Guest Post: Richard Morford on the MCC as a Model for Foreign Aid Reform

See the guest post below from Richard Morford, former Managing Director for Donor and Multilateral Relations at the Millennium Challenge Corporation (MCC).

What Foreign Aid Reform Can Learn from the Millennium Challenge Account

Richard A. Morford

The Millennium Challenge Account (MCA), the major experiment in reform of development assistance of the Bush Administration was designed to test whether bundling “lessons learned” over the past half century of foreign aid could yield greater development results.   It is still too early to do a full blown assessment of MCA performance and that of the Millennium Challenge Corporation (MCC) which administers the Account, but as the Obama administration and Congress undertake major reviews of foreign assistance, it makes sense to look at the experiences of this ongoing reform effort and see how they might inform the broader reviews currently underway.   Here are nine takeaways:

1.  Design for Purpose:  MCA was designed to help poor countries with relatively good political, economic and social policies “reduce poverty through growth”.  One of the strongest assets of MCC is that all staff members understand its mission.  Its objectives, governance and authorities were clearly spelled out in legislation to accomplish this quintessential development purpose.  There are many reasons why the USG provides foreign assistance beyond poverty reduction and development.  Humanitarian need, national security, and transnational threats are other compelling missions.  It is important to have clear mission statements for each.  Once the mission is clear, governance, authorities and modalities should differ based on how best to meet each purpose.

2.  Protect It from Ourselves:  Those who oversee diplomatic, strategic and humanitarian objectives want flexibility to move funds as necessary to adapt to changing events.  Long term development on the other hand requires long term focus and, while it must stay true to overall US foreign policy, it cannot be a pawn to the day-to-day business of diplomacy or the demands of the inevitable crisis elsewhere.  The governance structure for U.S. development assistance must reflect and protect this needed long term focus.   Guided by the principles in MCA’s founding legislation, the MCC Board, chaired by the Secretary of State with the heads of Treasury, USTR, USAID and MCC joined by four non-government Board members, has served well to keep focus on the MCC’s long term development objectives in the face of unrelated emergencies.  Even when foreign policy issues directly involve MCC partner countries, the Board has managed to address them within the context of MCC’s long term development mission.   While flexibility is needed within the foreign affairs accounts, funds for long term development should be protected and predictable as long as the partner country maintains program and policy performance.

3.  Provide Incentives:  Eligibility for MCC’s sizeable grants is determined by country performance on independent, transparent selection criteria.  Reform-minded individuals and governments have used this incentive to improve policies and performance crucial to development.  This notion of getting the incentives right should go beyond eligibility and be integrated into program design so that the incentives for aid beneficiaries, aid managers and aid providers are all aligned toward program objectives.  MCC, for example, also conditions quarterly disbursements to the achievement of mutually agreed program benchmarks.  The European Union provides incentive bonuses for good performance on agreed action plans.  And effective incentives are not confined to financial rewards.  As one Finance Minister said about the MCC “seal of approval”, “It’s not about the money. It’s about the recognition that we’re doing the right thing.”  Agencies should review programs and projects to make sure the incentives are right and that they are tied to performance, not promises.

4.  Let the Partner Country Lead:  Countries eligible for MCC grants identify their own objectives and then design and implement their own program.   Importantly, MCA founding legislation contains no earmarks for specified sectors or purposes, thus enabling countries to determine their own priorities.   MCC has evolved a number of required steps to make sure programs are sound, widely supported, and accountable, such as constraints analysis, broad consultation, economic rate of return analysis, and M&E plans, among others.  Ownership, however, is never in question.  This approach makes sense for the relatively well governed countries with which MCC works.  Does it also make sense for development assistance to other counties or for other types of assistance?   In general, yes.  MCC has shown that the process of taking charge may be as valuable to the partner country as the program itself.  Letting governments or communities lead and be accountable for results should be a principle of USG assistance, with exceptions made for incompetent, hostile or non-representative governments or for emergencies.

5.  Coordinate:  MCC requires an assessment of the relation of other investments – whether government, donor or private – to the proposed MCC investment at every stage of its process.  The partner government has primary responsibility for coordination throughout the program and must formally address the issue in its initial concept paper and at specific stages as the program moves forward.  MCC staff are required to check as well through external peer reviews of proposals and direct consultations with USG agencies, other donors and the private sector.  While most USG agencies coordinate with others to some extent, all could benefit from a requirement similar to that in MCC’s legislation to coordinate “to the maximum extent feasible” and regularly report such coordination.

6.  Give Others Something to Rally Around:  Because of the size of most MCC projects and the process governments go through, MCC programs often provide a nucleus around which others chose to invest.  MCC programs are generally five years in length with clear objectives, expenditures and outcome goals from the outset.  This gives the private sector and other donors the ability to assess what auxiliary and complementary investments would make sense.  A major road project could encourage others to invest in commercial development, tourist sites, mining, industrial zones, power distribution, or social services.  For countries in which development is one of our major objectives, a multiyear investment program developed with the host government should be a basic tenet of the USG relationship.  Elements could be added or changed as needed but the advantage of bundling at least major portions of the USG assistance program would highlight its size, promote its coherence, and encourage participation of others.  MCC and other USG agencies could benefit from early identification of areas where additional, complementary investment could enhance outcomes and widespread distribution of the information.

7.  Measure Results:  This is a basic principle of MCC which imbues every facet of the MCC process.  Often the first MCC expenditure once a country has identified its program areas is for baseline data.  Economic rates of return are calculated early on for activities and the overall proposal and then frequently updated as additional information becomes available.  As program goals and specific objectives emerge, they are pared with indicators and targets in an M&E plan.  MCC uses the metric of poverty as its ultimate measure of success, largely in the form of family income as compared with what would have happened in the absence of the MCC program.  With its partners it also employs a host of other indicators to measure program results and interim progress.  To complement interim reviews and end of program evaluations, MCC also invests heavily in “impact evaluations” that attempt to judge results more scientifically.  Roughly 60% of MCC programs undergo this more rigorous type of independent evaluation which needs to be considered from the beginning of the program.  From impact evaluation, one can not only more accurately assess program success but can also determine which interventions or combination of interventions was most effective.  While such a high degree of expensive impact evaluation is not required for all USG programs, independent evaluation should be.  To ensure accountability of partner countries and USG agencies to their respective citizens, the MCC practice of identification of objectives, indicators and targets at program beginning and of independent evaluations at the end of program should be a minimum standard across the USG.

8.  Insist on Transparency:  MCC has been a trailblazer in transparency, putting online not only its compact agreements with partners, but its selection criteria, economic rate of return analysis, monitoring and evaluation plans and quarterly country-by-country program progress.  As part of the MCA compact agreement, partner governments consult widely within their own country in developing their proposals and make public program and project details and progress, disbursements, procurements, and MCA related decisions.  When end of program evaluations are complete, all will be able to know how MCA programs faired.  Accountability rests on transparency and citizens in partner countries and the US can hold their governments accountable for MCA programs.  The USG sees itself as a leader in promoting transparency and accountability around the world.  Its aid agencies should set an example.

9.  Leave Room for Experimentation and Risk:  Development is an inherently risky business.  The mechanisms through which aid results in sustainable long term growth and poverty reduction are not always clear or predictable.  Trying different approaches makes sense to find what works best in each circumstance.  While MCA legislation provides objectives, principles, and operational requirements, it still leaves considerable room for MCC and its partners to experiment with program areas, methods, and implementing structures.  That MCC has done so only to a limited extent speaks more to concern about audit and political risk than legislative restrictions.  Oversight (by the Inspector General and to an extent the GAO and Congress) focuses on tracking funds to make sure tax payer money is not spent for questionable purposes.  Such tracking is understandable but insufficient.  Oversight should focus more on whether program objectives are accomplished (which means agencies must set targets from the outset) and the extent to which mechanisms for expenditure approval or other elements of program control work properly.  As a specific example, a major objective of development assistance is helping partner countries improve the competence and accountability of their own systems and institutions.   This is essential for development progress to become sustainable even after aid ends.   An expressed willingness to use capable country systems would provide an incentive for countries to improve their systems whether for fiscal management, procurement, environmental protection, or monitoring and evaluation.  Actual use of relatively good systems, when done in conjunction with oversight and technical assistance as needed, could further strengthen them.  To enable experimentation, agencies, auditors and overseers need a mutual understanding that risk is never zero and a process in which agencies justify from the outset and then proceed with a program in which the potential rewards outweigh potential risks.

Richard Morford was Managing Director for Donor and Multilateral Relations at the Millennium Challenge Corporation from its founding in January 2004 through October 2009.

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