Testimony

March 13, 2007

As Prepared by John J. Danilovich, Chief Executive Officer

U.S. House of Representatives

Millennium Challenge Corporation CEO John Danilovich Testifies before the House Appropriations Subcommittee on State, Foreign Operations, and Related Programs

Thank you, Chairwoman Lowey,  Ranking Member Wolf, and Members of the Subcommittee. I appreciate your interest in the Millennium Challenge Corporation (MCC) and welcome this opportunity to appear before you today and discuss our 2008 funding request so that we can continue our record of progress. 

The Millennium Challenge Corporation works to lift people around the world out of poverty through economic growth. Based on the American ideals of compassion for those in need,  accountability, and responsibility, our innovative model awards development assistance to partner countries that

  • practice sound policies, support good governance, invest in the health and education of their citizens, and promote economic freedom;
  • are actively engaging in and pursuing their own development by identifying and implementing strategies for poverty reduction and economic growth; and
  • demand nothing less than measurable and tangible results to make poverty reduction both sustainable and transformative.

To fulfill our mission and further our track record of progress, the President has requested $3 billion in fiscal year 2008 for the Millennium Challenge Corporation.

At a hearing of the House International Relations Committee in April 2005, it was suggested that MCC had more money than program.  Given progress made, results achieved, and the strong commitment to substantial reforms that countries are making to qualify for our assistance, we have now reached the point where MCC has more program than money. Full funding at the $3 billion level is vital to keep pace with current and increasing demand for MCC aid.  Fully funding MCC is essential to realizing our shared vision of bringing hope to the world’s poor by offering resources to countries that have qualified and are demonstrating their commitment to good governance as well as human and economic development.

Funding is crucial for countries already in the compact-pipeline.These countries have already qualified and are working diligently to complete their compact proposals for MCC to evaluate for funding.   A lack of funding on our part undermines our credibility to deliver the MCC program to the strong performers already in the program.  Even with the full $3 billion, several countries that hope to sign a compact in 2008 may have to wait until 2009.

We currently have 25 eligible countries, 11 with compacts.  We anticipate signing four more in fiscal year 2007 that will exhaust most current funding.  That leaves ten countries competing for funding in fiscal year 2008.

Funding is also critical for those countries taking on the hard work of policy reform  with the expectation of eventually qualifying for MCC assistance and becoming part of the pipeline.  Without enough funding, we cannot reward countries that are “doing the right things,” and the motivational MCC incentive effect is lost. The MCC incentive effect only works if the prospect of reward is real.

Moreover,  funding is essential for those countries in our threshold program that are working to address specific policy weaknesses to push them over the “threshold”  toward compact eligibility.Threshold agreements focus primarily on strengthening governance, especially on fighting corruption, as well as improving primary education completion rates among girls and immunization rates among children. Our current Threshold countries would question whether it is worth enacting tough reforms if funding is unlikely to be there if and when they become compact-eligible.

In addition to the 11 countries with which we have already signed compacts, 14 others are compact-eligible: Bolivia,  Burkina Faso, East Timor, Jordan, Lesotho, Moldova, Mongolia, Morocco,  Mozambique, Namibia, Senegal, Sri Lanka, Tanzania, and Ukraine. Of these, we expect Lesotho, Morocco, Mozambique,  and Sri Lanka to sign compacts in fiscal year 2007.  Tanzania, Mongolia,  Namibia, Burkina Faso, Senegal,  Jordan, and possibly Moldova and Ukraine are likely to be ready during fiscal year 2008, but depending on the 2008 funding level, we may only be able to sign three or four compacts due to budget constraints. 

The average size of each new compact has increased to between $400 and $500 million so as to reach an even greater number of beneficiaries and fund more transformative projects that will have a dramatic and long-lasting impact on poverty reduction through sustainable economic growth.  While we appreciate the difficult task you faced in writing the continuing resolution for fiscal year 2007, the resulting shortfall in MCC’s budget will mean we may not be able to sign every compact that is ready in 2007.  This will put additional pressure on the 2008 compact-eligible countries and will make full funding at the fiscal year 2008 request level that much more vital.

In discussing our appropriations request, the perception of large unobligated balances often masks the reality of what funding is needed.   MCC is well on its way to committing our entire remaining and available funds during this fiscal year and will need the full budget request of $3 billion for compacts that are in the pipeline.   Because Congress specifically requires that MCC has funds in hand before signing a compact, we welcome aligning how we record our obligations with that requirement so there is no distinction between committed and obligated funds.  Currently, whenever we sign a compact, we commit the funding.  We obligate funding when certain requirements are met by our partner country, such as compact ratification by its parliament,  where required, and the establishment of the fiscal entity in country that will manage implementation. To streamline this process, MCC is investigating how best to obligate at the time of signing.

While it is true that MCC “carried over” approximately $2.6 billion into FY 2007, more than $850 million of this total was already committed and has since been obligated for our compacts with Benin and Ghana.  An additional $1 billion has been committed and will soon be obligated for compacts signed with El   Salvador and Mali,  and threshold agreements signed with Jordan,  Indonesia, and Moldova in the fall of 2007.  As a result, our current unobligated and uncommitted balance has been reduced to approximately $700 million. 

With this $700-million carryover balance and the $1.75 billion provided for MCC through the continuing resolution for fiscal year 2007, MCC has less than $2.5 billion available for additional compacts, threshold agreements, and our administrative expenses.  We expect all of these funds to be committed to compacts that are signed in fiscal year 2007 or the very beginning of fiscal year 2008.

After concluding our fiscal year 2007 compacts, MCC will still have at least six additional countries, eligible from prior years, that are actively pursuing compacts.  We expect to conclude compacts with most or all of these countries in fiscal year 2008.   In addition, based on promising initial discussions with Jordan, Moldova,  and Ukraine,  which were selected for eligibility this past November, we expect to enter into detailed discussions with them this spring and summer.  Even at the President’s full request for MCC in fiscal year 2008, we will be unlikely to have sufficient funding to sign compacts with all nine countries.  A significantly lower level of funding would force MCC to postpone providing assistance to a number of these countries that are aggressively pursuing reforms and are developing their own strategies to fight poverty.

MCC’s commitment to progress in the fight against poverty involves activities in six key areas:

  • MCC is delivering results.
  • MCC is having an impact on human development.
  • MCC is accelerating compact implementation.
  • MCC is continuing our performance-based approach to aid.
  • MCC is ensuring fiscal responsibility.
  • MCC is strengthening our internal organizational capacity.

Let me explain what we mean by each of these areas.

First,  MCC is delivering results. Incountries seeking to become our partners, we are seeing positive results unfold even before MCC spends one cent of taxpayer money.  Presidents and ministers continue to approach us, write to us, or ask our ambassadors in the field, “What reforms do we need to make to become eligible for MCC funding?”  Even before spending any money, MCC has become a powerful incentive for countries to adopt good policies that lead to poverty reduction and economic growth.

  • The Dominican Republic, for instance, launched a campaign to immunize 5 million citizens for measles.  They explicitly attribute this tremendous undertaking to the desire to qualify for MCC assistance, and one of our indicators measures immunization rates in our investing in people category.
  • Cameroon has expressed a strong interest in becoming MCC-eligible and unveiled an MCC-Cameroon website to document steps taken to comply with our eligibility criteria.  These actions include removing 3,000 “ghost workers” from the government’s payroll, referring 500 civil servants to a disciplinary council on fraud charges, and working to lift the secrecy surrounding the country’s oil revenues.

This Subcommittee’s commitment to fund MCC’s new approach to development assistance promotes American interests abroad, where results on the ground in our partner countries are beginning to accelerate and yield tangible returns for those individuals and families benefiting from our programs.   Allow me to share with you some examples of extraordinary progress among our first compacts and threshold agreements.

  • Consider our $110 million compact with Madagascar to help move that African island nation from subsistence to a market-driven economy by fostering property rights, expanding the financial sector, and increasing household incomes among the poorest farmers. Some 2,589 small farmers and enterprises have received technical assistance from 6 new agricultural business centers so far and another 225 farmers have been trained to tap into microloans to expand their productivity. I helped hand out land titles and microloan certificates to poor women and farmers when I visited in February.  I saw first-hand what it means for a woman to own her own land—not only tremendous pride but also economic security, dignity,  and empowerment.  I planted geranium trees with farmers supported by our program, who had already secured buyers for their new, high-value crops used in soaps and perfumes. 
  • In Nicaragua, our $175 million compact is increasing the incomes of rural farmers and entrepreneurs in León and Chinandega.  Last October, I helped inaugurate a pilot project at a milk-collection facility as part of the rural business development component of the compact.   I handed out the first 26 of 43,000 land titles to be awarded, many to female landowners. And, I participated in the first Investment Summit, which has already sparked a number of foreign direct investments. By creating favorable business conditions, MCC has helped attract a $6 million investment, for instance, from Grupo Beta, a textile manufacturing firm that will create some 1,500 jobs.
  • Consider also our $295 million compact with Georgiato renovate regional infrastructure and develop enterprises.  Although the compact is in its first year of implementation, we have already awarded agricultural grants that are expected to benefit almost 10,000 people. Agribusiness development projects are creating new jobs, improving technologies, and facilitating market access. These projects are funded though grants from the agribusiness development activity component of the compact, and it is anticipated that up to 280 grants will be made over the next four years.  We have projects to rehabilitate municipal water supplies in two cities that serve 230,000 Georgians and are expected to generate $67.5 million in economic benefits to those cities.
  • I visited Burkina Faso, with which MCC signed our first threshold agreement totaling nearly $13 million to build 132 “girl-friendly”  schools throughout the country.  By ensuring that day-care centers are available at certain locations to care for younger siblings, and that boys and girls have separate bathrooms, and that take-home food rations are provided for the families of those girls who maintain at least a 90 percent attendance rate, the schools are making an education for girls a reality.  Some 12,500 students—more than double the number from the last academic year—are enrolled in these schools,  with girls making up more than half of the student population.  We are also improving the quality of education through teacher training.
  • In Indonesia, $20 million of our $55 million threshold agreement funds a program to immunize at least 80 percent of the children under one year of age against diphtheria, tetanus, and pertussis and 90 percent of all children against measles.
  • Overall and to date, MCC has approved 11 compacts totaling almost $3 billion and 13 threshold agreements for nearly $310 million. MCC is working presently with a total of 40 countries committed to reform. 

These results are beginning to improve the lives of the poor—more than 22 million beneficiaries of our programs—by increasing their incomes and making resources available for a better quality of life. MCC is centered on impacting the lives of the poor in tangible and transformative ways.  Our compacts are designed around the idea that sustainable poverty reduction requires a vibrant, dynamic, growing economy that generates wage-paying jobs to directly touch the lives of the poor. Countries that have grown rapidly have seen the number of people living below the poverty line drop rapidly; countries that have not grown rapidly have seen poverty levels stagnate or rise.  Sustained growth in household income means more money is available for consumption: for better food, better housing, better education, better healthcare. As MCC makes investments in secondary roads and other infrastructure projects, we are providing the poor with better access not only to markets and jobs but also to health clinics, schools, other social services,  polling booths, judges, and land titling offices.  Our economic rate of return calculations and beneficiary analyses are focused on income increases for the poorest participants of our programs. 

Second, MCC is having an impact on human development.  Our focus is always on the beneficiaries of our programs and on reducing their poverty.  In many of our partner countries, specific projects focus on investments in people—investments in health, education, and skills that expand human capabilities, raise the standard of living, and directly impact the quality of life in positive ways.  Two of our current compacts with El Salvador and Ghana entail projects that impact human development.

  • El   Salvador’s compact contains education and training components, both formal (secondary and post-secondary technical and vocational) and non-formal (skill development programs), aimed to increase employment opportunities for the region’s poorest inhabitants. 
  • Ghana’s compact supports basic community services such as the construction and rehabilitation of educational facilities, water and sanitation facilities, and electrification of rural areas.

We do not tell countries what sectors must be included in their proposals; rather, they develop their own priorities after consulting with all segments of their society.  We consider all proposals, and some countries with which we are currently working are considering health and education components in their compacts.

As a result, we are lifting communities out of poverty in the unique ways countries are choosing through the design of their compacts: infrastructure projects that make access to markets, schools, and health clinics possible; projects to improve the security of land tenure for small farmers; soil conservation projects and improvements to agriculture and irrigation systems; business development initiatives,  including the implementation of microlending credit programs for women entrepreneurs; the opening of trade schools; and improvements to water and sanitation services that are so vital for health. These investments in people are critical building blocks that will eventually lead to higher household income.  By helping to raise incomes, we are helping to make poverty reduction sustainable. Even our investments in basic infrastructure contribute to human development, allowing a sick child to reach a health clinic in enough time to make a life-saving difference, or children to attend schools even during the rainy season because travel is still possible, or poor farmers and workers to deliver their products to market before they spoil. 

Our two new performance indicators—a Natural Resources Management Index and a Land Rights and Access Index—provide additional measures to determine how well a country is protecting its ecoregions, providing clean drinking water, expanding sanitation services, streamlining the property registration process, and making land rights accessible and secure for poor and vulnerable populations.  These factors are critical in reducing child mortality, fostering environmental stewardship, and empowering people to more fully harness their skills and talents to improve their livelihoods. 

In addition, we demand that women, alongside men, participate fully in developing and implementing all our compacts in keeping with our gender policy.    Our insistence on women’s legal and economic rights as a precondition to the signing of a compact with Lesotho,  for example, led that country’s Parliament to enact a law to create full legal equality for married women.  This is a tremendous step in the right direction and in recognizing the instrumental role women play in a country’s development.  Ritu Sharma Fox, co-founder and president of the Women’s Edge Coalition, refers to MCC’s gender policy as follows, “And I can say, really unequivocally, that the new MCC gender policy is definitely the most comprehensive and practical and most likely-to-be-successful U.S.  policy on gender that I have ever seen.”

Third, MCC is accelerating compact implementation. Compact implementation has joined compact development as a core competency at the MCC.  Through the implementation stage,  we are able to realize projected results where it matters most—in the lives of the poor.   To make the emerging results sustainable, we insist that our partner countries assume the lead role in implementing their compacts.  Thus, we are working on instituting a number of measures to ensure that countries are able to ramp-up and proceed as quickly as possible toward implementation.  These measures include: having predeveloped templates for supplemental agreements on hand and requiring that these be ready to go much closer to compact signing; providing resources to in-country teams earlier to allow them to staff up, organize, and operate sooner; and outlining reporting formats and technical assistance for management information systems.  As more and more compacts enter implementation, we are endeavoring to fine-tune processes and procedures so as to try closing the gap and minimizing the time to achieve results without compromising quality.

To effectively implement our compacts and threshold agreements, we will continue our collaborative efforts to coordinate closely with other federal agencies and donor institutions to streamline funding, build on what is already being allocated, and avoid duplication.   In addition to working closely with our Board agencies—State, Treasury, USAID, and the USTR—detailees from the USDA and the Department of Commerce, for example, routinely work with us.

Fourth, MCC is continuing our performance-based approach to aid.  Our use of indicators to assess whether a country rules justly, invests in its people, and promotes economic freedom reinforces the instrumental role policy performance plays in ensuring the most effective use of aid.  Sound policies create and sustain transformational development by strengthening free societies, opening markets,  and lifting the less fortunate out of poverty.   We have witnessed remarkable improvements in data integrity, availability, and quality due to the increased pressure our candidate countries have placed on the third-party, non-U.S. governmental sources we use to supply our indicators. This allows MCC to continue making objective and transparent—rather than politically motivated—decisions about the countries with whom we partner.
As we have demonstrated, MCC will suspend a country for failing to perform on our indicators and take corrective actions to improve lagging performance.   The Gambia and Yemen,  for instance, were suspended from our program. In the case of Yemen, our suspension sparked a number of impressive judicial, anticorruption, public procurement, and microeconomic reforms to reverse its areas of decline.    This led to Yemen’s reinstatement into our threshold program.   We closely monitor the policy performance in all our partner countries, including those that show signs of declining performance, so that we can create remediation plans that avoid suspension.

Our commitment to good policy performance makes us the only donor that currently ties eligibility for assistance to performance on a transparent and public control of corruption indicator.  It is a hard hurdle for us. This has raised the profile of corruption as a policy issue and because of our tough stand on corruption, we are seeing countries adopt anticorruption laws, strengthen oversight institutions, open up the public policymaking process to greater scrutiny, and step up corruption-related investigations and prosecutions.   Anticorruption measures increase a government’s operating revenues so that more can be invested in sustainable social programs that impact the lives of the poor in transformative ways.   These measures improve the delivery of essential public services and build confidence in public institutions.   Moving forward, MCC will continue to make fighting corruption one of our highest priorities to deliver effective development assistance that, in turn,  delivers results.

Fifth, MCC is ensuring fiscal responsibility.  MCC commits the total amount of a grant award up-front, to ensure full funding availability over the course of the compacts, as an incentive for good performance.  However, to make sure implementation generates results and that good performance is sustained, MCC disburses actual funds only as performance benchmarks are met and maintained over time.  Funding can be cut off along the way for non-performance.   This approach to funding development ensures fiscal responsibility and accountability in how U.S.  tax dollars are invested in the poverty reduction and economic growth strategies of countries around the world.

We understand the need for urgency, and some have argued that larger disbursements should take place sooner.  However, we will not take unwarranted risks that could jeopardize the confidence of American taxpayers as well as the Members of this Subcommittee and your colleagues throughout Congress.  We feel the pressure to get resources on the ground to affect lives, but history has shown that pushing money out the door does not bring results.  Normal project spending patterns disburse only limited funds in the first year of a five year compact, with a sharp buildup as time goes on.   And, it is not prudent to start disbursing until such time as the staff and procedures for the implementing entity are in place and good procurement practices have been followed.   This gives our projects a “bell-shaped” disbursement profile, and disbursements have in fact been lagging behind our original, optimistic projections due to slower than expected development of country implementation capacity.  Making sure that the money is spent wisely and according to predetermined standards and benchmarks is essential for bringing measurable benefits to those our aid intends to help.

Sixth, MCC is strengthening our internal organizational capacity.   We have increased our staff—now reaching our cap of 300 professionals at our headquarters—to meet the heavy demands of our work.  We have made it a priority to recruit a highly diverse workforce, with 63 percent being female or representing minority ethnic backgrounds.  Because of our commitment to a diverse workforce, MCC increased minority hires 41 percent from June to December 2006, during which time overall staff grew by 23 percent.  We are refining and streamlining policies,  procedures, departments, and offices as needed to maximize efficiency as we work with our partner countries on compacts and threshold agreements. 

Your support for the Millennium Challenge Corporation has brought us to the three-year mark in our history and to the point where over 22 million people will benefit directly from our first 11 compacts as they break free from poverty’s grip. 

Over the past year, MCC has made great strides with the help and advice of Congress, and we thank you for that support.  We have moved far.   We have moved fast.  We have moved with energy and passion to put professionals and procedures in place to deliver results in the lives of the poor.  We can point to some incredible success stories. Only with your continued support, can we add to our track record of progress at MCC and further our challenging yet critical mission to reduce poverty through growth.  I fervently ask for that support today.

Chairwoman Lowey, Ranking Member Wolf, honorable Members of the Subcommittee, thank you for your attention.  I look forward to answering your questions.