“Challenge is our Middle Name:” Key Issues for MCC in FY2022

We’re already a few weeks into the new fiscal year, but nevertheless it’s good to see the House Foreign Affairs Committee has plans to delve into the FY2022 budget request for the Millennium Challenge Corporation (MCC), alongside the requests for DFC and the Peace Corps. Looking only at the topline figure, MCC appears to fare well this year, coming in at $912 million. This is the highest request since FY2017 and equal to last year’s enacted level. But that topline belies a major recission of $515 million in unobligated prior year funds, which could have real implications for the agency’s operations now and in the future.

The hearing also marks the first opportunity to hear about MCC’s priorities under the Biden-Harris administration. Of course, without Senate confirmed leadership in place—deep insights into the agency’s strategic direction may be more limited. In August, Biden announced his intent to nominate Alice Albright as MCC CEO, but there’s been no further movement. Still with several tricky issues on the horizon—or already in play—there should be plenty of material to cover.  

Here are four big issues that might attract lawmakers’ attention during next week’s hearing.

1. Grappling with the potential of a looming recission

MCC watchers were a bit surprised by the budget request’s proposal to reprogram $515 million of the agency’s unobligated balances. It’s a first—and it runs counter to the agency’s best interests.

It’s true that MCC is sitting on a pile of unspent cash (around $4 billion). This is unusual for a federal agency and makes MCC a target for budgeters looking for pots of available funding. But unobligated balances are a feature of how MCC works. Because of MCC’s unique model, appropriators provide the agency with no “year money,” so funds appropriated in one fiscal year are allowed to be carried over to be expended in future fiscal years. Having no year money enables MCC to provide predictable funding for the duration of its five-year country programs known as compacts. After MCC selects a country to be eligible for a compact, it spends around three years developing a set of investments, with an estimated envelope of funding committed to them. Funds aren’t obligated, however, until the compact agreement is signed, and even then, only a portion of them. It’s not until “entry into force” (often a year or more after signing) when the entire five-year sum (around $500 million, on average) is obligated.

This context is vital for understanding MCC’s $4 billion in unobligated balances—of which, around $3.8 billion is committed funding that will go out the door in large chunks as compacts are signed and enter into force. Now, admittedly, MCC’s unobligated balances are currently higher than usual. The pandemic slowed compact development, providing more time for prior year funds to pile up, and—more significantly—a planned compact with Sri Lanka, valued at $480 million, was discontinued due to lack of cooperation by the Sri Lankan government.

While this isn’t the first time MCC has cancelled a compact it was developing due to lack of government cooperation (Bolivia and Ukraine come to mind), it is the first time the White House has sought to rescind the implicated funds rather than allowing the agency to reprogram them. In this case, MCC could probably stand to relinquish some of the money intended for Sri Lanka, but it also appears some existing compacts could readily absorb additional funding, including Indonesia, Mozambique, Sierra Leone, and maybe the Cote d’Ivoire-Burkina Faso regional investment. That funding could also be used to help finance limited compact extensions, which Congress authorized in light of the ongoing pandemic. Morocco, Ghana, and Benin were recently granted short-term extensions, and Niger and Cote d’Ivoire could very well be next.

Of greater concern than the fate of this specific $515 million, however, is the risk that the proposed rescission creates perverse incentives. In the future, MCC may be less inclined to cancel programs with dubious prospects for success out of fear the money will be taken away. The agency’s demonstrated willingness to walk away from a bad partnership or program is one of the things that has distinguished it from other aid providers over the years. But budget defense is a strong bureaucratic imperative. The threat of recission may inadvertently give the latter an edge over program quality.

2. Making headway on the agency’s first regional investments—and planning for what’s next

In 2018, Congress authorized MCC to pursue regionally focused investments through concurrent compacts in neighboring countries. This new authority better equips MCC to tackle cross border constraints to growth than its standard, bilateral model allowed.

MCC’s foray into regional investments got off to a good start in late 2018 with the selection of five West African countries—Benin, Burkina Faso, Cote d’Ivoire, Ghana, and Niger—as eligible for potential regional investments. But the agency’s regional ambitions hit a snag a year later, when Ghana was dropped from this list after failing to meet conditions included in its existing bilateral compact. Since the regional project involving Ghana was the most well-developed of the options under consideration, this was a considerable set-back. But MCC, in cooperation with country partners, has succeeded in identifying two promising regional investments: a transport corridor between Benin and Niger and a power transmission line between Cote d’Ivoire and Burkina Faso. Still, the development of these two projects has lagged, moving at a slower pace than the bilateral compacts with countries selected in the same year.

Regional compacts were always going to be more complex than MCC’s standard compacts and a new way of working comes with a considerable learning curve; MCC’s standard operating procedures don’t translate directly to developing regional programs. And the global pandemic further complicated matters. But, after providing explicit authority, lawmakers may be eager for MCC to deliver on the promise of the regional authority. And with few prospects for other regional compacts outside of West Africa, there’s a lot riding on these first programs’ success.

3. Refocusing the spotlight on locally led development

One of the core tenets of MCC’s model is that local ownership is critical for achieving results. MCC partner countries identify priorities for investment—based on an analysis of constraints to growth conducted jointly by MCC and country economists as well as consultations with the private sector and civil society—and lead the implementation of the compact—running procurements, managing contracts, and monitoring results.

In recent years, there’s been less focus on the country ownership aspect of MCC’s model. But with renewed attention—including on Capitol Hill—focused on the importance of promoting and supporting locally-led development, there’s an opportunity to refocus the spotlight on this element of MCC’s approach. At the same time, MCC has often talked about the tradeoffs that can exist between ensuring country partners take the lead and developing or implementing compacts expeditiously. With eyes on MCC’s unobligated balances, there could be extra pressure to look for ways to streamline compact development and get money out the door more quickly. To the extent that this entails identifying and easing bureaucratic inefficiencies, this could be a welcome step. But MCC has sometimes, with the goal of speeding things up, taken steps that elbow country partners out of roles they previously led. For instance, MCC economists now lead the write up of the constraints to growth analysis, a job previously undertaken by country economists. While this may result in a faster deliverable, whether MCC has fully grappled with the implications of this change (in terms of buy-in or other factors) is unclear.

4. Expanding the country pipeline

For years, MCC has been inching toward an existential crisis. Simply put, the agency is running out of countries to work with. Superficially, this might seem like a mark of success. In reality, it’s a function of outdated norms around country selection.

MCC works only with relatively well governed countries, as determined (primarily) by their performance on a scorecard of independent measures of policy performance. Unfortunately, the set of countries that meets these policy standards changes little on an annual basis. On average, fewer than one new country a year passes MCC’s scorecard test. 

To date, MCC has maintained a strong enough pipeline through a combination of some of these newly passing countries, second compacts with some previous partners, and—recently—regional investments that can take place concurrently with standard bilateral compacts. But these opportunities will become increasingly limited.

Increasing the numbers of eligible countries could be accomplished by tweaking the scorecard indicators and how they’re (sometimes irrationally) used or expanding the number of candidate countries that MCC can consider (currently this is just low and lower middle income countries). All of these are potentially worth pursuing on their merits, but none would yield a long-term solution to the pipeline problem. At best, these changes could yield a small, short-term bump in countries that can be considered.

Of course, there’s also MCC’s threshold program, whose purpose is to help countries become compact eligible. It turns out, however, that this is an unrealistic goal. The threshold program may, as the agency says, support policy reforms that are key to growth and help MCC assess the prospects of a potential future compact partnership. But it won’t create a cadre of new countries that pass the scorecard criteria. Even the threshold program’s incentive power, which MCC periodically touts—this is, essentially, the idea that countries, knowing they’re close to compact eligibility, will implement reforms that improve their performance on the scorecard indicators—is also likely to be fairly weak. This is especially true when it comes to the indicators that matter most—those that measure corruption and democracy.

Thus, the most promising, continuous road ahead for MCC lies in pursuing subsequent compacts with some of its existing partner countries. MCC has engaged select partners in second compacts but moving forward, the agency—and its overseers—will need to be open to pursuing third compacts and beyond. Historically, some important stakeholders (including members of Congress) had expressed reservations about even second compacts with the same country. This hesitation seemed to stem from the perception that the need for another compact signaled the first investment had failed. After all, MCC, when it was founded, was billed as being “transformational.” But these early promises were unrealistic hyperbole. Aid alone will never “transform” a country, let alone in five years’ time. Still, MCC’s assistance can have a role—if done well and in a receptive environment—in helping boost incomes for the poor and supporting countries’ efforts to facilitate greater economic activity by addressing key constraints to growth.

Subsequent compacts shouldn’t be an entitlement. MCC has said as much by setting a higher bar for second compact eligibility: not only do countries have to meet certain levels of indicator performance, but also, they have to demonstrate positive trends on these indicators, too. But while reasonable on the surface, that extra screen is excessive. Just 13 countries of approximately 80 candidate countries have met the scorecard criteria for eligibility consistently over an eight-year period (roughly the time it takes between initial selection and compact completion). And five of these are unlikely partners by virtue of being a tiny island (e.g., Sao Tome & Principe) or uninterested in an MCC compact (e.g., India, Bhutan). Consistently strong performance is higher standard enough.

MCC’s new regional investments offer inroads into the realm of third compacts; Benin is implementing the second of two bilateral compacts and is developing a separate regional compact. But since opportunities for regional compacts are limited by the geography of eligible countries, this can’t be the only avenue for third compacts (and beyond). For countries that have had productive partnerships with MCC in the past and remain on a good enough governance trajectory, they should be considered. Good prospects for subsequent compacts may not emerge every year, at least at first. But how and if MCC leadership chooses to pursue these will be important to watch.

In sum, while the timing is a bit strange for a budget hearing, there’s a lot for Congress to consider when it comes to MCC’s current and future operations. Here’s hoping lawmakers will use this opportunity to reflect on their views around how the agency responds to unpromising partnerships, tackles the complexities of regional investments, delivers on its pledge of country ownership, and charts a course for the future amid a dwindling pool of potential partners.

Note: This blog was edited on 10/20/21 to correct a factual error regarding when funds are obligated.