Compact Development Guidance
As of March 2013
Overview of the Compact Development Process
Overview of the MCC Compact Development Process
Millennium Challenge Corporation (MCC) compacts are five-year agreements through which the United States provides grants to partner countries to support programs to reduce poverty through economic growth. MCC compacts are designed to target key constraints to economic growth and poverty reduction, and generate increased income for beneficiaries. Key constraints vary by country, and accordingly MCC compacts have funded a wide variety of projects in infrastructure (e.g., roads, power, ports, water, and sanitation), agriculture, irrigation, property rights, education, health, and financial services.
Countries seeking to sign a compact with MCC must first be selected as eligible by MCC’s Board of Directors (the Board). Eligible countries are responsible for the development of the compact, to which they are expected to commit significant financial resources and high-level attention.
Countries must remain eligible for MCC assistance until a compact is signed. MCC’s Board makes annual eligibility determinations on the basis of a country’s demonstrated commitment to just and democratic governance, economic freedom, and investments in people. Other factors include the availability of funding, MCC’s opportunity to reduce poverty and generate economic growth, and, if applicable, a country’s performance on a prior compact. For more information, see MCC’s Report for Determining the Eligibility of Candidate Countries.
Principles of Compact Development
Several principles are key to ensuring countries develop successful compact proposals. Eligible countries should demonstrate country ownership and commitment by providing leadership, mobilizing resources, and incorporating broad groups of stakeholders and potential beneficiaries throughout the compact development process. Countries should focus on economic growth by directly confronting the main constraints to private investment, even when difficult public policy decisions may be involved, including policy and institutional issues that may be the root causes of these constraints. Compact programs should be based upon strong program logic that clearly ties proposed projects to measurable results and high economic returns in terms of increased incomes for beneficiaries. Well-developed compact projects also have manageable technical, financial, environmental and social risks and allow for timely implementation within a fixed five-year compact term, given each country’s own oversight and management capacities.
The Compact Development Process
To develop a compact program, eligible countries typically follow a five-phase process. During Phase 1, an eligible country works with MCC to undertake preliminary analyses of constraints to growth and poverty reduction. During Phase 2, the eligible country identifies the root causes behind key constraints, and develops the program logic and proposes investment projects to address those issues. The most promising projects are further developed and appraised during Phase 3. MCC and the eligible country agree on the terms of the proposed program and sign the compact during Phase 4. Preparations for compact entry into force then begin in Phase 5. Once the compact enters into force, the fixed five year implementation period begins.
|1. Analysis||2. Project Definitions||3. Project Development and Appraisal||4. Compact Negotiation and Signing||5. Preparation for Entry Into Force|
|The Eligible Country…||
The MCC Board…
Approves Compact once country and MCC agree on technical and legal terms of compact agreement
The Partner Country…
|Millennium Challenge Corporation…||
The Partner Country & MCC…
Sign Compact, committing funds, defining program objectives, budget, monitoring and evaluation framework, and implementation arrangements
|27-month target timeline to reach compact signing||Pre-EIF|
Phase 1: Analysis
During Phase 1, countries establish a team that will lead the compact development process and work with MCC. The team will conduct preparatory analyses that will inform the development of a potential compact investment program and begin consultations across government, the private sector, and civil society. For most countries, this phase should take 4 months from MCC’s initial visit to the country.
- Core Team: The first step an eligible country must take after being selected is to designate a high-level official to lead the compact development process. The country will then establish and fund a team (Core Team) that will lead the compact development process and manage the country’s day-to-day relationship with MCC. The Core Team will be led by a Coordinator who has access to senior government officials and who can work at a national level. The Coordinator’s initial staff will include an economist, who will work with MCC on an analysis of the country’s key constraints to economic growth; a social scientist who will work with MCC on analyzing social and gender constraints to poverty reduction; and a private sector liaison who will coordinate with MCC to identify and develop opportunities for promoting private investment that may be supported by a compact program. Over time, the Core Team will grow to include technical and policy experts in the sectors where MCC may invest, environmental specialists, project management specialists, monitoring and evaluation experts, financial and procurement managers, and legal counsel. For more information, see MCC’s guidance on the Establishment of the Country Core Team.
- Constraints to Economic Growth Analysis: In partnership with MCC, the Core Team will conduct a diagnostic analysis based on the best available empirical data of the country’s most binding constraints to economic growth. Results of the analysis will help the Core Team identify important policy issues and key sector concerns that the compact program should target in order to increase economic growth. MCC works with eligible countries to identify root causes of the constraints and to develop investment proposals that are directly linked to addressing the root causes. For more information, see the Guidelines for Conducting a Constraints Analysis.
- Investment Opportunity Process: During the constraints analysis, the Core Team will consult with the private sector to understand investment constraints facing specific firms and sectors. As projects are developed, the Core Team will identify and pursue specific opportunities to promote private investment through the proposed compact program. For more information, see MCC’s guidance on the Investment Opportunity Process.
- Social Constraints to Poverty Reduction Analysis: The Core Team will also undertake an analysis of legal, policy, institutional, economic and socio-cultural inequalities that constrain the reduction of poverty reduction and limit the widespread distribution of growth. This analysis provides a complement to the Economic Constraints Analysis and the Investment Opportunity Process by identifying obstacles to the economic advancement of women, the poor, and other marginalized groups, and the implications of different investment proposals for mitigating these obstacles. For more information, see MCC’s guidance on Social and Gender Assessment.
- Public Consultations: The Core Team will conduct public consultations throughout compact development process to ensure that there is broad-based input to and support for the program. During Phase 1, public consultations are used to seek input that will inform the Constraints Analysis, Investment Opportunities Assessment, and the Analysis of Social Constraints to Poverty Reduction. The Core Team will initiate participatory consultations with civil society organizations, private companies, and government stakeholders at the national and sub-national level to discuss the findings from the analyses and how a compact program might address them. For more information, see MCC’s Guidelines for the Consultative Process.
Phase 2: Project Definition
During Phase 2, the Core Team will propose potential projects to MCC. The projects should be informed by the initial analyses and consultations conducted during Phase 1, and rooted in a clear logic that links the proposed projects to increased incomes and the Constraints Analysis. MCC will work with the Core Team to refine the initial project concepts into more detailed proposals that can be considered for MCC project development and appraisal. For most countries this phase should take 5 months.
Root Cause and Alternatives Assessment: Once preliminary analyses and public consultations have been completed, the Core Team should review the root causes of the constraints to economic growth identified in the Constraints to Economic Growth Analysis. Core Teams may find the Asia Development Bank’s Results-Focused Project Design and Logical Framework to be a useful tool for identifying the root causes of constraints to growth in consultation with stakeholders. The analysis will typically involve working with stakeholders and subject matter experts to understand the widest possible range of root causes. As such, the root causes analysis should include:
- An assessment of policy and institutional issues relevant to the constraint to growth. Areas of investigation should include the formulation and implementation of policies, laws, regulations, administrative procedures, along with the capacity of public institutions to carry out those functions.
- A consideration of social, economic, and political inequalities and de jure and de facto discrimination as root causes of the constraints to growth, as determined by the findings of the Social and Gender Constraints to Poverty Reduction Analysis.
- A consideration of private sector and other public views of the root causes of the constraints to economic growth, as informed by the Investment Opportunity Assessment and consultations.
Once Core Teams have analyzed the root causes of the country’s constraints to economic growth, they should assess alternative courses of action to address those constraints. For example, if insufficient availability of electrical power is identified as a constraint to growth, and low tariffs, high losses, and poor planning are identified as root causes of the constraint, the Core Team might assess different ways of addressing root causes, such as revised tariff setting policy and process, the installation of automatic meters, criminal prosecution to collect arrears, service shut-off for non-payment, and improved transmission, distribution, and sub-station infrastructure.
This analytical process will generate an economic theory of change for the Core Team, and provide an early analytical foundation for the programmatic logic that will underlie the initial investments proposed to MCC – the Concept Notes.
- Concept Notes: Informed by the steps above, the Core Team will identify which of the possible courses of action are the best fit for MCC’s investment criteria (see below), and propose initial project ideas (Concept Notes) that provide a brief description, logic, and basic background information for each proposed project, with a focus on how each will target the root causes of identified constraints to growth. Concept Notes facilitate early technical exchange with MCC before countries invest significant time and resources in elaborating detailed proposals. This step allows MCC and partner countries to quickly identify project proposals that are not a good fit for the MCC’s investment criteria, and to identify and shape project concepts that will be more fully defined in Project Concept Papers, as described below. For more information, see MCC’s Concept Notes guidance.
- Concept Papers: Following MCC’s assessment of the Concept Notes and ensuing discussions with the Core Team, more detailed project proposals (Concept Papers) will be developed by the Core Team. The proposals should clarify, organize, and prioritize a country’s investment ideas and establish a clear and coherent program logic that explains how the proposed activities will lead to economic growth and poverty reduction. MCC will conduct an assessment of the Concept Papers to assess: the rationale for the project proposal; expected impact; whether public policies and institutions are adequate to support the sustainability of the proposed projects; how to enhance private investment in and around the projects; environmental, social and gender issues, opportunities, and risks; implementation risk; and level of project preparedness. On the basis of this analysis, MCC will provide feedback to the Core Team as to how to improve the project proposals to make them ready to move forward to detailed project appraisal. As such, the Concept Papers help MCC and partner countries reach agreement on outstanding issues that need to be addressed before the project concepts become detailed investment proposals, including further assessments, studies, and data that will be required and any associated funding. For more information, see MCC’s Concept Paper guidance.
Once MCC is satisfied with the preparation of a country’s project proposals, it will prepare a memorandum (Concept Paper Assessment Memorandum) recommending which projects should move forward for full appraisal.
Phase 3: Project Development and Appraisal
MCC makes every effort to attain as much certainty as possible about the technical, environmental, social, financial, institutional, policy and other aspects of proposed projects in order to reduce the likelihood of cost overruns, implementation delays or other factors that could reduce the impact of a proposed compact program. Phase 3 of compact development includes detailed project preparation work such as feasibility studies, environmental and social assessments, and other analysis needed to fully develop proposed projects and understand their risks. These factors make Phase 3 among the most costly and lengthy part of the Compact development process. For most countries this phase should take 16 months from the time that the Concept Paper Assessment Memorandum is complete.
- Project Preparation Funding: Project appraisal frequently requires detailed and expensive preparatory studies. When countries require assistance to undertake these studies, MCC may be able to provide limited financial support (these funds are referred to as “609(g) funds”). 609(g) funds may be administered by MCC on behalf of the partner country or, subject to certain requirements, by the partner country. MCC expects to provide less 609(g) funding to lower middle income countries and countries pursuing a second compact than to low income countries and countries developing a first compact.
- Project Development: During Phase 3 the Core Team and MCC may conduct detailed studies such as feasibility and preliminary design studies, environmental and resettlement assessments, social and gender assessments, and economic and beneficiary analyses.
- Implementation Preparation: As project development proceeds, the Core Team will begin planning the framework for compact implementation, including the legal structure and staffing plan for the accountable entity that will implement the compact, project management planning, arrangements for procurements and funds control, and contributions from national and local governments.
- Appraisal: Based on project development studies, MCC will assess the viability of the proposed projects. MCC and the Core Team may need to make adjustments in project scope, approach, or design in order to focus a project, maximize its impact, improve quality, enhance implementation, and/or lower costs. These technical consultations are the heart of the project appraisal process. Where detailed assessments identify fatal flaws that cannot be mitigated through such modifications, MCC may decide to remove a project from further consideration. MCC’s project appraisal guidelines provide more detail on MCC’s project assessment for each technical sector.
Once project appraisal is complete, an internal decision memorandum (the Investment Memorandum) is prepared for MCC’s senior management.
Phase 4: Compact Negotiation and Signing
If MCC’s senior management team approves the proposed investment, a draft compact and other legal documents will be prepared for negotiation. Before MCC enters into negotiations with a country on the proposed compact, MCC must notify the United States Congress of its intent to negotiate. If there is no Congressional objection, MCC and the country may conduct negotiations on the compact and other legal documents, and, upon completion of such negotiations, the compact is submitted to MCC’s Board for consideration. If approved, MCC and the country may sign the compact following submission of a second notification to the United States Congress. Once the compact is signed, MCC commits funding for the entire five-year compact program. For most countries, this phase should take 2 months following the investment decision by MCC’s senior management.
Phase 5: Preparation for Entry into Force
Building the framework for compact implementation is a prerequisite to the entry into force of the compact, which signals the start of the five year performance period. Key actions include the formation, staffing and start-up of the country entity responsible for the administration and execution of the compact program (the accountable entity, or Millennium Challenge Authority), the assignation of procurement and fiscal agents to manage procurement and financial management functions, and establishment of banking arrangements and tax exemptions. For most countries, this phase should take 9 months following compact signing.
Compact Development Timeline
It may take up to 27 months to sign a compact due to the extensive project preparation, public consultation, and negotiation required to meet MCC’s investment criteria, as outlined below.
|4 months||5 months||16 months||2 months|
Compact Investment Criteria
While MCC will work with countries to develop and refine their project proposals, many projects are not a good fit for MCC’s investment model and fixed five-year implementation timeframe. Projects that satisfy the following investment criteria are more likely to be approved for funding by MCC:
- Significant economic returns: Each project proposed for funding to MCC should have an economic rate of return of at least 10%, measured by the expected increase in income of project beneficiaries in relation to the expected project cost. ERRs should be informed by a clear economic logic that links the proposed project to the alleviation of a constraint to economic growth and impact on beneficiary income.
- Achievable: Compact projects must be able to be completed within five years; projects with uncertain time horizons will not be funded. Compact programs should be technically feasible and able to be managed by the country. Overly complex, geographically dispersed compact programs create elevated risks that are extremely difficult to manage.
- Consideration of policy and institutional issues: Project proposals should consider the impact public policies and institutions will have on the project and its sustainability and whether reforms are necessary.
- Address environmental and social concerns: Projects must assess the environmental risks, costs, and impacts, in accordance with MCC’s Environmental Guidelines. Projects must also take into account social and gender inequalities, and take steps to incorporate their alleviation into project design in accordance with MCC’s Gender Policy and Gender Integration Guidelines.
- Role of private sector: Project proposals should be informed by the private sector, and where appropriate, directly promote private investment.
- Sustainability: The benefits from MCC compacts should endure beyond the five year implementation period. To ensure this, compact projects should be designed to be financially and operationally sustainable once the compact has ended.
Countries Eligible for Second Compacts and Lower Middle Income Countries
Countries that are selected as eligible to pursue second compacts should build on the experience and knowledge gained during the first compact. MCC expects to see countries pursuing second compacts to dedicate significant resources towards compact development and implementation; emphasize partnerships with the private sector; and ensure that social and gender analysis is integrated into investment proposals. Eligible countries should also demonstrate a continued commitment to the sustainability of MCC-funded investments. For more information, see MCC’s Guidance on Second Compacts.