Introduction

A. Overview of the Millennium Challenge Corporation (MCC)

The Millennium Challenge Corporation (MCC) is an independent foreign assistance agency of the United States Government. MCC’s mandate is to assist the world’s poorest countries in reducing poverty through economic growth while strengthening good governance, economic freedom, and investments in people in those countries selected to receive its assistance.

Principles and Practices

Each year, MCC’s Board of Directors selects, from among the countries that are eligible to receive MCC assistance, those countries with respect to which the United States will seek to enter into a Millennium Challenge Compact. In making these decisions, the MCC Board of Directors considers the following factors with respect to eligible countries it selects to pursue development of a compact: (i) the country’s performance on a range of policy indicators; (ii) the opportunity to reduce poverty and generate economic growth; and (iii) the availability of MCC funding. Recognizing that development is achieved by a country's own efforts, policies, and people, MCC invites selected countries to identify their own priorities for achieving sustainable economic growth and poverty reduction. After working with MCC to develop preliminary analysis of its current economic and poverty reduction challenges, each country prepares a concept note and then a full project proposal on the basis of meaningful engagement with a range of stakeholders in its own society and consultations with MCC. An MCC country team works with the country to fully develop a compact program aimed at reducing poverty and generating economic growth. When development of the program is completed, it is reflected in a Millennium Challenge Compact (a compact) that defines responsibilities and includes clear objectives and measurable targets to assess progress. The compact also describes how the country will manage and implement its program, including how it will ensure financial accountability, transparency, and fair, open, and competitive procurement.

In this way, MCC manages the compact development process to reflect its core principles of: (i) competitive selection of countries based on their actual performance; (ii) a preference for country-led solutions to economic development and poverty reduction challenges, developed in partnership with civil society and the private sector; and (iii) a reliance on country-led implementation of development programs, with strong controls to ensure technical quality and to manage procurements and the expenditure of funds.

Funding Instruments

MCC provides large scale grants for programming in selected countries. MCC’s grant programs seek to complement—not replace—the assistance programs provided by other international development organizations and United States Government agencies.

MCC’s grant programs come in two primary forms. Millennium Challenge Compact programs are available to countries that meet all of MCC’s eligibility requirements and are selected by the Board of Directors to develop a compact. Compact programs are generally large, five-year programs that consist of investments designed to address one or more binding constraints to the country’s potential for long-term economic growth. Threshold programs are available to countries that demonstrate strong commitment to MCC’s principles but do not yet meet its eligibility requirements. Threshold programs are generally smaller, two-year to four-year programs that help countries move toward compact eligibility by implementing key policy and institutional reforms. Not all countries with threshold programs will become eligible or be selected to develop a compact.

Governance and Organization

MCC is overseen by a mixed, public and private Board of Directors comprised of nine (9) members who are drawn from both inside and outside the United States Government. The government members are: the Secretary of State (chair), the Secretary of the Treasury (vice chair), the United States Trade Representative, the Administrator of the United States Agency for International Development, and the Chief Executive Officer (CEO) of MCC. Four board members from outside the public sector, and with relevant international experience, are appointed by the President with the advice and consent of the United States Senate.

The CEO oversees the day-to-day operations of MCC with the assistance of a management team. The corporation’s employees draw from diverse experience including work in international development agencies, government agencies, the private sector, universities, and non-government organizations.

B. Considerations for Country Eligibility

Each year, MCC’s Board of Directors evaluates all low-income countries and lower-middle income countries. For the purposes of consideration for assistance, MCC defines low-income countries as the 75 countries with the lowest gross national income (GNI) per capita, and lower-middle income countries as all remaining countries with a GNI per capita that is lower than the World Bank’s threshold for upper-middle income countries. Only countries that meet these income tests and are otherwise eligible to receive assistance under the laws of the United States are considered candidates for MCC assistance.

Selection Process

In evaluating each candidate country for compact eligibility, the Board of Directors is required by law to consider three factors, namely (i) the candidate country’s performance on a range of important policy indicators, (ii) the opportunity to reduce poverty and to generate economic growth in the candidate country, and (iii) the availability of MCC funding. These factors are described in more detail below.

1. Performance on Policy Indicators: First, the Board of Directors examines how the country performs on MCC’s scorecard for the country which consists of a panel of twenty (20) independent, objective, quantifiable indicators that allow clear comparisons across countries (scorecard). These indicators measure the relative strength of the country’s policies for encouraging economic freedom, investing in people, and ruling justly. In order to pass most indicators, a country must perform above the median score among the candidate countries in its income group during that fiscal year (or in the case of several indicators, above a minimum absolute score). And in order to pass on the scorecard overall, a country must (i) pass the indicator for the control of corruption, (ii) pass one or both of the indicators for political rights and civil liberties, and (iii) pass at least ten (10) out of the twenty (20) indicators overall.
2. Opportunity to Reduce Poverty and Generate Economic Growth: Second, the Board of Directors looks closely at the opportunity to reduce poverty and generate economic growth in each candidate country. In doing so, the Board of Directors consults sources of both quantitative and qualitative information to better understand the conditions within each country. While the Board considers a range of other information sources depending on the country, specific areas of attention typically include better understanding the issues on, trends in, and trajectory of: the state of democratic and human rights (especially of vulnerable groups); the perspective of civil society on salient governance issues; the control of corruption and rule of law; the potential for the private sector (both local and foreign) to lead investment and growth; the levels of poverty within a country; and the country’s institutional capacity. Where applicable, the Board of Directors also considers MCC’s experience in a particularly country through previous work on a threshold program or an earlier compact program. This information sheds light on the probability that MCC investments in a country will lead to appreciable economic growth and reduction in poverty.
3. Availability of MCC Funding: Third, the Board of Directors looks closely at the funding available for new countries. MCC’s annual budget is constrained, and at any given time, it has a pipeline of multiple countries that are simultaneously working through the compact development process. Consequently, the Board of Directors must weigh the selection of new countries against the level of funding available to develop and execute meaningful compact programs.

Standards of Selection

Generally, the Board will not select a country for compact assistance unless it is currently passing its scorecard at the time of selection. MCC’s Board may nevertheless exercise discretion in how it interprets information related to each country’s performance and potential.

MCC monitors the performance of each selected country throughout the year. The MCC Board of Directors has had the historical practice of “re-selecting” countries in compact development each year. While not required by statute, the Board had done so in the past to signal its support for MCC to continue developing a compact with the country. This focus on continued performance reflects MCC’s expectation that each selected country maintain its commitment to good governance and continuous improvement in the environment for economic growth and poverty reduction.

If a selected country’s policy performance declines as the result of significant policy changes or a reversal in reforms, regardless of whether or not the country is failing its scorecard MCC may issue a warning or may suspend or terminate eligibility for any otherwise available forms of MCC assistance.

Period of eligibility

Once MCC’s Board of Directors selects an eligible country to develop a compact, the country can engage with MCC and initiate its compact development process.

Once selected, a country remains eligible for compact funding unless the Board of Directors suspends or terminates the country from eligibility for MCC assistance. MCC typically expends its available funding quickly. For that reason, it is to a selected country’s advantage to maintain or improve its performance on MCC’s eligibility indicators and remain eligible to develop a compact program each fiscal year until compact signing.

Note: The information set forth in this chapter is based on MCC’s fiscal year 2017 Selection Criteria and Methodology Report (SCMR), which is available on MCC's website.

C. Considerations for Countries Eligible for a Subsequent Compact

MCC has the authority to enter into one or more subsequent compacts with a partner country after the expiration of its existing compact program. However, selection to develop a subsequent compact program is not automatic, and the completion of a previous compact program is no guarantee that a partner country will have a continued partnership with MCC.

MCC’s Board of Directors subjects potential subsequent compact countries to more rigorous selection standards. As a result, only a small number of partner countries are selected to develop a subsequent program. For those selected, MCC also sets higher expectations for the contribution of resources by the partner country to the subsequent compact. In addition, subsequent compacts are intended only for countries that: exhibit successful performance on their previous compact; exhibit improved scorecard policy performance during the partnership; and exhibit a continued commitment to further their sector reform efforts in any subsequent partnership.

Selection Process and Standards for Eligibility

As a general rule, MCC’s Board will not consider a partner country for subsequent compact selection until the existing program has been completed or is within eighteen (18) months of completion. In considering a partner country for subsequent compact selection, MCC’s Board of Directors takes account of a broad array of information in the following categories:

1. Successful Implementation of the Previous Compact Program: MCC’s Board of Directors gives substantial weight to each potential subsequent compact country’s performance during the implementation of its previous compact program and the quality of its partnership with MCC. First, the Board of Directors examines the degree to which the partner country demonstrated strong management capacity and political will, particularly in its commitment to implement the compact program faithfully and to fulfill its legal requirements. Second, the Board of Directors examines the degree to which the partner country exhibited the commitment and capacity necessary to achieve and sustain the compact program’s expected results, including actual progress against planned timelines and work plans, the extent to which the compact program remained on track to achieve important process and output targets, and the partner country’s commitment of its own resources to ensure the compact’s success. Third, the Board of Directors examines the degree to which the partner country implemented its previous compact program in accordance with MCC’s standards and policies (including MCC’s commitment to the timely, accurate, and transparent reporting of monitoring and evaluation information) and MCC’s commitment to directly addressing fraud or corruption concerns, including with respect to abnormalities in procurement processes or with potential misuse of funds.
2. Improved Scorecard Policy Performance: Beyond successful implementation of the previous compact, the MCC Board expects the country to have improved its overall scorecard policy performance during the partnership, and to pass the scorecard in the year of selection for the subsequent compact. In its consideration, the MCC Board focuses on: the overall scorecard pass/fail rate over time, what this suggests about underlying policy performance, as well as an examination of the underlying reasons; the progress over time on policy areas measured by both hard-hurdle indicators—democratic rights and control of corruption—including an examination of the underlying reasons; and other indicator trajectories as deemed relevant by the Board. Other sources of information are also consulted to look at policy performance over time in areas not covered by the scorecard, but that are deemed important by the Board. For that reason, the Board of Directors will closely examine each partner country’s patterns of actions and indicator trends over time for evidence that these kinds of improvements have taken place.
3. Commitment to Further Sector Reforms: Finally, the Board of Directors expects that subsequent compacts will endeavor to tackle deeper policy reforms necessary to unlock an identified constraint to growth. Consequently the Board carefully considers the extent to which a country implemented and followed through on any policy, legal, institutional, or regulatory reforms that were necessary to enhance the benefits or ensure the sustainability of its previous compact program. In making decisions about selection to develop a subsequent compact program, the Board of Directors expects a partner country to have implemented such reforms thoroughly and effectively in the past and to demonstrate an ability and willingness to undertake deeper, more fundamental reforms in a subsequent compact program.

Implications for Compact Development Resources

Once selected to develop a subsequent compact, MCC looks for each partner country to build upon its successful working relationship with MCC staff and its understanding of MCC’s model and approach. In particular, MCC expects subsequent compact countries to commit more significant human and financial resources to the compact development process. Such resources include the allocation of an ample budget to cover the costs associated with compact development, as well as the rapid recruitment, selection, and deployment of a national coordinator and a Compact Development Team that has appropriately skilled individuals in each important staff position. Staff from the existing Millennium Challenge Account (MCA) accountable entity team may provide mentoring and advice, participate in brainstorming sessions, offer feedback on discreet documents, and share lessons learned from the implementation of projects that are relevant to the development of a subsequent compact. However, in all other ways, the Compact Development Team must be separate and distinct if the previous compact is still in its implementation or closeout phases.

In addition to budgets and staff resources, MCC expects subsequent compact countries to plan and execute a robust process for consultation and outreach with a wide variety of stakeholders. In particular, the consultative process for a subsequent compact country should place heavy emphasis on seeking input from and developing partnerships with civil society organizations, the private sector, and other international development partners.

At critical stages of the compact development process, subsequent compact countries may also be called upon to conduct a range of economic, technical, social, gender and environmental studies, where doing so will contribute to the quality or pace of the compact development process.

Implications for Content

Each partner country that is selected to develop a subsequent compact program should exhibit an understanding of MCC’s model built on the experience, knowledge, and understanding it gained during the development and implementation of its previous compact program. With this advantage, MCC expects subsequent compact countries to be in a better position to develop clear, convincing concepts and strong project proposals that meet MCC’s requirements, standards, and expectations. These include MCC’s emphasis on integrating robust social and gender analysis into each stage in the compact development process.

In assessing a partner country’s concepts and project proposals, MCC has a particular interest in making sure that lessons learned from the implementation of a previous compact program are fully reflected, applied, and incorporated into concepts and project proposals for a subsequent compact program. MCC expects the partner country to include a detailed analysis of actual and expected results, planned versus actual timeline, and other lessons learned from the previous compact. MCC also expects the partner country to explain how it will address environmental, social, and other risks; how it will handle critical policy and institutional issues; and how it will control any factors that led to cost increases during the implementation of its previous compact program. As the results of impact evaluations and other assessments of the previous compact program become available, the partner country must use this use data to inform project proposal assessment, project design, and implementation approaches.

MCC expects that subsequent compact programs reflect a clear understanding of the need to ensure that public institutions and public policies support any proposed investments. Toward that end, subsequent compact programs should identify proactively the policy, legal, regulatory, and institutional reforms that are necessary to overcome constraints to economic growth and poverty reduction, and ensure the long-term sustainability of the proposed compact program’s objectives, to demonstrate the political will needed to overcome them, and to make clear and measurable commitments to achieve meaningful reforms during the development and implementation of the subsequent compact program.

Finally, MCC expects subsequent compact programs to reflect the potential of partnerships with civil society organizations, the private sector, and other international development organizations to maximize the impact of compact objectives. At a minimum, MCC will look for evidence that each partner country has considered approaches involving the private sector in developing concepts and project proposals for its subsequent compact program. Where such partnerships are feasible, MCC may also have an interest in encouraging a broad range of financing instruments, such as guarantees and other risk-sharing instruments, investment facilities, output-based aid, performance contracting, parallel financing, matching grants, and first loss facilities.

Implications for Funding

MCC has a strong institutional interest in country contributions that will have long-term impact on development results and sustainability of MCC-funded investments. For that reason, MCC expects each country that is selected to develop a subsequent compact program to identify and commit significant financial resources toward achieving the program’s objectives. For low-income countries, a partner country commitment of not less than 7.5 percent of the compact program’s total budget is expected. For lower-middle income countries, a partner country contribution of 15 percent is expected. These contributions should be focused on supporting improved performance toward, or sustainability of, compact objectives. MCC will work with each country partner to identify and estimate the value of these contributions, with the goal of maximizing the benefit from available resources without introducing excessive complications.

D. Overview of the Compact Development Process

When an eligible country is selected by the MCC Board of Directors to develop a compact (a selected country), it begins the process of conceiving, proposing, and developing a set of proposed investments, interventions, and activities. Over time, that process leads to a coherent compact program that targets the country’s most “binding” constraints to economic growth, generates increased income for beneficiaries, and reduces poverty while meeting MCC’s other rigorous standards and requirements. Although MCC is available to provide guidance and support, the selected country assumes primary responsibility for the pace, rigor, and ultimate success of its compact development process.

In developing a compact program, selected countries typically follow a process that includes five distinct phases. During the Preliminary Analysis phase, the selected country identifies binding constraints to its own sustainable, long-term economic growth and the reduction of poverty and consults the private sector, civil society, potential beneficiaries, and other key stakeholders to gather information and validate findings. In the Problem Diagnosis phase, the selected country analyzes the root causes that give rise to the binding constraints and identifies specific core problems around which to organize potential investments and other activities. In the Project Definition phase, the selected country begins identifying and defining specific activities and investments that are most likely to address the agreed problems and result in appropriate rates of economic growth and poverty reduction while also meeting MCC’s other standards and requirements. In the Project Development phase, the selected country fully prepares proposed projects through feasibility studies and other assessments and determines costs, outputs and outcomes, and beneficiaries, subject to a final appraisal by MCC. Finally, during the Negotiations phase, the country engages in final discussions with MCC to reach agreement on the specific activities, budget, objective, data collection and reporting, and legal requirements that will comprise the compact program. When a program has been fully agreed, including having been approved by MCC’s Board of Directors, the selected country may enter into a compact, a five-year agreement through which MCC provides grant funding to support achievement of the agreed developmental objectives.

These phases, along with the standards and requirements that pertain to each, are described below and discussed in more detail in the chapters that follow.

Phase 1: Preliminary Analysis

An eligible country selected by the MCC Board of Directors to develop a compact begins the Preliminary Analysis phase by appointing an experienced, full-time leader and designating a team of specialists (together, a Compact Development Team) to lead the compact development process and work in close collaboration with MCC. The team undertakes a detailed preliminary analysis (an Integrated Constraints Analysis) designed to identify the country’s most binding constraints to the growth of the economy and the reduction of poverty.

At the same time, the Compact Development Team begins reaching out and engaging a wide variety of stakeholders across the country’s public sector, private sector and business community, nongovernmental and civil society organizations, and academia (through a Public Consultation and Stakeholder Engagement process) to understand their perspectives, gather information and data, and validate results from the Compact Development Team’s constraints analysis.

The Preliminary Analysis phase ends with agreement between the selected country and MCC on a limited number of binding constraints that will inform the development of a potential compact investment program. For most selected countries, this phase takes about six (6) months from selection, or about four (4) months from early visits by senior officials on MCC’s management team and technical staff on the MCC country team.

Phase 2: Problem Diagnosis

During the Problem Diagnosis phase, a selected country undertakes a Root Cause Analysis, a structured assessment of the underlying factors, challenges, or problems that give rise to the binding constraints that the selected country has identified. Having diagnosed the root causes, the selected country identifies and chooses one or more as core problems that it expects to address through a compact program, along with the outcomes it expects to achieve by addressing each problem. To facilitate an early exchange of technical information with MCC, the selected country presents this information through one or more detailed Concept Notes. Each Concept Note defines a distinct core problem and its link to the binding constraint; describes its impact on poverty and key target populations; clarifies the expected outcomes; outlines a comprehensive approach that will largely resolve the problem; and lays out a theory of change that leads to long-term income growth and poverty reduction. MCC’s country team examines the selected country’s submission and develops an assessment of the most promising aspects in an Opportunity Memorandum for the MCC senior management to consider.

The Problem Diagnosis phase ends with the presentation of the Opportunity Memorandum to MCC’s senior management and an understanding between the selected country and MCC of the primary elements of an agreed proposed compact program. For most selected countries, this phase takes about four (4) months to complete.

Phase 3: Project Definition

During the Project Definition phase, a selected country develops a detailed Project Proposal for each of the primary elements or projects within the agreed proposed compact program. Each proposal serves to clarify, organize, and prioritize agreed investment ideas and to establish a coherent logic for the proposed compact program. To achieve this goal, each Project Proposal presents specific proposed investments and activities (in most cases, a combination of training, skills development and capacity building; capital investments; institutional strengthening measures; and critical regulatory, legal, and policy reforms); estimates their costs and benefits; identifies specific beneficiary populations and explains how benefits will accrue to the poor, women, and disadvantaged social groups; and describes in detail the logical cause-and-effect relationships that lead from each of the proposed investments and activities to changes in behaviors and improved outcomes. MCC’s country team examines the Project Proposal to assess the level of preparation; the potential economic and social impact; the environmental, social and gender risks; and the sustainability of the proposed projects. At the same time, the MCC country team also explores possibilities to reduce costs, enhance benefits or improve the distribution of benefits towards the poor, as well as ways to increase private investment in relation to the proposed projects. On the basis of its assessment, the MCC country team develops an assessment of the most promising aspects of the Project Proposal (in a Project Proposal Assessment Memorandum) for the MCC senior management to consider. The Project Proposal Assessment Memorandum includes the MCC country team’s proposed timeline, resources and work plan for fully developing the most promising aspects of the projects to meet MCC’s rigorous investment standards during the next phase of the compact development process.

The Project Definition phase ends with the presentation of the Project Proposal Assessment Memorandum to MCC’s senior management and an understanding between the selected country and MCC of the specific projects that will be fully developed for investment decisions. For most selected countries, this phase takes about four (4) to five (5) months to complete.

Phase 4: Project Development

During the Project Development phase, each selected country fully develops the plans for the agreed-upon projects. Full development generally involves preparing statements of work or terms of reference; procuring consultants and contractors; and undertaking detailed feasibility studies, environmental and social impact assessments, social inclusion and gender assessments, and preliminary project design studies. Throughout the Project Development phase, the selected country also will work closely with MCC to develop a full understanding of the costs and expected benefits, a clear picture of the expected beneficiaries and projected distribution of benefits across population groups, and a detailed plan for the monitoring and evaluation (M&E) of the progress, outputs, and outcomes associated with each project. These requirements make the Project Development phase the most lengthy and costly part of the compact development process. When a selected country needs assistance with the cost, time, or management of these studies, MCC is often able to provide financial support through a grant of Compact Preparation Funding.

As the Project Development phase moves forward, the selected country also begins organizing and structuring the necessary framework for compact implementation. This framework generally includes an agreement on counterpart contributions from national and local governments; a staffing plan and legal structure for the entity that will manage and oversee the implementation of the compact program; operational agreements with public or private entities that will conduct implementation; work plans and other arrangements for the management and execution of projects; and arrangements for procurements and funds control, among many other issues.

During this time, MCC will assess the proposed project(s) and the proposed framework for implementation. As the appraisal moves forward, MCC may advise the selected country that modifications in project scope, approach, or design are needed in order to improve focus, maximize impact, improve quality, enhance implementation, lower costs, or increase benefits. Such exchanges of views and technical modifications are critical to the Project Development phase. At the end of the process, the MCC country team develops an Investment Memorandum for MCC senior management to consider. The Investment Memorandum includes the team’s final assessment of the objectives, scope, costs, benefits and risks associated with each agreed project and with the proposed compact program overall.

The Project Development phase ends with the presentation of the Investment Memorandum to MCC’s senior management. For most selected countries, this phase takes twelve (12) to sixteen (16) months to complete.

Phase 5: Negotiation

During the Negotiation phase, MCC prepares a draft compact and other legal documents for discussion with to the selected country. When agreement on the specific activities, budget, objectives, data collection, and reporting and legal requirements has been reached, MCC submits the agreed compact to its Board of Directors for consideration. Only after approval from the MCC Board of Directors and a non-objection from the United States Congress can MCC and the selected country sign and implement their compact agreement. At that time, MCC commits funding for the entire five-year compact program.

The Negotiation phase ends with the signing of the compact documents. For most selected countries, this phase takes roughly one (1) to two (2) months from the end of the Project Development phase.

Timeline for Compact Development

Each selected country should expect the process of developing a successful compact program to take more than two years but less than three years, if aggressively managed. A variety of factors can impact that general timeline, sometimes quite significantly. Such factors include the speed with which the selected country staffs its Compact Development Team; the degree of authority and autonomy granted the Compact Development Team; the depth and range of skills on the Compact Development Team; the depth of coordination between the selected country’s government, its civil society and private sector, and its other development partners; the level of preparation of the specific investments, activities, and interventions proposed; the focus and coherence of the overall compact program; and the quality of engagement, oversight, and leadership from the selected country’s senior leaders.

A note on Public Consultation and Stakeholder Engagement

MCC believes that meaningful, ongoing engagement with stakeholders is a key to the development and implementation of a successful compact program. Effective stakeholder engagement offers selected countries an opportunity to engage important individuals and organizations as partners in compact development; to obtain expert advice and collect qualitative data for technical analyses; to ensure that decisions about the direction and content of the proposed compact program are well informed; to validate or adjust analyses, thereby helping ensure the technical quality of work; to manage risks and impacts; and to identify opportunities to maximize development impact. When done well, stakeholder engagement also helps ensure the long-term sustainability of the compact program’s impacts.

Early analysis and planning is important for staffing, scoping, and properly integrating stakeholder engagement into the compact development process. When carried out, stakeholder engagement will encompass a wide range of approaches, each of which may be used at different stages in the compact development process. These include:

• Public outreach, generally a one-way disclosure and dissemination of information from the Compact Development Team to stakeholders.
• Consultation, a two-way dialog between the Compact Development Team and stakeholders.
• Qualitative research for technical studies, such as input through interviews or focus groups. During compact development, this approach is often lead by economists, gender and social inclusion experts, and others.
• Participation in decision making.
• Grievance redress, a process by which grievances can be raised and resolved.
• External / ongoing reporting to stakeholders.