FINANCING DEVELOPMENT

Aid and Debt Relief Case Study - MCC/Benin Compact

On February 22, 2006 the Millennium Challenge Corporation (“MCC”), on behalf of the United States of America, signed a $307 million, 5-year Compact with the government of Benin. The funding is earmarked for four development projects, with the ultimate goal of fostering economic development and reducing poverty. As Benin has a GDP of just $8.6 billion, the MCC grant represents a significant infusion of funds.

Benin

Benin gained its independence from France on August 1st, 1960. Regional affiliations from before the colonial period quickly resurfaced, resulting in a culture of clientelism politics. During the early 1960s roughly 40% of government expenditures were spent on employee wages; the vast majority of government positions were awarded as political favors. Necessary policy changes were forgone as the ruling parties focused on buying political support. A military coup occurred in 1965 as the country’s economic situation became increasingly dire. The regime that came to power was unable to bring about meaningful changes in the operation of government, however, and the nation’s economy continued to stagnate. A second military coup occurred in 1972, leading to the creation of a socialist government.

In response to a mounting debt crisis, Benin started shifting towards economic and political liberalization in the mid 1980s. The changes in economic policies accelerated during the 1990s at the insistence of the IMF. However, the economy has remained extremely poor, with a per capita GNI of roughly $1,250 (PPP). The country’s main exports are all agricultural products (cotton and palm oil being the most important, the former in recent years). However, due to chronic underinvestment until the 1980s, the agricultural sector remains inefficient. A privatization policy started in 2001 that targets telecommunications, water supply, electricity, and a host of other sectors, has continued despite tepid support from the government.

The Millennium Challenge Corporation

The Millennium Challenge Account (MCA) was created in 2004 with the purpose of providing aid to foreign nations “in a manner that promotes economic growth and the elimination of extreme poverty and strengthens good governance, economic freedom, and investments in people.” The program is administered by the Millennium Challenge Corporation (MCC). When President Bush announced the creation of the program, he called for a $5 billion annual commitment by 2008. The 2007 appropriation approved by Congress is roughly $2 billion. This number still represents a significant increase in U.S. aid abroad.

The following is a brief outline of how the MCC delivers aid to a recipient country:

Candidate countries are identified based on their income per capita.
A set of eligible countries is identified based on a combination of bjective indicators of each country’s relative dedication to “ruling justly, investing in their people, and establishing economic freedom” and other factors deemed relevant by the MCC.
Eligible countries are notified and asked to submit proposals for projects to be financed by the MCC.
If a project proposal is accepted, the MCC and the recipient country will prepare a Compact to memorialize the agreement.

Noteworthy and somewhat novel features of the MCC approach to allocating aid are: the determination to restrict aid to countries that demonstrate a commitment to poverty reduction and good governance; the reliance upon objective indicators as opposed, for example, to political or strategic considerations; and the fact that once they are deemed eligible, prospective recipients propose how the money should be used.

Some commentators have questioned the extent to which the MCC respects these principles in practice. There are also principled objections to the idea of denying aid to countries that have not demonstrated a commitment to poverty reduction and good governance. Arguably, those are the countries whose people are in greatest need of foreign assistance.

The MCA and Benin

The Benin Compact contemplates funding for four major projects: the Land Project, the Financial Services Project, the Justice Project, and the Markets Project. The Markets Project, which is primarily a modernization of the Port of Cotonou, is expected to receive $169.45 million, and is easily the largest of the projects. Improvements to the Port are expected to reduce transportation costs and allow farmers to access world markets. The Land Project seeks to improve the process for obtaining title to land and to grant titles to 100,000 residents. Having title should encourage investment by enhancing security of tenure and access to credit. The Justice Program is an attempt to provide greater access to the judicial system throughout the country and make the judicial process more efficient. Finally, the Financial Services Program is an effort to dramatically increase access to credit.

Questions for discussion

What conditions precedent warrant non-disbursement by the MCC? What role did Benin have in determining these conditions? See Section 2.1(a)(ii)
The Compact has a number of provisions that allow the MCC to cease making disbursements. However, what happens if disbursements are stopped once the project is already underway? Given Benin’s current economic condition it is questionable whether the government could procure the necessary funds to finance the projects unilaterally. At the same time, a great deal of government funds could potentially be sunk into a project, particularly the Port of Conotou modernization, before the MCC decided to withdraw support. Would Benin have any recourse to recoup these funds if such a scenario actually occurred? Alternatively, if Benin flagrantly misused MCA funds would the United States have any legal recourse aside from halting future disbursements?
What repercussions will Benin face if their performance on the selection criteria falters?What are considered acceptable drops in performance? Should the MCC be allowed to make funding conditional on selection criteria once project development has commenced?
How broad will be the MCC guidance referred to in Section 2.1(e)? Will the guidance only refer to technical implementation matters or substantive changes to the programs? Will Benin have the ability to challenge the guidance given by the MCC? If so, how?
What process was used to determine the level of funding to be provided by the Government of Benin for the programs contemplated by the Compact? If Benin does divert existing funding away from development programs, how does the MCC determine if such a diversion is justified? What events would justify such a diversion? Would it be acceptable, or possibly even preferable, for Benin to reduce expenditures on development programs if doing so would reduce a budget deficit? How much flexibility should Benin have in budgeting for development programs? See Section 2.2.
Noting that these practices are outside the scope of the proposed programs and therefore ineligible for funding anyway, why does the United States prohibit funding activities referred to in section 2.3(a) given that they are legal in the U.S., especially when explosive population growth in recipient nations often vastly diminishes growth of GDP per capita?
What constitutes a substantial loss of United States jobs or production within the meaning of section 2.3(b)? Will this provision have any detrimental effect on Benin’s development programs?
What constitutes a “significant” health or safety hazard within the meaning of section 2.3(d)? How does the MCC promulgate their environmental guidelines? Is it fair to hold developing countries to environmental standards created by the United States?
If the MCC determines that Benin has violated terms of the Compact, what steps, if any, can Benin take to challenge that determination?
Is section 3.1(b)sufficient to ensure that conflicts of interest do not compromise any of the projects?
How were the procurement guidelines referred to in section 3.2(f) created, and what do they entail?
Are the audits contemplated in section 3.8(d) audits too invasive, or not invasive enough to ensure efficient implementation of the Compact?
Was the consultation process sufficient to allow Benin to choose development programs that would be the most effective in reducing poverty? Were the members of civil society represented in the consultation process from a sufficiently diverse background? How much guidance, if any, was given by the MCC as Benin developed their program proposals? See Annex I section 1(b).
The question of how much control the MCC should have with regards to Benin’s development is not easy. While Benin’s sovereignty must be respected, the United States has an equally compelling interest in ensuring that its funds are used effectively and to promote the goals that the funds were earmarked to support. Do you think that the Compact reached an acceptable balance between these competing interests?
The Procurement Plan is incorporated by reference in the Benin Compact. As with the Compact itself, the Procurement Plan balances the autonomy of Benin with the interests of the MCC in using their funds effectively. Of particular interest is the MCC’s right to approve all procurement plans created by MCA-Benin. Is this too much micromanagement, or is such oversight necessary to ensure that the programs stay within their budgets? Should all oversight remain with the MCC or should the government of Benin have some authority as well?
As with the Procurement Plan, the Disbursement Agreement is also incorporated by reference into the Compact. Read Article III carefully. Do the conditions placed on Benin represent an unnecessary burden? Since the country was selected as an MCA recipient based on a demonstrated commitment to economic growth and poverty reduction, is such a robust list of assurances really necessary? Or do these measures not go far enough?