[Senate Hearing 114-518]
[From the U.S. Government Publishing Office]
S. Hrg. 114-518
MILLENNIUM CHALLENGE CORPORATION: LESSONS LEARNED AFTER A DECADE AND
OUTLOOK FOR THE FUTURE
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HEARING
BEFORE THE
COMMITTEE ON FOREIGN RELATIONS
UNITED STATES SENATE
ONE HUNDRED FOURTEENTH CONGRESS
FIRST SESSION
__________
DECEMBER 8, 2015
__________
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COMMITTEE ON FOREIGN RELATIONS
BOB CORKER, TENNESSEE, Chairman
JAMES E. RISCH, Idaho BENJAMIN L. CARDIN, Maryland
MARCO RUBIO, Florida BARBARA BOXER, California
RON JOHNSON, Wisconsin ROBERT MENENDEZ, New Jersey
JEFF FLAKE, Arizona JEANNE SHAHEEN, New Hampshire
CORY GARDNER, Colorado CHRISTOPHER A. COONS, Delaware
DAVID PERDUE, Georgia TOM UDALL, New Mexico
JOHNNY ISAKSON, Georgia CHRISTOPHER MURPHY, Connecticut
RAND PAUL, Kentucky TIM KAINE, Virginia
JOHN BARRASSO, Wyoming EDWARD J. MARKEY, Massachusetts
Lester E. Munson III, Staff Director
Jodi B. Herman, Democratic Staff Director
Chris Ford, Majority Chief Counsel
Margaret Taylor, Minority Chief Counsel
John Dutton, Chief Clerk
(ii)
C O N T E N T S
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Page
Birdsall, Nancy Ph.D., president, Center for Global Development,
Washington, DC................................................. 41
Prepared statement........................................... 43
Cardin, Hon. Benjamin J., Senator From Maryland.................. 2
Corker, Hon. Jim, Senator From Tennessee......................... 1
Hyde, Hon. Dana J., chief executive officer, Millennium Challenge
Corporation, Washington, DC.................................... 2
Prepared statement........................................... 4
Kolbe, Hon. James, senior transatlantic fellow, the German
Marshall Fund of the United States, Washington, DC............. 26
Prepared statement........................................... 28
Natsios, Hon. Andrew S., director of the Scowcroft Institute of
International Affairs, and executive professor, the Bush School
of Government and Public Service, Texas A&M University, College
Station, TX.................................................... 31
Prepared statement........................................... 33
Additional Material Submitted for the Record
Responses to Additional Questions for the Record Submitted to
Hon. Dana Hyde by Members of the Committee
Ms. Hyde's Response to Senator Corker........................ 57
Ms. Hyde's Response to Senator Cardin........................ 63
Ms. Hyde's Response to Senator Isakson....................... 67
Ms. Hyde's Response to Senator Perdue........................ 69
Responses to Additional Questions for the Record Submitted to
Hon. Jim Kolbe by Members of the Committee
Congressman Kolbe's Response to Senator Corker............... 78
Congressman Kolbe's Response to Senator Cardin............... 80
Congressman Kolbe's Response to Senator Perdue............... 80
Responses to Additional Questions for the Record Submitted to
Hon. Andrew Natsios by Members of the Committee
Mr. Natsios's Response to Senator Corker..................... 81
Mr. Natsios's Response to Senator Perdue..................... 83
Responses to Additional Questions for the Record Submitted to Dr.
Nancy Birdsall by Members of the Committee
Dr. Birdsall's Response to Senator Corker.................... 86
Dr. Birdsall's Response to Senator Cardin.................... 89
MCC FY 16 Candidate Pool......................................... 93
(iii)
MILLENNIUM CHALLENGE CORPORATION: LESSONS LEARNED AFTER A DECADE AND
OUTLOOK FOR THE FUTURE
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TUESDAY, DECEMBER 8, 2015
U.S. Senate,
Committee on Foreign Relations,
Washington, DC.
The committee met, pursuant to notice, at 10:14 a.m., in
room SD-419, Dirksen Senate Office Building, Hon. Bob Corker
(chairman of the committee) presiding.
Present: Senators Corker, Johnson, Flake, Gardner, Perdue,
Cardin, Menendez, Shaheen, Coons, Murphy, Kaine, and Markey.
OPENING STATEMENT OF HON. BOB CORKER,
U.S. SENATOR FROM TENNESSEE
The Chairman. Now the hearing for the Senate Foreign
Relations Committee will come to order. Before we start, I want
to say that today's hearing, by the way, in large part is due
to some things that Senator Cardin would like to look at, and I
appreciate his interest. Today's hearing will review the
current operations and authority of the Millennium Challenge
Corporation. The MCC, created a decade ago, was intended to
take a unique approach to the development and foreign aid.
As designed, the MCC provides development assistance for
clearly defined economic objectives in full partnership with a
developing country. MCC compacts are earned, not given. With a
set of clear indicators that emphasize democratic governance
and economic freedoms that determine selectivity, the MCC works
with successful countries committed to establishing appropriate
enabling environments in which entrepreneurship and economic
growth can thrive.
Further, MCC is unique in that this process is strongly
driven by data and transparency. Today we will examine how MCC
is fulfilling its original promise as an independent aid agency
committed to identifying and removing constraints to economic
growth working in full partnership with the host country. It is
my hope we can discuss both the lessons learned along the way,
but also ways we can help improve the MCC model.
And I want to turn to Senator Cardin for his comments.
OPENING STATEMENT OF HON. BENJAMIN L. CARDIN,
U.S. SENATOR FROM MARYLAND
Senator Cardin. Well, Mr. Chairman, again, let me thank you
for bringing forward this hearing on the Millennium Challenge
Corporation. I think my colleagues are aware that this program
was established in 2004. It was unique in that it built upon
U.S. ideals of entrepreneurship and good governance in order to
do major infrastructure in a country, pretty much directed by
that country. But they need to be able to establish that they
are, in fact, governed by democratic goals, that they have
economic freedom, and they invest in their own people.
So it is basically our values directed by their priorities
that leverage a great deal of investment with strong
accountability. And it has worked extremely well during this
period of time, and I think by all accounts it has been given a
very high grade for developing the type of economic growth in
these countries that will sustain our values.
What I had asked the chairman, along with Senator Flake, is
why should we not be looking at regional issues when we look at
the countries that are involved; when you deal with trade, or
you deal with transportation, you deal with energy. It does not
end at one border. And why should we not be able to use the
same principles to do regional grants?
And that legislation was filed. It does present certain
challenges on accountability. It is different than how is it
working within this model. So I hope during the course of this
hearing we will have a chance to explore that expansion of
authority and whether it would further advance the goals of a
very successful program.
I welcome our witnesses, and I look forward to the hearing.
The Chairman. Thank you. Our first witness for the first
panel is the Honorable Dana Hyde, chief executive officer of
the Millennium Challenge Corporation. We want to thank you for
being here. I know you know well about how we receive
testimony. If you would summarize in about five minutes, we
will, without objection, take your full written statement as
part of the record.
If you would begin. Again, we thank you for your work and
your willingness to be here today.
STATEMENT OF HON. DANA J. HYDE, CHIEF EXECUTIVE OFFICER,
MILLENNIUM CHALLENGE CORPORATION, WASHINGTON, DC
Ms. Hyde. Thank you. Thank you, Chairman Corker, Ranking
Member Cardin, and members of the committee. I am delighted to
be here this morning and to have the opportunity to discuss the
Millennium Challenge Corporation's work and our proposal to
scale our investments through regional work.
Just over a decade ago, the Bush administration and
Congress worked together to create an agency with just one
focus: reducing poverty through economic growth. Now, this new
agency was built on the lessons of decades of development, and
it was charged with strengthening the U.S. effort to lift
people out of poverty. Today, what started as a grand
experiment is now an established and respected tool of U.S.
international development.
You do have my testimony, Mr. Chairman, and that details
MCC's unique model and accomplishments. So this morning I would
like to focus on just two areas. First, how MCC is catalyzing
change and growth around the world, and second, how MCC can
maximize our impact through regional investments.
Simply stated, MCC is working to reduce poverty in three
ways: first, by incentivizing countries to make meaningful
reforms, second, by funding projects with tangible outcomes and
real impact, and third, by focusing on systemic change that
will outlive MCC's engagement.
As you know, countries must pass a scorecard to become
eligible for compact assistance. This scorecard, an independent
assessment of 20 key indicators, has proven to be a powerful
incentive for countries to strengthen their democracies. Cote
d'Ivoire is a prime example. Several years ago they set out to
pass the scorecard. At the time they were failing 15 of the 20
indicators, including corruption.
They established a special team within the prime minister's
office that changed the laws, including providing rights to
women and tighten controls on corruption. If you were traveling
in Abidjan in 2013, you would have seen billboards across the
city with warnings to officials and citizens about the
consequences of corruption.
These efforts paid off. In 2016, Cote d'Ivoire passes 13 of
20 indicators and is a candidate for selection for an MCC
compact. Cote d'Ivoire illustrates how MCC's competitive
approach incentivizes reform before a dollar of taxpayer money
is spent. At the same time, projects themselves must be
targeted to achieve real outcomes.
I recently returned from Jordan, one of the most water
scarce countries in the world. There, MCC supported a public-
private partnership to finance the expansion of the country's
primary wastewater treatment plant. This PPP, one of the first
in the country, leveraged $110 million, surpassing MCC's own
$93 million investment. The compact is being completed under
time, under budget, and is expected to benefit nearly three
million Jordanians. By crowding in private investment, MCC is
multiplying its impact many times over.
The same is true in Ghana. In many ways, Ghana represents
the evolution of an opportunity for MCC's work. In the first
compact, MCC worked in many areas: road, agriculture, and
water. MCC's second compact is solely focused on energy, and
leveraging our credibility to support politically difficult
reforms that will unlock barriers to private investment. In
fact, MCC's reforms are already helping to catalyze more than
$4 billion in private investment in Ghana's power sector,
including General Electric's investment in a $1.8 billion power
project.
In these ways, MCC's compacts leave behind more than the
sum of the project, and we continue to pursue opportunities to
increase leverage. In today's interconnected world, we believe
regional investments in sectors like transportation or power
represent that opportunity.
In West Africa, for example, coordinating or pooling
national grids is essential to increasing access to
electricity. With the regional investment, MCC could
concentrate our effort not just on one country like Ghana, but
on the hard and soft infrastructure necessary better to
integrate power grids across borders.
This summer, I was privileged to join some of the members
of this committee at the AGOA conference in Gabon. Among the
African delegates, the widespread view was that over the next
decade, regional integration will be a primary driver of
economic growth on the continent. MCC risks missing
opportunities and leaving development impact on the table if it
focuses solely on engagements that stop at borders.
With your support, regional investments can help turn the
frontier markets of today into the emerging market partners of
tomorrow. I am deeply grateful to Senators Cardin, Flake,
Coons, and Isakson for introducing legislation that would give
MCC this authority.
Mr. Chairman, as I conclude, let me emphasize what you
noted earlier this year when you said ``With limited aid
dollars, it is--it is our responsibility to ensure American
resources are used in the most effective manner possible.'' I
can assure you the 300 professionals at MCC think about that
responsibility every day. MCC is a lean and efficient agency
that punches far above its weight. In little over a decade, it
has helped foster growth and promote American values around the
world. And since day one, MCC has held itself accountable to
Congress and to the American people.
I want to thank you again for your time and your support of
MCC's mission, and I would be delighted to answer your
questions.
[The prepared statement of Ms. Hyde follows:]
Prepared Statement of Dana J. Hyde
Thank you Chairman Corker, Ranking Member Cardin and members of the
Senate Foreign Relations Committee for the opportunity to discuss the
Millennium Challenge Corporation's (MCC) work to fight poverty, and the
increased impact MCC can have through regional investments.
Just over a decade ago, the previous administration and Congress
worked together to create an agency with a singular focus: reducing
poverty through economic growth. This new agency, built on the lessons
of 50 years of development assistance, faced many questions and an
uncertain future:
Could the United States use an evidence-based approach to
select relatively well-governed countries and effectively and
transparently fight poverty?
Could poor countries make data-driven investment decisions
and implement large projects within 5 years and without
corruption?
Could an innovative agency with a singular mission serve to
promote American values--open markets, democracy, and good
governance--while helping to support security and stability in
poor countries around the globe?
Over the past decade, each of these questions has been answered in
the affirmative. What started as a grand experiment is today an
established and respected tool of U.S. development and economic
engagement around the globe. MCC has become a key driver of good
governance standards in poor countries, while simultaneously rising
through the ranks to be recognized as one of the most transparent
development agencies in the world.
MCC's country-led and country-owned implementation model has
successfully delivered hundreds of projects that are improving the
lives of an estimated 175 million people around the world. In an
increasingly globalized economy, these investments are a down payment
on stability and market opportunities for American businesses. MCC's
engagement with a partner often stands as the cornerstone of the U.S.
economic relationship in that country--visible proof that U.S. economic
assistance leads to tangible results--and helps to create a more
attractive environment for private investment.
the mcc model & portfolio
Over the span of its first decade, MCC committed roughly $10
billion to programs, signing compacts with 25 countries. About 65
percent of the compact portfolio was invested in Africa, with the rest
in Central America, Eastern Europe, the Middle East, and Asia.
Overall, approximately 70 percent of MCC's portfolio has been
invested in infrastructure--power, roads, ports, and bridges--that
connects people to jobs, markets and opportunities. With large-scale
grants that average $350 million and a 5-year time horizon, MCC is
uniquely suited to tackle projects of this size and complexity. And
while much of MCC's early infrastructure investments were focused on
roads and transportation, the portfolio is increasingly invested in
energy infrastructure; four of the last five compacts considered by
MCC's Board--Ghana, Benin, Liberia and Tanzania--are aimed at helping
create the conditions for private investment in energy in Africa.
MCC was founded on the principle of data-driven and evidence-based
decisionmaking, which permeates every aspect of our work. It starts
with economists from MCC and an eligible country jointly conducting an
upfront analysis to determine the country's binding constraints to
economic growth. Based upon this analysis, concepts, sectors, and
ultimately projects are identified and assessed for potential impact
and cost effectiveness. MCC is looking to fund projects with at least a
10 percent economic rate of return (ERR) over a 20-year period. In
fact, what we have seen--in a sampling of projects recently completed--
is that the average ERR upon completion is actually over 16 percent.
Once a compact is shaped and signed, MCC monitors implementation
progress, including through quarterly reviews. MCC tracks contracts
signed and funds spent, outputs achieved, any outcomes that can be
determined during the course of a project, and whether our partner
countries are implementing the agreed-upon policy reforms. We disburse
funds quarterly if the benchmarks are being met. We will withhold
funds--and may even cut off assistance--if the conditions no longer
meet MCC standards. In addition, MCC seeks an independent evaluation of
every project, with gold standard performance and impact evaluations
conducted by universities, researchers and other outside experts.
Finally, MCC's model is unique because of our size and footprint.
MCC has just over 300 full-time employees, and our overseas presence is
only about one or two Americans in each country. Despite being so lean,
MCC is able to effectively and efficiently disburse about 1 billion
dollars per year in grant investments because we require the host
government to implement the compact--with strong MCC oversight and
monitoring--through an independent entity the government creates, often
called the Millennium Challenge Account (MCA).
a focus on measurable results
A commitment to achieving and measuring results is at the core of
MCC's model. MCC looks at results in the following three ways: (1) the
reforms MCC incentivizes countries to make; (2) the outcomes and impact
of the projects MCC funds; and (3) the ways in which MCC fosters self-
sufficiency in partner countries.
First, MCC achieves some of its most dramatic results without
spending a dime of taxpayer resources. MCC's stringent eligibility
criteria and its global credibility have created a powerful incentive
for reform, dubbed the MCC Effect. Countries are changing their laws in
order to improve their performance on MCC's annual scorecards and
qualify for MCC assistance. Indeed, researchers at the College of
William and Mary have carefully studied and documented this effect,
finding that MCC's scorecard is one of the most influential external
tools to incentivize policy reform.\1\
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\1\ Parks, Bradley C., and Zachary J. Rice.`` Measuring the Policy
Influence of the Millennium Challenge Corporation: A Survey-Based
Approach.'' The College of William and Mary, February 2013.
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Cote d'Ivoire provides a striking example. For several years, a
special team within the Prime Minister's office has worked across
government ministries to address scorecard concerns ranging from health
to women's empowerment to the business environment to corruption. In
2013, Cote d'Ivoire passed only 5 of 20 indicators on its MCC
scorecard. Fast forward just three years and Cote d'Ivoire now passes
13 of 20 indicators--and is a candidate for selection for an MCC
compact.
Moreover, the incentive effect does not end once a country is
selected as a partner. MCC continues to monitor governance performance
throughout the partnership while using its hard-earned credibility to
push for major policy and sectoral reforms that complement and sustain
the project investments. Together, these reforms and investments help
to crowd in private sector investment and create opportunities for more
growth.
Second, MCC's projects--in and of themselves--are designed to
reduce poverty and create growth. In little over a decade, MCC has
already had a lasting impact on countries, communities, and individuals
around the world. From a road in the Philippines strong enough to
withstand Typhoon Haiyan and facilitate rescue efforts to a port
expansion in Benin that resulted in a 75 percent increase in cargo, MCC
has shown a country-driven model of development can work, and work
well. As a result of MCC's work:
Millions of people will travel over more than 2,850
kilometers of roads, connecting businesses to markets and
fueling domestic and international trade;
Millions more will be able to light their homes and start
new businesses thanks to 4,400 kilometers of new energy
transmission lines and the sector reforms that MCC has required
to promote private investment
300,000 households have legal rights to their lands,
empowering women as heads of households, increasing individual
access to credit, and reducing land-related conflicts;
680,000 people have access to clean water, unleashing
economic growth potential by, among other things, improving
health and life expectancy; and
215,000 students have access to schools, including girls in
Burkina Faso whose improved math and French test scores will
mean greater opportunities to enter and be successful in the
labor market.
Finally, MCC's compacts leave behind more than the sum of their
individual projects. MCC's focus is not just on building
infrastructure, but on building expertise and know-how.
This is evident in Honduras, which has adopted standards of
transparency and accountability put in place by MCC to implement
additional projects even after MCC's compact had closed. In Cabo Verde,
the Government passed a new law on public procurement based on MCC's
procurement guidelines. And in Senegal, MCC worked to improve local
land governance through a blend of traditional and modern land
practices, an approach now being widely adopted by the Government of
Senegal.
Through MCC's unique country-led approach, countries learn
successful project implementation, accountable fiscal stewardship, and
transparent procurement processes that outlast the lifetime of a
compact. When combined, MCC's abilities to incentivize reforms, drive
results, and build self-sufficiency enable the agency to punch above
its weight and deliver outsized impact.
leveraging the private sector
In today's development landscape, traditional aid dynamics are
changing. The private sector plays an increasingly vital role in
delivering public goods. In sub-Saharan Africa, Official Development
Assistance (ODA) comprised 62 percent of external flows in 1990; by
2012, ODA was just 22 percent of external flows to Africa.\2\ Total
foreign investment to sub-Saharan Africa rose from just $1.7 billion in
1990 to a record high of $42.2 billion last year. These resources are
more critical than ever in addressing development needs.
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\2\ Sy, Amadou. ``Private Capital Flows, Official Development
Assistance, And Remittances to Africa: Who Gets What?'' The Brookings
Institution, May 2015.
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This is why everything about MCC's model and approach--from
selecting countries to developing compacts, from fighting corruption to
measuring results--is oriented around creating the right circumstances
for businesses to invest. Simply stated, catalyzing the private sector
for development is foundational to MCC's work and helps ensure the
long-term sustainability of our investments.
As part of this commitment, MCC is increasingly adopting innovative
approaches to specifically integrate the private sector into our
compacts. MCC helps countries design and implement public-private
partnerships; utilizes creative grant facilities to draw out innovation
from the private sector; provides viability gap financing to allow
projects to reach successful financial close; and targets policy
reforms that open up private sector market opportunities. The agency is
also bolstering efforts to engage American companies on business
opportunities through investment summits here in the United States and
trade missions abroad.
These practices enable MCC to leverage America's investments and
multiply its impact. To illustrate, in three recent compacts--Benin,
Ghana and Jordan--MCC's total investment of $1.1 billion is helping to
mobilize nearly $5 billion in private investment.
For instance, I was recently in Jordan to inaugurate the expansion
of the
As-Samra Wastewater Treatment Plant. Building on USAID's previous work,
MCC utilized a public-private partnership to support upgrades to the
country's wastewater network system, mobilizing an additional $110
million in private financing.
As-Samra will address 70 percent of Jordan's wastewater treatment
needs, and thanks to private sector investments in cutting-edge
efficient and environmentally sound engineering designs, the plant will
self-produce more than 75 percent of the energy required for its
operations through clean biogas and hydropower. The deal's financing
structure, a build-operate-transfer agreement, provides for high
quality operation and maintenance by the private sector operator for
the next 22 years, further ensuring the sustainability of the U.S.
taxpayers' investment. The facility, combined with MCC's other projects
in Jordan, is expected to benefit approximately 3 million people.
Shifting to Ghana, MCC's $500 million investment focuses on turning
around the country's main utility by funding the public infrastructure
and sectoral reforms that are necessary to make private sector-financed
power generation projects financially viable. As a result of the
compact's reforms and investments, over $4 billion in private
investments in the Ghanaian power sector is expected in coming years,
including $1 billion from General Electric.
Furthermore, MCC invested almost $190 million to double the
capacity of Benin's national port, which contributes nearly two-thirds
of tax revenue and impacts one-quarter of the nation's GDP. Through a
global competition, Benin selected a private investor and operator,
which invested an additional $256 million in customized improvements,
bringing greater volumes, efficiencies and revenues, and winning a top
global prize as an innovative private-public partnership.
transparency & accountability
MCC is clear about what the agency aims to achieve and holds itself
accountable for reaching its goals. MCC tracks and measures results
meticulously and transparently to ensure that its programs are
effective and efficient, thus maximizing valuable taxpayer resources.
MCC holds itself accountable, as it does its partner countries, and
will continue to learn, share, and adapt based on the results it
measures.
The data we track provides valuable insights into what is working
and what is not, including instances where MCC programs met or exceeded
output targets but the subsequent evaluations did not find attributable
impact on incomes. In addition to the internal learning this data
provides, MCC also contributes to the wider body of knowledge on many
of the assumptions underpinning methods of delivering foreign
assistance.
Building on a legacy of transparency, and the advice of this
Committee, MCC is producing ``after action reports'' for completed
compacts to make the collected data more comprehensive and accessible.
I look forward to continuing our work with you to find ways to better
capture and share MCC's robust data, monitoring and evaluation systems.
This Committee has recently shown its support for the increased use of
metrics, monitoring and evaluation, and transparency that are the
hallmarks of MCC by approving the Foreign Aid Transparency and
Accountability Act, which supports high standards of data transparency
and accountability.
growth, trade & regional integration
In today's global economy, growth is more dependent than ever on
trade and regional integration. Regional integration has been a proven
accelerator of growth and poverty reduction in places like East Asia.
Poor countries grow faster, create more jobs, and attract more
investment when they are part of dynamic regional markets.
As a development agency solely committed to fighting poverty
through economic growth, MCC risks leaving development impact and
investment returns on the table if it solely focuses on engagements
that stop at the border. Investing in the context of larger markets
will allow MCC to capture greater economies of scale and raise returns
in relation to costs.
MCC is well positioned to invest regionally for the benefit of poor
countries, in Africa, South Asia, and Central America. MCC has the
technical capacity and a successful track record of delivering large,
complex infrastructure projects, and can deploy that capacity for
cross-border investments. Just as important, MCC has experience
incentivizing and supporting difficult policy and institutional
reforms. That work can and should now be extended to a multi-country
context. Bringing together both the hardware and the software of
regional integration will be essential to make dynamic regional markets
work.
The challenges of multi-country investments should not be
underestimated. But MCC has already begun devising solutions to those
new challenges. Given the potential rewards, the risks of inaction are
also significant. By making coordinated regional investments across
multiple eligible countries, MCC can help countries work together to
build and grow regional markets; expand and link regional power,
transport, and water networks to reduce costs and improve service;
capture more benefits through economies of scale; facilitate increased
trade and investment; and help generate new business and market
opportunities for U.S. and other companies. Regional investments can
help translate the frontier markets of today into tomorrow's emerging
market partners of the U.S.
That is why MCC is seeking to work regionally with partners when
the economic analysis calls for it, consistent with the foundational
principle of country-led accountability. Additionally, allowing for
regional MCC investments would be a significant tool for the U.S. to
increase trade capacity and improve the uptake of AGOA preferences for
eligible countries.\3\ This is one of the reasons the House Foreign
Affairs Committee has approved language to facilitate MCC's regional
work in bipartisan legislation, H.R. 2845, the AGOA Enhancement Act of
2015. I am deeply grateful to Sens. Cardin, Flake, Coons, and Isakson
for championing Senate legislation, S. 1605, that would also give MCC
this authority.
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\3\ Government Accountability Office.`` African Growth and
Opportunity Act: USAID Could Enhance Utilization by Working with More
Countries to Develop Export Strategies'' January 2015.
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As you have noted in the Global Gateways Trade Capacity Act, Mr.
Chairman, stable trading relationships promote security and prosperity,
and can foster the expansion of open markets and democracy. Aid to
developing countries for trade capacity building can have other
positive side effects such as promoting best practices, encouraging
good governance, combating corruption, and reforming legal regimes.
By giving MCC the authority it needs to make regional investments,
this Committee can take a critical step toward reducing global poverty.
conclusion
The development community faces many questions and challenges as
the face of global poverty changes. Among other things, MCC, with your
support, needs to think hard about how best to measure poverty in
potential partner countries.
But we also know that, in the interwoven world of the 21st century,
investment in effective development, alongside defense and diplomacy,
promotes shared security and shared prosperity.
I want to echo your statement earlier this year, Mr. Chairman, when
you said that ``with limited aid [dollars] available, it is our
responsibility to ensure American resources are used in the most
effective manner possible.''
I am proud to lead an agency built on the pillars of effective
development. And I believe that MCC is uniquely positioned to
contribute in the current global context and in the current budget
climate. MCC's catalytic investments yield results in their own right
while supporting the policies and good governance that will allow
developing countries to reduce poverty by growing their own economies.
The challenge is great. More than half of MCC's current partners
have more than half of their population living on less than $2 a day.
These are among the poorest countries in the world, and MCC works with
them because they pass a high bar for their commitment to sound
economic and social policies that will reduce poverty among their own
citizens. MCC incentivizes this commitment through our competitive
standards. We accelerate this commitment through high-value investments
in economic growth. And we seek to embed in our partner countries a
culture of accountability, transparency, and responsible stewardship
that help sustain and scale progress.
MCC also has a critical role as a soft power tool that advances
U.S. values and builds a more secure and prosperous future. Today, MCC
is the single most important bilateral channel for U.S. aid in support
of economic growth--the strongest driver of sustained poverty
reduction--and its investments help channel U.S. assistance to the best
governed poor countries. MCC helps drive U.S. efforts to promote
American values and the market democracy model. And MCC is creating new
opportunities for the private sector, including U.S. businesses, to
invest and grow.
Through their support for MCC, the American people are helping
create the building blocks of growing economies and stronger societies
around the world. This means better governance, less poverty and more
economic opportunity: vital elements of peace and stability in their
countries and in ours.
Thank you very much for your time and attention.
The Chairman. Well, again, thank you for being here, and I
do want to thank Senator Flake, Senator Isakson, Senator
Cardin, and Senator Coons for looking at creative ways to cause
MCC to have greater impact.
Ms. Hyde, you and I have met in the office, and I
understand the purpose of MCC was to be transformative. I told
you about one of my first trips to Mali where I saw people in
extreme poverty, if you will, people transporting goods on
their head down the street and----
Ms. Hyde. Yes.
The Chairman [continuing]. On donkeys and other kinds of
manual transportation. And yet we were building this massive
airport there, and how, candidly, I was having some
difficulties connecting the two in terms of level of economic
development. I wonder if you might explain to others here your
thinking on this, and how your thinking may have evolved since
our meeting.
Ms. Hyde. Thank you. I appreciate the question, Mr.
Chairman. MCC's thinking has evolved in a number of important
ways. I would say that the principles that MCC was founded on,
that countries themselves have to be full partners in the
development effort in order for it to be sustainable, and how
that relates to our actual work in project selection, and then
how we evaluate projects, is certainly one of the lessons that
we have learned.
So, for example, I believe at the time of the Mali compact,
which was one of our first compacts, I think it was shaped in
year three of what was a startup agency at the time. At the
time, we did not have in place an economic analytic tool called
the constraints-to-growth analysis, which is the way we now
engage with countries to say what are the binding constraints-
to-growth in this economy and how do we go from the 30,000 foot
level down to a project level. We also put in place a cost-
benefit analysis to do an Economic Rate of Return (ERR) for
every project that we do and we are looking to achieve a 10
percent ERR.
These are both lessons that we learned over the years and
that we believe put more rigor and accountability around our
projects. So I would say those are two things in place that
were not in place at the time of the Mali compact.
Now, at the end of that compact, as you know, there was a
coup in Mali, and MCC actually terminated its compact because
of the accountability framework we work in, meaning you have to
maintain the governance standards throughout the life of our
compact.
The Chairman. So whatever happened to the airport?
Ms. Hyde. The airport itself was not completed by MCC. I
believe it was Mali's funds with another donor that came in to
finance it. There was also some question, just a factual
question, Mr. Chairman, about what you saw. Our work was mostly
around the runway, rehabilitation and the renovation of one of
the terminals, so I am not actually clear what it was you saw.
The Chairman. So, that is interesting. I do not think you
were running MCC at the time.
Ms. Hyde. Yes.
The Chairman. And I know things have evolved, but can you
say to us today that, again, this $800 million to a billion or
whatever that is being spent----
Ms. Hyde. Yes.
The Chairman [continuing]. Outside of USAID is something
that is creating transformative effects within these countries.
And could you very briefly just name a couple of those
transformative operations?
Ms. Hyde. Yes. Let me name five for you very briefly. The
first I would mention is what is known as the MCC effect, that
countries, particularly in Africa, where the penetration and
the portfolio has been 65 percent over the decade, are striving
to get to eligibility for MCC. And they are, in fact, changing
their laws so that they can pass the scorecard so they can have
compacts with MCC. We think that is very transformative. I know
laws for women in Lesotho, and Cote d'Ivoire, and Sierra Leone,
and other countries have been changed because of that.
Second, I mentioned the accountability framework. Over
roughly a decade, MCC has signed 32 compacts with 26 countries.
We have terminated assistance seven times. We have held
countries accountable for maintaining their governance, not
just at the front end, but through the duration of the compact.
And I would say that that is a really notable, distinct
accomplishment of a donor agency.
Third, in terms of economic rates of return, many agencies
do not assess a cost benefit analysis. MCC does a very rigorous
cost benefit analysis, and we do it before and after completion
of a compact, in addition to independent evaluations.
So we're are looking at the front end for a 10 percent ERR.
We have recently evaluated 58 projects--as of this month--that
have closed. We are finding on average across that portfolio,
the ERR at close out was 16 percent. So we are meeting those
output targets.
Finally, I would just note in terms of building big
infrastructure in the developing world, MCC in a decade has
built a reputation on being able to design scope to the highest
in some of the most difficult places on the globe, building
roads, building bridges, building power transmissions
facilities in a decade.
The Chairman. Well, I know when we go to countries like
Pakistan and other places, they are constantly talking with us
about these big signature projects that the Chinese and others
are doing and we are not. So it is interesting you would point
to that.
Let me ask just one last question, and I know we have two
panels today. With respect to the threshold program and the
issues of dealing with some of these projects, I understand you
all are asking for 10 percent, and the President asked for
less, and it has been around five percent. That, for what it is
worth, feels very much like moving away from signature
projects, moving away from transformative projects towards
doing the same things, if you will, that USAID is doing.
So why would you venture into that territory when you just
got through talking about doing things that are transformative?
Ms. Hyde. Yes, I appreciate the question. So MCC has
essentially two product lines. On average, a compact over a
decade has been roughly $350 million. The threshold size over a
decade is roughly $22 million. The portfolio over the first
decade was $10 billion, $9 and a half billion dollars put
toward compacts in those 26 countries. Half a billion dollars
against roughly as many threshold programs. The threshold
program was significantly revised in 2012 and pared back. Right
now, it is five percent of the portfolio. There are three
countries that are actively implementing threshold programs, so
it is very small.
I would say it is important, though, for these objectives:
There are countries that start working with us, and I mentioned
the MCC effect, this real sort of incentive effect for
countries to get the gold standard, to get the Good
Housekeeping Seal. There are countries that start years back--
Cote d'Ivoire was one of them--and they are striving to make
the scorecard and to make the changes, and they take many
years.
Last year, Cote d'Ivoire's trend lines were up. They were
on the cusp of being eligible for an MCC compact grant. And the
board awarded them a threshold program to start, a very small
investment so we could test their commitment, and so they could
come forward with some sort of engagement, formal engagement
with us. This year, a year later, the board will consider
giving them a compact instead of that threshold program.
One of the important changes that we made in the threshold
program is that a threshold program and a compact now both
start with the constraints analysis, and that analysis takes
about eight months, 10 months to complete between the
economists of both countries. So there is no time lost in the
fact that Cote d'Ivoire has been a threshold partner for a
year. It will ripen, or may depending upon the decision of the
board, into a compact partner. The same was true of Nepal,
which started as a threshold partner and then became a compact
partner.
So we think both from the ability to sort of test the
waters with the partnership, and to do so in a small, limited
way that does not lose any time or traction while we are
engaged in the analytic exercise, that it makes sense in that
context. And that is the context in which the threshold program
is here today.
The Chairman. Thank you. Senator Cardin.
Senator Cardin. Thank you very much for your leadership
here. And I said in my opening statement, I am a strong
supporter of MCC. I think it has been responsible for not only
dealing with poverty issues, but also dealing with good
governance issues and dealing with important security issues.
I know Jim Kolbe will be on the second panel. I was in the
House and saw his work in his leadership position, recognizing
how development assistance was critically important to U.S.
security issues. And if there is a father of this program, it
is Jim Kolbe, so it is nice to have Jim here, and I thank you
very much for your continued interest in this area.
As you point out, there are performance indicators that
need to be complied with, which is accountability, and it shows
that we have real standards in order to decide where we will do
a compact state. And you gave a good example on corruption--
anticorruption efforts. But as I understand, I want to drill
down a little bit more on this because I think we have learned
over the course of the last decade that corruption is extremely
difficult to deal with, and we need to leverage the best we can
all of our programs.
My understanding is the indicator on anticorruption is
basically a pass/fail grade based upon your relative efforts to
your neighbors in the region, so you use a curve. We called
that exam in college, you know, if you had a weak class you
could get by. Is there a way that we can be more directive on
any anticorruption activities?
It seems to me that we are developing universal standards
that need to be met for a country to be serious in fighting
corruption. No country will be corruption free, we know that,
but there are good practices. And in certain regions, we need
White House type of countries that are willing to really step
forward.
Ms. Hyde. Yes.
Senator Cardin. And it seems to me that the MCC could be
helpful in that regard.
Ms. Hyde. Thank you, Senator, for the question. MCC is
certainly seeking to drive a conversation among producers and
consumers of corruption data about how we can continue to
improve the data that we all use. What is interesting is that
the business community very much is interested in sound data
around corruption in countries and developing countries, and
that there are a multitude of sources and producers for this.
To that end, we have convened what is known as the Governance
Data Alliance, which is seeking to improve this information,
and we are doing a number of specific things under that
umbrella.
I would say with respect to the median idea, it is the case
that MCC is tracking corruption on an annual basis by the best
indicator that we know, albeit imperfect. For indicators, our
primary practical challenge is that we need an indicator that
has global coverage, that can compare Nepal to Niger, and that
is updated regularly on an annual basis. That in itself narrows
the world for MCC as to what indicators actually meet those
standards. And that is why these forums that we engage with to
continually improve are very important.
The way it works, Senator, is that low-income countries, as
defined by the World Bank, are judged against each other. That
would be both Nepal and Niger. And lower-middle-income
countries are judged against each other, and for both
categories we are looking for countries above the median on
each policy indicator. But importantly, we are looking at trend
lines, and I think this is something that does get us a little
bit beyond the pass/fail because we are looking at whether a
country is on an upward trajectory over a period of years or a
downward one, and both are significant as we think about
decisionmaking.
Senator Cardin. Well, I thank you for that answer. I would
just point out by comparison, we are looking--this committee is
looking at global standards on fighting corruption. We have
learned our lessons from trafficking. We have objective
standards of how countries need to deal with trafficking
issues. Each country is different, but we have universal
standards that the United States has developed. And, no, it is
not a passing or failing. We do have gradations there.
And I understand you have to make a decision, but I do hope
that you would be more aggressive because to me, this is one of
the most difficult areas, that fight for good governance. So
improving in this area I think would be important.
I want to move on to the regional compact and the
legislation that we have brought forward. There is a great deal
of interest in this. You mentioned Nepal and India are looking
at ways that they can either deal with transportation or energy
on a regional basis and which the compact could be very
helpful. And in East Africa and West Africa, Senator Coons has
been talking a good deal about projects in those regions where
we have compact countries individual, but if we could do it
collectively, we might be able to get further along on that.
And in our own hemisphere in Central America we have a compact
country, but we could do more. Similar problems on trade.
Similar problems on transportation, energy, et cetera.
So if you had that authority, how would you use the
evaluation process--considering that the performance indicators
are country specific, how do you deal with that if you had
regional authority? How do we know that we still will be able
to get the same type of progress, leveraging, of private sector
investment, and accountability if you had regional authority?
Ms. Hyde. Thank you, Senator, I appreciate the question. As
you mentioned, the theory of the case in today's global economy
for regional investments is quite strong, particularly when you
have a tool of U.S. development whose only mission is economic
growth, fighting poverty through growth. So we believe that
theory has been proven.
The challenge is more in the logistics and the operational
complexity of this. MCC would maintain the same standards; that
is, for the scorecard and for approval. So we would be looking
at those few places on the globe where there are contiguous
countries, next to each other, who are passing the scorecard,
who are fairly stable in passing the scorecard, and who
themselves are looking for opportunities to integrate.
I think our starting point for this could likely be in
Africa. I say that because MCC is a brand and an asset of the
United States that is well known in Africa, particularly in
West Africa where the penetration of our portfolio has been the
greatest. And we see, be it through Senegal, Cote d'Ivoire,
Ghana, a number of investments that we have made that perhaps
could have had a higher value if we would have thought about
how to cross borders. It may be in energy. It may be in
transportation.
The implementation modality, I think we would continue--we
have to continue to make this a country-led enterprise. And we
have done that through accountable entities that are created.
In this case, it would need to be across borders that would
work together. And we would have to be mindful of the idea that
if there was a governance stumble in one of the countries, we
would have to bifurcate and sever that investment and still
make part of that investment valuable. But our eyes are wide
open about those challenges.
Ten years ago, I would not have recommended that MCC launch
into this space. Today, I think it is uniquely positioned for
the reasons that you have mentioned. First of all, the
credibility capital. Not that we have it everywhere, but we
have it in some regions where we have had large penetration.
Second of all, the fact is that MCC has worked in
infrastructure, in power and roads, and that is vital. This is
what we are lookinf for in these countries. And third, because
MCC's instrument is grant assistance, and you mentioned the
private sector, these deals will not get done without private
investment, and there is some debt financing out there as well.
The grant assistance could be what actually pulls the private
sector investment deals together with the United States
involvement. So I think those are three reasons why it could
work.
Senator Cardin. Thank you.
The Chairman. Senator Flake.
Senator Flake. Thank you, and thank you for the testimony,
and thank you for what you are doing at MCC.
With regard to these regional compacts, I am happy to be
part of the legislation giving the authority, and I hope we can
get it through. Can you talk about Southern Africa? There are
some possibilities with Zambia----
Ms. Hyde. Yes.
Senator Flake [continuing]. Tanzania, Malawi. What are we
looking at there?
Ms. Hyde. In that area of the region in particular, we
think there are interesting power opportunities, certainly
between Zambia and Tanzania. There is also the need for water
infrastructure, and agriculture and irrigation, as well as road
and border crossings. So those three countries, as well, are
countries that we have worked with such as Mozambique, have
scoped out in a very broad sense what are some potential
projects to work there. We are in the very early stages of
this. We would need copious diligence on each one of them
before selecting where we would go.
Senator Flake. Can you tell us about kind of the
intersection between MCC and our Power Africa initiative that
is being undertaken now?
Ms. Hyde.Yes. So MCC, as I mentioned before, undertakes at
the front end, a constraints-to-growth analysis, and that is
conducted by economists usually from the finance ministry of
whatever country with which we are partnering together with
MCC's economists. It takes upwards of a year, and at the end of
that, there is a high-level buy in of what the binding
constraints are to growth.
What we have seen for quite some time is that energy
poverty, the lack of reliable electricity, is again and again a
binding constraint to growth in Africa. So that is the premise
through which the MCC is part of Power Africa. It is under that
principle that our engagement is to be a country-led program.
And I have had more than one head of state of an African
country call me directly and ask me specifically to engage in
energy.
I would say the third element to what these countries and
these partnerships are asking for is they want American private
sector investment, and they see a lot of opportunities in
energy through that as well. So we are a participant in Power
Africa, but we are doing so under the MCC model.
Senator Flake. Following on one of the questions that
Senator Cardin had about some of the challenges with these
regional compacts, suppose you have two countries enter into a
compact for some electricity project or power generation
project. One country has a coup two years later into the
compact. What do we do?
Ms. Hyde. We scope and design an investment at the front
end that takes account of that possibility, looks at economic
rates of return if we were to undertake the interventions on
just one side of the border or the other. The assumption is
that there will be greater returns if we do it across the
border, but I still would think we could not do a project that
was nothing in terms of its own value to the country because of
that possibility.
So I think it is a challenge in design and in due
diligence, and certainly a risk assessment of where we select
countries for regional investments. If MCC were to receive this
authority, I think we would be cautious, start slowly, not
undertake a lot at the front end, and prove the concept.
Senator Flake. So there is a political risk analysis done--
--
Ms. Hyde. Yes. Yes.
Senator Flake [continuing]. Working with the State
Department and other agencies.
Ms. Hyde. Absolutely. Absolutely.
Senator Flake. All right. Thank you. Thank you, Mr.
Chairman.
The Chairman. Thank you. Senator Menendez.
Senator Menendez. Thank you, Mr. Chairman. Ms. Hyde, let
me--I want to pursue a line of questioning so I understand some
of the apportionment of MCC. I have been a strong supporter of
it since its creation. But I look at development assistance as
a whole, and whatever we do at MCC we know AID and other
elements are affected by it, and I think MCC has done great
work.
But my understanding is that the MCC board has approved 33
compacts in 26 countries totaling about $11 billion. Is that
about right?
Ms. Hyde. My number I have is 32, but I would be happy to
figure out what the discrepancy is there, yes.
Senator Menendez. Okay. How about the other parts, about 26
countries?
Ms. Hyde. 26 countries, 32 compacts. Over the decade,
roughly $10 billion in year 11, about $11 billion. So year to
date, yes.
Senator Menendez. Now, of that, MCC's 32, 33 signed
compacts, 19 are with African countries spanning the continent.
Is that a fair statement?
Ms. Hyde. Yes.
Senator Menendez. So that from my calculations totals about
$7.4 billion or about 67 percent of MCC's total compact
portfolio.
Ms. Hyde. Yes.
Senator Menendez. So I have been a strong supporter of
development in Africa. I think it is an incredibly important
continent in many different iterations to U.S. interests. But I
would like to understand then the breakdown for other regions.
If roughly two-thirds of the MCC's efforts are directed to
Africa, that leaves one-third for the remainder of the world--
Latin America, which I have a great interest in, the Middle
East, the former Soviet Union, Asia. So can you talk to me
about the factors that you all assess? I mean, I am familiar
with the MCC. with what you need to qualify, but how do you all
go about looking at the world in the context of your focus?
What factors describe the disproportionality, and are you all
looking at this as part of your overall evaluation about where
you are working in the world?
Ms. Hyde. Thank you, Senator. I appreciate the question. I
would be happy to tell you how we got to that. The starting
point for selection and eligibility under the statute is that
MCC is to work with low-income and lower-middle-income
countries as defined by the World Bank. That is roughly a GNI
of zero to 2,000 dollars per capita, and 2,000 to 4,000 dollars
per capita.
Ten years ago, there were 113 countries in the globe that
fit this definition. Today there are 81, so there has been
about a 30 percent reduction. Those 81 countries are mainly in
Africa, but some are elsewhere in the globe. But I know, for
example, South America has some very poor countries, so that is
a starting point. From there, MCC is to apply the scorecard,
which is a filter that has a hard hurdle around corruption and
a hard hurdle around democracy. Those are two must pass
indicators. And then the other indicators, countries must pass
10 indicators overall on the 20 indicator scorecard.
This year, in FY 2016, there are 29 countries that passed
the scorecard. Roughly eight of them are small islands with
less than a million people. So the MCC selection process
through the filters that are both in statute and through the
scorecard, which is critical to our accountability framework,
filtering out much of the globe. That said, MCC has worked in
all three of the Northern Triangle countries: in Guatemala,
Honduras, and in El Salvador. In fact, is two are currently in
our smaller threshold program and we have a compact with El
Salvador.
The Board selections for new compacts last December were
all outside of Africa. The Board selected Nepal, Mongolia, and
the Philippines as partners, and we see countries rising in
Southeast Asia. But the result of where we are working is in
large measure the combination of the candidate pool as defined
by statute as well as the scorecard.
Senator Menendez. So if 81 countries in the world are
potentially qualified in the first instance, and that whittles
down to 29 after the filtering of your standards, and eight of
them are small islands of less than a million people, that is
about 21 countries that actually can be considered.
Ms. Hyde. Yes.
Senator Menendez. And so, I would like to get from you, and
not necessarily at this moment----
Ms. Hyde. Sure.
Senator Menendez [continuing]. But I would like to get from
you what are those 21 countries because you have to look at a
billion dollars and think about what is it that you are doing
vis-`-vis the universe of who is eligible, because if at the
end of the day only a certain universe is eligible, then I look
at development assistance as it relates to the amount of money
versus the universe that I can potentially spend it in.
Even though I believe MCC standards are incredibly
important----
Ms. Hyde. Yes.
Senator Menendez [continuing]. I also know that the
development pot is limited at the end of the day.
Ms. Hyde. Yes.
Senator Menendez. And that may affect how I or others might
look at what USAID does separate and apart from MCC and how
their focus should be, so that when we put it all together, we
understand the development in the world because I see within
the Western Hemisphere maybe a limited number of countries that
meet both the standards and the filtering. But I see some great
needs, as is evidenced by the fact of, you know, citizens'
security, children coming to the United States. I see a real
impact on U.S. interests as a result of that, and I do not see
us----
And I look at AID and the cuts on AID to Latin America. So
I say, okay, so what are we doing about the hemisphere in which
we live in and in which we have a direct interest in terms of
our security, our economics because citizens of the Western
Hemisphere most likely will seek American products and services
more so than in other parts of the globe. And we have a
population problem as it relates to those who seek refuge,
either from violence of their governments or violence of gangs
and other--and narco trafficking and whatnot.
I am a strong supporter of the MCC. I do not want you to
get me wrong. But I am trying to look at the total development
dollars in figuring out how we look at that as it relates to
our needs. And so, in that context, I look forward to your
answer.
Ms. Hyde. I would be happy to follow up.
[The information referred to can be found on page 93, at
the end of this transcript.]
Senator Menendez. Thank you.
Ms. Hyde. I would be happy to follow up with you
specifically. I should have clarified that with respect to
those 21 countries, MCC has already engaged with many of them,
so many of them are already current partners. Relatively few
new partners would be one point to that, but I am happy to
provide you with a list specifically of what they are for you
to take a look at.
In addition to that, I would just say, raising a more
global point, that we know over the decade that there has been
a shift in the landscape of poverty. MCC's only mission is to
address poverty through growth. And poverty looks different
than it did 10 years ago, so there may be reasons to re-look at
what that landscape is and how we measure it. And we would
welcome the opportunity to engage on that.
The Chairman. And when you say that, when you say it is
different, you mean there less poverty today than 10 years ago.
Is that what you are saying?
Ms. Hyde. There absolutely--there is less of it. There are
also more concentrations, as you have heard, in urban areas and
in cities. There is also--the particular measure that we use by
statute looks at GNI as opposed to individuals, households, and
pockets of poverty. And so, mineral wealth and natural resource
wealth can raise a country's GNI when there is a very large
percentage of that population living under two dollars a day.
So I think you may hear more about this in the second
panel, but I think it is worth examining.
The Chairman. Senator Perdue.
Senator Perdue. Well, Ms. Hyde, thank you. I really fully
respect what you are doing. God bless you for doing it.
Ms. Hyde. Thank you.
Senator Perdue. I have just four quick questions, and I
would love if the first two would be hopefully quick answers.
But, you know, let me try to put this in perspective.
In 1965, we had--we started basically the War on Poverty in
the United States, and unfortunately today the poverty rate is
basically the same as it was when we signed the Great Society.
In addition to that, in the last seven years, just to pick
seven years when our debt has really sort of skyrocketed, we
have spent about $125 billion between USAID and MCC. These are
round numbers and directionally correct.
And of that $125 billion, we borrowed $50 billion. So that
means that 40 percent of every billion dollars we spend with
MCC every year, we have to go to China, and Japan, to our own
Federal Reserve to fund that. And so, every dime that we spend
is very critical.
In addition to that, though, I will say we have got a
model, and that is Lee Kwan Yew in Singapore, based on four
things--water, power, infrastructure, and educated workforce--
went from a swamp to a major economy today. So I think you are
on the right track. I love your mission, reducing poverty
through economic growth. I heard, though, just a minute ago
American values slipped in there, and I want to come back to
later. I know that is one of the prerequisites, but I am
concerned about that.
Let me just ask a couple of questions. I am chair of this
subcommittee, and you and I are going to get to know each a lot
over the next couple of years I hope.
Ms. Hyde. Okay.
Senator Perdue. And I fully respect what you do. But to
whom do you report?
Ms. Hyde. I report to a board that is both the public and
private sector, nine members, five----
Senator Perdue. But who oversees that board?
Ms. Hyde. Secretary Kerry.
Senator Perdue. Thank you. And of the 68 programs you are
talking about, the compacts, about $3 billion, 16 percent
internal rate of return. I would love that if I were you, that
is good, over that. But what has been the poverty reduction of
those 58 compacts?
Ms. Hyde. Well, the evaluations of many are still under
way. Cost benefit, we are looking at dollars we actually spent
at close out, and our projections of beneficiaries. We are
independently evaluating 100 percent of the program, and those
valuations, I do not know if the alignment is between the 58.
We have about 50 that have been completed.
In terms of results of those independent impact
evaluations, MCC has set the bar higher than outputs, which
is--often sometimes inputs are measured. There are outputs. We
are looking to see if we can find income raises for----
Senator Perdue. So in 10 years, we do not have any programs
where we can measure the impact on poverty?
Ms. Hyde. We have 50 programs that have undertaken rigorous
outside independent evaluations, and these are projects.
Senator Perdue. Right.
Ms. Hyde. We have a mixed record, and for many reasons we
think, so far. We have seen income raises in some of our
agricultural projects in Ghana, farming projects. We have seen
with respect to the roads, for example--let me just give you an
example quickly. We----
Senator Perdue. I am sorry to interrupt. I know these are
anecdotal examples, and they are great. I fully respect that.
One of the concerns I have is you spent a billion dollars
across X number of compacts. Did we really spend enough in any
one country to really have an impact on poverty? And if so, why
can we not measure it? You may not be able to answer today, but
that is where I am going in the future is to say, okay----
Ms. Hyde. In fact, whether it is enough----
Senator Perdue [continuing]. If that is our mission, let us
get there. You guys do a great job of quantitative evaluation.
I will give you high marks on that. I am concerned about a
couple of anecdotal incidents, though. I visited your team in
Indonesia and Jakarta. Very impressive people, great hearts.
But I was very troubled that over half the money we are
spending in Indonesia is spent on a green power project. I do
not remember the name of it, and it had no cost benefit
analysis. And then in Tanzania, another about $285 billion, or
million rather, spent on a similar project that had no cost
benefit analysis on the front end.
Can you help me with why those energy projects in two
different instances did not have a cost benefit analysis?
Ms. Hyde. Thank you, and I will try to be quick because I
know you are trying to get through a lot.
Senator Perdue. Well, it is your time now. You can go on.
Ms. Hyde. Well, I did not know if there were more ERRs in
Indonesia. In Indonesia, we did it more as a financing facility
that wants to have private sector match, so we could not do a
cost benefit because we did not know what the calls for
proposals would bring in. So the way that is working is that it
is mostly small and medium enterprises. It is in rural
Indonesia.
We have signed a dozen plus of them. Each one of them has
had a matching component from the private sector.
Senator Perdue. But basically these were green energy
production.
Ms. Hyde. In our selection of projects we are doing ERRs.
We are doing them. We just did not do them at the front end
because we actually did not know what projects we were going to
fund. It was the financing facility.
In Tanzania, we have not--the board has not approved that
compact. That compact will not be approved without the ERRs.
There is data under way. Clearly not going to happen in the----
Senator Perdue. So the question is, when we look at an
enterprise like that in Indonesia in a business, you would look
at alternatives, right, and see which one had the best.
Ms. Hyde. Yes. Yes. Yes.
Senator Perdue. So you are looking at a green project, and
therein lies one of my concerns about American value in the
intervention in that in your very high regarded mission of
reducing poverty through economic growth.
Ms. Hyde. Sure.
Senator Perdue. I can do one, but when the other gets in
the way of this, then I have to say that is a constraint that
helps me or hinders me in reaching my objective.
Ms. Hyde. Yes, I----
Senator Perdue. So in Indonesia, I am concerned about that
one point because I have been in those villages. I have
operated factories in Indonesia. They need power, there is no
question. Putting a green power generating unit in there may
not be the most cost effective. So did you look at alternative
ways to get power in that community or those communities?
Ms. Hyde. In Indonesia, we started with the constraints
analysis. We worked with a core team of Indonesians who
themselves were putting on the table that they wanted to look
at renewable sources of energy. I think the constraints spoke
quite a bit about the degradation of the land outside of the
capital around these issues, and that it was the Indonesians'
idea to come forward and do this.
From an American values perspective, to the extent I use
that phrase, it is often in connection with the scorecard. So
top line values of good governance, corruption, rule of law,
very much reflective. I did not mean to speak to that in terms
of the context of a program because the programs are, and this
is much more challenging quite candidly, very much a country
within an accountability framework.
Senator Perdue. Right. Thank you.
Ms. Hyde. So that is----
Senator Perdue. Yes. One last question. We spend about a
billion dollars in MCC and about $17 billion in USAID.
Ms. Hyde. Yes.
Senator Perdue. And I think both have about the same
overhead. It is about 10 percent. But you have a little more
review and monitoring, I think, expense than maybe USAID. You
are teaching people to fish instead of just giving them fish,
so there is a fundamental difference. I get that.
Help me with the fact that given the earlier conversation
that we had, why MCC? What is different here? I understand you
have two different, you said products, I think, or efforts. Why
could not that be or why can that not be housed inside a
bureaucracy that we already have?
Ms. Hyde. Well, I think both are critical. I think they are
very different models, both being MCC and USAID. Top line,
USAID is across the globe. MCC is working with roughly two
dozen high performing countries, using objective standards.
Second of all, MCC is only focused on growth, and that is a
multi-sectoral approach in a country mix that is going to look
different in every country because of the third principle of
country-led and how important it is to teach them to fish.
As you know, we do not work in humanitarian assistance,
conflict, refugee relief. We do not set global targets for
health, global targets for education. We are looking at those
countries and looking to burrow deep and go deep into the
platform.
So those are top line differences between USAID and MCC. We
are extremely lean. I mentioned that there are 300
professionals at MCC undertaking this whole program. When we
have that program on the ground, there will be two people from
America for MCC, and there will be Indonesians leading that
program, with a board of Indonesians managing the program. So
it is a very distinct model.
Senator Perdue. Good. Good answer. I really, again, applaud
what you are doing. Thank you.
Ms. Hyde. Thank you.
Senator Perdue. I look forward to working with you.
Ms. Hyde. Thank you.
Senator Perdue. Thank you.
The Chairman. Before we turn to Senator Coons----
Ms. Hyde. Yes.
The Chairman.--I just think since we have another panel
that is coming up, with some who support MCC some who do not. I
think we left something hanging there, and I appreciate the
line of questioning. But you mentioned American values relative
to the scorecard. Yes/no answer. Are there are any pressures on
MCC to be involved in projects that really in some cases have
something more to do with pursuing a social purpose than with
just basic economic growth for the citizens there? Yes/no.
Ms. Hyde. No, there is a database of everything--evidence
base for everything MCC is doing. I mean, that is--MCC is--I am
not, Senator--Mr. Chairman, what you mean by social purpose.
The Chairman. I think you understood what the questioning
was. It sounded like that maybe energy projects were being
pursued that were maybe not economical, if you will, and not
pursued as driving towards economic growth as otherwise might
have been the case. You just need to answer that ``yes'' or
``no'' because it will become an issue.
Ms. Hyde. No. I was told particularly in Indonesia, diesel
is very expensive. So we are looking at cost benefit. We are
looking at what the country wants. I would say the two
principles are whether the constraints analysis has led us
there, and whether the country, the Indonesia team, is putting
these ideas on the table. So this is--that is how we get to
what we are doing.
The Chairman. Senator Coons.
Senator Coons. Thank you, Chairman Corker, Ranking Member
Cardin, for convening this hearing. And, Ms. Hyde, great to see
you again. I have had the opportunity to visit MCC projects on
the ground in Ghana, in Benin, in Senegal, in Cabo Verde, in
Tanzania. And I have to say your model, what MCC has been doing
since launched by leaders in Congress and the Bush
administration. I am a huge supporter. I am convinced that it
is a different way to do development.
Senator Perdue just cited some very large numbers in terms
of our foreign aid spend, the vast majority of which is on
Iraq, Afghanistan, Israel, Pakistan. You are a very small part
of our total foreign aid spend, and with a very different model
as I have seen it, and as you laid out, very data driven. Very
analytically based with a very light footprint. Country
ownership, country leadership, longer-term partnerships. I
think one that in the places that I have visited allows us to
compete directly with China by being a partner in designing,
delivering, and developing quality infrastructure.
Not quantity infrastructure. Not massive projects. For
example the port in Benin that I visited, the power generation
project, out to Zanzibar. What I saw in up country Ghana with
Senator Isakson were quality infrastructure projects.
But most importantly, in my view, is what you call the MCC
effect. I cannot tell you how many African heads of state have
lobbied me personally on trying to get into MCC without having
to meet the indicators around corruption, or transparency, or
media. And I am just going to take off for a moment on that
point about American values.
In a data driven analytical, transparent way that tries to
crowd in private investment, you are, in my view, advancing
some of our most core American values, which are that economic
growth is sustainable when it occurs in an environment of
transparency, rule of law, respect for right, and where
corruption is persistently tackled. So I do think you are
advancing American values, but not in a way that is outside of
these indicators.
The thing I mostly want to discuss--and I do agree with
Senator Menendez's point. I advocate for MCC in Appropriations.
I wish there were a broader, more robust funding stream to
allow a broader range of compacts. The good news is that over
the last decade, extreme poverty has been reduced, and the
number of countries you can work with has gone down. So your
focus is overwhelmingly on Africa in recent years where deep
poverty remains.
I am conscious of situations in Southern Africa, East
Africa, West Africa where there is very little trade between
countries, and these are not large countries. Many of them
trade more with Europe than they do with each other, with
countries literally 50 miles or 100 miles away.
Just walk through one more time--I am grateful for Senator
Cardin's leadership on this EMCOR bill. Why will regional
compact authority allow you to accelerate what your model has
made possible, and what are your intentions in terms of dealing
with some legitimate questions raised by Senator Flake, Senator
Corker, and others about the risks inherent in going into a
slight expansion--an expansion of the model that would allow
you to engage with several countries at once in a commonly
designed project?
Ms. Hyde. Thank you, Senator Coons. So let me try and
tackle that quickly. You know, as I mentioned, the economies of
scale argument that you referenced, Africa--let us take Africa,
54 fragmented, very small markets. At the time, the largest and
fastest-rising middle class on the globe. In terms of the
opportunity for American businesses, six of the 10 fastest-
growing economies.
Africa itself is seeking and has really made some progress
over the last couple of decades in terms of the political will
to undertake integration. This is something that we heard from
the African Union, certainly in Gabon, and I spoke to many
finance ministers about this directly.
What they need now is the support on the infrastructure.
There is both the hard side and the soft side to getting to
regional integration in Africa. There is obviously
harmonization of tariff structures and reforms, as well as
building those roads and building those border crossings and
whatnot.
I think MCC is viewed in Africa as a--I am speaking
generally here, but as a trusted partner of the United States
that can help bridge both sides of that, both the soft
considerations as well as the hard considerations. I certainly
know from speaking with the private sector that the project
prep funds, as well as viability gap financing, is what could
help make these deals possible.
I do not expect that MCC's portfolio would balloon in
regional work because it is so hard. So as I said earlier, I
think MCC has to be very careful about the countries we pick,
about the sector and the project that we pick, and start slowly
and responsibly to prove the concept because there is obviously
that component of it here.
Senator Coons. Well, in my experience in Africa, it is
striking that the lines on the map that divide countries were
often drawn fairly arbitrarily a century ago by European
powers. And so, they do not rationally reflect where water
systems are, where transportation systems are, where population
centers are, or where economies are growing, and they remain
real constraints. And our engaged, thoughtful leadership that
is outcomes oriented and data driven can pull together regional
markets in terms of energy and infrastructure.
The private sector investors I talked to, and I just met
the other day with one of the biggest French banks that invests
heavily in Africa, they are looking for markets of scale, and
they are looking for improvements in transparency and in rule
of law. We can help deliver that, and I think this is a great
bill, and I look forward to supporting it, and appreciate your
testimony and your hard work.
Ms. Hyde. Thank you, Senator.
The Chairman. Thank you. Thank you very much. Senator
Kaine.
Senator Kaine. Thank you, Mr. Chairman. Thank you, Ms.
Hyde. I want to return to a line of questioning from Senator
Menendez about the Northern Triangle, and I want to kind of use
the Northern Triangle as an example.
I actually think the Northern Triangle is a great example
of why regional compacts would make a lot of sense. We know
that we are dealing with a lot of policy issues in the Northern
Triangle--unaccompanied minors, violence--some of it driven by
frankly U.S. citizens' demand for drugs. So it is not just that
the problems there affect us, but our own problems affect those
communities, so there is a connection that is a significant
one.
I am kind of puzzled by why in the Northern Triangle there
is one compact and then two thresholds. And so, just in terms
of the metrics, I mean, all of these countries have challenges.
One of the original motives of MCC was to focus on free market
economics, and the country that has the compact is probably the
one where the private sector most feels suppressed by the
government, El Salvador. I am not saying El Salvador should not
have a compact. I am supportive, but I think it is interesting
as you look at Guatemala and Honduras, their private sectors
probably feel a little more included by the government than the
private sector in El Salvador.
So I think if you do not move to a regional, you are going
to end up with weird anomalies like that. Can you explain that
anomaly in the Northern Triangle?
Ms. Hyde. Yes. So I think the Northern Triangle outside of
Africa is, I agree with you, completely--one of the best
examples of the potential and the opportunity for regional
investments. Indeed, we have looked at some of the road
segments that we have built in those countries or supported in
other ways, and pondered over the opportunity if we just were
connecting those roads in and of themselves. So it provides a
very vivid map.
To answer your question specifically on the threshold
program, Guatemala has seen improvements in its scorecard, and
as of last year I believe was the median country, which is just
below passing in terms of the control of corruption indicator.
Obviously there were the events of the past year with the
election and the new administration. I was there early in the
year at the signing of the threshold program. They have not yet
passed the scorecard, but if there is a positive trajectory,
then they could be a candidate for an upcoming board meeting.
On Honduras, we had a strong partnership with Honduras.
Senator Kaine. Because they were a compact country
originally.
Ms. Hyde. They were a compact country. They experienced
political violence as well as at the same time transitioned
from a low-income to a lower-middle-income country, so they
were being evaluated against a different peer set. And their
scorecard went down precipitously.
Senator Kaine. I see.
Ms. Hyde. So those were the two factors that led us to move
and transition Honduras to Threshold.
Senator Kaine. But the point that you made about the
regional compact, the funding has supported transportation
infrastructure in all three countries, and it would be so much
better because these are nations that do trade with one
another----
Ms. Hyde. Yes. Yes.
Senator Kaine [continuing]. If the transportation could
link up instead of being kind of just country specific.
Ms. Hyde. I would share one more fact on that, which is, as
you know, the leaders of those nations last year came forward
with their own program, the Alliance for Progress, to address
the root causes of instability that were leading to the
unaccompanied minors issue. And what is interesting about the
statement that they put out is because each one of them have
worked with MCC, they know the MCC model that has a board and
local staff and has them undertaking the implementation under
these controls, and that the last line of that statement, the
leaders themselves said if we are to undertake this program
jointly, they would implement it with the MCC model, not
referring to MCC assistance, but essentially referring to the
doing it the MCC way.
To me, that was one of the best reflections of a country-
led approach that they would take on and adopt for their own if
that is how they perceive it.
Senator Kaine. Right, and that is an additional point about
the regional compact there. They are trying to act regionally
in putting a plan on the table.
Second question is sort of about the coordination of MCC
with other forms of aid. So the President in his introduced
budget asked for a billion dollars for Plan Central America to
basically help those three nations with security, governance,
economic development challenges. The appropriations process
will produce whatever number it produces.
But I am kind of interested, how will we try to leverage
whatever is the dollar amount that is appropriated for Plan
Central America and the three countries with the MCC
involvement in the three countries, because to kind of have
just, you know, competing or separate programs might not,
again, leverage the dollars to achieve the maximum effect.
So from the MCC standpoint, you know, Plan Central America
gets funded at X level. What would you do to try to make sure
that the work being done in the three nations gets the biggest
bang for the bucks?
Ms. Hyde. I appreciate the question. So, first, I would say
that we have done a constraints-to-growth analysis in each one
of those countries, and that we have shared that analysis. In
fact, El Salvador is part of the broader administration effort
on partnership for growth. MCC was--and we will share the
constraints anywhere, but--actively working with others to say
here is what we have identified in the United States
government. Here is what we have identified as binding
constraints-to-growth. Here is what we are able to tackle. Here
are other pieces for that.
And I think that approach is a value, a public good that
MCC brings to the table both in this region and with the U.S.
Government, but also with the other donor community, the way
that we can put within that framework those results. So we
would work closely if those programs do materialize. I would
say right now with the El Salvador compact, we are one of the
most concentrated and largest donors seeking to address those
root causes of instability there, and would work closely with
other partners.
Senator Kaine. Great. Thank you. Thank you, Mr. Chairman.
Ms. Hyde. Thank you.
The Chairman. We thank you very much for your testimony and
your leadership, and I am sure there will be some follow-up
questions that people will ask. Hopefully you will answer those
promptly.
And with that, if you would like to go about your business,
that would be good. [Laughter.]
And we will bring up another panel, okay? Thank you so
much. Thank you.
Ms. Hyde. Thank you. Thank you, Mr. Chairman. Thank you.
The Chairman. If the other panel would come on up.
I would now like to recognize the witnesses that we have
for the second panel. The first witness is the Honorable James
Kolbe, senior transatlantic fellow at the German Marshall Fund
of the U.S. And, Jim, while we have not worked together, I know
you had a distinguished career here in Congress. My staff
alluded the same credit to you relative to the creation of MCC,
and I want to thank you for all your involvement and for being
here today as a witness. It is much appreciated. I am sure
Senator Cardin will want to say even more since he served with
you.
The second witness is the Honorable Andrew Natsios,
director of the Scowcroft Institute of International Affairs
and executive professor at the Bush School of Government and
Public Service at Texas A&M. I want to thank you for being
here. We appreciate that.
And our third witness will be Dr. Nancy Birdsall, president
of the Center for Global Development. Thank you so much.
I think you all understand, it would help if you could
summarize your remarks in five minutes. Without objection, your
written testimony will be entered into the record, and Senator
Cardin and I and others look forward to questioning.
Why don't we just start and go through the order in which I
introduced you, if that is okay. And I do not know if you want
to say anything by way of introduction.
Senator Cardin. I will reserve. I just really want to point
out with Jim Kolbe, during the time of his leadership in the
House, it was a period where development assistance was
extremely difficult to support. I think there is greater
understanding today about the importance of development
assistance. But Jim Kolbe was the leader in the House of
Representatives for connecting the importance of U.S.
engagement internationally on the development assistance
program. So, Jim, it is wonderful to have you back here.
The Chairman. So if you would start. Thank you again for
being here, sir.
STATEMENT OF HON. JAMES KOLBE, SENIOR TRANSATLANTIC FELLOW, THE
GERMAN MARSHALL FUND OF THE UNITED STATES, WASHINGTON, DC
Mr. Kolbe. Thank you, Mr. Chairman, and Ranking Member
Cardin, thank you especially for your very generous remarks,
overly generous remarks, I should say, about my role in all of
this. But I am pleased to be here. I think it is a wonderful
opportunity to testify on the subject of the Millennium
Challenge Corporation. It is an important, it is a timely
hearing as the MCC passes its 10-year mark. And I want to
commend the CEO, Ms. Dana Hyde, for looking ahead and for her
commitment to keeping the Agency at the forefront of what I
consider to be good development practice.
I am also delighted to be joined by my distinguished
colleagues on this panel, Andrew Natsios and Dr. Nancy
Birdsall, with whom I have worked on various occasions. And I
will not go more into detail because of the limited time here.
As Senator Cardin pointed out, in 2004, the Foreign
Operations Subcommittee of Policy Appropriations, which I
chaired at that time, worked to pass with strong bipartisan
support the legislation creating the Millennium Challenge
Corporation. MCC did represent a new approach to foreign
assistance with a radical departure from the way programs had
been designed and countries designated for foreign assistance
in the past. It was designed with the singular mission of
reducing poverty through economic growth in the world's
poorest, but relatively well-governed countries.
The MCC's model of assistance is focused on four solemn
principles: first, selectivity in determining which countries
that ought to partner based on agreed upon criteria,
objectively measured and objectively applied; second, a
business-like approach to choosing investments; third a focus
on country ownership; fourth, a rigorous commitment to
transparency and accountability.
MCC partners must demonstrate a commitment to ruling
justly, investing in their people, and supporting democratic
rights. Over its decade-long existence, the MCC has
demonstrated, I believe, that this model does work. By working
exclusively with countries that demonstrate commitment to good
governance, the rule of law, and of economic freedom, the MCC
has had the multiplying effective of compelling low-income
countries, even those who do not currently partner with the
Millennium Challenge Corporation, to reform institutions,
change laws, improve how they operate in order to try to
qualify for MCC assistance, what was called the MCC effect that
you heard about earlier.
As we peer over the horizon of the next 10 years, I want to
offer just a couple of reflections on how I think MCC can
continue to stay on the cutting edge of development while
remaining true to its original intent. First, there is always
going to be a temptation by policymakers in the executive
branch and here in Congress to allow new priorities to
interfere with MCC's core values.
The MCC should not allow itself to succumb to other
considerations, strategic or otherwise, that are inconsistent
with or run counter to MCC's fundamental approach. Long-term
development requires focus and discipline. It cannot and should
not be an instrument of day-to-day diplomatic engagement or set
aside in order to respond to the political crisis of the day.
What has made the MCC successful has been its unwavering
commitment to the principles upon which it was founded--
democracy, rule of law, good governance, and transparency--
principles that are deeply embedded in the American value
system. But a desire for democratic decisionmaking to have a
government free of corruption, to be shielded by the adherence
to the rule of law, these are not exclusively American values.
Other countries want them as well.
When the MCC was established, it included in the founding
legislation a private sector component of the MCC's board, four
private sector members. These members have worked in a
bipartisan fashion in years that have passed in successive
administrations to honor the MCC's mandate by maintaining the
rightful focus on the MCC's development objectives, even when
confronted with sometimes unrelated policy priorities and
emergencies.
Second, I think the MCC model has always been built on the
idea of partnerships with developing countries, setting the
course of engagement. The MCC has integrated a number of
requested steps to foster inclusiveness and accountability. I
am confident with the passage of time we will find that one of
the long-term benefits of the MCC will prove to be its ability
to strengthen the citizen state compact.
Third, the MCC has been a pioneer on transparency,
publishing the data elements from the start of compact through
to its completion. This dogged adherence to openness ensures
accountability both for U.S. taxpayers and for the citizens of
participating countries.
I applaud the MCC's interest in concurrent compact
authority. I will not go into detail. You had a good discussion
of that with the CEO here. But I think that the concurrent
compacts would allow the MCC to break up in implementation the
compact components between Fiscal Years. Such authority would
provide more flexibility to the existing 5-year model employed
by MCC. The MCC explicitly has legal authority to negotiate co-
investment agreements with the private sector. Public-private
partnerships are necessary for the MCC to achieve its mission
in an era of limited government resources.
MCC's control corruption indicator needs to be
strengthened, allowing for greater distinction between those
countries that are meeting the criteria and those that are not.
Good governance does not equate to lack of corruption. Better
data is needed for the MCC corruption index.
The MCC also needs to take a closer look at low-income
countries and the lower-middle-income-countries categories to
ensure that we are targeting the right set of countries with
our assistance. As you just heard, the world has changed since
MCC was created. Thankfully the pool of countries that are at
the economic bottom is shrinking, and so we need to look today
to see whether the 25 percent cap on funds for the lower-
middle-income countries is appropriate in today's world.
So these are just a few of the things that I would mention
to you. In conclusion, let me just say that I believe that the
MCC has shown itself to be a game changer in how we look at
development assistance, engage partner countries, and achieve
meaningful development outcomes that are measurable and clear.
After 10 years, it is only appropriate that you look at today
how the Agency is working and how it can be strengthened to do
even better. But I am convinced that given the attributes of
the MCC and its performance-driven mission, I have no doubt
that it will remain up to the challenge. And I look forward to
answering any questions you might have.
[The prepared statement of Mr. Kolbe follows:]
Prepared Statement of Jim Kolbe
Chairman Corker, Ranking Member Cardin, and members of the
Committee: Thank you for the opportunity to testify today on the
subject of the Millennium Challenge Corporation. This is an important
and timely agency for your consideration, as the MCC recently passed
its 10-year mark and is currently developing a new 5-year strategic
plan. I would like to commend MCC CEO Dana Hyde for her looking ahead
and her commitment to keep the agency at the forefront of good
development practice.
I am also delighted to be joined by my distinguished colleagues on
this panel. I worked with Andrew Natsios when he ably served as
administrator of the United States Agency for International Development
under President Bush while I was chairman of the House Appropriations
Subcommittee on Foreign Operations and Related Agencies, and more
recently together as members of the Consensus for Development Reform,
which aims to strengthen U.S. global leadership through reforming and
improving our approach to global development. I've also had the
pleasure of working with Nancy Birdsall in numerous capacities,
including jointly serving on the Transatlantic Taskforce on Development
at the German Marshall Fund, which produced a report examining key
issues around the role of development assistance. Nancy remains a
respected thought leader on development. While she recently announced
she plans to step down from her leadership post at the Center for
Global Development next year, I know she will continue to be an
intellectual force and leading voice on the future of development.
mcc: in ten short years, a proven model of success
In 2004, while serving as chairman of the House Appropriations
Foreign Operations Subcommittee, our subcommittee worked to pass--with
strong bipartisan support, I might add--the legislation creating the
Millennium Challenge Corporation. After the MCC came into being, our
subcommittee provided the initial funding for its operations and
ongoing appropriations in the years that followed. MCC represented a
new approach to foreign assistance, with a radical departure from the
way programs had been designed and countries designated for foreign aid
assistance in the past. Not everyone in the executive branch or in the
development community, nor even some of my colleagues on Capitol Hill,
were confident of its success. It was designed with the singular
mission of reducing poverty through economic growth in the world's
poorest but relatively well-governed countries. Its objectives,
governance, and authorities were clearly spelled out in legislation to
accomplish this overarching development purpose. The MCC's model of
assistance is focused on four sound principles:
(1) Selectivity in determining which countries to partner
based on agreed-upon criteria--objectively measured and
objectively applied;
(2) A business-like approach to choosing investments using
well designed analyses of constraints to economic growth;
(3) A focus on country ownership through the consultation,
development, and implementation processes of each compact; and
(4) A rigorous commitment to transparency and accountability
from beginning to end of a country compact.
First and foremost, MCC partners must earn their place in MCC's
pipeline by sharing values that are common to democratic societies.
They must demonstrate a commitment to ruling justly, investing in their
people, and supporting democratic rights. By demonstrating this
commitment--sometimes over multiple years and often only after
undertaking significant and politically difficult reforms--countries
are then able to work with MCC to address identified constraints to
economic growth. Incentivizing reform in partner countries is a crucial
policy aim of the MCC.
I've followed the MCC's work closely from its inception, and over
its decade-long existence, the MCC has demonstrated that its model
works. MCC has invested over $10 billion in eligible partner countries
and improved the lives of millions of people around the world.
Eligibility for MCC's sizeable grants is determined by measuring a
country's performance against independent, transparent, selection
criteria. By working exclusively with those countries that demonstrate
a commitment to good governance, the rule of law and economic freedom,
MCC has had the multiplying effect of compelling low income countries--
even those who do not currently partner with MCC--to reform
institutions, change laws, and improve how they operate in order to try
to qualify for MCC assistance.
And the effect is not just taking place overseas where we provide
assistance. I have seen it impact our own U.S. government, where larger
organizations, such as USAID, have incorporated many of MCC's core
principles into their own business practices. Responsiveness to country
priorities, open and transparent practices, rigorous evaluations, and
evidence-driven learning and decisionmaking are becoming the norm for
development agencies here and abroad--no longer the exception.
However, as we peer over the horizon to the next 10 years, I want
to offer my own reflections on how the MCC can continue to stay on the
cutting edge of development while remaining true to its original
intent.
accentuate mcc's strengths and stay true to mission
First, there will always be a temptation by policymakers in the
executive branch and here in Congress to allow new priorities to
interfere with the MCC's core values. The MCC should not allow itself
to succumb to other considerations, strategic or otherwise, that are
inconsistent with, or run counter to, MCC's fundamental approach. Long-
term development requires focus and discipline. Bringing the 800
million people in the world who remain in the shadow of the worst
poverty is an end in itself with its own strategic purpose. It cannot,
and should not, be an instrument of day-to-day diplomatic engagement or
set aside in order to respond to the political crisis of the day.
What has made the MCC successful has been its unwavering commitment
to the principles upon which it was founded: democracy, rule of law,
good governance, and transparency. These are principles deeply imbedded
in the American value system. But they are also principles which
peoples of other countries strive to incorporate into their own
governing process. A desire for democratic decisionmaking, to have a
government free of corruption, to be shielded by adherence to the rule
of law--these are not exclusively American values.
In an effort to ensure public accountability, when the MCC was
established it included in the founding legislation a private-sector
component of the MCC's Board: four private-sector members appointed by
the President of the United States with the advice and consent of the
U.S. Senate. These members have worked in a bipartisan fashion in
successive administrations to honor the MCC's mandate by maintaining
the rightful focus on the MCC's development objectives, even when
confronted with sometimes unrelated policy priorities and emergencies.
Even when foreign policy issues directly involve MCC partner countries,
the Board has worked together to prioritize and uphold MCC's mission.
Second, the MCC model has always been built on the idea of
partnership, with developing countries setting the course for MCC
engagement by identifying their own objectives and designing and
implementing their own program. In fact, the legislation creating the
MCC was deliberately designed to contain no earmarks for specific
sectors or purposes, thus giving countries the political and policy
flexibility to determine their own priorities. Over time, MCC has
integrated a number of requisite steps to foster inclusiveness and
accountability, including constraints-to-growth analysis, broad local
consultation, economic rate of return assessments, and monitoring and
evaluation plans. Facilitating a process for governments and
communities to lead their development and be accountable for results
should guide U.S. assistance policy. I am confident that with the
passage of time we will find that one of the long term benefits of the
MCC will prove to be its ability to strengthen the citizen-state
compact so that governments are more responsive to the needs of the
people our assistance is intended to help.
Third, the MCC has been a pioneer on transparency, publishing data
elements from the start of a compact through to its completion. The MCC
expects to soon add subnational location data and disaggregated results
data. For its efforts, MCC has consistently ranked as one of the most
transparent donor agencies in the world by the organization, ``Publish
What You Fund.'' This dogged adherence to openness ensures
accountability to both U.S. taxpayers and citizens of partner
countries.
mcc's road ahead: building on a sound approach
I applaud the MCC's interest in concurrent compact authority which
would enable it to undertake regional investments in an effective and
efficient manner. Concurrent compacts would allow the MCC authority to
break up implementation of compact components between fiscal years.
This would allow more time for compact development and due diligence,
which in turn could yield more effective results. Such authority would
provide more flexibility to the existing 5-year model employed by MCC,
as compact completion could extend beyond 5 years on compacts approved
by Congress for concurrent funding. Enactment of concurrent compact
authority would also allow MCC to accelerate compact development and
implementation, while ensuring adequate time for the more detailed,
technical project development needed for complex projects.
In addition, the law that established the MCC explicitly provides
the authority for the agency to negotiate coinvestment agreements with
the private sector. Public-private partnerships will be necessary for
the MCC to achieve its mission in an era of limited government
resources. When the MCC was proposed by President George W. Bush in
2003, the stated goal was for the MCC to provide $5 billion in
assistance per year. Yet, 10 years later, its annual budget is slightly
less than $1 billion. The only practical way for the MCC to achieve
transformational growth and poverty eradication is to leverage private
sector investment alongside MCC compacts. Therefore, the MCC must
incorporate the private sector from the beginning of compact
development process to effectively utilize private resources alongside
compact investments. The MCC must also be vigilant to ensure that its
compact investments are designed to catalyze but never to replace or
crowd out private-sector investment.
more work needed: corruption and income categories
MCC's Control of Corruption Indicator must be strengthened,
allowing for greater distinction between those countries that are
meeting the criteria and those that are not. Good governance does not
equate to lack of corruption. Better data is needed for the corruption
index so that the MCC can make discreet and realistic distinctions
between countries that are really tackling corruption and those that
are not. Without this we cannot prevent misuse of U.S. taxpayer dollars
nor assure projects are actually helping those for whom they are
designed.
The MCC should also take a closer look at the Low Income Country
(LIC) and Lower Middle Income Country (LMIC) categories to ensure we
are targeting the right set of countries with our assistance. MCC
legislation requires that only 25 percent of MCC funds may be used for
LMICs, and the MCC continues to use gross national income per capita as
measured by the World Bank as the metric for determining income groups.
But the world has changed since MCC first started to work. Nearly 2
billion people have been lifted from deep poverty, so the pool of
countries at the economic bottom is--thankfully--shrinking. Congress
needs to examine whether the 25 percent cap on funds for LMICs is
appropriate in today's world and whether the World Bank's GNI measure
is the most effective.
the mcc long view: continue to innovate by taking smart risks
Development is an inherently difficult, protracted, and risky
business. The legislation my subcommittee helped to enact provided
clear objectives, principles, and parameters, while giving MCC and its
partners the flexibility to test new ideas and approaches in program
areas, methods, and implementing structures. This kind of innovation is
necessary to keep MCC at the forefront of development, but more
importantly, for U.S. development efforts to be transformational and
actually lead to sustainable outcomes.
I believe the MCC has at times shied away from experimentation due
to the political risks associated with innovating. Oversight
understandably tends to focus predominantly on where public funds are
spent and whether they are being used properly. Assessing success or
failure, however, should also take into account whether program
objectives are achieved--or could be achieved more efficiently--while
at the same time putting in place mechanisms for sufficient fiduciary
responsibility.
One example would be to look more deeply into how we apply
development assistance to increase the competence and accountability of
partner countries' own systems and institutions. This is the only long-
term pathway to sustainability, especially when, and after, assistance
ends. A desire on the part of the U.S. Government to use capable
country systems would provide a persuasive incentive for partners to
improve and optimize their public financial management apparatus. This
is the type of innovation the MCC and other U.S. agencies must explore
more seriously if we are to reap better development rewards.
In conclusion, the MCC has shown itself to be a game changer in how
we look at development assistance, engage partner countries, and
achieve meaningful development outcomes that are measurable and clear.
After 10 years, it is only appropriate for the MCC, and for Congress,
to review the agency's track record and seek ways to strengthen the
model so that it might do even more. In a time when limited fiscal
resources can be devoted to development assistance, the American
taxpayer will rightly insist that they be spent wisely and efficiently.
Given the unique attributes of the MCC, and its performance-driven
mission, I have no doubt it will remain up to this challenge.
Thank you, and I look forward to answering any questions you may
have.
The Chairman. Thank you very much. Mr. Natsios.
STATEMENT OF HON. ANDREW S. NATSIOS, DIRECTOR OF THE SCOWCROFT
INSTITUTE OF INTERNATIONAL AFFAIRS, AND EXECUTIVE PROFESSOR,
THE BUSH SCHOOL OF GOVERNMENT AND PUBLIC SERVICE, TEXAS A&M
UNIVERSITY, COLLEGE STATION, TEXAS
Mr. Natsios. Thank you very much, Senator Corker. Thank you
very much for your invitation to speak. I have not been before
your committee since, I think, I was envoy to Sudan.
The MCC makes three major contributions to the
international development practice. First, the MCC relies on
transparent and readily-available indicators to select
countries for participation in compacts. This has several
advantageous aspects to it, one of which is that countries know
ahead of time what is expected.
Secondly, the MCC compiles the data it uses, these 20
indicators, and publishes it, and those scorecards are used
even beyond the MCC. The business community looks at these
scorecards to see where countries are. Thirdly, and most
importantly, compacts are locally designed, driven, and carried
out.
Now, I want to emphasize that perhaps the most important
but least understood aspect of the strengths of the MCC are its
decentralization. Our aid program, other than MCC, has become
more and more centralized over the last 10 years. Carol
Lancaster, former dean of the law school at Georgetown, said it
was by stealth. This stealth takeover of USAID by the State
Department and by the Office of Management and Budget's growing
control in terms of demands for indicators for everything, and
short timelines for projects.
The old USAID during the Cold War had 20-year projects. If
you call someone to get your computer repaired, the person you
get may come from India, and they probably were educated at an
engineering school. There are 13 of these technical schools
built by the Indian government and the U.S. aid program in the
1950's and 1960's.. USAID linked these 13 engineering schools
in India with13 of the best U.S. Engineering Schools. This
linkages program was very successful in building the capacity
of the Indian Schools. Most Indians do not know that it was
USAID (or its predecessor agencies) that built those schools .
But it was the U.S. that did it.
The premiere engineering school in India was the one that
linked with MIT for 20 years under these projects. USAID does
not do 20 year projects anymore. The Agency stopped doing that
a long time ago and instead went to 10-year projects, then to
five-year projects. Many USAID career staff tell me now that
because of the control that the State Department and OMB the
Agency now reviews every project every year. Even though
officially projects last five years, every year the overseers
review everything, and if they need money for other
initiatives, they shut down a project, and move the money
somewhere else.
It is very destructive to the development process to have
one-year projects. Someone in the administration privately
described our aid program over both the Bush and Obama
administrations in Afghanistan as 13 one-year projects. And
that is one of the problems that has not been looked at, at
all.
Professor Dan Honig at the Johns Hopkins School of Advanced
International Studies did a detailed analysis of 8,000 aid
projects from five or six aid agencies--e.g the World Bank,
USAID, the British Aid Agency--and he looked at the degree of
autonomy of local managers had versus highly centralized
systems where everything has to be approved at the
headquarters. And he found a significantly higher level of
success in highly decentralized systems.
USAID used to be the most decentralized aid agency in the
world, and other development agencies were jealous because they
could actually make decisions in the field without going to
Washington all the time. That has been reversed in the last 10
years, and it has damaged our development programs. The only
holdout in the old system of decentralization is the MCC. That
is not discussed much, but in my view, it is extremely
important.
The second issue I think that we need to look at is the
issue of who we are competing with. China has an entirely new
model of development cooperation. Actually it is not a new
model. It is the model we used in the 50s and 60s. It was an
infrastructure-based model for development. What has led to the
12 percent growth rates in China? Of course that rate has
collapsed now, but for 20 years the focus was on infrastructure
in China. Most of their development, in fact, was physical
development. It was building, dams, bridges, ports, and
highways, and rural roads.
We stopped doing those projects a long time ago. Congress
and OMB argued these projects were too expensive, damaged the
environment and had maintenance problems. It took too long to
build the projects and maintain them, and the consequence of
that is that many of the Western donors and the World Bank have
gotten out of the infrastructure business. This has opened up
the field to China, which is now filling the gap. Much of the
MCC's spending is on infrastructure projects because that is
what developing countries need and want.
The third question I would like to raise here is the
relative independence of the MCC from the use of foreign aid
for geostrategic purposes. Now, I was a diplomat for a year and
a half. I know how important the USAID programs are to our
national security. If the State Department or the Defense
Department wishes to use foreign aid for very short-term
strategic purposes, they have an account to do that. It is
called the ESF (the Economic Security Fund) account. Congress
appropriates money every year to that account. They should use
that account, not the rest of our aid budget.
What the Defense and State Departments do in strategically
important countries is use our regular aid budget and sometimes
the MCC for diplomatic and national security purposes. This is
inappropriate, even under Federal statute. I think it is on the
edge of frankly being illegal sometimes when they do this.
Several countries have been approved for compacts that were not
eligible. The MCC staff strenuously opposed it. USAID also
opposed it, but the State Department under pressure from the
Defense Department, for strategic reasons, approved a couple of
these countries. I do not want to go into the details here. I
am happy to do it privately. There are national security
interests at risk. I understand why they did it from a
diplomatic standpoint. But these countries were well below the
corruption index requirement under the MCC legislation.
I completely agree with Jim Kolbe's comments on the
importance of separating the MCC from the strategic short-term
interests of the United States. That is not the purpose of the
program. It is clear in the statute that it was designed by the
White House or the Congress for this purpose. If they need to
make those kind of commitments, they should do it through the
ESF account.
These are my comments. I endorse the program. I think it is
very important. But I think we need to protect the MCC's
original mandate in the original legislation.
[The prepared statement of Mr. Natsios follows:]
Prepared Statement of Andrew S. Natsios
Mr. Chairman, thank you for the opportunity to testify today on the
strengths and weaknesses of the Millennium Challenge Corporation, and
to propose some changes in the authorizing legislation.
The Millennium Challenge Corporation was created by President
George W. Bush as major reform in the international aid system, where
we would reward those countries that made significant strides to
improve their governance, economic freedom and expand investments in
their people. President Obama has continued White House support for the
program which indicates that the MCC business model has strong
bipartisan support. More than 10 years after the 102nd United States
Congress passed the authorization for the MCC, we can take stock of its
successes.
The MCC makes three major contributions to the international
development practice. First, the MCC relies on transparent and readily
available indicators to select countries for participation in compacts,
which is advantageous in multiple ways--it makes the MCC effect
possible, for one. Second, the MCC compiles the data it uses for
selection in a scorecard of all twenty indicators, which it publishes
for all countries for which is has data. This scorecard is now a
valuable tool for private investors considering entry into a developing
country. Third, and importantly, compacts are locally designed, driven
and carried out with input from the MCC staff.
Local ownership of compacts is important because project success
rates increase substantially when the management of projects is
decentralized. Professor Dan Honig, at the John Hopkins School of
Advanced International Studies, has shown a significantly higher
success rate in aid projects where the local managers have a much
higher degree of independence than those where management decisions are
highly centralized. Over the past 10 years there has been a significant
centralization of decisionmaking in U.S. Government aid program in the
State Department which has compromised the integrity and success rates
of these programs, given the findings of Honig's research. The MCC has
the last hold out in the federal foreign aid system to this creeping
centralization, but it too is at risk.
The reality is, of course, that within certain bounds, recipient
countries (and project managers in the field) are much better suited to
make crucial decisions about how projects should take shape. With
increased local participation and local management, it is also more
likely that projects are carried through till the end--both because the
project was tailored to local needs, and because local officials will
take ownership of the projects. Moreover, the local implementation
authorities created when a compact is awarded contribute to building
the capacity of governments in the recipient countries. Accordingly,
locally driven compacts will tend to be more sustainable in the long
run.
One success story that is worth mentioning is the George Walker
Bush Highway in Ghana, which was built with funding from the MCA. The
highway is an embodiment of Ghana's success in its efforts to rapidly
modernize its economy and political system. The highway has
substantially improved market access in regions of Ghana that had been
relatively isolated from international markets.
After 10 years, we can conclude, with some assurance, that the MCC
is a success story. We have certainly learned many lessons, but moving
forward we should refine the MCC and not reform it.
In my testimony below are several suggested reforms to the MCC. The
two most important improvements are the composition of the board--where
the Secretary of State should not hold the chairmanship if we expect
the MCC to live up to its mandate--and the use of the current
corruption indicator, the purpose of which is more effectively carried
out by the rule of law indicator.
Moreover, while the MCC is successful in its mandate, it is not an
alternative to the United States Agency for International Development
(USAID). The MCC is designed to only operate in the most ideal
conditions--those where good governance, economic freedoms and
investments in people have already been demonstrated. Much of USAID's
work is specifically designed to operate under other and more
challenging local conditions, as is necessary to fulfill its much
broader mandate.
Strengthening the MCC is more important now than ever. The MCC
compacts provide alternatives to Chinese loans and infrastructure
development which do not encourage good governance or improved local
capacity. The MCC has focused much of its funding on infrastructure,
particularly in Africa, because that is what the people and leaders of
the countries have chosen to focus their projects on. Donor government
tend to appropriate money for sectors which are popular in wealthy
countries, such as health, education, and the environment while what
the developing countries need and want to build their economies are
roads, bridges, and other infrastructure. When countries are left to
make development decisions themselves, they prioritize these projects
over social services because they know that we have forgotten that
without economic growth and the tax revenues it generates, social
services are unsustainable. Chinese aid is heavily focused on
infrastructure and that is why it is so popular in the developing
world. The MCC effectively rewards those countries that strive to
achieve improvements for their citizens, but the relatively small
budget of the MCC is dwarfed by China's efforts.
the ``mcc'' effect
A central and important difference between the MCC and other
development agencies is the insistence on a commitment to good
governance, economic freedom and investments in citizens in recipient
countries. Potential recipient countries are well aware of the
transparent, quantitative and objective thresholds that they must
fulfil to qualify, which spurs reform and improvement in governance.
Research by Bradley Parks and Zachary Rica (2013) found that
policymakers in developing countries are sensitive to the eligibility
criteria of the MCC, which acts as an external incentive to improve
governance. The MCC effect is real, and it is a major contribution to
the development community, where it will act as an example for other
aid agencies. I saw the MCC effect at work while I served on the Board
of Directors as USAID Administrator.
Studies show that improving governance, economic freedoms and
social opportunities for citizens is important for economic
development--an idea championed by Amartya Sen, who received a Nobel
Prize for his work--which shows the complementarity of these different
areas to economic growth, development in general and poverty
alleviation in particular. The idea is firmly rooted in theory and
evidence, and several major studies have come out detailing the
relationship, including the report by the World Bank, ``Assessing Aid--
What Works, What Doesn't, and Why.''
The better countries score on these indicators, the more likely
they are to successfully turn an MCC compact into economic growth, and
the more likely it is that the economic growth benefits those citizens
in poverty. However, improving governance, economic freedoms and social
opportunities is also an end in itself for the 20 indicators the MCC
uses to measure this. In fact, many of the indicators are measures of
fundamental human rights, such as access to primary education, property
rights and the right to participate in government. The MCC effect is
such that even before funds are committed to a compact, the United
States makes a difference in the lives of millions, with the promise of
rewarding those governments that pursue these rights and freedoms for
their peoples.
Recognizing that reforms and improvements in governance, economic
freedoms and social opportunities can be costly, the MCC supports
countries that have shown commitment to improving governance, but do
not yet qualify for full compacts, by way of `threshold' programs that
assist governments financially to fund reform and improvements. The
difficulty with the threshold programs is they are so small in funding
and scope that their impact is limited. One refinement of the MCC would
be to approve fewer threshold programs with larger commitments of money
for longer periods of time which would increase their effectiveness.
While there is little doubt that the MCC effect is real, it is very
difficult to measure the magnitude of the effect. The Office of the
Inspector General of USAID funded a quantitative study by Johnson,
Goldstein-Plesser and Zajonc (2014) of the effect, which yielded no
conclusive evidence, one way or the other. Other studies have attempted
to find a measurable difference between those countries we would expect
to be affected by the MCC, and those that are not, with more but still
limited success. However, in all cases, the authors point out that
these results should not lead us to think the effect does not exist,
but rather to conclude that we cannot yet measure it.
In my own research (``The Clash of the Counter-Bureaucracy and
Development'' published by the Center for Global Development, in
2010),\1\ I demonstrate how the focus on quantitative measures of
success damages and distorts how we approach development because it
ignores a central aspect of development theory--that those development
programs that are most precisely and easily measured are the least
transformational, and those programs that are most transformational are
the least measurable.
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\1\ http://www.cgdev.org/publication/clash-counter-bureaucracy-and-
development
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This does not mean that we should stop attempting to estimate and
measure our success, but instead that our overreliance on numbers and
figures to evaluate development success is misleading and undermines
good development practice. The OMB, the GAO, the IG, the State
Department's Foreign Aid office, and Congressional oversight committees
have forced both the MCC and USAID to collect massive amounts of
program data which is never used by anyone and which does not actually
demonstrate outcomes successfully. This entire system of aid oversight
needs reform.
There are four distinct reasons why the MCC effect is difficult to
measure. The first is simply that the tools we have available to do so
are so crude that subtle, but important improvements in governance,
economic freedom and social opportunities are too small for our tools
to capture. The second issue is that many indicators that are used by
the MCC on the scorecard, especially those relating to corruption and
good governance (where the most important local reforms take place) are
not appropriate for tracking change over time. Moreover, because the
indicators are measured, collected and published by third parties
(which is in other aspects a strength of the MCC indicators), a change
in governance this year may not show up for a year or two, simply
because measurement, preparation of the indicators, and publication,
take time. But we also know from other research that many development
programs display a time lag between the end of a program and the
improvement in outcomes.
A third challenge is that the MCC is still a relatively small
program, with a relatively modest budget. The threshold programs, which
exist to help governments improve governance, economic freedom and
social opportunities, by law accounts for less than 5 percent of the
MCC's total budget. The current budget for the MCC is creating change,
but we cannot expect transformational change--the profound shift of
indicators--without committing at a higher level over a longer time
horizon. If we hope for the MCC to have a great impact by catalyzing
reform, then the compacts must be larger in size. The MCC can
accomplish this within existing appropriations by approving fewer, but
larger, compacts.
A fourth, and important challenge is the long time horizon
associated with the type of change we are working to incentivize.
Investments in anticorruption this year, for example, will not
substantially change the indicator the following year or two, even if
the program is as successful as one could hope for. Many development
outcomes, especially those relating to changes in governance, attitudes
and business practices change slowly, and they are not always
appropriately captured by quantitative indicators. Many of USAID's most
successful governance projects showed results over a decade or two, not
over months or years. As USAID has been gradually absorbed into the
State Department, the length of development projects have become
shorter and shorter, and that poses a significant threat to the
efficiency and success rate of our foreign aid programs because there
exists an inverse relationship between project length and project
success. In other words, when projects are forced to work on a short
time-horizon, development outcomes are adversely affected. During the
cold war, aid programs covered timespans of 20 years, they gradually
declined to 10 years, and while I served as USAID Administrator they
declined to 5 years. Many aid projects today in practice last one year
as they are constantly being reassessed as the State Department or OMB
wants to free up money for some other diplomatic initiative.
Despite these measurement issues, it is still clear that the MCC
effect is real. Passing the MCC's scorecard does not automatically lead
to funding of a compact for the country, so the effect is more profound
than reforms for the sake of securing funding. As a corollary to the
MCC effect, passing the MCC's scorecard is an important signal to the
private sector that looks to ``passing'' the scorecard as a seal of
approval akin to the World Bank's ``Cost of Doing Business Index.'' In
the study by Bradley Parks and Zachary Rica (2013) at College of
William and Mary, the MCC ranked as one of the three most influential
external assessments of government.
If one relies on qualitative evidence instead, the MCC effect is
even clearer. The MCC and others have provided testimony of instances
where governments directly sought the MCC's guidance and assistance in
overcoming governance obstacles, particularly with respect to
corruption. Examples of a direct impact of MCC criteria range from
Albania to Sierra Leone and Armenia. In Sierra Leone the government
finally passed the scorecard in 2013 after years of reforms guided by
the MCC and others.
It is important not to overstate the magnitude of the MCC effect,
but it is a significant aspect of the MCC's success. So too is it
important to recognize that the MCC effect is not the explicit goal of
the MCC, which is poverty reduction through economic growth, but rather
an additional outcome of the program beyond poverty alleviation.
the complementarity of the mcc and usaid
The MCC is not an alternative to USAID, and it is crucial that the
MCC is not seen as such. The MCC has a more limited scope, concentrated
in countries where we would expect development programs to be the most
successful because good governance, economic freedoms and investments
in human capital contribute substantially to economic growth. The
ownership and local project management, which is important to the MCC
model, is likewise only possible because the countries that pass the
threshold are much more likely to possess the capacity to manage a
compact than countries that do not qualify. While the MCC's single
mandate is to alleviate poverty through economic growth, many mandates
that cannot be achieved with MCC's model fall to USAID.
Among those mandates which fall outside the mission of the MCC is
the work of the U.S. Office of Foreign Disaster Assistance that
provides humanitarian aid in complex emergencies such as conflict and
famine, and the work of USAID's Office of Transition Initiatives, which
supports U.S. foreign policy objectives by supporting political
transitions and supporting democracy building. Additionally, USAID was
an indispensable leader in the U.S. nation-building efforts in
Afghanistan and Iraq, and it will continue to be important for their
recovery as well as in global health programs.
The MCC and USAID are thus complementary institutions that can
reinforce the other's work, but they carry out fundamentally different
tasks within the development process. USAID often operates in unstable
conditions, where good governance is absent or has collapsed and where
economic freedoms are a distant dream. Often USAID works in those
environments to save and protect life, to enable basic markets to
function and to prevent situations from deteriorating. The MCC, by its
legal mandate, only operates in stable conditions and where markets
function relatively well and is thus not a substitute for USAID.
Even in the countries that pass the MCC scorecard and where the MCC
can thus operate, USAID fills many other roles than those relating
specifically to economic growth. A third of the U.S. Government's
foreign aid budget (much of it administered by USAID) is focused on
global health, specifically on the world-wide eradication or treatment
of different diseases such as Polio, HIV/AIDS, Ebola, and Malaria.
USAID's very successful trade capacity building, ``World Bank Doing
Business'' reforms, and economic competitiveness programs by their
nature require policy dialogue with local business leaders and
technical assistance which the MCC is not designed to do. In fact,
while the MCC funds the threshold programs to assist governments in
improving governance, economic freedoms and social opportunities, it is
most often USAID that is contracted to carry out those programs.
focusing on corruption
Of the twenty indicators on the MCC's scorecard, a single indicator
reigns above the rest. Whereas countries must place higher than the
median in half of the indicators to qualify, control of corruption is
an indicator that a country must pass to qualify, no matter how good
the average of the others indicators is. It is a difficult requirement,
and rightly so, in recognition of how central corruption is to the
economic, political and social maladies in poorly governed countries.
We possess an abundance of evidence that corruption is bad for economic
growth, bad for poverty alleviation and bad for political
inclusiveness. President George W. Bush was the author of the
requirement which he insisted be written into the legislation, and
which has inspired anticorruption reforms and campaigns in several MCC
candidate countries.
We should continue to place a high premium on reducing corruption,
but we can refine the MCC's ability to use the hard indicator as a tool
for selection, and for inducing change in countries that wish to
qualify. The current indicators for corruption are largely
``perception''-based, meaning that if those surveyed perceive a high
prevalence of corruption, then the country will score poorly on the
indicator.
Perception does affect economic behavior, but it is only a minor
part of what the indicator is actually attempting to measure. Because
corruption is hard to quantify and measure (most people don't advertise
their own corruption), the indicator uses perception as a way to
estimate the full level of corruption in a country. It is what scholars
would call a proxy--the use of an indicator that can be measured to
extrapolate about a phenomenon that cannot. However, the perception
aspect of the indicator can have unintended consequences that work
against what the President and Congress designed the MCC to achieve.
One of the tools USAID uses widely to combat corruption is
increasing public awareness of corruption and its destructive
consequences, and educating people about how it can be dealt with. In
many countries corruption is viewed as a way of life and not an
aberration of government, which is a major obstacle to effectively
combating corruption. However, raising public awareness about
corruption--so it can be detected, reported, deterred and sanctioned--
will also tend to raise the perception of corruption because the public
is increasingly made aware of its presence and negative effects, and
that increase in perception--even though corruption has not increased--
is detrimental to the MCC's work. Simply put, with the current
indicator, those countries that effectively improve on corruption can
simultaneously be penalized for their efforts.
The solution is simple because the contributions of the hard target
in the corruption indicator can be achieved with another established
measurement: the Rule of Law indicator. Rule of law captures corruption
in government through multiple measures, ranging from the independence
of the judiciary and agents of the law, the impartiality, independence
and accountability of the police force, the protection against
government overreach in expropriation and so forth. The hard target for
corruption should be based on this indicator instead. However, moving
the hard target from the corruption indicator to the rule of law
indicator requires the approval of Congress in any future refinement of
the legislation.
independence
On the matter of MCC independence, it is crucial that this be
strengthened. The main benefits of the MCC's approach--the transparent,
indicator-based system that spurs the MCC effect--depend on the MCC's
credibility in using indicators for selection. The President's wish
that the MCC would provide a new, innovative and effective kind of aid,
based on hard evidence, is derived in part from the MCC's transparent
and predictable methods. Another central facet of the MCC's success--
local ownership, design and implementation of compacts--is indelibly
linked to the MCC's ability to create sustainable capacity in compact
countries. Anything but evidence-based selection of the best projects
would undermine the MCC's work and the best use of aid funds in the MCC
model. Recall that the MCC's mandate already ensures that aid is spent
in the interest of the United States by focusing only on those
countries that already have significant levels of political and
economic freedoms and invest in their people.
In general, the involvement of the State and Defense Departments in
specific development and humanitarian aid decisions has undermined the
effectiveness of our aid, for USAID and the MCC alike. We have to make
a very clear decision about whether or not our foreign aid is a grand
strategy tool that we wish to employ to reward or punish other
countries when they either support our goals or oppose them,
respectively. Foreign aid is often used for entirely contradictory
purposes--sometimes development for the purposes of development or
other times as a tool of diplomatic and national security strategy.
Hans Morgenthau argued this in his now famous 1962 article, ``A
Political Theory of Foreign Aid,'' where he suggested aid was given as
a form of legal bribery to induce a change of diplomatic behavior on
the part of the a recipient of the aid. On the other hand, we can
decide--as the President and a bipartisan Congress did when it
authorized the MCC--that the purpose of our foreign aid is to create a
stable, democratic, and resilient world around us, which ultimately
more broadly supports our foreign policy in profound ways.
South Korea is an excellent example that demonstrates the power of
good development. Over the course of 30 years, USAID spent about 6
billion dollars (in 1960's dollars) in development programs to support
economic growth and basic public goods such as sanitation, schools and
infrastructure, which ultimately support economic growth as well. With
the help of U.S. Government aid, South Korea rose out of poverty to be
a prosperous, democratic and stable ally that is indispensable to the
United States in preserving peace in East Asia. South Korea is a strong
and active partner that keeps North Korea in check. However, USAID's
work in South Korea would not have been as successful if it had been
used to support of shorter and more parochial diplomatic objectives of
U.S. foreign policy.
Using aid as a bargaining chip might satisfy short term goals in
some cases by buying the support of a warlord or important political
faction, but it undermines the developmental use of aid to create
prosperity and support the longer term interest of the United States.
That should not come as a surprise: if aid allocation is not made based
on the development potential, but instead based on political, short-
term priorities, then our development funds will not be effective. In
such cases, of which there are many, USAID is then criticized for the
lack of results in suboptimal development programs that they are forced
by the State and the Defense Department, and sometimes Congress, to
design without regard for their development potential. In many cases
these ``development aid'' funds are outright damaging our longer term
goals. As USAID has been absorbed into the State Department, good
development aid has become increasingly harder to do.
In fact, even the MCC is affected, despite the original intention
of its mandate. As chairperson of the board, the Secretary of State has
a disproportionate influence on compact decisions. Only one Secretary
of State--Condoleezza Rice--shied away from making the MCC work for
more parochial State Department objectives. She recognized that the
independence of the MCC was one of its strongest attributes, even if
the ultimate decision of the board did not align with her own
preference. While it makes sense that the Department of State should be
represented on the board, the Secretary of State should not hold the
chairmanship. In fact, I would suggest an outside chairperson who does
not hold public office as a statutory requirement. If the State
Department wishes to reward an ally with aid for strategic purposes
which is an important tool in a diplomats toolbox, they can use the
Economic Security Fund account which was designed precisely for that
purpose. I served on the U.S. delegation at the Hong Kong trade round
in 2005 and watched to my dismay as USDA and State Department diplomats
attempted to promise MCC compacts to countries for supporting the U.S.
position in the negotiations on agriculture trade. I strenuously
objected as the use of compacts for this purpose which in my view was
an egregious violation of the intent and purpose of the MCC statute.
These U.S. career officers backed down and the compacts were never
promised.
Moreover, the intention of the President and the Congress of the
United States was for the MCC to be entirely independent from political
and strategic pressure, as was abundantly clear at the time of the
MCC's authorization. When the State Department, or any other actor,
affects compact or threshold decision outcomes, it is in violation of
federal law and in violation of the original intentions of the MCC's
founders. Several countries have been approved which clearly did not
come close to meeting the indicators.
The independence of USAID and the MCC is imperative because
developing countries put faith in the advice our development agencies
offer. In many countries our aid agencies are well regarded and
trusted, which occasionally leads aid workers having highly developed
and influential relationships with government ministries and civil
society organizations. If the perception among recipients is that our
development programs are designed to serve U.S. short term strategy in
mind, the work of USAID and the MCC will be made more difficult, even
in the best designed projects.
I spent a while as a United States diplomat, so I have the utmost
admiration for the State Department's work in diplomacy. In my view,
our diplomats are among the best in the world. They should leave the
management of aid development programs to development professionals in
USAID and the MCC.
operating in fragile states
The MCC faces challenges in countries where governance, economic
freedoms and social opportunities are suboptimal. In a few cases this
fragility led to the early termination or suspension of compacts
because the relevant indicators fell. While that is regrettable, I
would argue that the termination and suspension of these compacts
should be looked at as a success for the MCC. While the MCC could
certainly improve its ability to help countries progress in governance,
economic freedoms and social opportunities, as could all other aid
agencies in the world, terminating the compact is not a symbol of
failure but evidence of success in the rigor and discipline of the
process. It is a victory for those countries that work hard to make
real, sustainable improvements in their indicators.
If entry into a compact is based on a certain level of indicators
that must be achieved, then those levels should be enforced after the
compact has begun as well. Otherwise the improvement in the indicators
is insincere; countries could improve to qualify, knowing that they
could simply reverse reforms once the compact is granted. By enforcing
the levels of the indicators after a compact is initiated, the MCC
prevents opportunistic behavior. Enforcement is thus paramount to the
MCC's mission of sustainable improvements in governance, economic
freedoms and social opportunities.
concurrent and regional compacts
A significant impediment to economic development is a lack of
intraregional infrastructure and cooperation. One particular category
of countries--those that are landlocked--depend almost entirely on
their connection with neighbors for access to the rest of the world, as
demonstrated by Paul Collier in his seminal book, ``The Bottom
Billion.'' In fact, the infrastructure projects including airports for
landlocked countries is their connection to the global economy. Even
for those with global market access, development tends to be closely
related to the development of neighboring countries. Concurrent
compacts would enable the MCC to operate in this crucial area of
development, which is necessary for long run sustainable development in
many areas, particularly in Africa.
A crucial aspect of economic development in many countries is
market access: the greater a country's access, and the wider the market
for its products for export, the more trade country a country can
sustain. Intercountry trade improvements in particular can be
beneficial to economic growth. If the regional compacts are carried out
appropriately, the benefits that accrue are even beyond economic
growth. With better connectivity, and cooperation in a compact, the MCC
will assist in building bridges--literal and figurative--that will
enable governments to increase cooperation in many areas, including
security, politics, border control and epidemiological control, all of
which are in the interest of the regions and the United States of
America alike.
A regional compact would, of course, be a new type of challenge for
the MCC. Whereas a traditional compact only has one qualifying
government, regional compacts would by definition have more, and all
governments should pass the thresholds for the regional compacts to be
implemented. It also requires significant coordination between the
administrating bodies set up in each country to handle the Millennium
Challenge Accounts. While these factors would complicate the approval
process, it would not make it impossible for regional compacts to be
approved and managed.
the performance indicators
These indicators are an important aspect of the work the MCC does,
and a fundamental requirement for the MCC effect. There are several
aspects of the indicators that are worth considering, both to refine
how they are used in the future and to understand their limitations.
Importantly, the indicators are used as a transparent and easily
identifiable cutoff for eligibility. In theory, this means that
compacts are only awarded to those countries truly committed to good
governance, economic freedoms, and social opportunities. It also means
that countries have tangible goals they can work toward. Finally, the
aggregate of the indicators--the MCC scorecards, which the MCC
publishes for all countries that fall in the income categories every
year--is also used by private and public actors alike to gauge how well
a country performs in governance, economic freedoms, and social
opportunities.
As a whole, the general level across all indicators will provide an
insight into country performance in these aspects. Once we look at
individual indicators, however, it becomes more troublesome to gauge
the current conditions, because some of the indicators simply are not
precise enough. This lack of precision does not stem from a lack of
effort to measure the indicators well, but rather from a lack of data
and, more importantly, from the fact that many of these indicators are
trying to capture things that are very difficult to quantify. Judging a
country's performance, and especially comparing the performance between
countries, based on a single indicator, is unwise.
Consequently, the indicators are only useful for the MCC's purposes
as a grouping of indicators, the total of which forms the scorecard.
Refinements can surely be made to the specific indicators used, but as
a whole, the MCC's use of the indicators is in line with the original
intention of the President and the Congress. Our biggest contribution
to the MCC here would be to encourage the MCC to upgrade to new
measures as they become available, but in a transparent and timely
manner. For the corruption indicator however, congressional approval is
necessary.
The trouble comes when the indicators are used for other purposes
than meeting the qualification threshold. Because the indicators are as
crude as they are on their own, measuring the contribution of a
threshold program for example--those designed to help countries in
areas where they struggle--is difficult. What would be even worse is if
we were to judge a compact based on whether it improved the indicators,
because that is not the purpose of the compact--its purpose to is
create economic growth and poverty alleviation. The indicators simply
are not appropriate for evaluating the outcomes of programs, and they
were never intended to be by the President and the Congress.
Moreover, the use of the indicators as a measure of the success of
any development program is problematic. Beyond the timelag in
measurement mentioned above, another and much more important timelag
exists. To put it simply: development takes time. Attempting to
quantify the success of programs in the next fiscal year is often
nonsensical. In the case of South Korea, USAID helped lay the
foundation that eventually enabled the South Korean economy to soar;
the true extent of the benefits from USAID programs in South Korea were
not known for at least two decades. With respect to governance and
social opportunities in particular, perceptions and attitudes are among
the major impediments to improvements, but perceptions and attitudes
take a long time to change. Even where the MCC provides the tools for
positive change, much of the benefit will not materialize for years.
A related issue pertains to the difference between output and
outcomes in development. Output is oftentimes easy to measure: how many
miles of road built, how many farmers trained, how many village
councils established? However, what we ultimately want to know--what we
term outcomes--is whether the road improved market access and reduced
poverty, whether the farmers that were trained translated their
training into improved crop yields or whether the village council were
in fact inclusive and effective at using their mandate. Measuring the
output does not guaranty a good outcome--nor does the absence of
outputs mean that there cannot be successful outcomes. The
overmeasuring of development thus yields little useful information and
instead creates a significant amount of paperwork that serves no good
purpose.
The MCC began with 17 indicators, and three more have since been
added to the MCC's scorecard. It is hard to disagree with the
indicators, either because they are morally important, or because we
believe a new indicator is connected to economic growth. If we know the
phenomenon that the indicator measures is important to economic growth,
why should we not include it on the scorecard? The answer is again that
the fixation on measurement is hurting the MCC's ability to carry out
good compacts, and it also causes undue stress on the governments vying
for a compact. Because the scorecard should be read as a whole and not
as individual indicators, adding more indicators does not necessarily
improve compact selection--it does, however, mean that potential
recipients have to spread their already sparse government capacity to
more indicators. This dilutes the efforts that governments are able to
expend on individual areas, hurting progress. Most developing countries
have limited capacity and weak institutions--even the ones which rank
high in the indicators--which means their capacity to reform and make
improvements in their countries have limitations. Piling one indicator
on top of another will overwhelm their capacity to focus their efforts
on a few reforms of the greatest significance. And, it creates a
greater burden on MCC to compile and publish the scorecards with a
greater number of indicators.
Without arguing that any specific indicators are unimportant to
economic growth, we should reduce the amount of indicators on the
scorecard (or at least freeze the number of the indicators at their
present level) to improve the effectiveness of the scorecard on
governments' behaviors and to reduce the adverse effects
overmeasurement will have on potential recipients.
The MCC's reliance on a certain level of several indicators has led
some observers to be concerned with the ``conditionality'' of MCC
compacts, because conditionality was the main culprit behind the
failure of much aid spending from the World Bank and other agencies in
the 1980s and 1990s. However, the conditionality of the MCC is
fundamentally different in several ways.
First, MCC conditionality takes place before compact-signing and
without guarantees that a compact will be awarded, by excluding those
countries that do not meet the requirements for application. Applying
for a compact and moving towards the indicator levels is entirely
voluntary--if a country does not find it in its own interest to enact
the reforms necessary, it is not adversely affected, except by forgoing
the potential funding.
In that same vein, the MCC's conditionality does not force specific
policy prescriptions on countries. The MCC's conditionality is an ``end
goal'' of a certain level in the indicators, as opposed to specific
methods for reaching that goal. The World Bank prescribes specific (and
sometimes inappropriate) policies that countries are forced to follow,
but for the MCC indicators, it is largely up to countries to decide how
to improve the indicators in ways which are most compatible with local
circumstances.
Moreover, World Bank (and International Monetary Fund)
conditionality in the 1980s and 1990s was often enforced for countries
eligible for loans without which the recipient governments could not
function, such as loans to sustain basic public goods or loans to help
stabilize a country's currency during a time of crisis. Countries had
very few choices but to accept the conditions, since without the loans
and grants, the situation could deteriorate past a point of no return.
In practice countries would agree to a laundry list of World Bank
reforms which they would not end up implementing. In the case of the
MCC, compacts cannot be held ransom in the same way, because they are
designed to be above and beyond other efforts by USAID, the World Bank
and other aid agencies, and because the compacts are not designed to
sustain governments, but rather to create economic growth and reduce
poverty.
In conclusion, the MCC has demonstrated success in achieving
President Bush and the Congress' original aspirational goals of the
authorizing legislation, but the legislation can be refined with some
of proposed amendments suggested in this testimony. Thank you for the
opportunity to speak today.
The Chairman. Thank you. Thank you very much.
Dr. Birdsall.
If I could just, so we do not leave that hanging, we are
going to want to meet with you privately to ascertain whether
what you just said relative to some of the things that may be
happening at MCC and USAID are occurring. We want to set that
meeting up, and Senator Cardin and I both will attend that,
okay? Thank you.
STATEMENT OF NANCY BIRDSALL, PH.D., PRESIDENT, CENTER FOR
GLOBAL DEVELOPMENT, WASHINGTON, DC
Dr. Birdsall. Chairman Corker, Ranking Member Cardin,
members of the committee, thank you for this timely hearing. I
am very privileged to have the chance to testify.
When MCC was created by the Bush administration, it was a
bold bipartisan experiment, as we have heard, consistent with
American values and foreign policy objectives. The idea was to
support countries where the need is great and where foreign aid
is most likely to be effective.
What is equally important, as we have heard, about the
Agency is that over the last decade, MCC has set the standard
in the aid community in other ways: using evidence to guide
decisionmaking, focusing on results, adhering (as Congressman
Kolbe said), doggedly to transparency, and partnering with
countries in a way that ensures that countries take the lead in
their own development. In quantitative assessments by my
organization and the Brookings Institution, MCC has
consistently scored near the top of more than 150 aid agencies
around the world on aid effectiveness measures.
Today I want to focus on two areas where congressional
action is needed to allow MCC to continue to build on its
record of success, and two areas where continued support from
Congress will help the Agency deliver even more of a
development impact. And I will close with a plea to Congress
about how to help USAID move in the direction by applying some
lessons--the lessons learned from MCC.
First, regional compacts, which we have heard much about. I
recommend that Congress authorize MCC to undertake a pilot
project at the regional level with separate and additional
funds above its country-based compact funds. Why? As you have
heard, MCC has been active on the African continent, especially
on major infrastructure investments, like roads and power. But
with 54 small economies, the region's market is highly
fragmented. The economic future for Africa is, therefore, in
the kind of cross-border investments in Africa that you could
compare to what the U.S. did during the Eisenhower
administration with the interstate highway system.
Cross-border power projects in West Africa are probably the
biggest impact opportunity for MCC right now. But the
experience of the World Bank and the multilateral development
banks on regional projects involving two or more countries, the
experience is it is really hard to do. Negotiations are far
more complex and take longer, and transactions costs and
administrative costs are higher than with single country
projects.
The point, however, is that MCC has two big advantages over
the multilateral development banks. It has grant financing and
the confidence that the U.S. government and U.S. businesses are
involved in these projects. That is an asset, as Dana Hyde
said. I am, therefore, pleased that Congress is considering
concurrent compact authority for MCC. Without concurrent
authority, there is little incentive for the Agency and little
incentive for countries that are eligible to go regional
despite the huge potential returns.
Second, the issue of country candidacy. The MCC mandate is
to focus on poor countries, itself a good idea, below currently
GNI per capita of just over $4,000. More fundamentally, I think
it is to work with responsible governments in countries with a
lot of poor people to help them grow into middle class
societies, where the middle class eventually helps entrench and
sustain responsible government without outside support.
The problem is that the current cutoff leaves out still
poor countries that in every other respect would qualify for
MCC compacts, and where the vast number of people live well
below the United States poverty line, well short of what we
would call even lower middle class. Consider Tunisia, a
struggling democracy in a difficult region where most people
live well below the U.S. poverty line, or Mongolia, which at
the moment is at risk of losing a second compact because its
per capita income GNI has risen, where most people are still
poor and poorly educated, but where GNI is above the cutoff
slightly because of recent foreign investment in its mining
sector. U.S. support can help build a good government there--it
can help a good government there, create the institutions, and
make the investments that are still needed desperately on
roads, schools, et cetera, that will spread that wealth to its
people. But it will take time, in effect, building a middle
class society. So I recommend that Congress ask the MCC to
explore other measures to define country candidacy in terms of
need that are more sensible reflections of a country's long-run
needs.
Now, I want to go to two issues where Congress can
encourage even greater MCC impact. One is a focus on funding
measureable, verified development outcomes. I recommend that
Congress encourage MCC's ongoing efforts to pilot what we call
pay for performance approaches, like cash on delivery aid and
development impact bonds.
With this approach, U.S. taxpayer money goes out the door
only when development outcomes are achieved, like the number of
additional households with affordable electricity access, not
just when new--not just paying for new power lines, but paying
for the outcome that we want of access to electricity. This
kind of approach definitely creates greater country ownership
and accountability of the kind that MCC has pushed on so
effectively.
The second issue where Congress can help with its support
is the idea of subsequent compact, second-round compacts. I
recommend Congress continue to allow MCC to enter into
subsequent compacts. Development simply does not happen in five
years even with the most successful partnership. Subsequent
compacts should not be automatic. MCC should have the
discretion to enter into subsequent compacts where warranted.
Finally, let me close by encouraging Congress to take the
MCC ethos beyond MCC. MCC has benefited from the start with the
clear mandate to focus on aid effectiveness. USAID in contrast
is burdened after over 50 years with an accumulation of
congressional earmarks by country and sector, as well as other
directives. I recommend Congress ask USAID to prepare a review
of the directives and informal mandates that reduce its
flexibility and undermine its ability--the ability of its
excellent staff to maximize the impact of American taxpayers'
foreign aid dollars.
Thank you very much.
[The prepared statement of Dr. Birdsall follows:]
Prepared Statement of Nancy Birdsall\1\
Chairman Corker, Ranking Member Cardin, and members of the
Committee, thank you for the opportunity to testify on the Millennium
Challenge Corporation, a small but critical agency when it comes to
U.S. efforts to reduce poverty and promote economic growth abroad. I am
honored to be here and very pleased the Committee is holding this
hearing.
My name is Nancy Birdsall and I am the president of the Center for
Global Development, an independent, non-partisan think tank
headquartered here in Washington, DC. CGD conducts research and
produces analytical outputs aimed at improving the policies and actions
of rich countries, including the United States, that affect developing
countries.
The Center has been closely watching MCC from the agency's
inception. And since MCC celebrated its tenth year anniversary just
last year, this seems a fitting moment to reflect on its record and
consider its future.
MCC was a bold experiment when it was created by President George
W. Bush in 2004. The concept was simple: channel U.S. taxpayer money to
poor countries that have responsible governments and sensible
policies--those that encourage private sector activity, invest in
schooling and health, fight corruption, and support democratic rights.
This is consistent with American values and foreign policy objectives.
Evidence suggests that these are the countries where foreign aid is
most likely to make a difference by encouraging the policy changes that
support longrun, sustained, poverty-reducing growth.
MCC's approach to delivering foreign assistance has set a standard
for aid agencies around the world. It uses evidence to guide
decisionmaking; it focuses on achieving and measuring results,
evaluating the vast majority of its programs; it gives partner
countries the lead role in identifying and implementing its
investments; and, overarching all this, it is among the most
transparent donors worldwide. In quantitative assessments of the
efficiency and effectiveness of more than 100 global aid agencies
conducted by the Center of Global Development with the Brookings
Institution, MCC consistently scores near the top of aid agencies
worldwide on a set of aid effectiveness measures.\2\
Today, I will focus on two areas where congressional action is
needed to allow MCC to build on its strong record of success and two
areas where continued support from Congress will help the agency
deliver even more development impact. I will close with a plea for
Congress to help other U.S. agencies apply lessons learned from the
MCC.
(1) regional compacts
Congress should authorize concurrent compact authority, and
encourage MCC to pursue a regional pilot project with separate and
additional funds above its country-based compact funds. Since regional
projects bring an extra set of challenges, I recommend the agency start
with a single pilot project accompanied by an independent review.
MCC has a strong record with road and power projects in bilateral
compacts, but in regions like sub-Saharan Africa with many small
economies and highly fragmented markets, some of the highest-return,
growth-spurring investments only result from facilitating regional
connections. In the U.S. context, for example, the Eisenhower
Interstate Highway System was a federal initiative that linked people
and markets across states--which no single State could have managed or
would have financed.
To date, MCC has not been able to help eligible countries benefit
from these kinds of returns because neighboring countries are rarely at
the same stage of compact development at the same time; one country
often has a compact underway by the time its neighbor is eligible.
Concurrent compact authority (making countries eligible for a regional
compact concurrent with a country compact covering some or all of the
same period) offers a relatively simple fix to this shortcoming in the
current MCC mandate.
Lack of this authority has impeded MCC's ability to encourage the
necessary and often complicated negotiations between or among countries
that is central to the planning and design of a cross-border
investment--particularly since governments will generally choose to
move expeditiously to lock in a national compact, rather than risk the
more complicated, if higher-return, potential of a regional deal.
Outside funders do not have adequate incentives to work with
countries to develop cross-border, regional projects despite their high
returns. The multilateral development banks' (MDBs) still-limited
experience explains why. With more than one partner country involved,
negotiations are complex and upfront transaction costs mount quickly.
The projects have long planning and implementation periods, and require
strong and continuous implementation support.\3\ Even so, successes are
possible, as demonstrated by the Ethiopia-Kenya Interconnection energy
project, supported by the African Development Bank and the SIEPAC power
grid in Central America, supported by the Inter-American Development
Bank.\4\
MCC has at least two advantages over other funders of large, cross-
border investments in low-income countries. First, its grant financing
eliminates the need to agree on the allocation of a repayment burden
among beneficiary countries. Second, MCC's work on energy projects
under the Power Africa umbrella indicates that the backing of the U.S.
Government is a powerful force in generating confidence on the part of
both private investors and partner governments in ``getting to yes'' on
a complex investment deal.
It's easy to think about how regional engagement might be
beneficial in the context of electricity. The logic of a shared grid
across borders is clear. To work, countries involved need to commit to
a strong regulatory and financial structure outside the auspices of a
single government for power trading and pricing.\5\ Grant money can
play an important role in supporting upfront technical work and provide
comfort to private investors in the guarantee of purchasing power
agreements.
As many of you have recognized with your support of the Electrify
Africa bill, reliable, affordable energy access is a massive constraint
to growth in sub-Saharan Africa and elsewhere. A future regional power
project covering Liberia, Cote d'Ivoire, and Ghana might be one
promising pilot, for instance. MCC already has considerable experience
with power under Power Africa and regional power investments in West
and Southern Africa show potential.\6\
(2) a more sensible measure of need for country candidacy
Congress should allow MCC to explore whether an alternative measure
of need to Gross National Income per capita (GNI) could produce a
candidate pool that better reflects the significant poverty and
development need in potential partner countries; one option is median
daily consumption per person.\7\
As set out in the agency's authorizing legislation, only countries
with a GNI below $4,125 (for FY2016) comprise the starting candidate
pool for MCC engagement. Millions of people who are poor by any
reasonable standard live in countries above this cutoff; and many
countries above that level, despite good governance today, are not yet
on a secure trajectory of sustained growth. American taxpayers want to
support building middle class, democratic societies in the developing
world, in which good government emerges and persists as income-secure
taxpayers have the wherewithal to hold their governments
accountable.\8\ Many countries with GNI per capita above $4,125 are not
yet middle class societies.\9\ Consider Tunisia, a struggling democracy
where per capita GNI is above MCC's cutoff. Yet one half of its
population survives on less than $8 a day (Tunisia's median consumption
level), compared to median (income) in the United States more than 10
times higher at over $50 per person a day.\10\ The democratic
government of Tunisia needs support if it is to stay on a trajectory of
sustained, broad-based growth in a difficult region. Or Mongolia, also
with median consumption of about $8, whose GNI per capita exceeds MCC's
cutoff principally because of high foreign investment in its mining
sectors, especially coal, copper, and gold. In Mongolia, it will take
years to create the institutions and make the investments in health,
education, roads, and energy that will bring the benefits of its
newfound wealth to all of its people.
No single measure is perfect. Median consumption or income can be
low because of a high concentration of income at the top of the
distribution. But a country with low median income where corruption or
tax or other policies fail to address high inequality would not be
eligible for an MCC compact given the standards embedded in the MCC
scorecard. Were MCC to adopt a measure like median income as a
determinant of candidacy, the agency should consider investment grade
and restrict partnerships with certain investment grade countries.
Where the use of its grant resources is appropriate, MCC could target
its funds to crowding in private investment.
(3) focus on funding measurable, verified development outcomes
Congress should support MCC in its ongoing efforts to pilot pay-
for-performance approaches, such as Cash on Delivery Aid. These are
agreements, developed by my colleagues and me at the Center for Global
Development, in which donor agencies pay a partner country for the
delivery of independently measurable and verified preagreed outcomes,
like the number of additional households with affordable electricity
access or average gains in learning of 10-year olds, rather than inputs
such as new power lines or schools built.
Another approach--one which MCC is also exploring--is Development
Impact Bonds (DIBs), also developed in part by the Center for Global
Development. DIBs are also an outcomes-based approach in which private
investors are invited to finance investments up front and are repaid if
and when measurable results are verified. Given limited U.S. assistance
dollars, this leveraging of private sector impact investors should be
particularly welcome. Other donors have begun to experiment with pay-
for-performance schemes--including the World Bank (Program-for-Results)
and the UK's Department for International Development.
Pay-for-performance schemes fit well with many aspects of MCC's
model. They promote greater country ownership and encourage innovation
by providing partner governments with increased flexibility to find the
best ways, within their own local context, to achieve agreed-upon
targets. The approach is particularly useful where countries need to
implement politically or bureaucratically difficult reforms if expected
results or outcomes are to be gained. Political and institutional
reforms are difficult to measure. It is most effective for countries to
undertake them because doing so is key to increasing, for example,
energy access or raising agricultural productivity or reducing waiting
time for ships and trucks at ports and borders.
MCC has positioned itself on the cutting edge of thinking about
results; to remain there it should push forward in its exploration of
some of these new ways to link payments to outcomes.
(4) more impactful partnerships through subsequent compacts
Congress should continue to allow MCC to enter into subsequent
compacts. Development simply does not happen in 5 years, even with the
most successful country partnership.
MCC was set up to work with well-governed developing countries. But
development is a long-term project. It took Korea, one of the world's
fastest growing countries in the 1960s and 1970s, something like 30
years to become what it is today: a middle class democracy. Tanzania
(which is currently eligible for a second compact) would have needed to
increase its per capita income by over 900 percent--over 50 percent per
year--during the course of its first compact to reach upper-middle
income status. More to the point, subsequent compacts can also
capitalize on institutionalized relationships and lessons learned.
MCC's strict, 5-year compact timeline is a feature that sets it
apart from other U.S. Government agencies. But the importance of the
timeline is in its application to each compact--providing an incentive
for timely implementation and forcing reassessment of continued
engagement--not to MCC's overall relationship with a country. Second
compacts (and potentially beyond) should not be automatic; but where
warranted, a longer relationship should be welcomed.
(5) taking mcc beyond mcc
Congress should help other U.S. development agencies rise to the
standard that MCC has set.
USAID and the State Department, which together control three
quarters of U.S. foreign assistance dollars, should--for far more of
their portfolio\11\--clearly demonstrate value for money, apply greater
country selectivity, give partner countries more responsibility for
identifying and managing aid investments, and further their commitment
to transparency and rigorous evaluation.
This is easier said than done. MCC benefited from a fresh start as
a new agency 12 years ago, and many of the features that have
contributed to its excellence had been learned over many years in the
aid community, and were hard-wired into MCC's culture and mandate from
its inception. Compared to USAID, which is burdened with an
accumulation over many decades of congressional directives on spending
by country and sector as well as others, MCC has the flexibility to
make reasonable demands on partner countries, to work with them on
their own priorities, and to target results-focused investments (though
still with appropriate oversight and quality controls).\12\
Congress must be a willing partner for a meaningful shift to take
place throughout the U.S. development apparatus. A review of the
external constraints that prevent USAID from exercising greater
flexibility would be a good start toward building on the lessons of
MCC. I also recommend that Congress request a comprehensive review of
directives and informal mandates that constrain USAID and undermine key
principles of aid effectiveness.\13\
conclusion
In conclusion, I hope that Congress will continue its strong
bipartisan support for MCC and encourage the agency to continue to
adhere to its model. But I also urge Congress to push MCC to explore
innovations within its model that would allow the agency to have even
greater impact.
----------------
Notes
\1\ Biography and CV: http://www.cgdev.org/expert/nancy-birdsall.
\2\ Nancy Birdsall and Homi Kharas. ``The Quality of Official
Development Assistance (QuODA).'' Washington, DC: Brookings Institution
and Center for Global Development, 2014.
\3\ World Bank. (2013).``Issues Remaining from the IDA16 Mid-Term
Review.'' IDA Resource Mobilization Department Concessional Finance and
Global Partnerships. Washington, DC: World Bank.
\4\ The Kenya-Ethiopia energy project supports a 1,068 km
transmission line from Ethiopia to Kenya and focuses on cost effective
and clean energy sources.
\5\ World Bank. (2008). Building Regional Power Pools: A Toolkit.
Washington, DC: World Bank.
\6\ The Southern Africa and West African Power Pools are examples.
\7\ Data on median consumption or income is now available for more
than 100 countries as a result of more frequent household surveys in
the developing world. http://iresearch.worldbank.org/PovcalNet/
index.htm?0,3
\8\ Nancy Birdsall, ``Does the Rise of the Middle Class Lock in
Good Government in the Developing World?''. European Journal of
Development Research 27, 217-229 (April 2015).
\9\ Nancy Birdsall, Nora Lustig and Christian Meyer, The
Strugglers: The New Poor in Latin America?, World Development, Volume
60, August 2014, Pages 132-146, ISSN 0305-750X, http://dx.doi.org/
10.1016/j.worlddev.2014.03.019.
\10\ This is a rough estimate; median household income in the U.S.
is about $50,000. At 2.5 people per household, per person median is
about $20,000, or over $50 a day, http://www.census.gov/quickfacts/
table/PST045214/00. Median consumption will be somewhat lower.
\11\ MCC's set of standard practices is not systematically
appropriate for all U.S. foreign assistance objectives and programs.
USAID has important responsibility for emergency relief and
humanitarian aid in many countries that would not be eligible for MCC
support. In countries that are eligible, some efforts, like expanding
the use of constraints analysis, a commitment made in the 2015
Quadrennial Diplomacy and Development Review, are more relevant for
growth-focused programming. However, other aspects, such as cost-
benefit-effectiveness analysis, country participation, evaluation, and
transparency, can be applied more broadly, and across sectors and
initiatives.
\12\ Andrew Natsios, for example, also complains of the effects of
the counter-bureaucracy of inspector generals that have increased risk
aversion at USAID. See ``The Clash of the Counter-bureaucracy and
Development,'' Washington, DC: Center for Global Development, 2010.
\13\ For one example of how such a review might be structured,
see, Casey Dunning and Ben Leo. ``Making USAID Fit for Purpose: A
Proposal for a Top-to-Bottom Program Review.'' White House and the
World. Washington, DC: Center for Global Development, 2015.
Senator Cardin [presiding]. Thank you all for your
testimony. Senator Corker has gone to vote. There is a vote on
right now. I am going to ask questions for the record, so I
will pass. I will want to follow up on the issue Mr. Natsios
raised on the objectivity of decisionmaking and, Congressman
Kolbe, on your point about how we can improve the corruption
efforts--anticorruption efforts by MCC.
Senator Perdue.
Senator Perdue. I will be very brief. We have to go make
this vote. Thank you for your testimony and your work. As I
mentioned to the earlier panel, I am concerned about the fact
that because 40 percent of the money we have spent in the last
seven years is borrowed, we have borrowed some $50 billion to
support our USAID and our MCC work over the last just seven
years alone.
And so, Congressman, I applaud what you guys did. It is
funny how fast 10 years goes by. In that period of time, the
earlier testimony was that of the programs that we have done,
some 58 are averaging about 16 percent return versus the 10
percent threshold. In that period of time, though, there are
some 21 projects that were done without having met the
threshold for internal rate of return or the benefit cost
analysis was not even calculated. And in addition, there were
two specific projects where it looks like there was undue
influence for strategic reasons for approval for a project
without MCC or without MCC doing a benefit cost analysis.
So my question goes back to the original thinking. Given
that over that period of time we spent--of a billion dollars a
year, we spent $100 million on our own overhead in managing
that, which means in the last 10 years we spent a billion
dollars in overhead that did not help--did not go to any direct
help. What is the--what was the original thinking, and how was
that debate won with regard to why MCC versus charging a part
of USAID to focus on eliminating poverty through economic
growth?
Mr. Kolbe. Well, I will take a stab at it. I am sure Mr.
Natsios will also have an answer. I think the--first of all, I
want to say that I do disagree a little bit with the CEO, Ms.
Hyde, in saying that there has never been any pressure on MCC.
That is not true. There has been pressure from the get-go
during the Bush administration as well as ongoing, and I think
it is a natural thing that the State Department and others are
going to say, but, you know, we have some strategic interests.
Senator Perdue. But do we not have to protect----
Mr. Kolbe. That is what we need to do is--what the role of
Congress is to make sure that it is protected from doing that.
And I think the outside independent private sector board
members have been the critical factor in making sure that
happens.
Senator Perdue. Can I ask you another question? I do not
want to get you off that line of answer, but the fact that the
board reports directly to the Secretary.
Mr. Kolbe. He is chairman of the board.
Senator Perdue. He is chairman, so that means that----
Mr. Kolbe. Yes.
Senator Perdue [continuing]. There is no undersecretary or
assistant secretary that has responsibility for MCC. Is that
correct?
Mr. Kolbe. That is correct.
Senator Perdue. Is that working out in your mind in terms
of operational review and maintaining that independence?
Mr. Kolbe. I think it has worked as best that it can. I
mean, I guess you could think of other places that it might
report, but I think it is logical that the Secretary of State
be the chairman of it. And I think the fact that it has a board
that includes several agencies plus the four outside members, I
think has been critical to maintaining the independence of the
board.
So I think by and large I would agree with Ms. Hyde that it
has been successful in resisting, for the most part, that
pressure, not all of it, but for the most part it has been
successful in doing that.
To go to the thrust of your original question, the idea of
it at the time we created it was that USAID had a different
mission, and this was--the idea here was to work with countries
that had a commitment to governance, to good governance, and
focus solely on that so that they met objective criteria. And I
can remember from the day we passed that legislation, a line of
ambassadors outside my door lining up to say how do we get in.
How are we going to get into this? And I would say it is not up
to me. I am not going to get you into it. It is going to be
your meeting these criteria that is going to do it.
So I think it has been successful in that sense.
Senator Perdue. Thank you. Mr. Natsios?
Mr. Natsios. USAID was deeply involved in the initial
drafting. In the original conception of this, USAID was
supposed to run it, and there were disputes among the White
House staff we were working with about who should run the MCC.
I do not want to go into it all. The President actually twice
told his staff he did not want to have two foreign aid
agencies, and he did not understand why the staff kept
insisting.
Senator Perdue. Well, the question is what should we do?
What is the best use of the money?
Mr. Natsios. Well, USAID administrators, Peter McPherson,
who was USAID administrator under Reagan, and Brian Atwood
under President Clinton and I argued in a an article we wrote
for Foreign Affairs in late 2008 that the U.S. Government
should go back to the model for managing aid under President
Nixon when he became President. He recentralized all of the aid
programs in one place, USAID.
If you wanted to get other domestic agencies involved--for
example the U.S. Geological Survey has seismologists. I mean,
USAID does not have seismologists, so USAID would sign
interagency agreements to bring their expertise into
development programs on disaster preparedness. These domestic
agencies had to report to AID and perform or they would be shut
off from money.
That is not the case now. We have two dozen different
agencies in the Federal government doing aid programs all over
the world, and they do not report to anyone frankly.
Senator Perdue. I understand.
Mr. Natsios. And they do not report to you, I might add.
These are domestic--they report to domestic committees, and
oversight committees domestically do not know anything about
this. It is the Foreign Affairs committees that should have the
oversight, not all these domestic oversight committees of the
Congress in my view.
So I have advocated with my colleagues--with Brian Atwood
and Peter McPherson in an article that came out in Foreign
Affairs in October/November of 2008 to restructure the whole
system very substantially to put these functions back in USAID
the way--and Nixon did this, and I might add, with support and
help from Hubert Humphrey, interestingly enough. The old
adversaries, they got together on these reforms in the--in the
late 1960s after Nixon had defeated Humphrey for the
Presidency. But on this they agreed. We needed a strong aid
program.
Two, it is not quite true to say this is new. In the 1980s
and the 1990s, we have the Development Fund for Africa, and it
was performance based. A country had to perform to get the
funding. This concept is not new. We had in place, and because
of all the massive cuts in aid in the 1990s after the end of
the Cold War, the whole program was shut down, and the program
collapsed.
So there is--there are roots in the past, and we do know it
can have an effect because we can show that from the record of
the 1980s and early 1990s.
Senator Perdue. Thank you. Thank you, Mr. Chairman.
Senator Cardin. We are going to go into a very short
recess. The chairman will back in a moment to continue. There
he is. We are not going to go into recess.
The Chairman [presiding]. Thank you all. And whether there
are a lot of members here or not, it is good for our record. It
is much appreciated. I know you will have other questions. I
ran to go vote. I know they are going to do the same. I doubt
either one of them will be back. And I did not hear the
question Senator Perdue, so I apologize if I end up being
redundant.
The other two witnesses--Congressman Kolbe and Dr.
Birdsall--is it your opinion that, in essence, the
effectiveness of USAID programs, which I know is not the focus
today, really has been in many ways minimized due to State's
involvement in other strategic interests? Is that something
that the two of you share?
Dr. Birdsall. I think it is actually reasonable to see some
of the work of USAID as directed to countries that are
strategically important at key moments for the U.S. I do not
think that is the issue. I think the difference between MCC and
USAID is that MCC had a fresh start. It is not encumbered
with--I think you were not here when I said that USAID after 50
years is encumbered with a lot of earmarks, and directives, and
informal mandates.
And, therefore, USAID as a bureaucracy has grown various
forms of risk aversion, what Andrew Natsios calls the counter
bureaucracy, which is the inspector general functions. All of
these make sense, but after 50 years I do believe it is time to
ask USAID to come back to Congress and explain what of these
encumbrances might help liberate it to behave more along the
lines of the MCC model in those countries that are ready with
good government to maximize the impact of U.S. taxpayer
support. That is the difference.
So I would not support at the moment moving the MCC,
somehow sticking it inside USAID or sticking its functions
inside USAID. I think that would be misguided. We have
something that works. It works very well. It is adhering to the
model that Congress mandated at the time of the legislation.
And, you know, I would move in the direction of helping USAID
undo some of the accretion of burdens that it labors under and
that make it less effective.
The Chairman. Congressman Kolbe.
Mr. Kolbe. Well, I would agree that I do not think that the
answer is to put the MCC into USAID. I would disagree with my
good friend, Andrew, on that. He is right that there are
precedents for this. There are roots that are found elsewhere.
But I think the differences, as he said, there are some 30, 40,
maybe as many as 50 different agencies in the U.S. government
that have some of its finger into the area of foreign
assistance in one way or the other. So the addition of the MCC
is not as though you are really adding that much more to the--
to the explosion of these agencies.
Why I think MCC is different is that it has taken the
criteria, performance based as he talked about, in USAID. It
has taken it and put it into writing into the law, into the
standards, and I think that has made a difference. It has had--
instead of changing with each country or with each kind of
project you go to, there is a set of criteria to qualify before
you even get to the threshold. And I think that has made a huge
difference in these countries and in the kind of assistance
that we have given.
And I think it has been transformational. If you were to
ask me the single most important thing that I think USAID or
that the MCC has been able to do has been to change the way
these countries think and to try to get into the MCC to make
changes internally in their own laws in their countries.
Mr. Natsios. Could I just add something, Senator?
The Chairman. Yes, sir.
Mr. Natsios. There are basically four or five different
ways to allocate money through aid programs, regardless of
which donor government you are in--Britain, Germany, the United
States, Canada--countries that have aid programs or the World
Bank. One is a performance-based system. The Development Fund
for Africa that I mentioned earlier in the Reagan
administration and First Bush administration were performance
based. The MCC is performance based.
There are need-based programs. A third of all our aid, $10
billion, goes to health programs, about a third. It is the
largest sector by far. It is a need-based program. You would
not send aid to a country based on their performance for
malaria programming. What if they did not have any malaria? I
mean, there is no point in having a malaria program if there is
no malaria in the country.
We respond to health needs, and the AID program actually
has a rigorous set of indicators that it uses to allocate money
unless the State Department interferes. And when I say they
interfere, we should have had an HIV/AIDS program in India or
Russia because they had the highest rates of increase. When I
was AID administrator, the decision was made over our
objections to put it in Vietnam. There was no reason to put in
Vietnam except a strategic one, which is we wanted an aid
program there, and we did not want anybody complaining about it
in Congress.
But from a technical standpoint, it should not have been in
Vietnam. It should have been India or Russia where the
infection rate increases were much greater. For the most part,
the HIV/AIDS program is where it should be, but there was an
exception made in this particular case that was a problem.
So the third way in which we allocate is based on interest,
our national interests, and that is appropriate. And AID should
run those programs, but it should come out of the ESF account.
Up until the 1990s, when policymakers had a strategy, like
Egypt, or Jordan, or Israel, that money all came out of ESF.
Now, we take it out of the Development Assistance Account. We
take it, and we use the MCC for it, too.
In one case, the U.S. ambassador to the country and the
USAID mission director opposed their own country getting an MCC
compact because of the high level of corruption. They did not
want to say it in cables because they were afraid their
opposition would be leaked and it would cause a huge furor.
They came back to Washington to try to stop the compact because
they said the country clearly did not qualify.
The Chairman. This is within MCC?
Mr. Natsios. This is within MCC, yes. And I can tell you
from direct experience they told me what they said, and they
were ignored. I know why they did it, State did it, for
counterterrorism reasons.
The Chairman. But there is an MCC board.
Mr. Natsios. No, the board was not--the board ignored the
indicators and approved the compact. You know, the thing is I
used to sit in those meetings as AID administrator. The
chairman of the board is the Secretary of State. Just think of
who the four secretaries of state who were under the MCC: Colin
Powell, a historic figure, Condi Rice, Senator Clinton, and
John Kerry. You are going to sit there and argue as a Federal
official with the Secretary of State sitting there who is
insisting that they ignore the indicators?
I think maybe having the Secretary of State appoint
someone, but not him or herself sitting as the chairman of the
board, would be much wiser.
The Chairman. Do the other two witnesses agree?
Mr. Kolbe. It is an interesting concept, and in an ideal
world I think that would be right. But I do not think
practically speaking you could substitute for the Secretary of
State. I think the Secretary of State has to be in that
position.
The Chairman. And tell me why you say that.
Mr. Kolbe. Just because I think of the role that the
Secretary of State plays in the overall foreign policy of the
United States, and I think it is the most significant position
and the most significant role. And I think it would be
difficult to substitute somebody else in that position. I think
politically it is difficult. I am not sure it could fly here in
Congress or fly with any administration.
Mr. Natsios. I agree with you. I do not think it would fly
politically.
Dr. Birdsall. There are in the world----
The Chairman. So let me just if I could, and I want to hear
from you, too, Dr. Birdsall. But it seems to me that what you
are saying validates some of the criticisms directed at MCC
that some of the decisions that they are making are not
economic, but based on other interests. And it seems to me that
a great way of nullifying that would be to ensure that the
Board was, in fact, truly independent. So I am a little
confused by the response.
Mr. Kolbe. Well, I think maybe you were not in the room
when I said that I did disagree with Ms. Hyde in that there had
not been pressure on the CEO or on the MCC or to not succumb. I
agree with Andrew that there have been times, and I think there
have been times when it has succumbed to that pressure.
But by and large, I think it has worked. I think it has
worked--in terms of what it was designed to do I think it has
worked. As he has pointed out, there are other projects that
are specifically designed to focus on our national security
needs, and those, as he said, should be done out of ESF.
But I think the Millennium Challenge Corporation, it is not
perfect, but I do think it has worked by and large as well as
can be expected, and it can be improved. And as I said in my
testimony, I think one of the roles of this committee and of
Congress is to be sure that it does have the independence. One
of the things that could be considered would be to add another
outside director so that you would have five independent
directors and four from government agencies. It was
deliberately done the other way around.
I might add when the draft came up from the Bush
administration, it had zero outside directors on it. It was all
government. And that was one of the things that we changed to
make sure there were outside directors for it.
The Chairman. How are those outside board members selected
today?
Mr. Kolbe. They are selected through a list that is
provided by the Majority Leader and the Speaker of the House to
the President, and he selects from that. So it is bipartisan.
The Chairman. But, in essence, the administration decides
who is on the board.
Mr. Kolbe. Well, but picking from a list that is submitted
by the leadership in Congress.
The Chairman. And how broad is that list typically?
Mr. Kolbe. It is pretty small, the number that is
submitted.
The Chairman. So then by virtue of that, basically the two
leaders are deciding.
Mr. Kolbe. Correct.
The Chairman. They submit two names each, and----
Mr. Kolbe. And the minority leaders.
The Chairman. Yes. Yes, I got it.
Mr. Kolbe. So it is the Speaker and Majority Leader in the
House and Senate, and the minority leaders in both.
The Chairman. Dr. Birdsall.
Dr. Birdsall. There are type one errors and type two errors
in the world, and we are focusing here on a type on error. I
would--I would be very careful about mandating some change in
the current arrangement. I would want to hear the examples that
Andrew has in mind, how egregious were they.
I have a vague recollection in the early years of Georgia
being one of the countries that was made eligible for MCC. It
was close on all of the other--on all of the various measures,
but it did not meet one or two of them. I would be interested
in getting back to the committee after consulting with staff at
CGD who know more about this.
I am much more concerned about type two errors. I am not
sure you heard all of my testimony. There are a number of
countries--I mentioned Tunisia, I mentioned Mongolia--that may
not be eligible for another compact because of an increase in
its GNI per capita. These are countries that can still--they
would pass MCC eligibility on all other measures other than
this extremely crude need-based GNI per capita where there are
millions of people that are far from middle class, far from
working class.
So my view is that that--that Congress should ask MCC to
look more carefully at that measure because the type errors are
far more important where the MCC model is cut off or never gets
started in countries like Tunisia in a very difficult
neighborhood, GNI per capita now over $4,000. It does not make
sense to me. It takes longer to develop the institutions and
make the investments that MCC can support so that a country
like Tunisia is a little bit more solid and entrenched as a
democracy that is working well for its people.
The Chairman. And those standards are set by Congress right
now, the GNI?
Dr. Birdsall. The GNI is in the legislation.
The Chairman. Yes. Yes.
Mr. Kolbe. Could I just----
The Chairman. Yes, sir.
Mr. Kolbe. Could I just add something to that? She used the
word ``close,'' and I think that is an important point here.
Part of the problem as I see it with the MCC is the must pass
criteria of corruption, which I think is an important standard.
But the data is weak on that, and the countries tend to cluster
right around the medium, so it is very easy for one to go just
above or just below that we think really does not qualify. It
moves from one side to the other.
That is why I mentioned in my testimony that I think we
need to do some work looking at ways we can strengthen the
corruption index and get better data involved. I do not have
the answer to that here today, Senator, but I think that is one
of the things that does need to be looked at.
The Chairman. Okay.
Mr. Natsios. Senator, if I could, I put in my testimony an
alternative to the current board structure because I completely
agree with Jim that the Transparency International Corruption
Index is widely used but it has problems.
But what they do is they send surveys out to the business
community in the country and ask, did you have to pay a bribe
to get the government to approve something? Do you know what
happened in one country? It was Kenya, at the time one of the
most corrupt countries in the world. All of a sudden there is a
big change in their ranking. The political leaders apparently
went to the business community and said, you are embarrassing
us by answering the surveys that you have to pay bribes. And
all of a sudden Kenya has improved in the rankings.
The same thing happened in the Philippines. Look at the
Philippines' indicator. They moved from 141 out of 172
countries, one of the worst in the world. Now they are 85.
There has not been an improvement in corruption problems in the
Philippines. It is because they went to the business community
and lobbied them to stop writing bad things in these
questionnaires.
A better standard on the corruption index would be the rule
of law. We can assess the rule of law, and the independence of
the court system, and how corrupt the police are, and how
abusive the police are in these countries. The rule of law--in
fact, empirical evidence, the most important factor that causes
state failure is the collapse or the nonexistence of the rule
of law or very weak rule of law.
Governance is central to a state collapse, and the
empirical evidence from scholars on this is overwhelming. We
used to think it was, whether there were tribes and ethnic or
religious groups fighting all of it is actually of peripheral
importance. The centrality of the cause or the central reason
for the cause of state failure is the absence of the rule of
law and bad governance.
And so, that in my view should be a standard that a
country, if you cannot get above, you should not be eligible.
But I would not use the corruption index alone because it is a
questionable methodology. So I agree with Jim entirely on that,
and I did put this in my written testimony.
The Chairman. Do all of three of you--I guess one of the
reasons for this hearing today is a push towards regional
compacts. Just based on what I have heard, can you share with
me your feelings about allowing MCC that flexibility?
Dr. Birdsall. I support that. I think that the Congress
should give--should authorize at least one pilot project at the
regional level. What I said when you were not here is that we
know from the experience of the World Bank and the African
Development Bank, these are tough to do.
Bureaucracies do not even want to do them because they take
a long time to negotiate. They are more complex. The costs of
administering, and monitoring, and supervising are higher. And
countries do not necessarily want to do if it takes away from
opportunities in their own country compact. So this is an issue
where huge returns are possible, especially in Africa--West
Africa, as Dana Hyde said. And I think MCC has the assets to do
it, both U.S. credibility that has been built up and grant-
based money that can be used to crowd in private money, private
domestic and foreign investment, that is central to energy and
infrastructure projects. So I would--I would definitely go for
that.
Mr. Kolbe. Yes, I would support it. It is logical to me. If
you take a West African country whose compact has to do with
building the infrastructure for farm to market roads and
transportation systems, those transportation systems may lead
to its border, but to a port in the next country. So you really
need to have the kind of--the ability to do regional.
The best example I think that was talked about earlier with
Ms. Hyde is the Golden Triangle in Central America. It is
impossible to think about El Salvador's economic development
without thinking about Honduras and Guatemala. They simply are
an entity really to go together economically, and you really
have to think about them together.
Mr. Natsios. I endorsed the idea in my testimony as well. I
think they are much more difficult to administer and to get
agreement. Many of these countries do not like each other.
There is a reason they do not have trade. They put up trade
barriers between each other. When I was USAID administrator,
the prime minister of one country said please talk to our
neighbors because they are stopping our goods from going
through to a port for export.
So I think they should get the authority, but it think they
are going to have trouble using it practically.
The Chairman. So if I could just to try to draw a consensus
out of your testimony, first of all, if I understand what all
has been said, you would prefer to see USAID move in the
direction and having the freedom and the flexibility that MCC
has versus it moving in the other direction. That is a
consensus position. All three of you support the notion of
regional compacts, even though, as has been mentioned, there
are many complexities.
And thirdly, I think there is agreement that we should
really be looking at the qualification standards that are being
looked at, whether it is national income levels or whether it
is the corruption levels, that that is something that Congress
really should be reviewing. And just for what it is worth, we
have had real concerns recently, on a bipartisan basis and
throughout almost the entire committee, if not the entire
committee, on things like the TIP report and other areas where
what is supposed to be objective decision making is being
influenced by an inappropriate degree of political influence,
for example with respect to decisions made on Malaysia, Cuba,
other places relative to other kinds of things. I do not know
if it is true. I think many people think possibly that was the
case.
You would call them type two errors. Would put standards at
a higher level than concerns about political influence? How
should we, as we leave here, think about the issue of political
influence over decision making because I think there is
consensus on the first three.
Dr. Birdsall. Can I make a comment on that?
The Chairman. Yes.
Dr. Birdsall. I would say that Congress could ask MCC to
bring back to Congress whatever changes in the measures of
corruption, for example, and in the use of those measures the
application in terms of standards and this use of where a
country is if it is at the median. I do not particularly--
median in terms of the list of countries on, say, behavior, on
spending on their people.
It is not always sensible because of crowding of a group of
countries around the median. Suppose they are all spending 20
percent on education and 20 percent on health. Suppose they--
more or less, you know. Slight deviations from that for a
country can throw it off the list. So some of this is about
wonky data issues of standard errors and so on.
So my sense is that it would make sense to ask the MCC to
come back to Congress with some ideas where changes are needed,
not on the general notion that there should be a scorecard, not
on the general notion that the focus should be on poor
countries with sensible government, but on how that is
implemented in terms of recent data, better data in some areas,
use of statistical measures.
I see problems there. I mean, one example seems to be--I
may not have it exactly right, but we could get back to you on
this, that Honduras when it moved from being a low-income
country to a lower-middle-income country, then different
standards were attached to it, and it was missing out for some
period on eligibility.
Well, in the general the question is not, you know, now it
is in a higher standard group. That does not make sense. If the
trend is correct, as Dana Hyde said, if it is moving in the
right direction on something like corruption, you know, if it
is--if it is better than it was a year ago, or two years, or
three years ago, it is not sensible to cut it off, which
apparently it was at risk at some point.
I mean, maybe it is a bad example because Honduras had many
problems, but it clarified for me the problems with the
implementation of standards that make sense in principle, how
are they--what are the actual measures and how should they be
implemented?
The Chairman. Well, as a result of that suggestion, I will
ask my staff now to ensure that is one of the QFRs we send to
the director as a result of this meeting. Any other input on
those two issues?
Mr. Kolbe. I would just add that I think I agree with what
Dr. Birdsall, except that you might want to consider adding
into that some independent analysis, recommendation as to
whether it is a consortium of universities doing a study or
something and not relying just on the MCC to tell you what--how
to rejigger the criteria for eligibility.
The Chairman. Good suggestion.
Dr. Birdsall. Yes, that is a good idea.
The Chairman. That is a good suggestion. Yes, sir?
Mr. Natsios. I agree with Congressman Kolbe's suggestion
and with Dr. Birdsall. There is a book your staff might want to
read. In fact, maybe you should not read it because it will
upset you. It is called Poor Numbers by Morten Jerven and it is
an academic book. And it looks at a lot of the data the World
Bank has collected and different U.N. agents have collected in
Africa. And a lot of it frankly is made up.
The notion that we have achieved all the MDGs, a lot of it
is simply manufactured stuff for these international
conferences. I am sorry to say that, but there is scholarly
evidence now. It is a good book, and it is a disturbing book,
that we rely too much on numbers. That is why I urged in my
testimony that we use qualitative rather than just quantitative
measurements because the numbers can be distorted. If you saw
how they were made up in some of the finance ministries, I
think you would be a little shocked.
The Chairman. Well listen, we certainly appreciate the
expertise, knowledge, background, insights that all of you
three have provided. If you would, there will be additional
questions I know, and if you could--we are going to take
questions here in the committee, without objection, to you by
the close of business Thursday. If you could respond fairly
quickly, we would appreciate it.
If there is any additional thoughts that you have, you
know, over the next few weeks that you would like to share with
our staff, we would much appreciate that.
The Chairman. And, again, thank you for helping found this.
Thank you for the tremendous insights that all of you have
relative to foreign aid and MCC in general.
And with that, the meeting is adjourned. Thank you.
Mr. Natsios. Thank you.
[Whereupon, at 12:15 p.m., the hearing was adjourned.]
----------
Additional Material Submitted for the Record
Responses to Additional Questions for the Record Submitted
to Ms. Dana Hyde by Members of the Committee
Ms. Hyde's Response to Senator Corker
Question 1. MCC's unique performance indicators evaluate a
candidate country's record of ruling justly, investing in people, and
establishing economic freedom. MCC economic assistance is intended to
go to recipients who embrace core values of economic and political
freedom.
Do the current indicators adequately capture the kind of
policy environment that is needed for private enterprise to
thrive and grow?
Answer. Yes, to the extent possible. The indicators MCC uses are
not perfect, but they are the best available given the range of
countries and available data that can be gleaned. The third party
indicators on the MCC Scorecard measure a country's commitment to
ruling justly, preserving economic freedom, and investing in its people
and they are intended to assess the degree to which the political and
economic conditions in a country serve to promote broad-based
sustainable economic growth and reduction of poverty.
Countries that score well on these indicators have faster growth
potential, and so are better candidates for successful partnerships,
and having the type of environment that is conducive to stronger
private enterprise. In fact, several indicators in the Economic Freedom
category look at various aspects of the environment for private
enterprise directly: (1) Access to Credit (a measure of the scope and
accessibility of credit); (2) Business Start-Up (time and cost to start
a business); (3) Trade Policy (a country's openness to trade); and (4)
Regulatory Quality (a measure of the quality of the rules-based
environment). The other indicators also all give a sense of the broader
environment in which the private sector has to function, such as Rule
of Law, Government Effectiveness, Control of Corruption, and the range
of indicators in Investing in People, which can allude to the quality
of the workforce. MCC's Board will look at all of these factors, as
well as supplemental information, in gauging the overall policy health
of a given country, and discuss what it means for private enterprise,
among other considerations. MCC is, however, always open to considering
new and better indicators and are continually engaging with
stakeholders on this very question.
How does MCC review the effectiveness and accuracy of the
performance indicators it uses?
Answer. MCC continuously reviews the indicators it uses on the
scorecard and regularly consults with a range of civil society and
academic stakeholders on governance indicators in order to understand
what data is available and how it compares to what MCC is currently
using. This is particularly important when certain indicators have not
been regularly updated or when better methodologies have been
identified providing better indicators for a particular policy area.
MCC has an open door policy on this and welcomes stakeholders to
discuss particular datasets, which happens often. When a change is
needed, MCC will update indicators accordingly, consulting externally
and with its Board before making the change. For example, in FY 2016,
more comprehensive and more regularly-updated data providers were
identified to capture the Freedom of Information Act and Internet
Filtering sub-components of the Freedom of Information indicator. These
were adopted and replaced the former datasets MCC had been using for
those sub-components, and involved extensive consultations with
institutions like Freedom House and the Open Society Foundation. In all
cases, MCC needs to make sure the data is public, regularly updated,
has broad country coverage, and has a sound and comprehensive
methodology.
At the same time, MCC is also cognizant of the need to not ``move
the goal-posts'' on candidate countries which would dilute the ``MCC
Effect'' (the positive impact of MCC's rigorous commitment to sound
policies beyond the agency's direct investments, such as policy reforms
incentivized by the scorecard) and cause the scorecard to lose
credibility. MCC seeks always to balance continuous improvement while
ensuring prudent stability in the scorecard. Fundamental changes,
therefore, such as changing the passing rules, or adding in entirely
new indicators are done with a long term perspective.
Transparency is a critical element to this process and all changes
are highlighted in the annual Selection Criteria and Methodology
Report, submitted to Congress each September.
How and why have the various indicators that MCC uses
changed over the years?
Answer. The scorecard has been changed significantly twice:
FY 2004-FY 2005: Original Scorecard: 16 indicators with 6 in Ruling
Justly, 4 in Investing in People, and 6 in Economic Freedom:
To pass an indicator, you had to be above the median except for
inflation (be less than 15%).
To pass scorecard overall, you had to (1) pass at least half in
each of the three categories (i.e., 3 in Ruling Justly, 2 in Investing
in People, and 3 in Economic Freedom), and (2) pass Control of
Corruption (the only ``hard hurdle'').
There was no Democratic Rights Hard Hurdle.
FY 2006-FY 2007: Minor Change: The Credit Rating indicator was
dropped in favor of Days to Start a Business.
FY 2008-FY 2011: Addition of the Natural Resource Management and
Land Rights and Access indicators:
MCC added Natural Resource Management (NRM) to the Investing in
People category.
We added Land Rights and Access (LRA) to Economic Freedom.
Both NRM and LRA were added due to intense Hill and stakeholder
interest in having indicators which captured land and environment
issues. There was a congressional requirement that an MCC country
demonstrate a commitment to ``the Sustainable Use of Natural
Resources'' which had historically been done via supplemental
information because at the time there was no good indicator to capture
this. Consultation with a range of NGOs eventually led to the
identification and construction of the LRA and NRM indicators by 2007-
08.
MCC also combined time and cost to start a business indicators in
the Economic Freedom category into one ``Business Startup'' indicator.
As a result, scorecard now had 17 indicators with 6 in Ruling
Justly, 5 in Investing in People, and 6 in Economic Freedom.
As before, to pass an indicator, you had to be above the median
except for inflation (for which a passing score was less than 15
percent).
To pass the scorecard overall, you had to first pass at least half
in each of the three categories (i.e., 3 in Ruling Justly, 3 in
Investing in People, and 3 in Economic Freedom), and then also pass
Control of Corruption (the only ``hard hurdle'').
There was no Democratic Rights hard hurdle.
FY 2012-FY 2016: The Current Scorecard: MCC reviewed all indicators
being used to make sure we were using best-in-class. Additionally, the
agency added indicators to make sure the full suite of issues that
needed to be captured were being captured, and changed the ``pass half
in each category'' requirement to ``pass half overall'' in order to
reduce the volatility that the Investing in People category induced and
also to better reflect the economic literature which reflects that that
there is no one recipe for economic growth.
MCC added two new indicators to Economic Freedom to better capture
the role of women in driving economic growth, as well as
Entrepreneurship: Gender in the Economy, and Access to Credit.
One indicator in Ruling Justly was replaced: Voice and
Accountability was replaced with Freedom of Information because of a
clearer dataset, as well as added in sub-measures of internet
filtering, and Freedom of Information legislation.
MCC split Natural Resource Management into two indicators: Natural
Resource Protection and Child Health, to better capture two distinct
issues that had previously been combined.
MCC added a second hard hurdle. In addition to the Control of
Corruption hard hurdle, a country must now pass one of the two
Democratic Rights indicators, either the Political Rights or the Civil
Liberties indicator.
MCC also, based on consultations with Freedom House, changed the
indicator from a median pass to minimum score.
To pass the scorecard overall, a country now needed to pass the
Control of Corruption indicator, pass the new Democratic Rights hurdle
and pass at least 10 out of the 20 indicators overall (as opposed to
half in each category).
Question 2. Countries selected for MCC compacts do not have to meet
the scorecard criteria every year after a compact has been signed.
Does this undermine the purpose of the scorecard?
Answer. No. Even after signing a compact, MCC's Board still looks
at a country's scorecard performance since all countries are expected
to maintain or improve their commitment to good governance. If a
country shows evidence of a clear backing away from this commitment,
MCC may take, and has taken, action including suspension or termination
of assistance.
Please provide the criteria according to which MCC suspends
or terminates a compact.
Answer. MCC has a clear policy on suspension and termination (found
here:
www.mcc.gov/resources/doc/policy-on-suspension-and-termination) which
lays out the three reasons that may trigger why MCC might look at the
range of options available:
The Country Has Engaged in Activities Contrary to the
National Security Interests of the United States; or
The Country Has Failed to Adhere to Its Responsibilities
Under a Compact, 609(g) Grant Agreement, Threshold Program or
Related Agreement (which could include failure to implement a
compact as required or fulfill another condition which MCC
required); or
The Country Has Engaged in a Pattern of Actions Inconsistent
with MCA Eligibility Criteria meaning that MCC has determined
that the country has taken actions that result in, or could
reasonably be expected to result in, a policy reversal, a
decline, or a deterioration of performance, in one or more of
the policy indicators used to determine eligibility, most
notably the MCC policy scorecard.
In all cases to date, MCC has taken action based on the third
reason: a country has engaged in a pattern of actions inconsistent with
the eligibility criteria, such as a flawed election or an undemocratic
change in governance. In its most extreme form, of the 32 compacts
approved to date, MCC has suspended or terminated a compact
partnership, in part or in full, six times.
Armenia (2008) [De facto partial termination due to flawed
elections]
Madagascar (2009) [Terminated due to military coup]
Nicaragua (2009) [Partial termination due to flawed
elections]
Honduras (2009) [Partial termination due to undemocratic
change in gov't]
Malawi (2012) [Suspended over governance concerns;
reinstated later]
Mali (2012) [Terminated due to military coup]
Question 3. Every MCC compact is subject to a rigorous and data-
driven impact evaluation. While these evaluations show how standards of
living were raised or economic growth was created after the compact was
completed, they don't address the details of how a compact was
implemented, including the overall performance of the host government
in meeting the demands of compact implementation.
How does MCC measure progress of compact implementation?
Answer. Because implementation is in the hands of our partner
country, MCC has developed a number of oversight tools to ensure the
proper progress is being made in every activity the compact funds. MCC
opens a Resident Country Mission, for instance, generally inside our
embassy, with two direct hire U.S. nationals to provide daily oversight
of compact activities. These Resident Country Missions are augmented by
quarterly field visits from MCC technical experts and independent
engineers that allows MCC to regularly monitor all risks including
completion risk and whether funding is on budget, and then take
appropriate action to manage completion risks. These actions may
include terminating or descoping projects and activities.
Each quarter for each country, MCC convenes a Quarterly Portfolio
Review (QPR) with management and the Country Team (including the
country mission, sector experts and others) to discuss compact risks
and results.
When risks are elevated, appropriate response from Headquarters
staff may require more frequent site visits, extended TDYs, or
mobilization of other outside assistance. When the Resident Country
Mission and Washington sector experts determine a problem with project
implementation exists--either because of funding issues or more common
completion risks due to the five year clock -- visits and oversight
becomes more frequent and a possible project rescope/deobligations may
occur. Because MCC must provide a `no objection' on all procurements
and the hiring on key personal, and all funds flow from the U.S.
Treasury direct to the vendor/contractor after works are certified, the
agency maintains significant leverage to ensure projects are properly
managed.
MCC assesses how these changes affect costs, beneficiaries, and
ERRs and places key tracking indicator information on its website.
Additionally, after consultations with this Committee, MCC has started
to issue comprehensive compact summary reports on its website. These
publically available compact-wide assessments aggregate in one place
the performance indicators available as well as providing greater
context for project progress and changes during implementation. Post-
implementation independent evaluations are also posted here as they
become available, plus original ERRs as well as updated close-out ERRs,
when available.
How does MCC track the progress of a nation's government's
commitments to threshold programs and compacts and hold it
account for its role in implementation?
Answer. Every MCC compact and threshold program includes
commitments by the partner country's government to ensure successful
implementation. These commitments are stated in the grant agreements
and range from broad policy commitments, such as enacting and
implementing reforms in a sector, to specific fiduciary obligations,
such as exempting MCC assistance from taxes.
MCC tracks these commitments and holds governments to account for
their compliance in several ways. The most critical commitments are
typically expressed as conditions to disbursement. Every quarter, the
country government must certify whether it has satisfied the applicable
conditions prior to that quarter's disbursement of MCC funds. If a
condition is not satisfied, MCC may withhold all or part of a
disbursement of the grant. MCC has exercised this right on several
occasions. For example, MCC has withheld disbursement on road
construction projects in compacts until the government has reformed its
road maintenance regime or increased the budget for maintenance. In
policy-focused threshold programs, government reform commitments are
also tracked through the monitoring and evaluation plan. For instance,
the M&E plan will track whether a country is increasing its tax to GDP
ratio, or decreasing commercial losses in the provision of water and
electricity.
MCC regularly conducts portfolio reviews of programs in
implementation to track and assess progress. If a government is not
meeting its commitments, MCC will engage with the government through
MCC's Resident Country Mission in coordination with the U.S. embassy to
encourage compliance. In extreme cases, MCC may suspend or terminate
all or part of a compact or threshold program in accordance with its
suspension and termination policy.
After consultations with SFRC, MCC has begun `after-action compact
reports' posted on our website that list the compacts' initial goals,
economic estimates and the required conditions precedent agreed to by
the countries, and then the status of those commitments and which were
met.
Question 4. There appears to be a growing trend whereby certain
countries have been cracking down on international NGO's and civil
society through politically motivated investigations or registration
laws. These actions appear designed to chill the activities of these
civil society groups or drive them out altogether. It would be
inappropriate to provide a compact to a candidate country that is
unduly persecuting civil society.
Please describe how MCC includes a government's enabling
environment for civil society in its scorecard indicators?
Answer. MCC has a scorecard indicator provided annually by Freedom
House, the Civil Liberties indicator, which explicitly captures this
issue. This indicator measures (on a scale of 0 to 60) Freedom of
Expression and Belief, Associational and Organizational Rights, Rule of
Law, and Personal Autonomy and Individual Rights. Freedom House
provides a full public narrative on why it scores a country a certain
way on each of these issues, which allows MCC to see the trajectory
over time more clearly as well as the reasons behind that trend, and to
engage directly with countries on specific areas of concern. The
enabling environment for civil societies cuts across all aspects of
this indicator, but especially the sub-section on associational and
organizational rights.
MCC's Freedom of Information indicator also captures some aspects
of the enabling environment for civil society, since it includes
explicit measures of freedom of the press, internet freedom and access
to information. This indicators helps ensure we have a full picture,
together with Civil Liberties, of what the civil society space looks
like in a given country.
How does MCC apprise the Board of candidate country
performance on engagement with civil society?
Answer. MCC staff, including the CEO and the in-country teams, meet
regularly with local civil society organizations and constantly monitor
this issue in partner countries, then apprises the Board of Directors
of candidate country performance regarding engagement with civil
society in three ways:
1. By actively discussing the performance of the country on the Civil
Liberties and Freedom of Information indicators, including
their trajectory over time, and what the accompanying
narratives say about the performance;
2. By actively bringing supplemental information to the Board to help
show real-time developments in a country's civil society
environment that may not be covered by the indicator due to
data lags or issues not captured directly by the indicator;
3. By the Board members themselves--MCC's private sector members are
often leading members of civil society, and will often host
their own consultations with in-country civil society groups to
get a richer picture of the civil society environment in a
country, and brief the rest of the Board accordingly.
Question 5. MCC has a number of governance and other performance
indicators to measure a country's policy performance. MCC's selectivity
with respect to candidate countries was, in part, intended to lead to
incentivize countries towards policy improvements. However, the compact
candidate pool is faces limitations, particularly with regards to the
number of eligible countries.
Why does the promise of an MCC compact not act as more of
an incentive for more countries to make policy changes to
qualify for a compact?
Answer. MCC's high standards for governance, most readily
exemplified by the scorecard which sets a clear and transparent
criteria for countries to gain MCC compact eligibility, establish a
high bar for inclusion in the program. There is clear evidence, dubbed
the ``MCC Effect,'' of countries working to improve their performance
on MCC's scorecard in hopes of not only eventual selection for MCC
compact or threshold eligibility, but also because they recognize the
scorecard can provide a ``road-map'' for a broader policy reform
agenda. From Cote d'Ivoire to Togo, Niger to Guatemala, and many more,
MCC has a wide range of examples of countries using their scorecard to
improve their overall policy performance. MCC meets almost weekly with
country stakeholders trying to understand the scorecard, what they need
to do to improve performance, and how MCC can better-connect them to
the indicator institutions.
Furthermore, in a 2013 study by the College of William and Mary,
when asked to identify the three most influential external assessments
of government performance from a list of 18 options, respondents to an
independent survey of development stakeholders repeatedly identified
MCC's scorecard eligibility criteria.
In some cases, a country's pathway to change is long and the
incentive effect takes time to manifest itself; that is why we see some
emerging MCC partners in our second decade with whom we could not work
in our first. We have found that in the presence of a government with a
sincere commitment to the wellbeing of its citizens, the MCC Effect is
alive and well.
Ultimately, however, there are many factors that influence a
country's willingness and ability to change, and sometimes even the
incentive provided by a potentially sizeable grant cannot overcome
countervailing forces.
Question 6. A significant portion of MCC's funding has gone to
infrastructure development. For example, over half of the MCC funding
since 2004 has gone to the transport sector, mostly roads, water supply
and sanitation, and energy infrastructure. Once this infrastructure is
built, it must be maintained.
What steps does the MCC take through its compacts to ensure
that this infrastructure is adequately maintained after the MCC
compact concludes?
Answer. One of our core principles is country ownership, which is
the idea that countries are full partners in designing and implementing
compacts. This is an industry best-practice approach that helps to
ensure long-term sustainability of our investments. The ownership a
country exhibits when they are developing the proposals and managing
the projects helps insure sustainability. The MCA, which is the
accountable entity set up by the government with a mixed government/
private sector/civil society board structure, is essentially a joint
venture between our country partner and the United States that ensures
U.S. funded projects are implemented effectively in tight timelines
without waste fraud or abuse, while fully investing the partner country
government in ensuring the sustainability of our joint work.
In addition, because the agency measures the benefit streams of its
investments over 20 years, MCC takes the long view with all of its
projects. Each compact has conditions precedent (CPs) that must be
satisfied before entering into force and, thereafter, for compact
funding disbursements. MCC has begun listing these CPs on our website
and tracking their success at closure. For instance, CPs on a road
construction project typically will include reform to the country road
maintenance systems generally, not just targeted to the MCC-funded road
segments. This both enhances sustainability environment for the newly-
constructed road and avoids any risk that the compact project would get
special attention from government funds while other roads languish in
need of maintenance. MCC also works with partner countries to establish
maintenance plans once projects are completed.
For example, in Burkina Faso, MCC funds was used to put in place
critical policy reforms to ensure long term sustainability of road
infrastructure. In addition, MCC funded technical assistance activities
that are aimed at building the institutional capacity of the road
agency to develop a 5-year road maintenance plan and implementation
mechanisms. MCC funds were also used to setup innovative matching
funding schemes that incentivized the government of Burkina Faso to
contribute long-term sustainable financing for road maintenance.
Another example is Liberia where we are funding the establishment of a
training center and training the technicians in the electricity sector
to better operate and maintain the assets of Liberia's electricity
utility that includes the Mt. Coffee Hydropower Project whose
rehabilitation we are also funding.
In Jordan, where MCC funded a program to provide additional water
to one of the largest cities--Zarqa--through wastewater treatment, the
compact implemented several measures to instill operational and
financial sustainability, including realigning and raising water and
sewerage tariffs to reflect the cost of service, mobilizing private
sector finance and technology to construct and operate wastewater
treatment, mobilizing private company to manage and maintain all water
and wastewater assets and operations in Zarqa under a performance-based
management contract, and funding capital equipment and training for the
maintenance of sewer trunk lines.
Progress on these promises by the government are tracked and will
factor into possible considerations of a subsequent compact.
Question 7. MCC is currently limited by law to using no more than
25% of its budget for lower middle income countries. Some argue that
the pool of lower income countries is shrinking as Lowering Income
Countries (LICs) graduate up to Lower Middle Income Country (LMIC)
status.
How do these limitations impact MCC's work?
Answer. The current definition of candidate countries as only low
and lower middle income countries may not capture ``need'' adequately.
Substantial poverty exists outside of low income countries, and
increasingly, donors are adjusting their operations to reflect this
view of the world. MCC is exploring whether other measures of poverty
and well-being exist--ones that may better capture countries currently
excluded but that are, by most reasonable estimates, still very poor.
For example--looking at median income levels, different poverty
indices, or inequality measures.
Because MCC's overall appropriations level is significantly smaller
than originally envisioned, the 25 percent cap for LMICs means the
agency is limited-even more so than originally intended-in its ability
to support and spur sound economic and social policies and good
governance in countries that may have widespread and persistent poverty
and to work with them to promote poverty reduction through economic
growth.
__________
Ms. Hyde's Response to Senator Cardin
Question 1. In his written testimony, Mr. Natsios suggested that
given the limitations of the underlying data behind the control of
corruption indicator, the hard hurdle for candidate countries should be
replaced with the rule of law indicator.
a. How does the data quality between these two indicators
compare?
Answer. The underlying quality of the data for the two indicators
is essentially the same, with 19 of the 21 sub-sources comprising
``Control of Corruption'' and ``Rule of Law'' coming from the same
source, although the specific survey questions asked and other data
pulled from those sub-sources are different for each indicator.
Both the ``Control of Corruption'' and ``Rule of Law'' indicators
are produced annually by the World Bank's Worldwide Governance
Indicators group (WGI), and are each comprised of 21 sub-sources that
are a mix of perceptions-based surveys, experiential surveys, expert
assessments, donor assessments, and private sector assessments. They
are produced by a range of public and private institutions such as the
Economist Intelligence Unit, the Gallup World Poll, Freedom House,
Global Integrity Indicators, among others. The Rule of Law indicator
uses two sub-sources that Control of Corruption does not (Heritage
Foundation Index of Economic Freedom and State Department Trafficking
in People Report) and Control of Corruption uses two sub-sources that
Rule of Law does not (Transparency International Global Corruption
Barometer Survey and Political Economic Risk Consultancy Corruption in
Asia Survey).
Because the WGI group chooses specific aspects or questions from
these sub-sources relevant to the concept they are trying to measure,
it aggregates them using a sophisticated weighting methodology. Further
details can be found here:
http://info.worldbank.org/governance/wgi/index.aspx#doc-
methodology.
From the Economist Intelligence Unit, for instance, WGI will pull
questions related to violent and organized crime, fairness of judicial
process, enforceability of contracts, speediness of judicial process,
confiscation and expropriation of property and intellectual property
rights for the Rule of Law indicator, and for Control of Corruption
they will pull surveys on corruption among public officials. In another
example, the Gallup World Poll survey that WGI uses for Rule of Law
asks, ``Have you had money property stolen from you or another
household member?'' and for Control of Corruption asks ``Is corruption
in government widespread?'' World Economic Forum Global Competitiveness
Report's questions on the cost of crime and violence and judicial
independence will go into the Rule of Law indicator whereas their
questions on the prevalence of bribes in the judiciary and public trust
of politicians find their way into the Control of Corruption indicator.
b. How quickly does each indicator respond to policy reforms
or other on-the-ground changes?
Answer. In general, there is a one to two year data lag for both
indicators. Both Control of Corruption and Rule of Law data appearing
on MCC's FY 2016 scorecard, released in November 2015, are generally
capturing the state of those surveyed in calendar year 2014 and the
early part of 2015. Each of the institutions creating the 21 sub-
sources used for the respective indicators typically updates their data
on a one to three year data cycle.
c. Is simply swapping one indicator for another in this sense
the best way to incentivize potential candidate countries to
tackle corruption?
Answer. Because there is no difference in data quality or time lag,
it would make no difference in terms of the volatility of either
indicator. The difference, though, is what type of information is more
desirable to be made a hard hurdle. Control of Corruption seeks to
capture the extent to which public power is exercised for private gain
(including both petty and grand forms of corruption, as well as capture
of the state by elites and private interests) whereas Rule of Law seeks
to captures the extent to which agents have confidence in and abide by
the rules of society (in particular the quality of contract
enforcement, property rights, the police, and the courts, as well as
the likelihood of crime and violence).
As a result, Control of Corruption is directly capturing all
aspects of corruption, while Rule of Law is looking at the overall
institutional strength of the country, which includes (indirectly) the
ability for corruption to flourish or not flourish.
d. Do you feel making this statutory change would preserve
the intent of provision while simultaneously allowing MCC
sufficient flexibility to balance the indicator score with the
sometimes conflicting realities that are observed on the
ground?
Answer. There is no statutory change needed. MCC's Board of
Directors has the authority to change or update as needed the criteria
used to determine eligibility through the annually updated Selection
Criteria and Methodology Report. The scorecard is the first and primary
piece of evidence the Board uses to select countries as eligible for
assistance. It takes the ``hard hurdles'' very seriously. However, the
Board uses sound judgement to analyze what the scorecards do, and
sometimes do not say. It considers supplemental information on a
potential partner country's economic context, investment climate, and
capacity. And it must look at the overall policy performance in a
country, the opportunity to reduce poverty through economic growth, and
the availability of MCC funds. While swapping out one hard hurdle for
another would imply switching priorities from a specific focus on
corruption to a broader focus on the overall strength of a country's
rules-based institutional environment, it would not necessarily change
the Board's overall discretion in making selection decisions.
e. What implications would this switch have for candidate
countries? How would the existing pool of candidates fare if
the rule of law indicator was made a hard hurdle in place of
the Control of Corruption indicator? Are there previous compact
countries that would have been made ineligible if this change
had been adopted?
Answer. Because of the substantial overlap between Rule of Law and
Control of Corruption, the impact of making Rule of Law the hard hurdle
in place of Control of Corruption would be small. While passing the
scorecard is not the only determinant of country partner eligibility,
the existence of any hard hurdles, and the importance the Board places
on passing the hard hurdles is, in and of itself, a limiting factor in
country selection. This would be true regardless of which indicators
are designated as hard hurdles.
If Rule of Law had been the hard hurdle, there were at least five
countries that passed Control of Corruption when they were selected but
not Rule of Law, primarily in Latin America (Honduras in FY 2004, El
Salvador in FY 2006, Colombia in FY 2009, El Salvador for a second
compact in FY 2012, and Liberia in FY 2013). During their compact
development phase, Honduras, El Salvador, and Liberia all failed Rule
of Law which would have most likely precluded signing a compact.
If Rule of Law and not Control of Corruption were the hard hurdle
in FY 2016's selection round, the low income countries of Bangladesh,
Kenya, and Nicaragua all would have passed their scorecards instead of
failing and therefore would have potentially been competitive for
selection. For lower middle income countries, Kosovo passed Control of
Corruption this year but failed Rule of Law (and was selected as
eligible) but Moldova failed Control of Corruption and passed Rule of
Law and was not chosen.
f. Have you identified alternative measures of corruption
that could be adopted in place of the current metric, for
example, Transparency International's Corruptions Perception
Index? If so, what are the advantages and disadvantages of
each?
Answer. Yes, MCC has spent--and continues to spend--significant
effort looking at alternative measures of corruption. To date, WGI's
indicator that measures control of corruption, while not perfect, is
currently the best indicator available because of its scope of
countries covered, how often it is updated, the transparent, evidence-
based methodology and the general level of comprehensiveness in their
assessments. The other alternatives miss one or more of these important
conditions. For example, Transparency International's respected
Corruption Perceptions Index (CPI) is not as comprehensive because it
asks those surveyed how corrupt they perceive their public institutions
to be, but does not dig down further and therefore yields little in
terms of evidence and actionability. On the other side of the spectrum
is Global Integrity's Country Reports, which rate a wide range of
specific anti-corruption institutions and mechanisms in a given country
and therefore ensure a wide range of evidence behind scores as well as
highly specific sets of actions a country could take--such as to
strengthen certain institutions or pass certain laws--however it does
not satisfy MCC's need for wide country coverage and regular updates.
g. Would a hybrid of the Control of Corruption indicator and
the Rule of Law indicator be practical and more informative for
MCC's country selection?
Answer. Because there is such a great deal of overlap between the
two indicators, a hybrid of the two indicators would not cause a big
change in who passes or fails their scorecard overall. On average, 80-
85% of all candidate countries either passed both indicators or failed
both indicators.
As discussed above, only 5 countries would have newly passed the
scorecard in FY 2016 if Rule of Law was the hard hurdle (Bangladesh,
Indonesia, Kenya, Moldova, Nicaragua) while 4 would have failed (El
Salvador, Kosovo, Liberia, Mozambique).
h. Would you recommend any statutory changes to allow more
flexibility in the application of the Control of Corruption
indicator?
Answer. No. The MCC statute provides the flexibility needed.
Section 607(a) of the Millennium Challenge Act of 2003, as amended,
stipulates that, ``MCC's Board shall determine whether a candidate
country is an eligible country.[and] such determination shall be based,
to the maximum extent possible, upon objective and quantifiable
indicators.''
The mechanics of the scorecards themselves and the Control of
Corruption ``hard hurdle'' is not a formal part of MCC's legislation.
MCC submits to Congress an annual Selection Criteria and Methodology
Report (SCMR) which outlines how MCC's Board will assess countries for
compact eligibility against the wide range of factors outlined in
section 607(b) of the Act, including the reliance to the maximum extent
possible on objective and quantifiable indictors. It is therefore MCC's
annual SCMR which determines and prescribes the Control of Corruption
hard hurdle.
i.Would you support Mr. Natsios' suggestion to adopt the Rule
of Law indicator in place of the Control of Corruption
indicator?
Answer. As discussed above, there is a minimal difference between
the two indicators in terms of which countries would newly pass or
newly fail, and the Board looks seriously at failure of Rule of Law
when making its selection decisions. Ultimately, the issue with Control
of Corruption versus Rule of Law is not which should be the hard
hurdle, but rather how we can find indicators that capture all the
issues stakeholders are concerned about, and do so in a way that is
comprehensive, evidence-based, and highly actionable.
This is why MCC is focused on supporting efforts to create stronger
governance indicators, as it is doing through the Governance Data
Alliance (GDA) which is a community of data producers, users, and
funders committed to the effective production and use of high-quality
data to advance governance reforms in countries around the world. MCC
helped form the Alliance in 2014 to address the persistence of
inadequate data coverage and mixed quality in assessing a range of
governance dimensions in countries around the world, and the twin
challenge of data producers often lacking insight into who the actual
users of their data were. No single organization can solve these
problems alone, and the GDA recognizes the need for collective action
to strengthen the ongoing future production and use of governance data.
The Alliance addresses these problems by facilitating coordination and
knowledge-sharing among governance data producers, collecting and
analyzing user data and behavior to better enhance the GDA's collective
understanding of target governance data users' actual needs, and
developing mechanisms to ensure that governance data producers are
responsive to these needs.
A first product of the GDA will be the imminent launch of a
publicly-available ``dashboard'' that consolidates all GDA members'
governance data into once place so that a user can immediately see what
data is and is not available for a given country or topic, and
producers can see where the gaps and overlaps are to help coordinate
future data production efforts.
Question 2. What is MCC's view on the suggestion made by other
panelists that Congress should amend MCC's authorizing legislation to
identify a different measure of poverty than the GNI per capita metric
currently used? Which metric do you feel best captures poverty for
MCC's purposes?
Answer. Poverty is changing in ways that are not well captured by
average per capita income measures. In the world today, the largest
numbers of poor people live in marginalized pockets in middle income
countries. Similarly, for countries with high inequality, measuring
average per capita incomes obscures important information, as it does
not show the degree to which growth is shared (or not shared) by those
at the bottom of the income distribution.
The current definition of candidate countries as only low and lower
middle income countries using GNI, therefore, may not capture ``need''
adequately. Substantial poverty exists outside of low and lower middle
income countries, and increasingly, donors are adjusting their
operations to reflect this view of the world.
MCC is exploring and will discuss with Congress and other
stakeholders whether other measures of poverty and well-being exist--
ones that may better capture countries currently excluded but that are,
by most reasonable estimates, still very poor. For example--looking at
median income levels, different poverty indices, or inequality
measures.
Question 3. The MCC legislative mandate is to lessen poverty
through economic growth. In your view, are sufficient funds being
provided to each country to make a significant difference in their
poverty levels?
Answer. While there are a number of factors that contribute to
overall economic growth in a developing country, MCC's approach is to
maximize potential impact by working in partnership with country
representatives to understand and unlock the binding constraints to
private investment to reduce poverty. This potential impact, however,
is often limited by the funds which can be effectively absorbed by
partner countries in five years as well as the available of funds MCC
has to deploy. In some instances we may not be able to fund high-ERR
projects due largely to budgetary limitations. In FY 2015 and FY 2016,
the President proposed significantly higher funding levels for MCC. The
lower amounts ultimately appropriated will require us to adjust
planning going forward, however, our role is to use our limited, but
still significant, grant resources to help support and spur country
commitments to sound economic and social policies, good governance and
investments in their own tools to accelerate and sustain public and
private investment in their country's future prosperity.
Question 4. Mr. Natisos suggested in his verbal testimony that in
the past, several countries had been approved for compacts that did not
meet the scorecard criteria. Furthermore, he asserted that compacts had
been previously awarded for geopolitical reasons. Are you aware of any
such instances? How does MCC's governance structure maintain
impartiality when selecting compacts?
Answer. There has only been one instance of a country being
selected and approved for a compact despite not passing the scorecard,
and it was in the first year of MCC's existence. Georgia failed the
Control of Corruption in FY04 the first year of MCC's selection process
when scorecard standards were not yet regularized, and publically
available supplemental information was used to augment the information
found in that case. While it was still failing the following year in
FY05 at the time of compact approval, Georgia later improved their
scorecard performance and subsequently passed by FY07.
Note that there have been cases of previously selected countries
not passing the scorecard at the time of compact approval. The Board
selects a country as eligible to develop a compact in one fiscal year,
but this does not guarantee a compact. Board approval of a compact
happens after the program proposal has been developed, which may be two
to three years after initial selection. The Board looks at scorecard
performance at these milestones and more.
MCC's Board has made 47 initial compact eligibility selection
decisions since FY 2004 resulting in 32 approved compacts. Six compacts
did not make it to approval, and nine compacts are currently still in
development.
MCC's Board has approved 32 compacts as of December 2016. Of those
32 compacts, 5 (detailed below) had failing scorecards at the time of
Board approval, and this has not happened again since Indonesia's
approval in September 2011. Furthermore, except for Georgia in FY05 (as
mentioned above), none failed when selected for initial eligibility and
in all 5 cases, the Board noted that the failures were not due to
policy backsliding since initial selection. Instead, they were due to:
1. Changes MCC made to the scorecard that caused a failure due to the
addition of new indicators as opposed to a decline in scores.
This happened to Namibia when it was approved in July 2008.
2. Supplemental information that accounted for data lags, such as what
happened to the first Georgia Compact when it was approved in
August 2005.
3. The sudden graduation from low income to lower middle income
categories. The LMIC category has significantly higher medians
and there is a high possibility that a country will fail in
their first years of transition. Congress recognized this and
provided relief for any country caught in this circumstance so
that each country is allowed to remain in its income category
for funding purposes up to three years before transitioning,
and MCC's Board often uses the same logic when weighing the
impact on scorecard performance. This happened to Morocco
(approved August 2007), the Philippines (approved in August
2010), and Indonesia (approved September 2011).
MCC's governance structure helps maintain impartiality in two ways:
Structurally: MCC is governed by a Board that is chaired by the
Secretary of State, but includes the Secretary of the Treasury, the
U.S. Trade Representative, the USAID Administrator, and four private
sector members. The private sector members are often major civil
society leaders (current members include senior officials from the
International Republican Institute and the Open Society Foundation),
and come from both sides of the political aisle. All perspectives are
brought to the table and discussed frankly in the months before a board
meeting at a staff level as well as at the Board meeting by principals.
Reliance on the Scorecards: MCC's legislation in section 607(a)
directs the Board to make its country selection decisions by relying,
to the maximum extent possible, upon transparent and independent
indicators to assess countries' policy performance. In application, as
per the annual Selection Criteria and Methodology Report, this means
relying on the scorecards as much as possible as a pre-requisite to
selection. As a result, Board decision impartiality is ensured by the
close adherence to the principle of passing the scorecard and
demonstrates that the mix of indicator objectivity and multi-
stakeholder governance structure works. Scorecards and the Selection
Criteria and Methodology Report are made public, which holds MCC
accountable to all outside stakeholders for our process and our
decisions. Finally, Congress, though the normal Congressional
Notification process, is able to examine country partner performance at
several steps on the pathway to compact approval.
__________
Ms. Hyde's Response to Senator Isakson
Question. The Millennium Challenge Corporation builds role models
throughout the developing world. That penetration of MCC compacts and
projects is high on the continent of Africa. Recently, MCC signed a
compact with Benin. Can you describe Benin's path to becoming a Compact
Partner? How was the MCC Effect a contributing factor to this
partnership? Finally, one of the keys to economic growth in Benin is
the Port of Cotonou. Please describe how Benin and MCC came to the
decision to work on the Port and how will the main components of the
project fit within MCC's accountability framework.
Answer. Nearly 75 percent of Benin's 10 million people live on less
than $2 a day. After becoming eligible to develop a compact in May
2004, the people of Benin worked with MCC to identify constraints to
economic growth and--after a consultative process with the people,
civil society and private sector stakeholders--signed a compact to
reduce poverty in 2007. In 2011, this program ended successfully after
addressing obstacles to investment and economic growth by modernizing
and expanding the Port of Cotonou, often referred to as the ``lungs''
of Benin; promoting land security; improving access to capital for
micro- and medium-sized enterprises; and creating a more efficient
judicial system. The $188.5 million Access to Markets Project improved
the Port of Cotonou's security, expanded its capacity, enhanced
intraport traffic flow, and invested in cost-reduction measures-all of
which helped create a more modern facility prepared for increased
movement of goods. The volume of merchandise flowing through the port
increased from 4 million metric tons in 2004 to 7 million metric tons
in 2010, exceeding the port's previous capacity. MCC's investment in
the Port of Cotonou continues to contribute to economic growth and
trade, while exemplifying the power of private sector-led partnerships
to leverage public resources. Creating a more competitive, efficient
port makes Benin an anchor for regional trade and investment. The
modernized port is expected to attract more than $250 million in
financing from the private sector, which will increase revenues and
create more jobs.
MCC's investments doubled the capacity of the port and led to
infrastructure and port administration improvements that have
contributed to the competitiveness of the Port of Cotonou, which has
registered a doubling of container traffic in the past decade. The port
was chosen as an investment because of its centrality to Benin's
economy--up to one quarter of national income is dependent on the port.
During the first compact MCC applied the major elements of its
accountability and quality assurance framework to ensuring timely
completion of works, including regular audits, use of independent
engineering services, and high-level political engagement on
significant policy an operational issues. An impact evaluation of MCC's
investment in the port is currently underway.
Because of Benin's continued improvement on governance and the
successful completion of the 2007 compact, the MCC Board of Directors
selected Benin as eligible to begin a second compact in 2011. During
the finalization of that compact proposal in 2014, however, Benin
failed MCC's scorecard when it failed the Control of Corruption
indicator. MCC's Board decided to limit the agency's engagement in the
compact development process and issued a statement saying that a
compact with Benin would not be signed unless this indicator score
improved. This had major repercussions in Benin's political leadership,
leading Benin's President to direct his government to take a number of
steps, including the establishment of a national anti-corruption
commission, public declarations of assets by government officials, and
removal of onerous roadblocks, among other actions. In FY 2015, Benin
passed the Control of Corruption indicator (and improved again in 2016)
and the MCC Board restored full eligibility. In advance of signing the
compact in September 2015, Benin's leadership took decisive steps to
improve the policy environment for the electric power sector, the focus
of the second compact, including by establishing an independent
regulatory authority and committing to far-reaching sector reforms
concerning tariffs, utility operations, and the environment for private
investment in power generation. The steps taken by the government to
tackle corruption and to improve electricity sector policy can be
considered an effect of the country's engagement with MCC.
The $375 million compact signed September 9, 2015, which includes
an additional $28 million contribution from Benin, is designed to
strengthen Benin's national utility, attract private sector investment,
and fund infrastructure investments in electric generation and
distribution as well as off-grid electrification for poor and unserved
households. In addition to making infrastructure investments in on and
off-grid power, this compact supports the sustainability of Benin's
electric power sector through professional regulation, stronger utility
operations and private sector participation in generation. The
investment also supports Benin's newly created regulatory authority in
its efforts to conduct tariff studies and develop a rate-making and
licensing framework; contribute to tariff reform; put into place the
policy and institutional framework required for off-grid
electrification; and introduce standards for energy-efficient household
practices.
Question. I am a cosponsor of S. 1605, which would authorize
regional compacts for MCC. Please elaborate on how these compacts will
make MCC's work more impactful. Additionally, please explain how these
compacts will operate under MCC accountability framework, which is one
of the strongest components of the MCC model. How will you ensure that
mission creep does not infiltrate into MCC's work?
Answer. We live in a global economy, where growth is more dependent
than ever on economic integration to increase production and efficiency
and the United States is missing potential impact if opportunities to
strengthen regional markets around developing nations are not
considered. This is particularly true in places such as Africa--where
MCC is heavily invested--and in sectors such as infrastructure--where
70 percent of MCC's $10 billion portfolio has been invested.
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 those countries to export
opportunities and to import factors needed for their own economic
activity, such as power or water. For instance, the World Bank
estimates that regionally integrated infrastructure could double Sub-
Saharan Africa's share of global trade.
By approaching growth opportunities from a regional perspective,
MCC will be able to make high-return investments in countries that will
benefit from economies of scale. 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.
MCC has the proven operational frameworks in place to deliver
economic impact through a country-driven process, and from that 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 ensure accountability. The authority in
the MCORE bill, S. 1605, will allow MCC to develop regional projects
while still adhering to the agency's important country-owned processes
that demand accountability.
The authority in the legislation allows MCC to maintain its very
focused, data driven model for country and project selection as well as
local implementation and accountability because it will allow 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.
MCC's accountability framework will, therefore, apply to any and
all potential regional partners, as with the current bilateral
agreements. As with traditional compacts, there will always be a
possibility that a country partner will fail to meet MCC's standards on
good governance and be suspended or terminated. Because of this, MCC
will look to structure regional investments to be scalable to
individual country partners in the event one country is suspended or
terminated.
__________
Ms. Hyde's Response to Senator Perdue
Question 1. I was a bit troubled by my visit to MCC's office in
Jakarta this August. More than 50% of the $600 million (5 year) compact
for Indonesia was not subject to cost-benefit analysis. I was
particularly concerned about the Green Prosperity project, which makes
up for $333 million of the Indonesia compact.
Can you explain to me, why was a cost-benefit analysis not
completed for the Green Prosperity Project or for the
procurement modernization project?
Answer. MCC performs cost-benefit analyses for our projects to
create Economic Rates of Return (ERRs). This assessment is done at the
beginning and the end of our projects, but how early we have sufficient
data to perform this analysis depends upon the project. The Green
Prosperity project in our Indonesia compact is a grant facility that is
structured to solicit proposals for the private sector, select the best
proposals, and then finance those proposals. This is one approach that
MCC uses to leverage additional outside private sector capital. Because
these proposals from the firms were solicited as part of implementing
the compact, ERRs for the investments were not available at the time
the compact was signed.
Importantly though, ERRs were still assessed before each proposal
was funded-just not as early as they are assessed for more traditional
projects. The signed compact stipulated that all grants provided
through the Green Prosperity grant facility would have to meet a cost
benefit test and have an Economic Rate of Return (ERR) that surpassed
MCC's hurdle rate before the funds were released. Because this project
was structured as a grant facility around proposals to be solicited
after the compact was signed, no firm ERRs could be generated before
details of the proposals were known. The Green Prosperity Facility was
designed, therefore, to fund proposals that would come after the
compact was signed and bring private investment to locally-driven
energy production, building on a separate compact activity that works
to clarify land use and licensing--a prerequisite for any successful
infrastructure development in Indonesia.
The economic analysis of this project began before the compact was
signed. However, the Government of Indonesia originally proposed a
series of renewable energy projects to MCC based on the results of a
constraints analysis that showed access to electricity in remote areas
was a constraint to the country's economic development. As part of
MCC's due diligence during compact development, preliminary project
appraisal and cost-benefit analysis were done on a sample of projects
in these sectors to inform project eligibility requirements and to show
there were viable projects that could meet the full economic analysis
and receive funding once the grant facility was launched. At the same
time, MCC included a covenant in the compact that outlined legal and
regulatory reforms necessary to attract private investment in this
sector.
As a result, the Green Prosperity Facility will provide co-
financing only on a competitive basis, generally Public Private
Partnerships, with a valid cost-benefit analysis used to determine ERRs
for each. A proposal must meet MCC's threshold ERR of at least 10
percent to be eligible for funding. After a call-for-proposals, 51 were
received and reviewed, leaving 23 short-listed proposals for
electricity generation by small hydro, biomass, or biogas technologies
that were ultimately selected for co-financing subject to successful
final negotiations. The ERR was devised by comparing the economic cost
of supplying electricity via the proposed technology to the economic
cost of current fossil fuel based electricity supplies.
The estimated ERRs for all 23 proposals selected for partial
funding were above 10 percent, ranging from approximately 12 percent to
over 45 percent. Using our ERR criterion demonstrates that the overall
economic cost of supplying electricity via the proposed renewable
technology in each of the 23 proposals is less than the current
economic cost of supply via fossil fuels.
With respect to the Procurement Modernization Project, corruption
and other inefficiencies in government procurements starve government
funds which should be going to their own social services. While there
is a strong intuitive link between the efficiency of government
procurement and a country's economic growth, it is difficult to find
hard data that meets MCC's standards to determine a baseline for
measuring the quality of each procurement based on the improved
practices the project would deliver. Ultimately, the project is working
to provide Indonesia, and the international development community, with
a better understanding of how this procurement reform effort will
deliver an improvement in goods and services while addressing
corruption. Some spending units have already reported savings of 16
percent and higher following their engagement with the project.
Do you have information on the economic rate of return for
either of these projects now? Does this green energy project
offer a better return on investment than say distributing
diesel generators to these remote areas?
Answer. Cost Benefit Analysis (CBAs) has been or will be done for
the Green Prosperity awards before they are funded. MCC will have ERRs,
as well estimates of annual economic benefit and cost streams,
assumptions about the number of direct beneficiaries, unit costs and
benefits, etc. for all awarded GP grants.
At this point, we have estimates for all grants that have been
awarded for both energy and natural resource management projects.
On-grid: Regarding energy projects specifically, the GP
Facility solicited proposals for supplying electricity into the
national grid in remote areas of Indonesia (``on-grid''
projects). Electricity is typically in short supply in these
areas and is currently supplied mainly from a combination of
fossil fuel generating units operated by the national electric
utility. 51 proposals were received and after careful review 23
proposals to generate electricity by small hydro, biomass, or
biogas technologies were short listed and ultimately selected
for co-financing (subject to successful final negotiations and
validation of the preliminary economic analysis). An ERR was
estimated for each short-listed project by comparing the
economic cost of supplying electricity via the proposed green
technology vs. the economic cost of current fossil fuel based
electricity supplies. The estimated ERRs for all 23 proposals
selected for partial funding were above 10 percent, ranging
from approximately 12 percent to over 45 percent. This means
that the overall economic cost of supplying electricity via the
proposed renewable technology in each of the 23 proposals is
less than the current economic cost of supply via fossil fuel.
In these remote areas off Java, current electricity supply
costs tend to be relatively high due to the small scale of
generating units, technical inefficiencies, and high fuel and
transportation costs. Because of this, renewable technologies
can, under the right circumstances, supply electricity at lower
economic costs in Indonesia.
Off-grid: The Facility is currently soliciting proposals to
supply electricity using renewable technologies (small hydro,
biomass, biogas) to remote areas of Indonesia not currently
supplied by the national grid (``off-grid'' projects). As
described above, ERRs will be estimated for all short listed
proposals, and only proposals with ERRs above 10 percent will
be selected for co-financing. Alternative sources of energy
(e.g. kerosene lighting or diesel motors) often cost more than
electricity. Thus we anticipate receiving a number of well
thought out and designed proposals with ERRs in excess of 10
percent.
Without the initial CBA on half the Indonesia compact
projects, does this hinder your ability to do rigorous impact
evaluations?
Answer. No. Because MCC's due diligence included sector surveys and
is ensuring each Green Prosperity Project has or will have a positive
cost benefit analysis before funding, the lack of an initial CBA prior
to the appraisal of individual projects does not affect the ability to
conduct a rigorous impact evaluation. The ability to rigorously
evaluate a project depends on the clarity of project design and the
implementation strategy, which a CBA simply reflects rather than
informs. Building a CBA into the process of individual project (as
opposed to the umbrella program) approval has helped instill in our
government partners the need for objective, economically-focused
criteria for project selection and award of grants. For every project
in this compact, MCC is working to learn lessons from implementation
and offer these to the Indonesian government and other donors, as well
as to ensure the sustainability of the projects after the MCC compact
ends.
Question 2. I was troubled to find that according to a study by the
Center for Global Development that in MCC's first ten years, about 9%
of MCC's portfolio-roughly $800 million-did not demonstrate acceptable
returns at the time of project approval.
Can you explain to me why so many projects were approved
with either a calculated economic rate of return below 10%, or
in some cases, no calculation of the economic rate of return?
Answer. MCC's Economic Rate of Return (ERR) calculation is an
assessment performed to estimate the anticipated effect of our work.
Our rigorous analytic framework is in place for all of our projects,
though the nature of the projects will determine when or how we can
calculate anticipated costs and benefits.
For traditional projects, ERR projections are available well in
advance. For other projects, such as those which fund proposals
solicited from the private sector or from local communities,
prospective ERRs cannot be calculated before MCC has received the
proposals. This is a timing issue-these projects will have ERRs, but do
not have them at the time of project approval, because the proposals
have not yet been received.
MCC also has introduced a practice of calculating ERRs at the end
of MCC's five year investment. These closeout ERRs provide an updated
estimate for the returns of the investment over its lifetime. While not
all projects achieve the original estimated ERRs, the closeout ERRs
help us assess our project's success, and help us learn and improve
future project designs. As of October 2015, MCC has calculated closeout
ERRs for 58 projects, representing $2.9 billion, with an average. ERR
of 16%.
When projects are approved at lower projected estimated rates of
return, MCC transparently documents the mitigating economic assumptions
which tend to reflect two scenarios. The first is that MCC partner
countries remain poor, with very low levels of economic activity and
extremely challenging growth dynamics where useful and accurate
economic data is limited. This can result in both low ERRs and
difficulty in producing a useful ERR.
For instance, the ERR spreadsheets for the Burkina Faso roads,
mentioned in the CGD paper, can be found on our website. Burkina Faso
is one of the poorest countries in the world. It is landlocked, borders
the Sahara Desert and has a gross national income per capita of $670.
80 percent of Burkina's poor live in rural areas and the country faces
several severe constraints to economic growth. MCC compact investments
targeted very poor beneficiaries, 68 percent of whom earned less than
$2 per day. These investments were made with the understanding that the
Government would adopt significant institutional and policy reforms
around road maintenance, agriculture, water management and land tenure
intended to improve the larger investment climate, all of which were
met. However, the estimated direct benefits from the project
investments were projected to be less than anticipated over the 20 year
compact period. This was due in part to the difficulty of gathering
sufficient reliable baseline data, especially concerning potential
agricultural increases in zones connected by the roads investments,
during compact development. Nonetheless, the Government and MCC expects
more than 1.1 million people to benefit from the investments to improve
land tenure security and land management, enhance agriculture
production, expand access to markets through roads, and address primary
school completion rates for girls. And MCC will conduct and share post-
compact ERRs and the investments will be independently evaluated to
assess whether they achieved the expected results.
Another of the projects that CGD highlights, the Namibia Indigenous
Natural Products, did have an ERR below the hurdle rate at the time of
investment. However, based on more current estimates of costs and
benefits, the updated ERR will be higher than the 10 percent hurdle
rate due to a higher demand for these kinds of natural products in the
world market than anticipated. While MCC does strive for the best
evidence to inform our investment decisions, and looks for those with
high economic rates of return and benefits for the poorest when we
approve investments, the Namibia example shows the uncertainties in the
analysis.
As noted above, MCC may approve a project but, because of the
nature of the investment, cannot complete the ERR until later. Both
Indonesia's Green Prosperity and the Philippines' community-driven
small infrastructure projects are examples of this. Even though we were
able to use economic analysis to determine the project framework,
because both projects are based on calls for proposals, and since that
call cannot happen until after the compact is approved, MCC must ensure
economically valid investments are made through stipulations in the
actual grants.
In all of these cases, ERRs allow us, together with our partners,
to measure and prioritize the best and most effective possible
interventions. MCC will continue to make investments based on the best
possible evidence that they will be cost-effective. In all cases, we
will continue to share with Congress and the public the pre-investment
evidence, cost-benefit calculations when projects are complete, and
rigorous, independent evaluations. While even the best forecasts may
still fall short when they are implemented in complex and changing
environments, it is critical to use and share the evidence-from
investment decisions, implementation and results-so that MCC can be
held accountable and provide other USG and international donors the
results.
Question 3. Looking at the Indonesia example, as well as a few
others, I'm concerned about how truly independent MCC is from State or
presidential priorities or initiatives. Tanzania's second compact, for
example, focuses on the energy sector, making it a big deliverable for
the President's Power Africa Initiative. However, about 70% of the
programs (worth $285 mil/5 year compact) is lacking a cost-benefit
analysis. Despite this, the compact was put before MCC's board for
consideration.
Why did the MCC (reportedly) not conduct a CBA of
Tanzania's second compact proposal prior to consideration of
the MCC Board?
Answer. MCC maintains a strong commitment to evidence-based
decision-making in our programs, and works to ensure our programs are
cost-effective with sound program logic that will produce real impact.
MCC is committed to ensuring that our proposed investment in Tanzania
meets MCC's economic analysis standards and is justified by a
satisfactory economic analysis prior to compact signing. At the time of
consideration, MCC communicated to the government of Tanzania, as well
as the Board and Congress, that while initial economic analysis
justified the projects, more analysis would need to be done and that
the compact with Tanzania would not be signed until that was complete.
As such, the compact and its projects have been reviewed and discussed,
but not yet approved, by the Board. MCC and the Government of Tanzania
continue to advance design and economic analysis work on all compact
projects.
It is important to note that Tanzania's interest in, and MCC's
decision to support, investments in the power sector in Tanzania and
other countries is driven by the Constraints to Growth Analysis
conducted by economists to help guide investment decisions.
If that's the case, why was there a rush to approve
projects before they are better defined?
Answer. MCC and the Government of Tanzania had been developing the
compact for approximately two years before the compact was presented to
the Board of Directors. Over the course of the compact development
process, and prior to signing a 609g funding agreement, MCC asked the
Government of Tanzania to undertake politically tough reforms to
increase transparency and accountability in its energy sector. Some of
the toughest conditions included the appointment of a regulator in
Zanzibar, payment of approximately $37 million of the national
utility's arrears to the private sector, adjusting electricity tariffs
for inflation, fuel costs and foreign exchange fluctuations, and
publishing technology-specific models for power purchase agreements.
The government fulfilled all of these commitments with the
expectation that MCC would negotiate the compact proposal and advance
it for Board consideration. The MCC Board reviewed the Tanzania Compact
in September 2015, but conditioned approval on two additional critical
stipulations, (1) that Tanzania be determined to be an appropriate
partner for MCC as evidenced in part by passing MCC's 2016 scorecard
and (2) the projects to be funded under the compact meet MCC's economic
analysis standards and would be justified by a satisfactory economic
rate of return (ERR).
While Tanzania subsequently did pass the Control of Corruption
indicator, concerning trends of policy performance have since emerged.
Because of this, MCC's compact has not been provided to the Board for
approval and, in November 2015, MCC sent the Government of Tanzania a
letter expressing MCC's deep concerns regarding the ongoing electoral
crisis in Zanzibar and the recent arrests made under cyber-crimes
legislation. This letter reminded Tanzania that all country partners
are expected to maintain a commitment to good governance, which
includes a strict adherence to democratic principles, and protection of
freedom of expression. In December, the Board deferred a vote on
Tanzania's eligibility for a second compact until relevant governance
concerns had been addressed.
Do you believe that MCC has maintained its integrity as a
truly independent agency, as originally intended?
Answer. Yes. MCC relies on a rigorous data-driven approach to
country selection and project selection. Our reliance on transparent,
evidence-based, and accountable decision-making roots our independence
and objectivity. Our Scorecards are built on independent third-party
data. We perform Constraints Analyses before designing all of our
compacts, in order to determine objectively what the binding
constraints-to-growth are in each of our partner countries. We rely on
these analytics and data to make key decisions.
By law, MCC's CEO reports to a Board of Directors, which consists
of five individuals from the government--the Secretary of State,
Secretary of the Treasury, U.S. Trade Representative, USAID
Administrator and MCC's Chief Executive Officer--and four highly
regarded private-sector Board members appointed by the President based
on congressional recommendation and Senate confirmation. Each member
brings a different perspective on how to fulfill MCC's very narrow
mission. The Board's reliance on the scorecards as a critical component
of selection decisions ensures MCC remains independent as it pursues
its mission of poverty reduction through economic growth in the best
governed poor countries.
MCC does not operate in a vacuum. The agency would be remiss if it
did not work in concert with other aid agencies to ensure that our
assistance is not redundant or wasteful. We carefully weigh the
opportunities we have to leverage other USG (or third party donor)
resources in order to avoid waste and ensure an integrated effort in
our partner countries.
The combination of MCC's Board and an evidence-based approach to
selecting partners and making investments help ensure the agency
maintains integrity and independence in its decision-making.
Why is this independence a vital part of MCC as an aid
agency?
Answer. MCC was established in 2004 to be a different kind of
development agency. We focus on a specific group of developing
countries-those that have demonstrated a commitment to good governance
and sound social and economic policies. We work alongside them to make
large, long-term investments with high economic and poverty reduction
returns. We are able to tailor solutions for each country based on what
the evidence says are the specific barriers to growth and poverty
reduction.
When creating MCC, Congress determined that independence was
necessary to ensure the funds would be used for a single purpose:
making investments based on transparent evidence and analysis. The
independent design and approach improves MCC's accountability and helps
MCC encourage and reward developing countries for good policies.
Simply put, because MCC chooses countries based on how they perform
on third party indicators and not on what any U.S. government agency or
administration deems important to their short term interests, countries
know that making tough political reforms will be rewarded. This clear
incentive structure permits MCC to promote American governance values.
This transparent framework for encouraging difficult policy reforms
benefits American businesses who wish to trade with these emerging
markets. Just as important, by investing in country-driven projects
based in sound economic data and local priorities, rather than
Washington-based priorities, MCC is able to more effectively and
efficiently reduce poverty and create economic growth in a sustainable
way.
Question 4. I constantly hear feedback from constituents that we
have too many federal agencies. We have too much bureaucracy. And a lot
of them are duplicative. I wasn't here in Congress when the MCC was
created in 2004.
Can you explain to me, why do we have MCC, which has an
annual budget of a billion dollars, when we have USAID doing
foreign assistance with a budget of $17 billion per year?
What does MCC do that USAID can't?
Why create another agency?
Answer. MCC and USAID are complementary tools and both play vital
roles. MCC's efforts are highly focused and mission-based towards
economic growth in a small group of relatively well-governed poor
partner countries as measured though objective data. We are able to
tailor solutions for each country based on what the evidence says are
the specific barriers to private investment as the means to accelerate
and sustain poverty reduction.
MCC, however, does not work in many places where the United States
has important interests, such as active conflict countries or U.S.
allies which do not meet the scorecard criteria. Also, MCC does not
provide humanitarian and disaster response which are core strengths of
USAID. Since all MCC programs have an economic growth tie and a
country-led model, a health or education program at USAID and one at
MCC would look very different, for instance.
MCC has specific authorities designed to support its focused
mandate and model which may not work for USAID. Congress has authorized
MCC to commit funding for long-term investments in a select group of
countries, work in partnership with country representatives to design
and implement programs to promote growth and reduce poverty, and to
create incentives for policy reform. MCC's statutory guidelines require
all activities be completed in 5 years and show a high, direct economic
rate of return. These requirements exclude many good and necessary
development activities that the U.S. may have an interest in financing.
In sum, because the U.S. has multiple objectives and needs a
variety of tools to respond, our national interests are better served
by having both of these agencies addressing different objectives with
complementary strengths and mandates.
With its emphasis on country-led implementation, strict discipline
on economic analysis, and strong focus on building conditions for
private investment, MCC's unique model works best in an independent
agency. This independence has produced a culture of best practices and
innovation. We have seen many of principles that MCC is testing
starting to be rolled into other development programs. Consolidation
into an agency with a much broader set of objectives and country
partners, and with different authorities, would undermine the
effectiveness of the MCC model.
Question 5. As you've discussed, MCC's legislative mandate is to
lessen poverty through economic growth.
Do you anticipate a measurable decrease in poverty as a
result of MCC compacts?
Answer. There are a number of factors that contribute to overall
economic growth and poverty reduction in a developing country. MCC's
approach is to maximize potential impact by working in partnership with
country representatives to understand and unlock the binding
constraints to private investment in order to reduce poverty. MCC holds
itself to a high standard on measuring results such as poverty
reduction. Rather than just measure outputs (such as the number of
farmers trained) or intermediate outcomes (such as whether farmers are
actually using the new techniques), MCC is striving to show not just
that poverty is being reduced, but also that poverty is being reduced
because of MCC's interventions. To this end, we have examples where our
programs have produced measurable decreases in the poverty of our
beneficiaries in the form of increased farm sales and incomes and
increased household incomes. But we also have examples where our
programs met or exceeded program targets but the evaluations did not
find an impact on incomes.
The Morocco performance evaluation showed mixed results. For
instance, although farmers participating in the Olive Tree Irrigation
Project expressed satisfaction with program's activities (training and
irrigation) and some reported increased farm incomes, average gross
farm income in the surveyed areas declined by 13 percent likely due to
adverse weather conditions in crop year 2012/2013. This does not mean
later years will not see an increase in incomes based on the new
training and irrigation, however. Participants in the similar Date Tree
Irrigation Project reported a 7 percent increase in their average gross
farm income.
Because MCC has a variety of projects, what we are able to measure
also varies. For example, we have some programs with clearly defined
populations who will benefit from a program (such as the individual
farmers mentioned above). In these cases, we are able to design
evaluations to assess direct benefits from our programs on the
beneficiaries. In other cases, we are investing in large-scale
infrastructure, like building or rehabilitating a road. In these cases,
it is much more difficult to identify individual beneficiaries, but we
can measure good proxy or intermediate outcomes. In the case of roads,
these results would be defined by things like reduced vehicle operating
costs and, over time, changes in the price of goods that travel along
the roads to markets.
Are sufficient funds being provided to each country to make
a difference in their poverty levels? MCC's annual budget,
after all is only roughly $1 billion per year. Can you explain?
Answer. An increase in MCC funding, as requested by the President,
would enhance the agency's ability to develop high-impact compacts on
an expedited timetable in key regions and to share expertise with other
elements of the U.S. Government. The lower amounts ultimately
appropriated will require us to adjust planning going forward, however,
our role is to use our limited, but still significant, grant resources
to help support and spur country commitments to sound economic and
social policies, good governance and investments in their own tools to
accelerate and sustain public and private investment in their country's
future prosperity.
Donor funding alone will never be enough to lift an entire
country's population out of poverty. MCC's role is to invest a
significant (but still limited) amount of funds in a way that
encourages countries to pursue sound economic and social policies and
strive toward good governance, while we work in partnership to unlock
some of their most binding constraints to economic growth. These
actions are designed to help the countries themselves attract the
public and private investment required to sustain and accelerate their
development progress. By creating the infrastructure and policy
environment necessary for additional investment to follow MCC's
investment into our partner countries, we multiply the impact of our
investment many times over.
To what extent have MCC projected impacts matched actual
post-compact impacts and projected outputs matched actual
outputs?
Answer. MCC uses projected ERRs to estimate specific quantitative
post-compact impacts. MCC is generally looking to fund projects with at
least a 10 percent economic rate of return (ERR) over a 20-year period.
In fact, what we have seen-in a sampling of projects recently
completed-is that the average ERR upon completion is actually over 16
percent.
Across MCC's closed compacts, approximately 70 percent of the
performance indicators that were tracked either met or exceeded end-of-
compact output targets. In Armenia, Benin, El Salvador, Mozambique,
Nicaragua and Vanuatu, over 85 percent of indicators met their targets.
We also look at results from our independent evaluations, which
focus on other outcomes and results that occur in the post-compact
period. These results are highly project-specific and are difficult to
generalize across the portfolio. Some examples include:
In Mozambique, one out of every two people lives without
access to clean water. One of our rural water supply activities
showed that the program cut down on the time women and girls
spent collecting water and increased consumption of cleaner
water, but did not reduce water-related illness. We learned
that much of the water contamination came from dirty buckets
and bad storage practice after water was collected.
In Mongolia, heavy use of coal stoves pollutes the air and
causes health problems. Poor families also spend up to 40
percent of their income to fuel stoves. MCC's fuel subsidy
reduced emissions-even more than anticipated-but didn't change
fuel costs. Households said their homes were warmer at night,
suggesting users may have sacrificed fuel economy for comfort.
In Honduras, MCC helped rehabilitate a main highway and
upgrade and pave secondary roads. The independent evaluator
calculated that the transport cost savings would results in
$547 million economic returns (from a $138m project). But it
also showed that better due diligence about costs-especially
full engineering road cost estimates-could have helped target
more profitable roads and created more benefits.
Below is a chart that lists the percentage of outputs achieved,
outcomes achieved, and both. We define an output as a direct result of
an activity, such as the goods and/or services produced by the
activity, and an outcome as the longer-term effect that follows
directly from the outputs of an activity (for example, the number of
miles of roads built is an output, while reduced transportation costs
due to better quality roads is an outcome). These percentages were all
achieved by the end of the compact. In those some cases when the
partner country continued works after compact closeout, the percentages
for those projects would increase, but this is not included in order to
track the effectiveness of compact funds alone.
Percentages of Outputs and/or Outcomes Achieved at Compacts' End
----------------------------------------------------------------------------------------------------------------
Outputs & Outcomes
Compact Outputs Achieved (90 Outcomes Achieved (90 Achieved (90 percent and
percent and above) percent and above) above)
----------------------------------------------------------------------------------------------------------------
Armenia........................... 100 75 88
Benin............................. 85 50 61
Burkina Faso...................... 65 33 48
Cape Verde........................ 57 35 43
El Salvador....................... 93 93 93
Georgia........................... N/A 57 57
Ghana............................. 58 50 53
Honduras**........................ 63 68 66
Lesotho........................... 63 29 50
Madagascar*....................... 71 24 34
Mali*............................. 76 70 73
Moldova........................... 73 69 71
Mongolia.......................... 75 47 64
Morocco........................... 66 31 52
Mozambique........................ 90 75 88
Namibia........................... 75 50 65
Nicaragua**....................... 94 72 87
Tanzania.......................... 58 46 53
Vanuatu........................... 89 100 92
----------------------------------------------------------------------------------------------------------------
Total............................. 71 47 60
----------------------------------------------------------------------------------------------------------------
Total excluding terminated 72 48 61
compacts.........................
----------------------------------------------------------------------------------------------------------------
*Terminated
**Partially terminated (The % achieved should not be affected. Indicators affected by the partial termination
were excluded from this count.)
Are projects ever suspended or terminated due to failure to
meet targeted outputs or deliverables? Why or why not?
Answer. Yes. MCC investments have been suspended for both declines
in country performance on MCC's governance standards as well the
performance of projects and activities in implementation. Suspension or
termination of a project or activity is not uncommon given MCC's
careful and regular monitoring of status. This is a benefit of day-to-
day oversight, formal quarterly monitoring, and, more broadly, the
limitations of a strict five-year implementation period and defined
project budget. MCC monitors progress on all compact projects
throughout implementation and has taken action to suspend or terminate
activities when appropriate, whether for failure to meet targets, for
non-performance of contractors, or otherwise. Because compact funds are
actually paid directly to contractors and vendors and not to the
partner governments, works that are terminated can be either
deobligated by MCC and used for another country or reallocated to
successful projects within the existing compact framework depending on
the reason for termination or the timeline and economic analysis of the
existing compact.
Several examples are provided below:
The Government of Morocco proposed the Enterprise Support
Project to help with two of its critical economic priorities:
reduce high unemployment among young graduates and encourage a
more entrepreneurial culture. High levels of unemployment in
Morocco stem from modest formal sector employment generation
and a burgeoning labor supply. While the overall unemployment
rate in Morocco hovers around 10 percent, youth unemployment in
recent years has risen to approximately double that amount. The
objective of the Enterprise Support Project was to improve the
outcomes of two existing high-priority Government of Morocco
initiatives: Moukawalati, which translates as ``My Small
Business,'' a national program intended to address high youth
unemployment rates and drive Morocco's businesses to be more
entrepreneurial and competitive in the face of globalization;
and the National Initiative for Human Development, a multi-year
initiative aimed at creating opportunities for the poor,
vulnerable and socially excluded. The project was designed to
be carried out in two phases, with continuation of the second
phase subject to positive results from an impact evaluation of
the first phase. The pilot phase was completed in March 2012;
although it met its implementation targets and showed promising
trends, the impact evaluation did not show statistically
significant impacts and the revised economic rate of return did
not justify scaling up the project for a second phase. MCC did
not continue with a second phase and the project was closed in
May 2012.
The Mozambique Nacala Water Supply Project was terminated
because the contractor failed to perform, despite the issuance
of multiple cure notices and warnings from the engineer and the
client, MCA-Mozambique. The contractor's inability to perform
jeopardized the timeline, and we reached a point during the
implementation period that keeping the contractor would prove
problematic for MCA-Mozambique after the conclusion of the
compact. Though the project design was sound and, if
constructed, would have delivered as designed, the project was
halted because of contractor performance issues.
In the first Ghana Compact, the Agricultural Credit
Activity was terminated when sub-loans were not being repaid.
About $19.6 million was disbursed to sub-borrowers in 2009.
Most of these sub-borrowers were smallholder farmers
cultivating less than 2 hectares. Due to a high percentage of
the portfolio at risk, MCC halted further lending in 2010 and
undertook a series of measures with its Ghanaian partner, the
Millennium Development Authority (MiDA) to recoup the on-lent
funds. MCC requested MiDA to engage a forensic auditor to
ensure that funds were not diverted. The audit concluded that
there was lax oversight by the implementing entity, the Bank of
Ghana. Due to this laxity, MCC issued a demand letter to the
Bank of Ghana requesting that it repay $6.7 million; these
funds were paid in February of 2013.
Question 6. It has been more than 4 years since the first MCC
compacts ended, and so far, only a handful of evaluations have been
publically released. Nineteen compacts with more than three dozen sub-
projects ended more than one year ago.
When do you expect we will see evaluations of these
completed projects? Will you notify my staff when these
evaluations are complete?
Answer. MCC's independent evaluations are generally conducted 2-4
years after our compact projects end. This is to give the projects
sufficient time to ensure that benefits accrue and that expected
results can be measured in a way that is meaningful. All of our program
evaluations are posted on our evaluation catalogue online, and we will
alert Congress, including your staff, when these are posted. In
addition, MCC collects data during compact implementation, which allows
us to monitor progress and make any adjustments necessary.
MCC's Monitoring and Evaluation Team is constantly working to add
more evaluations to this catalogue. As of December 2015, MCC had
completed and posted 14 impact evaluations (which measure our projects'
impact on poverty reduction) and 27 Performance evaluations (which
measure our project outputs, like number of farmers trained or miles of
road paved). An additional 31 impact and 46 performance evaluations are
underway or planned. These evaluations will continue to be released as
the evaluators finish their analysis.
Why is it taking so long to produce these evaluations?
Answer. MCC's evaluations include not only immediate outputs of the
investments, but also analyze the long-term impacts of these
investments. As the impact from a project may take time to be realized,
MCC endeavors to collect data after enough time has passed for the
effects of a project to be fully realized. Evaluations-especially
impact evaluations, which measure long-term effects on poverty
reduction due to MCC projects-take time. Impact evaluations are often
conducted years after projects are completed. For example, the impact
on farm income from training farmers on new growing techniques may not
be seen for one or two growing seasons after the implementation of the
new techniques.
Impact evaluations are often not finalized for several years after
a compact closes, in order to better analyze the long-term impacts of
our investments. They are conducted by independent firms under contract
to MCC. Performance indicators are tracked quarterly and are available
on MCC's website in a document called ``Key Performance Indicators.''
Question 7. MCC is taking on a lot of infrastructure programs-roads
and energy infrastructure, specifically. These compacts only last five
years, but most of these projects will need proper upkeep and
maintenance.
What steps does MCC take to ensure that its programs,
especially those building infrastructure, are maintained after
the MCC program concludes?
Answer. One of MCC's core principles is country ownership, which is
the idea that countries are full partners in designing and implementing
compacts. This is an industry best-practice approach that helps to
ensure long-term sustainability of our investments. The ownership a
country exhibits when developing the proposals and managing the
projects helps ensure sustainability. Each compact partner establishes
an ``accountable entity'' (known as the MCA) through which the country
implements their compact program. MCAs have governing boards that
include government, private sector, and civil society members. MCC's
implementation oversight includes direct daily interaction with the MCA
entity leadership and staff. The structure of the MCA and its close
working relationship with MCC supports effective implementation on
tight timelines, without waste, fraud, or abuse, while also ensuring
that the partner country government is fully invested in ensuring the
sustainability of our joint work.
In addition, because the agency measures the benefit streams of its
investments over 20 years, MCC takes the long view with all of its
projects. Each compact has conditions precedent (CPs) that must be
satisfied before entering into force and, thereafter, for compact
funding disbursements. MCC has begun listing these CPs on our website
and tracking their success at closure. For instance, CPs on a road
construction project typically will include reform to the country road
maintenance systems generally, not just targeted to the MCC-funded road
segments. This both enhances sustainability environment for the newly-
constructed road and avoids any risk that the compact project would get
special attention from government funds while other roads languish in
need of maintenance. MCC also works with partner countries to establish
maintenance plans once projects are completed.
For example, in Burkina Faso, MCC funds was used to put in place
critical policy reforms to ensure long term sustainability of road
infrastructure. In addition, MCC funded technical assistance activities
that are aimed at building the institutional capacity of the road
agency to develop a 5-year road maintenance plan and implementation
mechanisms. MCC funds were also used to setup innovative matching
funding schemes that incentivized the government of Burkina Faso to
contribute long-term sustainable financing for road maintenance.
Another example is Liberia where we are funding the establishment of a
training center and training the technicians in the electricity sector
to better operate and maintain the assets of Liberia's electricity
utility that includes the Mt. Coffee Hydropower Project whose
rehabilitation we are also funding.
In Jordan, where MCC funded a program to provide additional water
to one of the largest cities--Zarqa--through wastewater treatment, the
compact implemented several measures to instill operational and
financial sustainability, including realigning and raising water and
sewerage tariffs to reflect the cost of service, mobilizing private
sector finance and technology to construct and operate wastewater
treatment, mobilizing private company to manage and maintain all water
and wastewater assets and operations in Zarqa under a performance-based
management contract, and funding capital equipment and training for the
maintenance of sewer trunk lines.
Progress on these promises by the government are tracked and will
factor into possible considerations of a subsequent compact.
__________
Response to Additional Questions for the Record Submitted
to Congressman Jim Kolbe by Members of the Committee
Congressman Kolbe's Response to Senator Corker
Question. The current Board membership of MCC consists of five
public sector appointees and four private sector appointees. The MCC's
mandate is to seek poverty reduction through economic growth
unencumbered by important but unrelated non-economic foreign policy
objectives.
Given the strong public sector representation on the Board,
what would be the benefits of greater private sector
representation and what should be the proper ratio?
What, in your view, would be the downside of allowing the
board to vote for its own chairman as opposed to having the
Secretary of State have the position by statute?
Answer. I think this is a rather novel idea and one that should be
explored with the administration. There will be significant pushback
from State and the WH, but it is worth seeking their views on this.
Arguments in favor of this approach:
a. Would give more independence to the Board
b. Might permit an individual, such as one of the private members with
more time and direct interest to serve as chair.
Arguments against this approach:
a. There will be a tendency on part of the government board members to
defer to SOS as Chairman, giving them an almost insurmountable
bloc of votes to elect the Secretary every time.
b. State might use this as an excuse to undermine the effectiveness of
the MCC and perhaps even actively work against its annual
appropriation.
Question 2. Concerns have been raised in recent years that non-
economic considerations may have played a decisive role in granting
some compacts in recent years.
Do you share the concern that in some cases, MCC decision
making may be unduly influenced by broader foreign policy or
other priorities unrelated to economic development? For
example, should we be concerned that a country might receive a
compact based primarily on strategic considerations and not on
economic development grounds?
Answer. Absolutely. This has been the case on several different
occasions. Only once,, however, did the Board overtly violate the rule,
that in the case of designating Georgia as eligible for an MCC Compact.
That is why the charter for MCC must be very clear on this matter. The
Congress must conduct periodic oversight, including examination of the
minutes of Board meetings to see if these pressures are being applied.
And that is why the private members of the Board are essential as they
will have the purposes and objectives of the MCC more clearly in their
focus than foreign policy executives from the administration who
naturally have other considerations in mind for the uses of a Compact.
Please describe ways to improve MCC Board governance to
prevent undue influence being exerted with the intent to make
Board decisions based not primarily on economic development
grounds but on larger foreign policy strategic interests.
Answer:
a. Strengthen the language of the charter.
b. Periodically include report language in the appropriations bill
calling this issue to the attention of the executive branch
when Congress believes undue influence is being exerted.
c. Increase the number of private members of the Board of MCC
Question 3. There appears to be a growing trend whereby certain
countries have been cracking down on international civil society NGO's
through politically motivated investigations or registration laws.
These actions appear designed to chill the activities of these civil
society groups or drive them out altogether. It would be inappropriate
to provide a compact to a candidate country that is unduly persecuting
civil society.
Should Congress consider adjusting the indicators to
include an evaluation of the enabling environment for civil
society in a candidate country?
Answer. This tendency might be a reason to strengthen the
indicators to include this as an evaluation point. I think the
indicators already touch on this, but perhaps need to be made more
explicit. Certainly, persecution of civil society should be considered
as important as an indicator on rule of law, transparency or commitment
to education or health care.
Should the MCC develop internal reporting requirements so
that the MCC Board, before approving a country compact, is
fully informed and in a position to evaluate whether the
candidate country has been taking actions intended to
discriminate and discourage civil society groups from engaging
in legitimate democratic development?
Answer. It should be part of the normal evaluation process and
included in any report to the Board which proposes to designate a
country as compact-eligible. I don't think these should be separate
reporting requirements, but should be included in the usual process of
approving a country for a compact.
__________
Congressman Kolbe's Response to Senator Cardin
Question 1. What are your recommendations for reforming the control
of corruption indicator? In your view, what is the best way to measure
and hold countries accountable for tackling corruption while
simultaneously providing MCC the flexibility to interpret data in the
context of on-the-ground realities?
Answer. There needs to be an objective measurement for corruption.
Unfortunately, the current indicator is flawed in that it relies on a
survey of companies doing business in the country. More emphasis needs
to be put on rule of law, which is a more certain way of tackling
corruption where it exists.
Question 2. With the rise of more middle income countries in the
developing world, the world's poor will be increasingly located in
countries outside MCC's current focus. Is the current approach to
measuring poverty adequate? How might the MCC respond to this changing
face of global poverty?
Answer. The MCC measurement needs to be adjusted so that it can
have broader authority to make compacts with countries that might have
been considered the ``poorest of the poor'' when the MCC was created,
have now advanced to low income countries. This is a positive
development for the world and people in poverty, but MCC should be
adjusting its sights to adapt to the changing conditions. If our
objective is to continue raising the standard of living for the world
population, then MCC must adjust as the rising tide lifts country
incomes upward.
Question 3. The MCC legislative mandate is to lessen poverty
through economic growth. In your view, are sufficient funds being
provided to each country to make a significant difference in their
poverty levels?
Answer. The original plan for MCC was to gradually increase its
appropriation for compacts to $5 billion. We have never come close to
achieving this and, indeed, have found funding levels frozen at
approximately $1 billion for several years. This prevents MCC from
entering into compact that might have deeper economic impact.
__________
Congressman Kolbe's Response to Senator Perdue
Question 1. Here we are about 10 years post enactment of MCC. In
your view, is MCC living up to your original intent for the enacting
legislation-specifically with regard to true independence from other
foreign policy objectives?
Answer. Yes, I think it has lived up to its potential, which
doesn't mean it couldn't do more or do better. In contrast to a lot of
agencies created by Congress, this one has stuck to its mission and
within the parameters of limited funding has fulfilled its objectives.
There have been constant attempts to chip away at its independence by
substituting criteria other than economic development for poor
countries showing promise with better than average governance
standards. But for the most part, the Board, largely as a result of the
independence it gains from outside, private sector directors, has hewed
to its mission.
Question 2. I look to projects like Indonesia and Tanzania, which
were presented to the MCC Board without the requisite cost-benefit
analysis, and in my view, seem that they match up a little too
conveniently with other presidential or administration initiatives and
objectives. Is MCC maintaining its integrity, as you intended at the
time of drafting this legislation?
Answer. Not being involved in day to day MCC operations, I don't
feel qualified to comment on this question except to say generally, as
stated in the response to the question above, that I think MCC had
adhered by and large to its original objectives. Congress and the Board
needs to be constantly attuned to this issue and conduct proper,
rigorous and frequent oversight to be sure the objectives are being
met.
Question. I certainly appreciate the mission of MCC--reducing
poverty through economic growth. However, I constantly hear feedback
from constituents that we have too many federal agencies. We have too
much bureaucracy. And a lot of them are duplicative. I'm sure you heard
similar things from your constituents when you were in Congress. I
wasn't here in Congress when the MCC was created in 2004.
Can you explain to me the debate surrounding MCC at the
time of its creation?
Answer. The debate at the time of creation centered around the
question: could we deliver aid in a fundamentally different way, one
that made the recipient country responsible to developing a plan, for
meeting the criteria for eligibility and avoided most of the
bureaucratic conditions put on other American assistance such as ``Buy
America?''
Why do we have MCC, which has an annual budget of a billion
dollars, when we have USAID doing foreign assistance with a
budget of $17 billion per year?
Answer. USAID has a very different mission. Its assistance is given
for a variety of purposes, most of which are pout into law by Congress,
and does not singularly look at how assistance might be done if truly
in a partnership with the recipient country, freed of bureaucratic
restrictions, and based first and foremost on achieving standards of
governance that have never been a part of USAID's requirements.
What does MCC do that USAID can't?
Answer. See answer above. Its objectives and criteria for
qualification for aid are fundamentally different from USAID. Both have
a mission and purpose. USAID has a multiplicity of goals with its
assistance, from improving health or education, to promoting democracy
and human rights, to promoting gender equality and to some degree
economic development. MCC is singularly focused on the latter.
Why create another agency?
Answer. Because it would have been impossible to achieve the same
goals established in law for MCC within the existing structure and
culture of USAID.
__________
Response to Additional Questions for the Record Submitted
to Andrew Natsios by Members of the Committee
Mr. Natsios's Response to Senator Corker
Question 1. For many years after its creation, MCC was criticized
for its slow disbursement rates. Many, including you, have said that a
large part of the reason for the problem has been weak institutions in
recipient countries.
In your view, has this problem been solved? If so, what
lessons can we take away from these experiences with weak
recipient country institutions?
Answer. What distinguishes highly developed from underdeveloped or
poor countries is the legitimacy, density, productivity, and resilience
of indigenous institutions-governmental, private sector, and non-
profit. USAID in its earlier history used country institutions to spend
aid dollars and programs suffered from low disbursement rates (and
accountability problems) which Congress, the IG and the GAO objected
to. USAID moved in the 1990's to NGOs and development contractors to
implement programs which increased the disbursement rate and reduced
bad audit findings. Development is all about trying to build local
institutions. If Congress wants USAID or the MCC to move money through
local institutions, disbursement rates and accountability will suffer.
Question 2. MCC supporters have long pointed to the ``MCC effect''
as an important component of its value as a foreign aid program. These
supporters claim that the good governance indicators incentivize and
encourage policy reforms in candidate countries. Clearly, countries
that receive compacts have been rewarded for their good governance
efforts.
To what extent has the promise of a compact actually led to
countries taking meaningful steps to change their policies to
meet MCC standards? Has the promise of a compact actually
incentivized change?
Answer. Anecdotally (from my own experience when I served as USAID
administrator) MCC standards do encourage policy reform and change. The
one scholarly study done of this I mentioned in my testimony suggested
otherwise. I think the study was flawed as it asked hundreds of
officials in each developing country whether the MCC standards affected
their decision making processes and the answer in many cases was no.
Reform does not begin and end with hundreds of such officials, it
begins with a few very senior leaders. They are the ones who would be
incentivized. To my knowledge there haven't been any studies of this
small number of leaders, so we do not have academic evidence that the
MCC affect works or does not work. It's an open question from an
academic perspective.
Question 3. Threshold programs were originally intended to assist a
country in meeting scorecard criteria. They have since been redesigned
and now focus on policy reforms.
Are threshold programs enough of an incentive for countries
to strive for compact eligibility?
Answer. In and of themselves these threshold programs are not big
enough to be an incentive, but the promise of a large MCC compact later
is a large incentive that does encourage reform.
Considering the modest budget request made by the President
in his FY2016 budget for threshold programs (2.5%), are they
even needed? What are threshold programs doing that traditional
USAID programming cannot?
Answer. Traditional USAID programming can do (and have done since
the inception of U.S. aid programs) all of the things that the MCC
does. In fact in many ways MCC is what USAID used to be 30-50 years ago
when the programs did far more infrastructure projects than they do now
and were run through host country countries through government
ministries. Congress has been reluctant and even hostile to giving
money to USAID to do infrastructure programs except in Iraq and
Afghanistan (the one place they are most difficult to do because they
are a big bullseye for the insurgencies to shoot at). This is because
of opposition from NGOs (which usually do not do large infrastructure
projects) and from environmental groups (which fear roads, bridges, and
dams open up natural habits for development).
Too much USAID money comparatively is spent on human services and
not enough on good governance and economic growth. There is an
imbalance in the aid system because of earmarking by OMB and by
Congress to politically popular programs and an underfunding of those
which are not (as they are too esoteric). USAID does not get that much
money from OMB, (any) White House, or the Congress anymore to do much
policy reform (with some exceptions). Money spent strategically on
policy reform can (but not necessarily will) have a profound impact,
but it is not easily measured in the short term nor is it easy to see
how it helps poor people directly over the short term (though over the
long term it they do) and thus is not particularly popular in
Washington.
Question 4. Are there any adjustments to the indicators that you
would recommend?
Answer. The more MCC, White House, or Congress increases the number
of indicators the less affect each will have as poor countries do not
have the institutional or organizational capacity to make that many
changes to satisfy the demand for reform from donor governments. Few is
better. As I indicated in my testimony the corruption indicator based
on empirical evidence needs to be changed since it is the most
important indicator statutorily. However I don't know many Senators and
Congressmen who are going to vote to abolish the corruption indicator
even if it is imprecise. The rule of law is a much better indicator, so
perhaps the Committee could consider combining a rule of law indicator
with the existing corruption indictor. That would help.
Question 5. MCC's unique performance indicators evaluate a
candidate country's record of ruling justly, investing in people, and
establishing economic freedom. MCC economic assistance is intended to
go to recipients who embrace core values of economic and political
freedom.
Do the current indicators adequately capture the kind of
policy environment that is needed for private enterprise to
thrive and grow?
Answer. The World Bank Doing Business Report (which was almost
abolished a few years ago by the WB because of pressure by countries
that do not do well in the DBR index) is one of the best index on
economic growth and business investment environment since nearly all of
the sub-indicators which it is composed of are based on empirical
evidence. I think the DBR may be used by inference in the MCC, but not
directly (though I am not sure of this). USAID is the strongest
supporter of the DBR in the donor community and has had a program to
implement business climate reforms which we started when I was USAID
administrator and continue to this day.
Question 6. There is a growing trend whereby certain countries have
been cracking down on international civil society NGO's through
politically motivated investigations or registration laws. These
actions appear designed to chill the activities of these civil society
groups or drive them out altogether. It would be inappropriate to
provide a compact to a candidate country that is unduly persecuting
civil society.
Should Congress consider adjusting the indicators to
include an evaluation of the enabling environment for civil
society in a candidate country?
Answer. Increasing the complexity of MCC evaluations and indicators
is not a good idea. It will simply increase the amount of paperwork and
bureaucracy which costs money.
Should the MCC develop internal reporting requirements so
that the MCC Board, before approving a country compact, is
fully informed and in a position to evaluate whether the
candidate country has been taking actions intended to
discriminate and discourage civil society groups from engaging
in legitimate democratic development?
Answer. I would not increase the number of indicators any further
for reasons stated earlier, though I am sympathetic to the argument.
What would be a better idea is finding a new Governing Justly indicator
to substitute for the current one which includes the environment for
civil society.
__________
Mr. Natsios's Response to Senator Perdue
Question 1. Mr. Natsios, in your testimony you criticize the
decision-making process for U.S. foreign aid as being too centralized
in the State Department. As the chairman of the SFRC subcommittee that
oversees foreign aid, I'm interested at looking at how we do foreign
aid broadly.
Can you detail for me further the problems you see broadly
with how we do foreign aid?
Answer. Attached to this email is an essay I wrote five years ago
called ``The Clash of the Counter-bureaucracy and Development''
published by the Center for Global Development and an article for
Foreign Affairs magazine published in November 2008 called two other
USAID Administrators (Peter MacPherson under President Reagan and Brian
Atwood under President Clinton) and I wrote on aid reform called
``Arrested Development.'' These two papers describe both the problems
and some solutions and though they are dated are still valid as most of
the reforms have not taken place.
What recommendations do you have for how we can do this
better?
Answer. To summarize the two articles our foreign aid program
should be reorganized structurally within the federal system, authority
decentralized to the field missions, more money spent training the
large cohort of new young officers who make up the USAID career staff,
federal regulatory oversight over USAID and the MCC is burdensome and
dysfunctional, earmarked sectoral accounts should be made more
flexible, the Foreign Assistance Act simplified and rewritten, and the
biggest challenge to aid programs is the (absurdly) short time horizon
for outcomes demanded by Washington and the instability of funding for
long term commitments.
How does MCC fit into this picture? Does MCC get aid right?
Answer. It gets right some things and does not deal with other
issues of central importance. The MCC has many admirable qualities the
most important of which is letting countries decide how to spend aid
money which they usually decide to spend on infrastructure (wisely in
my view) and thus avoids sector earmarks. The MCC rewards to good
performers which by definition does not include fragile and failed
states (of which there are about 50 countries) which are the greatest
threat to the national interests of the United States? How do we deal
with these issues? MCC is one of many different approaches to aid, but
what we do know is that there is no magic bullet, no optimum answer to
what ails the aid system. All aid programs involve programmatic and
managerial tradeoffs: aid officers must decide what the priority
objectives are in order to choose one tradeoff versus another.
If so, how can the U.S. foreign policy-making apparatus
incorporate these lessons into other types of U.S. foreign aid?
Question 2. Mr. Natsios, you highlight in your written testimony
that MCC compacts provide alternatives to Chinese loans and
infrastructure development which do not encourage good governance or
improved local capacity.
Can you discuss in further detail how MCC serves as a
counterweight to Chinese influence in developing countries?
Answer. Most leaders in the developing world know that what the
Chinese offers them in aid projects has a considerable downside; the
construction quality of Chinese aid infrastructure projects sometimes
leaves a lot to be desired, the Chinese use imported Chinese laborers
to do the work instead of local workers (which the local communities
resent), the Chinese do not do much in the way of institution or
capacity building (though that may be changing), and the Chinese aid
programs are almost all concessional loans (subpar interest rates)
which they must paid back (the USG phased out aid loans in 1982) at
some point.
With an annual budget of roughly $1 billion, can MCC really
serve as an alternative to China's large quantities of foreign
aid?
Answer. Yes it can. Because of the above limitations in the Chinese
aid program, many countries prefer USAID or MCC aid help even though
the MCC cannot compare to the size of the Chinese aid programs.
Question 3. Mr. Natsios, in your testimony you point out that we
over-rely on numbers and figures to evaluate development success.
Can you elaborate on this point?
Answer. My essay (``Clash of the Counter-Bureaucracy and
Development'') (see: http://www.cgdev.org/sites/default/files/1424271--
file--Natsios--Counterbureaucracy.pdfdescribed) in the first answer
goes into the problems with quantitative measurement in aid
programming. I mentioned a book called Poor Numbers by Morten Jerven
during the hearing which offers a scholarly (rather dry) analysis of
the misuse of numbers in measuring economic growth in Africa.
Shouldn't we estimate and measure our success in foreign
aid?
Answer. In the old USAID we had an office called CDIE (the Center
for Development Information and Evaluation) which used impact
evaluations to analysis aid programs which used to be to gold standard
in determining aid success internationally. If CDIE said something was
working other donors and international organizations change their
approach. Over the years the office became less effective because it
was not staffed or funded properly. It used field based survey across
countries to interview people at the local level to see if aid programs
were successful or not.
Question 4. You also state in your written testimony that the
entire system of aid oversight needs reform.
What are your suggestions?
Answer. The last section of the essay ``The Clash of the Counter-
Bureaucracy and Development'' proposed a series of regulatory reforms.
Question 5. Mr. Natsios, you mention in your written testimony that
since MCC was created, we've expanded the list of indicators for
country qualification for MCC from 17 indicators to 20.
Are we overwhelming these developing countries with too
many targets?
Answer. The more MCC, White House, or Congress increases the number
of indicators the less affect each will have as poor countries do not
have the institutional or organizational capacity to make that many
changes to satisfy the demand for reform from donor governments. Few is
better. As I indicated in my testimony the corruption indicator based
on empirical evidence needs to be changed since it is the most
important indicator statutorily. However I don't know many Senators and
Congressmen who are going to vote to change the corruption indicator
even if it is imprecise. The rule of law is a much better indicator, so
perhaps the Committee could consider combining a rule of law indicator
with the existing corruption indictor. That would help.
Can you talk about which indicators should be prioritized
the most?
Answer. The key to development is democracy and improved governance
(done properly over the long term) and the right policies which
encourage investment and trains and supports entrepreneurship. There
are earmarks in the aid budget for the U.S. government for everything
under the sun, except for democracy and governance programs and
economic growth (they don't have a lot of support in Washington and
they take too long to show results). What distinguishes highly advanced
countries from those which are poor and dysfunctional are the
productivity, density, legitimacy, and resilience of institutions-
public, private, and non-profit.
In your view, does adding additional indicators hurt a
prospective MCC country's ability to focus their efforts?
Answer. More indicators will weaken the program. It is better to
strengthen existing indicators or to update them, but not increase
them.
Question 6. In the hearing, you briefly discussed the three types
of aid programs: performance-based, need-based, and national interest-
based. Would you elaborate on which programs you think are best suited
for different types of aid needs? Which type of program would you
suggest for aid programs in Africa? Would those differ than your
suggestions for aid in South America or Eastern Europe?
Answer. I am writing a book on foreign aid and have created a
framework for thinking about the distribution formulas for all of our
aid programs. These distinctions I mentioned at the hearing are part of
that framework, but only part. The USG also distributes aid to
countries and through sectors based on (1) ``future risk'' and (2) on
funding levels of aid in the previous year which I call the ``inertial
formula option.'' Generally global health programs and humanitarian
response funding for programs to keep people alive in war zones,
famines, and natural disasters should be need-based because by their
nature they mean life or death for millions of people. The inertial
distribution option is used when the disruption of existing programs
would take place if money was constantly be moved around for other
reasons. Determining national interest is not easily made and we
generally leave that to the State Dept. and Congress to determine as it
is a rather ambiguous term and funding levels are often a function of
negotiation between the recipient country which we wish to influence or
support and the State or Defense Dept. The MCC, agriculture programs,
economic growth programs, and democracy and governance programs should
be performance-based because their success is determined by the
political will and past performance of the recipient country itself.
Question 7. You also mentioned aid funds coming out of the Economic
Support Fund (ESF), specifically for interested-based and strategic aid
programs.
Would you elaborate on the decision-making process used to
determine that funds should be pulled from that account?
Answer. During the Cold War the State Department had control over
the programming of ESF funding in countries where the USG had critical
national interests narrowly defined. Our aid programs in Egypt, Israel,
and Jordan, for example were and still are paid for from that account.
The State Dept. would transfer the funds to USAID with guidance as to
which country should get how much money and set broad goals for the use
of the funds. USAID controlled the Development Assistance Account, the
Global Health Account, and Disaster Relief (IDA account). That
discipline was lost so that now State effectively controls all of the
accounts with the F reorganization of aid and is intimately involved
from Washington and from the Embassies in how program decisions are
made. Secretary Rice's reorganization of aid programming in 2006 and
2007 centralized aid funding decisions in the State Dept., but made the
USAID Administrator dual-hatted so he or she would also serve as the
Deputy Secretary of State for Foreign Assistance (a new position). That
meant the USAID Administrator controlled both USAID funding and State
Dept. aid programs. In 2009 Secretary Clinton separated the two
positions-the USAID Administrator was no longer dual-hatted and lost
control of both the USAID budget and programs and State Dept. aid
programs. Effectively the State Dept. now controls all aid programming.
Why do interest-based aid programs now use International
Disaster Assistance (IDA) or Development Assistance (DA) funds
rather than ESF funds?
Answer. When the President or Secretary of State makes an
announcement of a new program or pledges USG funds at an international
pledging conference State Dept. and OMB searches for ways to fund these
new programs with existing resources since getting money for aid
budgets in an era of fiscal restraint (the Executive Branch has not
proposed a new federal budget in how many years?) they look to USAID
budget to get the money by shutting down existing programs. When the
USG faces a crisis such as the civil wars in Syria or Iraq the State
Dept. tries to find funding from existing accounts, once again they
shut down aid programs to do that.
In the old, more independent, USAID aid program during the Cold War
programs typically lasted 10 to 20 years (which is how long it takes to
create functioning institutions). The Green Revolution in Asia, one of
the most successful aid programs of the 20th century that helped us win
the Cold War and save at least 300 million lives (some say a billion
lives) took thirty years to implement. The construction of 12
Engineering Schools in India linked with 12 of the best Engineering
Schools in the U.S. was a 20 year USAID (and its predecessors) program
(1951-1971). The high tech revolution in India today is based in those
Indian Engineering Schools. It took 20 years to build them and
strengthen them to be what they later became. Many USAID officers have
told me that now all programs are reviewed each year since the State
Dept. took control of the program and if they don't show immediate
short term results funding is shut down and transferred to other more
pressing needs. Evidence from political science research shows that new
democracies require at least (and often more) 12-16 years to take root
and mature. They cannot show sustainable results in three, four or five
years.
Can you speak to the pros and cons of each of these
different funding streams?
Answer. The DA account was supposed to be for long term programs,
while the ESF was for short term programs. The distinction does not
hold much weight any longer.
Question 8. You alluded to an example where several mission
directors, with their ambassadors, affirmatively tried to stop a
compact because their country so obviously didn't qualify, and yet,
were being considered to become candidate countries.
Could you relay more information on this instance to me (if
necessary, in a private letter)?
Answer I will provide the information to you privately.
To what extent does the MCC board interact with USAID
country mission directors? With U.S. ambassadors?
Answer. While I was in office there was little interaction between
either the MCC board or the staff and USAID or the Embassies as
Washington put out a cable which prohibited us from working with the
country governments on the MCC programs. In practice we ignored the
cable and helped design some of the MCC country programs because the
countries themselves had no idea how to do it. Now I am told there is
much more interaction between USAID and the MCC, especially when State
tries to interfere in program management (particularly in the threshold
programs) which neither USAID nor MCC likes. It does confuse officials
in the developing countries to have a MCC Mission Director and a USAID
Mission Director. More broadly the diffusion of USG aid programs abroad
is rather chaotic since the different U.S. agencies and federal
departments don't always give the same advice (sometimes they
contradict each other).
In your opinion, should there be more interaction between
these parties or less?
Answer. More not less.
__________
Response to Additional Questions for the Record Submitted
to Dr. Nancy Birdsall by Members of the Committee
Dr. Birdsall's Response to Senator Corker
Question 1. To date, the MCC Board has approved second compacts
for six countries. Second compacts should require more selectivity than
justpassing the indicators required in a first compact. In addition,
one could certainly argue that with respect to whether a second
compactwill be granted, the candidate country should be carefully
judged on how well it has implemented the first compact.
Do you agree with this view? What additional standards
would you recommend be considered before granting a second
compact?
Answer. Countries should be judged on implementation of their first
compact, but second compacts should not ``require more selectivity''
for two reasons: (1) poverty-reducing growth is vulnerable to global
external conditions and seldom takes a steady, simple path and (2) the
scorecard is not a perfect measure of policy performance. Further, it
is extremely difficult to pass the scorecard consistently over a period
of seven or more years, from the time that a country is first selected
to when it would be under consideration for a second compact. Only one
country, Lesotho, has passed the scorecard every year since 2004.
In addition to the scorecard, it also makes sense for a country to
be judged on the quality of the partnership during its first compact,
including whether the partner country government was committed to
undertaking agreed-upon reforms and worked to implement the compact
expeditiously. MCC should be able to make these qualitative judgments
but should be clear about when a country excluded from second compact
consideration because of weak first compact implementation could be
reconsidered. There may be compelling reasons, such as a change in
government, why a country that was not a strong partner during a first
compact could be considered for a second compact in the future.
MCC also looks for countries to exhibit positive ``trends'' on the
corruption and democracy hurdles when under consideration for a second
compact. However, I believe the agency should exercise caution and not
weigh these ``trends'' too heavily, especially with respect to the
corruption indicator. Changes in a given country's Control of
Corruption score over a period of a few years are almost always small
and well within the wide margins of error. Such small changes do not
reflect substantive shifts in climate or policy.
Do you think that second compacts should be required to
address development issues above and beyond what is addressed
in a first compact? What development challenges should second
compacts address?
Answer. The focus of any compact should reflect the priorities of
the partner country government, as informed by the constraints-to-
growth analysis and other economic analysis that helps the two parties
select projects most likely to achieve results. Second compacts might
seek further progress in a sector addressed in a first compact if that
sector remains a constraint to growth and has funding needs that are a
good match for MCC investments. In other cases, it could make sense for
a subsequent compact to focus on a different sector(s).
Question 2. The MCC indicators are an indispensable part of MCC's
operations. However, the indicators are only as good as the data
available and the specific models and statistics used to evaluate a
candidate country's success in meeting the indicator goals.
Are the current data sets and models adequate and
appropriate and effective? What changes to the indicators or
the date used to support evaluations do you recommend?
Answer. The data MCC uses are not perfect proxies of a country's
policy performance, but such indicators don't exist. What's important
is that the agency retains flexibility in how it interprets imprecise
data. Therefore, while the best approach would be for MCC to remove the
hard hurdle from the Control of Corruption indicator entirely, a second
best approach would be to maintain the hard hurdle for initial
selection (i.e. the first time a country is selected for a compact) but
remove the stringency for reselections i.e., during the period of
compact development. MCC should continue to monitor the partner
country's policy performance, but no single indicator will do this job
sufficiently once a partnership has started.While no statutory change
is required to enable MCC to make this change, the agency will need
support from members of Congress and other stakeholders in promoting
the responsible use of data. Rather than focusing on whether or not the
agency observes its hard hurdle rules to the letter, Congress can
encourage MCC's board to engage in a nuanced dialogue about policy
performance and help ensure that eligibility decisions are made based
on actual governance quality rather than mere data noise.
That said, the agency should continue to look for better indicators
as data sources change. MCC has been exploring options for alternative
indicators and methodologies, especially alternative governance
indicators. One new initiative that may help is the Governance Data
Alliance, a group of civil society, private sector, and donor data
producers, users, and funders committed to attaining more effective
production and use of governance data. (MCC helped convene the initial
group.)
I recommend Congress request a report every two years from MCC that
outlines the agency's efforts to seek alternative sources of data.
Among the factors the agency must consider when determining appropriate
indicators are country coverage, regular periodicity, public
availability from a third-party source, and broad enough applicability
for most countries. To illustrate the last point, membership in the
Extractive Industries Transparency Initiative, while important, is more
applicable to some countries than others. Beyond those basic criteria,
another characteristic of interest could be a greater focus on outcomes
(e.g., percentage of electricity generated that is paid for, percent of
vaccines delivered vs. paid for).
Question 3. In the hearing, you mentioned that there are many
countries that may have pockets of wealth but also pockets of extreme
poverty. There may countries that are badly governed but with pockets
of well-governed regions within the country.
What are your views on sub-national compacts? For example,
should MCC be allowed to grant a sub-national compact if the
economic rates of return are good and the local or regional
entity receiving the compact is well-governed, even though the
nation as a whole may not pass the MCC test either on the
indicators at a national level or because the country is ``too
rich'' at the national level?
Answer. In some cases sub-national compacts could make sense.
Changing the definition of candidacy--to include countries with median
consumption below $10 per day, for instance--would set the stage well
for sub-national compacts in certain countries that have large pockets
of poverty. Sub-national or geographically focused compacts in these
countries could make sense.
However, the logic of a sub-national investment depends on the
sector. Investing sub-nationally in a sector in which the national
government can intervene may not make sense. For example, a sub-
national compact relating to municipal water and sanitation using an
outcomes-based aid approach might make sense so long as the central
government has no ability to limit tariffs.
What are the dangers or problems with such an approach?
Answer. There are some practical questions and considerations about
how the agency might pursue sub-national compacts:\1\
---------------------------------------------------------------------------
\1\ Rose, Sarah. 2014. Regional and Sub-National Compact
Considerations for the Millennium Challenge Corporation. Washington,
DC: Center for Global Development. http://www.cgdev.org/publication/
regional-and-sub-national-compact-considerations-millennium-challenge-
corporation
How would MCC pick sub-national regions? MCC has long
stressed the importance of using high-quality, transparent, and
broadly comparable third-party data to evaluate countries for
eligibility. This type of information does not exist for sub-
national units within most developing countries-and certainly
not for sub-national units across countries. This is less of a
restriction for countries that pass the (national-level)
scorecard. In those cases, MCC could plausibly work with sub-
national units that express interest. However, to the extent
that MCC might work in well-governed pockets of countries that
do not pass the national-level scorecards, selecting where to
work in a transparent, comparative way would be more difficult.
For example, neither Nigeria nor Kenya pass the scorecard but
could have relatively well-governed sub-national units.
However, it would be hard for MCC to systematically and
impartially compare policy performance among 36 Nigerian
states. Comparing the performance of these states to counties
in Kenya-or to sub-national units in countries that do pass the
---------------------------------------------------------------------------
scorecard-could be even more complex.
Sectors are limited. MCC compacts are all accompanied by
certain policy and regulatory changes that the partner
government agrees to undertake. The success of MCC's investment
is contingent upon the partner government's contribution in
these areas. Because of this, it would be important for sub-
national compacts to focus in sectors in which the sub-national
government has jurisdiction and the national government is
uninvolved.
Question 4. There appears to be a growing trend whereby certain
countries have been cracking down on international civil society NGO's
through politically motivated investigations or registration laws.
These actions appear designed to chill the activities of these civil
society groups or drive them out altogether. It would be inappropriate
to provide a compact to a candidate country that is unduly persecuting
civil society.
Should Congress consider adjusting the indicators to
include an evaluation of the enabling environment for civil
society in a candidate country?
Answer. There is no need to do so. The current democracy hard
hurdle requires countries to pass either the Political Rights or Civil
Liberties indicators. In practice, most countries that pass one also
pass the other. In FY 2016, 74 out of 81 MCC candidate countries (91%)
either pass both or fail both. The current Civil Liberties indicator
includes an assessment of freedom for nongovernmental organizations.
However, MCC should be open to changes to the indicators should better
ones emerge. For the agency to be able to make such changes it is
important that its flexibility to do so be preserved.
Should the MCC develop internal reporting requirements so
that the MCC Board, before approving a country compact, is
fully informed and in a position to evaluate whether the
candidate country has been taking actions intended to
discriminate and discourage civil society groups from engaging
in legitimate democratic development?
Answer. This would be a reasonable piece of supplemental
information for MCC to provide its board before asking it to make a
decision about compact eligibility or compact approval.
addendum
(1) As I indicated during my testimony, I wanted to provide
additional details on the history of country selection without complete
fidelity to the scorecard and to the scorecard-related challenges faced
by countries who suddenly graduate to a new income category.
Only two countries have ever been newly selected for compact
eligibility despite not passing MCC's scorecard. This happened with
Georgia on two occasions and with Mozambique once. Georgia and
Mozambique were each among the initial tranche of countries selected
for MCC compact eligibility in May 2004. In both cases, MCC was aware
of substantial reform efforts that had taken place in the months since
the data reflected on the scorecard were collected, and the agency was
convinced that both countries would fully meet the scorecard criteria
in the near future. On this count the agency was right-Georgia passed
by 2007, Mozambique by 2006. Since the agency's first selection round
in 2004, MCC has been more inclined to wait until existing reform
efforts are reflected in the scorecard's indicators before selecting a
country. The only exception has been Georgia again, which was selected
in FY11 for a second compact despite not passing the scorecard. In this
case, the country fell short by one indicator in the ``Investing in
People'' category, but the data did not reflect significant policy
concerns. Specifically, the Immunization Rates indicator was affected
by a temporary shortage of a vaccine but was expected to rebound the
following year.
While MCC certainly faces political pressures, the agency's record
on country eligibility overwhelmingly suggests the prioritization of
policy performance over politics as the main and necessary criterion
for selection. (2) During my testimony, I also noted that countries
(for example, Moldova) occasionally have not been considered for second
compacts because they graduate to lower middle income and no longer
pass the corruption hurdle in this tougher group, though there is not
evidence of a substantial deterioration in performance. The broader
point here is that the hard hurdle on corruption can lead to decisions
that make little sense for development. MCC should be able to select
for a second compact those countries that have demonstrated good
partnership during the first compact and have not had a meaningful
policy deterioration. A just-below-the-median score on an imprecise
indicator and/or graduation to the lower middle income category do not
reflect such a change.
(2)During my testimony, I also noted that countries (for example,
Moldova) occasionally have not been considered for second compacts
because they graduate to lower middle income and no longer pass the
corruption hurdle in this tougher group, though there is not evidence
of a substantial deterioration in performance. The broader point here
is that the hard hurdle on corruption can lead to decisions that make
little sense for development. MCC should be able to select for a second
compact those countries that have demonstrated good partnership during
the first compact and have not had a meaningful policy deterioration. A
just-below-the-median score on an imprecise indicator and/or graduation
to the lower middle income category do not reflect such a change.
__________
Dr. Birdsall's Response to Senator Cardin
Question 1. In your testimony you highlighted the need for a better
definition of poverty for country candidacy. How would you envision MCC
operating in countries that currently exceed MCC's GNI per capita
ceiling, but still have widespread poverty? Which metric do you feel
best captures poverty for MCC's purposes?
Answer. Median consumption is a promising choice. The indicator is
a better reflection of people's well-being because it excludes
government spending (on defense, for example) and public and private
investment except as they affect household income; and because unlike
the average or mean measure, it corrects for the skewness in the income
distribution of virtually all countries, and thus reflects well typical
individual material well-being in a country.\1\ While median
consumption is not available for every country, the agency could
sidestep any gaps in data by layering median consumption on top of the
current GNI per capita measure. Countries that fall below either
threshold--it might be $10 a day for median consumption and it's
currently $4,125 GNI per capita--would comprise the potential candidate
pool.
---------------------------------------------------------------------------
\1\ Birdsall, Nancy and Christian Meyer. 2014. The Median Is the
Message: A Good-Enough Measure of Material Well-Being and Shared
Development Progress. Washington, DC: Center for Global Development.
http://www.cgdev.org/publication/median-message-good-enough-measure-
material-well-being-and-shared-development-progress
Question 2. The MCC legislative mandate is to lessen poverty
through economic growth. In your view, are sufficient funds being
provided to each country to make a significant difference in their
---------------------------------------------------------------------------
poverty levels?
Answer. The fundamental question here is whether MCC support, in
the form of funding but also through dialogue and negotiation,
reinforces good policies in a country. Ultimately, it is the countries'
policies that really matter when it comes to spurring poverty-reducing
growth.
Question 3. What are your recommendations for reforming the control
of corruption indicator? In your view, what is the best way to measure
and hold countries accountable for tackling corruption while
simultaneously providing MCC the flexibility to interpret data in the
context of on-the-ground realities?
Answer. MCC's authorizing legislation outlines the kinds of policy
areas the agency should consider when making eligibility
determinations, but it does not specify which indicators should be
used, nor does it describe how they should be interpreted. As a result,
the agency has both good guidance and necessary flexibility in choosing
and interpreting indicators. The agency needs support from Congress to
utilize this combination in a way that reflects on-the-ground
realities, while resisting what are sometimes short-term pressures from
political and advocacy groups.
Unfortunately, all existing composite measures and indices lack an
objective basis. Research conducted by the Center for Global
Development, Hating on the Hurdle and Focus on Policy Performance:
MCC's Model in Practice explain in detail the current Control of
Corruption indicator's limitations and why using it as a ``hard
hurdle'' that countries are required to pass is problematic.\2\
---------------------------------------------------------------------------
\2\ Dunning, Casey, Jonathan Karver, and Charles Kenny. 2014.
Hating on the Hurdle: Reforming the Millennium Challenge Corporation's
Approach to Corruption. Washington, DC: Center for Global Development.
http://www.cgdev.org/publication/hating-hurdle-reforming-millennium-
challenge-corporations-approach-corruption Rose, Sarah and Franck
Wiebe. 2015. Focus on Policy Performance: MCC's Model in Practice.
Washington, DC: Center for Global Development. http://www.cgdev.org/
publication/focus-policy-performance-mccs-model-practice
---------------------------------------------------------------------------
It is especially problematic for decisions around continuing
partnerships. There's some justification for using Control of
Corruption as a hard hurdle for initial selection into MCC eligibility
because it provides a transparent basis for those decisions. However,
once selected to begin a partnership, countries must be reselected each
year while developing a compact, a process that usually takes 2-3
years. Applying the hard hurdle to countries during this stage does not
make sense since countries can move from passing to failing for non-
substantive reasons like small score movements within the margin of
error or shifting from the low income group to the more competitive
lower middle income group. Curtailing an ongoing relationship with a
country that has had no real deterioration in policy performance
because of its score on an imprecise indicator threatens MCC's
credibility as a reasonable and rational development partner.
Therefore, while the best approach would be for MCC to remove the
hard hurdle from the Control of Corruption indicator entirely, a second
best approach would be to maintain the hard hurdle for initial
selection (i.e. the first time a country is selected for a compact) but
remove the stringency for reselections i.e., during the period of
compact development. MCC should continue to monitor the partner
country's policy performance, but no single indicator will do this job
sufficiently once a partnership has started.
See response to question 4e on other ways to measure corruption.
Question. In his written testimony, Mr. Natsios suggested that
given the limitations of the underlying data behind the control of
corruption indicator, the hard hurdle for candidate countries should be
replaced with the rule of law indicator.
a. How does the data quality between these two indicators compare?
Answer. The Control of Corruption indicator and the Rule of Law
indicator are part of the same Worldwide Governance Indicators series,
produced by the World Bank Institute and Brookings Institution. The
aggregation methodology is the same, as are many of the underlying
sources, so the quality of the two measures should be considered
essentially the same.
b. How quickly does each indicator respond to policy reforms or other
on-the-ground changes?
Answer. Neither indicator is particularly actionable. This is due,
in part, to the breadth of topics each one covers. Rule of law, for
instance, measures the extent of violent and organized crime, trust in
police, contract enforceability, the independence and efficiency of the
judicial process, private property protection, and intellectual
property rights protection. Even substantial reform in one of these
areas may not have an outsized effect on the indicator because it
encompasses so many components.
The indicators also measure things that are slow to change in a
meaningful, institutionalized way. Further, I would caution that
highly-responsive measures of corruption or rule of law may not be
particularly desirable. For instance, it would not necessarily be
helpful for a country to see a markedly improved score upon the
establishment of an anti-corruption commission when it then takes years
to assess whether or not it will be an effective, funded, and permanent
institution.
There was concern expressed at the hearing that because the Control
of Corruption indicator measures perceptions it can be easily
influenced by ``marketing'' or campaigning by the government. However,
since the indicator aggregates a number of different types of
perceptions-up to around 20 sources of expert assessments, firm-level
surveys, and citizen-level surveys-the data are not particularly
sensitive to that kind of activity. This aggregation is a useful
characteristic, but it is another reason why the data are slow to move-
the perceptions of many, both inside and outside the country, are
unlikely to turn on a dime.
c. Is simply swapping one indicator for another in this sense the
best way to incentivize potential candidate countries to tackle
corruption?
Answer. Ultimately, this indicator's purpose is less about
incentivizing anti-corruption measures and more about avoiding putting
money into countries that will not use it well. No amount of outside
funding is likely to influence whether or not a government ``chooses''
corruption. In fact, a study by AidData and the College of William and
Mary found that, in general, donors' or international non-governmental
organizations' ``scorecards,'' rankings, and other policy assessments
that focus on countries' political governance have little influence
over countries' policy choices.\3\
---------------------------------------------------------------------------
\3\ AidData and William & Mary Institute for the Theory & Practice
of International Relations. 2015. The Marketplace of Ideas for Policy
Change. Williamsburg: AidData. http://aiddata.org/marketplace-of-ideas-
for-policy-change. See also, http://www.cgdev.org/blog/dive-new-data-
mcc-effect.
d. Do you feel making this statutory change would preserve the intent
of provision while simultaneously allowing MCC sufficient
flexibility to balance the indicator score with the sometimes
---------------------------------------------------------------------------
conflicting realities that are observed on the ground?
Answer. It is extremely important for MCC to have the flexibility
to balance scores with sometimes conflicting realities.
The statute does not mandate the corruption indicator serve as a
hard hurdle, so no statutory changes are necessary to ensure the agency
maintains this flexibility. But members of Congress and other
stakeholders can help by promoting responsible use of data by MCC and
its board. Rather than focusing on whether or not the agency observes
its hard hurdle rules to the letter, stakeholders with an understanding
of the strengths and weaknesses of the indicators can encourage MCC's
board to engage in a nuanced dialogue about policy performance and help
ensure that eligibility decisions are made based on actual governance
quality rather than mere data noise.
e. Have you identified alternative measures of corruption that could
be adopted in place of the current metric, for example,
Transparency International's Corruptions Perception Index? If
so, what are the advantages and disadvantages of each?
Answer. No indicator is precise enough to act as a hard hurdle. The
better ones are composites and are transparent about the standard
errors of all components across countries (the current Control of
Corruption indicator is one of these). Using a hard hurdle around the
median for any corruption indicator is fraught, especially when many
countries are concentrated around median, as is currently the case.
My understanding is that MCC has been exploring options for an
alternative corruption indicator. One new initiative that may help is
the Governance Data Alliance, a group of civil society, private sector,
and donor data producers, users, and funders committed to attaining
more effective production and use of governance data. (MCC helped
convene the initial group.)
I recommend Congress request a report from MCC every two years that
outlines the agency's efforts to seek alternative sources of data.
Among the factors the agency must consider when determining appropriate
indicators are country coverage, regular periodicity, public
availability from a third-party source, and broad enough applicability
for most countries. To illustrate the last point, something like
membership in the Extractive Industries Transparency Initiative, while
important, is more applicable to some countries than others. Beyond
those basic criteria, another characteristic of interest could be a
greater focus on outcomes (e.g., percentage of electricity generated
that is paid for, percent of vaccines delivered vs. paid for).
f. Would a hybrid of the control of corruption indicator and the rule
of law indicator be practical and more informative for MCC's
country selection?
Answer. Both are areas that merit measurement and inclusion on
MCC's scorecard. But while a potential future indicator could combine
some aspects of the two thematic areas, combining the two existing
indicators would yield little benefit or additional information because
the two are highly correlated. For the most recent year's data the
correlation between the two indicators is 0.93 across all 215 countries
and 0.83 for just the set of low and lower middle income countries MCC
assesses.
g. Would you recommend any statutory changes to allow more
flexibility in the application of the control of corruption
indicator?
Answer. The current statute provides flexibility in the
interpretation of the control of corruption indicator. MCC specifies
use of the hard hurdle in its annual selection methodology report. In
the past, the agency has fallen under pressure from Congress and others
to maintain strict observance of the hard hurdle interpretation.
Congress should ask for regular reports on how MCC is measuring
corruption (see 4e above), as an alternative to inappropriate ``hard
hurdle'' approach.
h. Would you support Mr. Natsios' suggestion to adopt the rule of law
indicator in place of the control of corruption indicator?
Answer. A measure of both rule of law and control of corruption
have their place on MCC's scorecards. Neither should serve as a hard
hurdle. Shifting the hurdle from Control of Corruption to Rule of Law
would not eliminate the core problem of the indicator being too
imprecise to warrant rigid interpretation.
addendum:
(1) As I indicated during my testimony, I wanted to provide
additional details on the history of country selection without complete
fidelity to the scorecard and to the scorecard-related challenges faced
by countries who suddenly graduate to a new income category.
Only two countries have ever been newly selected for compact
eligibility despite not passing MCC's scorecard. This happened with
Georgia on two occasions and with Mozambique once. Georgia and
Mozambique were each among the initial tranche of countries selected
for MCC compact eligibility in May 2004. In both cases, MCC was aware
of substantial reform efforts that had taken place in the months since
the data reflected on the scorecard were collected, and the agency was
convinced that both countries would fully meet the scorecard criteria
in the near future. On this count the agency was right--Georgia passed
by 2007, Mozambique by 2006.
Since the agency's first selection round in 2004, MCC has been more
inclined to wait until existing reform efforts are reflected in the
scorecard's indicators before selecting a country. The only exception
has been Georgia again, which was selected in FY11 for a second compact
despite not passing the scorecard. In this case, the country fell short
by one indicator in the ``Investing in People'' category, but the data
did not reflect significant policy concerns. Specifically, the
Immunization Rates indicator was affected by a temporary shortage of a
vaccine but was expected to rebound the following year.
While MCC certainly faces political pressures, the agency's record
on country eligibility overwhelmingly suggests the prioritization of
policy performance over politics as the main and necessary criterion
for selection.
(2) During my testimony, I also noted that countries (for example,
Moldova) occasionally have not been considered for second compacts
because they graduate to lower middle income and no longer pass the
corruption hurdle in this tougher group, though there is not evidence
of a substantial deterioration in performance. The broader point here
is that the hard hurdle on corruption can lead to decisions that make
little sense for development. MCC should be able to select for a second
compact those countries that have demonstrated good partnership during
the first compact and have not had a meaningful policy deterioration. A
just-below-the-median score on an imprecise indicator and/or graduation
to the lower middle income category do not reflect such a change.
__________
MCC FY 16 Candidate Pool
(81 Countries)
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]