Background and Overview of MCC Processes 2007

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

Policy, Ownership & Results Make aid more effective Sound governance, economic and social policies Spur private investment and increased trade, the real engines of growth Maximize growth benefits by giving the poor access to accountable institutions, education and health, and economic opportunity Broad countryownership of development efforts Clear objectives, measurement of results and transparency Increases responsibility Builds capacity Yields better results Increase accountability Contribute to development success

Eligibility § MCA eligibility intended as a reward to countries for good policy performance and be an incentive to improve further § Two competitions in FY 07: Low Income and Lower Middle Income § Countries measured against others of similar income level § Eligibility based on scoring above the median on Corruption and on at least half of 16 indicators in each of the three policy categories: § Ruling Justly (pass 3 of 6) § Investing in People (pass 2 of 4 indicators) § Economic Freedom (pass 3 of 6 indicators) § For FY 07, MCC adopted as non-binding supplements two new indicators, a Natural Resources Management Index and a Land Rights and Access Index, and will propose their full adoption for FY 08 § Eligible Countries must maintain strong policy performance as measured by the indicators as a condition for continued eligibility

Indicators Used in FY 07 Ruling Justly Investing in People Economic Freedom Natural Resources § Civil Liberties (Freedom House) § Public Expenditure on § Cost of Starting a Health (Nat’l) Business (WB/IFC) § Land Rights and Access Index (UN/IFAD, WB/IFC)* § Political Rights (Freedom House) § Immunization (WHO) § Inflation (IMF, WEO, IFS) § Natural Resources Management Index (CIESIN, YCLEP)* § Voice and Accountability (WBI) § Primary Education Spending (WB Ed. Stats) § Fiscal Policy (IMF, WEO, other) § Government Effectiveness (WBI) § Girls’ Primary Education Completion (WB Ed. Stats) § Days to Start a Business (WB/IFC) § Rule of Law (WBI) § Trade Policy (Heritage) § Control of Corruption (WBI) § Regulatory Quality (WBI) WBI: World Bank Institute WB/IFC: World Bank/Int’l Finance Corp IFS: Int’l Financial Statistics WHO: World Health Organization WEO: World Economic Outlook UN/IFAD: Int’l Fund for Agricultural Development CIESIN: Columbia U Center for International Earth Science Information Network YCLEP: Yale Center for Environmental Law and Policy * Non-binding Supplemental information for FY 07

Country X Indicator Ranking (Pass)

Country Y Indicator Ranking (Does not pass)

Current MCA Eligible Countries § FY 07: 2 new Low Income Countries* (LIC) and 1 Lower Middle Income Country** (LMIC) selected § 25 countries currently eligible to compete for MCA Compact funding Africa Benin Burkina Faso Cape Verde Namibia Ghana Madagascar Mali Morocco Mozambique Senegal Lesotho Tanzania Latin America Bolivia El Salvador Honduras Nicaragua Eurasia Armenia East Timor Georgia Mongolia Sri Lanka Vanuatu Jordan** Ukraine* Moldova*

MCA Funding § Congress has appropriated to MCC a total of $5. 99 billion for FY 04 through FY 07. MCC has to date committed $3. 39 billion -- just over $2. 98 billion to 11 Compacts and nearly $310 to 13 threshold programs. MCC expects to commit substantially more in the next year to a robust pipeline of proposals § MCA money is “no-year” grant money and does not expire. Once a Compact enters into force the full amount is obligated and set aside § There are no limits on Compact amounts that countries can request § MCC has no inherent preference as to sectors or activities proposed, but elements must spur growth and poverty reduction § Final Compact amounts will be primarily based on program quality, estimated costs, and available funds § For Compact-eligible threshold countries, successful threshold program commencement is a precondition for Compact signing

MCA Compact Funding (in millions of dollars) Nearly $3. 0 Billion for 11 Compacts Approved $460. 94 El Salvador $109. 8 Madagascar $110 Cape Verde $295. 3 Georgia $461 Mali $307. 3 Benin $215 Honduras $175 Nicaragua $547 Ghana $235. 65 Armenia $65. 69 Vanuatu

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

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

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

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

Steps in the MCC Process Step 1: Proposal Development & Program Design Step 2: Due Diligence and Program Refinement – Analysis of Viability and Sustainability of Proposed Activities, and of Process Quality Step 3: Mobilization and Start-up Step 4: In-country Implementation

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

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

Step 2: Due Diligence and Program Refinement Detailed Technical Analysis of Proposed Activities Management Oversight and Fiscal Accountability Environmental and Social Safeguards Implementation Feasibility and Sustainability Consultative Process and Donor Coordination Due Diligence Plans for Monitoring and Evaluation Impacts on Growth , Poverty Reduction and Beneficiaries

Step 2: Due Diligence and Program Refinement § MCC and Country teams undertake implementation planning (e. g. procurement and monitoring and evaluation plans, accountable entity, financial mechanisms) § Once due diligence and program refinement complete, TT prepares an Investment Memo for MCC Investment Committee detailing proposed Compact elements and implementation plans § Country team continues to work with MCC on final Compact to reflect agreed Program § Based on Investment Memo, Investment Committee reviews the final Compact elements and requests MCC Board approval § Once the Board approves the Compact, MCC notifies Congress of its intent to enter into a Compact

Step 3: Mobilization and Start Up § Legal documentation completed § Compact signed by Country and MCC § Accountable entity staffed and audit/marking procedures negotiated § MCC and country experts complete documentation to permit entry-into-force § Baseline data for monitoring and evaluation collected § First disbursement is made § Fiscal and procurement agents and contractors secured

Step 4: In-Country Implementation • Compact provisions in effect • Partner country teams managing implementation • Country teams begin providing Quarterly progress, Procurement performance and Financial reports • Small MCC staff in place to guide, advise and assist

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Opportunities for Civil Society/Private Commercial Sector Involvement § Participate in Country-led Consultative Process that identifies key constraints to and opportunities for economic growth and poverty reduction § Carry out Due Diligence of Compact proposal components (in response to MCC procurements) § Participate in accountability processes during Compact implementation § Compete in country-led, open, program procurements related to implementation

Procurement Practices • Procurements by MCC for due diligence services will be listed under “MCC Procurements” and “Consultants” at: http: //www. mcc. gov/jobsandprocurement/ • The Millennium Challenge Corporation (MCC) funds contracts under its Compacts to recipient countries. These contracts are solicited, awarded and administered by Compact countries through an Accountable Entity in each country. • Such compact-funded, country “Program Procurements” are done under MCC-agreed “Procurement Guidelines, ” which apply open, fair and competitive procedures used in a transparent manner. These procedures apply to all firms -- US-based, international and Compact -country. • Significant “Program Procurements” will be linked to the www. mcc. gov website and posted to the UN site, www. devbusiness. com, and the World Bank’s Development Gateway Market, www. dgmarket. com

Threshold Program • Threshold program reinforces incentives for good performance and further improvements • Threshold countries close on the indicators and have demonstrated reform commitment • Threshold countries may propose funding to improve on MCC indicators, and raise chances of Compact eligibility • MCC to date has funded 13 threshold programs totaling nearly $310 million • If a threshold country becomes eligible for Compact funding, significant progress on threshold program implementation is a prerequisite for Compact signing

Policies Matter MCC Eligibility FY 2004 -07

Threshold Countries Africa Latin America Guyana Kenya Paraguay Malawi Peru Uganda Zambia Sấo Tomé and Principe Burkina Faso* Tanzania* Niger Rwanda Eurasia Albania Indonesia Kyrgyz Republic Jordan* Moldova* Philippines Ukraine* East Timor* Yemen** * Burkina Faso, Tanzania, East Timor also became eligible for Compact funding in FY 2006, and Jordan, Ukraine and Moldova in FY 2007 ** Yemen was suspended from the threshold program in FY 2005 and reinstated in February 2007, after addressing corruption and governance deterioration

Overview: MCC Africa Engagement § Engaged with 20 countries: Compact: Eligible: Burkina Faso*, Lesotho, Morocco, Mozambique, Namibia, Senegal, Tanzania* Threshold: § Cape Verde, Madagascar, Benin, Ghana, Mali Kenya, Malawi, Sao Tome and Principe, Uganda, Zambia, Niger, Rwanda Over $1. 5 billion approved: COMPACTS THRESHOLD PROGRAMS Cape Verde -- $110 million Malawi -- $20. 92 million Madagascar -- $109. 8 million Burkina Faso -- $12. 9 million Benin -- $307. 3 million Tanzania -- $11. 15 million Ghana -- $547 million Zambia -- $22. 7 million Mali -- $461 million Kenya -- $12. 7 million Uganda -- $10. 4 million * Current eligible countries with active threshold programs

Compact Countries in Africa Madagascar: § First MCC Compact, signed April 2005; $109. 8 million, 4 -year program includes Reforms in Land Tenure and Financial Sector, and Agribusiness Services. Collaborating with World Bank on National Land Reform Program Cape Verde: § $110 million, 5 -year Compact signed July 2005. Focus on watershed management/agriculture development, infrastructure (roads, bridges, port development), private sector development. Partnered with the World Bank on roads and bridges aspects and the IFC’s PEP Africa on private sector development Benin: § $307. 3 million Compact signed in March 2006. Includes port infrastructure and management reform, financial and business services modernization, and justice system and land tenure reform to enhance enterprise development and economic activity

Compact Countries in Africa, cont. Ghana: § $547 million Compact signed August 2006 is to improve productivity and commercial performance of agriculture, which employs over 60% of Ghana’s labor force, upgrade road and ferry transportation to support agriculture and social services, and to improve education, water and sanitation, power and other services in rural areas Mali: § $460. 8 million Compact signed November 2006 is to expand modernize irrigated agriculture and related policies, as well as improve the international airport and develop nearby a platform for industrial activity, including agroprocessing

African Threshold Program/Eligible Countries Burkina Faso: § Currently, a $12. 9 million threshold program funded by MCC focuses on improving Girls’ Education, including by constructing new classrooms and raising awareness of the issue Tanzania: § Tanzania’s $11. 15 million threshold program focuses on Controlling Corruption by improving public procurement, establishing a Financial Intelligence Unit, building monitoring capacity in the non-governmental sector and strengthening the rule of law

African Threshold Program Countries Malawi: § Malawi has a $20. 92 million threshold program § Focuses on Controlling Corruption; strengthens legislative and judicial branches and independent media coverage, builds the capacity of lead agencies, and enhances the role and work of civil society organizations Zambia: § Zambia has a $22. 74 million threshold program § Program will fight corruption and improve government effectiveness. Its threepronged strategy focuses on preventing corruption in targeted government institutions, improving public service delivery to the private sector, and improving border management of trade

African Threshold Program Countries, cont’d Kenya: • • Two-year, $12. 7 million program to reduce corruption by improving oversight, transparency, records management, regulatory quality and overall efficiency (e. g. via online systems) in the public procurement system Specific attention to strengthening capacity and management in health care procurement and delivery, to reduce and prevent waste, fraud and abuse Uganda: • • Two-year, $10. 4 million program to strengthen and develop oversight, financial management systems, auditing, professional certification and registry programs, public information dissemination and administrative efficiency in public procurement watchdog agencies Specific efforts will be made to enhance the role and capacity of civil society organizations to engage effectively with public agencies, including by improving access to information and legal support.

Overview: MCC Western Hemisphere Engagement § Engaged with 7 countries § Currently, 4 programs approved for over $875 million: Compact Honduras -- $215 million Nicaragua -- $175 million El Salvador -- $460. 9 million § Currently Compact Eligible: Bolivia Threshold Paraguay -- $34. 65 million Threshold Eligible: Guyana Peru

Western Hemisphere Compact Countries Honduras: § § § MCC’s second Compact, signed in June 2005; $215 million over 5 years Focus on upgrading critical Northern highway (including road management), farm-to-market roads, agricultural productivity, access to credit and know-how Impact will be higher incomes, lower transportation costs and enhanced capacity to trade locally, regionally and globally. Complements CAFTA Nicaragua: § § § MCC’s third Compact, signed in July 2005; $175 million over 5 years Program to strengthen property rights in the north, upgrade key roads, institutionalize road maintenance, improve farm and forestry water supply, and enhance rural farm, enterprise and agribusiness development Impacts include higher profits/wages, lower transportation costs, more business start-ups and successes, and better capacity to trade. Complements CAFTA El Salvador: § § § Signed in November 2006; $460. 94 million over 5 years Program will provide education and training and basic services to communities in the north, improve transportation infrastructure, and enhance rural agricultural productivity Impacts include enhancing the livelihood and welfare of hundreds of thousands of poor Salvadorans through improved and lower cost power, water, transport and financial services. Complements CAFTA

Western Hemisphere Threshold Program Country Paraguay: § Paraguay has a $34. 65 million threshold program § The program aims to reduce corruption, lower tax compliance and cumbersome business registration procedures

Overview: MCC Eurasia Engagement § Engaged with 14 countries** § Over $700 million approved: Compact Threshold Georgia -- $295. 3 million Albania -- $13. 85 million Armenia -- $235. 65 million Philippines -- $21 million Vanuatu -- $65. 69 million Ukraine -- $44 million Jordan -- $25 million Indonesia -- $55 million Moldova -- $24. 7 million § Currently Eligible: Compact Threshold Mongolia Sri Lanka East Timor Jordan* Ukraine* Moldova* Kyrgyz Republic Yemen * Ukraine, Jordan and Moldova are Compact-eligible for FY 2007, and have active threshold programs **Yemen was reinstated to threshold eligibility in Feb. 2007, after addressing corruption and governance deterioration

Eurasia Compact Countries Georgia: § $295. 3 million, 5 -year Compact signed in September 2005 § Focus on regional infrastructure (roads, gas pipeline, agricultural productivity, municipal services, enterprise development) to unlock growth Armenia: § $235. 65 million, 5 -year Compact signed in March 2006 § Focus on rural road rehabilitation and irrigated agriculture to raise agricultural productivity and reduce rural poverty Vanuatu: § $65. 69 million, 5 -year Compact signed in March of 2006 § Focus on civil works reconstruction of roads, wharfs, an airstrip, and warehouses on eight islands, and support with program administration

Eurasia Threshold Programs Albania: § Albania has a $13. 85 million threshold program § Aims to enhance performance on Ruling Justly and Economic Freedom via improvements in tax administration, public procurement and business registration Ukraine: § In December 2006, a two-year, $44 million threshold program aimed at reducing corruption was signed with the Government of the Ukraine § Program will strengthen civil society monitoring and exposure of corruption, promote judicial reform, improve government ethics and administrative standards and relevant regulations, as well as root out corruption in higher education admissions Philippines: § In July 2006, the Government of the Philippines signed a 2 -year, $21 million threshold program funded by MCC § Program to fight corruption by strengthening Office of the Ombudsman, which prosecutes senior officials, and revenue and customs procedures in the Department of Finance

Eurasia Threshold Programs, Cont. Jordan: § § In October 2006, $25 million threshold program signed Program will strengthen local democratic governance capacity and modernize customs services Indonesia: § § § In November 2006, a $55 million threshold program was signed with the Government of Indonesia Program will substantially improve immunization rates for key childhood diseases and improve health Program will advance Indonesia’s battle against corruption through judicial reform and strengthening the Corruption Eradication Commission and Financial Transactions Report and Analysis Center Moldova: § § In December 2006, the MCC signed a $24. 7 million threshold agreement with the Government of Moldova Program will underpin anti-corruption efforts involving the judiciary, the health care system, the main anti-corruption Center, and the tax, customs and police agencies

MCC Web Site Information • At www. mcc. gov you can find useful information, e. g. : § The full country guidance package, including MCC points of Contact, at “Countries” link § Candidate country indicator ranking sheets § MCC background, press releases, fact sheets § MCC partner country pages, including links to government web sites and key contacts § Compact and Threshold program documents • If you need help finding information on the website, either e-mail an inquiry via the web site, at “Contact us, ” or call MCC at 202 -521 -3600