Official Minutes from the October 25, 2023 MCC Advisory Council Meeting

October 25, 2023
9:00am-12:30pm ET
Hybrid meeting: via Webex and in-person at the Millennium Challenge Corporation (MCC)

Summary

MCC presented the Zambia II Compact Development – Electricity, Irrigation, and Logistics (EIL) Capital Inputs Projects and gave a progress update on the Indonesia MSME Finance Project. Then they discussed MCC’s blended finance strategy.

The advisory council members provided feedback that centered on the following themes:

1) Regional integration is important, and projects must be designed to stand even if countries drop out. They should incentivize investment in regional responses to global challenges and in infrastructure within countries aiming for a regional impact. MCC can consider regional issues that are not governed by externalities or evaluate whether regional programs are the most effective type of program to administer. MCC should learn best practices from its experiences and do due diligence.

2) The lack of skilled labor is a significant constraint not addressed by the Zambia Compact. MCC should focus on helping financial institutions serve the missing middle by encouraging efficient, low-cost, and less biased credit-worthiness methodologies for small loans. It should use grants for first loss/partial loss coverage and give banks additional revenue to help institutions move into new markets. It should use results-based financing and requirements for lenders, but relationships and trust must be cultivated.

3) About the types of projects to focus on, MCC should show preference for projects that focus on post-harvest loss. Hydroelectric projects may become commercially viable with subsidy and investment, but waste-to-energy can only be competitive with government subsidy. Projects need high quality assessments with early investor feedback to satisfy investor requirements. They also need technical expertise to validate their business plans. Finally, it is important to find and support reliable and engaged partners.

Welcome, Roll Call, and Overview of Agenda

Facilitator 1 welcomed everyone and reviewed the agenda. Roll call was taken through the Zoom participant list and in person attendance.

P1 and P2 welcomed everyone, thanked the MCC team for the agenda and pointed out that this meeting is the preferred way for MCC to receive input.

Welcome Remarks and Discussion with Members

Alice Albright reflected on MCC@20: MCC has made an excellent start and hopes to work in a greater geographic footprint, in climate, with more speed, and in partnership with the private sector in the next twenty years.

Facilitator 2 thanked the Council and noted that MCC has signed the Kiribati Threshold Program, the Kenya Threshold Program, and the Mozambique Compact. He celebrated the Nepal and Benin projects, noting that both countries contributed significant funds. He noted that two regional programs have been disrupted by coups. He invited input on whether MCC should continue regional projects that focus on single countries. He noted educational changes in the upcoming fall score cards and pointed the Council towards the blog post “MCC at 20: Applying the Model to Emerging Challenges Globally.” [https://www.mcc.gov/news-and-events/podcast/episode-062923-mcc-at-20-applying-the-model]

P3 noted that regional projects must be designed to stand even if countries drop out.

Facilitator 2 confirmed that, in Côte d'Ivoire and Benin, the compacts stand on their own even as the impacts flow out regionally.

P4 said MCC should incentivize investment in regional responses to global challenges and incentivize more investments in infrastructure within countries aiming for a regional impact.

P5 said there is no energy security without regional integration. Those without resources can be given the energy resources to develop. MCC should be pushing for integration.

P6 asked what MCC has learned from the Nepal Compact.

Facilitator 2 said Siri Lanka and Nepal projects were hindered by misinformation and disinformation about MCC. It needs to focus on informing people about its work.

P6 asked if there was a process to glean best practices from these events.

Facilitator 2said MCC incorporates lessons from its reports and team debriefings.

P7 said one approach to the regional question is to consider regional issues that are not governed by externalities. Another is to evaluate whether regional programs are the most effective to administer. There are three ways to think about administrative law: 1) the formal regulatory framework, 2) how it is applied, and 3) the country level bureaucrats who administer it. Working with powerful and entrenched bureaucrats can make regional approaches difficult, but also possible. MCC should do its due diligence.

Facilitator 1 (in chat) noted that P5 is MCC's practice lead for energy.

Facilitator 2 invited the Advisory Council members to the January MCC@20 event at Planet Word Museum in DC. [https://www.mcc.gov/news-and-events/event/outreach-012424-mcc20thbirthday]  

Readout from Subcommittee Meetings +

P8 summarized the fall subcommittee meetings.

Facilitator 1 thanked P8, introduced the team, and invited questions.

Zambia II Compact Development – Electricity, Irrigation, and Logistics (EIL) Capital Inputs Projects Discussion

Presenter 1 and Presenter 2 presented the Electricity Irrigation & Logistics Project from the Zambia Compact.

Presenter 3 acknowledged P9 and P10 from the compact development team. The project is planning to incentivize financial service providers to increase broad, long-term, low-cost lending to fund Agriculture equipment. She proposed these discussion questions from “Proposed Electricity Irrigation and Logistic Capital Inputs Project - Zambia Compact,” hereto attached as Attachment 1. The following discussion questions were presented to the group:

1. What innovative mechanisms and risk mitigation strategies can the EIL Project employ to make investments in EIL Project more attractive to private sector investors and lenders from the region and internationally?
2. How can successful models and strategies from the Small Ticket EIL Activity be scaled up and replicated to reach a larger number of Agri-SMEs and AAP communities, and what role can the private sector advisory council play in this process?
3. What additional risk mitigation strategies can be put in place to encourage greater participation from these financial institutions and donors, ensuring that Agri-SMEs have access to the necessary financing?  
4. What lessons can we draw from successful experiences in other countries that have faced similar challenges in attracting private sector capital for projects in sectors like agriculture and agro-processing (AAP)? How can we adapt and apply these international best practices to ensure the effectiveness and sustainability of the EIL Project in Zambia, taking into account local conditions and requirements?
5. What strategies can be effectively employed to lower the cost of capital for AAP borrowers?"
6. How can MCC optimize project preparation support and identify a robust project pipeline?  What type of support project prep would be most valued by project sponsors? What type of project sponsor capacity building would be needed?  How could the local MIIAs sustainably raise revenue to continue operating post compact?

P11 asked why the government was not willing to look at some of the other elements of the root cause analysis, especially the lack of skilled labor constraints.

Presenter 1 said that MCC identified five constraints and asked the government to identify no more than three constraints as their priorities. Then MCC focused on those.

P11 asked if this compact could help build the vital capacity for skilled labor.

Presenter 1 noted that, to do that, MCC would need the Government of Zambia to fund it, but MCC cannot.

P4 noted the risk of tackling too much. MCC should focus on helping financial institutions find efficient, low-cost credit-worthiness methodologies for small loans. It should use grants for first loss coverage to help institutions move into new markets.

Facilitator 2 said MCC evaluates its borrower assistance and prioritizes first loss coverage.

P11 said the World Bank and IMF are better positioned to address systemic change. He also noted that the number of banks in Zambia is not a sign of strength because many of them are weak. He noted pay per performance in the middle tier is successful because it puts the onus on the financial institution.

P3 (in chat) expressed support for P4’s comments and for pay for results.

P2 said MCC should insure the loans to ease investor concerns.

Presenter 3 noted that the main goal is to mobilize additional investment. She said that the number of banks indicates liquidity in the system, and MCC is trying to unlock this to incentivize more lending to the Ag sector. MCC is considering results-based financing.

P2 (in chat) asked why the country rating is important if you are only looking at taping the domestic financial market. He wondered if it is access to finance or cost of financing.

Presenter 2 confirmed that MCC’s design will be based on results-based financing type of arrangement with the FSPs.

P7 agreed that there are exciting technologies. He said MCC should use the compact to get a commitment from the central bank that these lenders must lend a certain amount of capital or percentage of their loans to these borrowers. A small number of banks are the real commercial lenders in most of these countries. They make specific loans to specific borrowers, use very specific terms, and make an excellent return. They expect excellent returns with a risk profile they are very comfortable with. There are no disruptive technologies that can fix that. The disruptor needs to be the same as it was in the US regarding redlining: a government mandate.

P12 asked about the creditworthiness of the power plant off takers and the regulatory structure. He asked if there was a role for MCC in guaranteeing PPAs.

Presenter 3 responded that the MCC program Millenium Impact Infrastructure Accelerator  (MIIA) would be looking at some of the energy projects. She then turned it over the Jim for further comment.

Presenter 2 confirmed that about six banks hold 70% of the Zambian market and expect high returns. MCC is trying to make lending as attractive as possible. The central bank wants to incentivize more finance into the sector. Bank loans to government and corporates crowd out other finance, but the IMF loan may reduce government loans and move banks into new markets.

P7 said loan officers must be incentivized to serve less affluent borrowers. But repeated market failures belie the usefulness of incentives and technologies. Non-market forces are needed. MCC should require banks to finance the sector which is not being served.

P3 (in chat) said that is what crowding out looks like.

Presenter 1 confirmed creditworthiness is a problem that MCC is committed to addressing.
P12 asked if local regulations allow power to be sold off the grid.

Presenter 1 affirmed that it is allowed.

P4 said MCC aims for transformative interventions. It can use these three tools to change the business model of institutions which target the missing middle: 1) Make loans are more profitable by reducing the credit scoring cost for very small loans—without absorbing all their loan origination costs. Instead, it should get them to try new, low-cost, less biased credit scoring methodologies. 2) Give partial loss coverage. 3) Give banks additional revenue associated with these loans. Regulation may not be the most effective approach because it can be evaded.

Presenter 1 agreed and said MCC is considering sustainability and trying to effect behavioral change, helping banks to build skills, trust, and new relationships with the missing middle. He expressed hope that some of the trust and relationships will continue long-term.

P2 said hydro projects may become commercially viable with subsidy and investment, but waste to energy is more difficult. If you assume that the waste-cleaning part is subsidized by the government, waste to energy can be competitive.

P3 said he works with those who have significant revenue but lack affordable capital, helping them become bankable. He also helps start up entrepreneurs become viable businesses.

P13 said projects need high quality assessments with early investor feedback to satisfy investor requirements. They also need technical expertise to validate their business plans.

P14 (in chat and in person) wondered if, given the level of post-harvest loss in Zambia, MCC could show preference for projects that focus on post-harvest loss.

P15 described a USAID effort ten years ago that grappled with the problem of Ag-finance and how equity firms could effectively participate. It aimed “to improve the livelihoods of farmers by investing in agricultural enterprise that provide improved access to goods, services, and markets.”  

P16 (in chat) offered to connect people with the fund manager.

P11 (in chat) noted that he has Amy Bell's new contact info.

P3 (in chat) hoped the full compact document describes the commercial agriculture sector - including export and import markets, policy distortions and market failures, etc.

P17 summarized the themes of the meeting: Don’t recreate the wheel. Unless you have a stick like the government regulation like in the US, you must find a bank or fund manager that already has the energy and longevity and then partner with them and support them.

P17 (in chat) said she was happy to connect to IFC FIG MSME folks and/or SME Finance Forum folks for lessons learned and their experience with mechanisms in the country - https://smefinanceforum.org/

Progress Update on Indonesia MSME Finance Project

Presenter 4 presented the Progress Update on Indonesia MSME Finance and opened the meeting up for discussion.

P3 said he would like to talk to the MCC team offline about a similar project of his.

P4 suggested that MCC could consult Global Financial Alliance for Women and InterAmerican Development Bank.

P7 said technology should be made easy for small businesses. He mentioned a micro-financing model in Bangladesh which lends small amounts for small periods of time.

Presenter 4 commented on a national bank in Indonesia interested in building the MSME portfolio in the view of their competition.

P18 (via email) said this about scaling up successful models: Nigeria (NISTAL), Tanzania and Ghana have, to various degrees, successfully piloted partial credit guarantee schemes to leverage private sector financing to agriculture. A key lesson is to build trust, enterprise profitability and sustainable markets, coupled with insurance schemes. Zambia is trying to adopt these international best practices in its development of a sustainable agriculture financing facility. About risk mitigation for financial service providers, she suggested partial credit guarantee funds, insurance schemes for SME loans and life, group lending schemes, registering all borrowers with the Credit Reference Bureau, processing of titles for agriculture land, bio and geo referenced registration and database of borrowers (KYC), and the use of off-takers to deduct loans at source. Regarding lowering the cost of capital, she said there were attempts in the past to lower the cost of capital in maize production in Zambia which failed. The lesson was that the cost of capital cannot be arbitrarily lowered unless the public sector seeks to subsidize it, but this is unsustainable and creates political patronage. The best option is to de-risk the financial market, build trust between parties, encourage competition, penalize defaulters, and build the creditworthiness of the AAP borrowers.

Discussion on MCC Blended Finance Strategy

Facilitator 1 opened the discussion on the blended finance strategy internal document MCC is developing for its website. There were no comments.

Public Comment/Closing Remarks/Housekeeping

Facilitator 1 opened the floor for public comment, but there was none.

Concluding Remarks and Adjournment

Facilitator 1 thanked everyone and noted that the anonymized minutes will be out within two weeks. He reminded the group of the Spring meeting, when some members will finish their terms, and MCC will start recruiting new members. He adjourned the meeting at 11:46 am ET.

MCC Advisory Council Members Present

• Andrew Gunther
• Darius Teter
• Deirdre White
• Guevera Yao
• Jeff Montera
• Jeffrey Jackson
• Joshua Powell
• Kimberly Heimert
• Milton Lore
• Nancy Lee
• Peter Choharis
• Randall Kempner
• Rees Mwasabili
• Roland Pearson
• Thierry Tanoh
• Tracy Washington
• Valérie Vencatachellum

Written Responses Received:

Rees Mwasambili

MCC Participants

• Albert Bossar
• Alexander Dixon
• Bahgi Berhane
• Brian Moy
• Cory Naquin
• Nebiyou Girma
• Zaidoon Khouri
• Steven Marma
• Caroline Nguyen
• Cheryl Mpande
• Crane Muleya
• Deirdra Fair-James
• J. Richart
• Katerina Ntep
• Matha Bowen
• Mesbah Motamed
• Nebiyou Girma
• Noah Siachoto
• Rees Mwasambili
• Sheena Cooper
• Thandiwe Sibulinjase