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APRIL 27, 2005

Serial No. 109–93

Printed for the use of the Committee on International Relations

Available via the World Wide Web: http://www.house.gov/internationalrelations

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HENRY J. HYDE, Illinois, Chairman

  Vice Chairman
EDWARD R. ROYCE, California
DARRELL ISSA, California
JO ANN DAVIS, Virginia
MARK GREEN, Wisconsin
JOE WILSON, South Carolina
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J. GRESHAM BARRETT, South Carolina
TED POE, Texas

TOM LANTOS, California
HOWARD L. BERMAN, California
BRAD SHERMAN, California
WILLIAM D. DELAHUNT, Massachusetts
BARBARA LEE, California
ADAM B. SCHIFF, California
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DIANE E. WATSON, California
ADAM SMITH, Washington

THOMAS E. MOONEY, SR., Staff Director/General Counsel
ROBERT R. KING, Democratic Staff Director
JEAN CARROLL, Full Committee Hearing Coordinator



    The Honorable Paul V. Applegarth, Chief Executive Officer, Millennium Challenge Corporation

    Mr. Steven Radelet, Senior Fellow, Center for Global Development

    David B. Gootnick, M.D., Director, International Affairs and Trade Team, Government Accountability Office

    Mr. Conor O. Walsh, Country Representative—Honduras, Catholic Relief Services
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    The Honorable Paul V. Applegarth: Prepared statement

    Mr. Steven Radelet: Prepared statement

    David B. Gootnick, M.D.: Prepared statement

    Mr. Conor O. Walsh: Prepared statement


    Responses from the Honorable Paul V. Applegarth to questions submitted for the record by the Members of the Committee on International Relations



House of Representatives,
Committee on International Relations,
Washington, DC.

    The Committee met, pursuant to notice, at 11:29 a.m. in room 2172, Rayburn House Office Building, Hon. Henry J. Hyde (Chairman of the Committee) presiding.
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    Chairman HYDE. The Committee will come to order. Good morning and welcome to today's hearing of the Committee on International Relations.

    In March 2002, in Monterrey, Mexico, President Bush laid out his vision for what would become the most fundamental shift in foreign development assistance in decades. Stating that pouring money into a failed status quo does little to help the poor, the President offered an alternative to the failure of past development practices. He proposed that the United States target larger levels of assistance to fewer countries that have demonstrated a commitment to good governance, open economies, and investments in their people.

    Congress answered the President's call by enacting the Millennium Challenge Account (MCA) proposal into law in June 2003, appropriating $1 billion for MCA activities in 2004 and $1.5 billion in 2005. The great promise of the Millennium Challenge Account was met with tremendous hope and anticipation by the international community and the developing world. Its reach and influence has already motivated many countries to reexamine their governance, openness, and accountability in the hope to be accounted among those nations accepted into the program.

    Today, we stand 37 months removed from Monterrey. The Millennium Challenge Corporation is now in place to administer the program, but the $2.5 billion appropriated by Congress for helping the most deserving countries remains in the MCA Bank, and intentions to jump start this initiative in its early stages have long since dissipated. While we congratulate Madagascar for being the first to sign a compact just 9 days ago, the same observers who once received this initiative with such optimism now feel underwhelmed by the cautious pace and the modest scope of MCA writ large.
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    We recognize that development work is extraordinarily difficult, and we commend those in the Millennium Challenge Corporation for their long hours and dedication. But from the outside, we see a program struggling to get off the ground and funding levels for compacts now emerging that lack the boldness necessary to break the cycle of poverty in countries prepared to take that step. Perhaps a series of $100 million compacts are, by convention, right sized, and development strategies should never be reduced to a funding race among donors.

    Realistically, however, such compacts are unlikely to provide the necessary clout to fundamentally change poor economies. At the end of the day, success will be measured by our capacity to spur fundamental improvements in the economies and poverty reduction of partner countries, not merely whether we had a program in place.

    MCA's current scope also poses difficulties for the scale and sequencing of future Millennium Challenge Account funding. The President's request is to add $3 billion in 2006 to the unspent $2.5 billion from the past 2 years. This total would require the equivalent of 27 compacts, at $200 million each, to be negotiated, approved, and signed in the next 20 months before the funds would be exhausted. Signing even half that number of compacts before the end of Fiscal Year 2006 would be a triumph over the current pace. Combined with the prospects of billions more coming on line in 2007, it seems that we have more funding than program. I would prefer that Congress be under pressure to catch up and fund a success than need to justify funding for a potential one.

    Today, I ask our witnesses to offer their views on several issues. First, how many signed compacts will we have in hand before the end of this fiscal year and before the end of Fiscal Year 2006?
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    Second, if the MCC Board met on a defined, regular schedule, perhaps once a quarter, rather than on an as-needed basis, would it spur greater urgency for action in order to meet specific deadlines?

    Third, what is MCC's strategy for handling poor performers, both before and after a compact is signed? Will the board have the diplomatic courage to remove lukewarm countries from the program? I look forward to hearing the responses from our witnesses to these concerns.

    MCC should bolster the levels of assistance to countries that implement their compacts in a manner that reflects the vision of MCA to create major improvements in economic growth and poverty reduction. A 3- or 4-year compact, though significant, is not likely to achieve such a result, particularly at the funding levels we now see emerging.

    MCA cannot become an open-ended commitment to partner countries, but we should consider awarding follow-on compacts of several hundred million dollars each to the four or five countries that demonstrate the greatest dedication to implementing their MCA compact and prove the most serious in their commitment to pursue the reforms necessary to create self-generated prosperity.

    Let me be clear: Millennium Challenge is the most important development idea in a generation, and it must become the global model for helping the transformation of needy societies into communities of opportunity. The incremental approach and lack of urgency in the implementation of this initiative belies the original vision. I am concerned that it could create an eventual backsliding that will make MCA just another development program.
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    This Committee will seek to reauthorize the Millennium Challenge Account before the current authorization expires at the end of this year, and we look forward to working with the Administration to ensure its place next to the Marshall Plan in its historical significance.

    I now turn to my friend, Tom Lantos, Ranking Democratic Member, for his remarks.

    Mr. LANTOS. Thank you very much, Mr. Chairman, for calling this important hearing and for your leadership on this whole issue, and I want to identify myself with your very thoughtful and serious comments.

    Mr. Chairman, 3 years ago, the President announced a dramatic, new, foreign-assistance program, the Millennium Challenge Account, designed to change the way the United States provides aid to developing nations. This morning, we shall answer the question of whether this program is living up to its important mandate.

    Mr. Chairman, you and I have been champions of the Millennium Challenge Account from the beginning, and we remain so, but our support is now in jeopardy. Unless the Millennium Challenge Corporation gets its act together and gets it together quickly, support for the Millennium project will evaporate.

    Between the program's founding vision and its meager results thus far, there is a vast gap. The lack of progress could just be chalked up to the growing pains of a new program, but it is also possible that the program needs much more congressional guidance to keep it true to its potential.
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    We are all pleased with the signing last week of the first Millennium compact with Madagascar, but I am not convinced that the corporation is up to the task of substantially reducing poverty through increased economic activity for the poor.

    I have three primary concerns in this regard, Mr. Chairman: First, the very slow pace at which available funds are disbursed; second, a clear need to do more to engage people at all levels in the receiving society; and, third, the funding of costly infrastructure projects over health and education efforts. Let me elaborate on each of these three items.

    First, the lofty goals of the Millennium Challenge Account will be for naught if the funds that Congress has approved continue to sit in Washington unused, instead of finding their way into the calloused hands of men and women in villages across Africa, Asia, and Latin America. Mr. Chairman, Congress has appropriated $2.5 billion to the Millennium project, but eligible countries have yet to receive one thin dime of this amount.

    After Madagascar was designated one of the lucky 16 countries to receive funds last May, it took nearly 1 year for the Millennium Corporation to conclude the Madagascar Compact. Compacts with the next four eligible countries—Honduras, Nicaragua, Georgia, and Cape Verde—have not yet been signed either.

    According to one of our witnesses today, the corporation may not have hired enough staff to do the job. The World Bank, the Ford Foundation, and the British Foreign Aid Agency have approximately 10 times as many staff per billions of dollars in assistance as does the Millennium Corporation. This staffing level must be evaluated and, if necessary, rectified. None of us want global bureaucracies, but we also do not want a staff which is palpably insufficient to get the job done.
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    Secondly, Mr. Chairman, I wonder if the Millennium Corporation is up to the task of ensuring a sense of ownership in each country that takes part in the Millennium program. I have received troubling reports out of Madagascar, Mozambique, and Honduras about how Millennium Corporation staff, in laying the groundwork for participating in the program, have not ensured that the governments of eligible countries have reached out to a broad spectrum of student and women's groups, farm co-ops, religious organizations, and labor unions. Instead, they have relied primarily on business associations to generate ideas for development.

    Mr. Chairman, when our staff traveled to Madagascar to investigate the status of our Millennium negotiations, they met with representatives from the 20 leading, non-governmental organizations in that country. Only one of these NGOs had been consulted by the Government of Madagascar in the crafting of its economic-development proposal to the United States. While I presume that other organizations may have been included, it strikes me as a glaring omission that key elements of civil society were left out of the discussions.

    When our staff traveled to Mozambique and was shown a potential project to be funded by the Millennium Corporation, the primary investors were South Africans, Portuguese, Germans, and French, who then had the audacity to propose a health clinic separated between foreigners and locals.

    Third, I wonder whether the Millennium Challenge Corporation is up to the challenge of seriously tackling poverty in developing countries. A review of the one completed compact and the proposed compacts for other countries does not bode well. Nearly 20 percent of Madagascar's compact is programmed initially to benefit the richest 1 percent of Madagascar society.
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    The compact will fund a financial services project that is meant to reduce the amount of time it takes to get a check cleared, but only 208,000 of Madagascar's total population of 17 million currently have bank accounts. In light of these statistics, why can't the large foreign banks operating in Madagascar share a portion of the cost for this project?

    Mr. Chairman, it is disappointing to note that the program has failed to realize its promise thus far, but this important initiative can, and must, be put back on track. Our negotiators must accelerate our deals with Millennium countries so money can begin flowing. A broad spectrum of leaders in the developing world must be consulted on how our Millennium money will be spent, and we can find ways to fund education and healthcare while encouraging the private sector to assume a greater burden of infrastructure projects.

    Mr. Chairman, I know this is a tall order, but I also know how the President and Congress intended the program to be implemented. Let us get it done right so that next year we will have nothing but good news to celebrate. Thank you, Mr. Chairman.

    Chairman HYDE. Thank you, Mr. Lantos.

    The Chair would like to get to the testimony; however, I will recognize Members for opening statements of 1 minute, should they feel compelled to make one. Mr. Rohrabacher?

    Mr. ROHRABACHER. Very quickly, we are fully aware that no matter how much money we provide certain countries to try to help them, unless they have actually reformed their ways of doing things, that money would be a waste. So we are looking very carefully at that. The amount of money is less important than the actual reform that it generates. Thank you very much.
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    Chairman HYDE. Thank you. Anyone else?

    [No response.]

    Chairman HYDE. Very well. I would like to welcome Mr. Paul Applegarth, the Chief Executive Officer of the Millennium Challenge Corporation. Prior to his confirmation in May 2004, he was Managing Director of the Emerging Markets Partnership, an asset-management firm specializing in emerging markets. He was also CEO of the Emerging Africa Infrastructure Fund, Chief Financial Officer of United Way of America, and served in the U.S. Army in Vietnam.

    Mr. Applegarth, we are honored to have you appear before our Committee. If you would proceed with a 5-minute summary of your statement, your full statement will be made a part of the record. Mr. Applegarth.


    Mr. APPLEGARTH. Thank you, Mr. Chairman. I will give you a brief summary of that statement and, in the interest of time, would like to address some of the issues that both you and Congressman Lantos raised in your opening statements.

    First, I want to emphasize that we are grateful for the bipartisan support of this Committee, which, under your leadership and that of Ranking Member Lantos, were champions in creating and sustaining the MCC, and as you know, I believe sustaining and building on that bipartisan support is an important part of my job.
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    MCC is built on a common-sense idea: Foreign aid yields better results when it is invested where it will be used well, i.e., in countries that put in place policies that support poverty reduction and economic growth, policies such as good governance, investment in health and education, and in enabling an environment for entrepreneurs. The President has requested $3 billion in funding for Fiscal Year 2006 for the MCC to reduce poverty. It will be a strong incentive for policy reforms.

    A $3 billion appropriation ensures that MCC can credibly tell our partner countries that we can fully fund compacts that reduce poverty and spur economic growth. It is critical for MCA-eligible countries to recognize that the U.S. will live up to its monetary commitment, and the $3 billion request helps us make such assurances.

    My presentation today will focus on three areas: The need for the $3 billion; the progress we are making in existing country proposals and the strength of our current pipeline; and the steps we are taking to accelerate progress. Thus far, we have received country proposals totaling more than $4.5 billion. Through due diligence, elimination of items that do not show a strong link to poverty reduction and do not appear to arise from an adequate consultative process, and deferral of things not yet ready, that $4.5 billion has been reduced to around $3 billion. However, this does not include the likely proposal from Morocco, which is expected to be fairly large.

    Our current estimate is that the amounts required to fund the proposals from existing eligible countries will exceed the resources currently available for Fiscal Year 2004 and Fiscal Year 2005 appropriations by at least a billion dollars. In addition, out of the Fiscal Year 2006 appropriation, we will need resources to fund new, low-income eligible countries, lower-middle-income countries, which will be candidates for MCC funding for the first time, and new threshold countries.
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    To approach the problem from another perspective, the Government Accountability Office found that the funding awarded from existing appropriations would only allow MCC to fund between 4 and 13 compacts. In contrast to this minimum of 4 and maximum of 13, MCC now has 17 eligible countries. To state it succinctly, if we are to achieve the original goals and transformational effect envisioned for the MCC, we need to be adequately funded.

    Let me now turn to the status of our current pipeline. I am both pleased and proud to report that MCC has made substantial progress since I testified before you last May. Our most notable achievement was the signing last week of our first compact with Madagascar for just under $110 million. The Madagascar Compact marks an important step forward for the MCC but is only the beginning.

    There are many countries working hard for the opportunity to sign a compact. In addition to Madagascar, MCC has already notified Congress of our intention to negotiate compacts with Honduras, Georgia, Nicaragua, and Cape Verde. Subject to successful negotiations, positive due diligence results, and board approval, we hope to sign compacts with all of them this summer.

    Honduras is up next, with its $208 million program to be considered by MCC's board on May 20th. We also have a robust pipeline of countries in varying stages of compact development. The chart to my right shows our most recent update, including the time required for due diligence, compact negotiation, board approval, and congressional consultation. The country names have been redacted, as these are ongoing negotiations with foreign governments and represent our internal management assessment of where we are with each. The first five countries on the chart are those in active compact negotiations with MCC, including Madagascar, which has, of course, already signed.
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    While this is a fluid document, as it is an internal management tool that is revised frequently, it gives you a sense of how we are managing the compact pipeline. My staff and I can also brief you and your staff in a more confidential setting about how we are progressing with each of the countries underlying this chart, some specific concerns we are addressing, and when we hope to sign a compact, et cetera. In terms of sectors, these country proposals reflect recurring themes: Rural development, agricultural, land tenure, financial sector reform, private sector development, and infrastructure.

    We are confident that the completed compacts with our eligible countries will yield real results; real results that are measurable. In fact, MCC has already obtained results, even before spending money. We are strengthening the hands of reformers to accomplish important changes. Governments have consulted with their citizens, some for the first time. Since the announcement of MCA indicators in February 2003, the medium number of days to start a business has dropped from 61 to 46 in MCA-candidate countries.

    Many countries have targeted corruption, a primary MCC indicator. Bangladesh's finance minister, while proposing a tough program targeting corruption, cited his country's exclusion from the MCA as an example of the heavy price he is paying for being branded a corrupt country. One official from an eligible country said that even if he received less aid than requested, the intangibles gained from taking control of their own development destiny are the most important part of the process.

    Finally, I want to take this opportunity to address some questions that you both raised and from others regarding the MCC timeline. MCC's mission differs from many other assistance efforts. In disaster relief and in many humanitarian-assistance programs, the diagnosis of the problem and the solution are relatively straightforward to determine and execute, i.e., rescue the people in danger; feed and house them.
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    MCC's task is fundamentally different, the problems are more intractable and the solutions less obvious. Identifying the real reasons for grinding poverty and finding answers that will lead to poverty reduction and long-term growth requires serious consideration and thoughtful effort.

    In addition, our partner countries are leading this effort for the first time. They do not want quick fixes; they want help making structural, long-term changes in their countries that will reduce poverty. We do help, and together we must identify the objectives, determine what results the countries want and how they will be measured, and develop detailed implementation plans that incorporate transparent procurement procedures, fiscal accountability, and donor coordination.

    We all wish you could make real, sustainable change happen faster. No one is more impatient than I am in terms of getting commitments, compacts signed, and funds disbursed, though we cannot move too fast, or you end up with a failed program. We have seen that happen too many times, and we have already seen the value of this rigorous process. A nonpartisan observer described our Madagascar program as ''a rare example of a development agency doing virtually everything right.''

    While I prefer to describe it as an example of one of our partner countries doing virtually everything right, the point is clear: Identifying obstacles to growth, consulting broadly, focusing on measurable results, and doing detailed planning in advance take time but lead to a better result.

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    I want to emphasize that preserving country ownership does not mean that countries are left without assistance during compact development. We do not sit passively by, waiting for countries to act. Poverty is an urgent matter. We do many things to speed up the completion of country plans. We want to do things right, but we do want to do things right fast, and, I think, if you look at the standard of processing and compact development at MCC and compare it to any comparable institution, public or private sector, it is something that you can take pride in.

    Even before a compact is signed, MCC is using funding and disbursing, under 609[g] of its legislation, to implement projects that will speed up compact implementation after signing, for example, to gather baseline data in Madagascar and Nicaragua and to fund an environmental impact study and a preliminary engineering design in another country.

    The MCC has the potential to accomplish a great deal in the struggle to reduce poverty. The MCC impacts the poorest people in the world, people who live on less than $2 a day. We have an opportunity to reduce poverty in some of the poorest countries of the world, and we have a responsibility to the American people to invest their money wisely. We take these responsibilities seriously.

    Let us not forget, MCC and international development are not only about bringing the best of America to our relationship with the world but are a key component of U.S. national security. As the 9–11 Commission recommended, ''A comprehensive U.S. strategy to counter terrorism should include economic policies that encourage development, more open societies, and opportunities for people to improve the lives of their families and to enhance prospects of their children's futures.''
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    This, of course, is the mission of the MCC. By lifting countries out of poverty and providing people of the world's poorest nations a stake in their future, these countries will less likely be havens for terrorists. The most recent country selections mean that MCC has relationships with 30 countries, totaling 400 million people. By focusing our efforts on countries that rule justly, invest in their people, and promote economic freedom, we can help the world, one country at a time, if we have the adequate resources.

    I would be pleased now to take your questions, and thank you very much.

    [The prepared statement of Mr. Applegarth follows:]


    Mr. Chairman, members of the committee, thank you for this opportunity to appear before you again as the CEO of the Millennium Challenge Corporation (MCC). I am grateful for the bipartisan support of the members of Congress in creating and backing the MCC, and I hope to strengthen that bipartisan coalition. I am pleased to have much to report since we met in May 2004.

    Today, I want to focus on topics that I believe concern this Committee and describe our activities since we last met.

    The President has requested $3.0 billion in Fiscal Year 2006 funding for the MCC to help reduce poverty through measurable results and preserve the strong incentive for positive policy reforms throughout the world. A $3 billion appropriation ensures that MCC can credibly tell our partner countries that we are ready, and able, to fully fund Compacts that show a real commitment to reducing poverty and spurring economic growth. It is critical for Millennium Challenge Account (MCA) eligible countries to recognize that the U.S. is committed to funding good proposals, and the $3 billion request helps us make such assurances.
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    The amounts in the original concept papers and Compact proposals totaled roughly $4.5 billion. Through due diligence, elimination of items that did not contribute sufficiently to poverty reduction and growth, components that did not appear to arise from an adequate consultative process, and phasing of items that might unduly delay an initial compact, that total has been reduced to around $3 billion. However, that amount does not include Morocco's proposal, which, given the size of the country, is expected to be fairly large. In short, proposals from eligible countries already are expected to exceed resources currently available by about $1 billion. In addition, MCC estimates that the addition of new FY 2006 candidate countries, along with amendments to existing compacts, will increase the total requests from MCA-eligible countries by as much as $3 to $5 billion in FY 2006.

    As you are aware, on January 23, 2004, the MCC was established to administer the MCA, an innovative new foreign assistance program designed to more effectively focus U.S. development assistance on poverty reduction.

    MCC is built on the common sense idea that foreign aid yields better results when invested where countries have put in place policies that support poverty reduction and economic growth-policies such as good governance, investment in health and education and an enabling environment for entrepreneurs. Indeed, MCC is about helping these countries help themselves.

    In addition, MCC and international development assistance are not only about bringing the best of America to our relationship with the world, but as a key component of U.S. national security, as the 9/11 Commission Report recommends: ''A comprehensive U.S. strategy to counter terrorism should include economic policies that encourage development, more open societies, and opportunities for people to improve the lives of their families and to enhance prospects for their children's future.''
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    When I met with you in May 2004, MCC had been in existence for less than one year, yet had significant milestones to report. Candidate countries had been identified, and the Board had already selected the first 16 eligible countries to submit proposals for funding.

    By mid 2004, less than eight weeks after MCC's Board had selected them, MCC teams had visited all 16 of our eligible countries. We are continuing to spend time on the ground in virtually every country and I can assure you that considerable progress is being made.

    We count among our recent accomplishments the MCC Board of Directors approval of our first Compact with the country of Madagascar for just under $110 million. The MCC Compact signing ceremony with the Republic of Madagascar was scheduled for April 7, but due to the attendance of Secretary Rice and Malagasy President Ravalomanana at the funeral of Pope John Paul II, we had to reschedule it for April 18th.

    The Madagascar Compact marks an important step forward for the MCC. But it is only a beginning. There are many more countries working hard for the opportunity to sign a Compact. There are hundreds of millions of lives that we are in a position to improve, provided we have adequate means.

    We have already notified Congress of our intention to negotiate Compacts with Honduras, Georgia, Nicaragua, and Cape Verde, and—subject to successful negotiations, favorable due diligence results and Board approval—we hope to be in a position to sign Compacts with each of them by this summer. In short, while it is difficult to be precise about our schedule, we anticipate that Compact approvals will proceed at a rapid pace.
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    To that end, we are also working hard on the Compact Proposals from the rest of the eligible countries that have submitted proposals. We are asking: What is the link to poverty reduction and growth? Who are the beneficiaries? How do you rank your priorities? How does this relate to what other donors are doing? These eleven countries are still working to be in a position where the United States can confidently make an investment, and we are helping them get there.

    We are generally pleased with the quality and content of many of the Compact proposals we have received. Several countries moved quickly into effective program development with MCC. Other MCA-eligible countries, however, were initially unfamiliar with the new approach and have taken longer to develop effective programs which MCC can support. MCC has adhered to the principles of country ownership, while neither pushing money out the door, nor meeting artificial deadlines for signing Compacts. However, country ownership and responsibility does not mean that MCC abandons countries to work on their own. Rather, MCC has been proactively helping eligible countries to design workable programs with detailed plans for monitoring and evaluating performance, fair and transparent procurement procedures, fiscal accountability and donor coordination.

    While the concept of preparing their own development proposals was not entirely new to some of these countries, many eligible countries are accustomed to having donors set priorities, design programs, handle implementation, procure goods and services, and manage most other aspects of these activities. Not surprisingly, these countries initially looked to MCC to do the same. Other countries produced ''laundry lists'' of projects which had been left on the shelf from earlier donor programs.
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    In certain instances, eligible countries were informed that the initial proposals required greater involvement from other stakeholders in the countries' development process, such as civil society, academia, and the private sector. In other cases the proposals needed more work in defining the planned poverty reduction impact.

    Specific problems have also surfaced in developing key components in the proposals, sometimes reflecting a shortage of institutional capacity to put a comprehensive proposal together. In such cases, MCC has worked with the countries to develop that capacity locally. It is a process that has taken patience and diligence on both sides to ensure that the proposal is the final product of the eligible country's decision-making, while MCC supports each country to move the process along as rapidly as possible. MCC continues to explore ways to facilitate faster, better Compact development by MCA-eligible countries consistent with the principle of country ownership, such as more extensive use of Compact development assistance under Section 609(g) of the Millennium Challenge Act.

    The result is that MCC has a robust pipeline of countries in varying stages of Compact development, many of which will be finalized during the remainder of 2005. In our review of these proposals we have identified several recurring themes: rural development, agriculture and irrigation, land reform and tenure, financial sector reform, and private sector development.

    As discussed above, the current total of the sixteen Compact proposals we have received from FY04 eligible countries (we are still waiting for a proposal from one 2005 eligible country, Morocco) is currently around $3 billion. In order to fulfill these valid requests we need more funds to do it. If the MCC is going to be able to fund our currently eligible countries, select additional eligible countries, select from the new category of lower middle-income countries eligible for the first time in FY06 as provided in our legislation, as well as fund our Threshold countries, there is a strong need for fully funding the President's request.
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    The concepts behind the MCC are bold and, as a package, unique. More importantly, they make sense for U.S. development assistance and for the countries we are helping. In 2004, the United States government created MCC as an alternative to what has previously been done in the field of foreign assistance. The Millennium Challenge Corporation has the potential to accomplish a great deal in our steadfast struggle to reduce poverty. MCC impacts the poorest people in the world, people who live on less than $2 a day, those without access to clean water, without access to basic health care, those who suffer through disease and drought, and have no way to sustain themselves. The MCC was created to help to these people.

    Through the years, the United States and others have devoted considerable funding to alleviating the effects of global poverty. Regrettably, however, there is far too little to be seen in terms of poverty reduction in relation to dollars spent. The MCC offers a new development assistance approach that requires measurable results for aid investment. We have learned that simply giving large sums of money away without quantifiable targets is not the most productive means of providing foreign assistance.

    We know now that money is best spent on those countries that rule justly, invest in their people, and encourage economic freedom. This is the environment that can use the goodwill of the United States and translate it into sustainable economic growth. The MCC was established to make this happen in the poorest countries in the world.

    Investing is always a risk when a measurable and positive outcome is desired. Bill Gates said that ''giving money away is a far greater challenge than earning it.'' The MCC has eagerly accepted this challenge. We have taken on the responsibility of helping fortify the desired results and of assisting in the measurement of them—we expect the United States will be proud of the results we achieve.
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    In fact, the success of the MCC has already begun, as our role in the foreign assistance arena has yielded results even before spending money. Early indications tell us that our process is working. Morocco and Vanuatu have consulted NGOs and the business sector for the first time. The MCA incentive has also prompted reform; anecdotal evidence points to a strong MCA role. One country, for example, passed four pieces of anti-corruption legislation and began enforcement, in the hope of receiving MCC assistance. Since the announcement of MCA indicators in February 2003, the median number of ''days to start a business'' dropped from 61 to 46 in MCA candidate countries. Many countries have targeted corruption—a primary MCC indicator—and are making strides to reduce corruption within their governments. Bangladesh's finance minister, Saifur Rahman, while proposing a tough program targeting corruption, cited his country's exclusion from MCA eligibility specifically as an example of the heavy price his country was paying for being branded a corrupt country. One official from an eligible country said, ''even if we receive less than requested, the intangibles gained from taking control of our own development destiny are the most important part of the process.''

    MCC believes in country ownership. We believe that countries, no matter how poor, should have the opportunity to create a real program of economic growth for the benefit of their country—reflecting their priorities which address the needs of the people of their country—not just their government's or ours. Countries maintain their autonomy while working with the MCC and, through mutual effort, a Compact takes shape.

    Yet the MCC does more than provide assistance; it disseminates and encourages democratic ideals. The monetary incentive of the MCA is incredibly powerful. When a respectable but weak country is provided the means to grow and develop, the national security interests of the United States are better protected.
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    The MCC has great responsibility. We have a responsibility to reduce poverty in some of the poorest countries of the world and we have a responsibility to the American people to invest their money wisely with achievable positive results. We take these responsibilities seriously and we thank you for supporting us thus far.

    While exactly how much we will obligate is driven by country priorities and pace of development and is contingent upon the MCC review process, provided our due diligence supports requests made in the Compact proposals and our Board approves, we expect to commit most of our current funding by the end of this calendar year or early in 2006.

    The requests that we have on hand exceed the $2.5 billion appropriated thus far. From those resources the MCC also needs funds for Threshold countries, expenditures for due diligence on the proposals themselves, a small portion for administrative expenses, and for compact development.

    MCC also has the authority under provision 609(g) of its legislation to make disbursements to eligible countries to facilitate development and implementation of the Compact.

    Our Compacts are implemented over three to five years, but, as directed by Congress, we obligate all our money up front and disburse as needed based on quantifiable benchmarks. This is part of the strength of the MCA and what will make us especially effective. Up-front monetary commitment helps motivate and support policy reform, assures all countries involved that substantial development progress can be made, that programs can be administered effectively, and that poverty will be reduced.
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    I would like to update you on the status of our Threshold Country Program. As you are aware, the Threshold Program is designed to support those countries that do not qualify for MCA assistance, but are close and have demonstrated a commitment to undertake the policy reforms necessary to improving their growth conditions and their prospects for qualifying for the MCA. In cooperation with USAID, we are currently working with thirteen Threshold countries. Seven Threshold countries were chosen in September 2004 and were given a January 31 deadline to submit concept papers. Six more were chosen in November and were given a March 15 deadline. All thirteen met the deadline and submitted concept papers.

    Eight of the proposals are in excellent shape and we have suggested to these countries that they work on their detailed implementation plans and determine the results—quantifiable results—they will generate out of the programs. That work has started.

    Five of the Threshold countries' proposals do not yet meet MCC standards. We have given these countries an additional 60 days to improve their proposals. We and USAID are working very hard with these countries to give them as good an opportunity as possible.

    I also want to take this opportunity formally to address and respond to comments I have heard regarding the MCC timeline—specifically the notion that MCC has been off to a slow start.

    The Millennium Challenge compact development process (Appendix 1) is thorough and it has never been done. As a point of reference, in the private sector, when an investment proposal is received, the parties have been through the process before, the objectives are known (e.g., financial return or credit-worthiness) and the management organization and implementation plan are known.
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    In contrast, the MCC and our countries are going through this process for the first time. Together we must identify our objectives, how we will measure results, and work to develop detailed implementation plans. We do not want the efficacy of the mission to be reduced because we are rushing to meet artificial deadlines or rushing money out the door. We want to do things right and we want to do them right the first time. But we also want to do the right thing fast.

    My experience has taught me that you are doing well in the private sector if it takes only four to five months from the time a sound and well supported proposal is received until an investment is made—and I am sure many of you can attest to this. I am told the World Bank takes an average of 18 months to make a lending decision. We received the first draft of Madagascar's Compact proposal in October 2004. In only six months, Madagascar and the MCC have succeeded in creating a workable Compact that will reduce poverty through economic growth. Certainly, this is a good accomplishment by any standard.

    Preparing a proposal is a new approach for our partners. Part of the novelty of MCC's approach is that if governments create a pro-development policy environment, they are given a significant amount of responsibility in establishing projects and goals, focusing on outcomes, and ensuring community responsibility. And we are actively working with them to develop the best possible proposals as fast as possible. This takes time, but we encourage our countries to take the time to create an excellent proposal, then work with them to develop a program as quickly as possible.

    For example, we are using the 609(g) authority in connection with the Madagascar Compact to provide some initial funds to do baseline data collection to facilitate Compact implementation. The lack of available data and local capacity to collect statistics in rural areas poses significant timing challenges for measurement of the program. This use of 609(g) funds will substantially accelerate the implementation of program activities and the establishment of measurable outcome targets.
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    Also, MCC teams make frequent trips to eligible countries to work with our partner's teams there. In several recent weeks, we have had teams in five different countries each week.

    MCC engages engineers and consultants to help refine country plans following proposal submission; in addition to providing our own funding and resources, we have arranged with UNDP to set up a capability to fund some items, if requested by countries.

    MCC has identified ''Lessons Learned'' from Madagascar and other countries that are more advanced in Compact development, and is holding meetings and seminars with other countries, including:

 A Washington seminar for all Ambassadors to the U.S. from eligible countries

 Outreach with a similar message to U.S. Ambassadors and USAID mission chiefs during country visits.

    In addition to formal seminars, we meet regularly with government officials from MCC countries visiting Washington, to focus on solutions to current obstacles in the process, and on next steps.

    MCC's website is regularly updated with Compact guidelines (in seven different languages) and other useful information, and the Madagascar Compact will be posted as an example as soon as it is signed.
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    The Millennium Challenge Corporation is not a quick-fix to poverty. We put substantial time into Compact development and review to ensure that the U.S. investment will make a definitive and positive impact on the poorest countries in the world. We are fiduciaries of the money Congress has appropriated. We remain committed to making sure the American taxpayers' investment is used wisely.

    Because Madagascar was the first eligible country to sign a Compact, I would like to briefly expand on it.

    Years of instability have left it one of the poorest countries in the world. Out of a population of almost 17 million, over 80% live on less than $2 a day. When the UN ranked countries on the Human Development Index—or better 'Human Misery Index'—Madagascar ranked at the 85th percentile as one of the very poorest countries. However, in the last two years Madagascar has demonstrated a strong commitment to good governance and social investment. The government is implementing wide-ranging, anti-corruption, financial management and judicial reform policies.

    Poverty in Madagascar is overwhelmingly rural. Its agriculture productivity is among the lowest in the world. Seventy-three percent of Madagascar's population live in rural areas; eighty percent of those who live under the poverty line are rural inhabitants. In this situation, the most effective vehicle to reduce poverty is for the rural poor to invest in their land, to plant new crops, to learn how to increase productivity, to improve farming methods, to get credit to implement these new methods and, finally, sell to new markets.

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    Consequently, the Government of Madagascar asked MCC to support a major effort to attack two of the root causes of poverty: first, a weak land-titling system that fails to provide the incentive or collateral for investments in poor rural areas, and second, a dysfunctional financial system that fails to serve the rural poor.

    The Malagasy people believe that reforming the broken-down land-titling system will give them clear rights to their property and the ability to borrow against it, the best asset they have to improve their lives and those of their children. Improved property rights will also help reduce the incentive to engage in environmentally destructive practices, such as slash-and-burn land clearance.

    In developing these concepts, the Government of Madagascar engaged in consultation focused on developing commitment around a sound program for consideration by MCC. A national workshop was organized in September 2004 to discuss the obstacles to growth and poverty reduction consisting of more than 350 participants, including President Ravolomanana, to describe the MCA and discuss obstacles to economic growth and poverty reduction.

    The Government of Madagascar then organized six regional consultative workshops, each consisting of 50 to 150 representatives of the business community, non-governmental organizations, civil society and donors in all the provincial capitals. The Government also ran radio and TV broadcasts about the MCC, and published newspaper ads that announced meetings and called for submissions of ideas from all segments.

    The Land Tenure Project of the Compact will formalize the titling and surveying systems, modernize the national land registry, and decentralize services to rural citizens. The Financial Project will make financial services available to rural areas, improves credit services, and create a streamlined national payments system. The Agricultural Business Investment Project will help farmers and enterprises identify new markets and improve production technologies and marketing practices to sell to new markets.
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    To the credit of the Malagasy, they have proven to be excellent partners in designing systems and procedures that provide the proper controls and safeguards over the use of MCC funding.

    Accordingly, the Malagasy will engage a professional firm to control funds, manage cash, and oversee accounting and procurement services. The Madagascar Steering Committee will select this firm as a result of a competitive process that is already underway. Our agreement with Madagascar also requires regular independent audits, and we will conduct our own on-site reviews over the course of the Compact.

    The MCC project development, due diligence, and implementation supervision process requires in-depth design, expertise, resources, and time. After the MCC received legislative approval in January 2004, we started with a staff of seven detailed employees. We now have between 110 and 120 people, plus detailees and PSC'S, and we're on plan to reach to our target number of 200 staff by the end of 2005. Talented staff have come from within the government, the private sector, universities, non-governmental organizations, and international institutions. That has taken a fair amount of our time, particularly because we need highly skilled people with specific qualifications.

    As we move forward with our other compact negotiations, we are seeking input on a Natural Resources Management indicator from a broad range of natural resource experts from academia, think tanks, and NGOs. Furthermore, we have an ongoing and active dialogue with these groups and institutions about MCC operations and policy matters of mutual interest. We are grateful to them for their support and their constructive feedback on issues such as the consultative process. In fact, with regard to that issue, these groups have even mobilized their partner groups in countries to engage in the consultative process and to provide us feedback, which we greatly appreciate.
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    I would like to conclude my remarks today by putting the President's request for $3 billion in context.

    The Government Accountability Office found that, using data on MCA-eligible countries, MCC would need to have total resources of roughly $3.4 billion to be one of the top three donors in eight to fourteen countries. In other words, to have the impact of one of the top three donors in eligible countries, MCA programs would need to be on the order of $250 million per country on average, based on three-year Compact programs; five-year programs would require proportionately greater funds. This analysis, combined with our experience to date, forms the basis for our projections. (Appendix 2)

    MCC must focus its available resources to fulfill its mission of supporting transformative development programs. MCA is intended to provide a significant policy incentive to candidate countries by commanding the attention needed to galvanize the political will essential for successful economic growth and sustainable poverty reduction, and needs substantial resources to have that incentive effect.

    Appropriations below $3 billion for FY06 will most likely require reductions in the number or scope of MCC Compacts, and/or force the MCC to forego funding good proposals. Such reductions would undercut MCC's effectiveness in having a significant impact on poverty reduction and economic growth.

    Moreover, for FY06 and beyond, up to 25 percent of the funds appropriated for FY06 can go to Lower-Middle Income Countries as specified by our legislation. Therefore, there will be two competitions: one for lower income countries and one for lower-middle income countries. This will further increase the demand on limited MCC funding.
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    We are deeply appreciative of your support thus far and are grateful to have had the opportunity to begin our mission. There is much more work to be done, however. To make significant progress in reducing poverty we need to uphold the commitment made by the United States. Now is an opportunity to reaffirm that the United States is serious about reducing poverty on a global level.

    The most recent country selections means that the MCC is in a position to have potential relationships with as many as 30 countries—some of the poorest in the world—totaling 400 million people. By focusing our efforts on countries that rule justly, invest in their people, and promote economic freedom, we can help the world, one country at a time. This will be beneficial for those countries, for the impoverished people living in them and for the United States.

    I want to end by thanking the committee, which under the leadership of Chairman Hyde and Ranking Member Lantos has given the MCC true bipartisan support, which has been vital to our accomplishments so far, and which will be even more vital for our future success.

    I welcome any questions you might have.

[Note: Image(s) not available in this format. See PDF version of this file.]

    Chairman HYDE. Thank you, Mr. Applegarth.

    Mr. Lantos?
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    Mr. LANTOS. Thank you very much, Mr. Chairman. I want to thank Mr. Applegarth for his testimony. I have a few quick questions, and I would be grateful for your responding to them, if I may.

    As I understand it, the final two members of the MCC's board of directors have not been nominated yet. I would like to know, when does the White House plan to submit names to the Senate for consideration and confirmation?

    I would like to know, since your written testimony finds that the MCC board has not completed a comprehensive strategy or plan for carrying out its oversight responsibility, when does that body plan to establish, minimally, an audit committee and other bodies that will evaluate the program?

    I would like to find out what, in your view, has been the nature of civil society participation in the development of compact proposals, and if I may, I would like to get some idea of how the relationship is unfolding between your organization and USAID. Should USAID missions be terminated in countries that participate in your program?

    And if I may include one other item, I am deeply concerned about the lack of emphasis on women's participation. These countries, historically, are notoriously failing to take advantage of the enormous potential of women to contribute to economic development. Concept papers and proposals for MCA-eligible countries, as well as the Madagascar Compact, in my judgment, do not adequately address how women will participate in, contribute to, and benefit from your programs.
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    Mr. APPLEGARTH. Let me address each of your questions in order, Mr. Lantos.

    First, in terms of the timing of the appointments of the two remaining members, the latest information I have is that they have cleared initial vetting in the White House and that they are in the stages of getting ready for an intent to nominate. That is the best that I can tell you at this point.

    In terms of the audit committee, I also believe we should have an audit committee. We need the additional members to really staff it appropriately. Both the Chair of the board and I cannot really participate on the audit committee, and we need the additional members to fully staff our board committees, and it is my hope that as soon as we have the board, we can constitute it. We think it is quite important. We take the outside audit function quite seriously.

    In terms of civil society involvement, first, we do take this issue very seriously. We take the consultative process very seriously. As you know, that is one of our two key tests of a compact proposal. First, will it lead to poverty reduction and growth? Secondly, was the process adequately consultated [sic]?

    We have quite different feedback on the Madagascar and Honduras consultative processes than what you reported. I will be happy to hear more directly from your staff what they found. We do address it quite seriously. One example: Ken Hackett, who is the head of Catholic Relief Services, who is on our board, has provided us field reports from Catholic Relief Services from each of the countries, and we have tried to address each of those concerns. And, I think, if you look at the consultative process in various countries, you will see, in some cases, where there was a slow start but significant improvement over time.
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    In Madagascar, for example, and I think my written testimony reflects this, the government organized six regional workshops. Each consisted of 50 to 150 representatives of the business community, non-governmental organizations, civil society, and donors in all provincial capitals. The government also ran radio and TV broadcasts about the MCC, and published newspaper ads that announced meetings and called for submissions of proposals for many areas.

    I think several independent observers, because we do spend a lot of time in due diligence, think the Madagascar Compact was broadly consulted, and I do not know who the staff talked to, in particular. We would be glad to understand it better because this is important to us.

    In Honduras, I think there has been significant improvement, and the process is still ongoing, particularly as the projects are designed at the local levels. We also were concerned initially about what we saw as the initial amounts of consultation in Honduras, but we have seen significant improvements over time, and I would be glad to discuss it further with you, going forward.

    In terms of the relationship with USAID, I think it is working quite well. Administrator Natsios is on the board. In addition, I see him frequently. We met regularly to talk about specific issues. USAID is working with us to implement the Threshold Program, and, in addition, in the field, we get a lot of support and assistance from USAID mission heads and USAID staff, and I do not think we could accomplish our mission if the relationship was not as good and positive as it is.

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    Lastly, your question on the lack of emphasis on women. We also believe women play a very important role in the development process and, as you know, Congressman, actually changed one of our indicators this year, which was focused on primary school completion rates, to focus on girls' primary completion rates. We found a better link to poverty reduction and to growth by focusing on that indicator and trying to emphasize that policy.

    I think, if you look at the consultative processes in countries, we look at participation of women's groups in the consultative process and, of course, are looking, when we look at beneficiaries, as required by our legislation, at the impact on women and girls. We would do it anyway and do it. In fact, we have on-line, baseline data gathering going on right now in Madagascar and some in Nicaragua so we can establish the appropriate baselines to measure the impact of the programs on women and on other targeted groups.

    Mr. LANTOS. Thank you, Mr. Chairman.

    Chairman HYDE. Mr. Rohrabacher?

    Mr. ROHRABACHER. Thank you very much, Mr. Chairman. And I appreciated your description of how you are totally different in your focus from USAID and other such efforts that are being made by our Government to help people in catastrophic situations and trying to help people build a better life for themselves overseas.

    Unless I am wrong, really, a very important element of what you are doing, as I mentioned, is looking at the policies of a government that would be contrary to what is necessary for that country to expand and to grow and to make sure that their economy was able to function in a way that people would be uplifting themselves.
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    There are many such factors involved: High levels of taxation, for example; confiscatory taxation. You cannot have an economy prospering with things such as that. If you could tell me a few of those areas that you would look at such as that, but one thing that I am particularly concerned about deals with its treatment, and the honest treatment, of property within their society.

    The last time you were here, I brought to your attention the plight of a family living in my district, the Brahami family, immigrants from Ethiopia who are now United States citizens, and they have been victimized by the Government of Ethiopia. Specifically, the current Government of Ethiopia has failed to return property that was illegally confiscated from the Brahami family by its former Marxist regime. They will not give the property back, but they also will not give just compensation for it.

    Now, OPIC, which is an agency of this government, has made a determination that the Brahami family has a legitimate claim. So the reason I am bringing this up again today, as I had mentioned that to your before, I would like to ask you to confirm whether or not this type of confiscatory policy by a government like that of Ethiopia, if the countries you are dealing with, they have that type of policy, are they eligible for your assistance?

    Mr. APPLEGARTH. Thank you, Congressman. In the case of Ethiopia, they are not eligible because we do look at exactly the kinds of things that you are talking about. Rule of law, corruption, and good governance are key indicators for us to look at in determining whether there is a proper environment in the country that will really mean our money is used well.
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    Mr. ROHRABACHER. When you say ''rule of law,'' that it would include the rule of law of how confiscated property is dealt with.

    Mr. APPLEGARTH. It would include the whole effectiveness of the court system, if it was an appropriate administrative area. It shows up in several indicators. It shows up in corruption. It shows up in the rule-of-law indicators. It shows up in the government-effectiveness indicator.

    Mr. ROHRABACHER. For example, in this case, their particular case was taken out of the official structure that had been set up to deal with confiscated property and put in someone else's discretion, which indicated that there might be some corruption involved.

    So the rule of law would include how confiscated property——

    Mr. APPLEGARTH. It would include those kinds of things, yes, sir. If a government is not committed and has already demonstrated its commitment, not promised, but demonstrated its commitment, to anticorruption, rule of law, protection of property rights, and opening up the country in terms of economic freedom, investing resources in health and education, then they are not going to qualify. That is what the competition is all about. That is, at the end of the day, what we are trying to incentivize through the MCC, and we are seeing that impact.

    I did, in my oral testimony, make some remarks, but you saw it even when President Yuschenko was here from Ukraine. He talked about Millennium Challenge in his remarks before you. And we have had separate meetings with the new Government of the Ukraine, talking about the criteria, what they would have to do, take steps to qualify. Right now, they do not qualify under our indicators. They are looking at things that they would have to do.
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    I will give you another example. I spent an hour yesterday with the finance minister of Nigeria, going through their ranking sheets and their ranking, indicator by indicator—what was involved, who did it, and what was being measured—because they are not eligible, nor as a threshold country, but would like to be at some point and are beginning to focus on the kinds of policy reforms, what is needed to change to really promote poverty reduction. It is these kinds of leaders, these kinds of reformers, that we are ultimately arming to make the changes in their countries.

    Mr. ROHRABACHER. Well, do not lower your standards. Thank you very much. We are going to be watching and wishing you well. Thank you very much.

    Mr. APPLEGARTH. Thank you very much.

    Chairman HYDE. Mrs. McCollum?

    Ms. MCCOLLUM. Thank you. I have a question—discussions with Armenia, and I will just take that at some point——

    Mr. APPLEGARTH. I would be happy to brief you in detail on Armenia.

    Ms. MCCOLLUM [continuing]. Status with the Armenian dialogue.

    My questions have to do with some of the discussion that was brought forward by Mr. Lantos about involving NGOs, not just U.S. NGOs, but NGOs in-country in general. There are many references in the GAO report and discussions with World Bank and other groups, but there seems to be some confusion among country officials knowing what their full range of potential could be; in other words, what they might be looking at for dollars so that they can actually kind of plan accordingly, and this is in the GAO report on page 18.
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    Honduras, and I will use that as an example because that is in the GAO report, talks about how local farmers were not brought into the discussion as much as they could have been, rural farmers, discussion of where the roads go. I come from an egg State, and even though I am in St. Paul, believe me, I know how important farm-to-market roads are, and you have got to be talking to the right farmers so that they can come together in cooperation to get the biggest bang for our buck in putting in the roads, but also that the roads make sense for them. Some of the points that are made in the GAO report is that we could have done much better outreach in talking with local farmers.

    The other criterion I would like you to discuss has to do with environmental issues. For example, if we are not talking to all of the farmers about environmental integrity when moving forward on projects, it is a true missed opportunity. There seem to be different criteria that are applied when it comes to environmental health and safety hazards—that is pointed out in the GAO report—and so environmental assessments currently are held out in some kind of interim guidelines.

    When you were before the Committee before, I asked, in the Millennium Challenge Account, would you be using USAID environmental guidelines, at least until you came up with your own. I had an amendment to put it into place. It was with best intentions that the amendment not be offered at this point in time because you were working on something. Everything still appears to be interim, and I would like to know where you are, at least as a stopgap measure using USAID environmental standards.

    Another barrier, and I will go back to the fact that we are working with the poorest of poor countries, is we are asking the host country to be responsible for conducting the environmental review and assessment before the compact is signed, or could there possibly be an agreement that you would take into account even before any assessments are completed? So I would like to know where we are using consistency with environmental standards, and I will use an example of a project that is not a Millennium Challenge project that took place in a Latin American country.
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    Beef cattle was very much wanting to move forward in this country, and they decided that they would go forward and clear land and move with beef production. The outcome of not having done a clear environmental assessment was the rapid spread of malaria in that area because there was no environmental assessment to look into to see what was happening. Now, we just spent many hours yesterday talking about malaria and the seriousness and what we need to do as a country in working with other nations to eradicate or, at a minimum, prevent the spread of malaria. So if you would address that, I would appreciate it.

    Mr. APPLEGARTH. I will try to, Congresswoman, and I hope everybody was able to hear you.

    First, on the consultative process, I talked some about that, how important it is. Obviously, it is going to differ country by country, culture, and so on, but there are certain minimum standards that we would like to look for, and we have, based on the early compacts that we have seen and the early progress we have made, we have recently actually put on the Web some guidelines for a consultative process. None is a requirement that a country must do this or that, but there are out there examples for how it has worked in countries where we are seeing a good process to allow countries to take a look at them because they are looking for examples.

    This is a new process for the countries, this idea of country ownership where they are actually taking responsibility for their own destiny, choosing their own priorities. They are working it through. We are helping them work it through, but we had a lessons-learned seminar of all of the eligible countries here 2 weeks ago with the World Bank during the World Bank/IMF meetings. All of the senior ministers were in town. They sat around—it was a workshop for them—each of them was talking about issues they were facing in the countries and exchanging ideas of how they were solving it with their own countries. I think that is an example where you are seeing the country ownership taking effect here. I think you see it in the consultative process.
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    We view the consultative as very important. It has to meet several standards. One, it needs to be timely. It has to be in early enough in the process so that the participants have a chance to really influence what is going on.

    Second, it has got to be participatory. So we want to see a lot of different groups. We want to see local NGOs involved. We want to see farmers' associations. We want to see women's groups. We want to see the business community. We believe—in, at least, the earlier ones—we are seeing that kind of involvement. And we want it to be meaningful, not just for show. We want to see some impact of the consultative process on the proposal.

    Actually, you mentioned Armenia earlier, and I think that is a case where you are seeing an impact. What it will look like at the end is going to vary. My personal standard for a good consultative process, when it comes to one of our countries, was where I was actually meeting with a leader of the opposition, and we concluded the meeting, came out, and there were some people from the press there. They asked him about where he thought the consultative process was going. He says, ''I do not agree with everything that is in the proposal. The proposal is not going to be a consensus. We understand that, but I will give the government credit for having a genuine, open consultative process.''

    Now, to get the leader of the opposition to say that, I think it is a pretty good standard. I do not think we are going to achieve that everywhere, but we do take it seriously, and I think you are seeing it in many of our countries. Those that are going slower; they are learning.

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    In the case of Honduras, the proposal itself, actually, is on the Web, if you want to see the detailed proposal. It is focused on integrated rural development. It does involve a lot of farm-to-market roads that are targeted to improving rural incomes, agricultural incomes. I think a lot of it has come out that reflects an environmental process at a sort of macro level. The detailed planning at individual project target areas is still ongoing, and that consultative process needs to be continuing, and I believe it is continuing.

    Lastly, on the environment, we really tackle it in two things. One, the last time I was here, I mentioned that we did not have an environmental indicator. Since then, we have established a group headed by Christine Todd Whitman, who is on the board, to focus on seeing whether we can get a good indicator that applies across many countries for management of natural resources. We have brought together some of the best environmental economists in the country to help on this. I think there has been a lot of active participation. I would be happy to give you a separate briefing on this, if you would like; it is so important.

    And we have published draft guidelines now for how we are going to evaluate compact proposals. We have put it out for public comment. Those comments are due back June 1st, and, I think, once we have that input, we will be able to publish our final guidelines.

    Chairman HYDE. Ms. Barbara Lee?

    Ms. LEE. Thank you very much, Mr. Chairman. I want to thank you for holding this hearing because the jury for me, of course, is still out on MCA. And I appreciate Mr. Applegarth being here and answering the questions, and, I guess, I need to first ask a couple of questions because I have got to make sure that what we authorized is still what is actually the law, and it is my understanding now that some of what this Committee authorized, the appropriators took out, one of which is an amendment that I offered.
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    And I would just like to ask you, given that you are really not required to do this, as this Committee wanted you to initially, I want to get a handle on the efforts with regard to the purchase of goods and services. And while I understand that MCA, primarily the money has got to get out to the countries, I do know that when we talked about this, that you will be utilizing the services and goods of American companies to perform certain activities. And my concern, and what I wanted to do, and what this Committee did, was ensure that minority women-owned businesses and small businesses participated in that activity.

    So could you tell me kind of what you are doing in terms of the types of goods and services from U.S. companies that you are buying and then, what has been your involvement with small, minority- and women-owned businesses? Because we actually had authorized a report to come back to this Committee after a year giving us that information, but since the appropriators, I guess, took that out, we have no way of knowing. So that is my first question.

    Mr. APPLEGARTH. Thank you, Congresswoman. I apologize. As you know, a lot of people date MCA from the announcement at Monterrey 3 years ago. The first 2 years were really getting the legislation developed and the discussions on the Hill, and I was not around for much of those discussions. I cannot track what happened to every amendment, but I will certainly try to find out for you. You, obviously, know it better than I do.

    But in terms of the U.S., procurement that we do——

    Ms. LEE. Right.

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    Mr. APPLEGARTH [continuing]. We follow all U.S. Government-procurement rules, and I think, maybe even more than follow the rules, we follow the spirit of the rules. First and foremost, even if we did not have a rule of really insisting on open competition, multiple bids, we would do it anyway. I have done it throughout my career. I think if you tracked—at various organizations, we bid out virtually everything. Okay? And so that fundamental standard is there.

    In addition, we want to create an open playing field for everybody, and I have just been handed a note that says the majority of our contracts are actually with women and minority businesses right now. I would like to provide you some more information on that.

    Ms. LEE. I would like to get some information because I want to see how you are utilizing the 8[a] program and also the types of women-owned businesses and minority-owned businesses that you are utilizing and how much you are buying and what you are buying and what percentage——

    Mr. APPLEGARTH. And we would be glad to provide that. I think we are seeing that a number of the 8[a]-type companies can service us here in Rosslyn. I think when you start talking about providing services in a variety of the places that we are working, they really do not have the representation there, and I do not even know how many bids we are getting, frankly, but we can certainly find out.

    Ms. LEE. Okay. So you will get us the information.

    Mr. APPLEGARTH. And then I think you see what is happening in the countries. We try to ensure that procurement happening in the countries is, of course, fundamentally by the countries themselves, but we want to ensure it is an open playing field, that people have a chance to participate, including locals.
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    Ms. LEE. Sure.

    Mr. APPLEGARTH. We want everybody to have a chance because this building of local capacity is part of our mission, and that is what we want to see happen, and I think we try to do it through a variety of things in the fiscal-accountability area.

    Ms. LEE. Sure. I understand that, and I am glad that is the main goal and the mission, but I also know, as with USAID, that, in many ways, we want local companies and organizations to provide the goods and services or deliver whatever product or service USAID is doing. But minority firms in America have a very difficult time when, in fact, USAID has contracts available, to penetrate USAID, and so I am concerned that MCA could be another entity that has those barriers which preclude minority- and woman-owned firms from——

    Mr. APPLEGARTH. Well, I would share that concern. I do not think we have those barriers, but if you identify them, we will be glad to look at them.

    Ms. LEE. Okay. So you are going to get us the information.

    Mr. APPLEGARTH [continuing]. Is there to make sure that we have the opportunity for people.

    Ms. LEE. Thank you very much.

    Chairman HYDE. Ms. Watson?
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    Ms. WATSON. Thank you very much, Mr. Chairman, and thank you very much, Mr. Applegarth. You have an awesome task, and I have worked with USAID in several of the countries, particularly in Africa, with programs of AIDS.

    A couple of things. Most often, monies that come in through you, a great portion is eaten up in overhead. You might want to comment on that.

    And then, second, I, too, am extending the question, I guess, that Ms. Lee raised. I really want to know how you work with the civil society because it has been the experience that corporations that contribute and have projects will make promises, particularly where there are environmental concerns, and then they make the promises to the government, but the people in these communities where these projects work do not get a chance to have their input periodically. So I have suggested—we were in Chad just recently—that they hold periodic forums so that the community in which these programs exists will have input all along the implementation of these programs. Can you comment, please, on those two areas?

    Mr. APPLEGARTH. Certainly. We are still developing formal benchmarks on the administrative-expense standard. I think, though, if you look at our administrative budget versus funds under management, the ones we are trying to do, you would be very pleased. I think, by any standard so far that we have been able to identify, we are significantly below the overhead ratios and the cost ratios of other organizations, both private sector and public sector.

    In terms of working with civil society, I mentioned earlier, the consultative process is very important to us. I think, in every country that I have visited, and I have visited almost all of our eligible countries and some more than once, I have met during my visit with local representatives of civil society and encouraged them to both participate in the consultative process and in the monetary-implementation process, bidding, if appropriate, on some parts of program implementation; bidding and participating in monetary evaluation, and also whether or not they are formally involved, to get involved in monitoring the overall progress.
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    Every compact we sign is going to be on the Internet. It is going to be available in the country to the beneficiaries of the compact so that they can see firsthand where their money is supposed to be going and who is supposed to be benefiting, and we look to them to be part of the front line in alerting us if it is not getting there. Now, we have a lot of other checks and balances, but that is there.

    In addition, what a number of our countries have actually implemented is your suggestion about a forum. I think, if you look in Georgia, if you look in Armenia, if you look in Madagascar, they have town meetings around the country, i.e., what should be the MCC priorities, what should be in the proposal, and what is the reaction to whatever the government has suggested? So I think you are beginning to see that in some of these countries, many of whom do not have this kind of a history of law.

    Ms. WATSON. Let me just add that it appears in some of the countries that the government overwhelms the civil society of the people, and statements on the environmental issues there are conflicts between the government's position and the people's position. And I recall Nigeria, several years ago, when Shell Oil Company came in, and they were pumping oil down in the Goni Delta region, and Sierra Wewah was the one that was complaining, and they ended up in a scuffle, and people died, and four of them were hung. That has always stayed in my mind, and so as I have traveled throughout Africa, we have always looked at whether or not the locals have had a voice that was meaningful.

    So are we still in 14 countries with USAID?

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    Mr. APPLEGARTH. I am sorry. What was the last——

    Ms. WATSON. Are we still in 14 countries that are eligible for USAID?

    Mr. APPLEGARTH. Well, within MCC, we have 17 eligible countries right now.

    Ms. WATSON. 17.

    Mr. APPLEGARTH. 17.

    Ms. WATSON. Okay.

    Mr. APPLEGARTH. Sorry. Go ahead.

    Ms. WATSON. I just wanted to say, I always look for guarantees that those lone voices out there do not get outshouted by what the government wants because it is those people who these projects that we get involved in are supposed to benefit, and often it goes in a different direction.

    So I just want some assurance from you that the Millennium funds and the contracting and so on will have a greater benefit to the people within the region and the area and not necessarily to the overall Federal Government, but it is the people whose areas they are in. And I just wanted to hear from you what kind of protections we build into these contracts and what kind of oversight, and is there a long-term follow-up?
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    Mr. APPLEGARTH. I think there are several protections, Congresswoman, and the first is even in the selection of the countries themselves. We do not have yet a good indicator that we can publish in terms of management of natural resources, but, fundamentally, we are trying to assess countries and their commitment to it, and we are only picking countries that have demonstrated some commitment to it, so you start with that.

    Secondly, in the consultative process, which we take very seriously, we want the local people to be involved, and I will give you an example in a minute where I saw where the government was giving us the wrong information. Country ownership means that the country determines the priorities, but we do not want people in Washington or Bonn or Paris setting the priorities for the country. We also do not want a couple of people in the ministry of finance in the country setting the priorities. We want a broad-based, consultative process. If it is being done right, those kinds of environmental concerns and other kinds of concerns are popping up in that consultative process.

    But our third check is, we do not limit it to that because, in our assessment of individual projects, we also do an environmental review. The draft guidelines, as I mentioned to Congresswoman McCollum, are on the Web. We are now in the process where two projects have already started environmental impact assessments for the proposals even before approval because we want to make sure that it is not going to have a hazardous effect or a bad effect on the environment.

    Coming back, on the consultative-process example, there was a country recently that had a long history of growing rice, and every government official told me, ''Our people will only want to grow rice, and we do not want to focus on a program that will diversify crops because our people will not do it; it is in the culture.'' The people in the capital said that. We went out and talked to some agricultural extension workers in the field, in the patties.
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    So then I met with a group of farmers, and I sort of asked them the same question. I came at it a little bit differently. I said, ''What would you like your kids to do when they grow up? Do you want them to be rice farmers?'' They said, ''We want them to be anything but rice farmers. We want them to go to the capital. This is not a future. We are barely getting by. We cannot get a good price for our crops. Everybody sells rice. This is not a future we want for our kids.'' To which I said, ''Well, why do you not do other crops? Would you be interested in other crops?'' ''Yes.'' ''Why do you not do them?'' ''Well, we do not know how to do them. Nobody has trained us.''

    So a big discussion then between the local agricultural extension workers representing the government and the farmers, and the farmers said, ''Why do you not teach us about these other crops?'' And the agricultural extension workers said two things they thought were key. Okay? One was, ''We do not know about the other crops ourselves. We have not been trained, and the only thing we have been trained to do is rice, and, more importantly, that is what the government tells us our jobs are, to teach you how to grow more rice and better rice.''

    And if you listened simply to the government feedback, all the way up the line, even from the field, you would have gotten one answer that was very different than when you go out and actually talk to the people in the paddies, in the fields, elsewhere, about what they want and what their needs are.

    I will never forget the last question I got there, which was, ''Why is it that somebody from the United States or Washington is asking us more informed questions and asking things that are more relevant in our lives than anybody here from the government has ever asked us?'' That is the challenge we left for that government when I was leaving.
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    Chairman HYDE. The gentlelady's time has expired. Mr. Boozman has waived his right to question, for which I thank him.

    We have a second panel, so we are ready to give you some freedom, Mr. Applegarth, and we thank you for a very instructive testimony.

    This panel, we are terminated with, and the second panel will please come forward. I want to welcome the witnesses on the second panel.

    Dr. Steven Radelet is a Senior Fellow at the Center for Global Development, where he specializes in foreign aid, debt, economic growth, and poverty reduction in developing regions. He is widely recognized for his book, Challenging Foreign Aid: A Policymaker's Guide to the Millennium Challenge Account. Before his current position, he served as Deputy Assistant Secretary of Treasury for Africa, the Middle East, and Asia. He has been a Fellow and a lecturer at Harvard, as well as an adviser to the finance ministries of Indonesia and The Gambia.

    Dr. David Gootnick is Director of International Affairs and Trade at the Government Accountability Office (GAO), where he has been since 2001. In his position, he oversees analysis of U.S. humanitarian aid, development assistance, economic assistance, and global health. Under his direction, a new GAO report has been released that examines the Millennium Challenge Account which Mr. Gootnick will discuss today.

    Mr. Conor Walsh is the Country Director in Honduras for Catholic Relief Services. Honduras is likely next in line to complete MCA compact negotiations, and Mr. Walsh has followed MCA developments closely in Latin America. He also has extensive humanitarian and development experience in Haiti, Angola, and South Africa. We look forward to hearing his on-the-ground perspective of how the Millennium Challenge Account is playing out in Honduras.
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    It is a pleasure to have you all here today at this hearing, and we look forward to your insights as we examine MCA. We ask that you proceed in the order in which you were introduced, providing a 5-minute summary of your written statements. Your complete statements will be made a part of the record. We expect votes at about 1 o'clock or 1:15, so let us see if we can get your testimony in before we have to adjourn. Mr. Radelet.


    Mr. RADELET. Thank you very much, Chairman Hyde, and thanks for the opportunity to appear before the Committee today.

    Two years ago, I testified before this Committee that the Millennium Challenge Account had the potential to significantly improve the quality and effectiveness of U.S. foreign assistance. I think that that potential remains today and that the MCA remains very promising as a vehicle for the people of the United States to achieve some of our most important foreign policy goals: Encouraging freedom, economic opportunity, and good governance; demonstrating American values to the world; and fighting poverty.

    The promise of the Millennium Challenge Account to be innovative and effective is based on several key principles that you are aware of. One is to focus on growth and poverty reduction. The second is to select countries that are the most committed to sound development policies, to allow local leaders to set their own priorities, to provide enough funding to make a real difference on the ground, and to hold the recipients accountable for results.
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    The MCC has made substantial progress to date since its founding just over a year ago, and Mr. Applegarth has already discussed that, and there is no reason for me to repeat it. But I do believe that over the last year, since their founding from absolutely nothing, that they have made some significant progress.

    However, despite these steps forward, I believe that the MCC faces some key challenges going forward. Its progress to date is less than many of us had hoped and expected, and I believe that this next year will be very critical for the organization to scale up its vision, to increase its speed, and to ensure high-quality programs to support growth and poverty reduction in some of the poorest countries in the world.

    Mr. Chairman, you mentioned several important concerns, and I concur with many of them. I want to mention six specific challenges going forward. Number one is to scale up the original vision of the MCA. Achieving this bold vision laid out by the President requires providing enough funding to make a real difference and to create the incentives for reform on the ground.

    The original vision called for $5 billion in funding per year, implying compacts the size of $150–250 million per year and to be the largest donor in many of the recipient countries. However, the compacts that we are seeing so far, both the one that has been signed and the ones in the pipeline, are much smaller than that. The Madagascar Compact is about one-sixth of that size, and the ones in the pipeline might be about one-third that size, on average.

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    The MCC, at the moment, is on track to become the third- or fourth-largest donor in most recipient countries, not the largest, and I think this undermines its ability to make a big, bold difference and to create incentives for important change. The MCC must encourage countries to be bigger, bolder, more innovative, and not small and average. It should not encourage countries to cut back to be safe or because it does not have adequate staff. Of course, it should not be reckless, but it should encourage countries to be bold enough to make a real difference on the ground.

    The second concern is balancing the tension between the consultative process quality and speed. There has been a lot of concern about speed. I do not think that the time taken to get to the first compact of 11 months is a problem. I actually think that that is quite appropriate and necessary to have the appropriate kind of consultative process. My concern is not that it took 11 months for Madagascar; my concern is that, at this point, we have only got Madagascar and only four others in the pipeline. We seem to not be close to decisions on the other 11 countries that were selected 1 year ago.

    Some of this is startup and growing pains, but we should be much closer to decisions on these other countries. One possibility would be for the corporation to set itself some firm deadlines and stick to them. I would recommend that the board set up two deadlines per year when they will make firm decisions up or down on proposals that have been submitted to them.

    For example, they could have a board meeting in May and another in September and tell the countries that they have a deadline 1 month before those meetings to submit proposals. If they do not submit proposals on time, they can submit them for the next board meeting, but the board would evaluate the proposals in front of them and vote up or down so that we could have some certainty. These kinds of deadlines, I think, focus attention and would be good for both the recipient and the corporation.
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    Third, I think it is very important to firmly establish the principle of local ownership. There has been much discussion already this morning about the importance of local ownership, and, indeed, that is one of the innovations of this program. Both the Administration and Congress, and especially the authorizing committees, deserve enormous credit for this intervention and for refraining from placing too many directors on the program and allowing local leadership to come to the fore in setting priorities. This is really important, I believe, to enhance local ownership, to ensure stronger commitment on the ground, to meet the highest priorities, and to increase the effectiveness of every dollar that is spent.

    But maintaining this local ownership will be a real challenge. Lots of observers on the ground and here, in Washington, want to put their own priorities forward. We cannot, on the one hand, extol the virtues of local leadership and, on the other hand, try to influence and second-guess program content. Undue micromanagement will weaken programs. Good poverty-reduction and growth programs require a combination of investments in health and education, good governance, and a robust private sector. The MCC need not fund all of those aspects, but it should be funding parts of it in a broader growth and poverty-reduction program.

    But there is concern that the MCC is not allowing for this full process and may be imposing some of its own priorities. I think the corporation needs to be much clearer on its expectations on the consultative process and transparently describe the process that it is using to judge programs.

    Fourth, the corporation needs to ensure higher-quality programs, and I think there are two ways to do this. First, I believe that it should engage an independent, technical review panel to evaluate every proposal that it receives, with outside experts that are experts in the field, that have much more expertise than the MCC can have in-house, to provide recommendations to the board on every single proposal.
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    Second, it must have a much larger staff size, as was mentioned earlier. With 200 people, a corporation financing $2 billion a year or more would make it, by far, one of the smallest staffings for financial organizations of any organization in the world, and I fear that this staff size is way too small. The International Finance Corporation, for example, distributes about $3 billion a year. They have a staff of over 2,000 people. Being lean is admirable, but if we are too small, we will undermine efficiency.

    The fifth concern is that we need to demand results while encouraging innovation, and I am particularly concerned about having high-quality monitoring and evaluation for these programs to create good incentives that will reward results, to make sure that we allocate resources to the most effective programs, to keep programs on track and get early warning when they get off track, and to learn from our experience.

    Monitoring and evaluation is very complex, but, unfortunately, the corporation is allocating only 16 staff members to this important task, and I believe there is a real risk that they will make the same mistake that so many other aid agencies have made, to underfund and undervalue evaluation.

    Finally, we need to target the right countries, and here there are two issues. There has been so much talk about the country-selection process; I think, too much. There are a lot of issues that could be improved. It must be strengthened, but it is easy to nitpick and miss the fact that what we are trying to do is, objectively and in a nonpolitical way, choose the best kinds of countries, and I think they have done an admirable job so far, although it can be strengthened.
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    The second issue where I have more concern is the introduction of lower middle incomes this year to expand the program to a new set of countries with higher income. These countries, in my view, have less need. They have higher savings rates, higher tax revenue, and much higher private capital flows, and most of them are graduating from foreign aid. To expand the program this year, I think, creates a danger of allocating some of our scarce resources to these richer countries instead of those with greater needs.

    Given the MCC's relatively slow start and the fact that it is not close to achieving the envisioned $5 billion in funding, I think that we need to concentrate our efforts this year on the countries that have been selected before expanding to a larger group. At a time when the organization is more mature and funding more secure, we can think about perhaps bringing in these lower-middle-income countries. At most, the corporation should choose one or two, if any, to receive funding in Fiscal Year 2006.

    Mr. Chairman, the MCA, I believe, still has great promise for the American people to deliver aid more effectively, and I believe it deserves our full support in this startup phase, but the MCC must step up this year to fully meet its vision by scaling up its programs, increasing its speed, and funding higher-quality programs. Thank you very much.

    [The prepared statement of Mr. Radelet follows:]


    Two years ago before this committee, I testified that the MCA had the potential to significantly improve the quality and effectiveness of US foreign aid. The original concept of the MCA—identify countries with a strong commitment to development, provide them with substantial funding for high priority activities to support economic growth and fight poverty, limit bureaucratic interference, and hold recipients accountable for results—remains very promising as an innovative vehicle for the people of the United States to achieve some of our most important foreign policy goals. It provides the United States the opportunity to use our strength, stature and resources to show the world that we can lead the way in helping low-income countries provide economic opportunities, stimulate economic growth, and fight poverty.
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    The MCC has made important progress in several areas towards achieving that vision. It has established a lean organization that is taking seriously the ideas of country ownership and consultations in program design. It identified a reasonably strong set of countries to submit proposals for funding. And it is considering a wide range of substantive proposals to support poverty reduction and growth. In other areas, however, progress has been slow and is falling short of the original vision, particularly in terms of size and speed.

    This next year is critical for the MCC, as the time has now come to take the bold steps necessary to turn its great potential into reality. The MCC faces six key challenges:

1. Scaling Up to the Original MCA Vision

2. Balancing the Tensions Between the Consultative Process, Quality and Speed

3. Firmly Establishing the Principle of Local Ownership

4. Ensuring High Quality Programs

5. Demanding Results while Encouraging Innovation

6. Targeting the Right Countries

    The MCC must now move from its initial start-up phase to become a mature, strong, and professional organization that puts the United States at the forefront of innovative and effective development assistance. I believe that as the MCC takes the steps necessary to achieve that vision, it deserves our continued strong support.
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    The MCA builds on America's core values of generosity, commitment to progress and poverty reduction, and the expectation of clear results. It operates on six key guiding principles that set it apart from most other foreign aid programs:

 It focuses clearly on promoting economic growth and poverty reduction, rather than supporting diplomatic and political partners or achieving other goals, which can be supported with other programs. The sharper focus and clearer goals should help ensure that both recipient countries and the American public get better outcomes.

 It selects a small number of recipient countries that have demonstrated a strong commitment to sound development policies, helping make aid funds more effective.

 It allows recipient countries to set priorities and design programs, engendering stronger commitment for success by recipients, and ensuring that programs actually are aimed at meeting the most urgent local needs.

 Its keeps its bureaucracy to a minimum, avoiding the large administrative structure and heavy regulation that bedevils some other aid programs.

 It is designed to provide recipients with sums of money large enough to make a real difference on the ground and provide strong incentives for success.

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 In principle, it holds recipients much more accountable for achieving results, including being willing to increase funding for successful programs and reduce it for weaker programs.


    During its first year, the MCC has made important progress in several areas:

 Establishing the organization. The MCC has established itself from scratch in just over one year, working rapidly to hire key staff, open offices, and set up the basic functions of the Corporation. It moved as quickly as the legislation allowed to convene its Board of Directors, announce country selection methodology, and select MCA and Threshold countries for 2004 and 2005. Despite being short-staffed in the early period, it made efforts to visit eligible countries to inform them about the MCA and worked with USAID to establish the Threshold Program. It has now received proposals from 16 of 17 MCA-eligible countries and from all countries eligible for the Threshold Program.

 Creating incentives for policy reform. The MCA has garnered significant attention abroad, with many low-income countries expressing interest in participating in the program. According to the MCA, the incentives for policy reform are already at work. For example the median number of days to start a business fell from 63 in 2004 to 45 in 2005, in part due to the emphasis the MCC placed on this indicator. Moreover, the MCC sites several countries that have passed tough anti-corruption legislation in hopes of being considered for the MCA. These results must be interpreted with caution, however, because the median score for other indicators actually worsened from 2004 and 2005. For example, the medians for political rights and civil liberties both deteriorated from a score of 4 to 5—more likely attributable to the inclusion of a wider pool of countries in 2005 than any incentive created by the MCA.
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 Negotiating and signing the first compact. The signing of the first country compact 6 months after the initial proposal was submitted is an important milestone. This pace was appropriate, as it takes time to work with countries to set their own priorities and map out a set of programs that complements a national development strategy.

 Adhering to a vision. To some degree, the MCA has adhered to its vision of being more focused and more nimble than traditional aid programs. An important part of this is that the Congress has given the MCA greater flexibility and fewer directives, which should help increase innovation and effectiveness. The MCA's success will rely partly on the freedom from pressure to contribute to strategic foreign policy goals beyond targeted poverty reduction and economic growth, and freedom from directives that obligate spending in certain sectors.

 Promoting transparency. The MCC is unique among US donor agencies in the amount of information easily available on its website. It is particularly notable that the MCC posts all of the data used to select eligible countries, opening itself to unusual scrutiny. The MCC has been partially successful in setting a standard for transparency among eligible countries as well. Of the 16 that have submitted compact proposals, half have made their proposals publicly available on national websites.

 Engaging with the public. The CEO and staff of the MCC have made themselves available to interested parties through outreach meetings, individual consultations, sessions with eligible-country embassies, and participation in NGO working group meetings. The MCC was receptive to suggestions that it change one of the selection criteria to include girls' primary school completion rates, and has opened for public participation the deliberation on an indicator for natural resource management.
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    Despite this early progress, the MCC faces several key challenges going forward if it is to achieve its full promise and potential. In its first year, the program, understandably, has experienced some growing pains. The next year will be critical for the organization to scale up its vision, increase its speed, and ensure high quality programs to support growth and poverty reduction.

Challenge #1: Scaling Up to the Original MCA Vision

    The MCA provides a bold vision for how the people of the United States can support committed and dynamic governments in fighting poverty, creating economic opportunities, increasing growth, and improving the standard of living for some of the world's poorest people. For the MCA to really help committed governments transform their economies, it must (1) provide substantial funding to make a real difference on the ground, (2) provide strong incentives for countries to take the steps necessary to become eligible and implement strong, successful programs, and (3) hold countries accountable for results.

    The President's original proposal called for $5 billion in funding each year, implying compacts that would be in the neighborhood of a minimum of $150–$200 million per year or more, making the MCC the largest donor in most countries. Countries would be willing to take the steps necessary to qualify, consult widely to design their own programs, and work hard to implement them successfully if they believed that substantial funding would be available with low bureaucratic costs, and that results would be rewarded. This would lay the foundation for the powerful combination of improved policies to become eligible, substantial funds to make a difference in people's lives, and the incentive to achieve results to enable continued funding.
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    At this early stage, however, it is not clear that the MCC is on track to achieve this vision. Its first compact in Madagascar calls for around $27 million per year, far smaller than the original vision, and just enough the make the MCC a slightly larger than average donor in the country. For the first 16 eligible countries, the MCC is currently reviewing proposals amounting to about $3 billion over 3–5 years—an average of about $40–60 million per country per year, depending on the length of the compact. This would make the MCC the third or fourth largest donor on average in the recipient countries. Programs of this size are only one-quarter to one-third of the original MCA vision, and as such are unlikely to be large enough to bring about significant change and create the incentives for improved performance. By contrast, aiming for compacts for 12 of the first 17 countries over four years of a size equal to the largest donor would require MCC commitments of about $5.5 billion, a far better target.(see footnote 1)

    The Corporation must encourage countries to be big, bold, and innovative in their proposals, and not discourage them from large proposals, as sometimes has been the case. For example, reportedly Armenia's original proposal amounted to $900 million, which has now been revised to $175 million. Madagascar's final compact left out several components that were in its original submission, and Mozambique was also asked to scale back. Of course, the MCC should not just encourage a wish list with a hodge-podge of activities, but it should envision interconnected programs of a scale that can make a significant impact on poverty reduction and economic growth. MCA eligible countries have among the most committed and capable governments, and have shown their ability to use aid flows effectively. Each has huge needs for improved infrastructure, water supply, power, health, education, and other areas where funds can be well used. The MCC has the opportunity to work with governments to provide funding on a large enough scale, always holding them accountable for results (as discussed below), to make substantial progress in the fight against poverty. But aiming to be a slightly larger-than-average donor won't accomplish that goal.
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Challenge #2: Balancing the Tensions Between the Consultative Process, Quality and Speed

    Many observers have expressed concern that it took so long for the MCC to sign its first compact with Madagascar. Much of the responsibility for the slow start lies with the administration, rather than the MCC, which did very little preparatory work during the two years between the President's speech proposing the MCC and the passage of the enabling legislation. There was a missed opportunity to prepare guidelines for recipient countries, analyze options for financial flows, and consider various models for monitoring and evaluation. This, however, is now water under the bridge.

    The MCC literally started from scratch just over a year ago, and chose the first group of eligible countries in May 2004 at the earliest possible date. In my view, given this start, it is perfectly appropriate that the first compact was signed in April 2005, 11 months after country selection. One of the strengths of the MCA is that it relies on country-led proposals, which require time to develop options, consult with stakeholders, and design high-quality interventions. There is an important balance to be struck between, on the one hand, the natural desire for speed, and on the other hand, the importance of a country-led process and the need to ensure quality. Moreover, there are certain growing pains inherent in a new organization that is hiring staff and establishing all new procedures while at the same time working with countries on proposals.

    However, while the amount of time to get from country selection to the first compact was acceptable, the more relevant concern is that only one compact has reached that stage. Just four others are in advanced negotiation, and some of these may take several months to finalize. The other 11 countries in the first round are well behind schedule. Ideally, after one year, the MCC should be close to making decisions—either up or down—on all 16 of the first round countries, not just a few.
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    Currently the MCC works with countries after they submit their proposals in an attempt to strengthen programs. Since there are no deadlines, the process can continue for many months, sometimes with relatively little progress, without a clear decision on the proposal. An alternative that would help provide more certainty and speed the process would be to announce two Board dates each year during which decisions would be made on all submitted proposals. For example, the MCC could announce its country selections in October, and plan on Board meetings in early May and early September to decide on proposals. Deadlines for final proposal submission would be April 1 and July 15. This timing would provide countries more than 5 months to prepare their proposal for the first round, and close to 9 months for the second round, which should be ample time to conduct consultations, prepare a proposal, and receive some initial feedback from the MCC. In its May meeting, the Board would make firm decisions to either approve or disapprove all proposals submitted by the April deadline. Disapproved proposals could be revised and resubmitted in time for the September Board meeting.

    These kinds of deadlines, which are common practice among many foundations, would help focus the attention of both recipients and MCC staff, speed the process, and provide certainty to the status of all countries. The MCC currently use such deadlines for its Threshold Program, but not for MCA eligible countries. At a broader level, the MCC should set a range of goals and deadlines for itself—some of them public, as its recipients do—and measure its own progress against those targets

Challenge #3: Firmly Establishing the Principle of Local Ownership

    The MCA's potential stems not only from its projected size, but because it promises to deliver aid differently and more effectively than many traditional aid programs. A key component is to give more responsibility and flexibility to recipient countries to establish priorities and design programs that can be tailored to local needs and circumstances. This is a very sensible approach, especially since MCA countries are chosen based on their demonstrated record of good governance and sound policy.
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    Both the administration and Congress, and especially the authorizing committees within Congress, deserve credit for this design. The administration refrained from placing too many directives on program content and formulation. Congressional authorizers wisely decided not to earmark funds for specific purposes, recognizing that local governments with proven records were better placed to determine the highest priorities. This process will greatly enhance local ownership, which in turn will increase commitment to success, improve program design, and increase effectiveness. As a result, each dollar of MCA funding is likely to have a larger impact on growth and poverty reduction.

    Nevertheless, maintaining local ownership for priorities will be a challenge. Some observers believe, incorrectly, that for an MCC program to reduce poverty, it must always include investments in health and education. Others believe, equally incorrectly, that for a program to support growth, it must be aimed directly at finance and business. In fact, economic growth and poverty reduction are closely linked in most countries, with growth the strongest contributor to sustained poverty reduction. Sustained growth requires a combination of good governance, strong investments in health and education, and a robust private sector. In turn these three ingredients form the foundation of the most effective poverty reduction strategies. Of course the specific details and most appropriate combinations will vary across countries, which is why local ownership and direction is so important. The MCA need not fund all the ingredients of a strong growth and poverty reduction program, but rather should be aimed at filling gaps not met by local resources or other donors.

    Supporters of the MCA cannot, on the one hand, call for stronger country ownership and, on the other hand, try to influence program content and effectively second-guess the priorities that eligible countries choose for their programs. Undue micro-management from afar will ultimately weaken the impact and effectiveness of MCA investments. At the same time, it is incumbent on the MCC to honor the country ownership process and not steer countries away from their stated priorities, as long as they are technically sound. This is particularly important in light of reports that the MCC has discouraged some countries from pursuing some stated priorities, especially in health and education, which can have a strong impact on both growth and poverty reduction. In the spirit of full transparency, the MCC must take steps to reassure Congress and the public that compacts actually represent country priorities. Towards this end, the MCC should publish guidelines for the consultative process, and more clearly and transparently describe the process it uses to judge the merits of initial proposals and the various components of proposals. As one part of this strategy, it should establish an independent technical review panel to help evaluate proposals, as described below.
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Challenge #4: Ensuring High Quality Programs

    Technical Review. The MCC is considering proposals covering a very wide range of substantive areas, including agricultural production, tourism, land titling, transportation, water, finance, energy, health, and education. The MCC's small staff does not have, and should not be expected to have, expertise in all of these areas. Yet it needs to make recommendations on the proposals, provide oversight, and conduct monitoring and evaluation. To ensure high technical quality, it will need to rely on a combination of in-house expertise, staff from other executive branch agencies, and outside experts. The MCC is taking some steps in all three directions.

    In addition, the MCC should consider establishing an independent Technical Review Panel of outside experts to evaluate all proposals prior to approval with respect to their technical merits and their potential contribution to poverty reduction and growth. The Panel would make non-binding recommendations to the Board. The panel should consist of non-partisan technical experts with deep knowledge of development that can provide expert opinion and commentary that will help strengthen proposals and assist the Board in distinguishing strong proposals from weak ones. The panel could combine a core set of members that would evaluate all proposals, together with additional specialists where necessary for certain proposals where the core panel may not have sufficient expertise.

    Staffing. Both composition and size of the MCC staff are important. On composition, the MCC has placed a priority on hiring staff with fresh ideas from the private sector, complemented by professionals with government experience. This strategy has its strengths and to an extent should be encouraged, but it also has its limitations. In particular, while the current staff is a strong group of professionals with important skills, there appear to be relatively few with strong expertise in economic development, which could adversely affect program quality. While fresh outside perspectives are welcome, it is critically important to augment the current staff with experts in economic development and poverty reduction, along with experienced professionals with deep knowledge of the strengths and weaknesses of other donor approaches.
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    With respect to staff size, the MCC currently has about 120 staff members, and is planning to increase to 200 by the end of 2005. One of the key objectives of the MCC is to keep its bureaucracy and administration small, both to maximize the funds available to recipients and to ease the administrative burden on recipients. Aiming for a relatively small staff size is admirable. However, a staff of 200 is extremely small for an organization planning to disburse at least $2 billion per year or more in the near future. At this size, the ratio of dollars disbursed per staff member is about $10 million:1, a very high ratio. By comparison, the Ford Foundation disburses about $1 billion with a staff of 600, a ratio of about $1.6 million per staff member, the U.K.'s Department of International Development disburses about $3.3 billion with a staff of 2,200 ($1.5 million per staffer), and the International Finance Corporation disburses about $3.1 billion with a staff of 2,200 ($1.6 million per staffer). Very few organizations have a ratio as high as $4 million:1, much less $10 million:1.(see footnote 2)

    There is a real danger that the MCC's staff will be too small, which could significantly undermine efficiency and effectiveness in several ways. Too few staff would:

 Slow the speed of proposal review, negotiation, and disbursement. Whereas one compact has been signed and four are in negotiation, much less progress has been made on the other 12 countries, partly due to staff constraints in the first year.

 Impede communication with other agencies, Congress, and recipient governments. Communication has clearly suffered in the first year because of staff shortages. For example, whereas staff prepared guidance for recipient countries for writing proposals, it has not yet released guidance for the consultative process, financial responsibilities and mechanism, monitoring and evaluation, and other key processes.
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 Overburden staff with responsibilities outside their expertise, leading to frustration and high rates of burn-out.

    This is not a call for a large bureaucracy with unnecessary administrative staff, but a modest increase to ensure efficiency and effectiveness. A staff of approximately 300, rather than the envisaged 200, would be more in line with the envisaged size of the MCC's disbursements, and would bring the ratio of disbursements to staff size more in line with the most efficient foundations and financial organizations. It would strike an appropriate balance between the need for sufficient professional competence and a lean administrative structure, keeping the MCC amongst the smallest of donor agencies. In particular, the MCC should aim to recruit a larger number of staff with strong backgrounds and experience in economic development and more specialists in the critical roles of monitoring and evaluation, as discussed below.

Challenge #5: Demanding Results while Encouraging Innovation and Risks

    It is imperative that the MCC hold recipients accountable for achieving results. It should reward countries that achieve their targets with renewed funding, and reduce or eliminate funding for those that do not. A sound monitoring and evaluation (M&E) process is central to making the MCA highly effective in achieving results, in several ways:

 Creating incentives. Clearly rewarding success and penalizing failure will establish clear incentives for recipients to take all steps necessary to achieve specified goals. Without a strong M&E program, it will be impossible for the MCC to clearly distinguish successful programs.
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 Allocating resources. A strong M&E program is essential to allocate more financial resources to successful programs, improving the impact of the program.

 Keeping programs on track. An effective M&E program can help detect problems at an early stage, and provide critical information to help countries get back on track. In this way, strong M&E programs help increase the probability of success by providing useful diagnostic information.

 Learning what works and what does not. A good M&E program will help distill the lessons from one program to improve the design of other programs. M&E programs help us learn what works, what doesn't work, and why.

    Establishing a strong M&E program is complex. It requires skilled staff, adequate resources, the ability to acquire sound baseline data, and establishing appropriate, measurable goals. Unfortunately, most aid agencies substantially under-fund M&E, undermining the incentives for strong performance and limiting understanding about program effectiveness. It is too early to tell how successful the MCC will be in this regard, but one early sign raises a concern. Under current staffing plans the MCC is aiming for just 16 people in its M&E program, a woefully inadequate number. Staffing of this size threatens to repeat the mistake of other aid agencies that under-fund M&E. Far more skilled people will be needed in this critical area, supported by the financial resources needed to obtain the necessary data and carry out evaluations, if the MCC is to reach its promise of effective, results-based programs.

    At the same time, sound judgment will be required to balance the need to penalize failure with the desire to encourage innovation and new ideas. Designing large scale, innovative programs will require time, patience, and some tolerance for risk. As with any investment banking or venture capital fund, not all MCC investments will pay large dividends, and we should all recognize up front that some will fail. But the risk of an occasional setback should not discourage the Corporation from aiming high, and should not detract from the potential for significant progress in many countries.
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Challenge #6: Targeting the Right Countries

    The Country Selection Process. More has been written and said about the MCA's country selection process than any other aspect of the program. In these discussions it is easy to get bogged down in the details, which are necessarily imperfect, and lose sight of the bigger picture and intended purpose. The selection methodology is designed to provide an objective, non-politicized process to distinguish countries that are committed to sound development policies that can use aid effectively from those countries that are not. As much as possible, the process relies on publicly available quantitative criteria rather than subjective back-room judgments. The problem, of course, is that no set of indicators can ever be perfect. The selection process for the MCC could be improved on the margin, but by-and-large it has succeeded in de-politicizing the allocation of aid funds and in providing a mechanism to hold accountable the MCC Board for its decisions. There are several ways in which the process could be strengthened, as I have described elsewhere.(see footnote 3) But it should not be dramatically changed, nor should it be overloaded with many new indicators on topics unrelated to the MCC's core mission.

    Eligibility of Lower-Middle Income Countries. Beginning in FY 2006, the MCC plans to add a second group of candidate countries consisting of all countries with per capita incomes between $1,465 and $3,035. The inclusion of these countries has always been controversial. They are much richer than the low income countries and have less need for foreign aid, since they have much larger private capital inflows, saving rates, and tax revenue. Generally, countries that reach this income level begin to ''graduate'' from aid and move to private sector finance. The counter-argument is that many of these countries have significant numbers of poor people that can effectively use MCC assistance. While this may be true, aid funds must be allocated to where they are most urgently needed, and the fact remains that most of the lower-middle income countries have several other alternative sources of finance to fund poverty reduction programs. Allocating funds away from the poorest countries (that have far fewer options) in favor of the richer countries is not the most optimal use of MCC funds.
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    Nevertheless, the MCC legislation states that the Corporation shall consider these countries as candidates for MCC assistance in 2006. The Board has the flexibility to determine which, if any, of these candidate countries will be eligible to submit proposals for assistance, and the authority to allocate from zero to up to 25% of appropriated funds for this set of countries.

    These decisions were taken at a time when the administration and Congress were aiming to provide the MCC with $5 billion in FY 2006, the first year the lower-middle income countries would become candidates. Now that the administration has scaled back its request to $3 billion, the eligibility of these countries should be seriously reconsidered. With constrained budgets, and with many of the first year eligible countries not yet having reached the negotiation stage, the MCC should concentrate its efforts on the poorest countries and not expand to the middle income countries. The more limited funds available should be focused on the poorest countries. The size of the programs in the poorest countries should not be diluted by the addition of several lower-middle income countries to the list of eligible countries.

    In considering the candidacy of these countries for 2006, the MCC Board should aim to make very few, if any, eligible to submit proposal during this start up phase. Ideally, at most one or two (if any) should be declared eligible, and the amount of funding available to them should be restricted so that they do not undermine the size of the programs in the poorer countries, where funding needs are more urgent. This part of the program could be gradually ramped up over time as funding and other constraints allow, so long as these richer countries do not detract funding from lower-income MCA eligible countries.

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    Chairman HYDE. Thank you.

    Dr. Gootnick.


    Dr. GOOTNICK. Thank you, Mr. Chairman. Thank you for the opportunity to be here today to discuss GAO's observations on the Millennium Challenge Corporation. Overall, consistent with Steve Radelet's assessment, our assessment is that MCC has made progress in its first 15 months of operation, and, at the same time, it faces key challenges looking forward.

    Today, I would like to discuss four aspects of MCC's activities to date: First, its eligibility determinations; second, its progress in developing compacts; third, coordination issues; and, fourth, establishment of its corporate-wide management-and-accountability structures.

    First, regarding country-eligibility determinations, in its first year, MCC developed a methodology, based on quantitative indicators, for making eligibility determinations. The board deemed 17 countries eligible for compact assistance, including three that did not meet their quantitative-indicator criteria. The board also selected 13 countries to participate in the corporation's Threshold Program.

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    MCC's public reports on the board's eligibility determinations were brief and provided limited information. The reports did not explain the board's rationale for not selecting 13 countries that met the indicator criteria. In general, our results thus far suggest that within the limits of, for example, classified and politically-sensitive information, the more documentation that the corporation can provide that would explain and justify their determinations, the better off they would be in the long run.

    Almost by definition, indicator-based methodologies have some limitations, and we have cited some of them in our report. MCC has stated that it will continue to refine its methodology in response to these and other limitations.

    Next, Mr. Chairman, regarding MCC's progress in developing compacts, thus far, the corporation has received proposals from 16 eligible countries, and they tend to focus on things such as agribusiness, large-scale infrastructure, roads and ports, policy reforms, including public sector capacity building, amongst other things.

    The corporation expects eligible countries to set priorities, consult broadly with civil society, and build on existing national-development strategies. Our work in Honduras found that their proposal is drawn largely from the poverty-reduction strategy paper in that country and, thus, would have the same strengths and limitations of the poverty-reduction strategy paper.

    We also observed that they have engaged civil society with an active and ongoing debate regarding the selection of projects proposed by MCC.

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    From the discussion here this morning, it is clear that sufficiency of the consultative process may, indeed, be in the eye of the beholder and that while GAO has not specifically done the work to determine whether the consultative process was sufficient, the core principles articulated by GAO and others suggest that reaching a consensus on criteria, on what determines that consultation has been adequate, and then examining documentation that supports that consultative process against those criteria would serve MCC well in the long run.

    MCC reports that it evaluates proposals' objectives, costs, and projected economic benefits. It also examines plans for fiscal management, procurement, and monitoring and evaluation of audit functions. Our prior work suggests that identifying host-country-based institutions that have the capacity to execute these functions would be a key challenge for MCC going forward.

    Regarding coordination with key stakeholders, in an effort to leverage its small staff, the corporation has sought advice, resources, and assistance from several Federal agencies. USAID will implement the Threshold Program; Treasury, Agriculture; and the Army Corps of Engineers will assist and provide technical assistance to evaluate compact proposals. MCC has begun a dialogue with NGOs and other donors.

    Finally, Mr. Chairman, regarding MCC's corporate-wide management and accountability structures, the corporation has developed key aspects of its administrative structures necessary to support its operation. For example, it has gone from 7 to over 100 employees in its first year. It has made some progress on structures needed to establish accountability and manage risk. For example, it established its investment committee. It also established an audit capability through its IG and has adopted bylaws to govern its activities.
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    However, on a range of key governance, internal control, and human capital structures, there remains some implementation to be done. For example, the corporation has not completed a strategic plan or an annual performance plan, and the board has not yet fully defined its roles and responsibilities regarding executing the corporation's corporate strategy. We are recommending that the corporation complete these overarching accountability structures.

    In conclusion, Mr. Chairman, MCC has made considerable operational progress and has signed its first compact. Of note here, the corporation's 2006 budget justification estimates that it will finalize two to four compacts each quarter through the end of Fiscal Year 2006 and projects that future compacts will be considerably larger than the Madagascar compact.

    Given these ambitious goals, we view MCC's completion of corporate-wide accountability structures as necessary to establish a viable and sustainable enterprise that effectively manages its institutional risk. Our recommendations are detailed in our written statement, and MCC has agreed to take these recommendations under consideration. We will continue to monitor the corporation's progress in this regard.

    Mr. Chairman, this concludes my statement, which is also publicly available at the GAO Web site. I am happy to answer the Committee's questions.

    [The prepared statement of Mr. Gootnick follows:]

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[Note: Image(s) not available in this format. See PDF version of this file.]

    Chairman HYDE. Thank you, Dr. Gootnick.

    Mr. Walsh.


    Mr. WALSH. Thank you very much, Chairman Hyde and Members of the Committee, for organizing this hearing on the Millennium Challenge Corporation and for inviting me to testify. It is an honor to have this opportunity.

    As you stated during the introduction, my name is Conor Walsh, and I work for Catholic Relief Services as the country representative in Honduras. My remarks today will focus less on the economics and more on the social aspects of the MCC as it has been implemented in Honduras.

    Because the success or the failure of the MCC initiative depends so much on local participation and on linking growth to poverty reduction, I will comment on the following two concerns: Number one, how much has civil society actually participated in the MCC Compact proposal process?; and, number two, will the proposed MCC activities result in economic growth that yields positive impacts for the poor?

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    Let me start off by saying that Catholic Relief Services is encouraged and shares the vision at the heart of the MCC. What stands out in the MCC philosophy more than any other is its principle of ensuring country ownership, and it is this aspect that distinguishes the program from many other development-assistance programs.

    To its credit, the Government of Honduras, together with the MCC design team, has solicited feedback from various social sectors on the draft compact proposal. I, along with local business councils, government officials, and NGOs, have attended meetings with the MCC. Information on the proposal has been posted on the Web with an on-line comments option, and in response to the comments received, the original proposal has been scaled down, and its focus has tightened.

    However, despite these commendable efforts in Honduras, our local partners, including the local church, have expressed doubts about the extent of citizen ownership. Local citizens' groups do not necessarily share the priorities that are set forth in the compact proposal. They do not feel that they were consulted sufficiently, and they have expressed reservations about the compact proposal in general. They also detected bias in the way the MCC team selected its audience, with a heavy predominance of private business, government, and government-aligned civil society groups.

    The Honduran Government contends that the MCC proposal is based on the consultations underlying the poverty-reduction strategy paper, to which Dr. Gootnick just alluded, and that it, therefore, enjoys broad popular consensus. However, the PRSP process in Honduras was widely criticized by civil society groups; and, therefore, it should not so much serve as a model for effective citizens' participation but, rather, as a cautionary lesson of what can go wrong.
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    Mr. Applegarth noted this morning that there have been improvements, and I share those, and I am not going to go into those details, but the very principle that they have based the compact on, the PRSP, is problematic. I do applaud the MCC design team for including at least some civil society representatives on the proposed governing council for the compact, but I do urge it to expand and strengthen the voice of local actors.

    It is critical to understand why CRS emphasizes so strongly the importance of meaningful local participation in the MCC. If we have learned one thing over the past 60 years, it is that the most effective programs are those which are locally designed and implemented by the intended beneficiaries. Civil society has a vital role to play in assessing problems, prioritizing investments, and identifying practical approaches to carrying out projects.

    In the time remaining, I would like to turn quickly to the second question that I asked at the outset: Will the proposed MCC activities actually result in economic growth that yields positive impacts for the poor? Our experience as a faith-based, development agency shows us that economic growth can have a powerful impact on poverty but only if the underlying inequities and imbalances that prevent the poor from sharing in the benefits of such growth are addressed. Our partners in Honduras have serious doubts that the proposed MCC activities will actually address those imbalances.

    One of the major investments called for is roads infrastructure. The question is, who will be the primary beneficiaries of such road improvements? At this point, it is still unclear where the secondary and tertiary roads referred to earlier that connect farms to markets will actually be built. Unless the roads reach those parts of the country where the largest concentrations of poor farmers are to be found, the impact of road improvements on poverty reduction is questionable.
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    Then, on the technical assistance issue, technical assistance for farmers, my concern has to do with the issue of sustainability. The MCC proposal correctly recognizes that the right kind of technical assistance is a prerequisite for economic growth for farmers. In my experience, technical assistance, whether it is on improved farming practices, crop diversification, et cetera, is most likely to be applied and sustained when farmers are involved as active participants and not mere recipients of technical know-how.

    The starting point should be community organization and institutional capacity building. This gives the practices that are being promoted a more solid social foundation. Instead of relying exclusively on specialized consultancy firms, the proposal should ensure that credible organizations with strong community links accompany farmers before, during, and after the provision of technical assistance.

    Furthermore, the compact should also lay out a far clearer strategy for addressing the needs of women. Because women play such a pivotal role that is often recognized in the rural economy, agricultural technical assistance should be geared toward those activities on which women spend the most time. This might be related to processing, the sale of produce, or other activities.

    Finally, on the issue of credit, it is vital for a successful rural development strategy to include access to rural credit for small farmers, but if it is extended primarily to more competitive farmers, the poor, more remote farmers are likely to lose out, and inequalities will increase further.

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    In conclusion, all of these activities may actually end up stimulating economic growth which may reach the poorer segments of society, but in order to make sure that they do, some simple steps should be followed. In other words, there is no need to start over. The weaknesses within the compact can be fixed. And, incidentally, I understand from my colleague country representatives in Madagascar and Nicaragua, two other MCC countries, that some of the similar concerns related to participation have also been raised.

    In closing, I would respectfully like to submit the following recommendations: Number one, as Congress considers the reauthorization of MCC funding, it should refer to section 609[d], which calls for the local-level perspectives of the rural-urban poor, including women, to be taken into account.

    Number two, the compact should address some of the technical shortcomings that were mentioned above by supporting proposals to implement social-audit mechanisms, which have worked so well in other contexts. In particular, in Honduras, local community organizations developed so-called ''regional PRSPs'' with extensive citizens' participation, and these offer some valuable guidance on how to gather input that is broad based and reflective of local needs.

    To finish, I want to thank the Committee for its support of innovative initiatives such as the MCC—the programs have great potential to reduce global poverty—and I also commend the Chairman and the Ranking Member for their stalwart support of non-governmental organizations such as Catholic Relief Services in Honduras.

    [The prepared statement of Mr. Walsh follows:]

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    Thank you, Chairman Hyde, and members of the House International Relations Committee, for organizing this hearing on the Millennium Challenge Corporation (MCC) and for inviting me to testify. I am honored to have this opportunity.

    My name is Conor Walsh. I am the Honduras Country Representative for Catholic Relief Services, based in Tegucigalpa. Catholic Relief Services is the overseas relief and development agency of the US Catholic Church, and has been implementing projects in Honduras since 1959. Today it is one of the most active international non-governmental organizations (NGOs) operating there, in partnership with the Honduran Catholic Church and local groups. CRS/Honduras serves an estimated 300,000 people through programs in health, education, agriculture and the environment, emergency management, and strengthening civil society.

    Having worked for CRS in Africa and Latin America for the past ten years, three and a half of which I spent in Honduras, I have come to appreciate the need for a new approach to US foreign assistance programs, given entrenched conditions of poverty and social injustice. My comments today will focus on two concerns that I have been able to observe as the MCC compact proposal from Honduras takes shape:

1) How much has civil society participated in the MCC compact proposal process?

2) Will the proposed MCC activities result in economic growth that yields tangible benefits for the poor?
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    Although Honduras has made progress in the past decades in consolidating a democratic form of government, it continues to fall short in meeting the basic needs of its population. Some of the constraints to achieving greater socioeconomic development are related to economic structures that favor traditional elites, be they agricultural landowners or owners of businesses. In addition, the country has grown dependent on large inflows of foreign assistance and on remittances sent by Honduran émigrés working primarily in the United States. Honduras also has to deal with corruption, a problem on which successive governments have a mixed record.

    To illustrate the problem of poverty in human terms, consider the following figures:

 over 50% of the population falls below the poverty threshold, but in rural areas this percentage increases to 70%

 Honduras has the highest HIV/AIDS infection rate of Central America (1.8%)

 Inequality is the most striking feature of Honduran poverty: The richest 20% of the population earns 59% of the national income, while the poorest 20% survive on less than 3%. Geographically, poverty is concentrated in the western departments bordering El Salvador, where the standard poverty measures such as the UNDP's Human Development Index are some 30% lower than the national averages. In terms of gender and women's participation in the political process, these areas also score significantly lower than the national average.(see footnote 4)
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    In light of this situation, CRS was pleased to learn of the Administration's proposal to set up the Millennium Challenge Corporation, an initiative to tackle global poverty reduction through new and innovative means, and of Honduras' eligibility to present a compact proposal to the MCA. CRS shares the MCC's conviction that eligible governments should demonstrate their commitment to investing in people, promoting good governance, and economic freedoms. They must reinforce this commitment by ensuring broad participation of all citizens in decision-making on policy, implementing programs, and monitoring progress.

    The cornerstone underlying the MCA's development approach—investing in activities that stimulate economic growth as a means of combating poverty—is also sound, as long as such growth reaches the poorest segments of society. Our experience as faith-based development workers shows us that economic growth can have a powerful impact on poverty, but only if growth impacts the underlying inequities and imbalances. The laudable MCA principle of ensuring country ownership distinguishes the program from many other development assistance programs. Country ownership assumes that the citizenry has been effectively engaged in the entire process of designing, negotiating, implementing, and monitoring programs. To be sustainable, ''country ownership'' should mean more than ''government ownership.'' It should also mean that the compact stems from an extensive consultation with civil society.

    To its credit, the government of Honduras, together with the MCC, has solicited feedback and comments from various social sectors on the draft compact proposal. I have attended meetings with the MCA design team or working group in Honduras, and a range of social sectors, including local business councils, government officials, and local and international NGOs. Information on the proposal has been posted on the web and a portal was opened to receive comments on-line. The original proposal has been scaled down and its focus has tightened, partly in response to comments from Hondurans, and partly in response to those from the MCC.
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    Despite these commendable efforts, in Honduras our local partners, including the local Church, have expressed doubts about the extent of citizen ownership. Local citizens groups do not necessarily share the priorities set forth in the compact proposal; they do not feel that they were consulted sufficiently; and they have expressed reservations about the compact proposal in general. They also detect a bias in the way the MCC working group selected its audience, with a heavy predominance of private businesses, government, and government-aligned groups such as COHEP and FONAC.(see footnote 5)

    Hondurans understand the complexities of convening meetings of diverse groups representing the various social sectors, and they know from their own experience that it takes time and money. But they also believe that the MCA design team could have ensured better feedback. Web-based communications and tight feedback deadlines are inappropriate for most parts of rural Honduras. As a result, many valid opinions were effectively ignored. In the Honduran countryside, I can assure you that 9 people out of 10 have never heard of the MCC or its stated goals.

    The Honduran government has asserted that its MCC proposal is based on the consultations underlying the Poverty Reduction Strategy Paper (PRSP), but this process (which was instituted in 2000 as part of the HIPC debt reduction initiative) fell short of its promise. While the PRSP process was a watershed event in Honduras in that it for the first time engaged the country as a whole in a comprehensive analysis of poverty and its root causes, many Hondurans were left disillusioned by the process. The final product, in their opinion, did not adequately reflect their feedback. Meetings to discuss the content of the PRSP were called on short notice and did not offer opportunities for effective dialogue, but rather consisted of presentations followed by Q&A sessions. Lately, there have been some encouraging signs that the consultative process governing the PRSP is gaining momentum: civil society representation on the PRSP Consultative Council (the body overseeing the implementation of the PRSP) has been expanded, giving civil society a majority representation. An agreement was also reached to at least partially fund the so-called ''regional PRSPs'' that—in contrast to the central government's PRSP—were devised with extensive citizen participation by the local Church, farmers associations, women's organizations, NGO umbrella groups, and other social sectors. These positive developments on the PRSP can serve as a guide for the MCC and partner governments as it seeks to include civil society more effectively in its planning and governing structures. In a word, I applaud the Honduran MCC's design team and working group for including at least some civil society representatives on the proposed governing council for the compact, but urge the designers to expand and strengthen the voice of local actors, institutionalizing their role in decision-making.
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    It is critical to understand why CRS emphasizes so strongly the importance of meaningful local participation in the MCC. In our 60 years of development experience, the central lesson we have learned is that development programs are only effective if they are locally designed and implemented by the intended beneficiaries. Citizen groups and local communities have a vital role to play in assessing problems, prioritizing investments, and identifying practical approaches to carrying out projects. When it is informed and armed with sufficient resources (technical or financial) to organize, civil society is more likely to hold governments accountable than donors. Independent social audit mechanisms and citizen oversight committees are two mechanisms that have proven effective for CRS in the Latin American and African contexts.

    I will now address some specific issues related to the content of the Honduras compact proposal that in my view merit a closer examination.

    First, the latest version of the compact (which has not been made available to the public as such; a summary presentation on the changes to the original is available on the website) consists of two major investments: roads infrastructure and agricultural development. On the first of these, my question is: Who will be the primary beneficiaries of such road improvements?

    Although the compact does envision the construction and improvement of feeder roads that connect farms to markets, it is as yet unclear where these secondary and tertiary roads will be built. Unless the roads reach into those parts of the country where the largest concentrations of poor farmers are to be found, the impact of road improvements on reducing poverty is questionable, at least in the short term.
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    The danger is that these investments will end up benefiting those farmers, transporters and businesses that are already comparatively better off, such as those living near or using the main north-south highway. I can also attest to the need for better roads and better road safety, having traveled earlier this week on the portion of the main highway that is to be improved with MCA funds. Under the best conditions, the trip is harrowing and time-consuming. The construction of an additional lane may indeed increase travel speeds and therefore reduce transportation costs. However, faster traffic also means greater risks in terms of safety, and the already appallingly high accident and death rate on the main north-south highway, is likely to increase unless road improvements are accompanied by concerted road safety campaigns consisting of education, training, and enforcement of speed limits.

    Second, the provision of technical assistance (TA) to farmers also needs attention. I agree that Honduran farmers need training in better agricultural practices, crop diversification, efficient production and processing, and marketing to enable them not only to subsist but also compete in an increasingly global economy. My concern has to do with the mechanism the compact proposal envisions for delivering such TA, which appears to rely heavily on consultants and private TA firms that will be contracted to impart technical services to interested farmer groups.

    In my experience, targeted technical assistance has the best chance of being applied, replicated and sustained when farmers are involved as active participants, not mere recipients of technical know-how. The starting point for any rural development strategy should be community organization and institutional capacity-building, so that the activities being promoted can rest on a solid and lasting social structure. In addition, training activities need follow up to monitor whether the technical assistance is being applied, and if not, to find out why not. The MCA should ensure that credible organizations with proven track records are selected to accompany rural communities before, during and after the delivery of TA, and that sufficient funds are made available to provide this kind of follow-up.
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    Furthermore, the compact should lay out a far clearer strategy for addressing the needs of women, especially as it pertains to TA. In the Honduran context, where women play a key role in agricultural transformation and processing, TA should be geared towards those activities on which women spend the most time, such as canning, pressing juice, and packaging.

    Third, better and more affordable credit to the small rural farmer is also a key component of a successful rural development strategy, but the MCC proposal fails to state which farmers, i.e. which economic or geographical group, will be targeted. If credit is to be extended primarily to those farmers who more competitively positioned to take advantage of the existing market linkages, the poorer, more remote farmers will be at a competitive disadvantage and inequalities will increase further. Achieving balanced growth will require a fair and effective microcredit program.

    I understand my fellow CRS country representatives and partners in MCA eligible countries, such as Madagascar and Nicaragua, have raised some of the same issues and concerns about participation and the impact of growth on the poorest.

    Now that I have illustrated the specific case of Honduras, let me end on behalf of Catholic Relief Services by respectfully submitting the following recommendations for consideration by the House:

1) Refer to section 609(d): ''In entering into a compact, the United States shall seek to ensure that the government of an eligible country—(1) takes into account the local-level perspectives of the rural and urban poor, including women, in the eligible country,'' when considering reauthorization for MCA funding in FY 06. Enabling the participation of the poor is the best safeguard to ensure achievement of the MCC's overall objective of poverty reduction.
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2) Design programs through consideration of the full range (beyond PRSP) of existing citizens' initiatives related to poverty reduction, such as the ''Regional PRSPs'' in Honduras; monitor and evaluate programs by employing participatory processes such as social audit mechanisms to ensure that the poorest and most vulnerable groups such as women are being reached.

3) Take additional steps to identify explicit coordination and communication mechanisms between MCC and key actors in development aid. As the GAO report indicates, the MCC has already taken initial steps in this direction.

4) Ensure that funding for the MCA is additional to existing development accounts, because poor countries need social as well as economic investments to effectively fight poverty.

    In conclusion, I want to thank the Committee for your support of innovative initiatives such as the MCC that both help to stimulate economic growth and combat global poverty. I also commend the Chairman and Ranking Member for your stalwart support of non-governmental organizations such as Catholic Relief Services in Honduras. I welcome the opportunity to respond to any questions you may have.

    Chairman HYDE. Thank you very much, Mr. Walsh.

    I am greatly impressed by the caliber of witnesses. You three are very knowledgeable, insightful, have made a real contribution to our understanding of this program, which is a marvelous idea, but it still seems to be potential despite the passage of time. You have highlighted some weaknesses, vulnerabilities. The understaffing can be pretty fundamental because the problems that Mr. Walsh mentions in Honduras require personnel on the ground to see what is going on and to interface with the local people and to get programs that will work.
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    I do not intend to hold you here much longer with oral questions, but I would like to write some questions and send them to you, and if you would answer them, it can be a more thoughtful process, and I can absorb your answers better.

    But I think this program must not fail, and if there are shortcomings at its inception, and you have highlighted many of them, let us address those. Let us address those, and we will.

    So I will be in touch with you with some questions that I would like to receive answers for, and I know that they will be informed.

    So, Mrs. McCollum?

    Ms. MCCOLLUM. Mr. Chair, this was a very timely hearing, as President Bush goes forward with G–8 meetings and as the world is watching to see if we mean what we say when it comes to poverty reduction. I have found particularly disturbing—and I am going to work with Mr. Applegarth and the MCC about the environmental standards that, in my opinion, appear to be lacking. I will look at the Web site and work with them. So, Mr. Chair, if I need some help, or if you think it is best that I submit that in question form so that the Committee can see all of it, I will have my staff work with your staff on that.

    Another point that did not get addressed that Mr. Lantos raised was Madagascar. Rural citizens in Madagascar live on 41 cents a day, and the Millennium grant, as Mr. Lantos pointed out, is going to go to modernizing the country's land-title system and its banks. Now, I am not saying that those are not noble things to do so that people have confidence in investing in the community, but I do not believe that the people who are living on 41 cents a day, the overwhelming majority of people in Madagascar, are going to be benefiting greatly from land reforms because they probably are not going to be able to afford to buy land, and we have heard from the testimony that they are not using the banks.
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    So I think we have opportunities to make this program a success, and I look forward to working with your staff and the Administration to make that so.

    Thank you, Mr. Chair.

    Chairman HYDE. Well, I want to thank you very much for a solid contribution. This is only the beginning of our concern with this program. You have made a contribution. Thank you.

    The Committee stands adjourned.

    [Whereupon, at 1:03 p.m., the Committee was adjourned.]


Material Submitted for the Hearing Record


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(Footnote 1 return)
Actual disbursements from the largest donor in each of the 17 MCA eligible countries in 2003 totaled $1.94 billion, or about $114 million per country. 12 compacts of four year duration at this size would require commitments of $5.5 billion.

(Footnote 2 return)
See Radelet (2003), Challenging Foreign Aid: A Policymakers Guide to the Millennium Challenge Account, page 114.

(Footnote 3 return)
Radelet (2003) Challenging Foreign Aid, and Steven Radelet and Sarah Lucas ''An MCA Scorecard: Who Qualified, Who Did Not, and the MCC Board's use of Discretion,'' May 2004, www.cgdev.org/Publications/?PubID=118

(Footnote 4 return)
UNDP Human Development Report 2003

(Footnote 5 return)
COHEP is the private business council, and many of its members are on the Tegucigalpa Chamber of Commerce. FONAC is a government-funded organization that serves as a proxy for civil society consultations, but few consider it an independent, representative organization.