Congressional Budget Justification (CBJ): Congressional Budget Justification, FY 2017 | February 2016

Compacts in Development

(in millions of $) FY 2015 Enacted FY 2016 Enacted FY 2017 Request
Total Appropriation/Request 899.5 901.0 1,000.0
Compact Assistance 665.5 667.0 752.6
Section 605     722.5
Section 609(g) Compact Development Funding (CDF)     30.1

* CDF amounts are estimated using MCC’s recent historical average of approximately 4 percent of total compact assistance.

In order to support U.S. global development priorities and maximize the investments available in its candidate pool of poor but well-governed countries, MCC plans to primarily invest $752.6 million of the FY 2017 request in new compact programs with Nepal and the Philippines.

Fully funding the FY 2017 request is critical to U.S. leadership in reducing poverty in Asia and to demonstrating U.S. commitment to advancing democracy, good governance, and open markets in a region that is under significant geopolitical pressure. In addition to Nepal and the Philippines, in FY 2017, MCC aims to bring to the MCC Board of Directors for approval two other Asian investments: (1) a compact with Mongolia; and (2) a threshold program with Sri Lanka, both of which are discussed in more detail later in this document.

FY 2017 Compact Investments

Based on multiple factors, including the size of the countries’ populations and economies, incidences of poverty, absorptive capacities, and need, $752.6 million for investment opportunities in Nepal and the Philippines could significantly advance poverty reduction in these two important economic and geopolitical partners.

Nepal is one of the poorest countries across Asia. It continues to face extensive development needs, especially in the aftermath of the devastating earthquakes in 2015, which killed more than 8,000 people and left hundreds of thousands homeless. Given the country’s weak foreign direct investment flows, chronic underinvestment in critical growth sectors such as energy and transport, and nascent public infrastructure, MCC’s investments in Nepal will come at a critical time. The energy and transport sectors, which were identified as the binding constraints to economic growth, have compact needs upwards of $600 million given the extensive requirements identified by the Government of Nepal. Through the compact development process, MCC will target the requested $301 million to high-return projects achievable within the five-year compact window to address the accumulated need for seismic-resilient investments in capital-intensive sectors. Investment decisions will take into account other donor assistance to Nepal, and projects will be coordinated with other donors where appropriate.

With a population of 99 million, the Philippines is a uniquely strategic partner in an economically and geopolitically important region. Despite its economic progress, the Philippines remains an economy with high degrees of inequality and persistent poverty across its more than 2,000 populated islands. Economic analysis is ongoing between the Government of the Philippines and MCC on identifying areas for second compact development. Given the extensive infrastructure gaps in the Philippines and pressing poverty needs across a large archipelago, MCC’s estimate of $430 million in this budget request may be modified as MCC negotiates project selection with the Government of the Philippines. The successes of the 2010 Philippines Compact are discussed on page 13, along with an update on the progress of developing the new compact program.

In December 2015, the Board selected Côte d’Ivoire, Kosovo, and Senegal as compact-eligible. MCC expects to use FY 2018 funding for these three programs. Both Côte d’Ivoire, as a recent threshold program in development, and Senegal, as a previous compact partner, are anticipated to move expeditiously through the compact development process.

Compact Development Process Overview

Compact Development Process Overview
  1. Preliminary Analysis 2. Problem Diagnosis 3. Project Definition 4. Project Development 5. Negotiation
Eligible Country
  • Names a National Coordinator and puts together a compact development team
  • Analyzes constraints to economic growth, opportunities for private investment, and poverty
  • Undertakes broad consultations with stakeholders
  • Expands compact development team
  • Analyzes key root causes of binding constraints
  • Defines, develops initiatl project ideas to address constraints
  • Submits Concept Notes
  • Defines and scopes specific projects and activities
  • Builds strong project logic for proposed compact program
  • Identifies intended beneficiaries
  • Consults stakeholders on project design
  • Submits detailed Project Proposals
  • Conducts feasibility, environmental and other studies
  • Measures expected economic impact
  • Identifies risks and mitigation measures
  • Begins establishing structures needed in implementation
  • Finalizes monitoring and evaluation
  • Negotiates legal, financial, technical terms of program
  • Creates dedicated MCA unit for implementation
MCC
  • Staff a country team
  • Provides compact development guidance
  • Advises and assists with analyses
  • Reviews, approves Concept Notes
  • Approves concept projects for further development
  • Reviews, approves Project Proposals
  • Approves projects for full development and apparaisal
  • May fund necessary preparatory studies
  • Oversees, manages procurements
  • Conducts thorough project appraisal
  • Makes final decision on projects
  • Notifies Congress of intent to negotiate
  • Defines budget and commits funding
  • Obtains approval of MCC’s Board
  • Signs agreements

Compact Pipeline and Country Updates

The chart below and the subsequent pages provide updates for all of the compacts currently in development, including estimated Board consideration timing and compact sizes. Program and sector data for countries already in implementation can be found online at www.mcc.gov/results.

Countries and Appropriations Used (in millions of $) Prior Years FY 2016 FY 2017 FY 2018 Total
Board Consideration in FY 2016:          
Niger 58 392     450
Tanzania 295 178     473
Board Consideration in FY 2017:          
Lesotho 91 97 22   210
Mongolia 260       260
Nepal     301   301
Philippines     430   430
Board Consideration in FY 2018:          
Côte d’Ivoire       TBD TBD
Kosovo       TBD TBD
Senegal       TBD TBD
Total   667 753 TBD  

Côte d’Ivoire

Compact size to be determined, Board consideration in FY 2018

MCC’s Board selected Côte d’Ivoire as eligible for compact assistance in December 2015. MCC is working with the Government of Côte d’Ivoire to develop a compact program building off of the constraints analysis and sector diagnostics that were conducted in FY 2015 when the country was developing a threshold program with MCC. The constraints analysis identified four binding constraints to economic growth in Côte d’Ivoire: (1) low levels of basic and technical/vocational skills; (2) lack of access to industrial land; (3) the administrative burden and unpredictability of paying taxes; and (4) barriers to moving goods and people, especially in Abidjan. In selecting Côte d’Ivoire as eligible, the Board also recommended that MCC explore potential investments that address regional obstacles to economic growth, in addition to domestic investments, while recognizing the need for statutory authority to optimize regional impact.

Kosovo

Compact size to be determined, Board consideration in FY 2018

MCC’s Board selected Kosovo as eligible to develop a compact in December 2015. This selection decision recognizes the progress Kosovo has made in controlling corruption, improving democratic rights, and ensuring sound and rigorous data collection for the MCC scorecard.

Kosovo’s progress on the key areas of policy performance measured by MCC’s scorecard is clearly seen in the spike in Kosovo’s Democratic Rights scores and the country’s improvement on the Control of Corruption indicator over the past year. Kosovo is a solid example of the “MCC Effect,” with the government having made an organized and concerted effort to improve on key indicators in order to pass the MCC scorecard. The president took a direct interest in Kosovo’s performance on MCC’s scorecard and worked closely with the United Nations Kosovo Team to get data reported and onto the scorecard for the first time. Kosovo now passes 13 indicators, six more than in FY 2015, and passes the Control of Corruption indicator in the 52nd percentile. The country remains very poor, with nearly a third of the population living in poverty.

Lesotho

Estimated $210 million, Board consideration in FY 2017

MCC’s Board selected Lesotho as eligible to develop a compact in December 2013. Following selection, MCC and the Government of Lesotho completed foundational studies to identify the most binding constraints to growth. MCC and the Government of Lesotho have been working since late 2014 to validate the findings through broad consultations with government, civil society, and the private sector. Four binding constraints to private sector-led economic growth in Lesotho were identified:

  • Health: A high disease burden among the working-age population that lowers the productivity of firms and individuals.
  • Skills: Agents in job-creating sectors have difficulty procuring appropriate technical and managerial skills, which lowers the productivity of firms.
  • Land: Agents in Lesotho have difficulty accessing secure, documented, and transferrable rights to productive land.
  • Regulatory and policy environment: Enterprises in Lesotho face an uncertain, inconsistent and underdeveloped regulatory, policy and legal framework for business and investment.

Underlying the binding constraints in Lesotho is a core syndrome: the Government of Lesotho’s ineffectiveness in utilizing its resources for the provision of key public services that would promote a competitive business climate.

While the initial studies have been completed and the Government of Lesotho has submitted comprehensive and detailed problem analyses and concept notes to MCC, at the December 2015 meeting, the MCC Board deferred a vote on the reselection of Lesotho for compact eligibility until the country addresses relevant governance concerns.

Results of Lesotho’s 2007 Compact

MCC’s $362.6 million compact with Lesotho, which ended on September 17, 2013, improved the water supply for industrial and domestic needs, increased access to essential health services and stimulated investment by improving access to credit for both men and women.

The Water Project upgraded and expanded water systems to increase water supply to domestic and industrial consumers in selected urban and rural areas, including the completion of 175 rural water systems. The project supported a multi-donor effort to construct a water treatment plant and storage facility for the Metolong Dam, which will provide an estimated 100,000 beneficiaries with access to clean water.

The Health Projectwas designed to mitigate the negative economic impacts of poor maternal health, HIV/AIDS, tuberculosis, and other diseases by strengthening health care infrastructure and human resources. All 14 planned outpatient departments at district hospitals are complete. The national reference laboratory and blood processing center and the health college dorms are complete. All 138 health centers are complete. Contractors continue to address minor repairs at the health centers, but the health centers are providing services to citizens, and the Government of Lesotho is implementing a plan for the proper maintenance of these facilities.

The Private Sector Development Projectaimed to increase access to credit, reduce transaction costs and enhance participation of women in the formal economy. The project supported the Government of Lesotho’s major policy reforms in gender equality, land and credit reporting, as well as the establishment of a commercial court and small claims process. Passage of the Legal Capacity of Married Persons Act removed the minority status of married women, giving them the legal right to enter into contracts, register property and act as a director of a company. The land project registered nearly 50,000 parcels out of a targeted 55,000, and the newly established Land Administration Authority continues to provide improved land administration services post compact.

Lesotho funded the remaining compact activities that were not completed by the compact end-date through approximately $150 million in government contributions.

Mongolia

Estimated $260 million, Board consideration in FY 2017

Mongolia, which shares the entirety of its southern border with China and its northern border with Russia, represents a strong democratic presence in its region. After passing MCC’s policy indicator scorecard and successfully completing a compact in 2013, Mongolia was selected in FY 2015 by MCC’s Board of Directors as eligible to develop another compact proposal. The Board reaffirmed that support in FY 2016.

Mongolia struggles with significant macroeconomic management challenges, institutional capacity constraints, and a large population living at or near the poverty line and vulnerable to falling below it.

Shortly after being named eligible for FY 2015, the Government of Mongolia established a National Secretariat for Compact Development. The National Secretariat with MCC’s team of experts completed a constraints to growth analysis that identified four binding constraints: (1) a weak and unstable macroeconomic environment, (2) inconsistent laws and policies, resulting in an unpredictable business environment, (3) health impacts of air pollution in Ulaanbaatar, and (4) costly access to water and sanitation in productive sectors and poor communities.

MCC and the Government of Mongolia then undertook a root cause analysis to examine underlying drivers of these four constraints. Based on this analysis, the Government of Mongolia will submit concept notes proposing focus areas for the compact program. Consultations with the public sector, private sector, civil society, including organizations representing women and other disadvantaged groups, and other donors has been key to each phase of this analysis.

Results of Mongolia’s 2008 Compact

Mongolia successfully completed its first compact program in September 2013. The multi-faceted compact focused on land tenure, health, vocational education, transportation, energy, and reducing pollution. The $284.9 million compact program’s results included improving property rights for small herders by formalizing over 19,000 land titles; establishing the country’s first state-of-the-art medical facility for stroke and heart attack patients; modernizing the vocational education system; constructing a paved 176 km all-weather road to access key trading markets; and supporting the installation of over 100,000 fuel-efficient stoves. 

Nepal

Estimated $301 million, Board consideration in FY 2017

MCC’s Board selected Nepal as eligible to develop a threshold program in FY 2012, and MCC began engaging the Government of Nepal on policy and institutional reforms at that time. Given steady progress to institutionalize democratic governance and strong performance on the MCC scorecard indicators for four consecutive years, the MCC Board of Directors selected Nepal as eligible to develop a compact program in FY 2015, thereby superseding the threshold program.

In developing the threshold program, MCC and the Government of Nepal completed an analysis that identified the inadequate supply of electricity and the high cost of transport as binding constraints on the country’s economic growth. The government worked with MCC on extensive consultations with the public sector, private sector, and civil society organizations, and on developing detailed sector analyses. These analyses demonstrated that the low availability of electricity has resulted in daily power cuts, which create significant costs for businesses that must invest in expensive alternative sources of power to meet their needs.

The high cost of transportation in Nepal is driven by the country’s rugged terrain and landlocked geography, as well as by the poor quality and quantity of roads, a lack of competitiveness in the trucking sector, and costly customs procedures. These factors result in the expensive and unreliable transport of goods within Nepal and to international markets.

To date, MCC and the Government of Nepal have signed an Initial Engagement Agreement for support of its compact development team. Despite challenges associated with the devastating earthquake in April 2015, the government has already identified a highly qualified national coordinator and added several technical specialists to its compact development team. MCC will be a partner in the country’s long-term recovery and has worked closely with the international donor community on its response to the earthquake and the assessment and identification of post-disaster needs. MCC is undertaking technical missions to inform project design and compact development.

Niger

Estimated $450 million, Board consideration in FY 2016

Niger is one of the poorest countries in the world, although it has relatively strong policy performance as indicated by several consecutive years of passing the MCC scorecard. In 2008, MCC signed a threshold agreement with Niger, which was suspended in 2009. In 2011, Niger was the first country to demonstrate that, with sufficient political will, countries can restore their MCC eligibility following suspension. Since that time, Niger has pursued reforms to enhance democratic and economic governance and has contributed to efforts to promote stability in the region. Niger was a strong MCC partner in its threshold program, operating a dedicated program and policy analysis unit through two elected governments and even during the period of the program’s suspension.

Niger was selected to develop a compact in December 2012. A compact development team, funded by the Government of Niger, completed a constraints analysis, as well as the first phases of complementary private sector and gender analyses in May 2013. The three binding constraints to economic growth were identified as: (1) access to water for agriculture and livestock production; (2) inefficient government regulation of business; and (3) institutional and regulatory barriers to trade. The Government of Niger submitted concept papers in June 2015.

Currently in the project development and appraisal phase, MCC and the Government of Niger are developing two primary projects: (1) a large-scale irrigated agriculture infrastructure project, which consists of the development of new and rehabilitated irrigation perimeters, as well as roads to facilitate market access; and (2) community-based livestock and climate-smart agricultural systems. Due diligence, feasibility assessment and design of these projects will continue, with a projected submission of the compact to the MCC Board of Directors for consideration in June 2016. 

Officials from the Government of Niger, including President Mahamadou Issoufou, cabinet ministers, and the president’s chief of staff, are deeply engaged in the compact development process and are strongly committed to maintaining and improving Niger’s performance on MCC’s scorecard. The first round of presidential and parliamentary elections in Niger will be held on February 21, 2016. The presidential run-off and local elections will take place on March 20, 2016. President Issoufou will be running for a second term.

Security risks in Niger and the West Africa region in general continue to be a challenge for the ability of MCC and partners to operate. The MCC country team will continue to work in close collaboration with the U.S. Embassy-Niamey to address the safety and security of agency staff and programs.

Philippines

Estimated $430 million, Board consideration in FY 2017

MCC’s Board selected the Philippines as eligible to develop a second compact in FY 2015. Despite recently graduating from a low income country to a lower-middle income country and thus being in a more competitive country pool, the Philippines has continued to perform well on the MCC scorecard. The Philippines remains among the 75 lowest per capita income countries, and is, therefore, a low income country for MCC funding purposes.

The Philippines has made strides in control of corruption in recent years, with the private sector noting significant improvements. The Philippines was identified as a top reformer in the World Bank’s Doing Business report in 2014, after improving processes for obtaining construction permits, accessing credit, resolving insolvency, and paying taxes. The International Monetary Fund also noted recent improvements in fiscal transparency and public financial management. 

In developing a second set of investments, MCC and the Government of the Philippines jointly completed a constraints analysis that has preliminarily identified binding constraints to growth and investment, including government coordination and implementation capacity, high costs of transport logistics and electricity, and difficulties in rural markets. Further sector analyses in the coming months will include further and extensive consultations with the government, the private sector, development partners, and civil society. MCC expects the Philippines to develop concept papers in FY 2016. 

The Philippines must successfully complete the current compact program and continue to meet MCC’s eligibility criteria before MCC approves a second compact.

Results of the Philippines’ 2010 Compact

The first Philippines compact began in 2011 and is on track for completion in May 2016. Among its results so far, the $433.9 million program has helped to double revenue collections and reduce opportunities for corruption in the Bureau of Internal Revenue through improved business processes. It has built over 2,800 small-scale and structurally sound infrastructure projects (exceeding compact targets). In building these projects to help address communal priorities in a sustainable manner, the compact has promoted participation by women. Finally, the Government of the Philippines and MCC are working diligently to complete the rehabilitation of 222 kilometers of a secondary national road to climate-resilient standards and with significant safety enhancements.

Senegal

Compact size to be determined, Board consideration in FY 2018

MCC’s Board selected Senegal in December 2015 as eligible to develop a second compact. Senegal continues to show strong policy performance, especially since the election of President Macky Sall in 2012. Senegal has seen improved performance on MCC’s Control of Corruption and Political Rights indicators. These improvements reflect the newly empowered National Anti-Corruption Commission investigating members of the former government and ending President Wade’s destabilizing campaign for a third term. President Sall continues to demonstrate strong domestic and regional leadership, leading anti-terrorism and peacemaking efforts as the chairman of the Economic Community of West African States. Senegal has had GDP growth of around 5 percent in 2014 and 2015, with improvements due to improved agricultural output and increased remittances. Inflation remains very low. 

In selecting Senegal as eligible, the Board also recommended that MCC explore potential investments that address regional obstacles to economic growth, in addition to domestic investments, while recognizing the need for statutory authority to optimize regional impact.

Results of Senegal’s 2009 Compact

The $540 million compact with Senegal aimed to boost economic growth by unlocking the country’s agricultural productivity and expanding access to markets and services through investments in roads and irrigation networks. The two primary compact projects, roads rehabilitation and irrigation and water resource management, were geographically focused in the Senegal River Valley in the north and the Casamance region in the south. The compact priorities were identified to align to the country’s long-term objectives of enhancing economic growth and food security. Results of the two projects are discussed in detail in the “Results of Recently Closed Compacts” section in the appendix.

The first Senegal Compact closed in September 2015, with successful completion of the irrigation project and most of the roads project, despite initial challenges in the early years of implementation. The government has committed the needed funds for the completion of the remaining works and is actively managing these contracts in addition to ensuring sustainability efforts for all compact investments going forward.

Tanzania

Estimated $473 million, Board consideration in FY 2016

After showing strong commitment to policy reform and implementation in its first compact, Tanzania was selected by MCC’s Board in December 2012 to develop a compact.

Tanzania completed an economic analysis as part of its participation in the Partnership for Growth initiative. The analysis highlighted constraints stemming from the lack of reliable electricity and the limited network of market access roads, among other concerns. After the initial stages of due diligence, the focus of the proposed compact was narrowed to the power sector. The Government of Tanzania has worked with development partners, civil society, and the private sector to prepare the Electricity Supply Industry Reform Strategy and Roadmap (ESI Reform Roadmap) to address a variety of challenges in the energy sector. The proposed MCC compact is designed to help the government implement critical elements of the ESI Reform Roadmap. The proposed compact will include infrastructure investments, significant technical advice to support energy sector reform and institutional reform in combination with a comprehensive set of conditions and covenants designed to achieve timely government actions and safeguard U.S. taxpayer funds. 

The current proposed compact is composed of five interconnected projects: (1) transformation of the Tanzania Electricity Supply Company (TANESCO); (2) reform of the Tanzania energy sector; (3) expansion of the TANESCO distribution system; (4) facilitation of the productive uses of electricity; and (5) transformation of the Zanzibar Electricity Company (ZECO).

Tanzania passed 16 of the 20 indicators in FY 2016, including Control of Corruption. At its December 2015 meeting, the Board deferred a vote on the reselection of Tanzania for compact eligibility until the country addresses relevant governance concerns.

Results of Tanzania’s 2008 Compact

From 2008 to 2013, Tanzania successfully implemented a $698.1 million compact program composed of the following projects:

  • The Transportation Project upgraded more than 470 kilometers of primary roads throughout the mainland and rural roads in Zanzibar to connect communities with schools and health clinics and reduce transportation costs. By the close of the compact, 190 kilometers had been fully completed and the remaining construction largely finished, with the Tanzanians finalizing outstanding works post-compact.
  • The Energy Project improved electricity coverage, primarily through new power transmission and distribution. Specifically, MCC funded a new 100 megawatt submarine power cable from the mainland to Zanzibar, and approximately 2,800 kilometers of new or rehabilitated transmission and distribution lines (200 kilometers of which were completed by Tanzania after compact closeout) and an additional 296 megavolt amperes of substation capacity in seven underserved regions of mainland Tanzania.
  • To address serious shortfalls in access to clean water impacting health and productivity, the Water Project helped rehabilitate water intake and treatment plants and improved the existing distribution network in both Dar es Salaam and Morogoro. This resulted in an increase in treated water capacity from 180 million liters per day to 270 million liters per day in the capital and from 23 million liters per day to 33 million liters per day in Morogoro, potentially benefiting 2.8 million people. The Government of Tanzania completed the Dar es Salaam and Morogoro works post-compact.

Throughout implementation of the first compact, Tanzania fulfilled its policy reform commitments and demonstrated country ownership through its use of $132 million of its own funds to cover any cost escalation and to complete construction work that was not finished when the compact ended in September 2013. All first compact activities are now complete.