No MCA Money at the Finish Line for Tanzania; More to Follow?

This blog is posted jointly by Sheila Herrling and Sarah Rose.
On September 18, the Board of Directors of the Millennium Challenge Corporation approved a $698 million compact with the Government of Tanzania. The New York Times picked up on Tanzania's compact approval in a blurb later in the week. This is the biggest compact to date, although in a country of 38 million people, it is the second-smallest on a per capita basis.
The MCC’s partnership with Tanzania is, in many respects, the model of how the Millennium Challenge Account program was designed to work -- a partnership with a country that has demonstrated commitment to both policy reform and coordination of donor (and national) resources for development; an effort to be inclusive of diverse regions within the country; a program that buids on the earlier Threshold Program that tackled reforms in governance, rule of law and procurement; and an innovative compact that targets somewhat tricky, but critical and seriously under-funded sectors.
But partnership is a two-way street and in this case -- and perhaps in more cases to come -- the United States is not meeting its end of the bargain because it doesn't have the money. Although the MCC can approve the compact, it cannot sign the compact until it has the resources to cover the entire amount, a requirement that was part of the MCA program's original design in order to assure those countries that were willing and able to tackle difficult reforms that their reward would not be in jeopardy each year. Congress has yet to complete its FY08 Foreign Operations budget. Unitl it does, the Tanzanians have to wait for their reward.
Now, the Tanzanians may not have to wait too long. The FY08 Foreign Operations budget heads into conference this week or next so the House and Senate can hammer out their differences in the bill. For the MCA, it's the difference between the House's $1.8 billion proposed appropriation and the Senate's $1.2 billion. A $1.2 billion appropriation would cover the Tanzania compact, so there is little threat to this good program, but it would leave less than $500 million for administrative costs, Threshold programs and the remaining candidates for FY2008 compact funding, including Namibia and Burkina Faso that, like Tanzania, have undertaken difficult reforms to meet the MCA program eligibility requirements and worked hard with their citizens to develop sound compacts for funding.
So here's the kicker. Realizing the credibility issues associated with turning countries away at the finish line because of lack of funding and being irritated by large undisbursed balances of prior compacts, the Senate (Senator Lugar, in particular, although he apparently has the support of Biden and other key appropriators), instead of appropriating sufficient resources, has proposed an amendment that changes the current stipulation requiring the MCC to obligate the entirety of the funds for approved compacts at the time of their signing to require that "not more than 50 percent of the entire amount anticipated for the duration of the compact" be obligated upfront.
While understanding the political and practical reasoning behind this proposal, we think it ultimately is the beginning of a slippery slope toward "un-innovating" and unfunding the MCA program. Sheila's earlier blog on the subject provides more details. Our main concern is how to provide incentives to the MCC to address its primary challenge -- making demonstrable progress in disbursing its funds and executing the compacts it has signed to date. The Lugar amendment does not address this challenge. The practical effect of the 50% cap in FY08 is that the MCC will have to sign 3-4 additional compacts above the three in the queu -- Tanzania (approved), Burkina Faso and Namibia -- or the MCC will carry a substantial unobligated balance into FY09. Given the strong criticism the MCC has faced regarding unobligated balances and given the fact that the MCC needs to re-orient its focus from signing compacts to executing compacts, arguments that this amendment somehow saves the MCA program aren't very satisfying. Rather, we should be looking for ways to shift the institution's management framework to focus more on implementation and evaluation of existing compacts than on approving more and further stretching the capacity of the MCC.
For those interested in more details of the Tanzanian compact, read on:

The compact was developed from the national poverty reduction program and includes three main projects:
Transport: This project includes road rehabilitation on both the mainland and Zanzibar, funds for continued road maintenance and an upgrade of an airport on one of Tanzania’s islands.
Energy: The project is intended to improve the reliability and quality of energy and extend service to those not currently on the grid. Again, there are interventions on both the mainland and on Zanzibar. Since firm-level surveys show that firms in Tanzania rate access to electricity as one of the main constraints to doing business, the MCC energy project could have a real impact on private sector growth. At first the MCC was reluctant to take on an energy project since energy policies are notoriously politically charged and difficult to reform in almost all countries, however, MCC saw a movement in Tanzania toward a more feasible scenario for energy investments.
Water: The MCC is working cooperatively with the Government of Tanzania and other donors to finance a national water strategy. The MCC will provide project financing to increase the quantity and reliability of potable water for home and business use by rehabilitating/expanding water infrastructure and controlling leakages. The MCC's participation in a broad, multi-stakeholder project represents good donor coordination with the MCC finding a niche that fits its mandate within a broader strategy. The water project is also a real investment in the health of Tanzanian citizens by reducing the prevalence of water-borne diseases and by reducing the time needed (in large part by women) to fetch water from more distant sources. This project comes on the heels of several years of policy reform in the water sector in Tanzania, so the time seemed ripe for investment.