Created in January 2004 by the US Congress, the Millennium Challenge Corporation (MCC) is an innovative and independent foreign aid agency focused on helping lead the fight against global poverty through economic growth. The MCC has approved more than USD8.4 billion in compact and threshold program funding worldwide, often to support infrastructure projects in developing and emerging markets.
Mr. Daniel W. Yohannes, CEO of MCC , spoke about the organization’s innovative funding models with Katherine Maloney, a Director with KPMG’s International Development Assistance Services (IDAS) practice in New York.
Katherine Maloney: I understand that the MCC is very involved in supporting the development of infrastructure in compact recipient countries. Why is infrastructure so important to reducing global poverty?
Daniel Yohannes: Our investment priorities are actually decided by our partner countries, who come to us with proposals after conducting some rigorous analysis on the factors that are constraining their economic growth. We look at their proposals and then make decisions based on the projects that are expected to return the greatest economic benefit for the countries and their populations.
What we have seen is that about 65 to 70 percent of our portfolio ultimately goes towards infrastructure-related projects which are vital for promoting trade and investment. One of the biggest constraints to economic growth in developing countries is a lack of infrastructure such as airports, ports and roads, and this is where most of the funding requests are focused.
Katherine Maloney: The sustainability of infrastructure has become a key topic, particularly in the developing world. How is MCC working with partner countries to ensure that the investment provides value long into the future?
Daniel Yohannes: Sustainability is very important to MCC. We don’t want to spend five years building roads only to have them fall apart after we are done. That is why we consider sustainability at all phases of our project design and implementation and pro-actively look for ways to reinforce sustainability – for example, by requiring governments, before the project even begins, to put aside a significant portion of maintenance costs and by requiring them to invest in improving the capacity of public works departments. We want the assets we fund to deliver value for a very long time.
Our project in Nicaragua is a great example of this. Before we arrived, the country was only able to maintain about 500 kilometers of road on a budget of USD2.5 million. But before we would invest in new roads, we needed to make sure that the government could secure the funds to properly maintain them into the future. We required that the government levy a national fuel tax; with the proceeds the country now maintains 3,000 kilometers of road from an annual budget of about USD31 million. Some of those are roads that we built, but the government has also been able to service the national road network.
Katherine Maloney: MCC has always put a significant focus on encouraging private sector participation in infrastructure development. How is this helping to reduce poverty in the regions within which you work?
Daniel Yohannes: Countries cannot rely on public sector investment alone to bring about long-term prosperity. So we make sure that the private sector is involved from Day 1. The private sector is often involved in the development of the constraints analysis at the outset, but they are also usually the first to recognize that these investments are effectively opening up markets and increasing trade. The private sector is also often involved in project design and development in our partner countries, and is certainly involved in contracting to implement projects. We are also focusing increasingly on sector policy reform to encourage private sector investment.
For example, we have a USD275 million contract with Jordan to enhance that country’s water security. Our funding is being complemented by a private sector builder and operator of water treatment plants who is bringing about USD85 million to the program to leverage our investment. Another example is our project in Namibia where we have a three-way partnership in which we are providing substantial funding to improve the management of national parks in the north of the country and about 25% of the costs of establishing new joint venture tourism lodges, which are partnerships between communities and tourism investors. The government is providing the wildlife and the private lodge owners are providing the remaining 75% of the costs. The local population benefits from the construction of these lodges and the resulting infrastructure and jobs.
But we are also working with the national governments to create the right environment for private investment from a policy perspective. In Benin, where we are helping to build a port, the government has introduced major policy reform to help reduce the customs burden. Before we became involved, businesses would have to go through 25 different windows to clear customs and now they are only required to go through one. As a result, we have seen significant improvement in the port’s efficiency as the time to unload a ship has fallen from four days to just two, and that number is continuing to fall.
Another example is Georgia, where they have really focused on creating a positive environment for business. Just a few years ago, the country ranked 118 in terms of ease of doing business, but with some concerted effort they now rank 12th which has greatly increased their attractiveness to private investment.
Katherine Maloney: Looking ahead, what trends do you see gaining traction in the markets in which the MCC invests?
Daniel Yohannes: There is a growing demand for infrastructure that supports inter-regional trade. For example, in Tanzania, the government has invested a significant portion of their compact into building a major road to connect northern Tanzania to Hora Hora on the border with Kenya. That is going to help Tanzania become more competitive and increase its balance of trade within the region. As a result, private investors can now think of Tanzania as a conduit to markets in Kenya and Uganda.
Growth in Africa is actually projected to outpace that of Asia over the next few decades and to help fund that growth, we are seeing increasing partner country interest in leveraging relationships with the private sector to create infrastructure assets to help those countries become more competitive in the global market. Businesses are looking at these countries to see if they can be competitive by allowing them to lower their cost of doing business.
One of the great attributes of the MCC is that we have no specific earmarks or sector requirements imposed by Congress. So everything we do is primarily based on addressing both the needs of the country and the opportunity for businesses to participate and benefit from our investments. That’s what makes us so successful; we look at every deal from the perspective of business.
By Katherine Maloney, KPMG in the US