Millennium Challenge Corporation
Curt Tarnoff
Specialist in Foreign Affairs
May 3, 2011
Congressional Research Service
7-5700
www.crs.gov
RL32427
CRS Report for Congress
P
repared for Members and Committees of Congress
Millennium Challenge Corporation
Summary
The Millennium Challenge Corporation (MCC) provides economic assistance through a
competitive selection process to developing nations that are pursuing political and economic
reforms 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 17
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;
• 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;
• an emphasis on public transparency in every aspect of agency operations.
In February 2011, the Obama Administration issued its FY2012 budget, requesting $1.125 billion
for the MCC, a 2% increase from the enacted FY2010 appropriation and a 25% increase over the
final FY2011 appropriation. Following a series of continuing appropriations, in April 2011,
Congress approved H.R. 1473 (P.L. 112-10), providing $900 million for the MCC in FY2011.
After applying a .2% across-the-board non-defense rescission, the MCC receives $898 million in
FY2011, a 19% decrease from the FY2010-enacted level.
Congress authorized the MCC in P.L. 108-199 (January 23, 2004). Since that time, the MCC’s
Board of Directors has approved 23 grant agreements, known as compacts: with Madagascar
(2005), Honduras (2005), Cape Verde (2005), Nicaragua (2005), Georgia (2005), Benin (2006),
Vanuatu (2006), Armenia (2006), Ghana (2006), Mali (2006), El Salvador (2006), Mozambique
(2007), Lesotho (2007), Morocco (2007), Mongolia (2007), Tanzania (2007), Burkina Faso
(2008), Namibia (2008), Senegal (2009), Moldova (2009), Philippines (2010), Jordan (2010), and
Malawi (2011).
MCC issues include the level of funding to support MCC programs, the impact of budget
reductions on MCC programs, the rate of program implementation, the results of MCC compacts,
and procurement and corruption concerns.
This report will be updated as events unfold.
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Millennium Challenge Corporation
Contents
Most Recent Developments......................................................................................................... 1
Introduction ................................................................................................................................ 1
MCC Policy and Programs .......................................................................................................... 2
Selection of Candidate Countries........................................................................................... 3
Eligible Country Selection Criteria and Methodology............................................................ 4
Selection of Eligible Countries .............................................................................................. 5
Country Selection—FY2011 ........................................................................................... 8
MCC Compacts .................................................................................................................... 8
Compact Development .................................................................................................... 8
Compact Implementation .............................................................................................. 10
Compact Suspension and Termination ........................................................................... 12
Compact Descriptions ................................................................................................... 13
Anticipated Compacts in FY2011 and FY2012 .............................................................. 20
Threshold Programs ............................................................................................................ 20
Select Issues.............................................................................................................................. 22
Funding .............................................................................................................................. 23
MCC Appropriations Request and Congressional Action for FY2011 ............................ 23
MCC Appropriations Request and Congressional Action for FY2012 ............................ 24
Authorizing Legislation and MCC Reform .......................................................................... 24
Compact Size...................................................................................................................... 25
Speed of Implementation..................................................................................................... 26
Compact Sectors ................................................................................................................. 27
Compact Outcomes and Impact ........................................................................................... 28
Role of USAID ................................................................................................................... 29
Procurement Policy............................................................................................................. 29
Corruption .......................................................................................................................... 30
Tables
Table 1. Compact-Eligible Countries: FY2011............................................................................. 8
Table 2. MCC Appropriations: FY2004-FY2012 ....................................................................... 23
Table 3. MCC Compacts ........................................................................................................... 32
Table 4. MCC Low-Income Candidate Countries—FY2011 ...................................................... 35
Table 5. MCC Lower-Middle-Income Candidate Countries—FY2011 ....................................... 36
Table 6. MCC Performance Indicators for FY2011 .................................................................... 37
Contacts
Author Contact Information ...................................................................................................... 37
Congressional Research Service
Millennium Challenge Corporation
Most Recent Developments
On April 15, 2011, the Full-Year Continuing Appropriations Act of 2011 (P.L. 112-10, H.R. 1473)
was signed, providing $900 million for the MCC in FY2011. After applying a .2% across-the-
board non-defense rescission, the MCC receives $898 million in FY2011, a 19% decrease from
the FY2010-enacted level.
In February 2011, the Obama Administration issued its FY2012 budget, requesting $1.125 billion
for the MCC, a 2% increase from the enacted FY2010 appropriation and a 25% increase over the
final FY2011 appropriation.
On January 5, 2011, the MCC Board approved a $350.7 million compact for Malawi (signed on
April 7, 2011) focusing on electric power development. The Board also selected Ghana and
Georgia as eligible to develop new, second compacts.
Introduction
In a speech on March 14, 2002, President Bush outlined a proposal for a new program that would
represent a fundamental change in the way the United States invests and delivers economic
assistance. The resulting Millennium Challenge Corporation (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:
• the competitive process that rewards countries for past actions measured by 17
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;
• 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;
• an emphasis on public transparency in every aspect of agency operations.
The original proposal 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.
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Millennium Challenge Corporation
Congress approved the new initiative in January 2004 in the Millennium Challenge Act of 2003
(Division D of P.L. 108-199).1 To manage the initiative, 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).2 The MCC headquarters staff level is currently about 258, with a handful of additional
employees in each compact country.3 On December 8, 2009, Daniel Yohannes was sworn in as 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.4
Since its inception, Congress has closely followed MCC implementation. The 112th Congress will
likely consider MCC funding issues and conduct oversight hearings on operations of the
Corporation.
MCC Policy and Programs
From the time the MCC Board of Directors held its initial meeting to establish the program and
agree to Corporation by-laws on February 2, 2004, procedures and policies have continued to
evolve. Program implementation moves chronologically through a number of steps: candidate
countries are identified, eligibility criteria are formulated, compact and threshold-eligible
countries are selected, compact programs are developed and proposed, and those approved are
funded and carried out. Elements in this process are discussed below.
1 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 Larry Nowels.
2 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. The MCC’s status remained
unchanged under Secretary of State Rice’s realignment of foreign aid authorities, announced on January 19, 2006.
While gaining policy and budget authority over nearly all USAID and State Department foreign aid programs, the new
Director of Foreign Assistance in the State Department played a more limited role in other agency activities,
developing an overall U.S. government development strategy and only providing “guidance†to foreign aid programs
delivered through other agencies like the MCC.
3 MCC, Agency Financial Report, Fiscal Year 2010, p. 15.
4 Current private sector board members are Mark Green, former congressman and ambassador to Tanzania, serving his
first term, and Alan Patricof, co-founder of a venture capital corporation, serving his second term. First terms run three
years and second terms run two years. Two board seats are currently vacant.
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Selection of Candidate Countries
The selection of initial candidate countries is fairly straightforward and based on the authorizing
statute. Countries must fall into specific economic categories determined by their per capita
income status (as defined and ranked by the World Bank). MCC participation is limited to all
low- and lower-middle-income countries (the former with per capita incomes below $1,905 and
the latter between that figure and $3,945 in FY2011), a total of 84 in FY2011. Countries in the
low-income group compete with other countries in the low-income group; countries in the lower-
middle-income group compete with each other.
As the relative income status of countries changes from year to year, their MCC eligibility is
affected, often negatively. For FY2011, two countries—Azerbaijan and Albania, the latter with a
threshold program—have moved from lower-middle-income to upper-middle income status and
are, therefore, now ineligible for further MCC assistance. Namibia signed a compact in 2008 and,
therefore, continues its program regardless of the upper-middle income status gained in FY2010.
Countries that move from low-income to lower-middle-income status may be affected negatively
by having to compete against countries at a higher level of development. In addition, under the
MCC legislative authority, only a quarter of total MCC assistance in any year is available for
lower-middle-income country compacts, severely limiting the possibility that such countries will
be selected or funded. For FY2010, this would have affected the chances of countries like
Indonesia and the Philippines, which would have been in a better position to obtain a compact
had they remained in the low-income group. In September 2009, the MCC Board announced that,
for countries that move from low to lower-middle-income status, it will consider their
performance relative to both their old income group and the newer one for a period of three years.
Further, the FY2010 Consolidated appropriations (P.L. 111- 117, H.R. 3288, Division F) allows
transitioning countries already selected in FY2009 to maintain their candidacy for eligibility and,
if reselected, draw on the same source of funds as when they were first selected. A possible
compact for Indonesia, reselected in FY2010, will therefore be funded as though in the low-
income group.5
In addition to the income ceiling, countries may be candidates only if they are not statutorily
prohibited from receiving U.S. economic assistance. For FY2011, 11 countries were excluded for
this reason. Most had been barred in prior years as well.6 One, Madagascar, excluded in FY2010
because of an undemocratic change in government, was one of the first compact countries and, in
losing its eligibility, had its program terminated early.
In August 2010, the MCC transmitted to Congress its annual notification of candidate countries,
listing 55 low-income countries and 29 lower-middle-income countries (see Table 4 and Table
5).
5 The Philippines moved to the lower-middle income level in FY2010, signed a compact as a low-income country in
FY2010, and has now returned to low-income status in FY2011.
6 Various types of aid restrictions applied to these countries. For several—Sudan, Cote d’Ivoire, and Madagascar—U.S.
aid was blocked because an elected head of government had been deposed by a military coup. For Uzbekistan,
legislation banned assistance to the central government. Aid restrictions imposed on nations not cooperating in counter-
narcotics efforts (Burma), that are on the terrorist list (Sudan, Syria, North Korea), or in arrears on debt owed the
United States (Syria, Sudan) also applied. Notwithstanding these and other restrictions, each country remained eligible
for humanitarian assistance from the United States.
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Eligible Country Selection Criteria and Methodology
As noted earlier, 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.
Country selection is based largely, but not exclusively, on a nation’s record measured by 17
performance indicators related to these three categories, or “baskets.†Countries that score above
the median on half of the indicators in each of the three baskets 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 6 below for a
complete list of the 17 performance indicators.)
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, the current indicators themselves have become prominent objectives of some
developing countries in what former CEO Danilovich called the “MCC effect.â€7 Countries
seeking eligibility are said to be moving on their own to enact reforms and take measures that
would enable them to meet MCC criteria.
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. The criteria have been altered and refined,
sometimes dramatically, over time.
As noted above, the main criteria is that a country has demonstrated a commitment to good
governance, economic freedom, and investments in its people (especially in health and
education). In addition to criteria originally proposed by the Bush Administration, lawmakers
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 has sought to use supplemental data and
qualitative information to inform its decisions on compact eligibility. The latter two factors have
led to the development of new indicators.
With regard to the requirement added by Congress regarding social investments in women and
girls, at first the MCC reported it would draw on girls’ primary enrollment rates to supplement the
four social investment performance indicators. But in FY2005, an indicator measuring girls’
7 MCC Public Outreach Meeting, February 15, 2007.
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primary education completion rates replaced a broader measure used in FY2004 that did not
disaggregate primary education graduation by gender.
Beginning with 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). For FY2006, the Corporation added a new indicator—the
Cost of Starting a Business—that replaced a Country Credit Rating. The Corporation believed
that not only did the new indicator have a strong correlation with economic growth, but that it
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. They believed that the Country Credit
Rating indicator was not as well linked to policy reforms and that it had a greater income bias
than other MCC indicators.
Efforts to develop a measurement to assess a country’s commitment to policies that promote
sustainable management of natural resources as required by Congress led to the adoption of two
new indicators, first used as supplemental information in determining FY2007 MCC eligibility
and then integrated with all the other indicators beginning with the FY2008 eligibility process.
The Natural Resources Management index is a composite of indicators: whether the country is
protecting at least 10% of its biomes, the percentage of population with access to sanitation and
clean water, and child mortality levels. It has been placed in the Investing in People basket,
raising the number of those indicators to five. The Land Rights and Access index looks at whether
land tenure is secure and access to land is equitable, and the number of days and cost of
registering property. It has been placed in the Economic Freedom basket. That basket remains at
six indicators, because, beginning 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 the explanatory statement accompanying the FY2009 Omnibus appropriations (P.L. 111-8),
Congress urged the Board of Directors to consider establishment of an indicator that would take
into consideration the votes and positions of countries in international institutions with regard to
human rights issues. The MCC explored this option and noted in its September 2009 criteria
report that as indicators measuring commitment to human rights within a country already exist
and a country’s voting record could be influenced by political goals, the suggested indicator was
not appropriate.
Selection of Eligible Countries
Shortly after release of the performance criteria, the MCC publishes a scorecard, showing where
each candidate country’s performance falls in relation to the other candidate countries in its peer
group (i.e., low-income countries “compete†with other low-income countries and lower-middle-
income countries with other lower-middle-income countries). Some time later, the MCC Board
meets to select countries eligible to apply for compact assistance.
A review of the history of MCC selections suggests that 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.
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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 passes half
or more of the qualifying indicators in each basket, but is not selected because it scores very
poorly—perhaps in the lowest 25th 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 that more recent trends indicated the fiscal policy situation was deteriorating
further.8 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 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 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. 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 fall 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.9 In selecting
Jordan, the MCC Board appears not to have been swayed by these arguments.
8 Comments by Paul Applegarth, then MCC CEO, at a State Department Foreign Press Center Briefing, November 9,
2004.
9 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.
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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.10 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 its 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.
A number of countries have remained eligible despite failing performances in years following
their selection. For example, Indonesia, selected in FY2009, and now in the process of preparing
a compact proposal, fails the corruption indicator and investing in people basket in FY2011. Cape
Verde, selected in FY2010 for a second compact, also fails the investing in people basket in
FY2011. Both countries remain compact-eligible. Indonesia, because Congress has allowed it to
be judged and funded as a lower income country, in which case it passes the selection
requirements. Cape Verde remains eligible, because revised data for FY2011 on expenditures for
primary education was received from UNESCO after the score was tabulated indicating it would
have passed that indicator and the investing in people basket.
Countries that are already implementing compacts generally appear unaffected by a decline in
performance indicators. Nine of the 19 countries implementing compacts as of January 2011
would not qualify in FY2011.11 Georgia and Vanuatu have failed three years in a row; Armenia,
El Salvador, Mail, and Mozambique have failed four years in a row. Morocco has failed for five
years straight.12
In not strictly following the rule of the performance indicators, the MCC argues 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 was derived as much as a year
or more previously. A country’s position vis-a-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.
10 MCC Press Release, “The Gambia Suspended From Participation in MCC Compact Program,†June 15, 2006.
11 These are Armenia, Burkina Faso, El Salvador, Georgia, Mali, Mongolia, Morocco, Mozambique, and Vanuatu.
12 For further discussion, see Casey Dunning, Owen McCarthy, and Sarah Jane Staats, Center for Global Development,
Round Eight of the MCA, December 3, 2010.
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Country Selection—FY2011
In its FY2011 selection round, the MCC Board reselected countries currently in the process of
preparing their compact proposals—Indonesia, Zambia, and Cape Verde—and selected Ghana
and Georgia as eligible to develop second compacts.
Table 1. Compact-Eligible Countries: FY2011
Low-Income Countries
Lower-Middle-Income Countries
Ghana
Cape Verde
Zambia
Georgia
Indonesia ((a lower-middle income country,
but for eligibility and funding, treated as a
low-income country until FY2012)
MCC Compacts
MCC compacts are grant agreements, none more than five-years in length (as required by the
MCC authorization), proposed and implemented by countries selected by the MCC Board. Details
of each compact and significant developments in their implementation are provided below (under
Compact Descriptions).
As of April 2011, 36% of MCC compact funding was in the transport sector, mostly roads; 20%
was targeted on agriculture; 9% on health, education, and community services; 9% on water
supply and sanitation; 8% on energy; 4% on governance, and 2% on financial services. Counting
all 23 compact countries to date, 58% of compact funding has gone to sub-Saharan African
countries, 12% to North Africa and the Middle East, 10% to the former Soviet Union, 10% to
Latin America, and 10% to Asia and the Pacific.
Since its inception, the MCC has designed guidelines and procedures for project development and
implementation that are followed by all MCC compact countries. These are described below.
Compact Development
Once declared as eligible, countries may prepare and negotiate program proposals with the MCC.
Only those compact proposals that demonstrate a strong relationship between the proposal and
economic growth and poverty reduction will receive funding.
While acknowledging that compact proposal contents likely will vary, the MCC expects each to
discuss certain matters, including a country’s strategy for economic growth and poverty
reduction, impediments to the strategy, how MCC 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 and monitored during implementation 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 MCC
performance indicators.
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Countries designate an entity, usually composed of government and non-government personnel,
to coordinate the formulation of the proposal and act as a point of contact with the MCC. In many
cases, a high level of political commitment to the program—country leadership identifying
themselves closely with the success of the compact—helps propel compact development forward
and continues into implementation.
The MCC did not set hard deadlines for compact submissions in order to allow countries
adequate time to conduct a national dialogue over the contents of the program proposal.
Underscoring the MCC concept of “country-ownership†and the requirement of broad public
participation in the development of MCC programs embodied in MCC authorization language,
the compact development entity typically launches nationwide discussions regarding the scope
and purpose of the MCC grant, with meetings held at the regional and national level that include
representation of civil society and the business community. In Namibia, the National Planning
Commission charged with developing the compact, identified 500 issues as a result of public
discussions held throughout the country on the question “What will unlock economic
development in your region?â€, narrowing them down to 77, and then just to several.13 Burkina
Faso’s consultations reportedly included 3,100 people in all 13 regions.14
Public consultation combined with analysis of constraints to growth help focus a country on the
range of sectors and possible activities that might go into a compact proposal. Concept papers are
developed around many of these ideas. During each step in the development process, the MCC
provides feedback to keep the country within MCC parameters.
The eventual result of these public deliberations and concept papers are compact proposals. These
proposal often exceed MCC’s budget capacity, forcing a process of further prioritization and
elimination. Tanzania reportedly suggested a package worth $2 billion; with the elimination of
irrigation and education options, they were able to bring it down to $700 million. Namibia’s first
proposal, at $415 million, was whittled down to $305 million by eliminating irrigated agriculture
and roads projects.
Proposals are developed by a country with the guidance of and in consultation with the MCC. To
assist in compact development, the MCC may, under section 609(g) of its authorizing statute,
provide so-called pre-compact development grants to assist the country’s preparatory activities.
Among other things, these grants may be used for design studies, baseline surveys, technical and
feasibility studies, environmental and social assessments, ongoing consultations, fees for fiscal
and/or procurement agents, and the like. For example, in June 2009, the MCC provided Jordan
with a pre-compact development grant of $13.34 million, not counted as part of the final compact.
It was used for feasibility studies and other assessments for water and wastewater projects.
One feature of compact proposals is the requirement that sustainability issues be addressed. In the
case of road construction, this might mean provisions committing the government to seek to
establish transport road funds, a fuel levy or some other tax to pay for road maintenance in future.
For example, as a condition of its compact, Honduras increased its annual road maintenance
budget from $37 million to $64 million.15
13 Tanzania and Namibia examples in this section are based on author interviews.
14 Rebecca Schutte, Burkina Faso Field Report, Center for Global Development, July 2009.
15 MCC, Policy Reforms Matter, September 9, 2010.
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Once a proposal is submitted, the MCC conducts an initial assessment, then, on the basis of that
assessment, launches a due diligence review that closely examines all aspects of the proposal,
including costs and impacts to see if they are worthy of MCC support. Included in the review is
an economic analysis assessing anticipated economic rates of return for the proposed projects and
estimating the impact on poverty reduction. At the same time, MCC staff work with the country
to refine program elements. Finally, the MCC negotiates a final compact agreement prior to its
approval by the MCC Board. The compact is signed but does not enter into force until
supplemental agreements on disbursements and procurement are reached.16
When the compact enters into force the clock begins to tick on compact implementation and the
total amount of funds proposed for the compact are formally obligated (held by the U.S. Treasury
until disbursed). Because of the difficulties encountered in trying to undertake a complex set of
projects within a set five-year time span, MCC has increasingly sought to front load many
planning activities prior to compact signing or entry-into-force, including feasibility studies and
project design, which in the case of infrastructure can be a lengthy process. Usually, the first year
of operations is consumed by contract design and solicitation for services. In the case of Burkina
Faso, however, one analyst noted that the passage of a full year between signing and entry-into-
force combined with early action on staff and planning, allowed an estimated 60% of
procurement to be initiated before entry-into-force.17
Compact Implementation
The MCC signed its first compact, with Madagascar, on April 18, 2005, an event that was
followed by four other signings in 2005—with Honduras, Cape Verde, Nicaragua, and Georgia. In
2006, six more agreements were signed: Benin, Vanuatu, Armenia, Ghana, Mali and El Salvador.
In 2007, four compacts were signed—with Mozambique, Lesotho, Morocco, Mongolia. In 2008,
three, with Tanzania, Burkina Faso, and Namibia were signed. In 2009, one compact, with
Senegal was signed. Compacts with Moldova, the Philippines, and Jordan were signed in 2010.
So far in 2011, one compact with Malawi was signed.
Typically, by the time of 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 is 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
16 Details on each of the negotiated compacts can be found at the MCC website: http://www.mcc.gov.
17 Rebecca Schutte, Center for Global Development, Burkina Faso Field Report, July 2009, p. 1.
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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. 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 says it will maintain the program management
unit to deal with projects funded by other donors and will apply MCC guidelines for
procurement.18
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 United States Treasury,
not the compact country.
Following completion of a compact, as is the case with Honduras and Cape Verde which closed in
2010, and will be the case with five more in 2011, the MCC conducts impact evaluations using
independent evaluators. Results of the first evaluations are expected to be made public within the
year.
As projects are implemented, events may require that changes be made to compact plans. 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 re-allocation of nearly $40 million for a Ghana transportation project.
A re-allocation of project resources was made unnecessary when bids on Tanzania’s rural roads
came in higher than budgeted, because the Tanzania 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
18 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.
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were 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 carry more serious consequences. These are
discussed below.
Compact Suspension and Termination
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.19 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.20
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.
19 “MCC Policy on Suspension and Terminationâ€, available at http://www.mcc.gov/mcc/bm.doc/07-
suspensionandterminationpolicy.pdf.
20 Most recently, section 7008 in P.L. 111-117, Division F, the State, Foreign Operations Appropriations, FY2010.
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The MCC has suspended or terminated programs in the following cases:
• Threshold programs have been suspended or terminated in Niger, due to
undemocratic actions taken by its leadership contrary to the MCC’s governance
criteria; Yemen due to a pattern of deterioration in its performance criteria; and
Mauritania due to aid prohibitions on governments deposed by a coup. See
Threshold Program section below for details.
• Compact eligibility was suspended in the Gambia because of “a disturbing pattern
of deteriorating conditions†in half of the 16 qualifying factors.
• Compacts have been suspended or terminated, in whole or part, in Nicaragua,
because of the actions of the government inconsistent with the MCC eligibility
criteria in the area of good governance; in Honduras, because of an undemocratic
transfer of power contrary to the Ruling Justly criteria; and in Madagascar, due to a
military coup. In Armenia, 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. See Compact Descriptions section below for details.
In as much as there have been only 23 compacts and 23 threshold agreements to date, 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 Sec.
611(a) in response to an undemocratic transfer/retention of power, a violation of the Ruling Justly
eligibility criteria. However, 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.21 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.
Compact Descriptions
Descriptions and key developments in the 23 compacts are provided below in alphabetical order
(also see Table 3). Compact funding totals include administrative and monitoring costs.
Armenia
The five-year, $236 million compact concentrates on the agricultural sector, investing in the
rehabilitation of rural roads ($67 million) and 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%.
Misgivings have been raised both prior to and during implementation of the Armenia compact. In
September 2005, during compact development, the MCC expressed concerns with Armenian
21 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.
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officials regarding slippage on two of the governance indicators and matters raised by
international groups concerning political rights and freedoms in the country. Moreover, the MCC
Board delayed final approval of the compact following the November 27, 2005, constitutional
referendum, after allegations of fraud, mismanagement, limited access by the press, and abuse of
individuals were raised. In signing the compact on March 27, 2006, the MCC issued a cautionary
note, signaling that Armenia must maintain its commitment to the performance indicators or risk
suspension or termination of the compact. On March 11, 2008, the MCC issued a warning that
assistance might be suspended or terminated in response to the government’s actions, including
the imposition of a state of emergency and restrictions on press freedoms.22 In the autumn of
2008, the Armenian government used $17 million of its own funds to begin a road segment when
there was some question of whether the MCC would continue its support. In December 2008,
then-MCC CEO Danilovich noted that Armenia had since moved forward on a number of reforms
addressing MCC concerns and he expected MCC support to resume in the spring of 2009.23
However, on March 11, 2009, the MCC Board of Directors declined to lift the funding hold for
the rural roads component of the Armenia compact until an interim review session could be held
prior to its normal June 2009 meeting in order to assess the status of democratic governance in
Armenia. On June 10, 2009, the MCC Board allowed the hold to continue on financial support for
the roads project. One board member noted that the hold on funding was, in effect, a termination,
as the work, if reapproved, could not be completed within the compact lifespan.24
Benin
The five-year, $307 million compact focuses 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.
Burkina Faso
The five-year, $480.9 million compact has four elements. A rural land governance project ($59.9
million) will focus on improving legal and institutional approaches to rural land issues, including
registration and land use management. An agriculture project ($141.9 million) will target water
management and irrigation, diversified agriculture, and access to rural finance in specific regions
of the country. A roads project ($194.1 million) will improve rural roads. The education effort
($28.8 million) will build on the country’s MCC threshold program and construct additional
classrooms and provide daily meals to children. The education project will be administered by
USAID.
22 See letters of John Danilovich to Armenia President Robert Kocharyan on December 16, 2005 and March 11, 2008
on MCC website.
23 MCC, Public Outreach Meeting Transcript, December 12, 2008, p. 12.
24 Lorne Craner at Public Outreach Meeting, June 11, 2009.
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Cape Verde
The five-year, $110 million compact, completed in October 2010, has focused largely on
improving the country’s investment climate, transportation networks, and agriculture productivity.
The program’s goal has been to increase the annual income in Cape Verde by at least $10 million.
The compact evolved around three projects. In support of private sector development, $2.1
million and additional participation with the International Finance Corporation was used to
remove constraints to private sector investment by creating a commercial credit information
bureau and stimulate other reforms. The MCC invested $83.2 million primarily for port
construction to help link the nine inhabited islands and roads and bridges to improve
transportation links to social services, employment opportunities, and local markets. By investing
$11.4 million to increase the collection and distribution of rainfall water and strengthen
agribusiness services, including access to credit, the project hoped to increase agricultural
production and double the household income of farmers.
Cape Verde is the first compact country to be made eligible for a second compact.
El Salvador
The five-year, $461 million compact addresses economic growth and poverty reduction concerns
in El Salvador’s northern region where more than half the population lives below the poverty line.
Education as well as water and sanitation, and electricity supply ($95.1 million); support for poor
farmers and small and medium-sized business ($87.5 million); and transportation, including roads
($233.6 million) are the chief elements of program.
Georgia
The $295 million, five-year agreement with Georgia, ended in April 2011. It focused on reducing
poverty and promoting economic growth in areas outside of the capital, where over half the
population lives in poverty. The compact was divided into two projects. The first and the largest
component ($211.7 million) concentrated on infrastructure rehabilitation, including roads, the
north-south gas pipeline, water supply networks, and solid waste facilities. The Enterprise
Development Project ($47.5 million) financed 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 expected to reduce 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; 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.
On September 4, 2008, the Bush Administration proposed a $1 billion aid initiative for Georgia,
of which one component was adding $100 million to the existing compact. An amendment to the
compact was signed on November 20, 2008. Complementing or completing projects begun in the
original compact, it is directed at road projects, water and sanitation facilities, and a natural gas
storage facility.
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Georgia has been selected as eligible for a second compact.
Ghana
The five-year, $547 million compact focuses on agriculture and rural development. Poverty rates
in the three targeted geographic areas are above 40%. The agriculture component ($241 million)
will provide training for farmer-based 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.
Ghana has been selected as eligible for a second compact.
Honduras
The five-year, $205 million (originally $215 million) compact with Honduras, completed on
September 17, 2010, focused on two objectives—rural development and transportation. The rural
development project, representing $68.3 million of the compact, assisted small and medium-size
farmers to enhance their business skills and to transition from the production of basic grains to
more high-value horticultural crops, such as cucumbers, peppers, and tomatoes. The project
provided farmers with the appropriate infrastructure and necessary training for producing and
marketing these different crops. More than 7,000 farmers were trained, of which 6,029
significantly increased production of horticulture crops. About 422 kilometers of rural roads were
also upgraded, helping farmers transport their goods to markets at a lower cost. The original
objective was 1,500 kilometers, but increased construction costs limited that figure.
The transportation project, totaling $119.2 million of the compact, sought to improve the CA-5
major highway linking Honduran Atlantic and Pacific ports and major production centers in
Honduras, El Salvador, and Nicaragua. Almost 50 kilometers of the CA-5 were completed of 107
originally planned and 45 of 68 kilometers in secondary roads before an undemocratic change in
government contrary to MCC’s Ruling Justly criteria—the removal of President Zelaya from
office by a coalition of civilian and military institutions—led to the September 9, 2009, MCC
termination of these two planned activities in the transportation sector. The termination affected
about $10 million in funding, including $4 million for the CA-5 road project. Already
contractually obligated programs were continued.25
Honduras has not been selected as eligible for a second compact due to concerns over
governance.
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
25 See MCC Congressional Notification, September 17, 2009, at http://www.mcc.gov/mcc/bm.doc/cn-091709-
honduras.pdf.
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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).
Lesotho
The five-year, $362.6 million compact has three elements. A water sector project ($164 million)
will focus on both industrial, supporting garment and textile operations, and domestic needs. It
will also support a national watershed management and wetlands conservation plan. A health
project ($122.4 million) will seek to strengthen the health care infrastructure, including
renovation of up to 150 health centers, improved management of up to 14 hospital out-patient
departments, construction and equipping of a central laboratory, and improved housing for
medical staff and training for nurses. A private sector development project ($36.1 million) will
address a wide range of legal and administrative obstacles to increased private sector activity,
including development of land policy and administration authority, implementation of a new
payments and settlement system, and improvement of case management of commercial courts.
Madagascar
The Madagascar compact, MCC’s first signed agreement, started out as a four-year, $110 million
program, was extended to five years because of start-up delays, and then terminated prematurely
because of a coup. The project had 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).
After restoring 149,000 land rights documents, digitizing another 128,000, formalizing land rights
for 12,800 families, constructing two new bank branches, and providing agriculture technical
assistance to 34,450 farmers and 290 small businesses and farmers associations, the compact
ended in May 2009, with little more than a year remaining in the compact’s five-year span and
$88 million of the $110 project committed.
Malawi
The five-year, $350.7 million Malawi compact 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).
Mali
The five-year, $461 million compact emphasizes an increase in agricultural production and
expansion of trade. About half the funds ($234.6 million) support a major irrigation project,
including modernization of infrastructure and improvements in land tenure. Improvements in the
airport ($89.6 million) target both passenger and freight operations. Due to rising construction
costs and changes in currency valuations, $94.6 million in funds originally intended for
construction of an industrial park at the airport have been reallocated to the airport project.
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Moldova
The five-year, $262 million compact addresses agriculture and roads. On the agriculture side,
$101.77 million will be provided to repair large irrigation systems supporting high-value fruits
and vegetables, to support the legal transfer for these systems to water user organizations, to
facilitate financing facilities for farmers and entrepreneurs. USAID will provide technical
assistance to improve market access for high-value agriculture. The compact will also provide
$132.84 million to repair a major bridge and highway leading toward Ukraine, facilitating
commercial traffic between the two countries.
Mongolia
The most significant part of the original five-year, $285 million compact was intended to
stimulate economic growth by refurbishing the rail system, including infrastructure and
management ($188.38 million). However, in April 2009, the government of Mongolia informed
the MCC that it would not be able to implement the $188 million rail component of its compact,
because Russian members of the joint Mongolian-Russian rail company would not allow an audit
of the company.
The MCC has decided to use $52 million of this amount to expand the three other original
projects in the compact. These include support for improvements in the property registration and
titling system ($23.06 million) and the vocational education system ($25.51 million), and an
attempt to reform the health system to better address non-communicable diseases and injuries,
which are rapidly increasing in the country ($17.03 million). In December 2009, the MCC Board
approved a further restructuring of the compact, utilizing remaining funding from the terminated
rail component of the compact to target $47.2 million at energy and environmental projects and
$79.7 million at rehabilitating a road and bridge.
Morocco
The five-year, $697.5 million compact has multiple components, all aimed at increasing private
sector growth. These include efforts to increase fruit tree productivity ($300.9 million),
modernize the small-scale fisheries industry ($116.2 million), and support artisan crafts ($111.9
million). In addition, the compact will fund financial services to micro-enterprises ($46.2 million)
and will provide business training and technical assistance aimed at young, unemployed
graduates ($33.9 million).
Mozambique
The five-year, $506.9 million compact, like most other compacts, targets specific districts, in this
case the less prosperous North of the country. The compact has four components. Water and
sanitation services will be improved ($203.6 million), a major road will be rehabilitated ($176.3
million), land tenure services will be made more efficient ($39.1 million), and steps will be taken
to protect existing coconut trees, improve coconut productivity, and support diversification to
other cash crops ($17.4 million). The long-term objective is to reduce the projected poverty rate
by more than 7%.
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Namibia
The five-year, $304.5 million compact focuses on education, tourism, and agriculture. The
education project ($145 million) will improve school infrastructure and training, vocational and
skills training, and textbook acquisition. The tourism project ($67 million) will target
management and infrastructure in Etosha National Park, the premier wildlife park in Namibia,
and build ecotourism capacity in the country. The agriculture project ($47 million) will focus on
land management, livestock support, and production of indigenous natural products.
Nicaragua
The five-year, $175 million compact with Nicaragua, ending in May 2011, focused on 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 had 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.
On June 10, 2009, the MCC Board voted to terminate assistance for activities not yet contracted
under the Nicaragua compact. These activities had been suspended since the end of 2008 because
of the actions of the Nicaraguan government inconsistent with the MCC eligibility criteria,
specifically in the area of good governance. Nicaragua first received a warning, then projects
were put on hold, and then activities not yet contracted were suspended in December 2008 as the
credibility of Nicaragua’s municipal elections was seriously questioned. In July 2009, due to
government actions that “limited the activity of political opposition, civil society, media elections
and observers†prior to the municipal elections,26 and were judged by MCC to be a pattern of
action “inconsistent with the criteria used by MCC to determine eligibility for assistance,â€27
compact funding was partially terminated. The termination affected activities not yet contracted, a
property regularization project and a major road, together amounting to about $62 million.
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).
26 MCC Press Release, “MCC Urges Nicaraguan Government to Respect Democracy,†available at
http://www.mcc.gov/mcc/countries/nicaragua/ni-documents/release-112508-nicaragua.shtml .
27 From Nicaragua country page of MCC website, available at
http://www.mcc.gov/mcc/countries/nicaragua/index.shtml.
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Senegal
The five-year, $540 million compact targets two infrastructure needs—roads and irrigation, both
largely intended to support the agricultural sector in Senegal. The road rehabilitation project
($324 million) seeks to improve two key roads, one connecting major towns and neighboring
countries to the capital and the other connecting the agricultural area of the Casamance to the rest
of Senegal. The irrigation project ($170 million) will develop up to 10,500 hectares of land and
prevent abandonment of 26,000 hectares. It will also address land tenure issues.
Tanzania
The five-year, $698 million compact focuses on three key economic infrastructure issues. A
transport sector project ($373 million) will improve major trunk roads, select rural roads, general
road maintenance capabilities, and upgrade an airport. An energy sector project ($206 million)
will lay an electric transmission cable from the mainland to Zanzibar and will rehabilitate the
existing distribution system to unserved areas. A water sector project ($66 million) will expand a
clean water treatment facility serving the capital, reduce water loss in the capital region, and
improve the water supply in Morogoro, a growing city.
Vanuatu
The $65.7 million, five-year compact, completed in April 2011, targeted improvements broadly in
multiple types of infrastructure, including roads, wharfs, an airstrip, and warehouses. The
objective was to increase the average per capita income by 15%, by helping rural agricultural
producers and providers of tourism-related goods and services. The compact further aimed to help
strengthen Vanuatu’s Public Works Department in order to enhance capacity to maintain the
country’s entire transport network.
Anticipated Compacts in FY2011 and FY2012
In addition to the compact signed with Malawi in April 2011 (discussed above), the MCC
anticipates possible approval of compacts with Zambia, Cape Verde, Indonesia, Ghana, and
Georgia in FY2011 and FY2012. At this stage, the government of Zambia has conducted an
analysis of poverty reduction strategies and has identified issues that will help guide its future
compact proposal. Cape Verde is developing a second compact. A compact with Indonesia was
anticipated for FY2012, but budget cuts and other considerations may mean a smaller grant with
Indonesia is approved in FY2011, leaving the other countries to compete for FY2012 funding.
Threshold Programs
In order to encourage non-qualifying countries to improve in weak areas, the MCC has helped
governments that are committed to reform to strengthen their performance so that they would be
more competitive for MCC funding in future years. Congress provided in authorizing legislation
that not more than 10% of MCC appropriations could be used for such purposes, stating that the
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funding could be made available through USAID. Subsequent foreign operations appropriations
have made 10% of new MCC appropriations available for this so-called threshold assistance.28
In the first part of 2010, the threshold program underwent a review, the conclusions of which
have only recently begun to emerge and have not yet been published in formal policy guidance.
Up through mid-2010, the threshold programs sought chiefly to assist countries make policy
reforms and institutional changes in areas where they failed to meet the MCC performance
criteria with the stated goal of helping them improve those indicators. Those countries deemed
eligible for the program had to submit concept papers identifying where and why the country
failed to pass specific indicators; make proposals for policy, regulatory, or institutional reforms
that would improve the country’s performance on these indicators; and note types of assistance,
over a two-year maximum period, required to implement these reforms. If the MCC, in
consultation with USAID, determined that the concept paper showed sufficient commitment to
reform and a promise of success, the country would prepare a threshold country plan that
specifically established a program schedule, the means to measure progress, and financing
requirements, among other considerations. USAID has been charged with overseeing the
implementation of nearly all 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 MCC compacts, funding is
not guaranteed for each country selected for the threshold program, but is based on the quality of
the country plan.
Although eight threshold country programs have been followed by compact eligibility, some
Members of Congress and others raised concerns regarding the efficacy of threshold programs. It
has been 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 undermines 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. 29 In response to an explanatory statement accompanying the FY2009 Omnibus
appropriations that suggested an assessment of the programs be undertaken before more are
approved, 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 briefed its board in June 2010 and announced in September 2010 a new approach to
threshold programs. While maintaining the basic purpose of helping countries become compact-
eligible as required by the authorizing language, the MCC will no longer focus on changing
specific indicator scores. Rather, it will focus on constraints to economic growth, like those
identified for compact countries, but maintain the former threshold program focus on reforming
policies. Working on resolving constraints to growth would have the benefit of helping MCC and
the board become more familiar with potential compact countries as well as of beginning to work
on policy reforms for problem sectors that would likely be among the ones addressed in compact
projects. Despite this statement of policy, the MCC has not selected new eligible countries for the
FY2011 round and requested no threshold funding for FY2012.
28 Initially, assistance for threshold countries was authorized only for FY2004.
29 One such critic, Sheila Herrling, has since become the MCC Vice President for Policy and Evaluation . See
“Precedent-Setting Board Meeting for Team Obama,†MCA Monitor Blog, June 9, 2009, Center for Global
Development website http://blogs.cgdev.org/mca-monitor.
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To date 23 threshold programs worth a total of about $495 million have been awarded to 21
countries, two of which have received second programs. Currently 6 countries are receiving
threshold assistance: Rwanda, Liberia, Albania (second program), Timor-Leste, Paraguay (second
program), and Peru. Of those countries that have completed programs, Indonesia, Moldova,
Burkina Faso, Jordan, Malawi, the Philippines, Tanzania, and Zambia, have either begun or are
eligible for compacts.
Threshold countries are subject to the same performance rules as compact countries. Two
countries—Mauritania and Yemen—have had their threshold eligibility terminated prior to
program implementation, the former because of a coup and the latter due to deterioration in
qualifying indicators.30 One country—Niger—had its active threshold program suspended as its
governance performance deteriorated.31
Funding levels for threshold programs differ, ranging from $6.7 million for Guyana to $55
million for Indonesia. Of the programs ongoing or completed, most have sought to improve
country scores on the corruption indicator. Several countries have multiple objectives. Indonesia
and Peru, for example, target both corruption and immunization indicators. Liberia’s program
focuses on girls’ education and land rights. Timor-Leste targets corruption and childhood
immunization.
Select Issues
Concerns regarding the MCC have been expressed at various points in time on its level of
funding, the speed of program implementation, the size of compacts, the sectors supported,
impact on development, the role of USAID, aspects of procurement, and the risk of corruption.
These issues are discussed below.
30 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.30 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.
31 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.
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Table 2. MCC Appropriations: FY2004-FY2012
(in $ billions)
FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012
Request 1.300 2.500 3.000 3.000 3.000 2.225 1.425 1.280 1.125
Enacted
0.994 1.488 1.752 1.752
1.544
0.875
1.105 0.900
Appropriation
Post-
0.989 1.480 1.751 1.746 1.484 0.871 1.081 0.898
Rescission
Appropriation
Note: P.L. 110-252 rescinded $58 million in FY2008 appropriation. P.L. 111-226 rescinded $50 million from
unobligated amounts; MCC applied it to the 2004-2010 fiscal years. H.R. 1473 includes an across-the-board 0.2%
rescission.
Funding
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 each year since the MCC was established, its enacted appropriation has
been well below the President’s request. At $1.1 billion, the FY2010 pre-rescission appropriation
was $320 million or 22% below the request. The FY2011 pre-rescission appropriation of $900
million is 30% below the request and the second lowest appropriation in its eight-year history.
In determining the appropriation level, Congress has to weigh the benefits of the MCC program
against all other foreign assistance programs as well as against other non-foreign policy needs. A
consequence of diminished appropriations is that the agency may provide fewer compacts each
year to fewer countries than originally anticipated. An additional effect may be that, if few
compacts are offered annually, the incentive for countries to reform on their own in order to meet
eligibility requirements—the so-called MCC effect—could be lost.
MCC Appropriations Request and Congressional Action for FY2011
On February 1, 2010, the Obama Administration issued its FY2011 budget, requesting $1.280
billion for the MCC, a 16% increase over the FY2010 pre-rescission appropriation level. On June
30, the House State, Foreign Operations Appropriations subcommittee approved a draft FY2011
bill, never reported out of committee. The bill would have provided $1.105 billion for the MCC.
On July 29, the Senate Appropriations Committee reported S. 3676, the FY2011 State, Foreign
Operations appropriations, also providing $1.105 billion for the MCC, $174.7 million below the
request and equal to the FY2010 appropriation level. The Senate bill also contained extensive
amendments to the MCC authorization (see below).
Following a series of continuing appropriations, in April 2011, Congress approved H.R. 1473
(P.L. 112-10), providing $900 million for the MCC. After applying a .2% across-the-board non-
defense rescission, the MCC receives $898 million in FY2011, a 19% decrease from the FY2010
enacted level.
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On August 10, 2010, Congress rescinded $50 million from unobligated balances of the MCC in
FY2009 and prior fiscal years, one of dozens of rescissions included in P.L. 111-226, an act that
funded a number of domestic programs.
MCC Appropriations Request and Congressional Action for FY2012
In February 2011, the Obama Administration issued its FY2012 budget, requesting $1.125 billion
for the MCC, a 2% increase from the enacted FY2010 appropriation and a 25% increase over the
final FY2011 appropriation.
Authorizing Legislation and MCC Reform
Although the requirement of an authorization of foreign aid programs has been routinely waived
in annual Foreign Operations appropriations bills, as the FY2011 Continuing Appropriations
measure did in the case of currently unauthorized foreign aid programs, including the MCC
(section 1108, P.L. 112-10), it is possible that an MCC reauthorization measure will be considered
in the 112th Congress.
A previous effort, in the 109th Congress (2006), was reported by the House International Relations
Committee (H.R. 4014, H.Rept. 109-563), but received no further consideration. That bill would
have made a number of policy modifications to the original legislation and would have authorized
MCC appropriations (“such sums as may be necessaryâ€) for fiscal years 2007 through 2009.
Early in 2010, the Administration proposed a number of changes to MCC legislative authorities,
including provisions on eligibility of countries moving from one income status to another,
compact extensions, and concurrent compacts. Provisions on these issues were included in section
609 of the Foreign Relations Authorization Act, S. 2971 (Kerry), introduced on January 29, 2010,
and were largely maintained in section 405 of the amended version of S. 2971 reported by the
Senate Foreign Relations Committee on April 27, 2010. A somewhat similar set of authorization
provisions was included in section 7075 of the Senate version of the FY2011 State, Foreign
Operations appropriations, S. 3676.
With regard to the MCC, these two pieces of legislation would have
• extended the potential eligibility of selected countries that transition from low-
income status to lower-middle income status, or the reverse, as though they
remained in their former income status for the year of transition and two
subsequent years. S. 3676 requires retention of the former status; S. 2971 allows it.
This provision addresses a matter raised first in the FY2010 Consolidated
appropriations (H.R. 3288, P.L. 111-117). However, the latter also allowed
countries that moved in FY2009 to the upper-middle-income class, a group
technically banned from MCC assistance, to maintain their lower-middle status for
several years. No such provision is included in either S. 3676 or S. 2971.
• allowed a compact to exceed five years in length, up to seven years. This provision
is deemed necessary in view of the difficulties that recipient countries may have in
implementing complex projects within a limited timeframe.
• allowed two concurrent compacts (more than one at the same time), in order to
give the MCC flexibility to do smaller, staggered projects, instead of wrapping
them all in one compact. The MCC argues that concurrent compacts could be
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implemented as a recipient country is prepared to do so, thereby speeding up the
implementation process. For example, some infrastructure projects require more
planning than do technical assistance projects. S. 3676 contains additional
provisions that would allow concurrent compacts only up to two years after an
initial compact and would limit compact funding to any one country to 15 years.
• redefined low- and lower-middle income status to place the lowest 75 countries in
the low-income group and the remaining lower-middle income countries in the
lower-middle income level. Without this change, there would be 55 countries in the
low-income and 29 in the lower-middle level in FY2011. This move is a response
to the continually shifting classification of candidate countries that determines who
they compete against for compact eligibility and the level of funding available to
support their compacts (only 25 % of appropriations are available to the lower-
middle group each year).
Some form of these authorization proposals may be considered in the 112th Congress.
Compact Size
During its first five years, the MCC was criticized for supporting compacts that were either too
small or too large based on the dollar size of the grants. A closely examined characteristic of the
early compacts was their lower-than-anticipated funding level. While Bush Administration
officials had said repeatedly that compacts would be funded at various levels depending on the
nature and potential impact of the proposal, the presumption in its first years was that the MCC
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 said that the size of its grants must place
MCC assistance among the top aid donors in a country.32 Some had estimated that once the
Corporation’s budget reached the $5 billion annual level originally suggested, each compact
would be supported with annual resources in the $150-$200 million range.33 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, did not meet the anticipated financial allocation
thresholds. Madagascar’s four-year, $110 million compact roughly doubled U.S. assistance to the
country, but did not place MCC assistance among the top donors. France was 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 was Madagascar’s largest source of concessional assistance of about
$209 million lent in each of 2001 through 2004.34 The $110 million compact for Madagascar was
also not very large relative to the country’s population. Of the 16 qualified countries for FY2004,
Madagascar had the fourth largest population (16.4 million), and might have been expected to
receive one of the larger MCC grants given its population size and its per capita income.
32 See, for example, Millennium Challenge Corporation FY2005 Budget Justification, p. 7. Found at
http://www.mcc.gov/about/reports/congressional/budgetjustifications/budget_justification_fy05.pdf.
33 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.
34 Organization for Economic Cooperation and Development (OECD), Geographical Distribution of Financial Flows to
Aid Recipients, 2000/2004: 2006 edition.
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For Honduras (a $215 million MCC program over five years), Georgia ($295 million over five
years), and Armenia ($236 million over five years), the United States was the top bilateral donor
without the MCC program, and will likely remain in that position as MCC grants are disbursed.
But the MCC Compact for Honduras called for only a slightly higher annual amount ($43
million) than U.S. economic assistance provided ($34 million) at the time, while Georgia’s
compact averaged only about three-fourths and the Armenia compact only about two-thirds of the
annual level of their recent American aid. While these were not insignificant amounts of new
resources, they were far less than Bush Administration officials had suggested previously.35
In contrast, the early five-year compacts with Cape Verde ($110 million), Benin ($307 million),
and Vanuatu ($66 million) represented a substantial investment by the United States, relative to
the size of recent 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 placed the United States second to Portugal, Cape Verde’s former colonial power, as the
leading donor, and represented 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 to the Peace Corps. The $13 million
annual average of the Vanuatu program places 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 Benin
compact likely places the MCC as the top aid donor, together with France.36
This issue of compact size was a priority of Ambassador Danilovich following his September
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 would receive funding if MCC was to
achieve its transformational goal.37 After assuming the CEO position, he moved the MCC towards
larger compacts and placing the MCC as the largest donor in recipient countries. In 2005, the
average amount of compacts signed in that year was $181 million, in 2006, $364 million, in 2007,
$463 million, and in 2008, $495 million.
Apparently, in the view of some in Congress, the move to larger compacts went too far. In the
explanatory statement accompanying the FY2009 Omnibus appropriations (P.L. 111-8), the MCC
was urged to limit compact size to under $350 million in order to “ensure that the MCC does not
become overextended, that existing compacts are meeting their goals, and future compacts are of
a manageable size.â€
Speed of Implementation
A recurrent criticism of the MCC, especially in Congress, has been the seemingly slow speed of
implementation, reflected, in the view of some, by the limited amount of disbursements relative
35 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.
36 Geographical Distribution of Financial Flows to Aid Recipients, 2000/2004: 2006 edition.
37 Prepared statement of John J. Danilovich, before the Senate Committee on Foreign Relations, September 27, 2005.
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to available funds. This view is, to some extent, a cause of cuts in MCC funding from the
Administration request and of threatened rescissions from amounts already appropriated during
the past few years. As of the end of September 2009, of the $6.4 billion obligated for MCC
compacts up to that point, only $889 million, or 14%, had been disbursed.
There are some good reasons for this spending rate. The MCC was a new initiative, and it took
time to develop methods of operation, including settling on the rules of eligibility and the
requirements of compact proposals. Further, the countries themselves are responsible for
developing proposals, and they have problems common to most developing countries in
managing complex programs to meet donor requirements of accountability. The GAO found that
for five signed compacts in Africa—Madagascar, Cape Verde, Benin, Ghana, and Mali—the
process of going from eligibility to compact signature took between 12 and 31 months. Four of
these compacts entered into force about five months after compact signature.38
Once launched, compacts may be slow to get underway. For example, Honduras and Cape Verde,
both in their fourth year had disbursed only 29% and 40%, respectively, of their total grants by
end of March 2009. Among the causes for these low rates are delays by compact countries in
filling managerial positions. The nature of many of the compacts is also responsible for the
delays. Typically, infrastructure projects are slow to disburse funds in the early years, the majority
of activity being the design and planning of projects rather than actual construction.
Whatever the causes, the MCC responded to the criticisms by shifting its organizational focus
from the early emphasis on compact development to compact implementation. In October 2007, it
announced a reorganization aimed at facilitating implementation. Spending has speeded up in the
past year, representing 28% of total compact obligations as of September 2010.
Compact Sectors
One feature of the first series of compacts drew particular attention. Most of the early compacts
included a similar sector concentration, focusing on agriculture and transportation infrastructure
projects. While these activities are well justified, the similarity across Compacts surprised some
observers. Given the wide diversity of conditions in each of the countries, plus the MCC’s
willingness to support all types of programs—the agency’s only requirement is that projects be
able to project the amount of economic growth and poverty reduction that will be generated—
many 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 budget support aid,
countries that qualify for MCC support are selected because they have already demonstrated
stronger performance in managing resources and fighting corruption.39
As more compacts are signed, some diversity in programs is creeping in—four of the more recent
ones, in Lesotho, Mozambique, Tanzania, and Jordan, feature a water and sanitation component.
38 Government Accountability Office, Millennium Challenge Corporation: Progress and Challenges with Compact in
Africa, Testimony, June 28, 2007, GAO-07-1049T.
39 James Fox and Lex Rieffel, The Millennium Challenge Account: Moving Toward Smarter Aid. The Brookings
Institution, July 14, 2005, p. 24.
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The Morocco compact includes micro-credit and artisan crafts support among its projects.
Burkina Faso and Namibia have education components.
Compact Outcomes and Impact
The MCC places considerable weight on demonstrating results. During project development, it
predicts a set of outcomes 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.
In its first seven years of existence, however, some observers have complained about the lack of
measurable results.40 There are some possible reasons for this, most prominently the slow speed
of compact implementation noted above. The first compact programs have only just ended in late
2010. As a result, it will likely be some time before a serious analysis of actual impacts can be
undertaken. In the meantime, some reporting on outcomes has emerged. For instance, according
to the MCC, the number of new registered businesses in Albania has grown by 20,000, and the
time and cost of starting a business in Paraguay has fallen by nearly half. In March 2009, the
MCC issued an independent impact analysis of the Burkina Faso Threshold Program, which
constructed 132 primary schools and provided other assistance to increase girls’ enrollment rates.
It found that enrollment increased for both genders, by about 20%, and for girls over boys, by
5%.41 With the recent completion of compacts in Honduras, Cape Verde, Vanuatu, and Georgia,
close of compact independent assessments are expected to more thoroughly enumerate outcomes
and impacts.
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 states that the compact would benefit 65,000 poor, rural inhabitants, the data, according to
the GAO, do not establish the extent of benefit to the rural poor. Further, the MCC projections
assume continued maintenance of projects following completion, whereas the experience of
previous donors is that such maintenance has been poor.42 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 will help Vanuatu address poverty reduction.43
40 For example, the Senate Appropriations Committee report (S.Rept. 110-425) on its version of the FY2009
State/Foreign Operations appropriations explained a proposed cut to the MCC by noting the small compact
disbursement rate (4% of total compact funding at the time) and the lack of tangible results to date as factors. The
committee stated its intention to support future compacts “if current country compacts are shown to be cost effective
and achieving results.â€
41 MCC Public Board Meeting, June 11, 2009. Mathematica Policy Research, Inc., Impact Evaluation of Burkina
Faso’s BRIGHT Program, March 2009.
42 Government Accountability Office, Millennium Challenge Corporation: Vanuatu Compact Overstates Projected
Program Impact, July 2007, GAO-07-909.
43 Testimony of Rodney Bent before the House Committee on Foreign Affairs, Subcommittee on Asia, the Pacific, and
the Global Environment, July 26, 2007.
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In lieu of results from the compacts, MCC officials have pointed to the impact made by the MCC
process itself. Under the so-called MCC effect, many countries are said to be establishing reforms
in an effort to qualify under the 17 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). Both the House and Senate approved resolutions in 2007
(H.Res. 294 and S.Res. 103) noting the role the MCC played in encouraging Lesotho to adopt
legislation improving the rights of married women.
Role of USAID
How USAID would participate in the MCC initiative was a concern of Congress and members of
the development community when the MCC was established. Section 615 of the MCC
authorizing legislation requires the Corporation’s CEO to coordinate and consult with USAID and
directs the Agency to ensure that its programs play a primary role in helping candidate countries
prepare for MCC consideration. USAID maintains missions in most of the eligible countries and
might be expected to support MCC programs in some way.
USAID’s role to date has varied. In cases where there is a USAID mission, the views of mission
personnel on potential compact proposals have been requested, and several MCC projects appear
to expand on activities from earlier USAID projects. In Namibia, for example, the MCC based its
community-based natural resource management efforts on USAID’s successful efforts to establish
conservancies. Almost all MCC threshold programs have been implemented by USAID, and
USAID is the implementor of the Burkina Faso compact education project, continuing efforts it
led in that country’s threshold program to increase primary school completion rates for girls.
One question of concern to the development community is how USAID would adjust its own
programs in countries receiving MCC compacts. Then-USAID Administrator Natsios told the
House Appropriations Committee on May 13, 2004, that the Agency would not withdraw from or
cut programs in MCC countries, but would not increase spending either. Nonetheless, some critics
continue to express concern that MCC funding is not always additive, as had been the pledge, but
substitutes for portions of previous USAID bilateral development aid programs. In its FY2008
report on the State/Foreign Operations bill (H.Rept. 110-197), the House Appropriations
Committee expressed the view that MCC aid should be “a complement,†not a substitute, to the
current aid program.
Procurement Policy
In the course of implementing compacts, the entity that MCC sets up with partner governments
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 54 countries have won MCC
procurement contracts, U.S. firms winning the most with 15% of the total.
In August 2010, Senator Jim Webb raised the concern that some of these contracts had been won
by Chinese government-owned firms. In a letter to the MCC, he argued that contracts awarded to
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Sinohydro Corporation for construction work in Mali and Tanzania supported Chinese foreign
policy efforts to expand influence in Africa and harmed U.S. business. In October 2011, the MCC
amended its procurement guidelines to 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. Its chief stated reason for making the change is to ensure a level playing
field for competing firms. As of June 30, 2010, $325 million or about 10% of MCC contracts had
gone to SOEs.
Corruption
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 corrupt-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 the only “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. Further,
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.
In 2010, there were suggestions from Congress that the MCC should take the issue of corruption
more into account in judging compact country behavior. During hearings with the MCC CEO, the
House State, Foreign Operations Appropriations Sub-committee Chair and Ranking Member
raised concerns regarding the absence of termination guidelines based on a pattern of
corruption.44
44 Hearing with Daniel Yohannes, MCC CEO, April 14, 2010.
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Millennium Challenge Corporation
In 2009 and 2010, several members of Congress noted their concern regarding provision of MCC
funding to corrupt countries.45 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 scores in the 74th percentile of the FY2011 Control of Corruption
indicator formulated by the World Bank. The MCC says it has looked at but found no pattern of
corrupt behavior since signing the Senegal compact that would justify suspending or closing the
compact program. It has notified the Senegalese government that any decline in policy
performance, regardless of indicator scores, could jeopardize the compact.
45 “For Senegal: U.S. Aid, 164-ft. Statue,†The Washington Times, August 16, 2010.
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Table 3. MCC Compacts
Human
Develop-
Other U.S.
Compact
Entry
Population
ment
Econ. Aid:
Compact
Size
Into
GNI
Living Below
Index
FY2010
Country
Signed
(millions)
Force
Compact Focus
per capita
$2 p/day (%)
Rankinga
(millions)b
Armenia
Mar. 27, 2006
$236
Sept. 29,
-Agriculture/ irrigation
$3,100 43.4% 76 $41.4
5 years
2006
-Rural roads
Benin
Feb. 22, 2006
$307
Oct. 6,
-Land & property
$750 75.3% 134 $35.5
5 years
2006
-Financial services
-Judicial improvement
-Port rehab
Burkina Faso
July 14, 2008
$481
July 31,
- Rural land governance
$510 87.6% 161 $6.0
5 years
2009
- Agriculture
- Roads
- Education
Cape Verde
July 4, 2005
$110
Oct. 17,
-Agriculture
$3,010 40.2 118 $0.0
5 years
2005
-Transport/roads
-Private sector
El Salvador
Nov. 29, 2006
$461
Sept. 20,
-Education
$3,370 20.5% 90 $29.4
5 years
2007
-Transport/roads
-Small business/farm
development
Georgia
Sept. 12, 2005
$295
April 7,
- Infrastructure/ gas
$2,530 34.2% 74 $59.9
5 years
2006
- Transport/ roads
- Agriculture/ business
Ghana August
1,
$547
Feb. 16,
-Agriculture
$700 63.3% 130 $138.2
2006
5 years
2007
-Transport
-Rural Development
Honduras
June 13, 2005
$215 5
Sept. 29,
-Agriculture
$1,820 34.8% 106 $49.5
(completed)
years
2005
-Transport/roads
Jordan
Oct. 25, 2010
$275.1 5
—
-Clean Water and Sanitation
$3,740
11.0%
82
$363.0
years
Lesotho
July 23, 2007
$362.6
Sept. 17,
-Water sector
$1,030 61.1% 141 $28.1
5 years
2008
-Health sector
-Private sector
CRS-32
Human
Develop-
Other U.S.
Compact
Entry
Population
ment
Econ. Aid:
Compact
Size
Into
GNI
Living Below
Index
FY2010
Country
Signed
(millions)
Force Compact
Focus per capita
$2 p/day (%)
Rankinga
(millions)b
Madagascar
April 18, 2005
$110
July 27,
- Land titling/ Agriculture
$420 88.7% 135 $69.4
(terminated May
4 years
2005
- Financial sector
2009)
Malawi
April 7, 2011
$350.7 5
— -Electric
power
$280
91.0%
153
$127.6
years
Mali
Nov. 13, 2006
$460.8
Sept. 17,
-Irrigation
$680 82.0% 160 $107.3
5 years
2007
-Transport/ airport
-Industrial park
Moldova
Jan. 22, 2010
$262 5
—
-Agriculture -
$1,590 28.9% 99 $19.0
years
Roads
Mongolia Oct.
22,
2007
$285
Sept. 17,
-Transport/rail
$1,630 38.8% 100 $7.5
5 years
2008
-Property Rights
-Voc Ed
-Health
Morocco August
31,
$697.5
Sept. 15,
-Agriculture/ Fisheries
$2,790 24.3% 114 $21.5
2007
5 years
2008
-Artisan Crafts
-Financial Serv/ Enterprise
Support
Mozambique
July 13, 2007
$506.9
Sept. 22,
-Water and Sanitation
$440 92.9% 165 $364.2
5 years
2008
-Transport
-Land Tenure/ Agriculture
Namibia
July 28, 2008
$305
Sept. 16,
- Education
$4,290 62.2% 105 $102.8
5 years
2009
- Tourism
- Agriculture
Nicaragua
July 14, 2005
$175
May 26,
- Land titling/ Agriculture
$1,000 37.5% 115 $34.1
5 years
2006
- Transport roads
Philippines
Sept. 23, 2010
$434 5
—
-Revenue Reform -
$1,790 43.8% 97 $103.5
years
Community Dev -Road
Rehab
Senegal
Sept. 16, 2009
$540 5
—
-Roads -
$1,030 71.3% 144 $105.1
years
Irrigation
CRS-33
Human
Develop-
Other U.S.
Compact
Entry
Population
ment
Econ. Aid:
Compact
Size
Into
GNI
Living Below
Index
FY2010
Country
Signed
(millions)
Force Compact
Focus per capita
$2 p/day (%)
Rankinga
(millions)b
Tanzania
Feb. 17, 2008
$698
Sept. 15,
-Transport/roads, airport
$500 91.3% 148 $463.0
5 years
2008
-Energy
-Water
Vanuatu March
2,
$66
April 28,
-Transport rehab
$2,620 NA
Not
ranked
$0.0
2006
5 years
2006
-Public Works Dept.
Sources: Population Living Below $2 Per Day—data from the World Bank, World Development Indicators, 2010; Gross National Income per capita (Atlas method)—2009
data from the World Bank, World Development Indicators. Human Development Index Rank—from UNDP, Human Development Report, 2010. MCC Information: MCC.
a. 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) U.S. dollars. The most recent report (2010) evaluates 169 countries, with
number 1having the best HDI and number 169 scoring the worst in the Index.
b. Other U.S. Economic Aid is defined here as Global Health and Child Survival, Development Assistance, Economic Support Fund, and Assistance to Europe, Eurasia, and
Central Asia accounts.
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Millennium Challenge Corporation
Table 4. MCC Low-Income Candidate Countries—FY2011
Criteria: Per capita income $1,905 and below, and not prohibited from receiving other U.S. economic
assistance.
Compact Eligible Countries (FY2011) are in Bold
Compact Countries are followed with (C)
Threshold Eligible Countries (FY2011) are in Italics
Threshold Program Countries are followed with (TC)
Africa
East
Asia/Pacific
Benin (C)
Tanzania (C)
Cambodia
Burkina Faso (C)
Togo
Kiribati
Burundi Uganda
(TC)
Indonesia (TC) (a lower-middle
income country, but for eligibility and
funding, treated as a low-income
country until FY2012)
Cameroon
Zambia
Laos
Central African Rep
Mongolia (C)
Chad
Papua New Guinea
Comoros
Philippines
(C)
Congo, Dem Rep of
Solomon Islands
Congo, Rep of
Vietnam
Djibouti
Ethiopia
Gambia
Ghana (C)
Guinea
Latin America
Guinea-Bissau
Bolivia
Kenya (TC)
South Asia
Guyana (TC)
Lesotho (C)
Afghanistan
Haiti
Liberia (TC)
Bangladesh
Honduras (C)
Malawi (C)
India
Nicaragua (C)
Mali (C)
Nepal
Mauritania Pakistan
Mozambique (C)
Mid-East
Niger (TC)
Yemen
Nigeria
Rwanda
Sao Tome & Principe (TC)
Eurasia
Europe
Senegal (C) Kyrgyz
Rep. (TC)
—
Sierra Leone
Moldova (TC) (C)
Somalia Tajikistan
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Millennium Challenge Corporation
Table 5. MCC Lower-Middle-Income Candidate Countries—FY2011
Criteria: Per capita income between $1,906 and $3,945, and not prohibited from receiving other U.S.
economic assistance.
Compact Eligible Countries (FY2011) are in Bold
Compact Countries are followed with (C)
Threshold Eligible Countries (FY2011) are in Italics
Threshold Program Countries are followed with (TC)
Africa
East Asia/Pacific
Latin America
Angola Marshall
Islands
Belize
Cape Verde (C)
Micronesia
Ecuador
Swaziland Samoa
El Salvador(C)
Thailand
Guatemala
Timor-Leste (TC) Paraguay
(TC)
Tonga
Tuvalu
Vanuatu (C)
South Asia
Mid-East
Bhutan
Egypt
Maldives
Jordan
(C)
Sri
Lanka
Morocco (C)
Tunisia
Eurasia
Armenia (C)
Europe
Georgia (C)
Kosovo
Turkmenistan
Ukraine
(TC)
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Millennium Challenge Corporation
Table 6. MCC Performance Indicators for FY2011
Ruling Justly
Investing in People
Economic Freedom
Control of Corruption
Public Primary Education
Inflation
Source: World Bank Institute
Spending as % of GDP
Source: IMF World Economic
http://www.worldbank.org/wbi/
Sources: UNESCO and National
Outlook
governance
governments
Voice and Accountability
Primary Girls’ Education
Fiscal Policy
Source: World Bank Institute
Completion Rate
Source: National governments and
http://www.worldbank.org/wbi/
Source: UNESCO
IMF World Economic Outlook
governance
Government Effectiveness
Public Expenditure on
Trade Policy
Source: World Bank Institute
Health as % of GDP
Source: The Heritage Foundation,
http://www.worldbank.org/wbi/
Source: World Health
Index of Economic Freedom
governance
Organization (WHO)
http://www.heritage.org/research/
features/index/
Rule of Law
Immunization Rates: DPT
Regulatory Policy
Source: World Bank Institute
and Measles
Source: World Bank Institute
http://www.worldbank.org/wbi/
Source: World Health
http://www.worldbank.org/wbi/
governance
Organization (WHO)
governance
Civil Liberties
Natural Resource
Business Start-Up: Days and
Source: Freedom House
Management: Eco-Region
Cost of Starting a Business
http://www.freedomhouse.org/
Protection, Access to Clean
Source: World Bank
template.cfm?page=15&year=2006
Water and Sanitation, Child
http://www.doingbusiness.org
Mortality
Sources: Columbia Center for
Int’l Earth Science Info Network
(CIESIN) and Yale Center for
Env. Law and Policy (YCLEP)
Political Rights
Land Rights and Access
Source: Freedom House
Source: Int’l Fund for Agricultural
http://www.freedomhouse.org/
Development (IFAD) and Int’l Finance
template.cfm?page=15&year=2006
Corporation
Author Contact Information
Curt Tarnoff
Specialist in Foreign Affairs
ctarnoff@crs.loc.gov, 7-7656
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