verde I

July 4, 2005

$110

Oct. 17, 2005

October 2010

Cape Verde II

Feb. 10, 2012

$66.2

Nov. 30, 2012

—

El Salvador I

Nov. 29, 2006

$461

Sept. 20, 2007

September 2012

El Salvador II

Sept. 30, 2014

$277

Sept. 9, 2015

—

Georgia I

Sept. 12, 2005

$295

April 7, 2006

April 2011

Georgia II

July 26, 2013

$140

July 1, 2014

—

Ghana

August 1, 2006

$547

Feb. 16, 2007

February 2012

Ghana II

August 5, 2014

$498

—

—

Electric power

Honduras

June 13, 2005

$215

Sept. 29, 2005

September 2010

Indonesia

Nov. 18, 2011

$600

April 2, 2013

—

Jordan

Oct. 25, 2010

$275.1

Dec. 13, 2011

—

Clean water and sanitation

Lesotho

July 23, 2007

$362.6

Sept. 17, 2008

September 2013

Liberia

Oct. 2, 2015

$257

Jan. 20, 2016

—

Power/Roads

Madagascar

April 18, 2005

$110

July 27, 2005

terminated May 2009

Malawi

April 7, 2011

$350.7

Sept. 20, 2013

—

Electric power

Mali

Nov. 13, 2006

$460.8

Sept. 17, 2007

terminated August 2012

Moldova

Jan. 22, 2010

$262

Sept. 1, 2010

September 2015

Mongolia

Oct. 22, 2007

$285

Sept. 17, 2008

September 2013

Morocco

August 31, 2007

$697.5

Sept. 15, 2008

September 2013

Morocco II

Nov. 30, 2015

$450

—

—

JobTraining/ Land Productivity

Mozambique

July 13, 2007

$506.9

Sept. 22, 2008

September 2013

Namibia

July 28, 2008

$305

Sept. 16, 2009

September 2014

Nicaragua

July 14, 2005

$175

May 26, 2006

May 2011

Philippines

Sept. 23, 2010

$434

May 25, 2011

—

Senegal

Sept. 16, 2009

$540

Sept. 23, 2010

September 2015

Tanzania

Feb. 17, 2008

$698

Sept. 15, 2008

September 2013

Vanuatu

March 2, 2006

$66

April 28, 2006

April 2011

Zambia

May 10, 2012

$354.8

Nov. 15, 2013

—

Water supply and sanitation

Descriptions and key developments in the 12 active board-approved or signed compacts undertaken by the MCC are provided below in alphabetical order. Compact funding totals include administrative and monitoring costs.

Benin II

The five-year $375 million compact will focus entirely on electric power infrastructure and related policy reforms. Assistance will go to the new regulatory authority ($41 million); to solar, thermal, and hydro generation facilities ($136 million); to distribution facilities ($110 million); and to off-grid access ($46 million). In addition, the government of Benin is contributing $28 million to the compact effort.

Cape Verde II

Cape Verde's $66.2 million second compact will address two issues impeding economic growth. A water and sanitation project ($41 million) aims to reform the regulatory regime and utility structure and provide capital infrastructure improvements. A land management project ($17 million) is expected to induce legal reforms and the clarification of property rights. Meeting an MCC requirement for second compacts, the government of Cape Verde will contribute an additional 15% of total costs toward project implementation.

El Salvador II

The $277 million five-year second compact with El Salvador consists of three projects. One will address constraints in the investment climate by developing an independent institution seeking regulatory improvement and will build the capacity of government to partner with the private sector in public service delivery ($42.4 million). A second project will focus on development of human capital, reforming education policy to increase school hours and strengthen the curriculum, and would also address skills needed by the labor market ($100.7 million). The third project will meet identified infrastructure needs—expansion of an important roadway and border crossing improvements related to commerce ($109.6 million). El Salvador will contribute $88 million to project implementation.

Georgia II

The five-year $140 million second compact would address education concerns in three ways. One project seeks to improve the quality education through infrastructure improvements and training of educators ($76.5 million). A second project will focus on meeting labor market needs through skills development ($16 million). A third project will modernize the teaching of science, technology, and math ($30 million).

Ghana II

The five-year, $498 million compact addresses electric power problems through investments in power generation and distribution and reforms in power sector policy. Of the total, $190 million is conditional on the government making agreed-upon reforms. The introduction of private sector participation is a significant requirement of the project. The Government of Ghana is expected to contribute at least 7.5% of total MCC funding toward compact implementation.

Indonesia

The five-year, $600 million compact has three projects. A Green Prosperity project ($332.5 million) will provide technical expertise and funding for renewable energy and natural resource management efforts that aim to raise household incomes. A community-based health and nutrition project ($131.5 million) is aimed at reducing stunting, from which more than one-third of Indonesia's children suffer. A public procurement reform project ($50 million) seeks to implement practices that will counter fraud, waste, and abuse that results in the loss of billions of dollars annually.

Jordan

The five-year, $275.1 million compact is solely aimed at the water sector. In the governorate of Zarqa, it will reduce water loss by rehabilitating the water supply and distribution network from reservoir to household ($102.5 million) and will improve the sewage system by replacing or rehabilitating sewage lines ($58.22 million). In a partnership with the private sector, the compact will also expand a wastewater treatment plant originally built by USAID ($93.03 million).

Liberia

The five-year, $257 million compact targets two constraints to economic growth—a lack of access to reliable and affordable electricity and inadequate road infrastructure. The energy project ($201.6 million) will provide a new hydropower turbine to an existing facility, provide training to Liberia Electric Corporation employees, and help establish an independent regulator. The roads projects ($21.1 million) will assist in the creation of five regional maintenance centers and a road fund administration to build sustainability and will provide technical assistance to build capacities in multiple aspects of road planning, maintenance, and policy development.

Malawi

The five-year, $350.7 million Malawi compact, signed in April 2011, focuses on just one sector—electric power. The program aims to reduce power outages, reduce costs to business and homes, and improve the economic environment. One element will upgrade and modernize generation and distribution capacity ($283 million); another will reform electric power supply institutions in the country ($25.7 million). In July 2011, the compact, which had not yet entered into force, was put on operational hold in response to concerns raised by several anti-democratic actions taken by the government, including suppression of the media and prevention of peaceful protests. In March 2012, the compact was suspended in view of the continuing pattern of actions "inconsistent" with good governance. On June 26, 2012, the MCC reinstated its compact with Malawi. A change in the country's leadership and subsequent steps to restore democratic society led the board to change its position.

Morocco II

The five-year, $450 million second compact focuses on secondary education and workforce development and on land policy and implementation. The Education and Training for Employability project ($220 million) will pilot a new model for educating a modern workforce in 90-100 secondary schools and support private sector training centers for technical and vocational education. The Land Productivity project ($170.5 million) addresses industrial and rural land use issues and seeks to strengthen the enabling environment for investment. The Government of Morocco will contribute $67.5 million, 15% of the U.S. contribution, to compact implementation.

Philippines

The five-year, $434 million compact has three components. Computerization of the revenue collection process is expected to raise tax revenues and reduce tax evasion, while improving the impartiality of tax administration ($54.4 million). Support for small-scale, community development projects, designed and implemented by rural communities, is intended to strengthen local governance and participation in development activities ($120 million). Rehabilitation of 222 kilometers of road linking two provinces is meant to reduce transport costs and increase incomes ($214.4 million).

Zambia

The $354.8 million, five-year compact focuses entirely on the water and sanitation sector in the Lusaka area. Most of the funds ($284 million) will be used to rehabilitate and improve infrastructure; other funds will go for strengthening management and policy controlling the water sector.

Descriptions and key developments in the three active board-approved or signed threshold programs undertaken by the MCC are provided below in alphabetical order. Currently two other countries—Sri Lanka and Togo—are developing threshold programs. Funding totals include administrative and monitoring costs.

Guatemala

The $28 million Guatemala threshold program, signed on April 8, 2105, has two elements. One $5.8 million effort seeks to increase government revenue by targeting corruption in tax and customs administration. A $19.7 million education project focuses on the quality of secondary education, addressing teacher skills and the effectiveness of technical and vocational education and training.

Honduras

The three-year $15.6 million Honduras threshold program, signed on August 28, 2013, aims to improve government financial management, help government provide services more efficiently and inexpensively by improving budget formulation and execution, procurement capacity and management, and by increasing civil society oversight, among other efforts.

Sierra Leone

The $44.4 million Sierra Leone threshold program, signed on November 17, 2015, targets improved government delivery of water and electricity services, focusing on the Freetown area. The project will assist the new independent Electricity and Water Regulatory Commission (EWRC) and will attempt to increase transparency and accountability in delivery of public services.

Africa—Low Income

South Asia—Lower-Middle Income

Latin America—Low Income

Benin (FC): (CII)

Sao Tome & Principe

Bhutan *

Haiti

Burkina Faso (FC)

Senegal (FC): Second Compact Eligible FY16

Sri Lanka *: Threshold Eligible FY16

Nicaragua

Burundi

Sierra Leone: (TC)

Cameroon

Somalia

East Asia/Pacific—Low Income

Central African Republic

Tanzania (FC): 2^nd Compact Eligible FY13&14&15; Suspended FY2016

Laos

Latin America—Lower-Middle Income

Chad

Togo: Threshold Eligible FY16

Solomon Islands

El Salvador(CII)

Comoros

Uganda

Vietnam

Guatemala* (TC)

Cote D'Ivoire: Compact Eligible FY16

Zambia (C)

Guyana*

Democratic Republic of Congo

East Asia/Pacific—Lower-Middle Income

Honduras (FC) & (TC) *

Djibouti

Indonesia (C) *

Paraguay

Ethiopia

Africa—Lower-Middle Income

Kiribati *

Gambia

Cape Verde (CII)

Micronesia *

Ghana (CII)

Nigeria*

Papua New Guinea*

Europe—Low Income

Guinea

Republic of Congo*

Philippines (C) * Second Compact Eligible FY15&16

None

Guinea-Bissau

Swaziland

Samoa

Kenya

Timor-Leste *

Europe—Lower-Middle Income

Lesotho (FC): Second Compact Eligible FY14&15

South Asia—Lower Income

Vanuatu (FC) *

Armenia (FC)

Liberia: (C)

Afghanistan

Georgia (CII) *

Madagascar (FC)

Bangladesh

Mid-East—Low Income

Kosovo: Compact Eligible FY16

Malawi (C)

India

Yemen

Moldova (C) *

Mali (FC)

Kyrgyz Rep

Ukraine

Mauritania

Nepal: Compact Eligible FY15&16

Mid-East—Lower-Middle Income

Mozambique (FC)

Pakistan

Egypt *

Upper-Middle Income

Niger: Compact eligible FY13&14&15&16

Tajikistan

Morocco (CII)

Mongolia (FC): Second Compact Eligible? FY15

Rwanda

Uzbekistan

(C) = Current Compact Country; (CII) = Second Compact Country; (FC) = Former Compact Country; (TC) = Current Threshold Country.

Ruling Justly

Investing in People

Economic Freedom

or

Author Contact Information

Footnotes

Submitted testimony and hearing video available at http://www.foreign.senate.gov/hearings/millennium-challenge-corporation-lessons-learned-after-a-decade-and-outlook-for-the-future-120815p.

When first proposed and in its early years, the initiative was known as the Millennium Challenge Account. Today, both the program and the funding account in the foreign operations budget are more commonly known by the name of the managing entity, the MCC. For a more in-depth discussion of the original MCC 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 [author name scrubbed].

The decision to house the initiative in a new organization was one of the most debated issues during early congressional deliberations. The Bush Administration argued that because the initiative 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 initiative was 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 program, while others said that it should reside in the State Department. 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.

MCC, Agency Financial Report, Fiscal Year 2015, p. 11.

Current private sector board members serving their first term are Susan M. McCue, president of Message Global, and Mike Johanns, the former Senator from Nebraska. Currently serving a second term is Mark Green, president of the International Republican Institute, and Morton Halperin, senior advisor for the Open Society Foundations. First terms run three years and second terms run two years.

The MCC draws on World Bank income data published in the July preceding the MCC's August report identifying candidates for the following fiscal year. As there is a lag in data collection, the July 2015 World Bank report, for example, provides 2014 data that is used in the FY2016 MCC candidacy and compact-eligibility process.

The practice up until passage of the FY2016 State, Foreign Operations appropriations (Division K of P.L. 114-113) has been that a shift to upper-income status excludes a country from consideration for new programs, unless the MCC Board had selected that country as compact eligible in a previous year (when the country qualified as lower-middle income or below) and is able to fund the program using that previous year's funds. Mongolia, selected for second compact development in FY2015, moved to upper-middle-income status in FY2016, prior to signing of its second compact. While the MCC Board considers it eligible, the FY2016 appropriations requires that the Government Accountability Office (GAO) assess this practice and provide its review by March 2016. Countries such as Namibia in FY2008 and Jordan in FY2012 that changed to upper-middle income status while their compacts were ongoing are unaffected by this rule, because they were selected and signed compacts prior to their change in status.

An example of the limitations of determining eligibility based on variable factors like income level is the Philippines. The Philippines was selected for compact eligibility as a low-income country in FY2008 (and signed a compact based on that status in 2010), moved from low-income to the lower-middle-income level in FY2010, then returned to low-income status in FY2011, and again to lower-middle-income status in FY2012 where it has remained since.

Note that the IDA low-income eligibility figure differs from the standard World Bank classification of low-income countries.

73 in FY2016, instead of 75, because Iraq (in FY2014) and Mongolia (in FY2016) leapt from low income to upper-middle income, and application of the legislative provision that holds countries at their income status for three years, leaves a gap of two.

In an early version of this provision, the FY2010 Consolidated Appropriations Act (P.L. 111-117, H.R. 3288, Division F) allowed those transitioning countries already selected in FY2009 to maintain their candidacy for eligibility and, if re-selected, draw on the same source of funds as when they were first selected. The compact for Indonesia, transitioning to lower-middle in FY2010 when it was re-selected, was therefore funded as though in the low-income group.

Various types of aid restrictions apply to these countries for FY2016. For Zimbabwe, legislation bans assistance to the central government until the rule of law has been restored. For Burma, assistance is prohibited until measurable progress is made in human rights and democratic governance. Legislation specifically prohibits aid to Sudan, Syria, and North Korea. Notwithstanding these and other restrictions, each country remains eligible for humanitarian assistance from the United States.

MCC, Report on Countries that are Candidates for Millennium Challenge Account Eligibility for Fiscal Year 2016 and Countries that would be Candidates but for Legal Prohibitions, September 14, 2015.

For scorecard performance assessments, low-income is defined as below the World Bank's IDA eligibility ceiling and lower-middle income is defined as between the IDA ceiling and below the Bank threshold for upper-middle-income countries. The MCC's 75 country low-income definition is for funding availability purposes only.

Most recently, Report on the Criteria and Methodology for Determining the Eligibility of Candidate Countries for Millennium Challenge Account Assistance in Fiscal Year 2016, September 22, 2015.

MCC Public Outreach Meeting, February 15, 2007.

Comments by Paul Applegarth, then MCC CEO, at a State Department Foreign Press Center Briefing, November 9, 2004.

Freedom House, "Millennium Challenge Corporation Should Hold Countries to Higher Standards of Democratic Governance," November 2, 2006, http://www.freedomhouse.org; Sheila Herrling, Steve Radelet, and Sarah Rose, "Will Politics Encroach in the MCA FY2007 Selection Round? The Cases of Jordan and Indonesia," Center for Global Development, October 30, 2006, http://www.cgdev.org.

MCC Press Release, "The Gambia Suspended From Participation in MCC Compact Program," June 15, 2006.

For further discussion, see Casey Dunning, Owen McCarthy, and Sarah Jane Staats, Center for Global Development, Round Eight of the MCA, December 3, 2010.

There is no scorecard for Jordan, as it is now an upper-middle income country.

And 11% was program administration and monitoring. Data provided by MCC to CRS, March 31, 2016.

MCC, Congressional Budget Justification Fiscal Year 2017, p. 28.

MCC, Compact Development Guidance, January 2012, p. 15.

Tanzania and Namibia examples in this section are based on author interviews.

Rebecca Schutte, Burkina Faso Field Report, Center for Global Development, July 2009.

MCC, Policy Reforms Matter, September 9, 2010.

Details on each of the negotiated compacts can be found at the MCC website: http://www.mcc.gov.

Rebecca Schutte, Center for Global Development, Burkina Faso Field Report, July 2009, p. 1.

As of September 2010, the MCC procurement guidelines prohibit contracts with state-owned enterprises (SOEs), except in the case of educational, research, and statistical units of government not formed for a commercial purpose. The chief stated reason for making the change was to ensure a level playing field for competing firms. Up to then, $400 million of MCC contracts had gone to SOEs, mostly Chinese-owned.

Marco Bogran, Acting General Director, MCA-Honduras, and Ariane Gauchat, Associate Director, MCC, MCC Hosts Public Event: Lessons Learned from MCC's First Compacts, February 22, 2011, pages 9 and 32.

For more details, see Office of Audit for the MCC, Review of the Millennium Challenge Corporation's Compact Modifications, M-000-12-006-S, July 16, 2012.

"MCC Policy on Suspension and Termination", available at http://www.mcc.gov/mcc/bm.doc/07-suspensionandterminationpolicy.pdf.

Most recently, §7008 in P.L. 111-117, Division F, the State, Foreign Operations Appropriations, FY2010.

The December 2015 board meeting deferred a decision on reselection of Tanzania for compact eligibility, raising governance concerns stemming from a 2015 election in which the Zanzibar governing party nullified election results after the opposition won. Concerns were also raised regarding Tanzania's use of a Cybercrimes Act of 2015 to limit freedom of expression and association. In March 2016, Tanzania held a new election in Zanzibar that was deemed unrepresentative.

Freedom House, Press Release, "Millennium Challenge Corporation Should Hold Countries to Higher Standards of Democratic Governance," November 2, 2006, available at http://www.freedomhouse.org/template.cfm?page=70&release=435; Sheila Herrling, Steve Radelet, and Sarah Rose, "Will Politics Encroach in the MCA FY2007 Selection Round? The Cases of Jordan and Indonesia," Center for Global Development, October 30, 2006, http://www.cgdev.org.

It was variously argued that two years is insufficient time to alter the indicators; that some countries passed the indicators before the threshold program could begin; that, by funding reform to improve an indicator, the threshold program undermined the principle that countries should themselves be responsible for reform and MCC eligibility; and that programs should focus on better preparing countries to implement compacts rather than on enabling them to qualify for eligibility.

Mauritania, made eligible in 2007, saw its eligibility terminated in 2008, prior to development of a threshold program agreement, due to aid prohibitions on governments deposed by a coup. Yemen, made threshold eligible in 2004, was suspended by the board in November 2005, as a result of a consistent "pattern of deterioration" in its policy performance on selection criteria. Following a series of government reforms, Yemen's threshold status was reinstated in February 2007 and a threshold agreement valued at $20.6 million was approved in September 2007. In October 2007, however, the chair and ranking Member of the Senate Foreign Relations Committee noted their concern regarding the Yemen decision, in particular noting that, while Yemen had made reforms, its performance indicators had not yet shown improvement. The Members emphasized that, even if the MCC moved forward with the Yemen threshold program, "such compromises should never extend to the Compact program itself." In the end, implementation was postponed on October 27, 2007, pending a review, and its program has never been resumed.

In September 2009, the MCC Board warned that Niger appeared to be moving away from its reform agenda, jeopardizing its $23 million threshold program. Niger's threshold program was suspended in December 2009 due to "political events that were inconsistent with the criteria used to determine eligibility for MCC assistance," when President Tandja dissolved parliament and dismissed the constitutional court after it ruled that a referendum to extend his presidential term was illegal. See MCC Congressional Notification, December 17, 2009, available at http://www.mcc.gov/mcc/bm.doc/cn-121709-niger.pdf. As noted above, in June 2011, following Niger's return to democratic rule, MCC announced it would reinstate the Niger program, and, in March 2012, $2 million was approved to enable completion of education activities under the original agreement. Further work on the program ended when Niger was made compact eligible in December 2012.

Available on the MCC website at https://www.mcc.gov/resources/pub/next.

The Table of Key Performance Indicators can be found on the Monitoring and Evaluation page under each country compact listing.

MCC, Congressional Budget Justification Fiscal Year 2017, p.37.

MCC Public Board Meeting, June 11, 2009. Mathematica Policy Research, Inc., Impact Evaluation of Burkina Faso's BRIGHT Program, March 2009.

MCC, Fact Sheet: MCC's Continuum of Results, May 23, 2012.

MCC data provided to CRS on January 12, 2016.

NORC at the University of Chicago, Final Report, Samtskhe-Javakheti Roads Activity Impact Evaluation, January 15, 2013, pp. 38, 41.

Government Accountability Office, Millennium Challenge Corporation: Vanuatu Compact Overstates Projected Program Impact, July 2007, GAO-07-909.

Testimony of Rodney Bent before the House Committee on Foreign Affairs, Subcommittee on Asia, the Pacific, and the Global Environment, July 26, 2007.

GAO, Millennium Challenge Corporation: Results of Transportation Infrastructure Projects in Seven Countries, 12-631, September 2012.

GAO, Millennium Challenge Corporation: Georgia and Benin Transportation Infrastructure Projects Varied in Quality and May Not Be Sustainable, 12-630, June 2012.

Government Accountability Office, Millennium Challenge Corporation: Compacts in Cape Verde and Honduras Achieved Reduced Targets, GAO-11-728, July 2011.

GAO, Millennium Challenge Corporation: Georgia and Benin Transportation Infrastructure Projects Varied in Quality and May Not be Sustainable, 12-630, June 2012, p. 33 and p. 47. Sustainability concerns have also been raised in 2012 MCC Office of the Inspector General reports regarding a fruit tree productivity project in Morocco and a Senegalese road project. See Office of the Inspector General, USAID, Management Challenges Identified by the Inspector General, November 26, 2013, in MCC, Agency Financial Report, FY2013. The USAID Inspector General also acts in that capacity for the MCC.

In 2015, the House Appropriations Committee noted its continued concern regarding corruption in MCC compact countries (H.Rept. 114-154), and both House and Senate (S.Rept. 114-79) committees expressed interest in MCC efforts to improve data employed in assessing corruption for country selection purposes. This follows on similar report language in 2013 and 2014, including a request in 2013 (in the FY2014 State, Foreign Operations appropriations statement of conferees [P.L. 113-76]) for the MCC to improve its eligibility criteria in this area, and on suggestions from Congress in previous years that the MCC should take the issue of corruption more into account in judging compact country behavior. In response to the FY2014 statement of conferees, the MCC Board noted its commitment to improving measures of corruption at its March 2014 meeting.

During hearings in 2010 with the MCC CEO, the House State, Foreign Operations Appropriations Subcommittee chair and ranking Member raised concerns regarding the absence of termination guidelines based on a pattern of corruption. (Hearing with Daniel Yohannes, MCC CEO, April 14, 2010). In 2009 and 2010, several Members of Congress noted their concern regarding provision of MCC funding to corrupt countries. ("For Senegal: U.S. Aid, 164-ft. Statue," The Washington Times, August 16, 2010.) Specifically, they each referred to the case of Senegal, whose leader installed a monument to the country's independence estimated to cost between $24 million and $70 million. The $540 million compact with Senegal was signed in September 2009. Despite corruption reports, Senegal scored in the 74^th percentile of the FY2011 Control of Corruption indicator formulated by the World Bank. The MCC said it had looked at but found no pattern of corrupt behavior since signing the Senegal compact that would justify suspending or closing the compact program. It notified the Senegalese government that any decline in policy performance, regardless of indicator scores, could jeopardize the compact.

MCC, MCC Statement on Board of Directors' Discussion of Tanzania at the December 2014 Meeting, December 10, 2014.