|(in millions of $)||FY 2015 Enacted||FY 2016 Enacted||FY 2017 Request|
|Compact Development/Oversight: 609(g) and Due Diligence||94.0||94.0||104.0|
|Office of the Inspector General||5.0||5.0||5.0|
The Millennium Challenge Corporation (MCC) works to improve lives and transform communities around the world by focusing on one mission: reducing poverty through economic growth. Over the next five years, MCC is working to expand impact, leverage public and private partners, and drive innovation to accomplish this mission.
The agency is requesting $1.0 billion for Fiscal Year (FY) 2017 to advance its mission by funding partnerships to spur economic growth in developing countries and enhance the stability of strategically important regions.
Evidence shows that economic growth is the strongest driver of poverty reduction and that development programs focused on both policy reform and growth are particularly important as global growth slows.
MCC creates the conditions for growth and poverty reduction through its performance-based model that incentivizes countries to develop and maintain policies necessary for growth. MCC maximizes the effectiveness and impact of the projects it funds by partnering only with countries that meet rigorous metrics for democracy, good governance, and open markets, and by catalyzing and leveraging private sector financing.
MCC has funded compacts with 26 countries totaling over $11 billion since 2004. About 65 percent of MCC’s compact portfolio has been invested in Africa, with the rest in Central America, Eastern Europe, the Middle East, and Asia. By using a country-led and country-owned implementation model, MCC has successfully worked with partner countries to improve the lives of an estimated 175 million people around the world. These investments are connecting some of the world’s poorest people to jobs, markets, and opportunities. MCC projects provide families with clean water, communities with electricity and roads, farmers with protections for their land rights, and students with schools that teach the skills they need in the workforce. These projects improve quality of life and empower people to become more self-sufficient, so that they can improve their own lives.
Through rigorous oversight and monitoring, countries are held accountable to high standards of both governance and project implementation throughout their MCC partnership. As a result, this country-led model produces investments that are sustainable and effectively spend aid dollars. By coupling this model with an evidence-based approach to country and project selection, MCC helps to foster democracy and open markets, generating a strong return on U.S. investment and new economic opportunities for American businesses. MCC’s compacts are often a cornerstone of the U.S. economic relationship in the countries with which the agency partners.
FY 2017 MCC Investments
Globally, a lack of roads, bridges, power, and ports is a major hurdle to economic growth and often traps people in endemic poverty. Too often, the private sector is unwilling to make investments because of poor governance and rampant corruption. The funds requested in MCC’s FY 2017 budget will not only advance good governance and economic values, but make lasting improvements in the lives of poor people by leveraging private investment through political and institutional reforms. Without sufficient funding, MCC will have less leverage to incentivize these reforms, or make the large investments needed to empower individuals though improved access to vital services. Fully funding the Administration’s request for MCC will provide the agency the resources it needs to:
- Embed the United States more deeply in the fight against poverty in the economically dynamic and geopolitically important region of Asia. In FY 2017, MCC is expected to bring forward compact proposals with Nepal, Mongolia, and the Philippines. Investments in these countries will bolster the gains in democratic governance and economic freedom that each country has made and leverage untapped private resources in a cohort of countries that show great potential for sustained growth. MCC is also expected to advance a threshold program with Sri Lanka in FY 2017.
- Support an accelerated compact development pace. MCC signed two compacts in FY 2016 and anticipates signing two additional compacts before the end of the year. The agency expects the Board of Directors to review four additional compacts in FY 2017. The increased funding request, including program assistance, 609(g)/due diligence, and administrative expenses, stems from this accelerated pace. Fully funding MCC’s FY 2017 request is critical to realizing the opportunity for growth from the new compacts with Nepal and the Philippines. Moreover, the request does not include funding for countries selected as compact eligible in December 2015, namely Côte d’Ivoire, Kosovo, and Senegal, which will need to rely on funds appropriated in FY 2018. Both Côte d’Ivoire, which had been developing a threshold program, and Senegal, a previous MCC partner, are anticipated to move expeditiously through the development process.
- Maximize impact through regionally focused investments. Congressional support for potential MCC regional investments has been strong, and MCC continues to pursue concurrent compact authority as part of the FY 2017 President’s Budget to better operationalize this concept. Lack of regional integration continues to be a key constraint to growth across many of MCC’s partner countries, and this authority is critical to allow MCC to make strategic regional investments that facilitate trade flows, yield high economic returns, and deliver economies of scale. In West Africa, for example, MCC could finance the development of electricity, water, or transport infrastructure and policies to facilitate regional trade.
- Efficiently manage the agency’s resources in order to provide effective program development and oversight. The President’s Budget requests raising the statutory cap on administrative expenses to $108.4 million, a modest 3.2 percent increase from the funding cap that has been in place since FY 2012. The small increase is driven primarily by: (1) MCC’s greater staffing needs, due in part to the pace of compact signings; and (2) the growing cost of overseas operational support, including higher State Department-mandated International Cooperative Administrative Support Services (ICASS) costs and Capital Security Cost-Sharing (CSCS) expenses required to maintain staff overseas. The increase will enable MCC to continue to make investments to effectively and efficiently execute, monitor, and evaluate MCC programs.
The sections that follow provide detailed information on the funding requests for Compact Assistance, Threshold Programs, 609(g)/Due Diligence, Administrative Expenses, and the Inspector General.
The Five-Year Budget and Strategic Plan
In the coming weeks, MCC will release a new five-year strategic plan that will guide the agency to:
- Expand Impact. MCC will double down on its commitment to reduce poverty through economic growth by identifying constraints that are regional in nature, improving efforts to achieve systemic and sustainable change, and ensuring that the agency’s work is reaching those who need it most, including the poor and the vulnerable. MCC will deepen its partnerships in Africa and look to expand partnerships in regions like South Asia.
- Leverage Public and Private Partners. The world of global development has changed, and private-sector investment is crucial to meeting global development goals and tackling poverty. In coordination with partner countries and other donors, MCC will hone its focus on policy reforms and solutions that reduce risks and create opportunities for businesses, and it will identify and deploy new ways to draw the private sector into its projects to scale up its investments. For example, MCC has committed to providing $70 million to support public-private partnerships in partner countries. This new commitment is expected to bring $1 billion in private-sector investments over the next five years.
- Drive Innovation. Founded upon decades of development experience, MCC will continue to lead by example and drive best practices in the global effort to lift people out of poverty. MCC’s commitment to evaluating its projects and sharing lessons learned, as well as its unique ability to scale up cutting-edge approaches, will support its role as a knowledge leader in the U.S. government and across the development community.
As part of the agency’s strategic planning efforts, the FY 2017 request projects resource needs over the next five years. These projections are based on MCC’s historical compact sizes (accounting for inflation) and execution rate of compact investments, including pipeline projections for funding at least three bilateral compacts each year, or two bilateral compacts each year and one regionally-focused investment every 2.5 years on average. The five-year budget framework will be refined each year based on the most recent developments in the compact pipeline, information gathered from the agency’s active portfolio, and other relevant data, such as changes in the candidate country pool.
|Country*||FY 2017||FY 2018***||FY 2019||FY 2020||FY 2021|
|Country 1 (bilateral)||Primarily supports compacts with Nepal and the Philippines||416||425||435||445|
|Country 2 (bilateral)||416||425||435||445|
|Regional Compact Funded Over 3 Years or Country 3 (bilateral)**||295||302||308||315|
* Dollar figures are estimates using inflation assumptions consistent with economic assumptions included in the FY 2017 President’s Budget.
** The funding in this row will be allocated to either a regional investment every 2.5 years or a bilateral compact each year.
*** Please note that the FY 2018 estimates above are a placeholders and are not intended to presuppose future budget requests or the specific sizes of compacts with Côte d’Ivoire, Kosovo, and Senegal or of regional investments.
The FY 2017 request supports the efficient allocation of resources over time and will also have positive effects on MCC’s potential and current partner countries. The projected funding baseline will encourage potential partner countries to take difficult steps to improve policy performance to be selected for a compact because of the expectation of funding being available in the near future. As always, countries with compacts currently in development will need to develop high-quality project proposals to compete with other partner countries for funding within the forecasted baseline.
Maximizing Poverty Reduction through Regional Investments
Economies do not work in isolation and poor countries can grow faster, create more jobs, and attract more investment when they are part of dynamic regional markets. Enhanced regional integration can connect countries to export opportunities as well as provide the ability to import factors needed for their own economic activity, such as power or water. The World Bank, for instance, estimates that regionally integrated infrastructure could double sub-Saharan Africa’s share of global trade. After more than 10 years of successfully delivering large, complex infrastructure projects, coupled with supporting difficult policy reforms, MCC is well positioned to increase the impact of its investments by focusing, in some cases, regionally.
Under the right circumstances, regional investments—particularly in transportation, water, and energy—present opportunities to increase impact by taking advantage of higher rates of return on investment and larger scale reductions in poverty. Regulatory mismatches and actual physical barriers constrain countries’ ability to realize the full benefits of trade with neighboring countries, effective management of common resources, or the creation of larger consumer markets. Financial or regulatory integration, transport networks that cross borders, or management of resources like energy or water all can benefit smaller or less developed economies, which are sometimes otherwise unable to reach the scale they need to be seen as consumer markets or investment destinations.
By making coordinated investments across multiple countries to expand existing infrastructure, MCC will be able to help partners work together to build and grow regional markets, facilitate trade, and capture more impact through economies of scale. This, in turn, will help generate new business and market opportunities for U.S. and other companies.
At present, however, MCC has the authority to sign and implement only one compact at a time with any given partner country. As a result, MCC cannot move forward on most multi-country investments if some of the countries involved have ongoing compacts. In December 2015, for instance, MCC selected Côte d’Ivoire as eligible to develop a compact. Several existing MCC compact partners are neighbors of Côte d’Ivoire and the ability to sign concurrent compacts would enable MCC to increase its impact by addressing regional constraints to growth.
The authority MCC is seeking would allow the agency to maintain its focused, data-driven model for country and project selection. These investments will employ MCC’s local implementation and accountability, allowing for multiple bilateral compacts to be knitted together into a regional project. The agency framework will seek to spur economic growth through a combination of policy reforms and infrastructure, justified by rigorous economic analysis. Without concurrent compact authority, MCC will be leaving critical development impact on the table.
Operationalizing Regional Investments
MCC has the proven operational frameworks in place to deliver economic impact through a country-driven process, and from this has gained the trust and reputation needed to address the added complexities of regional projects. The agency is able to leverage its reputation for clean procurements, economic justification for every project, and country buy-in to promote accountability. Concurrent compact authority will allow MCC to develop regional projects while still adhering to the agency’s important country-owned processes that demand accountability and allow the agency to maintain and build upon the core elements of its operational model to produce high returns on investments. In any regional investment, MCC would continue its:
- Transparent process for selecting the best-governed poor countries. Selection of regional investments would be based upon the existing country selection system; countries selected by the Board as eligible for bilateral compacts would also be eligible for regional investments.
- Use of economic analysis to choose investments. Regional investments would be selected based on economic analysis of project returns. The preliminary economic rates of return (ERRs) will need to show returns above MCC’s hurdle rate, five-year timeline feasibility, manageable environmental and social risks, implementation of policy and institutional reforms, private sector engagement, and sustainability.
- Commitment to suspend or terminate investments. MCC recognizes that one of the risks inherent in regional investments is that one or more of the countries involved in the partnership may not perform well or may suffer governance declines inconsistent with continued MCC engagement. MCC is committed to suspend or terminate regional investments as appropriate just as it is with bilateral investments.