Testimony by Paul V. Applegarth to the House Committee on International Relations

May 19, 2004

Mr. Chairman, Members of the Committee, I am pleased to appear before you as the newly confirmed Chief Executive Officer of the Millennium Challenge Corporation. You are to be commended for your leadership, vision and bipartisan support in creating the MCC. It is my personal objective to work closely with you and to strengthen that bipartisan coalition.

I am pleased to report that the Millennium Challenge Corporation has had a fast, productive start-up. In the four months since MCC was established, we have created an operational structure, met the legislated schedule for selecting eligible countries, and implemented a major communication and outreach effort to all key constituencies.

MCC completed a major milestone on May 6, 2004, when the Board of Directors selected 16 countries as eligible for funding from the Millennium Challenge Account (MCA). The eligible countries for FY 2004 are:

Armenia
Benin
Bolivia
Cape Verde		 Georgia
Ghana
Honduras
Lesotho		 Madagascar
Mali
Mongolia
Mozambique		 Nicaragua
Senegal
Sri Lanka
Vanuatu

These countries were selected based on the criteria and methodology submitted to Congress on March 2. We welcomed a wide array of public input on the criteria and methodology. While public comment is a mandated part of the Corporation's procedures, such dialogue is also part of our core philosophy and key to our future success, and we are committed to a continuing process of input and response. Indeed, this initial outreach effort was followed by a number of public meetings and sessions for candidate countries.

The 16 chosen countries responded enthusiastically to the May 6th eligibility announcement. It is clear they want to be part of this unprecedented approach to international development assistance. This weekend, five MCC teams will depart for in-depth discussions and briefings in all 16 countries. We will seek dialogue, not only with government officials, but also with local civic and business leaders, members of the public and international donors. Following these and other discussions, the countries will submit program proposals. MCC will then negotiate and finalize Compacts with those countries that propose quality programs for sustainable growth that have a strong likelihood of success.

Today, I want to focus my testimony on four core issues that I believe are important to your Committee: the concepts that drive MCC; our operational procedures; budget priorities; and the role of accountability and partnership. I also will touch on our relationship with other donors, including USAID.

The Concepts that Drive the MCC

Two years ago in Monterrey, Mexico, the President called for a new "Compact for global development" that would make greater contributions from developed nations to greater responsibility from developing nations. That's exactly what the United States is launching with the Millennium Challenge Corporation.

So, what are we, together, engaged in? First and foremost, this initiative is about helping the poorest people in the world. All of us who wake up every morning in good health, turn on the lights, are warm, can run a bath and eat a plentiful breakfast can easily forget that half the human race - more than three billion people - lives on less than $2 a day. More than one billion people don't have safe water to drink. Two billion people have no electricity and another two billion people lack adequate sanitation. When we in Washington talk about mechanisms, plans, procedures and administrative processes, we must not forget that these people are living in crushing poverty and that assisting them to escape this poverty is what MCC is all about.

For several decades, many of us have worked to change the conditions in developing nations that I just described. Many programs, policies and institutions are making significant changes but some, unfortunately, are not succeeding as well as we would like. Building on what has been learned in international development assistance, the MCC will take a new approach, one that combines six major concepts in an unprecedented way:

Previous development assistance has involved these concepts with varying degrees of emphasis and success. The fact that all of them are key structural components of MCC makes MCC truly different - and, I believe, capable of making a real difference in the lives of millions.

Let me elaborate briefly on some of these core elements of MCC's approach. First, policy reform. Research has shown repeatedly that development aid produces the best results when it is targeted to countries that respect political and economic rights and freedoms, respect the rule of law, and pursue effective growth policies. Thus, MCC provides incentives for countries to adopt or maintain policies for governing wisely, investing in their own people and promoting economic freedom. Policy reforms in poor nations can provide opportunities for citizens to benefit from increased international trade and private capital inflows, from the growth of their domestic economics, and from greater economic and political freedom. These reforms, in turn, can have a much greater impact than whatever MCC itself achieves.

President Bush told me personally that providing incentives for policy reform to our partner nations is a critical aspect of our new approach. MCC provides incentives for countries to change their policies, reward those that do, and assist them in achieving their development goals.

Second, MCC will promote sustained economic growth. There are many legitimate purposes of development assistance, including disaster relief, food aid, and disease prevention. But over the years, the press of short-term needs has squeezed out attention on to long-term issues. Thus, MCC's focus would include investments in agriculture, education, private sector and financial systems development, legal and regulatory reform, and enabling infrastructure. Our exclusive mission is to focus on the long-term challenge of assisting developing countries to escape their dependency status through self-sustaining economic growth.

Partnership is a critical third piece. This is a major change in the relationship between donors and recipient nations. Millennium Challenge Corporation will ask qualified nations: what are your development priorities? This positive, empowering approach gives partner nations ownership for their programs from the start, and then provides the financing they need.

Let me add that this partnership spirit should extend beyond MCC's relationship with its partner countries. MCC has an extraordinary Board. USAID, the State and Treasury Departments, and the U.S. Trade Representative are each represented on MCC's Board. All greatly contribute to MCC's own expertise, experience, resources and country relationships. MCC's own staff is lean by design. We should and will take maximum advantage of what these partners, and others within the U.S. government, can contribute.

Fourth, to meet MCC criteria, each partner nations must consult broadly within its society to determine their priorities. This ensures the participation of non-governmental bodies, private businesses, and representatives of civil society, with all their skills, knowledge, interests and concerns.

Fifth, MCC will enter into Compacts with qualifying nations that focus on outcomes - that outline concrete objectives, benchmarks and responsibilities for meeting development goals.

And finally, partner nations are will be accountable for their performance. If a country's performance under a Compact begins to falter, MCC will attempt to find ways to support and assist it. However, if under-performance is chronic or if a country fails to live up to its commitments, MCC must be prepared to terminate funding and end a Compact.

Operational Procedures

As the first step in the partnership between the MCC and eligible countries, eligible countries will identify their priorities and the programs to achieve them, and submit proposals for assistance to the MCC. Proposal guidance is posted on our website (www.mcc.gov) and will also be shared directly with the 16 eligible countries.

The six core concepts that I described above -- the core structural components of the MCC - will encourage partner countries to adopt and implement better policies, to develop institutions and build capacity to govern wisely, to invest in their own people and to promote economic freedom. At the same time, these core concepts also provide a clear opportunity for the USG to demonstrate international leadership in promoting economic growth that will help reduce poverty in many of the world's poorest countries. They articulate an international role for the United States that is a positive statement about our country and our values.

This year's 16 eligible countries - and others as well -- are clearly eager to be partners and participants. Over the three months that the MCC has been in existence, we have heard from many of them. Indeed, countries have already begun to discuss ways to improve their performance on the indicators.

In short, the incentives inherent in the MCC's core concepts are already at work, even before the MCC has entered into a Compact or disbursed a single dollar. This is the ultimate sign of the ability of this approach to catalyze positive change.

Budget Priorities

The Compacts between the MCC and partner countries will establish multi-year programs that involve significant up-front commitments: by countries; which will commit to continued policies and actions that promote growth; by the MCC; which will commit to deliver a significant level of financial assistance. These commitments by the MCC and partner countries will permit the countries to achieve measurable objectives that lead to economic growth and poverty reduction.

MCC allocation and funding decisions will be driven by the quality of each country's proposal rather than by the number of eligible countries that submit proposals. MCC may not finalize Compacts with all eligible countries if the programs proposed do not meet MC standards. But where we can successfully negotiate a Compact, it is important that the MCC be able to provide substantial funding. Being among the largest providers of assistance in a country will allow the MCC to be an effective incentive, to command the attention needed for breakthrough country proposals, and to galvanize the political will essential to success.

In order to underscore this commitment, the MCC plans to fully fund multi-year Compacts at a magnitude that would make it either the largest or second largest donor on average in country. In an analysis earlier this year, the GAO estimated that, with a funding level of $3.5 billion, the MCC could fully fund three-year Compacts in 8 to 13 countries. Our own calculations, based upon the actual countries selected, is consistent with the GAO analysis. However, in practice, the MCC will likely engage in a number of Compacts that are longer than three years, increasing the funding needed for each compact. In summary, a funding level of less than the requested $2.5 billion for FY 2005 will reduce the number of Compacts that the MCC will be able to finalize. In addition, a reduction in funding will dampen the incentive effect and impair the MCC's ability to stimulate economic growth and poverty reduction.

Because MCC was legally established in January 2004 and per the MCC legislation the eligible countries were not determined until May 6, 2004, the MCC is approaching the remainder of FY 2004 plus FY 2005 - a period of about 17 months - as a single period for planning purposes. Framing our work within this planning period will enable us to discuss development priorities with countries, review country proposals, and negotiate and sign Compacts in a manner that gives meaning to our concepts and allows us to reach decisions with prudence, discipline and sound business judgment.

This is important because, in addition to the FY-2004 eligible countries, in early FY 2005 the MCC will be determining countries eligible for FY 2005. As per the legislation, the pool of potential countries will be broadened somewhat for FY 2005. The result is that in the first quarter of FY 2005, following the steps laid out by the Millennium Challenge Act, we are likely to lengthen the list of countries that will be eligible to submit Compact proposals to the MCC, proposals that if approved would be funded from the $3.5 billion. The threshold country program will also be funded during this period.

We are confident that the requested funding would put MCC in an optimal position to provide both international leadership in promoting economic growth in developing countries and needed incentives to the countries themselves to help them adopt the policies, build the institutions and make the investments that will lead to a better future for their citizens.

Accountability and Partnership

I have emphasized the key concepts upon which the MCC has been established and upon which the MCC will provide assistance to countries through Compacts. Let me highlight one of these concepts that will be central to all stages of MCC's relationship with partner countries - from the review of proposals, to the negotiation of Compacts, to the oversight of implementation. That concept is accountability.

Accountability for results will be an integral part of every Compact funded by MCC. MCC will monitor systems and activities to ensure financial responsibility. It will review overall budget data to demonstrate that MCC resources, domestic resources and other development resources are used in a complementary manner. MCC will conduct audits of partner nation programs and monitor achievement of specific benchmarks. These evaluations will be made public.

MCC will actively coordinate with other agencies in Washington and in the field. We will also be coordinating our activities with other donors. It would defeat MCC's objectives if MCC funds displace the resources of other donors. Therefore, we will work with our partners to identify the contributions of other donors, and we are already in touch with much of the donor community to ensure that our resources are complementary.

Finally, there has been a lot of discussion about relations between MCC and USAID. First of all, I'm proud that I have the opportunity to sit on the same board with Andrew Natsios. He and his staff deserve a tremendous amount of credit for helping start up the MCC, and I look forward to taking continuing advantage of USAID's experience and expertise. Indeed, we expect USAID to be a key partner of MCC in many eligible countries.

One important shared initiative is the establishment of a "threshold" program for countries that just missed selection for eligibility in the FY 2004 round. The Board of Directors has reserved up to $40 million for this program, which would make MCC funding available for targeted programs in these countries to improve their policy performance. The MCC and USAID intend to develop a joint strategy for the program. The MCC will update Congress on the details of the threshold program when it is developed.

I cannot conclude without returning to what I've called the first and foremost purpose of our enterprise: helping the poorest people in the world. Please note that the average per capital income for the 16 countries selected to be eligible is roughly $470 per year. These countries face poverty levels that we can only imagine. These countries have demonstrated, however, that they are working hard to make the reforms that will help give their people an opportunity at a better life for themselves and for their children. They need and deserve our help.

The President and Congress, in approving the MCC, have invited developing countries - governments and their citizens - to participate in an expanding circle of development and offered a vision for reducing poverty through economic growth. It is a vision that demonstrates American leadership at its best. And it invites the best from our partner countries: a new commitment to policies, institutions and programs that are the building blocks for sustained economic growth.

The MCC is off to a fast start and is poised to move forward in pursuit of our shared vision.

Thank you for giving me the opportunity to appear before you today. I would be glad to answer any questions you have.

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