Official Minutes from the April 25, 2024 MCC Advisory Council Meeting

April 25, 2024
10:00-11:15am ET
Via Webex

Call to Order and Roll Call

Alex Dixon welcomed everyone and thanked those who participated in the April 3rd, 2024, subcommittee meetings. He called the meeting to order.

Overview of Agenda

Member 23 introduced the agenda and the Gambia Compact.

Welcome Remarks & Discussion with Members

Cameron Alford thanked the Advisory Council for their time, dedication, creativity, and expertise. He acknowledged the outgoing Advisory Council members: Kate Ahern, Peter Choharis, Joshua Powell, Shehnaz Rangwala, Valérie Vencatachellum, Deirdre White, Guevera Yao, and Olu Verheijen. Then he introduced MCC’s new deputy chief executive officer, Chidi Blyden.

Chidi Blyden said she was very thankful for being there and welcomed the private sector advisory council members. She noted her gratitude for the thoughtful contributions of the members, saying that now, in the 20th anniversary year of MCC, it has much to be proud of. She noted that MCC has invested $17 billion in 47 countries, impacting the lives of 300 million people during that time. She said that MCC will continue to pursue our mission to reduce poverty through economic growth while simultaneously reinforcing and broadening our model is key to the work that we continue to do. And we want to continue to equip the agency with tools that will help it move forward. MCC hopes to expand its partnerships to broaden capabilities and further bolster the agency. This includes our partnership with those who are part of this council. She introduced the Gambia Compact. The challenge of evaluating development-centric investment opportunities is understanding the right amount of limited MCC funding to be used to stimulate economic growth. Without stifling private sector investment, MCC strives to build the right ecosystem for MCC to be successful. She said she looked forward to being part of this discussion and learning from the council members. She reiterated the appreciation she has for the outgoing members’ contributions. Your continued contributions are always appreciated.

Cameron Alford reviewed some highlights of MCC’s accomplishments and noted that President Biden had announced PREPARE at COP28 which brings together the diplomatic, development and technical expertise of the US to help more than half a billion people adapt and manage the impacts of climate change. MCC’s environment and performance teams are preparing a whole systems approach to plan for environmentally resistant infrastructure that is consistent with the PREPARE initiative. In December, MCC approved Cabo Verde for a regional compact. The Philippines and Tanzania will test our Threshold after Compact Authority. For a long time, MCC was restricted from doing a threshold program with a country with which it had previously had a compact, and both nations are close to passing the score card. MCC is continuing to see that they are on positive governance trajectories, and we look forward to engaging with them in the policy and institutional reform programs related to the threshold.

MCC is actively working in 27 programs. In March, the Kosovo Team held a successful workshop and MCC had its first compact outreach event, spotlighting ACFD which is looking to facilitate MCC’s investments there. The compact is on track to enter into force. Belize country team just successfully concluded negotiations on a $125 million compact that just ended on April 17th. It will address quality of education and high electricity costs, two constraints to growth in the country.

In Indonesia, the administrator for the compact’s access to finance project hosted an auction simulation which provided some important insights into finance service providers in the country. That will help inform the compact.

Niger’s compact end date was in January. The team had already concluded many activities and accomplished many of the goals before the coup, including roads, irrigation, markets, vaccination of the national herd.

MCC was attempting to work across the region, but coups in Africa have forced MCC to focus more on single countries like Cote d’Ivoire and Benin, which might have a regional impact.  instead of regional compacts. Two years ago, MCC selected only Senegal for a regional program. It went through the analysis but did not necessarily pick a specific partner country. Cabo Verde was picked in a similar way. Senegal has focused on the blue economy as their opportunity for regional integration. Senegal’s government is committed to the compact. Cabo Verde may collaborate with other countries including Senegal. Cabo Verde sees itself as a crossroads between many regions.

MCC recently signed an aid memoir with Cote d’Ivoire. The compact with Malawi will enter into force on May 6th. The compact with Lesotho just entered into force on March 30th. Their prime minister said, “It is not just a compact, but a manifestation of a shared dream.” Some of the requirements for entering the compact with MCC are transformational, and the government of Senegal used the compact as an opportunity to push 6 laws, specifically for women’s rights. That is an example of the lasting transformational power of MCC’s work.

We have done quite a lot in the last six months and have an intense schedule of projects going forward, with four programs that will enter into force in the next four months.

We look forward to this discussion and the input of this council and Alex Dixon opened it up to discussion.

Member 16 said she was very excited about the progress that is being made and asked two questions: About the Blue Economy, how are you integrating climate into your constraints to growth analysis that impacted the decisions regarding Senegal?

Is there a way you measure and tell the story about the transformational effect of the systemic change in women’s inheritance laws? Getting the news out about the role of MCC in this change differentiates MCC from other development institutions.

Cameron Alford said yes to both questions. In Lesotho, many of our economists would welcome the opportunity to capture the data regarding the intergenerational impact of MCC’s work. MCC is not just capturing the benefits into its ERR calculation. It is one piece that is helping to capture the story that MCC is able to tell.

Chidi Blyden said that, in Lesotho, women told her about the impact of including women in the agricultural sector. They said that even one hector of land can have a huge impact over their lives and the broader boarder market economy long-term, feeding more than just Senegal. Including women in the economy has an outsized impact and is a model that needs to be taken to the region and globe.

Member 21 4/25/2024 9:39 AM • One critical thing to continue measuring and monitoring in Lesotho will be whether / how social change follows legal / policy change. Those numerical projections are great, but on the ground day by day, there will be real push back by established social structures, e.g., Lesotho is a patriarchal kingdom.

17:56

Cameron Alford said that the Blue Economy is new to MCC as well.

Jon Richart said that MCC has done many things to complement the constraints analysis (CA) process. MCC has always had some capital analysis, but it is beefing that up. In addition, it is doing a climate vulnerability analysis in conjunction with the CA. It has been done systematically in Sierra Leone, Togo, The Gambia, Mauritania, and Senegal. That has brought another dimension into our analysis of constraints to growth.

We have done it in many African countries. Our Economic Analysis Team has been analyzing how to integrate climate and broader climate uncertainties into the cost-benefit analysis integrating. A lot of it has been in-house and not broadcast externally, and that is something that we can do a better job of.

Member 1 asked how, at this twenty-year mark, MCC is thinking about what has and hasn’t worked.

Cameron Alford said MCC is always analyzing assumptions, results and data is transparent with lessons learned. Impact Evaluations are done on every program. There are few other organizations in this space that do that. Because of this, we are recognized as the most transparent aid agency in the world. This 20th anniversary has caused us to reflect even more on our model and planning what we want to carry forward in the next twenty years.

Chidi Blyden said that she has been reflecting on this as well. MCC is constantly doing this evaluation as a matter of policy. If you are looking at MCC in the context of the greater of the larger toolkit of the United States government, we need to ask what we are doing to be competitive and advance our interest. How are we investing in our people, accelerating our programs to keep up with changes in the development and foreign aid sector. MCC is looking at digital skills and systems, artificial intelligence, infrastructure, and the speed at which we offer some of these things. She said that she was impressed looking at all MCC has done over the last twenty years and where MCC wants to go. We have learned a lot and are looking to get the tools in place to launch for the next twenty years. A strong part of that is developing strategic partnerships which are vital for MCC to improve in new sectors like climate and digital spaces.

Member 23 appreciated the achievements of the last twenty years in addressing needs of countries and strongly encouraged MCC to increase its leverage with the domestic private sector. That would impact the local economy. Also, MCC must analyze what it is doing globally because development is not one-size-fits-all. Regional compacts are vital for land-locked countries in sub-Saharan Africa. If you take The Gambia out of Senegal or Lesotho out of South Africa, it doesn’t work. Mali, Niger, and all these countries have to benefit from the ability to foster trade within the region. This would be in line with the African Union trade effort. It might be different in Asia and Latin America, but in Africa, he said he expects to see a stronger emphasis on regions when working with land-locked countries in years to come. A regional approach with land-locked African countries will help the costal ones as well.

Cameron Alford thanked him and said that, notwithstanding coups, thinking about a regional approach will be to MCC’s benefit longer-term. The Partnership for Global Investment and Infrastructure (PGI), the G7 initiative and its emphasis on corridors, is also forcing MCC to think about working with a regional approach.

Alex Dixon said MCC is looking at domestic private mobilization. We survey the private sector first to identify their bottlenecks, then we match that with the analysis of our micro-economics team. It almost always matches, so when we design a program, it has the private sector focus. MCC tries to help early stage projects to come to market, applying early stage intervention and support developers to get their projects to the stage where they can attract private investment and get into the project prep facilities that are available. MCC is proactively working. MCC always tries to integrate more of the local organizations into the procurement and to develop the organizations. We continue to make strides. He sees the programs in two buckets, one is like our compact in Indonesia, where MCC is providing access to capital and technical assistance to compacts to spur growth and promote broader engagement of women in the market. We don’t have the perfect formula. We are continually trying to improve and help create businesses, like rock quarries when we build roads or enabling a small contracting firm to reach international standards. There is room for improvement, but MCC is making strides in what it does with blended-finance and the private sector.

Stephen Gaull confirmed that, in Indonesia, MCC has a blended finance delivery system that he presented on last year. It has aggressive, ambitious leverage targets.

Member 23 gave an example: If you look at the needs for in the sub-region, in Cote d’Ivoire, Mali, Niger, Burkina, there is a very strong demand for infrastructure. In the long run, MCC should be able to expand, increasing local capacity and bringing capital and local technical expertise to a region that needs it. For example, energy distribution is a huge gap in the region. Producing electricity is not the problem. Distributing it is. In Chad, the distribution is the problem. MCC needs to look at the companies that are needed to implement infrastructure and to leverage the private sector development that is needed in these countries and a regional level.

Member 6 added that, in Lesotho, we are working with the pension fund to mobilize domestic capital to invest in the country. We have allocated funding for first-loss capital, for a fund in which the pension fund would be an anchor investor. MCC and our counterparts will be signing MOUs for that. We have been working on that for a couple of years. Also, in Zambia, we are incentivizing lending to meet needs for ag-related equipment. They will be lending their own capital. We are providing incentives for loan origination and to reduce risk, mobilizing domestic capital from banks and equipment suppliers and leasing companies. Those are two other examples of where MCC is mobilizing domestic capital for investment.

Alex Dixon added that Lesotho had a law that 30% of the pension assets had to be invested locally, but they had limited vehicles. So, MCC provided a vehicle to implement their own policy.

Member 24 said (via chat) In the programs that focus on SME Finance (Indonesia and Lesotho), are there technical assistance components? How will they be integrated with the investments to ensure they are relevant. It may be too early in the design but should be kept in mind. Thank you.

Member 18 said that the temptation is to compare projects in different regions. MCC needs to prioritize what is needed locally and measure what was done rather than have global metrics, which would not always fit and might be too rough of a slice. These are moral and policy choices: choosing an environmental versus a human rights measure, empowering women versus legal reforms, etc. He encouraged MCC to gather as much information as it can to inform next steps. The data sets do not all need to be shared but can empower good choices. The rich data that can be accumulated globally.

MCC has a process from initial conversations to signing the compacts, then implementing it. He wondered how MCC can open up portals for Advisory Council members to contribute ideas when MCC is in the process of negotiating. There are transparency act issues, but Council members can try to be part of the journey when they are involved. That would be valuable for council members and for MCC.

Cameron Alford said he looks forward to engaging on that. It is a great point. What is the data that we comparing? The Selection and Eligibility Team focuses on core issues like human rights and anti-corruption when selecting partners and having those expectations met during the life of our partnership, holding countries accountable. The team always evaluates and evolves the selection criteria because of changing circumstances and external pressures. The loss of the World Bank’s accountability vehicle was significant. MCC is monitoring and evaluating partners and learning lessons and implementing the lessons we learn in context.

Member 3 said (via chat) Where is MCC at with partnerships for SME finance in Indonesia? I think the intersection of SME finance for women x climate / non-forest asset business for IPLC populations would be very interesting to Philanthropy – especially using our balance sheet instruments like PRIs (concessional debt) to create leverage. The intersection of philanthropy x MCC x private sector Fis would be interesting.

Member 3 said most development organizations recognize that there are not enough resources across the public sector, so they need to turn to public-private partnerships. He affirmed MCC’s emphasis on those partnerships and referenced his chat message which asked for a status update on where MCC is with private sector partnerships for SME finance in Indonesia. He added that there are coalitions of foundations that have pooled our resources in our balance sheets to help lever up public and private interventions. He wondered if there were opportunities to further pursue that.

Stephen Gaull said there are two aspects: the MSME Finance Project and the Financial Markets Development Project. In the Financial Markets Development Project, MCC is seeking leverage from commercial lenders, which brings in the private sector and operationalizes the cascade, which is the purpose of blended finance. In the MSME Finance Project, the MCA has just hired a contractor that will be helping to implement digital and financial literacy and capacity enhancement for MSMEs. They will be looking at partnerships and sub-contracts with organizations that can help deliver those sorts of training and capacity building.

Cameron Alford spoke to the partnerships more generally: For many years, MCC, like other institutions, had negotiated with local partners and made partnerships that did not produce the programmatic results that were expected. Often, opportunities did not align well in specific programs. So, MCC shifted its orientation to developing specific partnerships in the context of specific programs. We see that in the context of Mozambique. We see real opportunity there for partnerships to leverage and blend finance, implement, operationalize, and encourage local capital. MCC is continuing to focus on those partnerships and build upon them.

Chidi Blyden asked that the group talk about the candidate pool legislation expansion, which will allow us to have more of a global reach and increase our ability to work in multiple sectors if passed. She encouraged the group to talk about Malawi’s blended finance model and MCC investment in there, making sure that there is private sector investment that comes in immediately after. She reiterated that the Council’s recommendations are most welcome.

Cameron Alford thanked her and said that, by legislation, MCC is limited to work with countries based on income. As the world is becoming wealthier, there are fewer places MCC can operate, but there are places of poverty that would benefit from an MCC program, so MCC is speaking to Congress about legislation to expand the pool of countries that MCC can partner with. MCC would continue to adhere to the score card criteria. Legislation was introduced in the last two sessions, including a piece of legislation that is pending now, which was introduced by Representatives Castro and Kim. It proposes to expand the target countries by about thirty countries. That forces MCC to think in its upfront analysis and the programs that it implements. We are still working on getting the legislation enacted, and the political environment makes passing bills more difficult.

Member 5 said (via chat) MCC working its way out of a job thanks to progress on poverty is not necessarily an existential threat!

Alex Dixon said MCC put the ACFD into place. It is a blended finance facility in which MCC is setting aside grant-funding for DFC to use to get bills that are near-bankable across the finish line. MCC has made allocations in Malawi, Kosovo, Lesotho, and planning to make one with Zambia. We have challenges in how we integrate DFC and MCC. The program is keyed on the DFC driving the process. So, there is a front end part that needs to be crossed. MCC is holding outreach events like webinars. It is trying to provide strategic support. Ultimately, the action must be taken by a company to seek financing by DFC, and then once DFC processes that, they must prove that grant-funding is necessary to complete the deal. It provides sustainability for us because, with ACFD, as long as DFC is committed, that is what we are trying to achieve regarding access to financing. And then the project can be implemented afterwards. Outside of that, we continue looking at different ways we recalibrate how we look at investment, how we provide strategic capital after the compact is done, how to attract philanthropic dollars and help set the stage for that capital to flow. We are looking back over the blended finance interventions that worked and that didn’t—and why. We have been doing blended finance for many years in different modes. We are starting to look at asset recycling after MCC is done: Should we use a concession arrangement for what we have built? Should we help that country monetize the assets? How can we continue to use those funds for good after the five-year period when MCC is there? There are challenges with that. MCC is somewhere between a DFI and not a bi-lateral grant agency. MCC is not well-known and is trying to improve by telling what it does.

Member 5 said (via chat) ACFD (and maybe DAFs) - interesting way to address the serious limitation of 5-year money for complex projects.

Cameron Alford presented Member 18 with a token of MCC’s appreciation for serving on the Council.

Alex Dixon thanked Cameron Alford and introduced the subcommittee read-outs.

Readout from Subcommittee Meetings

Member 14 reviewed the minutes for the spring subcommittee meetings:

The Blended Finance Subcommittee minutes note that Timothy Freundlich, the founder of Impact Assets, gave a presentation on exploring multi-donor funds (MDFs) for international development. MDFs are donor advised funds, which are funds in which donors pool their funds. They are philanthropic contributions to a synthetic fund in which the donor can make recommendations for specific investments within parameters, but someone else is making the decision about where that money goes. The donor can get the tax benefits early on. There is growing interest in MDFs, and he said there are more than $230 billion in assets held in DAFs across about two million donor accounts. They are used by high net worth individuals and families to pool their resources for charitable causes. Timothy Freundlich said they are ideal as impact investments because they are flexible. They are synthetic, so they are much simpler and cheaper to set up than actual funds. MCC believes that these DAFs, and more specifically, the MDFs, can be a tool to support smaller projects that need patient capital. The committee had questions about MCC using this model because of its smaller scale compared to MCC’s usual scale, but in general the subcommittee thought the structure was interesting and could be impactful. They were very happy that MCC was open to using creative tools like Multi-Donor Funds.

Member 19 asked if there are examples of DAF holders investing into MCC projects and asked that MCC share more details about that.

Alex Dixon said there is no direct link to MCC at this point, but he is planning to go through Impact Assets portfolio, which has root capital and other funds that they put money into from fund managers, to see if there is any crosslink between the MCC investments and theirs. We are exploring possibly using the MDF model in Zambia.

Member 5 said (via chat) And enjoy tax benefits.

Member 19 said that it is a fair critique of DAFs that they can be a way for wealth-holders to sit on their money. Risk tolerance of DAF holders does not seem to be any higher than it is for any other type of investment across those individuals or families’ portfolios. It may be harder to break into that area than we would hope. But if that becomes an issue, there are groups like the Mission and Investor Exchange and others that are trying to get their members to be more aggressive. Half your DAF is a matching fund to compel people with DAFs to spend half of their DAF within the next year. MCC will need to do some networking and find a compelling case for people who do not already care about international development.

Member 6 said (via chat) Very good point Randall.

Member 14 said that Timothy Freundlich provided the number of distributions out of DAFS, and he indicated that they are higher on average than distributions out of foundations. She asked if that was not his experience.

Member 19 said that that may be true on average, but he doubted whether it was true as a median. There are people who try to quickly get a lot of money out of their DAFs, but there is a large number that sit on it. Timothy Freundlich is better positioned to have the data, so you should listen to his numbers. But he would probably agree that DAF holders are not making the investments at the level that he would hope. You can invest your DAF like you want, but few people probably invest them in high-risk international development initiatives. It may be because they are not interested, or they do not know about them.

Member 14 appreciated his response and said that it sounds like what you are saying is that donors control how the money is being dispersed, but she thought that was not legally the case. Is that how it works practically although they are just supposed to advise?

Member 19 said yes. He has a DAF and has never had any of his investments or donation choices turned down. In most cases, on the donation side, any non-profit organization or equivalent international organization will be approved by the DAF manager. If they don’t approve it, investors can move their money to another DAF-holder who is more likely to approve it. So, on the donation side, it is very rare that it would be rejected by the entity which holds the DAF. On the investment side, there are more challenges: I had to negotiate to say that I wanted to take a more international and aggressive investment strategy, which is probably more risky than most people who hold DAFs at that foundation, but ultimately, they were willing to let me do it.

Member 14 is sounds like DAFs are an area that needs to be regulated because high-net worth individuals can take advantage of getting a tax deduction without actually utilizing them.

Member 19 agreed and said that there has been legislation written that would require DAF holders to at least maintain the same 5% per year requirement that foundations do for their payout. At present, there is no requirement for the pay-out, and many people are frustrated by that, so he would not be surprised if there were legislation that at least targeted the percentage amount, but he doubted that the legislation would do anything other than that.

Member 5 said (via chat) 100% agree with Randall's observation. He posted this link: https://www.nytimes.com/2018/08/03/business/donor-advised-funds-tech-tax.html

Member 19 said (via chat) Thanks for the article, Darius -- I think the challenges identified are still valid/in place.

Member 16 asked how this set of grant-makers fits into MCC’s private finance mobilization strategy. She noted that MCC does have grants and is already risk-tolerant, so she wondered what value additional grant-making has for MCC. She asked if it was because MCC’s grants have to be spent within the term of the compact, that this would be a source of longer-term finance or impact investing finance for which MCC funds could not be deployed.

Alex Dixon confirmed that MCC can set the stage, make early-stage investments, and set up platforms, but since MCC is limited by the five-year clock of the compacts, MCC needs investors who will continue to make those investments. Impact Assets is making investments into other funds like Leap Frog, root capital, emerging managers in Kenya. So MCC could look at tapping those dollars, not necessarily putting them into funds or managers to strategically invest with us, but also helping us set up platforms to help money flow. He said he took Member 19’s points that there are investors who are sitting on DAFs. There is a big marketing component to this. They may be able to provide some sustainability and oversight to the few opportunities in which MCC can help set up platforms for investing that will go beyond the MCC timeframe. We have opportunities, like in Indonesia where we are setting up a system where MCC’s money can recycle, where MCC money can prove the concept out, and then maybe we will be able to attract follow-in investors. Using a multi-donor fund strategy like Impact Assets is an interesting concept to continue to explore.

Member 16 asked how the first loss case mentioned earlier solved the problem of the time frame?

Alex Dixon said that in terms of first loss, MCC has been looking at putting in grant capital through letter of credit or other means so MCC can have its money sit there as a first loss for SME loans. In Zambia, MCC is looking at working with an institution that effectively provides funds for first loss for SME loans through a performance grant that they provide banks to cover their costs. It is an indirect way to do it. From a constructive standpoint, MCC funds must be used in a 5-year period. It cannot park money in a traditional first-loss structure in which the money sits and might or might not be called at the end of five years. So, we must look for structures in which we can provide a continuous permanent vehicle to provide for the first loss, and we must do it through this rewards framework we are looking to implement in Zambia.

Member 16 said it was interesting that the MCC legal team had come down in that way. She thought that it would work to park the first loss money in a fund permanently and disperse it once it is parked. Not being able to do that is a major constraint. It would be a hugely powerful tool to mobilize local finance.

Member 2 said that DAFs are transformational for NGOs to receive unrestricted resources, no matter the size or the NGO or of the gift. She mentioned that on April 18th, the Chronical of Philanthropy has a whole issue dedicated to DAFs, including all the regulations. She added that DAFs could be a powerful tool for MCC to use because of the way that it tries to influence change. DAFs can be powerful for local NGOs in the communities where MCC is working, to be able to access grant funding to either do social safeguards, or to have voice in accountability, or to look at human rights. So, it could sit alongside. Having a deliberate cultivation of DAFs for those communities could help amplify leverage and make a more successful and sustainable, if not smoother, process for MCC work. Many NGOs were looking at DAFs because they are great.

Alex Dixon thanked her and said he would follow up.

Member 18 said that the size and nimbleness of MCC is good. MCC may need to test the parameters and get the statute modified. MCC can be an incubator to the extent that it can make people aware of these partnerships. MCC has a lot of money, but it needs to be more visible. These communities are entities that can help MCC communicate with certain emerging markets. Rules and procedures are not always clear to the NGO or think tank communities.  It is Capitalism 101 for people who don’t think in that space and thus are skeptical and suspicious about working with MCC because it is a government agency and promotes capitalism. There is going to be a learning curve. MCC can use these organizations, and be itself used, as a force multiplier for certain metrics that MCC agrees with like combating corruption, promoting human rights, and promoting sustainability. It would be good for MCC to show up at the international conferences where these groups are.

Member 19 noted the need to have something that is easy and understandable to invest in. If Timothy Freundlich is offering to help MCC create such a vehicle, then that is a great thing. It also needs to get into the hands of the folks on his team and others that can promote DAF investments and help DAF holders manage their funds because they are the ones that actually get it in front of folks in a way that is much more effective. MCC needs an easy vehicle.

Alex Dixon thanked him.

Member 14 then presented a summary of the Energy and Climate Subcommittee meeting where MCC presented “A System’ Approach on Climate.”  on “A Systems Approach to Climate-Resilient Infrastructure Planning,”  a paper that is being written with MCC in the lead and multiple agencies contributing. It advocates for planning across interconnected assets and sectors to create more climate resilient societies and communities. It uses the 2020 floods in Kenya as a case study and recognizes that systems planning would be a helpful model around the world. All the contingencies and risks need to be incorporated in planning. The committee was enthusiastic about this big picture approach. They said that the systems and infrastructure that is included needs to be clearly defined. The committee also encouraged MCC to utilize experts in urban planning, especially those who have done that kind of planning in places that are not as urban, to look at the whole system. They affirmed that collecting and processing accurate data was needed. The committee also warned that collaborating with too many parties may be difficult in practice. Also, they recommended that the implementation involve staff, not just senior leadership.

There were no questions or comments from the Advisory Council Members.

The Gambia Compact Development: River Projects Proposals

Carmen Carpio introduced herself and Stephen Gaull. She presented the Gambia Compact Development: River Projects Proposals, introducing the country’s characteristics and its constraints to growth: insufficient access to finance, low enrollment and low-quality education, high cost of electricity and the losses incurred during distribution, limited tax revenue, and under-utilization of the Gambia River. The team focused on three of the least-addressed constraints: access to education, river rehabilitation, and addressing the immediate capacity limitations of the Port of Banjul. At present, there is a strong dependence on the less efficient highway system and not on the river. The threshold program aims to reduce transport costs of goods by converting long-haul, high-volume, east-west cargo transport from trucks to shallow draft barges.

Member 5 noted that when previous donors have done an analysis on a project but have not moved forward, there may be underlying challenges. He asked if any of the other donors who were looking at the development of the port have done feasibility and pre-feasibility studies that MCC could benefit from.

Carmen Carpio said that MCC has looked at that. There were some initial studies that date a few years back. What we do know now is that a few of the donors that were interested continue to be interested. The challenge that they are facing is that they cannot activate their financing because of their internal processes. Africa Development Bank financing is already committed. They were part of the initial package, so now, we have gaps because of the process that other donors are facing in terms of not being able to access or disperse their funding. Africa Development Bank has done studies that MCC is benefitting from. European Union did some initial work, but it is not so in depth in terms of feasibility. That is where their processes got stuck. There were other aspects of the country consultation involving other investments in the private sector. Private sector involvement has been positive, but also interested in opening other areas. The strength of what MCC is looking at now with Africa Development Bank with MCC involved is that it is focused on keeping a disciplined approach that will look at efficiency at the Port of Banjul. So, we have looked at the studies done by other partners and there is great interest and commitment already from a reliable partner that has done some initial work. MCC would be able to build on that.

Member 2 wondered if that had anything to do with changing governments.

Carmen Carpio said that the government is still new as a democracy and still learning. Even within their government, there has been interest in building a deep seaport. There were internal conversations about whether that would mean that there would not be a Port at Banjul. We have been accompanying them as the country has struggling through that discussion. A deep seaport could be pursued, but it is a 20 year project. It does not address the immediate capacity. It is a new democracy. One of the challenges for the government is that it tries to be very transparent, so they don’t want to create the impression that an executive decree is determining what is done. They may over consult to avoid the sins of the past.

Stephen Gaull presented the private sector and blended financial sector analysis part of the slide show.

He said that, in finance, there are high reserve requirements and low levels of long-term deposits create liquidity mismatches, which inhibits long term lending. High interest rates and regulatory requirements limit SMEs access to loan. Credit to the public sector is materially higher than private sector, due to high risk aversion and limited credit guarantees.

Access to finance would be improved by reducing transport costs of goods by converting long-haul, high-volume, east-west cargo transport from trucks to shallow draft barges.

Private Sector / Blended Finance Approaches Funding for all the projects could be done through public funding and/or joint public and private funding, which is more complex.

MCC has been contemplating using an American Catalyst Facility for Development (ACFD): MCC can use blended finance to de-risk a DFC financial intermediary loan to enable on-lending in local currency. MCC would pay for an FX hedge so that the financial institution that borrows from DFC can repay the loan to DFC in US$ after making local currency loans to eligible borrowers. And the cost of the FX hedge might be about ~10% per year on the principal, e.g., the cost of a five-year hedge for a $20 million exposure would be ~$10 million.

He opened the floor with the following questions:

1. What thoughts do you have about ways to deliver Port of Banjul/Inland Port of Basse with private sector participation?
2. Should we bundle Inland Port of Basse with Port of Banjul in #1 above
3. What are your thoughts about an MCC-supported FX hedge for a DFC loan to a Gambian bank for on-lending in local currency?
   • Should this become a standard FIT product under ACFD, benefiting from DFC’s due diligence? 
   • Would a grant to a local bank be a better, less costly approach?

Member 5 said (via chat) Kudos to the team for visualization / summary of the constraints to growth analysis.

Alex Dixon opened the discussion.

Member 2 said that figuring this out is so important because of the outsize impact it can have on the country and the region. It is a new chapter for their governance, which has been through so much turmoil over the years. The country is at a particular moment when there is good will. It is working to keep stability. However the financing is worked out, it is important to make sure that there is strong communication with the affected communities. Gender dynamics there can also be improved by trade. This project could have a significant impact because there is so little being done in development there.

Member 23 said that when the MCC supported the DFC, it was the MCC supporting a US institution. He wondered why MCC would do this. If MCC is there to take some risk, de-risking a US institution defeats the purpose. He would prefer to see MCC supporting a local bank to get an incentive to support the local economy. If the DFC will only do this if the MCC does it, then we have an issue. The Gambia is in Senegal, so Gambia should be a regional project with Senegal. The river should be used to feed Senegal. It is important to support women in trade as well. The volume of the port’s activity is a question. Senegal is improving its port, so it will be difficult for the Port of Banjul to compete with Senegal. And Senegal may not like to see the competition increase.

Stephen Gaull recognized the point and said that ACFD would indeed be derisking DFC, but that DFC is more likely to join MCC in this if it is de-risked with the ACFD.

Alex Dixon said that MCC would facilitate DFC lending to a local bank, so the bank would have the capacity to finance it. The local bank should always be the conduit for the funds to flow.

Stephen Gaull said the local bank is still taking portfolio risk. MCC is just helping with the FX risk on the repayment. If the on-lending loans go bad, that is still on DFC.

Member 23 said that MCC might want to present it in a different way to be clearer.

Carmen Carpio noted that the Gambia Team is in the process of doing due diligence assessment for the compact. The experts are looking at the numbers regarding the ports in Senegal and Banjul. We are gathering data to ascertain whether the anecdotal evidence of a market is correct. We see capacity limitations already and recognize a need for the country to satisfy its own needs. The costs are being borne by the consumer. We hope we can make efficient transport from Banjul to Basse. Roads are being depleted, so the river is a good alternative. It can have some carryover effects. The MCC experts are in the process of evaluating the project, and it is assessing the interrelationships.

Alex Dixon said that traffic from Guinea and Mali goes through The Gambia. The Senegal port has some difficulties around duties, so a lot of traders the like to use the Banjul Port to bring goods up. And there is a concession for the new Senegal Port to be redone, and that includes the duty-free that goes to Mali. There is a lot of traffic that goes into Dakar, that is going up to Mali, but a lot of the traffic that has to go to Guinea and a lot of the other areas, that can be picked up by Banjul. MCC will need to analyze the capacity of container volume, but there seems to be ample and stable demand.

Member 18 asked what the thinking is behind having a BOT structure, who will do that for Basse, what kind of volume is being discussed, and what will the environmental impact be on the river. The more successful this is, the more environmental impact there will be on fisheries, etc.

Member 16 asked whether barge traffic will produce lower emissions than trucking and if MCC can encourage greener fuels and greener shipping. She also noted that hedging is a good thing to do, but it is hugely expensive in this case. So, partnering with DFC on this is good. To have a 50% cost on the total exposure for hedging seems to be a poor use of money. She asked, if MCC is trying to mobilize local finance, what is most efficient way to do that? Does MCC have to give the bank a grant for on-lending or a guarantee so it can use its own resources but lower its risk? Or is there another way to do that rather than just using the bank as a pass-through for finance?

She also noted the Gambian government might be the best investor because there is low profitability and most of the benefits will go to the Gambian economy internally. It may be good to avoid overestimating the regional benefits of port traffic and therefore paying large fees to the private sector.

Carmen Carpio appreciated the points and said that the Port of Banjul has been designed to be climate friendly. Some of the investments through the African Development Bank include green technologies. As part of MCC’s compact development, it will also have climate guidelines and environmental impacts that will be assessed throughout the project. In resettlement, MCC is looking at innovative ways to move people and create less waste. We are going to see how these areas interact, and what depth we need to go.

Stephen Gaull commented on the FX hedging, saying that what MCC is concerned about the cost and is trying to solve for the lack of long-term financial intermediation. There is liquidity in the local currency to lend for the short term. He was not sure that the banks need the portfolio risk cover as much as a source of long-term lending. The last question was whether it would be better to give a grant to a local bank. That would lower the cost, and if the loans are repaid, the grant could be evergreen, but the bank still does not have its own indigenous source of long-term lending capacity.

Member 18 asked what the cost of capital is currently that the hedging would allow.

Stephen Gaull said the IMF was very keen on the PPP. It would be a market risk. There is no availability payment. The things that MCC is trying to avoid are things like minimum revenue guarantees. So, MCC is thinking of this as something that would not be on the government balance sheet and that it would be trying to avoid any liability as much as possible.

Member 1 asked if this was a positive IRR project for the investor. We don’t know the numbers about things like what revenue would be generated, so it is hard to say if one would want to invest in this. He said that bundling the two ports would be good because investors would want to control what happens end to end. It lowers the risk and maybe even your required return. If you can show that using the river rather than roads from a carbon point of view, you could generate revenue from the carbon market. Not everyone wants to spend their carbon dollars in the Gambia because it is not well-known. But if you could show a case for direct reduction in CO2 emissions. Also, DFC has a mechanism for doing local currency lending through a company called MFX, which does swaps. It is a mission-based for-profit organization. It would increase the interest cost to the project. So, the question would be if the project is economic or not. Blending finance into it may be needed for the project to be economic.

Member 24 said that FX is complex and expensive. DFIs are really taking a close look at this space under the IDA-PSW, the IDA funding supports the FX losses from the private sector window investments that the IFC is doing. So, there is a blended finance model around local currency there. The lost funding is coming from grant-funding. She was not sure it is MCC’s role to play. We are all mulling these questions. Ther are models and other institutions that are researching this too. MFX has got this, and you might want to talk to other players like IFC, which also has a department that does swaps.

Carmen Carpio appreciated the comment about carbon and said that MCC is carefully assessing the environmental and financial impacts in detail. The team has been able to map out data relating to cost and is also going to look at environmental impacts as part of the due diligence that it doing.

Stephen Gaull said if IFC wants to lend to a local financial intermediary, MCC would welcome that.

Member 24 asked (via chat) Has MCC used this FX Hedge approach in other projects?

Alex Dixon answered (via chat) We are speaking with MFX about possible FX hedging options. MFX is able to take the DFC risk.

Public Comment / Closing Remarks / Housekeeping

Alex Dixon thanked the Gambia Team and the advisory council for their feedback and noted that MCC did not receive any public comment. He reiterated that the out-going members (leaving the Council in September) will receive their packages. MCC will start recruiting new members in June. He welcomes help finding new members. Then members will be surveyed for times in your calendars. The transcripts and records will be done in a timely manner. They will be published on our website. He appreciated the council’s impact on MCC’s thinking. Then he adjourned the meeting.

MCC Advisory Council Members Present

• Peter Choharis
• Andrew Gunther
• Kimberly Heimert
• Ann Hudock
• Randall Kempner
• Daniel Tomlinson
• Darius Teter
• Deirdre White
• Guevera Yao
• Jeff Jackson
• Nancy Lee
• Roland Pearson
• Thierry Tanoh
• Tracy Washington
• Valérie Vencatachellum

MCC Participants

• Albert Bossar
• Alex Dixon
• Brian Moy
• Carmen Carpio
• Cameron Alford
• Chidi Blyden
• Deidra Fair James
• Jim Hallmark
• Jon Richart
• Kathy Farley
• Mike Sehzue
• Sheena Cooper
• Stephen Gaull

Minutes prepared by: TransPacific Communications