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The FY2011 budget deal is for the most part a better-than-expected story. The compromise cuts Millennium Challenge Corporation (MCC) funding $380 million from the $1.28 billion FY2011 request.  While this is better than the $790 million proposed in the original House funding bill (H.R.1), a $900 million budget for FY2011 will force the MCC to make difficult choices. Likely to be hit hardest: compacts being developed in Indonesia and Cape Verde.

When President Bush announced the MCC in 2002, the plan was for the MCC to be a $5 billion per year program. Even at its high point in FY2007, the MCC only reached $1.75 billion. The FY2011 numbers cut even that relatively low mark almost in half.

The MCC's FY2011 congressional budget justification includes the following compact allotments:

  • Malawi: $100 million (plus $200 million from FY10)
  • Zambia: $350 million
  • Indonesia: $521 million (plus additional funds in FY12)
  • Cape Verde (second compact): $100 million

Compact investments for FY2011 total $1.071 billion.

MCC just signed a $350 million compact with Malawi and will have to make the rest of the tough FY2011 budget decisions on a case-by-case basis as compacts reach the end of the design phase. Zambia appears to be furthest along in developing their compact, which is expected to come-in between $300 and $350 million later this year. Assuming Zambia’s compact is $300 million (using the lower estimate) and that MCC used roughly $150 million from FY2011 for Malawi and still needs $200 million for due diligence, administration expenses and audits, that would leave just $250 million in FY2011 funds for Cape Verde and Indonesia.

The MCC says rushing compacts can reduce results. I agree and the new budget reality could force MCC to proceed more slowly. This isn’t entirely a bad thing, especially in a case like Indonesia where I've been concerned that there may be political pressure to move ahead before a compact is fully prepared or a strong partnership is demonstrated.  (It's also worrying that Indonesia fails the MCC indicators when compared to its lower middle income peers. Legislatively, MCC can compare Indonesia to both low income and lower middle income country groups--and fund Indonesia from the low income pool of money to avoid running up against the 25 percent spending cap for lower middle income countries--but failing the lower middle income indicators isn't a good signal.) But slowing down any of the FY2011 compacts makes things even trickier for the FY2012 budget and expected pipeline.

Right now, MCC anticipates the following compacts and amounts in FY2012:

  • Indonesia: $346-$416 million
  • Georgia (second compact): $100-$150 million
  • Ghana (second compact): $350-$400 million

Compact investments for FY2012 total $796-$966 million.

If an additional $300 million or more of Indonesia’s compact rolls over to FY2012 (and bear in mind, the total FY2012 budget request could also be slashed), the MCC is going to be hard-pressed to fund all it has in mind.

I see a couple of possible scenarios:

  1. Split funding. Right now, the MCC can only split funding across a current and past year (for example, they can sign a compact in 2011 and use FY2010 and FY2011 funds as they did for Malawi).  The MCC can't sign in one year and hope for additional funds from the next year unless they are granted concurrent compact authority. Concurrent compact authority is off the table in FY2011 and while the MCC will push for it next year, there is no guarantee when or if it will be approved. Presumably, this means an Indonesia compact couldn't really be signed until FY2012 and may still need to pull on FY2011 funds as it will be difficult to fund all of a large Indonesia compact from a modest FY2012 budget.  But the domino effect on the FY2012 pipeline would then affect anticipated FY2012 compacts with Georgia and Ghana, too.
  2. Ramp up the competition. When MCC was created, it argued that countries selected for MCC eligibility were not guaranteed a compact. In reality, almost every country that has been selected as eligible has worked its way through the process and eventually signed a compact. This could be a moment for MCC to ramp up the competition stakes and grant compacts only to the countries that develop the best proposals and show the strongest partnership. Part of the challenge here is that Ghana, Georgia and Cape Verde already demonstrated in their first compacts that they are strong country partners, have had compelling programs and strong implementation records if not yet fully fledged impact results. But it could put the pressure on these countries to continue to show strong commitment, and to Indonesia to really prove that it is on par (or better) than the others.
  3. Hold off on second compacts. The MCC could decide to hold off on second compacts, or at least postpone until there is more funding. Again, the challenge is that each of the countries eligible for a second compact has a strong track record with the MCC and some good ideas underway as to how to build upon first compact programs and broaden the MCC’s economic growth and poverty reduction impact. Saying "no" or even "wait" at this stage may be difficult.
  4. Seek private sector support. MCC CEO Daniel Yohannes brings a private sector background to the MCC. His description of the MCC business model is compelling and he says the MCC can and should do more to leverage the private sector. Maybe now is the time, especially in second compact countries, to come up with innovative ways to leverage the private sector in MCC programs. (Suggestions welcome!)

There are no easy choices for the MCC and it’s tough to watch given the overwhelming support for the MCC principles and approach from the administration and Republicans and Democrats in Congress. It's odd that the program that seems to be setting the standard for other U.S. development agencies--for its focus on economic growth, country ownership, gender analysis, transparency and results--is facing significant cuts. And a shrinking overall MCC budget is likely to reduce the incentive for countries to improve their policies, compete for MCC funds and put in the effort required to show they are good partners.

More than anything, the protracted and messy budget process shows just how difficult it is to run a government agency and effective development programs amidst budget uncertainty that isn't resolved until several months into a given fiscal year.  And I'm not optimistic that FY2012 will be signed, sealed and delivered come the first day of the next fiscal calendar (October 1, 2011), which will only add to the headaches and inefficiency.

How do you think the MCC should manage the new budget reality?

Disclaimer

CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.