[Senate Hearing 109-187]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 109-187

          THE MILLENNIUM CHALLENGE CORPORATION'S GLOBAL IMPACT

=======================================================================

                                HEARING



                               BEFORE THE



                     COMMITTEE ON FOREIGN RELATIONS
                          UNITED STATES SENATE



                       ONE HUNDRED NINTH CONGRESS



                             FIRST SESSION



                               __________

                             APRIL 26, 2005

                               __________



       Printed for the use of the Committee on Foreign Relations


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                     COMMITTEE ON FOREIGN RELATIONS

                  RICHARD G. LUGAR, Indiana, Chairman

CHUCK HAGEL, Nebraska                JOSEPH R. BIDEN, Jr., Delaware
LINCOLN CHAFEE, Rhode Island         PAUL S. SARBANES, Maryland
GEORGE ALLEN, Virginia               CHRISTOPHER J. DODD, Connecticut
NORM COLEMAN, Minnesota              JOHN F. KERRY, Massachusetts
GEORGE V. VOINOVICH, Ohio            RUSSELL D. FEINGOLD, Wisconsin
LAMAR ALEXANDER, Tennessee           BARBARA BOXER, California
JOHN E. SUNUNU, New Hampshire        BILL NELSON, Florida
LISA MURKOWSKI, Alaska               BARACK OBAMA, Illinois
MEL MARTINEZ, Florida
                 Kenneth A. Myers, Jr., Staff Director
              Antony J. Blinken, Democratic Staff Director

                                  (ii)




                            C O N T E N T S

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                                                                   Page

Applegarth, Hon. Paul V., CEO, the Millennium Challenge 
  Corporation, Arlington, VA.....................................     5
    Prepared statement...........................................     8
    Responses to additional questions submitted for the record by 
      Senator Biden..............................................    43
Gootnick, David B., Director, International Affairs and Trade, 
  U.S. General Accountability Office, Washington, DC.............     3
Lugar, Hon. Richard G., U.S. Senator from Indiana, opening 
  statement......................................................     1

                                 (iii)

  

 
          THE MILLENNIUM CHALLENGE CORPORATION'S GLOBAL IMPACT

                              ----------                              


                        TUESDAY, APRIL 26, 2005

                                       U.S. Senate,
                               Foreign Relations Committee,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 9:30 a.m., in 
room SD-419, Dirksen Senate Office Building, Hon. Richard G. 
Lugar, chairman of the committee, presiding.
    Present: Senators Lugar, Coleman, Martinez, Sarbanes, 
Nelson, Obama.

 OPENING STATEMENT OF HON. RICHARD G. LUGAR, U.S. SENATOR FROM 
                            INDIANA

    The Chairman. This hearing of the Senate Foreign Relations 
Committee is called to order.
    Today the Foreign Relations Committee meets to review the 
progress of the Millennium Challenge Corporation. We are 
pleased to welcome Mr. Paul Applegarth, the CEO of the 
Millennium Challenge Corporation, to present firsthand evidence 
of the MCC's experience around the globe over the last 13 
months.
    We also welcome David Gootnick, Director of International 
Affairs and Trade at the U.S. Government Accountability Office, 
to present the results of a year-long review of the activities 
of the MCC.
    Our committee has enthusiastically endorsed the concept of 
the Millennium Challenge Corporation, which will provide 
assistance to developing countries that invest in their people, 
uphold political freedoms, fight corruption, maintain the rule 
of law, and pursue sound economic policies. We want to ensure 
that the MCC becomes an efficient and valuable tool of U.S. 
foreign policy. We want it to be a bold weapon in the battle 
against poverty, disease, corruption, disorder, and terrorism. 
We want the MCC to help lift deserving nations and provide 
incentives for meaningful reform in countries around the world.
    More than 6 months ago, at our last hearing on the MCC, I 
said, ``My hope is that the MCC will perform so well during the 
next year that Members of Congress of both parties will embrace 
it enthusiastically as an inspired idea and an essential 
program. But for this to happen, the execution of the MCC 
concept must be extraordinary. Compacts must be concluded, and 
money must be spent quickly, while ensuring that those dollars 
are distributed fairly, effectively, and without corruption.''
    Last week, at a ceremony at the State Department, the 
United States and the Republic of Madagascar signed the first 
MCC compact. I am encouraged by this action, and salute the 
efforts of the Government of Madagascar to meet MCC eligibility 
requirements. I look forward to hearing more about the steps 
taken to reach this compact and its potential impact on other 
nations.
    It is imperative that the MCC moves forward to expand its 
portfolio of compacts with eligible countries. As new compacts 
are being concluded, we must ensure that U.S. taxpayer funds 
are closely monitored and the process for selecting countries 
and evaluating proposals is carried out in a transparent 
process. We are eager to know the timetable for completing 
additional compacts, and whether the process can be 
accelerated, while maintaining requisite standards of 
operation.
    In July, the leaders of the G-8 will meet in Gleneagles, 
Scotland, to tackle the ambitious agenda of poverty reduction 
in Africa. Tony Blair, the host of this year's summit, has 
presented Great Britain's plan through the Commission on 
Africa. The MCC will play an important role in the U.S. 
contribution to this effort. We must demonstrate to the rest of 
the world that we are committed to the MCC's success.
    President Bush requested $3 billion for the Millennium 
Challenge Corporation in this fiscal year. The Foreign 
Relations Committee endorsed that amount in the Foreign Affairs 
Authorization bill that we reported to the Senate.
    Some have argued that the President should have requested 
$5 billion--the amount he originally had conceived for the 
Corporation's third year of funding. Others have argued that $3 
billion is too much for a new venture that is just getting off 
the ground, and that some of this money should be shifted to 
other priorities. My own view is that $3 billion is a 
reasonable amount, given the scope of the program and its 
potential for spurring democratic reforms overseas. The 
credibility of the program, which foreign nations are observing 
closely, would be strengthened by congressional support for the 
President's funding request. Today, we will be seeking 
additional assurances that the program is on target to 
productively and efficiently use the funds that Congress and 
the President have devoted to it.
    The MCC holds great promise for both participating 
countries and the United States. It gives us a chance to 
invigorate our relationships with the developing world and help 
set them on a course of progress. We hope that the MCC, working 
closely with Congress, can realize the original vision of 
President Bush to dramatically expand our ability to spur 
economic development throughout the world.
    Again, we welcome our witnesses to the committee, and look 
forward to their testimony.
    I'm advised that Mr. Applegarth is not in the committee 
room at this point, and therefore we will proceed with Mr. 
David Gootnick as our first witness, and then proceed to Mr. 
Applegarth later.
    Mr. Gootnick, we are delighted you are here, and let me say 
that your prepared statement will be made part of the record in 
full. You may proceed as you wish, perhaps with a summary of 
major points, and then we will have questions for you.

STATEMENT OF DAVID B. GOOTNICK, DIRECTOR, INTERNATIONAL AFFAIRS 
 AND TRADE, U.S. GENERAL ACCOUNTABILITY OFFICE, WASHINGTON, DC

    Mr. Gootnick. Thank you, Mr. Chairman. Thank you for the 
opportunity to be here to discuss GAO's observations on the 
Millennium Challenge Corporation. Overall, MCC has made 
progress in its first 15 months of operations, at the same time 
it faces key challenges looking forward. Today I will 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 corporatewide management and 
accountability structures. This work is based on our ongoing 
analysis for your committee, and our field work in Honduras in 
January of this year.
    First, regarding country eligibility determinations. In its 
first year, MCC developed a methodology based on quantitative 
indicators for making eligibility determinations. The 
Corporation's Board deemed 17 countries eligible for compact 
assistance in 2004 and 2005, including three countries that did 
not meet the quantitative indicator criteria. The Board also 
selected 13 countries to participate in the Corporation's 
threshold program.
    MCC's public reports on the Board's eligibility 
determinations were brief, and did provide limited information. 
The reports did not explain the Board's rationale for not 
selecting 13 countries that met the indicator criteria. Almost 
by definition, an indicator-based methodology has some inherent 
limitations, such as measurement uncertainty and missing data. 
These limitations made some indicators less useful in 
distinguishing among candidate countries. For seven of the 
indicators, primary source data was not readily accessible to 
the public. MCC has clearly 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. These proposals focused, among other 
things, on agri-business, large-scale infrastructures such as 
roads and ports and policy reforms, including public sector 
capacity building.
    The Corporation expects eligible countries to set 
priorities, consult broadly with civil society, and build on 
existing national development strategies. In Honduras, we found 
that the proposal was drawn largely from its Poverty Reduction 
Strategy paper. We also observed an engaged civil society with 
an active, ongoing debate regarding the selection of projects 
proposed to MCC.
    MCC reports that it evaluates proposals' objectives, costs, 
and projected economic benefits. It also examines plans for 
fiscal management, procurement, monitoring and evaluation, and 
audit functions. Prior GAO work suggests that identifying host 
country-based institutions that have the capacity to execute 
these functions will be a key challenge for MCC. MCC's compact 
with Madagascar is funded at $110 million over 4 years, making 
MCC Madagascar's fifth largest donor.
    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 Corp of Engineers will provide technical 
assistance to evaluate compact proposals. MCC has also begun a 
dialog with other donors and NGOs.
    Finally, regarding MCC's corporatewide management and 
accountability structures--the Corporation has developed key 
aspects of its administrative structures necessary to support 
its operations. In its first year, for example, MCC has 
expanded from 7 to well over 100 employees, and intends to 
reach a goal of 200 employees by the end of 2005. The 
Corporation has made some progress on structures needed to 
establish accountability and manage risk. For example, MCC 
established its Investment Committee to support the compact 
development process. It also established an audit capability 
through its IG, and the Board adopted bylaws to govern its 
activities. However, a range of key governance, internal 
control, and human capital structures remain to be implemented.
    For example, the Corporation has not completed a strategic 
plan or an annual performance plan, and the Board has not yet 
fully defined roles and responsibilities in formulating and 
executing MCC'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, the Corporation's 2006 budget justification estimates 
that it will finalize two to four compacts each quarter through 
the end of that fiscal year. Given these ambitious goals, we 
view MCC's completion of corporatewide 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 completes my statement, our written 
statement has been submitted for the record and is publicly 
available at the GAO Web site. I'm happy to answer the 
committee's questions.

    [Note.--Due to the length of the documents submitted, Mr. 
Gootnick's prepared statement and GAO Report will not be 
printed. They will be retained in the premanent record and can 
also be accessed at www.gao.gov/cgi-bin/getrpt?GAO-05-455T.]

    The Chairman. Well, thank you very much, Mr. Gootnick. We 
thank you and your associates for a very detailed written 
statement, for your written recommendations, and for your very 
concise oral summary of those this morning.
    The Chair would like to call now upon the Honorable Paul 
Applegarth, the CEO of the MCC, and a good friend of this 
committee. He has been a companion of mine as we've traveled on 
recent foreign missions. We have witnessed the work of some 
remarkable MCC personnel in the state of Georgia as they are 
working in the field on some of the things we are talking about 
today.
    Mr. Applegarth, thank you for coming. Let me say your 
entire written statement will be made part of the record in 
full. Perhaps you would summarize orally and then we'll proceed 
to questions of both of our witnesses.

STATEMENT OF HON. PAUL V. APPLEGARTH, CHIEF EXECUTIVE OFFICER, 
      THE MILLENNIUM CHALLENGE CORPORATION, ARLINGTON, VA

    Mr. Applegarth. Thank you, Mr. Chairman. Maintaining 
bipartisan support is part of my job description. I also want 
to thank the previous speaker for his efforts and those of his 
team. As we build our own internal structure and team, we've 
relied a lot on him and his team to help identify issues, spot 
potential areas of concern for us early, and help us to address 
them early on, and I find--even though they're an external 
reviewer--their efforts to be quite collaborative and very 
helpful to us.
    The MCC is built on a commonsense idea. Foreign aid yields 
better results when invested where it will be used well, in 
countries that have put in place policies to support poverty 
reduction and economic growth. Policies such as good 
governance, investment in health and education, and creating an 
enabling environment for entrepreneurs.
    The President has requested $3 billion in fiscal year 2006 
funding for the MCC to help to reduce poverty and to preserve 
the strong incentive for positive policy reforms. That $3 
billion appropriation ensures that MCC can credibly tell our 
partner countries that we can fully fund compacts to reduce 
poverty and spur economic growth. It is critical for MCC 
eligible countries to recognize the United States will live up 
to its Monterey commitment, and the $3 billion request helps us 
make such assurances.
    My presentation today will focus on three areas. A 
discussion of the need for the $3 billion; the progress we were 
making on existing country proposals; and the strength of our 
current pipeline, and the steps we were taking to accelerate 
progress. Thus far we've 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 
growth, items that are not yet ready for consideration, or they 
do not appear to arise from an adequate consultative process--
that $4.5 billion has been reduced to around $3 billion. 
However, that 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 are expected to 
exceed resources currently available from fiscal year 2004 and 
fiscal year 2005 appropriations by about a billion dollars. To 
approach the problem from another perspective, the Government 
Accountability Office found that the funding from existing 
appropriations will only allow MCC to fund between 4 and 13 
compacts. In contrast to this minimum of 4 countries, and 
maximum of 13 countries, the MCC now has 17 eligible countries. 
Appropriations below $3 billion for fiscal year 2006 will most 
likely require reductions in the number or scope of MCC 
compacts, and force the MCC to forgo funding good proposals. 
Such reductions will undercut MCC's effectiveness, both in its 
direct impact on poverty reduction, and the incentive it 
provides for policy reform.
    Let me now turn to the state of our current pipeline. I am 
both pleased and proud to report that MCC has made substantial 
progress since I testified before you last October. Our most 
recent notable event 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 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.
    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 proposal to be considered 
by MCC's Board on May 20.
    We also have a robust pipeline of countries in various 
stages of compact development. This chart shows our most recent 
update, including the time required for due diligence, compact 
negotiation, Board approval and congressional consultation for 
each country. I realize it's difficult to see the details from 
where you are, but I think you get a sense of the momentum 
behind the current pipeline. The country names have been 
redacted, as these are ongoing negotiations with foreign 
governments, and represent our internal management assessment 
for where we are with each. The top five countries on the chart 
are those in active compact negotiations with MCC, plus 
Madagascar, which is already signed. The rest of the countries 
are in various stages in the proposal preparation or the due 
diligence process.
    While this is a fluid document, and as an internal 
management tool 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 of the specific concerns we are 
addressing, when we hope to sign the compact, et cetera.
    In terms of sectors, the country proposals reflect 
recurring themes. Rural development, agriculture and 
irrigation, land tenure, financial sector reform, private 
sector development and infrastructure. We're confident that the 
completed compacts with our eligible countries will yield 
positive results, results that are real and measurable. In 
fact, the MCC has already obtained results, even before 
spending money. Governments have consulted their citizens, some 
for the first time. Since the announcement of MCC indicators, 
in February 2003, the medium number of days to start a business 
has dropped from 61 to 46 in MCC candidate countries.
    Many countries have targeted corruption, which is a primary 
MCC indicator. For example, Bangladesh's Finance Minister, when 
proposing a tough program targeting corruption, cited his 
country's exclusion from the MCC as an example of the heavy 
price it was paying for being branded a corrupt country. One 
official from an eligible country said, ``Even if we receive 
less than requested, the intangible gains from taking control 
of our own development destiny are the most important part of 
the process.''
    Finally, I want to take this opportunity to address some of 
the concerns we've heard regarding the MCC timeline. The MCC's 
mission differs from many other assistance efforts. In disaster 
relief, and many humanitarian assistance programs, the 
diagnosis of the problem, and the determination of the 
solution, are relatively straightforward to identify and 
execute; i.e., rescue the people in danger, feed and house 
them. MCC's task is fundamentally different. The problems 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 require serious 
consideration and thoughtful effort.
    In addition, our partner countries are leading this process 
for the first time. They don't want quick fixes, they want help 
making structural, long-term changes in their countries that 
will reduce poverty. We do help, and together with them, we 
identify the objectives, determine what results the countries 
want and how they will be measured, develop detailed 
implementation plans and incorporate transparent procurement 
procedures, fiscal accountability, and donor coordination. And 
we're already seeing the value of this rigorous process.
    A nonpartisan observer recently 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 takes time, but leads to a 
better result. Our mission will be hurt if we cut corners to 
meet artificial deadlines, or rush money out the door.
    I want to emphasize that preserving country ownership does 
not mean that countries are left without assistance during 
compact development. We don't sit passively by waiting for 
countries to act. During compact development, we do many things 
to speed up the completion of country plans. We want to do 
things right, but we also want to do things right, fast.
    For example, our teams make frequent trips to eligible 
countries to work with our partners. In several recent weeks, 
we've had teams in five different countries each week. We 
engage various experts, both private sector and from other U.S. 
Government agencies to help. Even before a compact is signed, 
MCC is using funding under section 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 environmental impact 
studies and preliminary engineering design in other countries.
    The MCC has the potential to accomplish a great deal in the 
struggle to reduce poverty. Mr. Chairman, you saw first-hand--
during our visit to Georgia for Prime Minister Zhvania's 
funeral--the involvement and commitment of our partner 
countries' most senior leadership in MCC's efforts. We are 
strengthening the hands of reformers to accomplish important 
changes.
    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, with achievable, positive results. We do take 
these responsibilities seriously.
    MCC and international development assistance are not only 
about bringing the best of America to our relationship to the 
world, but are a key component of U.S. national security. As 
the 9/11 Commission Report recommends, ``a comprehensive U.S. 
strategy to counterterrorism 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.'' That is, of course, 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 selection means that MCC has 
relationships with 30 countries, totaling 400 million people. 
By focusing our efforts on countries that rule justly, invest 
in people, and promote economic freedom, we can help the world, 
one country at a time.
    Thank you again, Mr. Chairman, and your colleagues for your 
bipartisan support, and I will now be pleased to take your 
questions. Thank you very much.
    [The prepared statement of Mr. Applegarth follows:]

  Prepared Statement of Paul V. Applegarth, Chief Executive Officer, 
         Millennium Challenge Corporation (MCC), Arlington, VA

    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 October 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 United States is 
committed to funding good proposals, and the $3 billion request helps 
us make such assurances.
    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 fiscal year 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 fiscal year 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 commonsense 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 
counterterrorism 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.''
    When I met with you in October 2004, MCC had been in existence for 
less than 1 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 8 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 18.
    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.
    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 11 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.
    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 
decisionmaking, 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 16 compact proposals 
we have received from fiscal year 2004 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 fiscal year 2006 as provided in our legislation, 
as well as fund our threshold countries, there is a strong need for 
fully funding the President's request.
    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 U.S. 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.
    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 anticorruption 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.
    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 3 to 5 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. Upfront 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.
    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 13 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 13 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.
    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 4 to 5 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 6 
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 
prodevelopment 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.
    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 United States 
        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 Web site 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.
    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 percent 
live on less than $2 a day. When the United Nations 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 2 years Madagascar has demonstrated a 
strong commitment to good governance and social investment. The 
government is implementing wide-ranging, anticorruption, financial 
management, and judicial reform policies.
    Poverty in Madagascar is overwhelmingly rural. Its agriculture 
productivity is among the lowest in the world; 73 percent of 
Madagascar's population live in rural areas; 80 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.
    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, nongovernmental 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.
    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 onsite reviews over the course of the compact.
    The MCC project development, due diligence, and implementation 
supervision process requires indepth 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 PSCs, 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, 
nongovernmental 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 dialog 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.
    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 8 to 14 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 3-year compact programs; 5-
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 fiscal year 2006 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 fiscal year 2006 and beyond, up to 25 percent of the 
funds appropriated for fiscal year 2006 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.
    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 Lugar and Ranking Member Biden 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.--Appendix 1 and 2 referred to are in the GAO statement 
submitted by David B. Gootnick which has not been printed in this 
hearing but has been retained in the permanent record of the hearing.
                                 ______
                                 

                                   CONGRESSIONAL BUDGET JUSTIFICATION SUMMARY
                                            [In millions of dollars]
----------------------------------------------------------------------------------------------------------------
                                               Funding FY 2004/FY 2005                   Funding FY 2006
                                          ---------------------------------    ---------------------------------
                                              No. of      Average                  No. of      Average
                                           transactions   amount    Totals      transactions    amount    Totals
----------------------------------------------------------------------------------------------------------------
Low-income countries.....................         12                 2,278              6          291     1,745
Amendments to earlier compacts...........         --                    --              3          100       300
Low middle-income countries..............         --                    --              4          170       680
                                          --------------          ---------    --------------           --------
      Total compacts and amendments......         12                 2,278             13                  2,725
Threshold programs.......................                              130                                   140
                                                                  ---------                             --------
      Total assistance...................                            2,408                                 2,865
                                                                  =========                             ========
Administrative expenses..................                               55                                    85
Due diligence/monitoring & evaluation....                               17                                    48
Audit expenses (Inspector General-USAID).                                2                                     2
Rescissions--FY 2004 and FY 2005.........                               18                                    --
                                                                  ---------                             --------
      Total administrative, due                                         92                                   136
       diligence, M&E....................
                                                                  =========                             ========
      Total obligations..................                            2,500                                 3,000
----------------------------------------------------------------------------------------------------------------

                                                                                                         
                                                                                                         
    The Chairman. Well, thank you very much, Mr. Applegarth, 
for your statement and for your leadership. We'll proceed with 
questions from those who have gathered here today. The Chair 
will suggest a 10-minute limit. We'll have one round, and maybe 
two, and maybe three, if required, so that we have an 
opportunity to explore this.
    Let me commence, Mr. Applegarth, by pointing out the 
obvious. In each of our hearings, we've discussed our own 
unusual budgetary structure in this country in which, in this 
particular case in this year, we've tried to set aside $3 
billion for a program which we now know something about. You've 
described in previous hearings the data that you seek, how 
nominees come to the fore, and likewise the parameters of what 
kind of assistance might be available, within the $3 billion 
framework for the entire group, whether this involves a minimum 
of 4 countries, as you say, or a maximum of the 17 that are now 
potentially in the zone, with others still trying to sign up.
    As you pointed out, the effects of this program have been 
extraordinary with regard to countries that are not yet 
eligible and may not be. For example, in a mission during which 
I had to look for Weapons of Mass Destruction in Albania last 
August, I found that the MCC was of extraordinary interest to 
the Albanian Government. It was off the charts of much of our 
consideration. We explored how they might shape up for the 
Millennium Challenge. The corruption issue, in particular, was 
foremost. And as you've quoted a development official in 
another country, even if countries don't finally qualify for 
the money, the internal changes in governance are healthy for 
their people, healthy--really--for the world. So, an influence 
from this program that often is not overtly cited, can 
nonetheless be clearly observed in countries around the world.
    Now, the dilemma that we have posed for you in each hearing 
is that if there are not results to show for the authorization 
and the appropriation, very rapidly, then rival means of doing 
good and spending the funds and so forth, will not only be 
found, but suggested and forwarded, at the expense of the MCC 
while it is still working its way through. So, we always couple 
these hearings with the thought, ``Please, make decisions and 
spend money,'' but then on the other hand, we point out, 
``Don't spend your funds irresponsibly. Make sure all the 
controls are there, and involve the government in that 
process.''
    On the face of this, this is contradictory. We are trying 
to root out corruption in a culture doesn't happen in a 2- or 
3-month period to fit our authorization or appropriations 
cycle--and we are attempting, likewise, to bring about 
extraordinary changes which are profoundly important in the 
life of those countries. This process takes time, and yet for 
all of us there isn't much time. There are results that need to 
be achieved. This is why we call you today, and we call Mr. 
Gootnick as an auditor of the whole endeavor, looking at 
measurements from the outside, saying, ``How are we doing?''
    Now, having said all of that, the fact is you have got a 
compact with Madagascar, and there are a list of other 
countries you have suggested that are close. And, maybe 
Madagascar will expend its funds and be able to report--through 
the local press, through international audits--results. 
Meanwhile, we are conducting hearings about multinational 
development banks, which is another way the countries have been 
receiving funds. For a long while, and in a multinational 
sense, we have been finding that in some cases, those funds 
have gone to governments that displayed quite a bit of 
corruption. The citizens of the countries lost twice. First of 
all, the project didn't happen very well, if at all, and 
second, the citizens still had a debt hanging over them. And 
then the world community holds conferences on how much of the 
debt should be relieved. So we know that all the money is going 
out, and the expenditures are documented. You could make a case 
for humanitarian efforts. Sometimes the results on the ground 
are de minimis. The results, with regard to the world financial 
picture, are disastrous. So, you're curing that, but it's 
tedious. And I keep going through this because I'm not sure how 
to resolve it.
    We had, in this committee during the markup--and you were 
here in the audience, witnessing--the authorization in which a 
serious amendment came forward to tailor the $3 billion back to 
a smaller figure. And the arguments offered were good ones, 
namely, there are agencies now doing good things, and perhaps 
MCC is not quite up to it yet, maybe we just are not getting 
along, and therefore maybe $2 billion or $2 billion-plus would 
do all of that.
    And we'll have that argument almost every year until there 
is a track record that indicates that the flow moves, that 
there is progress, that decisions are being made, despite our 
testimony about corruption in the development banks. There will 
be conferences, you'll take part in these on Africa, even this 
year. And rightly so. There is tremendous interest in the 
pervasive poverty of a majority of African countries--in 
addition to problems of starvation. We hear testimony from the 
World Food Program officials, as well as testimony about HIV/
AIDS and tuberculosis--there are horrendous complications and 
mortality.
    So, the pressures will be on this country and the rest of 
the world. What are we going to do about it? We've been talking 
about a program to alleviate world poverty. But here, how 
starkly can you make it? In the midst of this, the criticism 
will come--where does the Millennium Challenge fit? How many 
African countries? How many are likely to be involved? And you 
can say, well, some of the governments are not really up to 
speed on the corruption level, on the planning level.
    As a result, American taxpayer funds under our charter 
really can't go to this, but others are going to be arguing 
funds are going there, they're going with regards to AIDS, and 
tuberculosis, the World Food Program--and you could argue 
back--but with sometimes mixed results. Misappropriation, 
dictators who starve other people in the same country while 
we're trying to feed people. This is the way the world works. 
And I parse it all in this way to ask you, once again, for the 
best rationalization of why this program is different, why it's 
better, why we should be patient, why the $3 billion is the 
right figure for this? What can we anticipate your request will 
be next year? In other words, give a prognosis, if you can, for 
the future of this program.
    Mr. Applegarth. Thank you, Mr. Chairman.
    First, I take your points quite seriously, and there are, 
of course, other competing needs for funds that are valid. I 
would also think, it would be fair to say, if you took a survey 
of MCC staff it would be unanimous that no one is more 
impatient than I am, in terms of getting results, in terms of 
getting compacts done.
    We are having an impact already, in terms of policies, we 
are having an impact now in terms of results. At the end of the 
day, the best evidence that the MCC model works will be good 
compacts done, having an impact on the ground, I think all of 
us believe that.
    Madagascar, frankly, did an amazing job from the time they 
gave us a proposal in early October, which was simply a couple 
ideas. We took those ideas, determined what they wanted, 
determined how the implementations and plans were going to 
work, determined how results would be measured, and they had it 
ready for us to recommend to the Board in under 5 months. From 
the time we received the initial idea, to signing, was about 6 
months. Even against private sector standards, that's a very 
good track record, where typically it would take 4 to 5 months 
from the time you get a fully developed proposal from an 
existing management team, with the results known, to the time 
you were able to sign. They did a very good job. I'm told the 
IFIs, International Financial Institutions, take on an average 
of about 18 months.
    Nonetheless, we're trying to keep our process to 5 or 6 
months. Most countries won't meet that standard, but if you're 
going to do it right, with detailed plans, get the things in 
place, you have to take time to make sure that the money's 
going out well, the money's going to get from us to the right 
place. But we take the charge very seriously. The need is 
there, we believe this is a model that will work to lead to 
long-term poverty reduction and growth, and we are as impatient 
as you all are to be able to show results.
    The Chairman. Thank you very much.
    Senator Nelson? All right, Senator Obama.
    Senator Obama. Well, thank you very much, Mr. Chairman. 
Thank you Mr. Applegarth, Mr. Gootnick.
    I want to focus my questions on a couple of fronts. I'm 
somebody who's supportive of the notion that we do no good for 
the people of countries by funneling money to governments that 
aren't effective. And I think the basic goals of the MCC are 
ones that I'm approving of, and supportive of, and I wish the 
utmost success for the Millennium Challenge Corporation.
    There are two areas that I'm trying to figure out, and you 
may not have all the answers, but maybe you can give me some 
understanding of how you're thinking about them.
    The first has to do with funneling our aid through a 
variety of different mechanisms. In a 1996 article in Foreign 
Affairs, former Secretary of State Lawrence Eagleburger wrote, 
``The current structure of U.S. foreign policy bureaucracy 
invites foreign countries, both allies and adversaries, to play 
agencies or issues against each other. A consolidated structure 
would buy the United States more effective diplomacy for the 
buck.''
    Currently, you have USAID, you have MCC, and you have the 
State Department making determinations on allocations of 
foreign assistance resources. This is setting aside special 
projects like Iraq or Afghanistan, I don't know where Pakistan 
falls in that category, but I recognize these are unique areas 
where there are strategic objectives that the administration is 
trying to pursue. Setting aside special objectives I'm 
wondering whether we are losing some coherency in terms of how 
all these programs fit together.
    So let me pose some specific questions.
    In a country where AID is already functioning, and that is 
also an applicant for a Millennium Challenge grant, does the 
AID operation suspend itself during the operation of MCC, or is 
it running on parallel tracks while in this particular country? 
What is the relationship going to be between MCC and existing 
foreign aid programs? Will the MCC supplant and take over all 
our foreign aid efforts in a particular country that's received 
the grant, or will the AID program continue? And if so, then 
how do you make sure that they're not working at cross 
purposes?
    Mr. Applegarth. Thank you for your question, Senator.
    I think you should first start with recognizing there are 
different types of foreign assistance, with different purposes. 
AID, I think, has an unparalleled track record in, for example, 
disaster relief. They stepped up in the tsunami, and in other 
areas to really do a tremendous job similarly, in humanitarian 
assistance. I think the State Department programs are targeted 
toward democracy, political affairs, ESF funding. OPIC, another 
agency which you didn't mention, targets the development of the 
private sector, EXIM bank--each has a particular mandate or 
function.
    MCC's function is to try something different that is truly 
focused on results, on selectivity among the countries, where 
countries have to compete for it, with the idea that you are 
really incentivizing, and recognizing, governments that are 
demonstrating, not promising, but actually demonstrating--a 
commitment to poverty reduction by putting good policies in 
place. And you take our model of countries competing, countries 
putting good policies in place in advance, before we even 
consider them for funding, and then we work with them to really 
focus on poverty reduction, and not poverty alleviation; we 
focus on results. Then, I think, that is the context. We do 
cooperate closely, and coordinate particularly with AID quite 
closely, and I'll be glad to elaborate, but I don't want to 
interrupt you.
    Senator Obama. I appreciate what MCC is trying to do, 
again, I'm just trying to figure out what is the relationship 
in a country, let's say, like Madagascar that's receiving $35 
million in AID funds. Are those $35 million still flowing? Will 
they be spent by AID or channeled through MCC? Are there AID 
workers still on the ground in Madagascar that are working with 
the same government officials that MCC is? Are there some 
requirements incorporated into the MCC plan that indicates how 
existing aid should be coordinated? I'm trying to get some 
specifics on that.
    Mr. Applegarth. I think you see the levels of cooperation--
and let's talk specifically about AID--in a variety of ways. 
You see it first, here in Washington, Administrator Natsios is 
a member of the MCC Board, I see him regularly, we both attend 
the Secretary of State's morning meetings, so I see him at all 
of those. We also meet regularly, at least once a month, to go 
through specific operational issues. In addition, AID is 
administering the Threshold Program, together with us.
    In the field, the AID mission is in place in Madagascar, 
will continue to function and operate; they are doing some 
things in rural development, doing a variety of other things, 
and those programs will be continuing. We have certainly 
discussed at the local level there, our efforts, and not only 
in Madagascar, elsewhere the AID mission directors. We seek 
their advice in both evaluating programs, and reviewing them, 
and we want to make sure that our programs are fully 
coordinated.
    Senator Obama. So, Mr. Applegarth, am I to understand that 
these other programs are going to still be operating even as 
MCC is taking place? They're not supplanted, is that correct?
    Mr. Applegarth. That's correct, I think individual accounts 
may go up and down, and I don't believe AID has set its final 
programs for fiscal year 2006, I think they're still waiting 
for the final appropriation this year. But, I personally 
believe that MCC is intended to be additional, if we're going 
to have a proper impact. I think if you look at the 
administration requests overall for foreign assistance in the 
150 account, they've gone up substantially over the last 
several years, even not counting MCC, and of course, MCC will 
represent a significant increase as it goes forward.
    Senator Obama. Let me shift topics, because I've got a 
limited amount of time here. I want to discuss the strategic 
value of MCC. I want to play Devil's advocate here. Madagascar 
is a beautiful country with wonderful people, and we want to 
make sure that they are receiving rewards for doing the right 
thing. But when I look at the universe of potential MCC 
compacts--Honduras or Nicaragua, or Cape Verde or Madagascar--
it's not clear to me how grants there impact the strategic 
interests of the United States. This seems especially true in 
the context of other countries with enormous poverty, enormous 
corruption, and seismic influence, in terms of how countries 
and regions are operating. What if we said, we're going to take 
all this money and we're going to give it to Nigeria, 
Indonesia, and Mexico, where there's rampant corruption, but 
also enormous populations, enormous strategic considerations? 
Why would we not take into account some of our larger strategic 
objectives in terms of reshaping the climate in these areas? 
Presumably, if Nigeria underwent significant government reforms 
and economic reforms, that could have spillover effects into 
the entire western portion of Africa, for example. Has there 
been any discussion about how we think about that? Or is it 
very much just going to be whichever country, no matter how 
small, meets the MCC criteria and comes up with the best 
proposal?
    Mr. Applegarth. I wouldn't underestimate our scale, 
Senator, with existing eligible countries, and threshold 
countries, we have relationships, as I mentioned in my remarks, 
with 30 countries, 400 million people. If you exclude the 
populations of India and China, that represents a fairly 
significant portion of the population of the developing world.
    Moreover, the low middle-income countries, which we could 
not legally consider before, will be considered out of this 
coming appropriation, in addition to the list of threshold and 
eligible countries. And, I think you'll see some fairly large 
countries potentially competing this year.
    In addition, the incentive effect is there. We would like, 
very much, to work and to have influence on some of these 
countries. By chance, the Finance Minister of Nigeria is coming 
by this afternoon, we're sitting down and talking about MCC 
criteria and how they measure, and how we measure up, so that 
we can have a greater influence there. Similarly, President 
Yushchenko, when he was here, from the Ukraine, was already 
talking about MCC and how they want to qualify, so I wouldn't 
diminish the value of our impact in looking at the countries 
where we're currently operating. The fact that we chose eight 
countries in sub-Saharan Africa, I think, surprised everybody 
out of our first group. To me, it was a clear statement that 
there are good leaders in sub-Saharan Africa, and good 
governments that are helping their people, and they do serve as 
examples to their neighbors.
    Senator Obama. Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Obama.
    Senator Coleman.
    Senator Coleman. Senator, I'll yield at this time to 
Senator Martinez.
    The Chairman. Very well. Senator Martinez.
    Senator Martinez. Thank you, sir. Thank you, Mr. Chairman. 
Thank you, Senator Coleman.
    Sir, I wanted to pursue this sub-Saharan subject with you. 
I know that over the 1980 to 2003 timeframe I think we could 
count up about $32 billion in assistance over that time, while 
at the same time, apparently a per capita GDP in the sub-
Saharan area has fallen from $660 to $585. There have been 
other sources that have provided bilateral and multilateral 
assistance with billions of dollars as well, so apparently 
assistance has not been the key ingredient that has not 
afforded them a path to greater development and greater 
prosperity. And I am pleased to see that 8 of the 17 countries 
eligible are in sub-Saharan Africa, and I commend you for the 
relationships you've developed there, and I'm intrigued with 
where you are with Cape Verde, which I understand has 
submitted, you've submitted a letter to the chairman for the 
15-day period of consultation, prior to starting the compact 
negotiations, so I wondered if you could update us on the 
status of Cape Verde and their application and where we are 
with them.
    Mr. Applegarth. Thank you, Senator. I think anyone who 
looks at the performance in sub-Saharan Africa over the last 
number of years recognizes that simply disbursing funds isn't a 
solution to the problem, and that you have to learn lessons 
from what's worked and not worked. Those lessons are the 
lessons on which MCC is built. If aid is going to work, country 
ownership is important, policies are important, focusing on 
results, outcomes--what are you going to get for this money 
that you're investing? Even though it's grant money, we view 
this as an investment, we look for a growth return.
    These are the models upon which MCC is built, and which 
we're trying to implement. We very much want to have an impact 
in sub-Saharan Africa, and I think we already are having it, 
and will continue to have it. But it has to be done in a way 
that is focused on results, unless you're doing simple 
humanitarian assistance. Humanitarian assistance is important, 
but it does not get you out of poverty reduction, it does not 
help countries reduce their dependency on foreign aid.
    With particular reference to Cape Verde, I think progress 
has moved along quite well. We are in the final stages of due 
diligence, my current estimate is that it will not be ready for 
a consideration of the Board in May. Assuming we have a June 
Board meeting, I think it's quite likely that, based on the 
latest information I have, that it would be ready for 
consideration by the Board by, in June, for signing sometime in 
July.
    Senator Martinez. I also noted that, in Latin America there 
were not as many countries in which you are engaged. Can you 
tell us a little something about that region, and what 
obstacles you encountered to being able to develop in those 
countries?
    Mr. Applegarth. The principle reason there are so few Latin 
American countries that are eligible right now is really the 
income threshold. By design, in our first 2 years MCC is only 
focused on the poorest countries in the world. We have an 
income ceiling and, I think six or seven Latin American 
countries are even on the list to compete. Obviously Cuba does 
not have a government that promotes good governance, full 
freedom, or the kinds of things we measure. We do not believe 
the kinds of policies they put in place lead to poverty 
reduction and lead to growth, therefore they're not eligible to 
receive funds, but the point is, although they're under the 
income ceiling, they don't qualify. Haiti is in a similar 
situation; the balance of the countries, Honduras and 
Nicaragua, they're both eligible, Bolivia is eligible, Paraguay 
and Guiana have been named as threshold countries. I would 
expect to see a significant increase of the number of countries 
on the candidate list in November when, for the first time, we 
can include lower middle-income countries on the list.
    Senator Martinez. So, that will be an ongoing process in 
which the threshold will rise as time goes on?
    Mr. Applegarth. Under our legislation there are two ceiling 
caps. One is for lower income countries, that's roughly $1,450 
per capita; in addition, under the legislation, Congress gave 
us the authority, starting in our third year, which is fiscal 
year 2006, to begin considering lower middle-income countries 
and up to 25 percent of the program funds can go to them.
    Senator Martinez. You know, I have some experience with 
domestic programs that assist with trying to eliminate poverty 
and improve economic development conditions and so forth, and 
one of the things we've found is that oftentimes, those in most 
desperate need--communities and cities that had the most need--
were the least capable of managing those funds which were sent 
in their direction, or to prepare the applications for 
competitive grants. What are you doing about capacity building 
within those nations that are in need of funds, in need of 
assistance, in need of participation with the Millennium 
Challenge Account, but yet, may not have the wherewithal to 
properly cross t's and dot i's and be able to qualify and be 
competitors?
    Mr. Applegarth. I think even the best of our countries need 
help. They're being asked to do this for the first time, in 
terms of really taking ownership. That's what we're really 
trying to do, actively now. We don't interfere in the priority-
setting process, because we're afraid that if we start advising 
or saying what the priorities should be, they become our 
priorities, not the country's. But once that priority-setting 
process is underway, we provide engineering help, we provide 
help in program development, whether it's 609(g) funds, visits 
by our people. We had seminars, during the recent World Bank 
IMF meetings, on lessons learned from our most advanced 
compacts. We had a workshop for senior ministers from eligible 
countries, what's worked, what hasn't worked. Leaving up to 
them how they want to approach it.
    But it's clear that things like dedicating a full-time host 
country MCC coordinator is important. Involvement of the senior 
leadership of the country is important. Dedicating a certain 
amount of resources to it. These are the kind of things, very 
practical nuts and bolts things, but we're trying to assist the 
process to move it on really quickly.
    Senator Martinez. One of the things that frustrates me, I 
think, as I look to this process, is that sometimes countries 
who have tremendous need also have an equally dysfunctional 
government, or a corrupt government, and I wonder how we break 
through that cycle so that we can get help to people that 
desperately need it and move them out of poverty into better 
lives, while at the same time, having to work in an environment 
where the governmental structures are not sufficiently stable 
or transparent enough for us to be able to work with them.
    Mr. Applegarth. Senator, that problem concerns us, too. 
Right now, we're trying to set a model of working with the 
best, poorest countries in the world, with the idea that if 
they can set an example, and we create an incentive for other 
governments to put policies in place that will lead to poverty 
reduction and growth, so that people can see their neighbors 
doing a good job.
    I think realistically, there are certainly a lot of very 
poor people in countries we're not working with. How you best 
address them is something we're trying to think about. Other 
parts of the administration are trying to think about it, too, 
because it's pretty clear that working in an MCC model with 
those governments as they currently function is not a solution. 
You may have to do as AID does; go in targeting directly the 
populations, go around the government, try to do some other 
things, and maybe try to focus primarily on poverty 
alleviation, rather than the long-term poverty reduction, until 
you have a true part of government that's committed to doing 
things.
    It is a real dilemma; we understand it. Hopefully by what 
we're doing with the better of the countries, we can be an 
example to help the countries that don't measure up at this 
point.
    The Chairman. Thank you very much, Senator Martinez. Let me 
just mention that the questions, by and large, have been 
directed to Mr. Applegarth. Some may be directed to you, Mr. 
Gootnick, but if you have a comment, and it's appropriate, even 
if a question's been directed at Mr. Applegarth, please make 
your comment, and if you don't, don't feel compelled to. But at 
the same time, we really want to have the insights of both of 
our distinguished witnesses, and we appreciate that.
    Senator Nelson.
    Senator Nelson. Thank you, Mr. Chairman. Tell me about the 
programs that you're negotiating in Honduras and Nicaragua.
    Mr. Applegarth. I believe both the compact proposals are 
public, but I will describe them in general terms. Both are 
targeted toward rural development. Increases in agricultural 
productivity, increasing rural incomes. In the case of 
Honduras, which is somewhat more advanced at this stage, they 
are targeting a region to the western part of the country, 
focused really on a broad-based integrated rural development 
effort. Increasing crop yields through drip irrigation, through 
agricultural extension, through microcredit, through rural 
roads. It then is linked to getting those crops to market. So 
from the rural roads, you go into the secondary roads, you go 
into a major highway stretch that we're funding--if the Board 
approves--we will fund. The stretch is the final length between 
a road that is being funded by the World Bank, and another road 
that is funded by the Inter-American Development Bank, where we 
are the final link to complete a corridor that will not only 
allow the crops in the rural program areas to get to market, 
but will also provide a major corridor that links many Central 
American countries together.
    Senator Nelson. How is that different from the USAID 
program?
    Mr. Applegarth. I would perhaps like someone who's somewhat 
more expert on the AID program to comment in more detail, but 
actually parts of this program are built on AID efforts, 
including some of their agricultural extension efforts in 
Honduras, which I think are quite impressive in terms of what 
they've achieved in crop diversification. I think you would see 
it being different in its integrated focus, its scale, its 
focus on overall country competitiveness, and the involvement 
of the country leadership in trying to assure that the program 
will succeed against measurable benchmarks and outcomes.
    Senator Nelson. So, if I talk to the President of Honduras, 
for example, he will be able to tell me the difference between 
this program and USAID because he is committing to achieve 
certain goals. Is that what you're suggesting?
    Mr. Applegarth. I would suggest that if you talk to 
President Maduro, he would be able to describe to you, 
intimately, the details of the MCC program; how and why it is 
important for Honduras; why it is a strategic priority for 
them; how it addresses poverty reduction and growth. I don't 
know whether he knows all of the programs that AID is doing.
    Senator Nelson. And if I ask him, ``Well, what's the 
difference between that and the USAID program?'' What would he 
say there?
    Mr. Applegarth. I would hate to speculate, but I think he 
would say one difference is that through a consultative process 
here, this is our program. These are the areas we think are 
most important, this will lead to long-term poverty reduction 
here, and lead to long-term growth here.
    I can tell you what the senior leadership of Madagascar 
said, because they were quoted in the papers, and we took great 
pleasure in it. They did not talk about the MCC program. They 
talked about Madagascar's program, and how they were going to 
use the MCC funding. They talked about their goal: How they 
wanted to improve rural incomes, that they were focused on the 
80 percent of their population that was poor, that lived 
outside the urban areas, with 70 percent of them living on 41 
cents a day or less. And that their primary focus was to 
increase the incomes of these people. But it is their program, 
they designed it, and we're working with them to help implement 
it. It's a very different dialog, it's a very different way of 
describing what they are trying to do.
    Senator Nelson. I notice that Paraguay is in the second 
group of countries with which you're expected to negotiate. 
It's well-known in Latin America sometimes, even as a standing 
joke, about the level of corruption within the Government of 
Paraguay. And they're trying to do something about it. Now, 
tell me, as you negotiate with a country, or you think about 
putting a country on your list, how do you think the MCC 
program can help a country with so much corruption?
    Mr. Applegarth. Yes, sir. First of all, to clarify; 
Paraguay is a threshold country, it's not an eligible country, 
and that means that the Board is not recognizing them as being 
fully eligible to submit a proposal for poverty reduction 
through growth.
    Where we would assist Paraguay, if they come to us and say 
``This is our program, we want to improve performance under 
your MCC indicators so that we have a better chance of being 
selected to be eligible for MCC funding, will you help us?'' 
That's what the threshold program is about. In the case of 
Paraguay, we've received their initial proposal. As you can 
imagine, it is targeted on corruption. They recognize that they 
need help. The inheritance, whether it's in the genes or the 
product of the regime for years and years, I don't know. But 
the point is, you do see signs of serious effort and commitment 
by the government to begin to root out this problem. And, we'll 
see what the program looks like, and finally, whether it 
measures up. If the commitment is there, and the program looks 
like it's going to work, we'll provide them some funding, but 
we're still in the early days of the project.
    Senator Nelson. Mr. Gootnick, why does the program need 
more money, since they haven't spent what's been appropriated 
thus far?
    Mr. Gootnick. Well, Senator, Congress has provided the 
Millennium Challenge Corporation considerable flexibility in 
the use of its funds so that, unlike AID, these funds are not 
earmarked, these are no-year funds, and the appropriations 
language stipulates that the compacts be funded up front from 
day one. That means that, while it's a tremendously ambitious 
goal, MCC may indeed have a shot at obligating the funds that 
you are considering, that the appropriations process is 
considering putting forward.
    That said, MCC has established a very ambitious set of 
goals carrying forward, looking at signing two to four compacts 
per quarter, through at least the middle of fiscal year 2006. 
And their assumptions are based on the premise that these 
compacts will be, on average, considerably larger than the 
Madagascar compact. So, all of that is to say that they have a 
good shot at obligating the funds that you are considering 
putting forward.
    The only other thing I would say to that is that obligating 
the funds is a different matter than spending the funds, and 
that's a different concern that faces MCC going forward.
    Senator Nelson. Well, let me ask you: How much has the MCC 
spent on development assistance, compared with administrative 
expenses?
    Mr. Gootnick. Madagascar was the first compact that they've 
signed, and funds have not yet begun to flow, per se, to the 
Madagascar compact. If you look at what is in the compact 
itself, what you will find that, as a product of their due 
diligence efforts, considerably more information about the 
project areas that are proposed under the compact. There is 
reference to a range of in-country structures that MCC/
Madagascar will build that will allow the funds to flow. So the 
oversight entity, the fiscal entity, the monitoring and 
evaluation, the audit function, the procurement function, those 
are articulated in principle, but are to be determined in terms 
of actually building those structures to MCC specifications, 
which will allow the funds to flow. And that will take place at 
some point in the future.
    The Chairman. Thank you very much, Senator Nelson.
    Senator Coleman.
    Senator Coleman. Thank you very much, Mr. Chairman. First, 
a comment about the MCC. I think this is a tremendous idea. As 
I've listened to some of the conversation and some of the 
discussion we've had, not just in this hearing, but in others, 
there have been some concerns raised about whether MCC is 
taking money away from other programs. I would hope that we're 
not engaged in a situation that since the President's proposed 
this, that all of a sudden it becomes politicized, that if it 
comes out of the White House, somehow there's got to be 
something wrong with it.
    This is the way I think aid should be done. You work with 
the country, you identify objective indicators as to the type 
of things we'd like to see in place: Ruling justly, investing 
in people, fostering enterprise and entrepreneurship--and then 
it's not our program, but it's their program. You give folks 
ownership to tell us the ways in which we can reduce poverty, 
increase quality of life. So I think in concept, it is a 
magnificent concept, and I just hope that it is not getting 
caught up in some of the politicization that we see around 
here.
    I am concerned about some of the funding issues. The last 2 
years, Congress has failed to fully fund MCC accounts, and that 
causes me concern. So, just a general statement, I think the 
Millennium Challenge Account, MCA, and the work that the MCC is 
doing is critical, and I hope we get it out of the realm of 
politics.
    I would note, my friend and colleague from Florida, I'm 
sure his comment on Paraguay was reflecting on the past. I do 
want to say, as chairman of the Western Hemisphere 
Subcommittee, that I have been impressed by the efforts of 
President Duarte Frutos, that Paraguay is making great strides, 
and the President's shown great courage. Endemic corruption is 
difficult to challenge, when folks do that, I do think that 
they deserve our support and appreciation.
    I want to ask a question about Nicaragua. There you have a 
President who's taken great personal risk to tackle corruption, 
he may be paying a price politically.
    And I'd ask the question, both to Director Gootnick, and 
Mr. Applegarth. This is the other side of the coin. On one side 
you have corruption and how do you deal with it. But how do you 
factor in political courage in deciding to support a country, 
move forward with an MCA relationship? Can you factor it in? Is 
that something, as you looked at the qualification standards, 
is that something that is there, or that should be there? In 
other words, we have leadership taking risks to fight 
corruption, how does that factor into the analysis? Mr. 
Applegarth, I'd appreciate your comments.
    Mr. Applegarth. Would you like me to go first, Senator?
    Senator Coleman. That's fine.
    Mr. Applegarth. I think you see it in a lot of ways, and I 
wouldn't limit courage to either simply Paraguay and Nicaragua. 
We are, no question, helping reformers in these countries make 
some very tough changes, and some of them are doing it under 
very difficult circumstances. Certainly President Bolanos is in 
a quite difficult situation. We believe that a successful 
Nicaraguan compact should strengthen him.
    I think you see political courage first reflected in the 
indicators themselves, and performance under the indicators, 
it's not short-term courage, but it's courage over a period of 
time that begins to show up in the indicators. I think you see 
it also, and certainly the Board takes it into account, in the 
countries that are substantially below on some indicators, but 
we're looking at the commitment of the leadership and 
commitment of the countries themselves to take steps to address 
the areas that are substantially below in the indicators. The 
last area is where the data is clearly outdated, as it was in 
the case of Georgia where the indicator measured the 
Shevardnadze regime versus the Saakashvili regime, where you 
had true leadership, clearly reinforcing the principles of the 
Millennium Challenge, to fight corruption, to clean up the 
government, to put effective procedures in place. So I think 
you see it throughout our decisionmaking process in the 
selection of countries, both eligible and threshold, and then 
when you start to look at the kind of programs these leaders 
are presenting to us.
    Senator Coleman. Mr. Gootnick, could you respond, can you 
assess whether the indicators adequately measure political 
courage?
    Mr. Gootnick. Right. I would say that the indicator 
methodology, the eligibility determinations, there's a clear 
recognition that there will be objective and quantifiable 
indicators, and that there will be discretion. And a great deal 
of work went in, both prior to the organic authorization of the 
Millennium Challenge Corporation, and subsequent to it, on 
building this methodology that relies both on objective 
indicators and discretion. The results demonstrate that MCC 
exercised some discretion in the eligibility determinations.
    I would only add to that, that to the maximum extent 
possible, to the extent that MCC could make public its 
determinations, the use of its discretion, and make those 
results transparent, recognizing that there are some 
limitations there, that there is confidential information, 
there is classified information, there may be diplomatic 
issues, but in order to both justify, explain and, when 
necessary, defend those eligibility determinations to potential 
recipients, to stakeholders and others, and to Congress, that 
to the maximum extent possible, documenting those decisions 
would be of benefit to the Corporation.
    Senator Coleman. Mr. Gootnick's comments actually kind of 
lead into my next question, that's to you, Mr. Applegarth. I 
wasn't here earlier, and I apologize for that, but I'm 
interested in your reaction to two of the areas of the GAO 
report, they've talked about internal controls and oversight, 
and then apparently transparency here, can you react to that?
    Mr. Applegarth. We believe in, and try to demonstrate our 
commitment to transparency. We have open Board meetings to the 
extent we can, we post everything we do on the Web, our 
criteria are there, how countries rank individually there, who 
does the ranking--since we don't do them--their methodology is 
all there. As much data as we can, underlying the data, we try 
to put there. We frequently hold public outreach meetings, I 
think on average once every 6 weeks or so, since the time 
virtually, that I came on board, as well as a number of 
meetings--frequently--with NGOs, members of the business 
community, both in the United States and in the countries that 
we're operating. Our compacts will be public documents, they 
are going to be on the Web, I think the Madagascar compact's up 
already.
    We believe this is important so that the potential 
beneficiaries of the compact can see what the compact's 
supposed to accomplish, and if they're not getting the benefits 
then they can complain about it. We see this as an implicit 
part of monitoring and evaluation, so we consciously try, 
throughout our activities, to be as transparent as we can, and 
we welcome suggestions as to how to be more so.
    Senator Coleman. Thank you, Mr. Applegarth. I do want to 
repeat that I think that the work that's being done by the 
Millennium Challenge Corporation in bringing to life the 
principles behind MCA is really important. This is, I think the 
future of aid and development.
    One other quick question; I'm going to Armenia at the end 
of this month. What message should I bring to the Armenians? 
They're one of those eligible countries where we don't have a 
compact yet. Where are we at with Armenia? What are some of the 
challenges that are faced, and what message can I articulate to 
facilitate that process?
    Mr. Applegarth. I think we should perhaps have a considered 
response to that at a later date. We just received a revised 
proposal from Armenia, and I think you would see--not only 
there, but in many of our other countries--significant 
improvements in the focus of the proposal. They've clearly 
benefited and learned from a consultative process when I think 
instinctually they may not have opted for that initially, but I 
think they would now publicly acknowledge it's been beneficial, 
and I think they're clearly on the right track. We would like 
it to go faster, I think they would like it to go faster. This 
is an example of the learning curve, when you're asking 
countries to undertake a new process for the first time and try 
to do it and try to do it right. I think they're making quite 
significant progress now and I'd be basically encouraging to 
them.
    Senator Coleman. I look forward to having that conversation 
before my trip. Thank you, Mr. Chairman.
    The Chairman. Thank you very much, Senator Coleman.
    Senator Sarbanes.
    Senator Sarbanes. Thank you very much, Mr. Chairman.
    I say to the witnesses, if I ask a question that's been 
previously covered, please indicate as such. Unfortunately we 
have to cover a number of hearings in the course of a morning, 
and I regret I haven't been able to be with you until now.
    Mr. Applegarth, the Millennium Challenge Corporation has 
been appropriated $2.5 billion to date; is that right?
    Mr. Applegarth. Close. Subject to slight rescission, that's 
correct, Senator.
    Senator Sarbanes. And there's a request for an addition $3 
billion in this year's budget from the President?
    Mr. Applegarth. That's correct.
    Senator Sarbanes. So, if the Congress were to appropriate 
what the President asks for, you'd have $5.5 billion?
    Mr. Applegarth. We would have had a total of $5.5 billion 
appropriated, some of that has already been obligated, and you 
did miss the presentation on the pipeline.
    Senator Sarbanes. Well, how much has been expended, to 
date, of the $2.5 billion?
    Mr. Applegarth. Of actual disbursements, there's a certain 
amount for administrative expenses, I think it's on the order 
of $25 million. We've obligated now $110 million for 
Madagascar, we have a Honduras compact up for consideration by 
the Board on May 20. The chart on my immediate right 
demonstrates our current planning for commitments for the 
balance of the year, and early next year.
    Senator Sarbanes. So, how much do you plan to commit by the 
balance of which year?
    Mr. Applegarth. By calendar year 2006, I believe we will be 
close to exhausting, under this current timetable, and this 
moves around, but we will have virtually obligated all of the 
money that we currently have appropriated, plus or minus $100 
million or so, I think is the current estimate.
    Senator Sarbanes. By when?
    Mr. Applegarth. By the end of the calendar year.
    Senator Sarbanes. Which calendar year?
    Mr. Applegarth. 2005.
    Senator Sarbanes. Fiscal or calendar year?
    Mr. Applegarth. Calendar.
    Senator Sarbanes. So by the end of this year, you will have 
obligated the $2.5 billion?
    Mr. Applegarth. Close to it, plus or minus $100 million or 
so, under the current planning. I did testify to this earlier, 
but we've taken the initial proposals we received from 
countries, reduced them from over $4.5 billion to approximately 
$3 billion. The $3 billion does not include Morocco, which we 
expect to be a fairly sizable program. Our current estimate is 
simply to fund the good proposals that have already, after 
initial vetting from the fiscal year 2004 and 2005 eligible 
countries, we need, at least, an additional billion dollars to 
fund those proposals. In addition, we have the new lower 
middle-income countries coming in November. We expect to have 
more lower income countries, and we will have additional 
threshold countries.
    Senator Sarbanes. How much will be expended by the end of 
the calendar year?
    Mr. Applegarth. By expended I presume you mean disbursed? 
Or obligated, Senator?
    Senator Sarbanes. You just told me virtually all would be 
obligated.
    Mr. Applegarth. Obligated, correct.
    Senator Sarbanes. The question I'm obviously asking is 
disbursed. I think, because I think you already told me the 
other.
    Mr. Applegarth. Correct, I just wanted to make sure we were 
on the same page. My guesstimate, and I would have to give you 
more precise numbers looking at the programs, because we 
obligate over a 3- to 5-year period, say, on average, 4 years--
if you take the total amount obligated, divided by roughly 
four, that would give you the amount that would be disbursed 
over 12 months, the first 12 months from the time the compact 
is signed. I think the final disbursements this year will 
depend very much on the particular compacts that are signed, 
and the size of them.
    Senator Sarbanes. So, the first year of the disbursement 
would extend beyond the end of the calendar year, in every 
instance, actually.
    Mr. Applegarth. The first 12 months from every compact will 
extend beyond this calendar year; yes. We have started, expect 
to start disbursements on the Madagascar compact reasonably 
soon, I have already approved disbursements for what's called 
609(g) funding, to accelerate the compact development in three 
different countries.
    Senator Sarbanes. Now, during the committee's last 
oversight hearing on the MCC in March 2003, Under Secretary of 
State Alan Larson said repeatedly that the MCA ``must 
complement, not replace, other assistance''; ``The MCA will not 
come at the expense of USAID.'' Despite this assurance, we see 
in the administration's fiscal 2006 budget proposal, that the 
MCA is slated for large increases, in fact a doubling from last 
year's level of $1.5 billion to a request of $3 billion this 
year.
    But at the same time, the President has proposed 
significant cuts in core USAID accounts, such as development 
assistance and child survival and health, as well as 
international organizations such as UNICEF. What's the 
explanation for this failure to carry through on the assurances 
the Under Secretary gave to the Congress?
    Mr. Applegarth. Senator, I don't think I would characterize 
the comments as a failure to carry through. First, I agree with 
Under Secretary Larson, our programs should be complementary, 
not to replace other programs. And we also, as I testified to 
this earlier, believe we should be additional.
    And I think if you look at the track record of the 
administration, there have been significant increases in 
development assistance of the last 4 years, and I think there's 
a significant increase in the request this year, even before 
you look at the MCC increase.
    In terms of specifics, I would refer you to, perhaps, those 
program administrators----
    Senator Sarbanes. Are you asserting there's been an 
increase in development assistance, and child survival and 
health in this year's budget submission?
    Mr. Applegarth. I was testifying in terms of the aggregate. 
I believe there's a significant increase in the total even 
before you consider MCC. Regarding specific accounts, others 
are more expert on that.
    I've been told that the administration has asked for more 
for child survival and health this year than they did last 
year. I could be wrong on that, I'd have to check.
    Senator Sarbanes. And UNICEF as well?
    Mr. Applegarth. I don't have any information on that, I 
would certainly be happy to get that for you, Senator.
    [The submitted written answer to the requested information 
follows:]

    MCC believes that State Department is better positioned to explain 
U.S. funding levels for UNICEF and we would direct your question to 
them. That said, we are unclear why there is a suspected linkage 
between MCC and UNICEF funding. The President's FY 2006 Budget requests 
a significant increase in funding for the United Nations and U.N.-
affiliated agencies. We hope the Congress fully funds the President's 
request. Moreover, the President's FY 2006 Budget requests an increase 
in contributions to all International Organizations compared to 2005 
levels and represents a 30-percent increase from what the Congress 
appropriated to all International Organizations in 2004.

    Senator Sarbanes. But you adhere to the view that you're 
not supposed to be cutting other programs in order to fund the 
MCA, is that correct?
    Mr. Applegarth. I believe the MCC should be additional, 
that's how we have the incentive effect. I don't think the 
establishment of the MCC is a guarantee that every program is 
immune from rationalization or being plus or minus'd, depending 
on the effectiveness of the program, I don't think Congress 
would want to enter into that kind of a guarantee to the 
program either, but I think if you look at overall, in 
aggregate, there have been significant increase in funding over 
the last 5 years from the administration, and I think it 
reflects the recognition that there's a genuine need, 
recognition that development assistance is not only a 
projection of American values, but important for the national 
security of the United States, and it is fundamentally the kind 
of thing Americans want to do.
    Senator Sarbanes. What ``scrub-down'' process do you follow 
with respect to proposals that you receive?
    Mr. Applegarth. I think the due diligence process is quite 
rigorous. As evidence of it, as I mentioned earlier, the 
proposals we received initially from countries total an excess 
of $4.5 billion, that total is now reduced to $3 billion. That 
is significant evidence of scrubbing.
    Senator Sarbanes. Well, what's the process for reducing it?
    Mr. Applegarth. We look at several things. First, will the 
program lead to poverty reduction? That's our first test. And 
by that, we want to see, what are the outcomes, what are going 
to be the measures of success, how do we know 5 years from now 
this program was successful or not? And we don't want just a 
bunch of words, we want some demonstrated measures. We also 
want detailed plans of how we're going to get from here to 
there, we want some assurance that the money's going to get 
from us to the intended beneficiaries, and then we also want to 
know that the program came from a consultative process, that it 
was broadly defined, within the country, as being a true 
obstacle to growth, an obstacle to poverty reduction and 
reflects some national sense that this is important for the 
country.
    Senator Sarbanes. Now you said the MCC conducts due 
diligence to ensure that countries consult fully with civil 
society groups when they develop their proposals. I'm 
interested in what this due diligence consists of. What steps 
do you take to ensure that women, poor people, and local civil 
society groups are meaningfully consulted in the process of 
developing compact proposals?
    Mr. Applegarth. I see my red light's on, Senator, but I'll 
try to answer you quickly.
    Senator Sarbanes. The way it usually works is if we get the 
question in by the time the red light goes off, then you get an 
answer.
    Mr. Applegarth. I'll ask the chairman not to hit me with 
the gavel or his electric prod here.
    A consultative process, Senator, is going to vary from 
country to country, there's no cookie-cutter approach, it's 
going to reflect the country's own history, culture, and 
customs. And we've actually worked with a number of NGOs to try 
to develop guidance for a consultative process--broad 
principles--and examples from which countries that are moving 
more quickly have done. We held a seminar for visiting 
ministers at IMF meetings that focused on this, and we just 
recently published further guidance on the consultative 
process.
    But I think if you look at the principles, first, it needs 
to be timely, it has to be early in the process, and continue 
throughout. Second, it's got to be participatory, which means 
not only the business community and NGOs but women, farmers, 
others should be participating in the process. And during the 
due diligence we talk to them, we don't simply rely on the word 
of the government, we go out and talk to them as to their 
assessment of the process. And it has to be meaningful, so it's 
not just a hollow exercise. You can hopefully see some impact 
of the consultation on the proposal design and implementation. 
I think we are seeing that.
    My personal standard for a good consultation was in one of 
our countries; I was meeting with the leader of the opposition. 
We came out of his office and there was a couple of members of 
the press there, and one of the questions was directed toward 
the consultative processes, and the leader of the opposition 
said, ``You know, I don't agree with everything that's in the 
government's proposal, but I will agree that they ran a fair, 
consultative process.'' Are we going to achieve that standard 
in every country? Probably not, but the point is, if you can 
actually get the leader of the opposition giving credit to the 
government for the adequacy of the consultative process, I 
think that's a pretty good test.
    Senator Sarbanes. Can I ask one followup question?
    If I'm a country that's interested in submitting a compact, 
wouldn't it behoove me to ask for a lot of money on the 
assumption that you're going to bring it down, regardless of 
the request? Can I assume that if I inflate my figure, my 
chances of getting a good figure at the end of the process will 
be enhanced?
    Mr. Applegarth. I guess my initial reaction is probably 
not, Senator, where we've seen what we would have considered 
very large proposals, the impact has been to delay the process, 
not to speed it up. If you believe achieving a compact in a 
reasonable and expedited time is important, that wouldn't be an 
appropriate thing to do.
    I think the MCC disciplines remain the same. Will this lead 
to poverty reduction? Is there an economic return on this 
investment of U.S. taxpayer dollars; are the outcomes 
measurable? Are there benchmarks along the way, is there 
detailed planning, and did it arise from a consultative 
process? I also know that in, at least, a couple of the 
compacts, the amounts have actually gone up as a result of this 
review, when you look at the detailed plans, and you don't 
believe that the funding is adequate to accomplish the 
objective, so you've actually seen some increases in some of 
the compacts. I think, and I'll have to double check this, I 
believe Madagascar's an example of that. I can think of a 
couple of others off the top of my head where the amount has 
gone up as a result of the due diligence process, when you see 
what resources are needed to do the job right.
    [The submitted written answer to the requested information 
follows:]

    MCC does not have a formula for allocating funds across countries 
but, reviews individual country proposals in terms of viability, likely 
impact, contribution to poverty reduction, and economic rates of return 
for the program.
    In several cases the amount committed or planned to be committed 
under compacts either exceeds or is less than the original amount 
requested. This variation can be due to several reasons, including the 
deletion or modification of components because they did not have an 
adequate economic benefit or did not arise from a consultative process, 
or because due diligence revealed that a larger investment would be 
needed for the compact program to be successful.
    In the specific case of Madagascar, the amount did increase from 
just under $90 million to $110 as we got a better understanding of the 
costs of the project.

    Senator Sarbanes. Are there some guidelines, linked to a 
country's size and population or extent of poverty, that give 
them a range, in terms of the size of the proposal to make? I 
mean, I'm a country getting ready to apply, and I have enormous 
needs, let's assume. How do I know what is a realistic proposal 
to come forward with?
    Mr. Applegarth. Currently we don't have such guidelines, 
Senator, and it's a topic we debate constantly, for some of the 
reasons you're implying, and we'd welcome your advice.
    Right now we've said focus on what are important obstacles 
to growth in your country and show us what's needed to really 
eliminate those obstacles and lead to poverty reduction and 
growth. That's the standard we're applying, so you don't see a 
rigid formula of x country with a small population gets a small 
amount of dollars, and a larger country with a bigger 
population gets more. We're really trying to assess the quality 
of the proposals. It's not always easy, I understand that. 
Sometimes countries ask for guidance, we try to keep coming 
back to--tell us why this is important to you, what are the 
real obstacles to poverty reduction, and we'll try to work with 
you.
    Senator Sarbanes. Well, that's helpful. Are any of these 
countries hiring lobbyists here to try to help them frame their 
proposals in advancing and moving through the process in 
Washington?
    Mr. Applegarth. We've seen some countries hire lobbyists to 
try to influence the selection process for eligibility or 
threshold. I don't have a universal survey, but I would think 
that that has been detrimental to their prospects, not helpful. 
There certainly is no positive correlation, I believe the Board 
has been quite seriously focused on the criteria, and 
government performance, and immune to advice from lobbyists, 
and I think it's come as a surprise to the countries who hired 
them. I would think the countries would spend better time 
investing in proposal development, and putting a good proposal 
before us is more likely to have results.
    We do see countries engaging assistance in the consultative 
process. The Asia Foundation is assisting a couple of countries 
in that area, we certainly are providing help in proposal 
development, in terms of engineering, environmental impact, 
early stage data gathering through 609(g), and we see the UNDP 
trying to assist countries in some other parts, so you see a 
variety of help as the countries take ownership of this 
process, but lobbyists is not a way that would be productive.
    Senator Sarbanes. That might be something we might want to 
keep an eye on, Mr. Chairman.
    Mr. Applegarth. My hunch is that you will see them before 
we do, Senator. I suspect you will be closer to that than we 
will.
    The Chairman. We can share our information. Thank you, 
Senator Sarbanes.
    Let me ask you, Mr. Gootnick, a question about the trip 
that you and your staff took to Honduras. This is a hands-on 
attempt to gather information on the Millennium Challenge 
Corporation in the field. I'm curious whether your research 
findings were different from information you had received from 
the MCC headquarters, and what your impressions were of the way 
in which MCC personnel were working with USAID in the field. 
Can you give us some recollection of those impressions?
    Mr. Gootnick. Certainly, thank you.
    A number of observations from the field work in Honduras 
that are responsive to both your question and perhaps some of 
the broader dialog that we've had here this morning.
    I would say, first observation is that in the case of 
Honduras the Inter-American Development Bank did provide some 
funding to assist the Government of Honduras in developing its 
proposal, and I think that was instrumental in them being 
really one of the early eligible countries that had proceeded 
through the process.
    The other observation I would make is that the proposal 
that came forward from Honduras was very clearly based in its 
national development strategy, in Honduras' case the Poverty 
Reduction Strategy paper. And the Honduran officials were quite 
clear and indeed, proud, of the fact that their proposal could 
be culled, or pulled, largely from the PRSP. From that 
perspective, consider that the proposals will have some of the 
strengths, and perhaps some of the inherent limitations that a 
national development strategy, for example, a PRSP will have. 
To wit, the level of civil society and broader input to a 
national development strategy, as has been alluded to in this 
discussion, can be very difficult to measure. One has to 
distinguish between consultation and consensus around proposed 
MCC projects. In fact, in Honduras we observed a fair degree of 
consultation, I would say, with respect to consensus there was 
a lively debate and certainly some disagreement as to what 
projects should be funded, and whose needs were most being 
considered.
    And then finally I would speak to the partnership with AID. 
I think AID, from what we saw in Honduras, was acting as a 
tremendously good faith partner, providing some of their staff, 
certainly providing entire to MCC, to a broad range of actors 
in the country, governmental and nongovernmental officials, and 
beginning to articulate its role in an environment where MCC 
would be active in both Honduras and Nicaragua.
    For example, the regional strategy that AID has put forward 
in Central America really adopts and has begun to bring in some 
core MCC principles into its core strategy.
    The Chairman. Well, those insights are helpful in giving a 
sophisticated view of how the process works. For example, 
you've stated Honduras, as a country, had done quite a bit of 
work in thinking about this. It's not that all countries have 
not given some thought, but I suspect if you went 
systematically from country to country you would find the 
planning efforts in some vastly superior to the almost minimal 
efforts in others.
    So, one could conceive a situation in which a country 
within its own political structure has been thinking about 
development and, as you suggest, having debate--maybe not 
consensus, but a good bit of consultation--and this is 
occurring transparently so that the ruling party, or whoever 
happens to be in power at the time, has responsibility for 
applying, but the opposition is clearly aware of the debate 
that has preceded this plan that's being shared, and then--
interestingly enough as you said--a factor, perhaps, of some 
funds from the Inter-American Development Bank, sort of a 
cross-hatch, in a way, of the multinational development banks.
    There's nothing wrong with that, but obviously, maybe an 
ingenious aide comes along, and the Honduran Government says 
``Help us,'' and we use some of these funds to develop our 
plan, to interact with the MCC officials who have criteria, 
some of which we have met, or some we're trying to meet and so 
forth. And that, I thought, was an interesting thought. I'm not 
certain--we'll have to go through each of the applications to 
see who may have offered some assistance--if not a bank, 
whether there were other consultants, whether others came into 
the process, to alter and refine a final product which may be 
better than the kind of application Honduras was making to the 
Inter-American Development Bank, or the problems we have been 
observing in some of the loans from that Bank, not necessarily 
to Honduras, but to others.
    All the strategies and the criteria and the indices that 
you were examining were not necessarily part of their pictures, 
but might be. So in a way, we're describing, perhaps, the 
evolution of the process of effective foreign assistance. Bit 
by bit we all learn more of the state of the art as to what is 
effective in the use of scarce resources, credibility, honesty 
about the whole process, transparency, building of democracy 
that comes from all of the above, as opposed to broad 
humanitarian efforts to get the money out there, to show our 
sense of compassion. But in the process, the degree of 
necessary sloppiness, arbitrariness may have disillusioned some 
people--including American taxpayers. We've not intruded into 
the conversation today about this program, but I would guess 
one reason that the President suggested the program was that 
there has been an uphill fight for foreign assistance in this 
country.
    There are a lot of very generous Americans, and I don't 
want to overplay that argument. But given the needs in the 
world, one would say, why isn't the United States more 
forthcoming? Well, one reason is that people like ourselves, 
members who represent constituents, visit at town meetings with 
people who say, ``Why in the world are our dollars being 
expended in Honduras? As opposed to Kokomo, Indiana, we've got 
some problems here, you folks ought to recognize that,'' and we 
say, ``Well, this is a big world, and there are important 
issues,'' and they say, ``We understand that,'' but 
nevertheless, rationalize.
    And what about the waste? What about the fraud? What about 
the dictators? Before long, you're off to the races again in an 
argument that you're not going to do well on in any particular 
meeting unless you have a very congenial group that sort of 
started with the thought that we're oriented this way.
    Now, here you come along, both of you, with a program in 
which we're saying, ``There are criteria.'' There's advancement 
of anticorruption, of democracy, of the best use of dollars to 
help very poor people. And these countries are very poor, and 
your indices show that. You're buttressing this, Mr. Gootnick, 
as the honest auditor, so that their enthusiasm doesn't get us 
carried away. You're taking a look at the country as you did, 
and that's why I draw on your meeting with Hondurans and your 
staff, which I hope will continue. In that vein, what other 
trips do you have planned or, how will you, in the future, 
attempt to do the kind of intensity of work that you did with 
your associates in Honduras?
    Mr. Gootnick. One small technical correction to my prior 
remarks before I go too far, I believe it's the Central 
American Bank for Economic Integration.
    The Chairman. Very well, we'll correct the record for all 
of us.
    Mr. Gootnick. With respect to your question about how do we 
carry forward from here, my intention would be to consult both 
internally at GAO, and then to get with your staff to look at 
how we can best support this committee's efforts of oversight, 
carrying forward, and we'll be establishing that plan in the 
very near future.
    The Chairman. We would welcome that. I think GAO is 
obviously very appropriate, and we would appreciate your 
inclusion of our bipartisan interest in this. As you've both 
witnessed today, we've had good participation of, at least, 
three Senators on both sides of the aisle and their staffs. 
We're appreciative of that, given all the conflicts that 
Senators may have.
    Now, let me ask, Mr. Applegarth, have you noted, talking 
about the development of the state of the art in all of this, 
any changes in other donor policies of other international 
agencies, or even agencies in our own Government, whose outlook 
toward giving assistance, humanitarian care, might have been 
influenced at all by the new approach of your corporation?
    Mr. Applegarth. Senator, I'm always reluctant to claim 
causality.
    The Chairman. I understand, that's why I'm asking so that 
you have an opportunity.
    Mr. Applegarth. I think you clearly see an increasing focus 
by other institutions on some of the same principles that we're 
talking about, government effectiveness, country ownership, 
outcomes, results, there's no question that our ranking 
system--as imperfect as it is, and I don't think anybody claims 
that it represents perfection, is receiving a lot of attention. 
We are open to comments and suggestions on how to improve it, 
and we get them, and we try to incorporate them. But our rating 
sheets, which are up there on the Web for everybody to see, are 
looked at by other development ministers, and are looked at by 
the senior leaders of the countries we've selected. We're 
seeing it in a variety of ways, as I mentioned, President 
Yushchenko, even the Palestinian authority who wanted to 
understand, not so much that they have any prospect of 
qualifying for MCA assistance any time soon, but what are the 
policies that are demonstrated to lead to poverty reduction, 
and to lead to growth, there are committed leaders around, 
there are committed donors around, we're all trying to do, 
ultimately the same thing, which is to help people who are 
living in abject poverty to do better.
    On that, I would like to add that I know Congress is going 
to have some tough decisions with MCA and the big funding 
request and some other decisions. This is not a black and white 
or zero sum thing. The beneficiaries of the Millennium 
Challenge are the same beneficiaries of some of the other 
programs, and the real question is, What's the most effective 
way to deliver assistance to them? They're still the rural 
poor, it is still farmers, it is still people looking for an 
opportunity for a job, what's the best way to do it? MCC's 
built on the lessons of development--what's worked in the past, 
what works best? And that's what we're trying to do and that's 
the basis upon which the countries are responding, they're 
putting policies in place that will lead to poverty reduction 
and growth and we believe we need to deliver on the promise for 
those governments that are taking the steps they committed to.
    The Chairman. Well, it's obvious, I think, to you, having 
been through our hearings, that the majority of the members of 
this committee applaud that thought. It's not a question of 
diminishing our interest in other countries, but rather 
augmenting it through programs in which there is the confidence 
of the Congress and the public. Therefore we are more likely to 
have momentum to do more as we try to take part in these 
international conferences.
    Let me just ask both of you this question. A comment was 
made earlier on--as a country is approached--for example, 
Georgia was mentioned specifically--the indicators and the data 
might very well have been from the Shevardnadze government of 
the past. But suddenly here are the young Georgians, they had a 
revolution, they had an election, they are struggling with 
enormous poverty and they approach you. When examining the 
track record of the country, to what extent do you have to make 
a political speculation, a prediction on the basis of trial 
results? This would be even more problematic, I would guess, in 
the other international situation I mentioned in Albania.
    I come back to that because this is such an extraordinary, 
new experience for me. I had not visited Albania before, and I 
would not have visited Albania on this occasion, but there were 
strong reports that there was a lot of nerve gas up in the 
mountains, and it might not be guarded. I take these things 
seriously. We move out with the Cooperative Threat Reduction 
people and put a fence and guards around it, with the 
cooperation of the host country, but this is out of the blue.
    Now, while we're there, they also identify 79 missiles in 
the shed. We got a pledge to destroy those during the next 
month. Then we come down the hill and we talk to a Defense 
Minister. So we have a new relationship now, and we're going to 
make, as a requirement for our new military academy, that our 
graduates have proficiency in the English language. Well, 
that's a rather extraordinary situation. Maybe 3 weeks before, 
there wasn't such a requirement. Quite apart from the missiles 
discovered and destroyed, or the nerve gas.
    But then we have a further request that we send an 
ambassador to the country. I understood our problem. We had 
sent our Ambassador to Iraq, and that was an urgent situation, 
but nevertheless, they felt in this new spirit that we needed 
an ambassador on the ground here. So our committee worked with 
the State Department. We were in the last 60 days of a highly 
partisan campaign, all sorts of people stacked up waiting for 
confirmation, but to make a long story short, because of the 
national urgency, a very distinguished lady in our State 
Department was identified and confirmed as an ambassador, and 
got there.
    Now, on top of all of that, then, they said, ``Oh, by the 
way, we're interested in the Millennium Challenge business, and 
we've got some problems--pervasive corruption,'' and that 
understates it. Huge problems, just in terms of title of land, 
any land, any enterprise. There are all sorts of things going 
on with almost no legal basis. That's why Albania didn't 
regress to, at least, the list under consideration. It's 
because suddenly there was a dramatic turn in the life of a 
country that has had a horrendous dictatorship, so obnoxious 
the Soviet Union did not find it very compatible. They searched 
from the Chinese or from others for much of their history, and 
suddenly they want to change, to become a democracy, to become 
affiliated with us, and to deal with us on weapons of mass 
destruction and terrorism and so forth. But this is really 
tough if you are an evaluator. The kind of data we're talking 
about today, this is not like looking at an American 
corporation coming in for a large loan, and trying to find a 
track record. It's a given with all of our legal system and 
banking data.
    Now this is what leads me to ask both of you: How do we 
deal with these situations? How do we deal with the young 
Georgians who had a slight track record? They certainly did 
root out a whole lot of corruption, firing the entire police 
department of the country and rehiring a few because all of 
them were corrupt, the whole lot. That's pretty demonstrable 
that you take corruption seriously. It hadn't happened with all 
the neighbors around, but it is instructive as to what catches 
our attention. How much of this do we take into consideration? 
How much can we, in fairness to the other applicants, and 
likewise in making your case, which you must make to the 
Congress for funds, and for credibility? Will you try that one 
on, first of all Mr. Applegarth, and then Mr. Gootnick, will 
you give your observations?
    Mr. Applegarth. There have to be considered judgments, I 
wouldn't say speculation, I would say considered judgments, and 
I think that's why you have a Board, the quality of the Board 
we have, and the kind of people we have.
    The Chairman. Now, how is the Board selected, where do they 
come from? And you've mentioned the quality and their dialog, 
but that's an important consideration? Who are they?
    Mr. Applegarth. The Chair of the Board is the Secretary of 
State, Dr. Rice. it used to be Secretary Powell. Vice Chair is 
the Secretary of the Treasury; the U.S. Trade Representative is 
on the Board; Administrator Natsios, the head of AID is on the 
Board; I am on the Board, in addition we have spaces for four 
members selected from lists provided by Congress. The first two 
of those have been named, Kenneth Hackett, who is the head of 
Catholic Relief Services globally, a large NGO with operations 
in many of the countries where we operate, and Christine Todd-
Whitman, former head of the Environmental Protection Agency.
    The Chairman. Are there other nominees before the Congress, 
or are there still two--
    Mr. Applegarth. There are two nominees still in the 
process. They have not been formally proposed at this point. 
But I think the quality of the Board, and this is not an ex-
officio board, these Board members come to meetings and they 
work, and I think that reflects the fact that they think this 
is an important mission and it also reflects the judgments they 
bring to bear based on considerable experience.
    I also think the transparency of our decisionmaking, the 
criteria being out there, and anybody who looks and sees how 
the rankings of the country says, ``Yes, MCC stuck to what it 
said it was going to do.'' Considered judgments applied to the 
criteria, it wasn't a formula but fundamentally these are the 
right kind of countries being selected and the Board is paying 
attention to the criteria. It seems to me that helps as a check 
and balance on the judgments being brought to bear. Now, is 
there some element of judgment? Absolutely. Is there some risk 
taking? Yes, but it is perhaps risk taking in the context of 
Board credibility. We have demonstrated considered judgment and 
prudent risk-taking, in the case of Georgia already, at the 
time we picked them in May. We knew it was going to be many 
months before they actually would get funding, so we could 
continue to see that track record, and certainly there's no 
guarantee that any country named eligible is going to get 
funding. So you've got a chance to see how the country runs the 
consultative process, how they select the priorities, and the 
quality of the proposal.
    I think in the case of Albania it's a different situation 
because it is a threshold country. Many of the threshold 
countries are having to deal with the same thing which is 
corruption and rule of law. These are very difficult problems 
to get rid of. Ultimately we're seeing the evidence of the 
countries making steps in the right direction and committed to 
trying to do something about it. The question is, Can they give 
us a good program that looks like it's going to work that 
really fundamentally addresses these kinds of things? If they 
do, we'll give them funding, it won't be large amounts, there's 
much smaller amounts of money at risk, and it will be targeted 
very specifically. But if the country does a good job and 
increases our confidence that it will use the money as a full 
compact eligible country, the rest of the money will go. So 
it's a modulated approach, it's certainly based on 
consideration and judgment but it's also transparent and it is 
targeted.
    The Chairman. Mr. Gootnick.
    Mr. Gootnick. Mr. Applegarth has spoken to the use of 
objective indicators versus discretion quite thoroughly. Beyond 
that, I'd say with respect to your comments on Albania, 
Georgia, or any of a number of other, either eligible or 
threshold countries, your observations go very much to the 
heart of our recommendation, which is that MCC as an evolving 
institution needs to identify, manage, minimize on an ongoing 
basis, assess its major institutional risks, and in this 
environment, those major institutional risks pertaining to the 
large flows of funds through the corporation to in-country 
structures that the corporation expects to establish to execute 
its projects. In that regard, one could look on page 23, figure 
6 of our document, where we've articulated the key 
institutional structures that MCC expects to establish to 
execute its programs. Oversight entity, fiscal entity, 
procurement entity, audit entity, monitoring and evaluation 
entity, and that those entities performing up to MCC 
specifications represents a key issue and a major institutional 
risk for the Corporation going forward, and may be the subject 
of a debate and discussion a year from now, as compact funds 
have begun to flow.
    The Chairman. I suspect it will be, and I thank you for 
drawing our attention specifically to those six criteria which 
you identify in your report. That's important, it gives some 
credibility to your evaluation to the American public that's 
looking over your shoulder to see what you're doing and how 
you're doing it.
    Let me just ask--these compacts have a time limit to them. 
They're for a certain period of time. What is the probability 
that if things go well in a country, there may be an additional 
plan, additional submissions, additional years? Now, that 
speculates that the President of the United States and the 
Congress will continue to find this to be the constructive 
avenue we believe that it is, and that it's going to be. It may 
be expanding for all we know, if we were to have this hearing 
10 years from now. But as a country looks at this, is there 
some thought or some hope on the part of some of the leaders, 
that if things go well, if really remarkable results are 
produced, that we will not simply indicate ``Congratulations! 
You've graduated,'' and head on to another country? In some 
cases we have taken that view with regard to foreign assistance 
for a good reason. Countries that were desperately difficult in 
terms of their economies, their politics or whatever, got 
better, and as a matter of fact, began to show a lot of growth 
from their internal qualities. All our efforts were a spur to 
get things moving, not as a permanent donor. What is the 
expectation of these countries that you're dealing with, by the 
very definition of the group income-wise, and prospects that 
you've talked about to begin with?
    Mr. Applegarth. Of course, Mr. Chairman, our ultimate 
objective is to have these countries graduate from the need for 
assistance. That's what we're trying to do, build the capacity, 
reduce poverty and create the model for sustainable growth, and 
then ultimately reduce their dependency on foreign aid. Of 
course, we are targeted at some of the poorest countries in the 
world.
    The Chairman. They're not on the threshold of graduation to 
begin with by the very----
    Mr. Applegarth. No, even the most successful is going to 
take some time. These are not easy problems that we're going to 
address. We would like to see progress. What we're about is to 
try to help them make the progress. To do it so that 
ultimately, maybe you get the success of the Asian tigers and 
some of the other countries that are no longer dependent on 
foreign assistance. But that's not going to happen in the short 
term. Our expectation is that when additional program 
components are ready, countries can come back, and we could 
amend a compact to fund it, at least in some of the countries. 
Madagascar certainly said, ``Let's focus on the key 
fundamentals first, phase one, hopefully at some point we can 
talk to you about a phase two.'' If and when they're ready, 
we'll be glad to talk to them.
    There are two legislative limitations on our ability to do 
that, one is right now we can only have one compact at a time 
with a country, so we can't enter into a new compact, you can 
only amend an existing compact for an additional element. In 
addition, there is a 5-year maximum term for any compact. So 
anything we do by way of an amendment, at least under our 
current understanding, would have to be accomplished within 5 
years as well.
    The Chairman. With Madagascar, this data is in your 
submissions, but off the top of the head, do you recall what is 
the per capita income of a citizen of Madagascar presently?
    Mr. Applegarth. I probably have it handy. The latest data 
that I have is for 2003, is $290 per person.
    The Chairman. $290.
    Mr. Applegarth. Per year, that's right.
    The Chairman. Talking about graduation, this does 
illustrate how far--if, in fact, there were a doubling of the 
income of the country in a short period of time, or even a 
tripling of the income, the average citizen would still have 
less than $1,000 per capita income a year.
    Mr. Applegarth. You're correct, Mr. Chairman, I think in my 
opening remarks I talked about countries living under $2 a day 
per capita, this is less than $1 a day. If you triple this, 
you're still probably under $2 a day.
    The Chairman. This illustrates the awesome problem. I 
probably don't do justice to the Financial Times chart that was 
published recently, but I thought it was remarkable the other 
day in discussing the extraordinary growth of China and its 
economy, which is truly dynamic. It is often stated as 9 
percent growth or more per year, and that has been the case now 
for several years, so it is compounded annually. That's 
extraordinary given the size of the country, the number of 
people, but I think the Financial Times indicated that maybe 5 
years ago or 10 years ago, sometime in the intermediate time 
range, the per capita productivity of a person in China was 5 
percent of the productivity of a person in the United States. 
Now, over the course of this 5- to 10-year period, that 5 
percent has changed to 16. That is a major feat. In essence, a 
tripling of the five, if you do the math. But you come out, 
even then at a point that at this point the equivalence of that 
production, granted, times a billion or more people, adds up to 
a big figure. The United States has maybe 300 million times 
whatever figure we have, so the multiple of the Chinese people 
at some point may get to a GNP that begins to come into the 
United States range. But it indicates that even with those 
situations that we look at with some degree of awe in terms of 
how all that occurs, the yawning gap, and standards of living, 
now moving down to Madagascar, that's a very different 
situation altogether. I would just say that's why this whole 
process would be tremendously interesting, not only to this 
committee and to you, but to the American people. How much 
headway can we make against pervasive, awesome poverty? Even in 
a fairly small country, as we become more ambitious and take on 
larger countries, more complex societies that have these cross-
hatches of AIDS and tuberculosis and chronic malnutrition on 
top of all this, that is the quest. How do you get governance 
of these countries into shape so that it can be sustained by 
the people, their own democratic dialog, and their own 
consensus?
    Mr. Gootnick, do you have a final thought before we 
conclude the hearing about this process?
    Mr. Gootnick. Mr. Chairman, I'd simply reiterate the key 
challenge, I think the Corporation faces going forward, is the 
ability to expend these funds accountably with the in-country 
structures that they intend to build at each of the recipient 
nations. The other key challenge I think I would highlight, is 
the evaluation of compact proposals. While there's been and 
there is a due diligence in that process, the technical rigor 
required to determine that a given project is the right project 
for the right country at the right time is a key challenge.
    The Chairman. You'll try to achieve that obviously through 
your interviews with the MCC, but likewise in some in-country 
examination by you and your own personnel, and by these 
indicators, some of which you've said are classified, 
confidential. At the same time we have to have confidence that 
you are handling that material discretely and that's being 
funneled into your overall evaluation, and then hopefully over 
the course of time there will be a free press in the countries 
that will highlight what's occurring, argue about it, in an 
open society, with the benefit of debate. Whether it's the 
legislature or the political campaigns or so forth, these often 
tell a lot about a country, and the views of its own citizens. 
That may be informative to us as to what our objectives and 
criteria ought to be.
    All of that, you have encompassed, I think, in your report. 
I have simply, for sake of emphasis, mentioned this as we try 
to conclude this hearing. We've tried to have an oversight 
hearing today at another mid-point to see how we're doing.
    I congratulate you, Mr. Applegarth, and your associates, 
and you, Mr. Gootnick, and your associates for the roles that 
you are playing and that I think you're playing well. I think 
the comments from my fellow committee members indicated that.
    We thank you for appearing, and the hearing is adjourned.
    (Whereupon, at 11:35 a.m., the hearing was adjourned.)
                              ----------                              


       Additional Questions and Answers Submitted for the Record


   Responses of Paul Applegarth, Chief Executive Officer, Millennium 
Challenge Corporation, to Questions Submitted for the Record by Senator 
                                 Biden

    Question. What capacity does the Millennium Challenge Corporation 
(MCC) have to assess the different impacts a country's proposal might 
have on women and men in terms of potential benefits? How are you 
encouraging different country teams to focus on this important issue as 
they work with countries during the proposal process?
    Answer. Each compact includes a plan for monitoring various results 
of the program through the life of the compact, as well as a plan for 
evaluating the impact of the program on poverty reduction and economic 
growth. Data collection for this evaluation will be conducted during 
the compact term. The analysis of this data may continue, in some 
cases, after the end of the term. In general, all ex-post evaluations 
will assess the extent to which the program or project increased the 
incomes of the targeted beneficiaries.
    We are in the process of recruiting staff with gender expertise to 
analyze the compacts generally, as we think this is an important 
responsibility. Additionally, we also have within our staff technical 
experts who incorporate gender analysis into their work on agriculture, 
infrastructure, environmental/social impact issues, land tenure, 
financial sector, and in the monitoring and evaluation frameworks. 
Additionally, our country teams include individuals with development 
experience that have done this type of analysis, are sensitive to 
gender issues, and take them into account when evaluating program 
design.
    As part of our proposal analysis, MCC staff consults with women and 
women's groups to form a judgment about whether the proposed programs 
will reach women. For example, with regard to agricultural programs in 
Africa, where a significant share of agricultural work is performed by 
women, MCC's agricultural specialists work with stakeholders in each 
country proposing to work on agriculture to identify the particular 
status and role of women and how design interventions can improve their 
situation. Understanding a woman's role in agriculture can help to 
illuminate how to improve technologies to make women's work easier and 
more productive, whether it involves packaging inputs in volumes that 
can be handled more easily by women, assisting with water supply, 
energy for cooking, transportation to markets, etc. Supporting 
productivity enhancements in the crops important to women, whether for 
household consumption or marketing, is an important part of program 
design that MCC considers.

    Question. Through what mechanism does the MCC evaluate how 
countries have taken into account the degree of input local women and/
or women's organizations have had during the consultation process in 
which a government is to engage in order to develop its proposal?
    Answer. Our approach starts with the consultative process and 
continues through to monitoring and evaluation. In our discussions with 
countries and in our written guidance, MCC stresses the importance of 
consultations with women and women's groups to understand their 
challenges. We specifically examine the extent to which women 
participate in consultations, including during program and project 
design. We also ask our staff to evaluate the extent to which their 
input of women is taken into account and shapes the program design.
    On the program itself, MCC staff consults with women and women's 
groups to form a judgment about whether the programs will reach women. 
For example, with regard to agricultural programs in Africa, where a 
significant share of agricultural work is performed by women, MCC's 
agricultural specialists work with stakeholders in each country 
proposing to work on agriculture to identify the particular status and 
role of women and how design interventions can improve their situation. 
Understanding a women's role in agriculture can help to illuminate how 
to improve technologies to make women's work less onerous and more 
productive, whether it involves packaging inputs in volumes that can be 
handled more easily by women, assisting with water supply, energy for 
cooking, transportation to markets, etc. Supporting productivity 
enhancements in crops is important to women, whether for household 
consumption or marketing, and is an important part of program design 
that MCC explores with the partner country.
    Our monitoring and evaluation indicators are, to the extent 
practicable, disaggregated by gender, age, and income level, so that we 
can see whether impacts are reaching the intended beneficiaries and are 
the impacts different across these groups.

    Question. How will the MCC monitor and evaluate the different 
impact that MCA funded programs have--in both the short and long term--
on women and men?
    Answer. Because development interventions can have different 
impacts on men and women, data on performance indicators should be 
disaggregated by gender whenever feasible. MCC's Monitoring & 
Evaluation unit has adopted as policy that program evaluations include 
a description of which indicators can be disaggregated in this manner. 
For example, rural roads in Honduras will be evaluated on the extent to 
which they reduced travel time and cost to markets and public services 
for both men and women. In Madagascar, land tenure indicators will 
disaggregate title and land certificate holders by gender.
    The due diligence process includes an assessment of the capacity of 
host country institutions to measure results. Where there are 
weaknesses in capacity during implementation, funding for monitoring 
and evaluation as part of the compact budget could be used to address 
specific areas of weakness. If weaknesses were identified prior to 
finalizing compact negotiations, MCC may use its 609(g) authority to 
help put in place the means to measure results based on gender. We 
expect, however, that weaknesses in collecting gender-disaggregated 
data ordinarily would not become apparent until a program is in the 
implementation phase, which is one reason that M&E plans include a 
description of data quality assessments to be conducted over the life 
of the program. This is in addition to making regular performance 
reporting publicly available which, in turn, allows interested groups 
outside of the country and MCC to review results. Based on these data 
quality assessments, we may structure necessary capacity building 
measures for collecting and analyzing gender-disaggregated results.

    Question. Explain the MCC's role in helping a country finalize a 
compact proposal. How does the MCC balance an emphasis on country 
ownership with the need to ensure that proposals are sound? In the 
cases of Madagascar and Cape Verde, how closely do the final compacts 
reflect the initial proposals?
    Answer. The MCC has engaged countries from the outset after they 
were identified as eligible to clarify our goal (reducing poverty 
through economic growth) and guidelines for proposal development. This 
has involved visits to the country as well as meetings with government 
counterparts in Washington and elsewhere. The MCC has suggested to 
governments that they put together a team to carry out a consultative 
process to develop a proposal for MCC funding and name a point of 
contact so that there is a clearly identified interface in the country. 
Once the MCC receives a proposal, our technical staff review that 
proposal in terms of the way the proposal was developed, ensuring that 
there was indeed a consultative process and that the program reflects 
national priorities, as well as identified program impacts and economic 
returns and policy changes that would result from the program's 
implementation. The MCC has defined what makes a good compact and this 
information is shared with host country counterparts. The criteria that 
the MCC considers in reviewing a proposal include:

   Poverty reduction: Positive impact on poverty reduction, via 
        constructive distributive effects (as measured, for example, by 
        the percentage of identified beneficiaries from poor households 
        or the creation of new economic opportunities accessible to the 
        poor).
   Economic rate of return: MCC economists work with our MCC 
        partners to analyze the economic growth impact, including 
        positive assessment of economic logic and ability to measure 
        the expected results of how this project will contribute to 
        growth.
   It's measurable: The project should have measurable targets 
        and interim milestones for key indicators, with linkage to 
        disbursements to the extent this is possible.
   Country support: Proposals should be designed with broad 
        public support, developed through a consultative process. If 
        the proposed projects are important to the country, and not 
        included as the result of political compromise, MCC will 
        consider give them careful consideration.
   Policy reform: For some proposed projects to be successful, 
        it is necessary that the government implement policy reforms. 
        MCC will consider the government's willingness to make the 
        necessary policy reforms to make the project a success.
   Environmental sustainability: This is measured principally 
        by adherence to MCC's environmental guidelines.

    In the context of these criteria, the MCC team works with the 
country to clarify the proposal so that there can be a full 
understanding of what exactly the country anticipates that the MCC 
would fund and the links between the program proposal and the projected 
results. To carry out initial phases of this interchange, the MCC sends 
a team to the country to develop an ``opportunity memo'' that 
identifies the context, the program, the consultative process used by 
the country, the opportunity for investment, likely results, 
sustainability and potential for policy reform. In discussions with 
host country counterparts, the MCC asks for rigorous justification of 
programs in terms of the consultative process, the feasibility of 
implementation, and the economic rate of return. If the program falls 
short on any of these, a more detailed program justification is 
requested to address shortcomings; in some cases, based on these 
discussions, the host country decides to eliminate or modify program 
elements.
    Countries are responsible for defining their priorities in their 
initial proposals. However, MCC works with the country to take a 
development priority and help develop it into a concrete proposal. In 
addition, the MCC makes every effort to respect country ownership by 
using consistent standards to make recommendations to the host country 
as to whether projects will be included in the compact.
    The attached table shows the components that were in the original 
Madagascar proposal and those components that are in the final compact. 
As for Cape Verde, there is not yet a final compact and negotiations 
are still underway. However, there have been some changes since the 
initial proposal.

Summary Comparison of MCA Program Activities--Original Proposal Versus 
                        Compact Signed April 18

                       LAND TENURE REFORM PROJECT
------------------------------------------------------------------------
                                     MCC compact draft (Feb. 2005) $37.8
Original proposal (Oct. 2004) $20 M                   M
------------------------------------------------------------------------
 Launch a national           Activity A: Support the Development
 information campaign to educate      of the Malagasy National Land
 the public.                          Policy Framework ($1.1 M)
 Simplify the land code and   Carry out information,
 facilitate the acquisition of land   education and communication
 by poor rural people.                campaigns designed to explain the
                                      specific land tenure reforms
                                      contemplated in the initial PNF to
                                      potential beneficiaries of such
                                      reforms, the staff of the National
                                      Land Service Administration and
                                      other interested parties.
                                      Consolidate and refine the
                                      PNF, during and after completion
                                      of the campaigns outlined above,
                                      which may result in additional
                                      white papers, additional land law
                                      proposals and suggested donor
                                      interventions.
                                      Conduct public outreach
                                      and dissemination of the final PNF
                                      after completion of the
                                      consolidation and refinement
                                      outlined above.
------------------------------------------------------------------------
 Modernize and reform        Activity B: Improve the Ability of
 property and topographic services    the National Land Service
 by installing an improved service    Administration to Provide Land
 structure and interdependency of     Services ($19.8 M)
 land tenure with other sectors       Index and restore
 (tourism, agriculture, industrial    documents.
 investments, etc.).                    Ask all current landholders
 Create a system for land     of land titles and other formal
 and topographic information.         ownership documents to bring these
 Create aerial maps.          documents to existing land offices
 Secure land management       to compre the information
 information electronically           currently on record with the
 (rehabilitate, save and catalog      physical documents being produced.
 all property and topographic           Take inventory of the
 documents in a database) and train   existing 800,000 land documents
 staff.                               (land titles and surveys)
                                      currently stored at the existing
                                      land management offices and
                                      produce a plan for (i) restoring
                                      the damaged land documents and
                                      (ii) scanning and digitizing all
                                      of the existing documents,
                                      including those produced by
                                      current holders above.
                                        Restore a portion of the
                                      damaged land titles and surveys in
                                      and around Antananarivo and in the
                                      Zones (approximately 300,000).
                                        Resolve disputes and
                                      address irregularities encountered
                                      in the indexing and restoration
                                      process.
                                      Modernize and computerize
                                      system.
                                        Install an automated land
                                      parcel information system
                                      containing property rights
                                      information relating to each
                                      parcel (e.g., date of transfer,
                                      identification of occupant, legal
                                      property description, physical
                                      boundaries and restrictions).
                                        Scan and digitize a portion
                                      of the existing land titles and
                                      surveys in and around Antananarivo
                                      and in the Zones (approximately
                                      400,000), including those produced
                                      by current holders.
                                        Procure satellite imagery
                                      for use in generating parcel maps.
                                        Train staff of National
                                      Land Service Administration
                                      (central and regional offices).
                                        Introduce mobile service
                                      units of the National Land Service
                                      Administration.
------------------------------------------------------------------------
 Strengthen and              Activity C: Decentralization of
 decentralize services related to     Land Services ($7.7 M)
 land tenure.                         Build and equip new local
                                      land management offices (10 per
                                      Zone).
                                        Finance an initial 2-year
                                      period of the operating costs of
                                      such new land management offices.
                                        Provide on-the-job training
                                      to local land management office
                                      staff.
                                        Establish procedures and
                                      practices for communications and
                                      coordination between the National
                                      Land Service Administration and
                                      local land management offices.
                                        Develop capacity for on-
                                      going management of records in the
                                      local land management offices.
------------------------------------------------------------------------
 Develop a system for        Activity D: Land Tenure
 registration of rural land by        Regularization in the Zones ($7.9
 removing legal barriers, dedicate    M)
 rights to undisputed parcels and     Formalize tenure in
 issue land titles whenever           selected municipalities (communes)
 possible.                            using one of three registration
                                      methods endorsed by the National
                                      Land Service Administration.
                                      Implement a fast-track
                                      titling and/or property
                                      registration process within
                                      selected areas within the Zones.
------------------------------------------------------------------------
                                     Activity E: Information Gathering,
                                      Analysis and Dissemination ($1.3
                                      M)
                                      Finance the cost of a
                                      resident long-term land tenure
                                      expert with international
                                      experience to provide ongoing
                                      advice and technical assistance
                                      regarding policy matters (e.g., to
                                      eliminate market distortions) to
                                      MCA-Madagascar and policy-level
                                      government institutions, offices
                                      or agencies.
                                      Finance occasional short-
                                      term national and international
                                      experts to provide more
                                      operational ongoing technical
                                      assistance and training to the
                                      staffs of the National Land
                                      Service Administration and local
                                      land management offices.
                                      Organize and conduct
                                      workshops, seminars and other
                                      outreach activities with intended
                                      beneficiaries and other
                                      stakeholders in order to obtain
                                      their feedback and comments to
                                      improve procedures relating to
                                      property transactions and other
                                      related services.
                                      Organize formal training
                                      and study tours outside of
                                      Madagascar for the staffs of the
                                      National Land Service
                                      Administration and local land
                                      management offices.
                                      Complete needs assessments
                                      for future reform relating to (i)
                                      land conflict resolution methods,
                                      (ii) policy development and (iii)
                                      legal framework, based on lessons
                                      learned from the activities
                                      carried out under the Land Tenure
                                      Project.
------------------------------------------------------------------------


                     FINANCIAL SECTOR REFORM PROJECT
------------------------------------------------------------------------
                                     MCC compact draft (Feb. 2005) $35.9
Original proposal (Oct. 2004) $63 M                   M
------------------------------------------------------------------------
 Improve the legal,          Activity A: Promote Legal and
 regulatory, and policy environment   Regulatory Reform ($1.1 M)
 for business.                        Finance the development of
 Support the emergence of     new banking laws and laws
 new trades, notably in the fields    regulating financial instruments
 of brokerage and ancillary           and markets, including enabling
 services.                            legislation for expanded
                                      intermediation and new credit and
                                      investment instruments.
                                      Train government
                                      officials, judges and potential
                                      beneficiaries on the contents and
                                      application of these new laws.
                                      Promote public awareness
                                      of these new laws through an
                                      educational and public awareness
                                      campaign.
------------------------------------------------------------------------
 Develop the financial       Activity B: Reform Sovereign Debt
 market--expand existing market for   Management and Issuance ($1.0 M)
 short-term treasury bonds, allow     Automate all sovereign
 distribution of securities by        debt issuance operations.
 microfinance institutions (MFIs),    Create new forms of
 allow distribution of securities     sovereign debt that will appeal to
 by businesses at a regional level,   a broader set of investors,
 establish regulatory and             including new denominations of
 monitoring mechanisms that           Treasury bills.
 guarantee the roll-out and           Create a fiscal policy
 transparency of transactions.        unit within the Ministry of
                                      Finance that will advise the
                                      Minister of Finance on sovereign
                                      debt portfolio management and
                                      issuance alternatives.
------------------------------------------------------------------------
 Implement a financial       Activity C: Strengthen the National
 system that is better adapted and    Savings Bank ($1.9 M)
 more accessible for SMEs.            Increase the operational
 Promote the establishment    efficiency of the NSB through
 of new financial institutions that   modernization and computerization,
 can supply appropriate financial     in particular by automating branch
 services through a public account.   operations and agency issuance for
                                      sovereign debt instruments.
                                      Increase the quality of
                                      service through staff training and
                                      the establishment of new NSB
                                      branches in the Zones.
                                      Increase mobilization of
                                      domestic savings.
                                      Strengthen capacity to
                                      manage liquidity facilities for
                                      MFIs.
------------------------------------------------------------------------
 Implement new financial     Activity D: Provide New Instruments
 instruments (factoring, risk         for Agribusiness Credit ($8.4 M)
 management, etc.).                   Create a revolving fund
                                      for refinance of MFI assets.
                                      Extend warehouse receipts
                                      and leasing as a means of
                                      extending credit to rural and
                                      agricultural producers.
                                      Conduct a major study on
                                      constraints and alternatives for
                                      providing access to market-based
                                      credit to agribusiness all along
                                      the value chain.
------------------------------------------------------------------------
 Improve the payments        Activity E: Modernize National
 system through the installation of   Interbank Payments System ($21.0
 telecommunication and security       M)
 systems in the provinces and         Conduct a design and cost
 priority zones.                      study for a new national interbank
                                      payments system that will reduce
                                      check clearing from the current 45
                                      days to D+3.
                                      Provide information
                                      technology and telecommunications
                                      equipment and installation
                                      services, if the above study
                                      demonstrates feasibility and the
                                      results are acceptable to MCC
                                      (including within the expected
                                      budget or if additional financing
                                      is secured).
------------------------------------------------------------------------
 Strengthen and improve      Activity F: Improve Credit Skills
 accounting practices.                Training, Increase Credit
 Establish a central credit   Information and Analysis ($2.5 M)
 reporting agency.                    Increase awareness of new
 Improve communication and    accounting standards and provide
 education in the finance sector.     sustainable training of finance
                                      and accounting professionals
                                      through Madagascar including
                                      accountants, business managers,
                                      and microfinance loan officers.
                                      Create a central database
                                      accessible by all providers of
                                      credit that contains credit data
                                      and payment and repayment history.
------------------------------------------------------------------------


    Question. Given that 70 percent of the population of Madagascar 
lives on less than $0.40 a day, as the MCC points out in its fact 
sheet, and less than 2 percent of the population holds formal bank 
accounts, I am surprised that almost a fifth of the total compact would 
go toward a check-clearing improvement system. Could you explain the 
rationale and public support for such a high priority on this 
intervention?
    Answer. The focus of this component is not the 2 percent who have 
accounts but the 98 percent who do not. Kofi Annan announced 2005 as 
the International Year of Microcredit (2005) on December 29, 2003, with 
the following words:

          The stark reality is that most poor people in the world still 
        lack access to sustainable financial services, whether it is 
        savings, credit or insurance. The great challenge before us is 
        to address the constraints that exclude people from full 
        participation in the financial sector . . . Together, we can 
        and must build inclusive financial sectors that help people 
        improve their lives.

    Current research shows that making the financial sector more 
inclusive, disproportionately benefits the poor (vis-a-vis the wealthy) 
and therefore reduces poverty. Two recent examples from the World Bank 
summarize the theoretical basis for focus on the financial sector as a 
poverty reduction tool:

   Finance for Growth: Policy Choices a Volatile World. World 
        Bank and Oxford University Press; 2001, Washington.

     ``The World Bank Group has long recognized that poverty 
            reduction and growth depend on effective national financial 
            systems.'' Page ix.
     ``There is now a solid body of research strongly suggesting 
            that improvements in financial arrangements precede and 
            contribute to economic performance. In other words, the 
            widespread desire to see an effectively functioning 
            financial system is warranted by its clear causal link to 
            growth, macroeconomic stability, and poverty reduction.'' 
            Page 5.

   World Bank Policy Research Working Paper 3338, June 2004. 
        ``Finance, Inequality and Poverty: Cross-Country Evidence.'' 
        Thorsten Beck, Asti Demirguc-Kunt, and Ross Levine.

     While substantial research finds that financial development 
            boosts overall economic growth, we study whether financial 
            development is pro-poor: Does financial development 
            disproportionately raise the income of the poor? Using a 
            broad cross-country sample, we find that the answer is yes: 
            Financial intermediary development reduces income 
            inequality by disproportionately boosting the income of the 
            poor and therefore reduces poverty.

    Madagascar's payment system is outdated and dysfunctional. It can 
take up to 45 days for a check to clear. We are told that the average 
period for a check to clear is around 25 days. Compare this to 1 or 2 
days in the United States. The failure of the financial sector to 
achieve greater penetration must be due, at least in part, to its 
failure to provide one of the fundamental services--handling everyday 
payments. By any measure, Madagascar's financial sector fails to meet 
standards of performance. The country's population is approximately 17 
million. Only about 200,000 bank accounts exist, implying about 1 
percent of the population is participating in the formal financial 
sector. Another measure of the lack of penetration of the financial 
sector is the credit/GDP ratio, approximately 10 percent, and 
characterized by the IMF as among the lowest in sub-Saharan Africa, 
which has the lowest intermediation rate of any region in the world.
    Poverty reduction and economic growth will only be permanent in 
Madagascar when conditions permit greater mobilization of domestic 
capital. A constraint is the archaic operations of the financial 
sector, as measured by the excessive check-clearing time. The goal of 
the payments system project is to reduce check-clearing times from a 
maximum of 45 days to a maximum of 3 days after the date of deposit 
(``D+3'' in banker's language). We believe that this will eliminate a 
major barrier to the growth of the financial sector in Madagascar. This 
development, in turn, will permit the financial sector to make its 
contribution to poverty reduction and economic growth--a contribution 
that, by any measure is now severely constrained.
    As the above analysis indicates, the beneficiaries of the project 
will be all the poor of Madagascar. Access to safe, remunerated savings 
vehicles and to the credit that will allow them to enter into the real 
economy will benefit anyone who avails himself or herself of the 
opportunity. We take other steps in the compact to assure that credit 
will, in fact, flow to the poor. A critical step to any of those steps, 
however, is an efficiently functioning traditional financial sector, 
including the payments system.

    Question. Access to information and transparent processes are 
required for citizens to be able to engage in the MCA process and 
ultimately hold their own governments accountable for good use of MCA 
development funds. What steps are being taken to ensure that MCA 
country citizens have the information and resources, if necessary, to 
hold their governments accountable for MCA program objectives?
    Answer. The MCC insists on transparency as a fundamental principle 
for program design and implementation in all programs that it funds. At 
the outset, the MCC advises country counterparts of the importance the 
MCC places on the consultative process and the fact that the way this 
process is carried out will be a significant consideration in program 
approval. The MCC encourages countries to make their proposals to the 
MCC public--in terms of establishing a Web site to provide continuous 
information not only about the proposal, but about the interactions 
taking place as the original proposal evolves, as well as encouraging 
interaction with civil society, business groups, and other relevant 
groups in all parts of the country and with a variety of interests. The 
MCC asks that the country document this process so that there can be an 
objective discussion of exactly what type of consultative process is 
taking place in relation to the MCC program.
    In terms of program implementation, the MCC has encouraged 
countries to include nongovernmental advisors for the ``accountable 
entity'' that will oversee operations; in some countries, the proposal 
has included a public-private oversight board where nongovernmental 
members have voting rights. The MCC also encourages countries to make 
public all aspects of program implementation, including procurement and 
budgetary data, so that there will be public scrutiny of program 
implementation and consistency of implementation with the original 
design. Programs in some countries are building on the concept of 
social audit of implementation and include capacity building for local 
civil society to have the necessary information and training to carry 
out this oversight role.

    Question. The Government Accountability Office (GAO) has made 
several recommendations for the MCC in the areas of transparency and 
governance. What are you going to do to correct the fact that not all 
source data used to generate country scores on the indicators were 
publicly available?
    Answer. MCC is striving for complete transparency in the country 
selection process. MCC staff have considered GAO's recommendations, as 
well as other public comments received about the indicators and the 
transparency of data. We believe that improvements in the Web site, 
including additional links to supplementary data sources can address 
the issues cited.

    Question. What about what the GAO termed the ``inherent 
limitations'' in some of the indicators--how do you plant to address 
those limitations?
    Answer. MCC evaluates the indicators used to measure government 
policies on an ongoing basis to ensure that we are using the best 
available indicators. If we find that there is a better measure of a 
government's policy that meets our criteria for selecting an indicator, 
we will propose a change to the Board of Directors. For the last 
selection process, the Board adopted two changes to the indicators 
based on our recommendation--substitution of Girls' Primary Education 
Completion Rates and lowered the inflation ceiling from 20 percent to 
15 percent.
    Additionally, to address the weaknesses in the indicators where no 
change is recommended, MCC can provide the Board with supplemental 
information to address weaknesses such as lags, gaps, and trends not 
reflected in the data.

    Question. When do you anticipate that the MCC Board will address 
the corporate governance issues that GAO raised in terms of defining 
its role in the areas of developing corporate strategies, audit and 
assurance processes and developing risk management and communicating 
and coordinating with corporate stakeholders?
    Answer. This is an ongoing process. The Board holds regular 
meetings in which the Board members have an opportunity to provide 
input and guidance to the CEO on program development matters and other 
strategic issues. In addition to regular meetings, there are a variety 
of ways in which the Board carries out its responsibilities. MCC's CEO 
and staff regularly apprise the Board of MCC activities through oral 
briefings of members and their staffs, background papers and other 
documents, affording the Board the opportunity to provide input to 
management, either directly or through agency staff.
    MCC has established an interagency working group of Board agency 
staff that meets regularly so that all Board agencies are aware of 
pending issues and have the opportunity to provide an agency 
perspective. In its role of overseeing audit and assurance processes, 
the Board recently invited the inspector general to brief the Board on 
its planned audit activities and to provide individual Board members an 
opportunity to ask questions and provide input. Consideration has been 
given to the establishment of an audit committee to assist the Board in 
its risk management responsibilities, although any decision on that 
will likely be made after the full Board is in place. In another 
example, the Chair recently designated three Board members to sit on a 
committee to engage the CEO on compensation matters.
    To more formally institutionalize these and other Board 
responsibilities, MCC is in the process of developing a more 
comprehensive ``Governance Policy'' for Board consideration that will 
address both statutory and nonstatutory Board roles in the overall 
oversight of the corporation, including, for example, compact 
development, public outreach, risk management, coordination with other 
donors, and policy development. Board members will be given the 
opportunity to consider the proposed governance policy and provide 
input prior to adoption of the policy by the Board.

    Question. Does the board plan to establish an audit committee?
    Answer. The Board will most likely make a decision as soon as the 
full complement of directors is appointed (two Board positions remain 
open at this time).

                                  
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