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The Senate Appropriations Committee recently released its FY2011 State, Foreign Operations bill and while funding for the Millennium Challenge Corporation still remains at $1.1 billion, $175 million below the president’s request, the bill includes significant procedural changes to the MCC.  Some of these fixes – longer and concurrent compact authority and new candidate categories – are beneficial for the MCC.  Others – mandatory partner country contributions, a set limit on years of compact funding – raise important questions about the MCC’s future.

The FY2011 State, Foreign Operations Act provides for the following:

  • Longer compacts: Compacts can be extended beyond five years (but cannot exceed a total of seven years) with board approval.
  • Concurrent compacts: MCC can have concurrent compacts but the legislation requires that all funds be committed upfront at the same time as the original compact.  Concurrent compacts must be signed no later than two years after the earlier compact is signed.
  • Second (and third) compacts:  Subsequent compacts are already a part of the MCC model, but the bill requires countries to chip in their own resources as part of subsequent compacts. Low income countries (LICs) must contribute at least 7.5% of the subsequent compact, and lower middle income countries (LMICs) must contribute at least 15% of the subsequent compact.  The legislation also limits the MCC to a maximum of 15 years of compact funding to a given country.
  • New candidate categories:  The legislation re-defines MCC’s income candidate categories.   As outlined in a recent MCA Monitor report, the LIC category would comprise the 75 poorest (lowest income per capita) countries as identified by the World Bank.  The LMIC category would then be the 76th poorest country at the lower bound and continue to be the World Bank’s LMIC income ceiling at the upper bound.
  • Income graduation:  Any country that moves between country categories (i.e. from LIC to LMIC or from LMIC to LIC) in a given fiscal year retains its candidacy status in its former income classification for the transition year and two subsequent fiscal years.

Longer compact authority gives the MCC a little breathing room when a particularly complex project ends up needing more than five years to complete.  Concurrent compact authority allows the MCC to include more complex projects without holding up the rest of the compact. The MCC should be careful not to overuse concurrent compact authority, lest MCC compacts begin to look too much like project-based funding or appropriators use it as a way to defer funding full compacts.

Likewise the new candidate categories allow the MCC to work with the best-performing poor countries by stabilizing the number of low income countries, and the gradual graduation clause will allow the MCC to better plan its compact development pipeline and budget in the face of unplanned data adjustments and the like.

The legislation makes subsequent compacts trickier.  While not unreasonable to want MCC compact countries to contribute to second compacts, poor countries like Mali or Benin may struggle to meet the 7.5% contribution despite performing well on MCC indicators and demonstrating strong results in first compacts.

The biggest question raised in the legislation is around the proposed 15-year limit on total compact funding. There are good reasons to ensure that the MCC doesn’t become just another donor for decades on end, but more serious discussion is needed on what the MCC should look like in another ten years and whether the 15-year limit supports or hinders the MCC model.  Should a developing country that passes the indicators and shows results in two compacts necessarily (and statutorily) be prevented from future funds, even if those funds could continue to improve economic growth and reduce poverty? Or should the MCC focus on a few countries and bigger compacts?

The Senate FY2011 State, Foreign Operations bill smoothes many of the procedural problems that the MCC has begun to experience as it transitions out of its start-up phase.  However, there are still a few wrinkles yet to be worked out.  No doubt the MCC and others will be grappling with these questions and more as the bill heads back to the House before becoming reality.