(D-R-A-F-T) Background and Overview of MCC Processes 2007 Workshop – Measurement of Law Paris December 15-16, 2006

Millennium Challenge Account  Formally established in 2004 as a new, independent government corporation managed by a CEO and overseen by a Board  Fulfills President Bush’s 2002 Monterrey commitment to “provide greater resources to countries taking greater responsibility for their own development”  Illustrates that development is a key pillar in our national security strategy -- helps to build good, capable partners and prospering, democratic societies and projects U.S. values and generosity  Mission: Poverty Reduction Through Economic Growth  MCA resources add to other U.S. aid, targeted to good partners

MCC Structure  Small, independent USG Corporation with own authorities and budget  Managed by a CEO and overseen by public-private Board (approves eligibility and threshold status and Compact programs) comprised of: Secretary of State, Chair; Secretary of the Treasury, Co-chair; U.S. Trade Representative; USAID Administrator; MCC CEO; Private sector representatives   Works closely with State, USAID (and others) in DC and the field  USAID field-manages threshold programs for MCC; other agencies (Geological Survey, Army Corps) help with due diligence, as appropriate  MCC Resident Country Director part of USG country-team in the field, and staff of 3-5 usually co-locates with State or USAID overseas  Countries implement, not MCC, including procurements (no US source requirement)

Policy, Ownership & Results Sound Governance, Economic and Social policies Make aid more effective Spur private investment and increased trade, the real engines of growth Maximize growth benefits by giving the poor access to accountable institutions, education and health, and economic opportunity Broad country- ownership of development efforts Increases responsibility Builds capacity Yields better results Clear objectives, Measurement of results and Transparency Increase accountability Contribute to development success

Eligibility  MCA eligibility intended as a reward to countries for good policy performance and be an incentive to improve further  Two competitions in FY07: Low Income and Lower Middle Income  Countries measured against others of similar income level  Eligibility based on scoring above the median on Corruption and on at least half of 16 indicators* in each of the three policy categories:  Ruling Justly(pass 3 of 6)  Investing in People (pass 2 of 4 indicators)  Economic Freedom(pass 3 of 6 indicators)  For FY07, MCC adopted as non-binding supplements two new indicators, a Natural Resources Management Index and a Land Rights and Access Index, and will propose their full adoption for FY08  Eligible Countries must maintain strong policy performance as measured by the indicators

Indicators Used in FY07 Ruling Justly:  Civil Liberties (Freedom House)  Political Rights (Freedom House)  Voice and Accountability (WBI)  Government Effectiveness (WBI)  Rule of Law (WBI)  Control of Corruption (WBI) Investing in People:  Public Expenditure on Health (Nat’l)  Immunization (WHO)  Primary Educ Spending (WB EdStats)  Girls' Primary Educ Completion (WB EdStats) Economic Freedom:  Cost of Starting a Business (WB/IFC)  Inflation (IMF, WEO, IFS)  Fiscal Policy (IMF, WEO, other)  Days to Start a Business (WB/IFC)  Trade Policy (Heritage)  Regulatory Quality (WBI) WBI: World Bank InstituteWB/IFC: World Bank/Int’l Finance Corp IFS: Int’l Financial StatisticsWHO: World Health Organization WEO: World Economic OutlookUN/IFAD: Int’l Fund for Agricultural Development CIESIN: Columbia U Center for International Earth Science Information Network YCLEP: Yale Center for Environmental Law and Policy * Non-binding Supplemental information for FY07 Natural Resources: Natural Resources Management Index (CIESIN, YCLEP)* Land Rights and Access Index (UN/IFAD, WB/IFC)*

Country X Indicator Ranking (Pass)

Country Y Indicator Ranking (Does not pass)

Current MCA Eligible Countries Africa Benin Mali Burkina Faso Morocco Cape Verde Mozambique The Gambia Namibia Ghana Senegal Lesotho Tanzania Madagascar Latin America Eurasia Bolivia Armenia El Salvador East Timor Honduras Georgia Nicaragua Mongolia Sri Lanka Vanuatu Jordan** Ukraine* Moldova*  FY07: 2 new Low Income Countries* (LIC) and 1 Lower Middle Income Country** (LMIC) selected  25 countries currently eligible to compete for MCA funds Note: The Gambia was suspended in June 2006 due to deterioration in its policy performance.

MCA Compact Funding  Congress has appropriated $4.27 billion for MCA; MCC has committed just over $2.98 billion to 11 Compacts, and expects to commit the rest to a robust pipeline of proposals  MCA money is “no-year” grant money and does not expire. Once a Compact enters into force the full amount is obligated and set aside  There are no limits on amounts that countries can request  MCC has no inherent preference as to sectors or activities proposed, but elements must spur growth and poverty reduction  Final Compact amounts will be primarily based on program quality, estimated costs, and available funds

MCA Compact Funding (in millions of dollars) Nearly $3.0 Billion for 11 Compacts Approved

Country Ownership Critical  Countries establish and fund core teams with relevant skills to lead Compact proposal development  Countries consult with civil society/private sector to develop Compact program proposals consistent with overall development efforts and an approach to economic growth shared by the country and MCC  Proposals rigorously “due diligenced” on consultation process, growth and poverty reduction potential, coherence, measurable development results and impact, technical and administrative feasibility and environmental and social impacts  Countries also work with MCC to evaluate and establish structures for fiscal accountability, high procurement standards and effective program management, and to set performance benchmarks  Once Compact proposal is refined, MCC Board-approved and formally signed, countries must staff up and implement program activities, with MCC guidance and oversight.

Focus on Growth and Poverty Critical  Accelerating economic growth sustainably needs to be a central part of any successful poverty alleviation strategy  Increasing levels of private investment, both domestic and foreign, and enhancing the efficiency of the economy, are often essential elements of a sound growth strategy  MCC grant funds represent a new opportunity for eligible countries to look for ways of accelerating investment and growth  Constraints Analysis: Eligible countries begin with an economic analysis to identify critical barriers to economic growth.  A small national team, including economists and private sector representatives, undertake this assessment.  The results of this analysis form the basis for consultations with MCC that lead to mutually agreed document, the Joint Framework, which establishes the economic basis for the development of a proposal

MCC is Results-Based  Early, ongoing engagement with partners provides detailed guidance on core teams, consultation processes, Compact proposals and governance of the process  Specific objectives and beneficiaries, intermediate performance and results benchmarks, and measures of impact and success are agreed on in the Compact  A monitoring and evaluation plan is an integral part of each Compact, to promote measurable growth and poverty reduction  Quarterly disbursements depend upon planned activities meeting agreed benchmarks for program implementation

Characteristics of a Strong Program  Promotes faster, sustainable growth and poverty reduction  Builds human and institutional capacity; improves relevant policies  Creates complete and comprehensive approach to new economic opportunities  Reflects inclusive domestic consultation and broad support for priority elements  Identifies specific activities, beneficiaries, measurable results, and development impacts as well as implementation strategy  Builds on development strategies and other donors’ activities  Economically, socially, technically and environmentally justifiable

Steps in the MCC Process Step 1:Proposal Development & Assessment Step 2:Due Diligence – Analysis of Viability and Sustainability of Proposed Activities, and of Process Quality Step 3: Compact Negotiation Step 4: Board Approval, Compact Signing and Compact Implementation

Step 1: Proposal Development & Assessment  Meet with MCC on Compact Process  Identify full-time senior Point of Contact and core team to manage process  Initiate broad and meaningful consultative process  Identify primary constraints to economic growth and poverty reduction, and objectives and potential activities for MCA funding  Dialogue with MCC on proposal activities  Countries may receive MCC funds for elements of Compact development or implementation, if appropriate

Step 1: Proposal Development & Assessment (cont.)  Country presents MCC with a proposal that reflects analysis of growth constraints and poverty reduction  If proposal review positive, MCC authorizes formation of an MCC Transaction Team (TT)  TT engages country team on growth opportunities, poverty reduction, and the consultative process  Once satisfied, TT prepares an Opportunity Memo to the MCC Investment Committee requesting full “due diligence” resources

Step 2: Due Diligence Process - Detailed Technical Analysis of Proposed Activities

Step 3: Compact Negotiation  With due diligence complete, the TT prepares an Investment Memo for the Investment Committee detailing proposed Compact elements and implementation plans  Country team continues to work with MCC on final Compact to reflect agreed Program  Based on Investment Memo, Investment Committee reviews the final Compact elements and requests MCC Board approval

Step 4: Board Approval, Compact Signing and Implementation  Once the Board approves the Compact, MCC notifies Congress of its intent to enter into a Compact  Country and MCC sign the Compact  MCC and country experts complete documentation to permit entry-into-force  First disbursement is made and Program implementation begins; maximum Compact Program duration five years  Program monitoring and evaluation begin as part of ongoing consultation throughout Compact Program

Opportunities for Civil Society/Private Commercial Sector Involvement  Participate in Country-led Consultative Process on Priority Activities  Help MCC assess growth constraints and on Due Diligence (In Response to MCC Procurements)  Participate in Accountability Processes During Compact Implementation  Compete in Country-led, Open, Program Procurements Related to Implementation

Procurement Practices Procurements by MCC for due diligence services will be listed under “MCC procurement” at By law, all MCC-funded procurements must be fair, open and competitive. MCC monitors and approves them. Such compact-funded country “Program Procurements” are done under MCC-agreed “Procurement Guidelines,” which are consistent across countries and have core elements in common with those of the MDBs. Significant “Program Procurements” will be linked to the website and posted to the UN site, and World Bank’s Development Gateway Market,

Threshold Program MCC Compact eligibility intended to reward good performance and to incentivize further improvements Threshold Program reinforces this objective Threshold countries close on the indicators Have demonstrated reform commitment May propose funding to improve on MCC indicators

Threshold Countries Africa Kenya Malawi Uganda Zambia Sấo Tomé and Principe Burkina Faso Tanzania Niger Rwanda Latin America Guyana Paraguay Peru Eurasia Albania Indonesia Kyrgyz Republic Jordan* Moldova Philippines Ukraine East Timor Yemen** *Burkina Faso, Tanzania, East Timor also became eligible for Compact funding in FY2006, and Jordan in FY2007 ** Yemen was suspended from the Threshold Program in FY2006

Overview: MCC Africa Engagement  Engaged with 20 countries: Compact:Cape Verde, Madagascar, Benin, Ghana, Mali Eligible:Burkina Faso*, The Gambia**, Lesotho, Morocco, Mozambique, Namibia, Senegal, Tanzania* Threshold: Kenya, Malawi, Sao Tome and Principe, Uganda, Zambia, Niger, Rwanda  Over $1.5 billion approved: COMPACTSTHRESHOLD PROGRAMS Cape Verde -- $110 millionMalawi -- $20.92 million Madagascar -- $109.8 million Burkina Faso -- $12.9 million Benin -- $307.3 millionTanzania -- $11.15 million Ghana -- $547 millionZambia -- $22.74 million Mali -- $461 million * Current eligible countries with active threshold programs ** The Gambia is currently suspended due to policy performance issues

Compact Countries in Africa Madagascar:  First MCC Compact, signed April 2005; $109.8 million, 4-year program includes Reforms in Land Tenure and Financial Sector, and Agribusiness Services. Collaborating with World Bank on National Land Reform Program Cape Verde:  $110 million, 5-year Compact signed July Focus on watershed management/agriculture development, infrastructure (roads, bridges, port development), private sector development. Partnered with the World Bank on roads and bridges aspects and the IFC’s PEP Africa on private sector development. Benin:  $307.3 million Compact signed in March Includes port infrastructure and management reform, financial and business services modernization, and justice system and land tenure reform to enhance enterprise development and economic activity.

Compact Countries in Africa, cont. Ghana:  $547 million Compact signed August 2006 is to improve productivity and commercial performance of agriculture, which employs over 60% of Ghana’s labor force, upgrade road and ferry transportation to support agriculture and social services, and to improve education, water and sanitation, power and other services in rural areas. Mali:  $460.8 million Compact signed November 2006 is to expand and modernize irrigated agriculture and related policies, as well as improve the international airport and develop nearby a platform for industrial activity, including agro-processing.

African Threshold Program/Eligible Countries Burkina Faso:  Currently, a $12.9 million threshold program funded by MCC focuses on improving Girls’ Education, including by constructing new classrooms and raising awareness of the issue Tanzania:  Tanzania’s $11.15 million threshold program focuses on Controlling Corruption by improving public procurement, establishing a Financial Intelligence Unit, building monitoring capacity in the non-governmental sector and strengthening the rule of law

African Threshold Program Countries Malawi:  Malawi has a $20.92 million threshold program  Focuses on Controlling Corruption; strengthens legislative and judicial branches and independent media coverage, builds the capacity of lead agencies, and enhances the role and work of civil society organizations Zambia:  Zambia has a $22.74 million threshold program  Program will fight corruption and improve government effectiveness. Its three-pronged strategy focuses on preventing corruption in targeted government institutions, improving public service delivery to the private sector, and improving border management of trade

Overview: MCC Western Hemisphere Engagement  Engaged with 7 countries  Currently, 4 programs approved for over $875 million: CompactThreshold Honduras -- $215 million Paraguay -- $34.65 million Nicaragua -- $175 million El Salvador -- $ million  Currently Compact Eligible : Threshold Eligible: Bolivia Guyana Peru

Western Hemisphere Compact Countries Honduras:  MCC’s second Compact, signed in June 2005; $215 million over 5 years.  Focus on upgrading critical Northern highway (including road management), farm-to-market roads, agricultural productivity, access to credit and know-how.  Impact will be higher incomes, lower transportation costs and enhanced capacity to trade locally, regionally and globally. Complements CAFTA. Nicaragua:  MCC’s third Compact, signed in July 2005; $175 million over 5 years.  Program to strengthen property rights in the north, upgrade key roads, institutionalize road maintenance, improve farm and forestry water supply, and enhance rural farm, enterprise and agribusiness development.  Impacts include higher profits/wages, lower transportation costs, more business start-ups and successes, and better capacity to trade. Complements CAFTA. El Salvador:  Signed in November 2006; $ million over 5 years.  Program will provide education and training and basic services to communities in the north, improve transportation infrastructure, and enhance rural agricultural productivity  Impacts include enhancing the livelihood and welfare of hundreds of thousands of poor Salvadorans through improved and lower cost power, water, transport and financial services. Complements CAFTA.

Western Hemisphere Threshold Program Country Paraguay:  Paraguay has a $34.65 million threshold program.  The program aims to reduce corruption in a country beset by smuggling, low tax compliance and cumbersome business registration procedures.

Overview: MCC Eurasia Engagement  Engaged with 13 countries**  Over $700 million approved: Compact Threshold Georgia -- $295.3 millionAlbania -- $13.85 million Armenia -- $ million Philippines -- $20.69 million Vanuatu -- $65.69 million Ukraine -- $44.97 million Jordan -- $25 million Indonesia -- $55 million Moldova -- $24.7 million  Currently Eligible: Compact Threshold Mongolia Kyrgyz Republic Sri Lanka East Timor Jordan* Ukraine* Moldova* * Ukraine and Moldova are Compact-eligible for FY2007, and have active threshold programs **Yemen is currently suspended

Eurasia Compact Countries Georgia:  $295.3 million, 5-year Compact signed in September 2005  Focus on regional infrastructure (roads, gas pipeline, agricultural productivity, municipal services, enterprise development) to unlock growth Armenia:  $ million, 5-year Compact signed in March 2006  Focus on rural road rehabilitation and irrigated agriculture to raise agricultural productivity and reduce rural poverty Vanuatu:  $65.69 million, 5-year Compact signed in March of  Focus on civil works reconstruction of roads, wharfs, an airstrip, and warehouses on eight islands, and support with program administration

Eurasia Threshold Programs Albania:  Albania has a $13.85 million threshold program  Aims to enhance performance on Ruling Justly and Economic Freedom via improvements in tax administration, public procurement and business registration Ukraine:  In December 2006, a two-year, $44.97 million threshold program aimed at reducing corruption was signed with the Government of the Ukraine.  Program will strengthen civil society monitoring and exposure of corruption, promote judicial reform, improve government ethics and administrative standards and relevant regulations, as well as root out corruption in higher education admissions Philippines:  In July 2006, the Government of the Philippines signed a 2-year, $20.69 million threshold program funded by MCC.  Program to fight corruption by strengthening Office of the Ombudsman, which prosecutes senior officials, and revenue and customs procedures in the Department of Finance

Eurasia Threshold Programs, Cont. Jordan:  In October 2006, $25 million threshold program signed.  Program will strengthen local democratic governance capacity and modernize customs services. Indonesia:  In November 2006, a $55 million threshold program was signed with the Government of Indonesia.  Program will substantially improve immunization rates for key childhood diseases and improve health.  Program will advance Indonesia’s battle against corruption through judicial reform and strengthening the Corruption Eradication Commission and Financial Transactions Report and Analysis Center. Moldova:  In October 2006, the MCC Board approved a $24.7 million threshold agreement.  Program will underpin anti-corruption efforts involving the judiciary, the health care system, the main anti-corruption Center, and the tax, customs and police agencies