Memorandum for the MCC Board
TO:
FROM:
DATE:
RE:
Members of the MCC Board
Sheila Herrling and Steve Radelet
Center for Global Development MCA Monitor
March 6, 2009
March 11th Board Meeting
The March 11th meeting of the Board of Directors of the MCC is a critical moment for the MCC.
This first gathering of the new Board provides an opportunity to publicly signal the beginnings
of the new Administration’s plans for the MCC. Although the Board will be faced with
immediate operational decisions regarding Armenia and Nicaragua, we hope the Board will also
use this meeting to begin to develop its strategy on the future of the MCC and some of the
changes necessary both to enhance the effectiveness of the model and to position the MCC in the
larger U.S. foreign assistance landscape.
The overarching goal for the MCC for the next phase of its operations should be to show
demonstrable progress in reducing poverty through sustainable economic growth in its partner
countries, and to do it as quickly and efficiently as possible. The new Board and MCC team
face two key challenges. First, tensions and tradeoffs exist between different actions to show
results quickly. For example, the desire for speed sometimes conflicts with the need for
incorporating country ownership and building local capacity, and the desire for country
ownership must be balanced with the need for achieving a threshold return on investment and
proper fiduciary oversight. Second, the MCC faces a significant budget constraint which may
force a decision either to reduce the number of eligible countries, or to reduce the size of each
compact. Either choice could undermine the basic principles of the MCC. If the MCC retains the
same selection process but chooses fewer countries, it could risk undermining the “MCC effect”
if countries perceive that they may not be selected even if they pass the indicators test. If instead
the MCC approves smaller compacts, it will undermine its ability to foster transformative
change. The budget situation creates a difficult dilemma: the MCC’s ability to show results over
time depends to a large degree on its budget, while at the same time its ability to gain support for
its budget depends on its ability to show strong results on the ground.
Since its inception, we have been closely monitoring the MCC and providing independent
assessments and analysis of its progress as an innovative foreign aid agency through our “MCA
Monitor” Initiative. In our most recent analysis, “From Innovation to Impact: Next Steps for the
Millennium Challenge Corporation,” we propose a set of changes to enhance the model’s
effectiveness, which are summarized on the attached page. We hope you will find the work of
the MCA Monitor useful in your oversight role of the MCC. Please do not hesitate to get in
touch with us if you have any questions.
Enhancing the Effectiveness of the MCC: Key Next Steps
1. Seek authority for countries to implement concurrent compacts, rather than one large
compact. This critical step would allow the MCC to enter into smaller and more manageable
compacts, which would (1) speed the implementation process and accelerate achieving real
results on the ground; (2) provide robust incentives for countries to maintain eligibility and
strong implementation performance; (3) reduce the amount of upfront budget obligations per
country, as funding would be required only for the components ready to roll out in the fiscal
year; (4) and help to effectively transition current compacts that merit a second round of
engagement.
2. Establish greater selectivity and stronger quality standards at every stage. For both
budgetary and quality control reasons, the MCC will need to institute greater competition
and, hence, greater selectivity at the country candidate stage, the country selection stage, and
the compact design stage. That will mean selecting fewer new countries going forward,
rejecting compact proposals without adequate returns on poverty reduction and income
generation, and terminating country eligibility and funding when countries do not perform.
3. Focus exclusively on low-income rather than middle-income countries: With continued
budgetary pressures, the MCC must allocate each additional dollar where it is most likely to
achieve its over-arching goal of reducing poverty through sustainable growth.
4. Reorient the threshold program to better prepare countries for successful compact
implementation. Threshold programs could incorporate design elements that would begin to
build country capacity that would pave the way for faster and more successful compact
implementation. This could be similar to an expanded 609g program, but the resources would
be provided to countries before selection for full compact eligibility. With less funding,
greater selectivity in threshold country eligibility will be required. A more radical option
would be to eliminate the program entirely.
5. Use alternative financing methods smartly: The MCC should apply its innovation mantra to
its financing terms, and consider (1) financing compact activities through the recipient
government’s budget on a pilot basis in a subset of MCC countries with the best fiduciary
systems, (2) providing finance to local government units or non-governmental organizations
(such as local foundations) that could provide sub-grants to smaller NGOs, (3) more direct
financing to private sector entities, or (4) co-financing infrastructure projects with private
sector entities to more fully leverage MCC funds.
6. Strengthen outreach and communications approaches: The new administration will need to
work closely with Congress to ensure that results are fully recognized; develop common
objectives for the MCC and a set of shared expectations around how MCC (or an MCC-like
approach) would achieve those objectives (including a reasonable disbursement rate for
doing so); and build alliances and champions on the Hill for the MCC approach.