Congress Abhors a Vacuum: the MCC faces cuts due to unallocated funds

Jul 2nd, 2007 2:00 PM UTC
By Josh Chernila, ONE Online Communities Coordinator

Pop quiz:

As Congress stands poised to pass historic increases in poverty-focused development assistance for the coming fiscal year, what program is targeted for massive reductions totaling potentially $1.8 billion less than the President’s budget request?

Answer:

The three and a half year old Millennium Challenge Corporation (MCC), which was established to invest in people and develop free enterprise in the well-governed nations of the developing world, and which some lawmakers fear is mired in process, is set to have its funding for this year reduced from $3 billion to $1.2 billion.

The MCC rewards and requires good governance and calls for country driven plans – developing nations identify for themselves the projects they most need. To date, many nations have determined long-term, infrastructure projects the best use of MCC funds. Because of the unique nature of the MCC, much of its most important work is just starting or being planned. Precipitous funding reductions could damage the institution’s ability to sign additional compacts due to a lack of sufficient funds.

As the Senate takes up the FY ’08 State and Foreign Operations Appropriations bill, Senator Leahy said he cut the MCA because of the unobligated balance ($2.139 billion) that MCC has for FY ’07.

Meanwhile, the House Subcommittee on Africa and Global Health held the first oversight hearing since the MCC’s inception. The subcommittee heard testimony from Members and witnesses who discussed the progress and promise of the MCC, specifically in Africa. Both House and Senate are currently considering sweeping reductions in appropriations for the MCC, because it doesn’t appear to be spending the funds allocated.

MCC is an innovative program, which was created in an environment which questioned a number of assumptions about aid disbursement. It seeks to support good governance, investment in people, and the expansion of enterprise. “Compacts” are granted on a five year basis. They require countries to submit large-scale projects that they themselves determine to be most important. These are 5 year multi-million dollar projects. Countries may only submit and administer one compact at a time – which are evaluated against 16 evaluation criteria, especially focusing on the elimination of government corruption. [Click here for a look inside the evaluation process.PDF]

The MCC argues that it has taken time to start up operations, likening this to the initial difficulties faced in establishing the Peace Corps. Also, the MCC encourages African governments to engage the full citizenry in defining the most important use of funds. That takes time. When coupled with the rigorous “good governance” evaluation, it’s a time consuming process.

A few committee members inquired about compacts focusing on micro-credit, education, and healthcare. While all of those programs are within the MCC’s purview, countries decide for themselves which projects are funding priorities. So far, it seem the lion’s share of projects have to do with basic infrastructure, especially roads. This tendency has been explained as countries’ trying to fill a funding void from donor countries, which have been reluctant in recent years to fund large infrastructure projects. However, recent compacts have begun to include education and healthcare funding such as, Togo, Burkina Faso.

In his testimony before the Subcommittee, Dr. Steven Radelet of the Center for Global Development provided an informative evaluation of the foreign aid effectiveness debates surrounding the MCC. He laid out the core criticisms of the MCC – the process identifies the wrong countries, its choices are political, and the process lacks local input. Dr. Radelet’s evaluation of the core criticisms of the MCC:

MCA criticisms that are not valid:

1. Criticism – We pick the wrong countries. These countries are succeeding, we need to help the ones that are failing. Invalid: The countries picked by MCC have succeeded in making progress against corruption and towards good governance, and we need to support them. The MCC aid model supports the countries that are well governed.
2. Criticism – We fund the wrong projects. Why are we funding roads when people are dying? Invalid: One of the great strengths of MCC aid is that it focuses on the programs that the countries identify. The local governments decide, and that’s the way it should be. We’re not the best to decide the best use of these funds. There are reasons why countries choose infrastructure. Roads are critical for farming, job creation, and energy supply.
3. Criticism – MCC can’t spend money that has been appropriated. There’s $3 billion in this program and less than $100 million has been spent. Do we need to fund this anymore? Invalid: The $3 billion may not have been spent yet, but it’s in the pipeline. Money is allocated 5 years in advance. There will always be lag, because of the way the program is set up. If you cut off funding now, it will serve as a disincentive to other countries that are in the pipeline towards MCC compacts.

 

Valid criticisms of the MCC:

1. Criticism: MCC is not delivering as quickly as envisioned. Valid. We all believe that MCC should be progressing much more quickly. Some problems had to do with startup. Some has to do with procedures. MCC has made some recent changes; we’ll have to see how much it speeds up the process.
2. Criticism: MCC should target poorest countries, and not middle income countries. Valid. We should be funding the poorest countries that are well governed.
3. Criticism: The compact process is slow. Valid. The overall MCC restriction that we have one compact for 5 years, is worthy of review. All incentives are to build big, complex programs. Incentives are to do something over 5 years. If there were more flexibility we could move more quickly. Dr. Radelet suggested either shorter term compacts or the opportunity for a country to engage in more than one compact at a time.

 

He concluded with 4 points:

1. MCC should examine current processes
2. Congress should restate its commitment to focus on the poorest, well-governed countries
3. MCC should focus on the most impoverished countries.
4. Congress should allow concurrent compacts within countries.

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