Millennium Challenge Corporation

Curt Tarnoff Specialist in Foreign Affairs June 26, 2009 Congressional Research Service CRS Report for Congress Prepared for Members and Committees of Congress 7-5700 www.crs.gov RL32427

Summary In a speech on March 14, 2002, President Bush outlined a proposal for a major new U.S. foreign aid initiative. The Millennium Challenge Corporation (MCC) provides 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. The MCC differs in several respects from past and current U.S. aid practices: the competitive process that rewards countries for past and current 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; and the requirement to solicit program proposals developed solely by qualifying countries with broad-based civil society involvement. As announced by the President Bush in March 2002, the initial plan had been to fund the MCC annually at $5 billion by FY2006, but this figure has never been reached. The Administration has sought a combined $15.0 billion for the MCC program, FY2004-FY2009, while Congress appropriated $8.3 billion, or little more than half of the total sought (55%). Under the FY2009 Omnibus appropriations (P.L. 111-8), Congress provided $875 million to the MCC. On May 7, 2009, the Administration issued its FY2010 budget request, providing $1.425 billion for the MCC. Congress authorized the MCC in P.L. 108-199 (January 23, 2004). Since that time, the MCC s Board of Directors has approved 18 Compacts: with Madagascar (April 2005), Honduras (June 2005), Cape Verde (July 2005), Nicaragua (July 2005), Georgia (September 2005), Benin (February 2006), Vanuatu (March 2006), Armenia (March 2006), Ghana (August 2006), Mali (November 2006), El Salvador (November 2006), Mozambique (July 2007), Lesotho (July 2007), Morocco (August 2007), Mongolia (September 2007), Tanzania (September 2007), Burkina Faso (June 2008), and Namibia (July 2008). In June 2009, the Madagascar Compact was terminated early, as were uncontracted components of the Nicaragua Compact. A suspension of the roads portion of the Armenia Compact has been continued. MCC implementation matters continue to unfold, including the relationship of MCC and USAID, sectors chosen, and the impact of rising costs on country programs. A growing question raised by some Members of Congress concerns the level of funding to support MCC programs. Some fear that insufficient funds might force the MCC to reduce the number of recipients or the size of the grants. Others, however, support reductions in the MCC budget, disturbed by the slower-thananticipated pace of Compact agreements and lack of concrete results to date. This report will be updated as events unfold. Congressional Research Service

Contents Most Recent Developments...1 Overview...1 MCC Background...2 MCC Implementation...3 Selection of Candidate Countries...4 Country Selection Criteria and Methodology...4 Selecting Eligible Countries...6 Country Selection FY2009...10 MCC Compacts and Program Proposals...10 Compact Descriptions...12 Threshold Countries and Programs...17 Select Issues...19 Funding...19 MCC Request and Congressional Action for FY2009...20 MCC Request and Congressional Action for FY2010...20 Authorizing Legislation and MCC Reform...20 Compact Size...21 Speed of Implementation...23 Compact Sectors...23 Compact Impact...24 Changing Costs...25 Role of USAID and the Future of Agency Programs in MCC Countries...25 Tables Table 1. Compact-Eligible Countries: FY2009...10 Table 2. MCC Appropriations: FY2004-FY2010...19 Table 3. MCC Compacts...26 Table 4. MCC Low-Income Candidate Countries FY2009...28 Table 5. MCC Lower-Middle-Income Candidate Countries FY2009...29 Table 6. MCC Performance Indicators for FY2009...30 Contacts Author Contact Information...31 Congressional Research Service

Most Recent Developments On June 23, 2009, the House Appropriations Committee reported the FY2010 State, Foreign Operations Appropriations, providing $1.400 billion for the MCC, $25 million less than the request. On June 10, 2009, the MCC Board of Directors partially terminated Nicaragua s Compact, ending assistance activities not already contracted, including a road and a property regularization project. These efforts had been suspended in December because of actions taken by the Nicaraguan government, contrary to the MCC requirement that countries promote political freedom and the rule of law. At the same time and for the same reasons, the Board decided to continue the suspension of funding of road construction and rehabilitation under the Compact with Armenia. On May 19, 2009, the MCC Board of Directors authorized termination of the Madagascar Compact, which had been suspended since March 2009 because of the undemocratic change of government there. On May 7, 2009, the Administration issued its FY2010 budget request, providing $1.425 billion for the MCC, a 63% increase over the FY2009 level. On March 11, 2009, the President signed the FY2009 Omnibus appropriations (P.L. 111-8, H.R. 1105), providing $875 million to the MCC (in Division H of the legislation), $1.4 billion less than the Bush Administration request, and $611 million less than the FY2008 appropriation (after rescission). The explanatory report accompanying the act urges the MCC to limit Compact size to under $350 million and raises concerns regarding performance of threshold programs. On December 11, 2008, the MCC Board of Directors announced countries eligible for Compacts in FY2009. New entries are Colombia, Indonesia, and Zambia. Countries not re-selected from the previous year are Bolivia, Ukraine, and Timor-Leste. Liberia was made eligible for a threshold agreement. Overview 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; the requirement to solicit program proposals developed solely by qualifying countries with broad-based civil society involvement; and Congressional Research Service 1

the responsibility of recipient countries to implement their own MCC-funded programs. The proposal also differed from previous aid efforts in the size of the original $5 billion commitment, an aim never even approximately met. Congress authorized the new initiative in January 2004 (the Millennium Challenge Act of 2003, Division D of P.L. 108-199) and has closely followed its implementation. 1 As the program evolves, the 111 th Congress will consider MCC funding issues and conduct oversight hearings on operations of the Corporation. MCC Background The Millennium Challenge Corporation (MCC) provides assistance through a competitive selection process to developing nations that are pursuing political and economic reforms in three areas: Ruling justly promoting good governance, fighting corruption, respecting human rights, and adhering to the rule of law. Investing in people providing adequate health care, education, and other opportunities promoting an educated and healthy population. 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 the three categories, or baskets. Countries that score above the median on half of the indicators in each of the three areas qualify. Emphasizing the importance of fighting corruption, the indicator for corruption is a pass/fail test: should a country fall below the median on the corruption indicator, it will be disqualified from consideration unless other, more recent trends suggest otherwise. (See Table 6 below for a complete list of the 17 performance indicators.) Administration officials, since announcing the MCC initiative in 2002, have said that the selection process would be guided by, but not necessarily bound to the outcomes of the performance indicators. Missing or old data, general trends, and recent steps taken by governments might also be taken into account when annual decisions are made. Eligibility to receive MCC assistance, however, does not necessarily result in an aid grant. Once selected, countries are required to submit program proposals referred to as MCC Compacts that have been developed through a broad-based, national discussion that includes input from civil society. The focus of program submissions may vary among countries in size, purpose, and degree of specificity, and are evaluated by the Corporation for, among other things, how well the Compact supports a nation s economic growth and poverty reduction goals. Only those Compacts 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. Congressional Research Service 2

that meet the MCC criteria will be funded. It is expected that successful Compacts will support programs lasting three to five years, providing a level of resources roughly equivalent to the largest providers of assistance in the country. In most cases, this will likely result in a significant increase of U.S. economic assistance to MCC participant countries. In perhaps the most dramatic departure from previous U.S. assistance practices, MCC Compacts are implemented by the recipient country government. To manage the new initiative, the Administration proposed and Congress authorized the creation of a Millennium Challenge Corporation (MCC), an independent government entity separate from the Departments of State and the Treasury and from the U.S. Agency for International Development (USAID). The MCC staff level is currently about 300. Until a new CEO is nominated by the Obama Administration and confirmed by the Senate, former deputy Rodney Bent is the acting CEO. 2 A Board of Directors oversees operations of 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 drawn from lists of proposed nominees submitted by Congressional leaders. 3 The decision to house the initiative in a new organization was one of the most debated issues during early congressional deliberations. The 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 where more U.S. foreign policy entities have been integrated in recent years. At least, some argued, the USAID Administrator should be a member of the MCC Board, which had not been proposed in the initial Administration request. The MCC s status remained unchanged under Secretary 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 has played a more limited role in other agency activities, by developing an overall U.S. government development strategy and providing guidance to foreign aid programs delivered through other agencies like the MCC. MCC Implementation 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 2 CEO Ambassador John Danilovich stepped down on January 20, 2009. 3 The private sector board members are Alan Patricof, co-founder of a venture capital corporation; Lorne Craner, President of the International Republican Institute; former Senate Majority Leader William Frist; and Kenneth Hackett, President and CEO of Catholic Relief Services. The latter is a reappointment, permitted a two-year term; the others are serving their first three-year terms. Congressional Research Service 3

countries are identified, criteria are formulated, Compact and threshold-eligible countries are selected, programs are developed and proposed, and those approved are funded and carried out. Elements in this process are discussed below. 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). During the first year of the program, in FY2004, MCC participation was limited to the poorest nations that were eligible to borrow from the World Bank s International Development Association; there were 74 of these. The list expanded in FY2005 to include all low-income countries (adding another 13 nations). Beginning in FY2006 and beyond, all low- and lower- middle-income countries (with per capita incomes between $1,785 and $3,705 in FY2009) compete for MCC resources (a total of 93 countries in FY2009). However, lower-middle-income countries may receive only a quarter of total MCC assistance in any year. In addition to the income ceiling, countries may be candidates only if they are not statutorily prohibited from receiving U.S. economic assistance. In FY2009, 11 countries were excluded for this reason. Most had been barred in prior years as well. 4 One, Mauritania, excluded in FY2009 because of a military coup, had been selected as the one new threshold program-eligible country in FY2008 and will thereby lose its eligibility. In August 2008, the MCC transmitted to Congress its annual notification of candidate countries, listing 64 low-income countries and 29 lower-middle-income countries (See Table 4 and Table 5). There was one new entry to the low-income candidates: Kosovo, now an independent state. Bosnia and Herzegovina is a new entry in the lower-middle-income group, and Thailand returns following democratic elections. Georgia and Vanuatu have moved from low-income to lowermiddle-income status. Three previously lower-middle-income countries are no longer candidates: Jamaica, Belarus, and Suriname have graduated to middle-income status. Country Selection Criteria and Methodology The choice of criteria on which to base the eligibility of countries for threshold and Compact programs is one of the most important elements in MCC operations (See Table 6 for Performance Indicators). They are a key statement of MCC development priorities and 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 Board CEO Danilovich has called the MCC effect. 5 Countries seeking eligibility are moving on 4 Various types of aid restrictions applied to these countries. For several Mauritania, Sudan, Cote d Ivoire, 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, Iran), or in arrears on debt owed the United States (Syria, Sudan, Zimbabwe) also applied. Notwithstanding these restrictions, each country remained eligible for humanitarian assistance from the United States. 5 MCC Public Outreach Meeting, February 15, 2007. Congressional Research Service 4

their own to enact reforms and take measures that would enable them to meet MCC criteria. The criteria and the methodology for applying them have evolved over time. 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. While the MCC legislative authorities broadly match criteria proposed by the Administration, lawmakers included four additional matters on which to evaluate a country s performance. These relate to the degree to which a country: recognizes the rights of people with disabilities; 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 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 the Country Credit Rating, a measure that was used in the FY2004 and FY2005 evaluation process. 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 Congressional Research Service 5

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 addition to adding or refining indicators, the Corporation has also modified its principal that, in selected cases, countries must score above the median in order to pass a hurdle, with a rule that scores at the median will represent a passing grade. This comes into play especially for those indicators (civil liberties, political rights, and trade policy) where performance is measured on a relatively narrow scale of 1-5 or 1-7. A number of countries fall exactly on the median of these indicators and the methodology change allowed the MCC to make a more refined determination of whether a country passes or fails these hurdles. In December 2006, the MCC began to apply gender analysis to all aspects of the MCC program, including country selection and Compact development and implementation. In the explanatory statement accompanying the FY2009 Omnibus appropriations ( ), 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. Selecting 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., lower income countries compete with other lower income countries and lowermiddle income countries with other lower-middle income countries). Some time later, the MCC Board meets to select its list of 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. For example, in its first year, FY2004, the MCC selected 16 countries. The selection reflected decisions that both strictly followed the performance indicator outcomes and applied Board discretion to take into account other factors. Ten of the countries complied with the stated criteria: performing above the median in relation to their peers on at least half of the indicators in each of the three policy baskets and performing above the median on corruption. The Board also examined whether a country performed substantially below average on any single indicator and whether their selection was supported by supplemental information. Each of the 10 countries also passed these additional tests. For 10 other countries, however, some discretion was applied by the Board. In three cases, countries which met the criteria but fell significantly below average on one indicator were still selected by the Board due to recent policy changes or positive trend lines. Cape Verde, for example, scored poorly on the Trade Policy indicator, but the Board took into account the country s progress towards joining the World Trade Organization and implementing a value added tax that will reduce reliance on import tariffs. Lesotho did not score well on the measurement for Days to Start a Business. The MCC Board, however, took note of Lesotho s creation of a central office to facilitate new business formation and saw positive performance on other factors related Congressional Research Service 6

to business start-ups. Sri Lanka scored far below the median on Fiscal Policy, but the most recent trends suggested that the government was making progress in reducing its budget deficit. For three other countries Bolivia, Georgia, and Mozambique the Board deviated from a strict application of the selection criteria because of evidence that the governments were taking corrective actions in the deficient areas. Bolivia fell at the median (as opposed to above the median) on the corruption indicator, something that would eliminate it from consideration. The Board, however, noted that President Mesa, who took office in October 2003, had created a cabinet position to coordinate anti-corruption activities and an office to investigate police corruption. Georgia, with a newly elected government that had created an anti-corruption bureau and taken other steps to fight corruption, was also selected despite scoring below the median on corruption and three other ruling justly indicators. Mozambique, which failed on corruption and each of the four investing in people indicators, was chosen based on supplemental data that was more current than information available from the primary data sources. This evidence, the Board felt, demonstrated Mozambique s commitment to fighting corruption and improving its performance on health and education. On the other hand, the MCC Board chose not to select four countries that technically met the performance criteria but fell substantially below the median on one or more indicator. In each of these cases, the Board did not believe that the government was taking any action to improve its performance. Although Bhutan, Mauritania, and Vietnam passed the corruption hurdle and half of the ruling justly indicators, they scored very low on the measurements for Political Rights and Civil Liberties, and in Vietnam s case, on the Voice and Accountability indicator. A fourth country Guyana was also not selected despite passing the necessary hurdles. It scored particularly low on the Fiscal Policy measurement. 6 As the candidate pool has expanded in succeeding years while funding levels failed to meet expectations, the Board has become increasingly more selective. Many outside the MCC support the approach of keeping the number of new participants to a few so that future Compacts can be larger and emphasize transformational development opportunities as the MCC program originally envisioned. For FY2005, the Board did not select 10 countries that met the criteria, including Bhutan, Vietnam, Guyana, Burkina Faso, China, Djibouti, Egypt, Nepal, the Philippines, and Swaziland. The Corporation offered little explanation as to why these countries were not chosen. 7 It appeared, however, that scoring substantially below perhaps in the lowest 25 th percentile on an indicator had become a de-facto criteria for exclusion. For example, the Corporation s then- CEO Paul Applegarth commented that the Philippines, a country that passed 13 of the 16 indicators, did not qualify 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 Each of the other nine nations that met the minimum qualifications but 6 For a complete statement regarding the Board s rationale, see Report on the Selection of MCA Eligible Countries for FY2004, found at http://www.mcc.gov, Congressional Reports. 7 The MCC s authorizing legislation (section 608(d)) requires the Corporation s CEO to provide justification to Congress regarding only those countries declared as eligible for MCC assistance and for those selected for Compact negotiation. Otherwise, there is no statutory requirement for the MCC to comment on its decision-making process, including the rationale for not selecting specific countries. 8 Comments by Paul Applegarth at a State Department Foreign Press Center Briefing, November 9, 2004. Congressional Research Service 7

were not selected also had one score in the 25 th percentile, although the Corporation has not commented on whether this was the reason for not choosing them. Another Board departure in the FY2005 selection process was to avoid using its discretionary authority to qualify countries that did not meet the minimum performance indicators. For FY2004, the Board chose three nations Bolivia, Georgia, and Mozambique that did not pass the so-called hard-hurdle of corruption. The latter two again qualified despite falling below the median on corruption, while Bolivia did not require an exemption after the median dropped below its score with the addition of new countries. For FY2005, five nations Malawi, Moldova, Paraguay, Tanzania, and Ukraine passed the required number of performance indicators, except corruption. Although Malawi, Paraguay, and Tanzania are Threshold Countries, none of the five were chosen for full MCC status. In FY2006, the Board did not choose eight countries in the low-income group that qualified and did not use its discretionary powers to select any new nations that failed to meet the minimum requirements. 9 Bhutan, China, and Vietnam passed enough hurdles but did not qualify, as was the case the previous two years, based on very low scores on political rights and civil liberties. Kiribati, the Philippines, and India were not selected most likely because some of their scores were substantially below the median. India also presents a challenging case for the Board in that, despite qualifying, it is a country with a significantly large poor population which would require a sizable MCC Compact in order to produce a reasonable degree of impact on poverty reduction. It is also a nation with the means to attract capital and investment from other sources. Egypt, also not selected, falls into a somewhat different category as the second largest recipient of annual U.S. assistance based on a strategic rationale. The reason for not selecting Uganda, despite having passed 12 of the 16 indicators and not falling significantly below the median on the other 4, is less obvious. In its first year of choosing among lower-middle-income countries, the Board s approach was less clear. A number of analysts had argued that especially given the less-than-anticipated budget available to the MCC, the Board should refrain from selecting any lower-middle-income countries (LMICs), at least in the FY2006 round. 10 Of the eight LMICs (out of 32 total) that passed sufficient performance hurdles, the Board chose two to participate in FY2006. In addition, the Board also selected Cape Verde, a country that passed only two of the six economic performance indicators and therefore, did not technically qualify. 11 It appears, however, that the Board could have decided to select none of the lower-middle-income nations by using criteria it had applied consistently in the two previous rounds. Moreover, it was not clear why the Board chose the two that did qualify and excluded others. All eight LMICs that passed the performance indicator test fell significantly below the median on at least one of the indicators. El Salvador and Namibia, the two that were selected, both had low scores on fiscal policy. El Salvador also scored well below the median on the costs of starting a business, while Namibia also did poorly on days to start a business and immunization rates. The 9 Georgia and Senegal were selected despite not passing the necessary hurdles, but both had been chosen in FY2004 and FY2005. 10 See, for example, Steve Radelet, Kaysie Brown, and Bilal Siddiqi, Round Three of the MCA: Which Countries are Most Likely to Qualify in FY 2006? Center for Global Development, October 27, 2005. 11 Cape Verde had been classified as an eligible low-income country in FY2004 and signed a Compact in July 2005. The Cape Verde case, however, also points out a limitation in using the system of 16 performance indicators. For two of the economic categories, no data are available for Cape Verde, resulting in a failing score on those hurdles. Congressional Research Service 8

other six that were not chosen Brazil, Bulgaria, Jordan, Samoa, Thailand, and Tunisia also performed substantially below the median in at least one area, although Jordan was selected to participate in the Threshold program. What separated these latter six from El Salvador and Namibia, however, was not explained by the Board. Although the Gambia was selected in FY2006, its eligibility for MCC assistance was suspended by the MCC Board on June 16, 2006, because of a disturbing pattern of deteriorating conditions in half of the 16 conditions that are used to determine candidate countries. Among the problems cited in this case were human rights abuses, restrictions on civil liberties and press freedom, and worsened anti-corruption efforts. On November 8, 2006, the MCC Board added three new countries to the list of those eligible for FY2007 MCC grants Moldova, Jordan, and Ukraine. Even prior to the selection, the possible choice of Jordan had come in for severe criticism. 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 the MCC is not an appropriate funding source. They assert that Jordan, already is one of the largest recipients of U.S. aid, has access to private sector capital, and is not a democracy. 12 In selecting Jordan, the MCC Board appears not to have been swayed by these arguments. Another concern expressed by observers regarding the FY2007 selection process was that four of eleven current Compact countries Ghana, Benin, Madagascar, and Cape Verde would fail if measured under FY2007 indicators. While it was not expected that existing Compact funding would be withdrawn as it is based on eligibility in previous years, some had hoped the Board would send a signal of disapproval of such lapses. However, the MCC Board did not address this issue at the November 2006 candidate selection meeting. For the 2008 selection process, the MCC Board added the Philippines and Malawi to the list of countries eligible to apply for a Compact. Two countries that had appeared in the past were absent in the 2008 list. Sri Lanka was left out because of the resurgent civil strife that would make a Compact problematic, and Cape Verde for more complicated reasons. Due to changes in the qualifying indicators, Cape Verde would not have been eligible for the third year in a row, and, as a lower-middle income country, would be more strictly judged. Nonetheless, according to the MCC, 12 of the 25 countries that made the cut did not meet the FY2008 criteria, five of them failing the control of corruption indicator. One reason that the MCC re-selected these countries was that they were viewed as maintaining or improving their performance rather than adopting policies contrary to the criteria. This approach was taken because countries following reasonable policies may fall behind the performance criteria when other countries are improving faster thereby raising the bar. 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. 12 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. Congressional Research Service 9

Country Selection FY2009 On December 11, 2008, the MCC Board added three new entries to the list of Compact-eligible countries Indonesia, Zambia, and Colombia. The first two met the indicator criteria for the first time this year, both benefitting from threshold programs targeting corruption factors that had prevented them from eligibility in the past. The most striking aspect of this year s process was the decision not to re-select several countries that had been eligible in the previous year 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, has passed its indicator test in every year, including this one. The hold put on MCC consideration of its Compact proposal during the past year and its current exclusion from eligibility appears likely due to the political tensions currently existing between it and the United States rather than its performance in development-related matters. Countries previously selected that remain eligible in FY2009 and which continue to prepare Compact proposals are Jordan, Malawi, Moldova, Philippines, and Senegal. The Board, however, has noted that a Philippines Compact would not be signed until it passed the corruption indicator that it failed in FY2009. Table 1. Compact-Eligible Countries: FY2009 Low-Income Countries Benin Burkina Faso Ghana Honduras Indonesia a Lesotho Madagascar Malawi Mali Moldova Mongolia Morocco Mozambique Nicaragua Philippines Senegal Tanzania Zambia a Lower-Middle-Income Countries Armenia Cape Verde Colombia a El Salvador a. New for FY2009. Georgia Jordan Namibia Vanuatu MCC Compacts and Program Proposals 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 program proposal and economic growth and poverty reduction will receive funding. Not all qualified MCC countries may submit successful Compact proposals. While acknowledging that Compact proposal contents likely will vary, the Corporation expects each to discuss certain matters: a country s strategy for economic growth and poverty reduction, impediments to the strategy, how MCC aid will overcome the impediments, and the goals expected to be achieved during implementation of the Compact; Congressional Research Service 10

why the proposed program is a high priority for economic development and poverty reduction and why it will succeed; the process through which a public/private dialogue took place in developing the proposal; how the program will be managed, monitored, and sustained after the Compact expires; the relationship of other donor activities in the priority area; examples of projects, where appropriate; a multi-year financial plan; and a country s commitment to future progress on MCC performance indicators. The Corporation 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. Proposals are developed by a country with the guidance of and in consultation with the MCC. Sometime during the proposal development process, the MCC may provide so-called pre-compact development grants to assist the country s efforts. Among other things, 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 is being used for feasibility studies and other assessments for water and wastewater projects. 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. 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. 13 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. The case of Madagascar is a good example of how the Compact process is expected to take shape. Elements of the design, negotiation, and completion of the Madagascar Compact met several of the key criteria of the MCC process. Discussions regarding the scope and purpose of the MCC grant occurred at the regional and national level in Madagascar that included broad representation of civil society. Management and oversight of the Compact is handled by a new entity, MCA- Madagascar, whose Steering Committee includes government and non-government officials. Both of these steps underscore the country-ownership and broad participatory nature of MCC programs. The Compact also includes fiscal accountability requirements concerning audits, monitoring, and evaluation that support the transparency concept of the MCC. While the $110 million MCC grant was fully obligated when the Compact entered into force, resources were 13 Details on each of the negotiated Compacts can be found at the MCC website: http://www.mcc.gov. Congressional Research Service 11

transferred periodically following a determination that performance continued satisfactorily. This funding plan emphasizes the MCC principles of accountability and results. Madagascar is also a case of how things can go wrong. In June 2009, with little more than a year remaining in the Compact s five-year span and $88 million of the $110 project committed, the Compact was terminated because of the undemocratic change in government. Compact Descriptions The 18 Compacts agreed up to this point are described below (also see Table 3). In addition to individual Compact components noted in each description, Compact totals include administrative and monitoring costs. Madagascar The Madagascar Compact was a five-year, $110 million program, focusing on rural agriculture development and poverty reduction. Specifically, 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). According to the MCC, the Compact was designed to assist Madagascar s rural poor, which account for 80% of the nation s impoverished population, and generate income by expanding opportunities to own land, to access credit, and to gain technical training in agriculture and market identification. After restoring 149,000 land rights documents, digitizing another 128,000, and 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 Madagascar Compact was terminated in June 2009 due to an undemocratic change in government. Honduras The five-year, $215 million MCC Compact with Honduras focuses on two objectives rural development and transportation. The rural development project, representing $72.2 million of the Compact, will assist small and medium-size farmers enhance their business skills and to transition from the production of basic grains to horticultural crops, such as cucumbers, peppers, and tomatoes. According to the MCC, these vegetable crops will generate about $2,000 to $4,000 in annual income per hectare, compared with roughly $500 for basic grains. The project intends to provide farmers with the appropriate infrastructure and necessary training for producing and marketing these different crops. The transportation project, totaling $125.7 million of the Compact, will improve the major highway linking Honduran Atlantic and Pacific ports, and major production centers in Honduras, El Salvador, and Nicaragua. Rural roads will also be upgraded, helping farmers transport their goods to markets at a lower cost. Specific results sought in the Compact are: double productivity in 15,000 hectares in rural areas expand access to credit for farmers by over 20% upgrade the major road that links Honduras with commercial centers Congressional Research Service 12

upgrade about 1,500 kilometers of rural roads Cape Verde The MCC and Cape Verde have a five-year, $110 million Compact focused largely on improving the country s investment climate, transportation networks, and agriculture productivity. The program s goal is to increase the annual income in Cape Verde by at least $10 million. The Compact evolves around three projects: Private Sector Development with $7.2 million and additional participation with the International Finance Corporation, the project aims to remove constraints to private sector investment. Infrastructure the project will invest $78.7 million in road and bridge construction to help link the nine inhabited islands and improve transportation links to social services, employment opportunities, local markets, and ports and airports. Watershed Management and Agriculture Support by investing $10.8 million to increase the collection, storage, and distribution of rainfall water, the project hopes to increase agricultural production and double the household income of farmers. In June 2009, the first road funded under the Cape Verde Compact was completed. The MCC expects that an estimated 12,500 farmers and families will benefit from use of the 10-kilometer road. Nicaragua The five-year, $175 million Compact with Nicaragua focuses 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 has three components: (1) to strengthen property registration ($26.5 million); (2) to upgrade primary and secondary roads between Managua and Leon and to provide technical assistance to the Ministry of Transportation ($92.8 million); and (3) to promote higher-profit agriculture activities, especially for poor farmers, and to improve water supply in support of higher-value sustainable agriculture. 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 December 2008 because of the actions of the Nicaraguan government inconsistent with the MCC eligibility criteria, specifically in the area of good governance. In 2008, the credibility of Nicaragua s municipal elections was seriously questioned, and a fair resolution of the electoral issue has not been reached since that time. The termination, reducing about $62 million from the Compact total, affects a property regularization project and a major road. Georgia The $295 million, five-year agreement with Georgia focuses on reducing poverty and promoting economic growth in areas outside of the capital where over half the population lives in poverty. The Compact is divided into two projects. The first and the largest component ($211.7 million) Congressional Research Service 13

concentrates on infrastructure rehabilitation, including roads, the north-south gas pipeline, water supply networks, and solid waste facilities. The Enterprise Development Project ($47.5 million) will finance an investment fund aimed at providing risk capital and technical assistance to small and medium-sized businesses, and support farmers and agribusinesses that produce commodities for the domestic market. The program expects to: reduce in the incidence of poverty by 12% in the Samtskhi-Javakheti region; provide direct benefits to 500,000 people and indirectly benefit over 25% of Georgia s population; 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 $295 million MCC Compact. An amendment to the Compact was signed on November 20, 2008. The additional $100 million, complementing or completing projects begun in the original Compact, is directed at road projects, water and sanitation facilities, and a natural gas storage facility. 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, the MCC expressed concerns with Armenian 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. 14 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. 15 However, on March 11, 2009, 14 See letters of John Danilovich to Armenia President Robert Kocharyan on December 16, 2005 and March 11, 2008 on MCC website. 15 MCC, Public Outreach Meeting Transcript, December 12, 2008, p. 12. Congressional Research Service 14