Few would question that building productive infrastructure has to be at the center of development goals, energy access, food security, and combatting and adapting to climate change. We just saw G7 countries make a bold commitment to infrastructure, launching the Partnership for Global Infrastructure and Investment (PGII). PGII’s financial targets are rightly ambitious: $600 billion collectively, with a US target of $200 billion.
We have seen that China’s massive flows of infrastructure finance came with real risks for debt sustainability, project selection, and quality. But “Western” institutions, bilateral and multilateral, have lagged far behind in scale. The “billions to trillions” hope was that the private sector would come riding to the rescue with some help from public subsidies and risk sharing. But history and the evidence demonstrate that much infrastructure falls broadly into the public good category and has to be built and managed by the public sector or with a substantial public sector role.
So what is the scalable “Western” model with a demonstrated track record in poor countries? Let’s start with what one might want to see as desirable characteristics of that model. One would likely want:
- to use aid to build infrastructure in countries that are poor and lack fiscal space but also are willing to help themselves—that is, deploy the policies that are essential for aid impact;
- a process for selecting and designing investments that target the most productive (growth-promoting and poverty-reducing) projects, rather than those that mostly benefit the political elite;
- the ability to help countries strengthen the institutions that have to be counterparties to infrastructure contracts, like utilities;
- country ownership, including taking responsibility for building and managing the infrastructure, but using competitive, transparent bidding processes that ensure value for money;
- to avoid loading countries with unsustainable debt as a consequence of the investments;
- very strong results measurement, both potential and actual; and
- to be able to stop disbursing funding if the country falls off the governance wagon.
That list essentially defines the Millennium Challenge Corporation’s compact model. MCC’s approach is unique, demanding high standards for recipient countries and for stewardship of US taxpayer aid dollars. But it now has a track record of 18 years of successful infrastructure projects, totaling $15 billion or roughly two-thirds of MCC’s commitments. It has learned valuable lessons over time and adjusted operational approaches to overcome frequently occurring problems. (These are documented by the agency in its “Principles into Practice” series.) And it has its own valuable infrastructure in the form of staff that know how to make the model work. It makes perfect sense to focus at this moment to consider how the model can deployed at greater scale.
In general, the limits of the MCC model fall in five buckets:
- it can only work in very poor countries,
- too few countries are able to pass MCC’s scorecard for good policies and governance;
- it takes significant time to develop the compacts, or country agreements, which include both the projects and the policy and institutional reforms,
- compacts are sometimes left partially unfinished with unspent funding going back to the Treasury, either because projects could not be completed within the five-year time limit, or the country failed MCC’s scorecard in the course of the compact, and
- countries where MCC has worked frequently need additional support post-compact.
The first four limitations stem from the MCC model itself. MCC is working on (3), but, to be fair, infrastructure quality is partly a function of how much time, money, and effort go into choosing and developing the right projects. One could argue that (4) is a strength: MCC does not spend money when the underlying conditions change in ways that undercut development effectiveness and good governance. (5) reflects the collision between reality and the expectations of some when MCC was launched that several hundred millions of dollars of grants, well deployed, would put poor countries on irreversible growth and poverty reduction paths.
New bipartisan legislation (that enjoys strong support from the agency) would advance limited changes to MCC’s statutory authority—preserving the essential elements and benefits of the model and focusing on substantially broadening the pool of countries MCC can consider for partnership. These changes are not only sensible, but also urgently needed.
Specifically, the just-introduced bill would expand MCC’s pool of candidate countries to the 125 poorest countries in the world, from the current 81 poorest. It would also remove the limit that caps the share of funds MCC can invest in lower-middle-income countries.
Based on the data from FY22, this expansion would add 17 countries in Latin America and the Caribbean (LAC) to the candidate pool, a region of clear strategic interest to the US, where poverty gains have been partially reversed by the pandemic. Eighty-six million people now live in extreme poverty in LAC, up from 81 million pre-pandemic.
These changes do not remove MCC’s focus on poor countries. The threshold for what constitutes a poor country, defined in terms of a $4,255 income per capita ceiling, was always arbitrary and its power as a poverty measure varies greatly from country to country. The aim should be to allow the MCC to operate in well-governed countries that are not only poor but also where most of the world’s poor live. If the number of candidate countries is expanded to 125, countries that meet MCC’s income standard for candidate countries would account for 98 percent of the world’s populations living in poverty ($3.20/day) and extreme poverty ($1.90/day).
To avoid putting low-income and lower-middle-income countries at a disadvantage, MCC would create a new income category for judging country performance using the agency’s scorecard—ensuring these comparisons would continue be made across peer countries at similar income levels.
The expansion of candidate countries would have another key benefit. It would scale the potential for collaboration between MCC and the US International Development Finance Corporation (DFC) by increasing the potential overlap in their countries of operation. The two agencies could operate with more complementarity and mobilization of private finance than at present. MCC has the scarce grant finance that can help build the right projects, the right policy and institutional environment, and the fiscal space for infrastructure. All are necessary for successful public-private infrastructure transactions. DFC, for its part, has the tools to support the commercial private sector side of those transactions.
While separate from the new bill, MCC has asked appropriators to remove language that prevents the agency from pursuing threshold programs in countries that have already had MCC compacts. Providing MCC with greater flexibility to engage in threshold programs is especially important now. In light of recent democratic backsliding and reversals in progress against poverty in many parts of the world, it would be beneficial for MCC to be able to reengage through threshold programs with previous compact partners struggling to regain positive momentum. Threshold programs can be very useful vehicles for preparing the ground and building support for large-scale change. It is counterproductive to constrain the use of threshold programs at this moment in particular, as external shocks from conflict, disease, and climate change have driven much of the backward slide in both politics and economics.
After nearly 20 years, MCC’s model is still path-breaking and, given a little more flexibility, has the potential to be even more impactful in this era than when it was launched. It deservedly receives bipartisan support because it rests on broadly shared values and principles, including transparency and accountability. Swift action by Congress to allow it significantly greater scale would help put real financial capacity behind US aspirations and urgent poor country needs for infrastructure investment.
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.