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[Senate Hearing 108-778]
[From the U.S. Government Publishing Office]

                                                        S. Hrg. 108-778

                  THE MILLENNIUM CHALLENGE CORPORATION:
                           A PROGRESS REPORT

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

                                HEARING

                               BEFORE THE

                     COMMITTEE ON FOREIGN RELATIONS
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                             OCTOBER 5, 2004

                               __________

       Printed for the use of the Committee on Foreign Relations

 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 senate

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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
SAM BROWNBACK, Kansas                JOHN F. KERRY, Massachusetts
MICHAEL B. ENZI, Wyoming             RUSSELL D. FEINGOLD, Wisconsin
GEORGE V. VOINOVICH, Ohio            BARBARA BOXER, California
LAMAR ALEXANDER, Tennessee           BILL NELSON, Florida
NORM COLEMAN, Minnesota              JOHN D. ROCKEFELLER IV, West 
JOHN E. SUNUNU, New Hampshire            Virginia
                                     JON S. CORZINE, New Jersey

                 Kenneth A. Myers, Jr., Staff Director
              Antony J. Blinken, Democratic Staff Director

                                  (ii)

  
?

                            C O N T E N T S

                              ----------                              
                                                                   Page

Alexander, Hon. Lamar, U.S. Senator from Tennessee, prepared 
  statement......................................................     5

Applegarth, Hon. Paul V. Chief Executive Officer, Millennium 
  Challenge Corporation, Arlington, VA...........................     5
    Prepared statement...........................................     9
    Responses to additional questions for the record from Senator 
      Lugar......................................................    31
    Responses to additional questions for the record from Senator 
      Biden......................................................    33
    Responses to additional questions for the record from Senator 
      Corzine....................................................    36

Lugar, Hon. Richard G., U.S. Senator from Indiana, opening 
  statement......................................................     1

                                 (iii)

  

 
                 THE MILLENNIUM CHALLENGE CORPORATION:
                           A PROGRESS REPORT

                              ----------                              

                        TUESDAY, OCTOBER 5, 2004

                                       U.S. Senate,
                            Committee on Foreign Relations,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10:05 a.m. in 
room SD-419, Dirksen Senate Office Building, Hon. Richard G. 
Lugar (chairman of the committee), presiding.
    Present: Senators Lugar, Hagel, Alexander, and Feingold.

        opening statement of senator richard g. lugar, chairman

    The Chairman. This hearing of the Senate Foreign Relations 
Committee is called to order. Today the Senate Foreign 
Relations Committee meets to receive a progress report on the 
Millennium Challenge Corporation and we look forward to the 
testimony of our witness, Mr. Paul Applegarth, who is the Chief 
Executive Officer of the MCC. The MCC is charting an innovative 
course in development assistance. Our committee has 
enthusiastically endorsed the concept of this new organization, 
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.
    The performance of the MCC during the next 6 to 12 months 
will determine whether it can fulfill this ambitious vision. 
During that period the MCC will operate in a difficult 
political and budgetary environment. In recent years, Congress 
has demonstrated a parsimonious attitude toward the 150 
account, which funds foreign assistance, embassy operations, 
cultural and educational programs, contributions to 
international institutions, and many other aspects of our 
outreach to the world. It has significantly cut the President's 
request for the 150 account for 2 years in a row.
    This year, President Bush proposed a healthy 8 percent 
increase for the foreign affairs portion of the budget. The 
Senate Budget Committee cut the President's request by a 
billion dollars. On the Senate floor, I offered an amendment to 
restore the cut, and that amendment succeeded. But the House 
Budget Committee cut the President's request by $4.6 billion. 
The resulting budget conference settled on a compromise that 
would trim more than $2 billion from President Bush's request.
    Thus, Congress is doing, in my judgment, the unthinkable--
downsizing the President's foreign policy budget request at a 
time of our greatest diplomatic crisis in decades. This is the 
equivalent of cutting the defense budget in time of war. 
Responsibility for this untimely action is unfortunately 
bipartisan and bicameral.
    By downsizing the President's 150 account requests, 
Congress has ignored the fact that foreign affairs spending has 
not yet recovered from extreme cuts implemented in the 1990s 
during the era of peace dividends. In constant dollars, the 
foreign affairs budget was cut in 6 consecutive years from 1992 
to 1998. This slide occurred even as the United States 
sustained the added costs of establishing new missions in the 
15 emergent states of the former Soviet Union. In constant 
dollars, the cumulative effect was a 26 percent decrease in our 
foreign affairs programs. As a percentage of GDP, this 6-year 
slide represented a 38 percent cut in foreign affairs programs.
    By the end of the decade, these cuts had taken their toll. 
The General Accounting Office reported that staffing 
shortfalls, lack of adequate language skills, and security 
vulnerabilities plagued many of our diplomatic posts. 
Meanwhile, after decades of being the largest provider of 
economic aid to the world, the United States fell behind Japan 
throughout the period between 1993 and 2001, even though our 
gross domestic product is almost three times greater than 
Japan's and our international interests are more expansive.
    In the year following the September 11 attacks, President 
Bush and Secretary Powell prevailed upon Congress to boost 
foreign affairs spending. We began the process of filling the 
budgetary hole that we had dug for ourselves in the 1990s. But 
Congress's reductions in the President's requests during the 
last 2 years have impeded this progress. As a percentage of 
gross domestic product, foreign affairs programs are still 
about 40 percent below their average levels in the 1980s.
    Not every problem can be solved with more resources. But 
Congress must understand that we are in a race to secure our 
future. We are in a race to safeguard weapons and materials of 
mass destruction; and to overcome anti-American opinion in 
dozens of nations around the globe; to gain cooperation in the 
war on terror and to combat poverty, disease, and economic 
hopelessness. These are life and death issues on which the 
security and moral authority of our country rest.
    In the best case, Congress will reconsider and give the 
President and the Secretary of State what they need to fully 
restore U.S. diplomatic and foreign assistance capabilities. I 
will continue to argue for this outcome with like-minded 
colleagues on this committee and elsewhere in Congress. But in 
the absence of enlightened 150 account increases, the MCC will 
be competing for scarce funds with other deserving foreign 
policy programs.
    In this competition, the MCC enjoys the advantage of being 
the President's initiative, but this sometimes can turn into a 
disadvantage. 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 truly extraordinary. Compacts must be 
concluded and money must be spent quickly, while ensuring that 
those dollars are distributed fairly, effectively, and without 
corruption.
    This committee has held multiple hearings on the loan 
practices of multilateral development banks and on 
reconstruction spending in Iraq, both of which have suffered 
from severe management flaws. In the case of the MDBs, loans 
have frequently been made with insufficient oversight, leading 
to corruption and waste. In the case of Iraq, critical 
reconstruction funding has been stalled by bureaucratic red 
tape, a cumbersome approval process, and an insufficient sense 
of urgency. The MCC must avoid all of these problems.
    President Bush has pledged to seek $5 billion for the MCC 
in its third year of operation, which will be 2006. This 
committee authorized $1 billion for 2004 and $2 billion for 
2005. I am hopeful that appropriators will find a way to 
increase funding for the MCC. I have written to the Bush 
administration to urge that they act decisively on behalf of 
increasing funds for the MCC in this fiscal year. Mr. 
Applegarth, we look forward to a report on MCC expenditures 
thus far.
    The United States will be writing compacts with MCC 
countries after consulting with them on their ideas of how best 
to stimulate growth and eliminate poverty. This dialog is a 
crucial component of the MCC concept. We look forward to an 
update on the compact development process, and we are 
especially interested in knowing how the MCC is ensuring broad 
civil society participation in the drafting of country 
proposals.
    We are also eager to know your timetable for completing 
compacts. In the last 8 months I have had to build an entire 
organization from the ground up, solidify the MCA's procedures, 
and develop criteria for selecting eligible countries. You have 
done a lot in a short period. However, we are anxious to see 
actual compacts signed. Do you anticipate that any compacts 
will be completed and any funding distributed by the end of 
this calendar year? If not, when will the first compact be 
completed, and is there any way to accelerate the process while 
maintaining requisite standards of operation?
    We are also interested in your thoughts about the threshold 
program, which is intended to provide targeted assistance to 
help near-miss nations qualify in the future. This joint 
venture with USAID is a critical component of the MCC mission. 
It was encouraging to hear Secretary Powell say during a recent 
hearing that many countries are coming to us asking what they 
have to do to get into this program. This enthusiasm may spur 
new efforts toward reform around the world. To this end, we 
need to maintain the right incentive structure for countries 
interested in becoming MCC countries. The continued 
transparency of indicator policy, selection methodology, and 
compact development is critical to the overall success of the 
MCC.
    The MCC holds great promise for both participating 
countries and the United States. It gives us a chance to 
invigorate our relationship with the developing world and help 
set those countries 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.
    Let me welcome our colleagues to the hearing and ask if in 
fact any of our colleagues have additional opening comments 
that they would like to make. Senator Feingold?
    Senator Feingold. Mr. Chairman, just very briefly, I thank 
you very much for having this hearing. Mr. Applegarth, it is 
good to see you again.
    As you know, I believe that the President's Millennium 
Challenge Account initiative is an admirable one. It recognizes 
two important facts: that sustainable development overseas is 
in our national interest and that development efforts are most 
likely to succeed in countries that are actually taking serious 
steps to get their own fiscal houses in order, to crack down on 
corruption, to respect the rule of law and basic human rights, 
and then to invest in their own citizens' well-being.
    As I am sure you are already experiencing and have 
experienced before, good ideas are not always easy to 
implement. A lot of people are skeptical about creating a new 
institution to implement this initiative. I for one have not 
yet heard concrete plans for how the Millennium Challenge 
Corporation plans to monitor and evaluate U.S. taxpayer-funded 
projects overseas.
    I also want to be sure that resources for very valuable 
existing programs are not used in order to fund this. My 
understanding is this was to be on top of other things that we 
believe strongly in, and I would have some questions about that 
as well. But I am eager to hear how it is going and I very much 
appreciate your being here.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Feingold.
    Senator Hagel, do you have an opening statement?
    Senator Hagel. No statement.
    The Chairman. Senator Alexander.
    Senator Alexander. Thank you, Mr. Chairman. I have a 
statement I would like to put in the record and I would like to 
say these things.
    First, I fully support what Chairman Lugar said. I support 
the Millennium Challenge Account. It is a bold new approach. I 
hope we as a Congress can appropriate at the level that the 
President has asked for, and I also sent a letter to our 
committees along with some other Senators urging that.
    The one thing I would like to suggest is you have 16 
countries qualified for funding and another 7 who came close. 
Temptation in government in some quarters would probably be to 
give everybody a little bit, but it is my hope that, especially 
in this first round, that the money go to fully fund the best 
projects. I will be supporting you on that if that is the 
decision that you make, even though that means that some pretty 
good projects do not get funded because there is not enough 
money in the first round. But it is very important that the 
first projects be the best projects and that they have the best 
chance of success in setting a good example for the future.
    Thank you, Mr. Chairman.
    [The prepared statement of Senator Alexander follows:]

             Prepared Statement of Senator Lamar Alexander

    Millennium Challenge Accounts represent a bold new approach to 
foreign aid. If properly executed, it should prove quite successful. 
The principle is simple: reward poorer countries that have established 
sound policies, giving them the needed boost to achieve the next level 
in their nation's development. The result is a double bonus: we're 
providing incentive for good policy choices by rewarding them, and 
we're providing aid where it is most likely to do good--in those 
countries that already have the right policies in place. By rewarding 
poorer countries that put an emphasis on open markets and the rule of 
law, we will help put more countries on the path to prosperity.
    That's why earlier this year I sent a letter--that was also signed 
by Senators Santorum, Sununu, and Sessions--to appropriators asking 
them to appropriate as nearly as possible the amount requested by the 
President for this important initiative. I'm sorry to report that both 
the House and Senate came up short. The House version of the Foreign 
Operations Appropriations bill funds only half the President's request, 
and the Senate version even less. I hope conferees on the bill will do 
better, but I'm not optimistic.
    At the same time, we also need to see some positive results coming 
from the Millennium Challenge Corporation. To date, no money has been 
awarded, and the MCC is still severely understaffed. We need a success 
story. Unless Congress can see an example of the MCC working--
efficiently and effectively--we are unlikely to fund the MCC to 
requested levels.
    To that end, I hope the MCC will remain true to its purpose: to 
provide a relatively large sum for major projects in a few qualified 
countries. Sixteen countries qualified for funding under the MCC this 
year, and another seven threshold countries, who came close to 
qualifying, were announced last week. I'm pleased that eight of the 
sixteen and four of the seven are in sub-Saharan Africa. The temptation 
will be to fund qualified projects in all those countries. While I 
sympathize with that desire, given that the MCC has been severely 
under-funded to date, we should not give in to that temptation.
    Rather, the best projects in a few of the qualified countries 
should be fully funded. That may not seem fair to every country that 
has qualified, but it will ensure that Millennium Challenge Accounts 
achieve the desired impact--greatly improving a few qualified countries 
so they can rise up to the next level of development. If the MCC 
chooses to sprinkle its limited funds around all the qualified and 
threshold countries, the impact will be greatly diminished and the 
program will end up looking more like our traditional foreign aid 
programs rather than a new, bold initiative.

    The Chairman. Thank you very much, Senator Alexander.
    Mr. Applegarth, we deeply appreciate your patience in 
waiting for our votes to happen. We believe that we have clear 
sailing for a good period of time ahead of us before votes will 
recommence. We look forward to your testimony as well as your 
responses to all of our questions, but even more we appreciate 
the enthusiasm and idealism which you bring to this program.
    Will you please proceed. Let me say your full statement 
will be made a part of the record. You may either recite from 
that or summarize as you prefer.

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

    Mr. Applegarth. Thank you, Mr. Chairman and members of the 
committee, for the opportunity to address you today. Because we 
do have a lot to discuss, I have submitted a written statement 
for the record and will just summarize it this morning.
    My opening remarks address several of the questions that 
you all raised in your own opening remarks. To the extent that 
they do not, and it does not, I would like to address them 
during the Q&A session.
    Sixteen months ago I was testifying before you as President 
Bush's nominee to become the first Chief Executive Officer of 
MCC. During these past 6 months, the MCC has designed and 
implemented its operating structure, carefully reviewed and 
selected countries that are eligible to formally apply for 
fiscal year 2004 assistance, and announced the first threshold 
countries. And at this moment we are evaluating the first 
proposals and concept papers that have arrived from 13 of the 
16 selected countries.
    As the committee is well aware, it was only on January 23 
of this year, with sustained bipartisan support, that MCC was 
established as a unique and innovative effort in poverty 
reduction and sustainable development. Underlying all our 
efforts is a pronounced emphasis on policy reform. We believe 
that by providing incentives for countries to adopt policies 
for governing wisely, investing in their own people, and 
promoting economic freedom, we strengthen the critical 
relationship between fundamental democratic principles and 
economic freedom, that together form the bedrock of stable and 
responsible nations.
    MCC is unique because it was deliberately designed to make 
U.S. aid more effective by linking increased foreign assistance 
to good governance and sound policies. As you mentioned, Mr. 
Chairman, MCC is innovative in several important respects. 
Countries are selected based on their ability to participate as 
full partners in the development process. This genuine process 
means that they themselves will design programs that directly 
address the root causes of poverty and will stimulate economic 
growth in those areas that they determine are most important.
    Since January 23, MCC has set ambitious goals for itself, 
moving as fast as the legislation allowed. On May 6, MCC's 
board of directors selected the first 16 countries eligible to 
submit proposals for MCC assistance. These 16 countries, which 
when combined represent more than 130 million people, were 
selected out of 63 of the poorest countries in the world. The 
selection was based on published criteria, including 16 
indicators developed by the World Bank, Freedom House, and 
other entities independent of the U.S. Government. They rank 
countries on whether they are governing justly, investing in 
their own people, and encouraging economic freedom.
    MCC has already announced the names of 71 candidate 
countries for fiscal year 2005. We expect our board to select 
the 2005 Millennium Challenge Account-eligible countries next 
month.
    It is important to point out that since the fiscal year 
2004 selection criteria and methodology were announced MCC has 
received a number of very valuable public comments. These 
comments were taken into account during our review of the 
selection criteria for fiscal year 2005. For example, in a 
direct response to public comments MCC replaced the primary 
school completion rate indicator, which measured graduation 
rates for all students, with a girls primary school completion 
rate indicator. We made the change to emphasize clearly the 
proven importance of primary education for women in terms of 
poverty reduction and growth and because data is now available 
to provide a measurable ranking.
    MCC is also exploring potential improvements in the 
selection criteria for the future, such as measuring the 
country's support for entrepreneurial activities, improved 
focus on investing in people, and the economic cost of trade 
barriers. We are also establishing a working group to help 
identify an indicator to measure a country's policies as they 
affect its natural resources. This group will be chaired by MCC 
Board Member Christie Todd Whitman.
    Within 3 weeks of the selection of the first round of MCC-
eligible countries in May, we had MCC teams on the road to 
visit all the countries. Working together with USAID and 
embassies, we explained to a wide variety of groups in each 
country that we wanted each nation, through a consultative 
process with civil society and the private sector, to develop a 
compact proposal, which is essentially a detailed 
implementation plan that lays out country priorities, 
objectives, and benchmarks for the use of MCC assistance.
    We are not pushing any particular sector or project, but 
instead we seek to help those countries find the best 
opportunities for poverty reduction and growth.
    President Bush has requested $2.5 billion for fiscal year 
2005. In an analysis earlier this year, the General Accounting 
Office estimated that with a funding level of $3.5 billion, the 
President's 2005 request plus the fiscal year 2004 enacted 
levels, the MCC can fund compacts in only 8 to 14 countries at 
a level that would provide a meaningful incentive for policy 
reform. MCC is a good investment in security, poverty 
reduction, and growth, and achieving an adequate level of 
funding is essential to our mission. I very much appreciate 
your support, and that of the members of this committee in 
achieving adequate levels of funding.
    We are now looking at the country proposals that we 
received. We are looking at them as investment opportunities. 
However, the return we seek is not a financial return, but a 
return in poverty reduction and growth. We want to give our 
partners an opportunity to escape the cycle of dependency and 
actively change the economic path of their country and the 
lives of their people.
    We have been impressed with the efforts of MCA-eligible 
countries so far and the innovative steps they have taken to 
ensure a broad-based consultative process. Some countries have 
significantly involved NGO and business sectors in priority-
setting for the first time. For example, Mongolia is holding 
public meetings throughout the country. Armenia and Georgia 
have broadcast public meetings on national TV. One official 
from an MCA country in Africa said: ``Even if we receive less 
than we have requested through our compact proposal, the 
intangibles gained from taking control of our own development 
destiny are the most important part of the process.''
    Just as important, the potential for qualification is a 
continuing incentive for countries to make reforms. One country 
passed four pieces of anti-corruption legislation and began 
enforcement. The stated reason: They hope to qualify for MCA 
funding. Since the announcement of potential MCA indicators in 
February 2003, the median number of days to start a business 
has dropped from 61 to under 50 in MCA candidate countries.
    The first country proposal reached MCC in mid-August and a 
number of countries have submitted proposals and concept 
papers. What we see thus far covers almost all areas linked to 
poverty reduction and economic growth, education, health, 
water, microcredit, rural development, infrastructure and 
financial sector development. As we begin our due diligence, we 
are asking direct questions: What is the link to poverty 
reduction and growth? Who are the beneficiaries? How will we 
measure results? How will the proposal impact the environment? 
Will the money be well handled?
    We are also coordinating with the United Nations 
Development Program, the World Bank, and other donors and 
working closely with USAID, State, and other U.S. Government 
departments to think through technical issues, to coordinate 
our activities, and to maximize the effectiveness of our 
assistance.
    We anticipate that we will begin consulting with Congress 
about entering our first compact negotiations in the near 
future. This consultation will occur once we have conducted a 
thorough review of a country's proposal to determine whether 
there is a basis for conducting more formal negotiation. My 
personal hope is we could sign one or more compacts by the end 
of this year. But let me be clear that MCC is not in the 
business of rushing funds out the door before it is satisfied 
that the proposed compact will achieve real measurable results.
    As I emphasized earlier, underlying all MCC's efforts is 
the importance of incentivizing policy reform. We believe this 
objective is enhanced by the threshold program. For fiscal year 
2004 the board selected Albania, East Timor, Kenya, Sao Tome 
and Principe, Tanzania, Uganda, and Yemen to be invited to 
submit their proposals for improving their MCA indicators.
    To encourage and support these reforms, we are working 
closely with the USAID to assist these threshold countries with 
targeted programs that will help improve their policies so they 
have a better chance of qualifying for MCA assistance. Let me 
emphasize, however, that selection for the threshold program 
does not ensure automatic or quick selection for MCA 
eligibility. The type of reforms that the threshold program is 
designed to assist requires leadership and commitment over a 
period of time.
    Like MCC's primary programs, the responsibility lies with 
the countries. If these countries want to undertake the 
challenge and opportunity, we will support their efforts. 
Eligibility, with or without threshold program participation, 
will be judged only against clearly measurable data that 
reflect the concrete efforts made by the governments.
    Operationally, MCC has increased its staffing and has 
developed detailed hiring plans, while addressing the basic 
issues inherent in the startup. We have sought to bring to MCC 
the most highly qualified individuals with diverse backgrounds 
and experience in government, the private sector, multilateral 
institutions, NGOs, and higher education.
    I could continue speaking at length about the ways we are 
constructing the foundations of MCC, but perhaps your questions 
will allow us to address these subjects in more detail.
    In closing, let me remind you of our ultimate 
beneficiaries, the people we have been created to help. 
Madagascar, one of our potential partners, has a population of 
16.4 million, who on average earn less than 64 cents a day. 
These people, like the rest of the world's poorest countries, 
live with hopes, aspirations and potential as yet unrealized. 
The Millennium Challenge Account exists to help the world's 
poorest countries and exists because of a significant 
bipartisan consensus here in Congress that clearly recognizes 
the importance of effective and lasting global poverty 
reduction.
    Through MCC we have the capability to carry that task 
forward, to help create a world of free and prospering nations. 
I believe that together we can do this by working closely with 
our partner countries, by insisting on commitment and 
accountability, and by focusing on poverty reduction and growth 
to help them move toward a more flourishing and more stable 
future.
    I thank the committee for its support and attention this 
morning and I would be glad to answer any questions you have 
about MCC and its operations.
    [The prepared statement of Mr. Applegarth follows:]

             Prepared Statement of Hon. Paul V. Applegarth

    Thank you very much Mr. Chairman--and members of the committee--for 
the opportunity to appear before you this morning. Six months ago, I 
was testifying before you as President Bush's nominee to become the 
first Chief Executive Officer of the Millennium Challenge Corporation 
(MCC). Yet during these past six months, MCC has designed and 
implemented its operational structure, carefully reviewed and selected 
countries that are eligible to formally apply for assistance from the 
Millennium Challenge Account (MCA), announced the first threshold 
countries and--at this very moment--we are evaluating the first 
proposals and concept papers that have arrived from 13 of the 16 
countries.
    As the Committee is well aware, it was only on January 23rd of this 
year--with sustained bipartisan support--that MCC was established as a 
unique and innovative foreign assistance program. By establishing MCC, 
the United States Government has boldly (and generously) begun a new 
era in poverty reduction and sustainable development. Underlying all 
our efforts is a pronounced emphasis on policy reform. We believe that 
by providing incentives for countries to adopt policies for governing 
wisely, investing in their own people, and promoting economic freedom, 
we strengthen abroad the critical relationship between free market 
ideals and fundamental democratic principles that together form the 
``bedrock'' of stable and responsible nations.
    MCC is unique because it was deliberately designed to make U.S. aid 
more effective by linking increased foreign assistance to good 
governance and sound policies. We are innovative in several important 
respects: countries are selected based on their capacity to perform 
according to the stringent standards mandated by Congress; countries 
are also selected based on their ability to participate--as full 
partners--in the development process. This genuine partnership with 
selected countries means that they themselves will design programs--
with MCC evaluation and guidance--that directly address the root causes 
of poverty; it means that the countries themselves will seek to 
stimulate economic growth in those areas that they determine are most 
important.
    Since January 23rd, MCC has set ambitious goals for itself, and 
then met them, moving as fast as legislation allowed. MCC legislation 
has a series of sequential requirements--naming candidate countries, 
publishing criteria and methodology for selection, and holding a public 
comment period--each followed by a waiting period before selection can 
take place. MCC opened its doors with only 7 staff members. I am both 
grateful and proud to inform the Committee that MCC has met--and in 
some cases surpassed--every one of these requirements. On May 6, MCC 
Board of Directors (Board) was able to select with confidence the first 
16 countries eligible to submit proposals for MCC assistance; again, 
all of this activity took place as quickly as the current law would 
allow.
    These 16 countries, which when combined represent more than 130 
million people, were selected out of 63 of the poorest countries in the 
world. The selection was based on published criteria, including how 
well (or poorly) the 63 countries performed on 16 indicators developed 
and monitored by the World Bank Institute, Freedom House, and other 
entities independent of the U.S. government. MCC uses these 16 
independently derived indicators to evaluate the policy performance of 
countries in terms of whether or not they are ``governing justly, 
investing in their people, and encouraging economic freedom.''
    Let me emphasize that the performance of the candidate countries on 
the sixteen policy indicators are completely transparent: any member of 
the Committee, any government staff, and--perhaps most important--any 
interested member of the public can look at our Web site (www.mcc.gov) 
and see how the candidate countries scored this year. In order to 
become candidates for fiscal year 2004, countries had to have an annual 
per capita income of under $1,415 US dollars (the historic cutoff for 
the International Development Association), be eligible for assistance 
from IDA, and be eligible to receive U.S. assistance.

                       FY 2005 SELECTION PROCESS

    MCC has already announced the names of the 71 candidate countries 
for fiscal year 2005. Because the MCA legislation no longer required 
that countries be eligible for IDA loans, the number of competing 
countries has grown. We expect our Board to select 2005 Millennium 
Challenge Account (MCA) eligible countries before the end of the year, 
probably next month.
    It is also important to point out that since the FY04 selection 
criteria and methodology were announced, MCC has received valuable 
public comment. These comments were taken into account during our 
review of the criteria for FY05. In a direct response to public 
comments, MCC replaced the Primary School Completion Rates indicator 
(for all students) with a Girls' Primary Completion Rates indicator. We 
made the change to emphasize clearly the proven importance of primary 
education for women in terms of poverty reduction and high economic 
return because data was now available to provide a measurable ranking. 
The second indicator change MCC made was to lower the ceiling inflation 
rate indicator from 20 to 15 percent in order to make the indicator a 
more meaningful test of a country's economic policies.
    In addition to the two changes to the selection criteria for FY05, 
MCC will explore potential changes for the future, such as measuring a 
country's support for entrepreneurial activities, improved focus on 
investments in people, and the economic cost of trade barriers. Taking 
into account suggestions from the public and advice from Congress, MCC 
will also establish a working group to help identify--or promote the 
development of--an indicator to measure a country's policies as they 
affect its natural resources. The group will be chaired by MCC Board 
Member (former Governor of New Jersey, and most recently head of the 
Environmental Protection Agency) Christine Todd Whitman. This group 
will work with outside groups and experts to establish criteria and 
invite ideas for such an indicator.

                            COUNTRY COMPACTS

    Within weeks of the selection of the first round of MCC eligible 
countries in May, we had MCC teams on the road to visit the countries. 
Working together with USAID and our Embassies, we explained to a wide 
variety of groups in each nation that we want each country, through a 
consultative process with civil society and the private sector, to 
develop a Compact proposal--which is essentially a plan that lays out 
country priorities and objectives for the use of MCA assistance to 
address barriers to poverty reduction and growth in the country. These 
proposals form the basis for discussions between MCC and the country on 
their priorities and, finally, for negotiating a mutually agreeable 
Compact that includes plans for ensuring accountability, and clearly 
lays out the responsibilities of each partner.
    As investors using U.S. taxpayer dollars, we are not pushing any 
particular sector or project, but instead we seek to help these 
countries find the best investment opportunities for poverty reduction 
and growth. President Bush has requested $2.5 billion for FY05. In an 
analysis earlier this year, the GAO estimated that, with a funding 
level of $3.5 billion--the President's FY 2005 request plus FY 2004 
enacted levels--the MCC could fully fund three-year Compacts in only 8 
to 14 countries.
    We will be looking at proposals we have received as investment 
opportunities. The return we want to see is poverty reduction and 
sustainable economic growth in the countries. We want to give them an 
opportunity to escape the cycle of dependency, and actively change the 
economic path of their country and part of our strategy is that this is 
best accomplished by allowing them to take ownership of the success of 
the program.
    That means that the programs are about our partner countries' 
priorities, their ideas, their activities, their policy reforms and 
compacts should reflect the priorities and needs of the people of the 
country--not just the government--by placing a strong emphasis on civic 
and private sector participation in setting priorities and then 
implementing these priorities. This is why we have met with key 
individuals in each country--inside and outside of government--such as 
the private business sector, NGO's, and other organizations that have 
an important stake in the positive development of their nation.
    We have advised countries that we would assess their proposals 
based on a number of criteria, including:

   the proposal's contribution to poverty reduction and 
        economic growth;

   the breadth of public support within the country for the 
        proposal; and

   the government's commitment to continued policy improvement.

    We explained to them that MCA eligibility does not mean automatic 
entitlement to funding, and that MCC allocation and funding decisions 
will be driven by the quality of each country's proposal and their 
ability to successfully implement the Compact as well as the 
Congressionally mandated criteria for a robust financial management 
plan so that U.S. taxpayer money is optimally used.
    We have been impressed with the efforts of MCA eligible counties so 
far and the innovative steps they have taken to ensure a broad based 
consultative process. Some countries have consulted NGO and business 
sectors for the first time. Mongolia is holding public meetings in all 
four corners of its large expanse. Armenia and Georgia have broadcast 
public meetings on national TV. One official from an MCA 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.'' Indeed, we are finding that the process itself 
is an incentive for progress.
    Just as important, when countries don't achieve eligibility, the 
potential for qualification is a continuing incentive for them to make 
reforms and become eligible. One country passed four pieces of anti-
corruption legislation and began enforcement. The stated reason: the 
hope of qualifying for MCA funding. And since the announcement of 
potential MCA indicators in February 2003, the median number of ``days 
to start a business'' dropped from 61 to 47 in MCA candidate countries.
    Many countries decided to include additional parties in the 
consultation, and as a direct result of this increased participation 
they have achieved a much deeper analysis and more careful 
prioritization. They know this will lengthen the proposal development 
process, but they believe it will increase proposal quality and as well 
as its acceptance within the country.
    The first country proposal reached MCC in mid-August and a number 
of MCA countries have now submitted proposals and concept papers. What 
we have seen in the proposals and concept papers thus far covers almost 
all areas linked to economic growth and poverty reduction: for example, 
education, water, micro-credit, rural development, infrastructure, and 
financial sector development. We have begun our due diligence 
processes. We are asking direct questions. What is the link to poverty 
reduction and growth? Who are the beneficiaries? How will you measure 
results? How do you rank your priorities? How will the proposal impact 
the environment? How does your proposal relate to what the government 
and other donors are doing? Will the money be well handled? Is 
procurement going to be fair and transparent?
    As part of our due diligence process, we have already begun 
consultations with the United Nations, the World Bank, the UK's 
Department for International Development (DFID), Japan and other 
donors. We are doing analysis on the growth and poverty reduction 
potential among proposals. We are working closely with USAID, State and 
other USG departments to think through technical issues, to coordinate 
our activities, and to maximize the effectiveness of our assistance.
    MCC anticipates that we will begin consulting with Congress about 
entering our first Compact negotiations in the near future, as 
prescribed in our legislation. This consultation will occur once MCC 
has conducted a thorough review of a country's proposal to determine 
whether there is a basis for conducting a more formal negotiation. We 
believe that due to our efforts as well as the efforts of the 
countries, that we will make significant progress on several proposals 
by the end of this year. My personal hope is that we could sign one or 
more Compacts by the end of the year. Let me be clear, however, MCC is 
not in the business of rushing funds out the door before it is 
satisfied that the proposed Compact will achieve real, measurable 
results.

                           THRESHOLD PROGRAM

    As I emphasized earlier, underlying all MCC's efforts is the 
importance of incentivizing policy reform. In many ways, this is the 
challenge in the Millennium Challenge Account. But we don't just want 
to challenge these countries that are eligible, but also those 
countries that currently fall short on MCC indicators but are making 
efforts to reform. We believe this objective is enhanced by the 
Threshold Program.
    The Board made the decision to set aside an initial pool of up to 
$40 million dollars from fiscal year 2004 funds to go to the 
``Threshold'' countries that are very close to qualifying and have 
demonstrated a commitment to undertake the policy reforms necessary to 
improve their growth conditions and their prospects for qualifying for 
the MCA. For FY 2004, the Board selected Albania, East Timor, Kenya, 
Sao Tome and Principe, Tanzania, Uganda, and Yemen to be invited to 
submit their proposals for improving their MCA indicators.
    To encourage and support reform, we will be working closely with 
USAID to assist these ``Threshold'' countries with targeted programs 
that will help improve their policies so that they have better chance 
qualifying for MCA assistance. Moreover, such a program can help 
countries put in place the policies that provide the foundation for 
increasing productivity, reducing poverty, and moving toward more 
sustained economic growth. Distinct from the poverty reduction and 
economic growth programs that are MCC's primary focus, the hope of 
qualification presents these countries with an opportunity to actively 
address and improve their performance on the policy indicators.
    This type of reform requires leadership and commitment. Like MCC's 
primary programs, the responsibility lies with the countries. If these 
countries want to undertake this challenge and opportunity--we will 
support their efforts. However, I want to make it clear that simply 
participating in this program will not guarantee eligibility for MCA 
assistance. Eligibility, with or without Threshold Program 
participation, will be judged by clearly measurable data and concrete 
efforts made by the governments.
    Change will not be easy and will not soon be reflected in country 
scores. The policy areas where these countries will need to focus can 
only be changed with consistent effort and a high level of political 
commitment--over a period of time.
    Building on our strong working relationship with USAID, MCC will 
ask countries to submit their plans for reforming failing indicators 
and we will evaluate their final proposals based on political 
commitment, looking for specific actions that the government will 
undertake. MCC will soon post guidance on our Web site explaining the 
parameters for submitting such a proposal.
    MCC has also increased its staffing and has developed detailed 
hiring plans to ensure that MCC will have the right number of people 
and skill sets to analyze proposals from both eligible countries and 
those in the Threshold Program. In less than nine months the number of 
staff has gone from 7 to 63 (which includes contractors) and we have 
sought to bring MCC the most highly qualified individuals, with diverse 
backgrounds and years of experience in government, private sector 
development, multilateral institutions, NGO's, and higher education. I 
could continue speaking for a considerable length of time about our 
goals for specific departments, the meticulous and frankly demanding 
way in which we are constructing the foundations of MCC. But perhaps 
your questions will allow me to address these subjects in detail.
    In closing, Madagascar, one of our potential partners, has a 
population of 16.4 million people who, on average, earn less than 64 
cents a day. These people live with hopes and aspirations for a better 
life that are as of yet unrealized. The Millennium Challenge Account 
exists to help them and others among the world's poorest countries to 
achieve their potential. MCA also exists because of a significant 
bipartisan consensus here in Congress that clearly recognizes the 
importance of effective and lasting global poverty reduction.
    Through MCC we have the capability to carry that task forward--to 
do our part in creating a world of free and prospering nations.
    And I believe that, together, we can do this by working closely 
with partner countries, by insisting on commitment and accountability, 
and by focusing on growth, nudging each nation toward a more 
flourishing, more stable future. And that will be a great good, for us 
all.
    I thank the Committee for its attention and support. I would be 
glad to answer any questions you may have about MCC operations.

    The Chairman. Well, thank you very much, Mr. Applegarth.
    We will have a 10-minute round to begin with for our 
members. When was the threshold group of countries announced?
    Mr. Applegarth. It was announced last Thursday, September 
30, Mr. Chairman.
    The Chairman. I appreciate your giving that list to us 
today. I mention just anecdotally the selection of Albania as 
one of the seven. It was my privilege to visit Albania in 
August. I would say that the Prime Minister, and all of the 
ministers with whom I visited, were extremely hopeful of being 
included on the threshold list. They thought that they had 
taken steps, which they outlined to me, that would qualify them 
to do that.
    I could offer no assurance, but let me just underline some 
of the points you have made in your testimony about the 
internal debate which is occurring in countries around this 
world. Albania is a focus because I talked to the people there 
and they had in mind first of all some MANPAD missiles that 
were up in the mountains, at least 79 of them as I recall, that 
they were prepared to destroy.
    Now, this has nothing to do with economic assistance and 
the normal things that we are involved with, but it has 
everything to do with a country that is forthcoming, and that 
wanted to make sure that these missiles and various other 
things that were in sheds and so forth and that were revealed 
to us as we proceeded up above Tirana were going to be 
destroyed safely. The Albanian officials wanted some degree of 
expertise as they worked with the United States.
    In addition to that, they outlined the idea of a military 
academy, in which young officers in the Albanian armed forces 
would come forward. One of the requirements of this would be 
proficiency in the English language--once again, a clear 
reaching out to us to indicate that they really wanted to be 
friends and to be part of the move toward democracy.
    Then we heard a very vigorous debate over the dinner table 
in the Ambassador's residence. This included the Prime 
Minister, but likewise members of at least two distinct 
political parties that were in the opposition, who felt free in 
arguing publicly and vociferously about the course of affairs 
in the country, which I think is very healthy.
    Now, you are running into that, I am certain, with your 
administrators as you visit these countries and as they become 
aware of the possibilities. I have no idea what sort of plan 
Albania will propose, but I think it will probably be a fairly 
good one. They have given some thought to this, and their hope 
is that they might be included.
    Other countries in the world are out there in the same 
condition. When I visited Georgia shortly after the Albania 
visit, they were extremely pleased and, as you said, have had 
public meetings. It is a point of national interest that they 
are formulating a plan. I do not know whether they have 
submitted one as yet.
    In both of these countries the needs are obvious to an 
observer just walking along the street, quite apart from going 
out in the countryside. They have extraordinary needs. But in 
Georgia the application that they have given was preceded by a 
tremendous crackdown on public corruption, including dismissal 
of most of the police force of the entire country and rehiring 
of persons on different terms, and a whole culture of change, 
with the young people from the Rose Revolution. It is 
extraordinary for that area, exemplary, in every way. This 
should be supported by us in our public diplomacy and in our 
espousal of democracy.
    So this is not an incidental program that we are 
discussing. I have already gone through some criticism of the 
Congress for its lack of prescience with regard to our 
possibilities in the world, but at the same time, this is why 
the urgency of this situation impelled this hearing before we 
go out of session. Members have many things on their minds. It 
is the final week of session and people sometimes say: Not 
another hearing. Yes, we are holding another hearing. We are 
here because we really want to hear from you, and we have some 
benchmark at this point.
    We will return to this subject. We must. The appropriations 
process for the next year is upon us there rendering this 
matter particularly urgent.
    Now, it is in that spirit that you have indicated that 
probably some compacts will be concluded in this calendar year, 
but can you quantify that any better? How are the 16 coming 
along? What sort of timetable may we expect before we see the 
results of those examinations?
    Mr. Applegarth. I will certainly do so, Mr. Chairman. I 
wanted to emphasize something you mentioned, which is the 
impact in the countries. I think some of the most interesting 
and positive feedback we have received, that I have received, 
has been in discussions with the Presidents and Prime Ministers 
of countries, some of whom qualified, but a number of whom did 
not.
    I know Secretary Powell has also mentioned this, but to see 
our little country data sheets, which are available on our Web 
page, in the hand of a President or a Prime Minister--as 
happened twice in New York the week before last, is gratifying. 
Two different Presidents said: Paul, we really want to qualify 
for Millennium Challenge; Why did we not?
    In one case I had to say: Mr. President, because you fail 
our corruption indicator. And he said: I understood that and I 
just needed to have you confirm that; what kind of things 
should we be doing? And I said: We are not going to be 
prescriptive. It is a partnership. We just set the benchmarks. 
But let me tell you what some of the other countries that did 
qualify have been doing.
    To have this opportunity to talk with the senior, truly 
senior leadership of countries about what is important in terms 
of promoting good governance, in terms of promoting economic 
freedom, in terms of investing in their own resources, is 
really extraordinary. We get constant feedback and constant 
reinforcement that this joint mission that we are all about is 
really significant.
    In terms of the compact proposals themselves, as I 
mentioned, we got our first one in mid-August. They continue to 
come in virtually every other day. I think we got the most 
recent one on Friday. To be fair, they all require still a fair 
amount of work. A lot of them have had a lot of effort going 
into them, but they all require a focus on true prioritization 
and more detailed implementation and work.
    I think the 13 that we have received total $4.2 billion 
themselves. Now, there is no question that I am in complete 
sympathy with Senator Alexander's remarks, but even if I was 
not, we would still focus only on the very best, and the 
countries understand that in terms of the available funding we 
have. We think it is also very important that we show a clear 
linkage of high quality plans and proposals to poverty 
reduction and growth.
    My own experience in the private sector has been that, even 
when you get a very good proposal with parties that are used to 
doing funding, whether it is the private equity world or other 
kind of worlds, for this kind of investment it frequently takes 
4 to 5 months to negotiate a contract--even in the best of 
circumstances, from the time you get the proposal until you get 
to completion.
    Therefore, I say it is my personal target and I hope we can 
get a couple done by the end of the year. But I also have to 
recognize that this is a learning process for parties on all 
sides. Our emphasis is in the consultative process, which is 
certainly not typical in a private sector perspective, and the 
fact that we are asking governments to step up and do a number 
of things that they have not done before, and at the end of the 
day we need a government to government agreement, says that 
that is a stretch target, an ambitious target, but we will try 
to do it.
    The Chairman. Well, you are between a rock and a hard place 
because on the one hand you are attempting to do the 
responsible, prudent thing, and you must. On the other, the 
governments that are involved, 13 of the 16, have sent them, 
but three have not, and here we are on October 5.
    The problem in our government, however, is that already the 
appropriation that MCC will need for the year following this 
year is going to be going on during November and December. 
Before long, OMB and others will already be suggesting what the 
limits are. You understand our predicament as advocates. We 
understand yours, that there has to be a track record that 
somehow you are handling this money, you are handling it 
successfully and we are getting results. Failing that, the 
result is going to be that people will say: Well, you are not 
able to use the money that fast, you are just not able to 
assimilate this. They will say, it is a good program, but by 
and large we should fund it at half-speed.
    This is what I am worried about, quite frankly, and that is 
why in my opening statement I offered the long recitation of 
the battles over the foreign account, the 150 account, which 
all of us are engaged in. This is hand-to-hand combat each year 
on this business.
    Let me just mention one more thing. The capability 
corruption item is just critical. We have held hearings on the 
multilateral development banks. Granted, this is an area that 
people do not get into very often, and some would say hardly 
should get into at all. It is off somewhere else. There are 
many countries involved and we play a part in it. But who knows 
exactly what happens when loans are made to a government for 
budgetary support?
    Well, somebody needs to. In other words, the accountability 
of American taxpayer funds, however humanitarian the intention 
may be, is of the essence. A corrupt government on the face of 
it, even if it has great needs, is not a candidate for MCC 
funds. We know off the bat that this is very bad news.
    I had the Foreign Minister of Papua-New Guinea in the 
office on Friday, an able gentleman and an able Ambassador who 
once came over here on a Henry fellowship or what have you. 
Unfortunately, all the fellowships for Papua-New Guinea were 
cut off about 1997, which is sad. We will address international 
scholarships in a separate hearing tomorrow.
    The corruption business, as we found in these multilateral 
development bank oversight hearings, is just endemic. Cases 
like Georgia, with the young people overthrowing their 
government, these are extraordinary exceptions in the world. 
And yet you have a great opportunity here to fashion a 
different culture that will be of great benefit to people in 
terms of their governance, quite apart from their economics, 
which you understand.
    Let me pass the baton on to Senator Feingold for his 
questions.
    Senator Feingold. Thank you, Mr. Chairman.
    I would like to start, Mr. Applegarth, by asking you 
essentially the same question I asked you at your confirmation 
hearing in March, which is: How will the MCC monitor the very 
significant expenditures of taxpayer resources with a total 
staff of about 200 people?
    I understand it is your intention to have about 20 people 
based overseas to monitor programs in 30 countries by fiscal 
year 2006. As the recent Inspector General's report noted, $5 
billion a year, as the President called for, spread over 30 
countries still averages out to $167 million per country per 
year. Do you think that 20 roving employees can adequately 
monitor the use of these taxpayer dollars?
    Mr. Applegarth. I think we are different, Senator, because 
we have the true country partner ``buy-in'' as to what we are 
doing, and it is not only our resources, in that we view 
ourselves as fiduciaries to the American taxpayer, but at the 
end of the day this is also their resource. This opportunity is 
a rare one for them, and we are fortunate in picking really the 
best of the highest ranked of the potential countries we are 
working with.
    We will, as a part of the detailed implementation plan 
under a compact, have explicit monitoring benchmarks and 
methods and procedures built in, and essentially we will 
monitor the monitors. We do not expect our staff to be doing 
the detailed monitoring, but we will be working with the 
partner countries to make sure that that happens correctly.
    In addition, those compacts and those procedures will all 
be public and available. We have been trying to encourage both 
the community here as well as in the countries to participate, 
so they know what the benchmarks are, they know what the 
intentions for where the money is supposed to go are, and so we 
expect to have not 20 watchdogs, but thousands of watchdogs in 
each country in some way that are helping us do this informally 
as well as formally through the procedures we build together 
with the country and the compact.
    Senator Feingold. I appreciate that answer. Let me follow 
by asking if these plans for monitoring and evaluation of the 
Millennium Challenge are based on any existing model? Is there 
some existing arrangement that you can point to that will give 
us confidence that we will be able to keep close tabs on our 
taxpayers' dollars, especially since you are talking about a 
relatively modest staff of American employees and an 
interesting concept of thousands of other people helping us in 
those countries? And I am wondering if there is some other 
model that would suggest it might work.
    Mr. Applegarth. We are looking at the best that is out 
there. We are different in some ways because we are combining 
what the private sector does in terms of ongoing and short-term 
monitoring and quarterly monitoring, if you like, or even more 
frequently, as you would if you were sitting on the board of a 
country or of a company, together with some things that the 
World Bank has been doing and the IDB has been doing and 
elsewhere, in both looking at the long-term impact, but also 
the short-term monitoring basis.
    We have been looking closely at both successes and failures 
in monitoring in those other institutions and we will try to 
pick the best of them, depending upon the sector and depending 
upon the country. It is just going to vary by both.
    Senator Feingold. What will it cost for the MCC to maintain 
these 20 employees who are based overseas? And are you asking 
the State Department or USAID to share some of the cost, and 
how much?
    Mr. Applegarth. Well, we have been working closely with 
State and USAID to make sure we are leveraging our staff 
resources to the extent we can. By design we are not intended 
to be creating another bureaucracy. We are really modeled much 
more on a professional services entity, where we are 
subcontracting out anything that is not critical to our 
mission. So that we subcontract out things like our personnel 
administration, our internal accounting, even our security 
clearances, so that our folks really are directed to our 
mission, which is to work with the countries to make these 
things work.
    In many countries, we expect to be housed in the embassy or 
with the USAID mission. It will vary on the country's 
circumstances, but that would be our intention. To the extent 
we can leverage the usage of other U.S. Government resources in 
the area, we would like to do that. We have been getting quite 
good cooperation on the ground from both our Ambassadors and 
the mission heads from USAID in particular.
    Senator Feingold. I think I understood that answer. Let me 
followup by asking, does the MCC anticipate asking USAID or 
State Department personnel to assist in the monitoring effort?
    Mr. Applegarth. We can and I think it will be country 
specific. As you know, we certainly will be seeking their views 
and their input. Whether or not they have the resources to do 
that for us I think is really up to them.
    Senator Feingold. Would State or USAID be reimbursed for 
these costs?
    Mr. Applegarth. We would attempt to, I think, work out on a 
country by country basis arrangements that would work for them 
as well as for us. We are not going to divert them from their 
primary missions.
    Senator Feingold. Some have voiced concerns that lobbyists 
have been retained at a significant cost to extremely poor 
countries to help represent developing countries that wish to 
participate in the Millennium Challenge initiative. Obviously, 
this is troubling since the whole premise behind this 
initiative is that objective performance will be rewarded. It 
is not supposed to be about who is in and out of political 
favor, who has a high-priced lobbyist, and who does not.
    What's more, the objective indicators are well-known and 
publicized. Certainly our embassies should be able to explain 
clearly how one qualifies for MCA assistance. So it would 
trouble me if some countries believe that by hiring some 
professional lobbyist that that is a good investment, rather 
than, say, implementing the actual policies that the chairman 
was talking about to root out corruption.
    Does this phenomenon trouble you? Do you have any idea of 
how widespread the phenomenon is, and what steps are being 
taken by the MCC to discourage this kind of activity?
    Mr. Applegarth. I share your concerns 100 percent, Senator. 
This is not a good use of funds. I have been quite public about 
that. This is not an approach that countries should take. As 
recently as last Thursday, I spoke before a large audience at 
the Bretton Woods Conference. In response to a particular 
question from an emerging market Ambassador, I repeated the 
fact that success with MCA does not involve lobbyists.
    We have seen only a couple instances of it, and I cannot 
think of a case where a lobbyist was hired that I am aware of 
where the country was selected in this first round. The board 
takes it quite seriously that its selections are based on the 
criteria and not politics and lobbying. I think that is the 
best signal, both our jawboning and the fact that it does not 
work.
    Senator Feingold. I am very pleased to hear you have shown 
concern about this already, and over time I want to work with 
you to make sure we stay on top of this possible problem.
    What steps has the MCC taken to ensure that civil society 
in qualifying countries is engaged in actually developing 
compact proposals, so that this program really empowers 
citizens and not just empowering governments overseas? What can 
you do to bring civil society into this process?
    Mr. Applegarth. Transparency is our biggest ally, 
particularly now when we are trying to build confidence that we 
will use the money well. In the countries--in every country 
that we visited on the initial rounds--we had separate meetings 
with civil society, with NGOs, members of the business 
community. Most of our followup trips have involved similar 
meetings.
    We have asked the countries to in their compact proposals, 
to discuss and explain their consultative process. It is clear 
to them that we are taking it seriously, and, as a result, they 
are taking it seriously, and it is constantly reinforced in our 
messages to other countries and in our discussions and they 
know it will be a key element of our due diligence.
    Senator Feingold. Thank you, Mr. Chairman.
    Thank you, Mr. Applegarth.
    The Chairman. Thank you very much, Senator Feingold.
    Senator Hagel.
    Senator Hagel. Mr. Chairman, thank you.
    Mr. Applegarth, welcome. We are grateful for your 
leadership and please convey to your colleagues that we 
appreciate their good work and you are off to a very productive 
beginning.
    As noted in your testimony and in the opening comments of 
Chairman Lugar, the current funding for MCA is below expected 
levels, below what the President had requested. Most of us on 
this committee fought for that mark. We did not achieve that. 
Now, as that as the context of the issue, I have got two or 
three questions regarding that shortfall in funding for fiscal 
year 2005.
    The first is, what impact does this have on planning and 
implementation as you have completed fiscal year 2004? More 
importantly, you are planning for 2005 with essentially a 
billion dollars less than what the President had requested.
    Mr. Applegarth. It affects us in a number of ways, Senator. 
As we evaluate proposals and really build a pipeline, it is 
crucial that we have adequate funding. If you come back to what 
we are really about, it is to provide an incentive to countries 
to enact policy reform. It would be a fundamental problem if 
countries gave us good proposals--and there are a lot of good 
elements in proposals in what we are receiving right now--and 
that as a result of the cutbacks in funding, we either had to 
eliminate countries that had good proposals. There will be some 
countries that do not have good proposals. We are confident of 
that. But if there is a proposal before us that has good merit, 
that clearly leads to poverty reduction and growth, and we are 
unable to fund it, we have built expectations in the countries, 
their governments are taking heroic steps. Georgia is a very 
interesting example, the things they are doing, but there is 
also leadership in our other partner countries where they are 
trying to do things. If we fail to deliver on the Monterey 
promise that if they take those steps we will be there to help 
provide assistance, we are going to get questioned: Well, where 
is the beef? What happened?
    I think it is important to us in terms of our role in the 
world that what we are doing be funded adequately. I think it 
is important for U.S. credibility and I think it is important 
in terms of poverty reduction and growth, and we will come back 
to that. So it is very important as we go forward that we be 
able to work with the countries and credibly respond to good 
proposals as we have encouraged them to submit.
    Senator Hagel. In the same regard as the general question 
that I asked previously, what specific contingencies are you 
taking to deal with the shortfall? If you could give the 
committee one or two or three examples? You have laid out a 
general dynamic of what you are going to be dealing with, the 
concerns, the vulnerabilities, the down sides, but what are you 
doing to prepare for this?
    Mr. Applegarth. Well, first we are being rigorous in our 
evaluation of the proposals. We do that anyway, but I think we 
have tried to make it clear to the countries that only the best 
proposals will qualify. We are looking at timing; we think it 
is very important to have full funding up front in a compact, 
so the government can really plan and does not at the last 
minute get a rush of funds that ultimately leads to 
inefficiency and corruption.
    We are trying to make sure that the planning is up front. 
There are some things we can do in terms of funding technical 
assistance or evaluate in early stages something where we can 
perhaps as funding comes through amend the proposal to increase 
the funding once we have the certainty of it. At the same time, 
we will obviously do the other things we can in terms of 
adjusting timing. We think a number of countries will qualify 
in the future, if we pick the right countries, and qualify for 
2006 funding, qualify for 2005 funding.
    But the reality is it is important, if we are going to do 
this right, that we do get the funding that we need. We will 
obviously manage the program to the resources that are 
available, but I cannot assure you that significantly reduced 
funding would not impact either our mission, how the U.S. is 
viewed, or what we are trying to do.
    Senator Hagel. So the level of funding for fiscal year 2005 
could in fact affect the countries that have been selected? We 
just might not be able to fund those programs, after we have 
committed to the world that this program was effective and new 
and efficient and was a partnership that was very important for 
them?
    Mr. Applegarth. Absolutely, Senator. I think that is a very 
important point. At current funding proposals it is inevitable 
that the number of countries that we work with will be reduced, 
the size of the programs will be reduced, and/or our ability to 
truly create the incentives for the kind of policy reform that 
we are really all about will be impaired.
    Senator Hagel. I might note, Mr. Chairman, this is at a 
time when America is reaching out to the world, trying to 
improve its standing in the world, trying to develop 
relationships, partnerships, based on common interests, and 
these are the kind of programs that probably are most 
effective, have the most long-lasting effects of any, but yet 
we are shortchanging these kinds of programs and I think, Mr. 
Chairman, very clearly undermining our overall foreign policy 
objectives.
    Is there any way that other donors can assist to fill in 
some of these gaps, Mr. Applegarth, that we are going to 
obviously come up underfunded and we are going to need some 
assistance to fill those gaps?
    Mr. Applegarth. We are looking. We are working closely with 
other donors, first to make sure that they stay in the 
countries that we are coming into. We will start the 
conversation within the context that we do not want them 
pulling back simply because MCC is coming in. We lose all of 
our additionality, all of our incentive effect if they are not 
there.
    We are trying to align what we are doing with their 
programs, to the extent it is consistent with what the 
countries have identified as our priorities. It is not just 
with other donors, but I will mention one specifically. I just 
came back from Central America, where the countries propose 
that we do something that ties in very closely with something 
the World Bank and the IDB are doing, but which will take years 
before they can address it. We have the support of those two 
institutions to try to get this particular piece done.
    We are also working closely with other U.S. Government 
institutions. The senior management of OPIC, for example, is 
coming over this afternoon after this hearing to talk with us 
about what they are doing to put in place, how we might be able 
to leverage their resources and their capabilities to 
supplement what we are doing and provide more bang for our 
developing buck.
    Now that you have got me started; the private sector. I had 
a conversation on Friday with an institution that is looking 
closely at moving back into one of the regions we have been 
operating in. They have not been there for a while. They are 
trying to decide the best way to do it and to pick the areas of 
opportunity for them. Coming out of that conversation I think 
was a recognition that the criteria that we are using to 
evaluate countries that really do recognize good governance and 
recognize long-term growth and poverty reduction are probably 
very fertile areas for them to be putting their money. It is 
clear from that conversation they are going to be looking 
closely at the countries we pick and potentially using that as 
a basis for their own strategic investments.
    If we can truly mobilize that kind of support, we have 
really delivered on the promise that we are about.
    Senator Hagel. What is the role of multilateral lending 
institutions, private institutions, here? How can we--and 
obviously you have touched on it and I want you to go a little 
bit further--integrate those institutions and those private 
lenders into this fabric to make it more complete? Obviously 
you have thought about that and your own background lends 
itself to understanding that probably better than most.
    Mr. Applegarth. First, we have encouraged the private 
sector companies, both domestic and those that are operating 
internationally, that already have a presence in the country to 
participate actively in the consultative process, because we 
think that if there is anyone who truly knows about job 
creation, how to use resources to promote growth, it is the 
local private sector.
    We are not talking about the elites. We are talking about 
farmers or small businessmen or housewives who start a 
business. We ask them to do it. We are also talking about the 
multinationals trying to participate through their local 
professional staff.
    Second, we think there will be opportunities through our 
operations for them to participate business-wise. But more 
important, I think we are looking proactively for ways that 
their funding can complement whatever we are doing, 
particularly if it is not the governments themselves that are 
doing the implementation of some of our programs, if it is the 
private sector or even NGOs, others that are actually doing the 
program management and implementation. There would be a number 
of opportunities.
    Senator Hagel. Thank you. I might note, Mr. Applegarth, 
that the power of Chairman Lugar is immense. He was just in 
Albania and miraculously it shows up on your list of threshold 
countries 30 days after his appearance. If there is any 
question and doubt about the strength and power of this 
chairman, it should be dispelled immediately. I have understood 
that long ago.
    Mr. Applegarth. I did not realize he had been there, but I 
am glad to know--it is in the record I did not know he was 
there.
    Senator Hagel. A celestial kind of happening, really.
    Thank you.
    The Chairman. Well, thank you very much, Senator Hagel, for 
underlining the authority of the chairman.
    Senator Alexander.
    Senator Alexander. Thank you, Mr. Chairman.
    Thanks, Mr. Applegarth, for being here. This is a 
fascinating process we all hope succeeds. As I was thinking and 
listening to you, there is really nothing so new about it. I 
can think of many examples in our society, like foundation 
grants. I remember when I was Governor 20 years ago, Memphis 
went through a big jobs conference in which they got 2,000 
people involved and came up with private money, county money, 
city money, had a great vision for the future, and then came 
and wanted the State to put some money in, and we did. 
Chattanooga then wanted its money, and what I remember doing is 
sending them back to get more people involved and to think 
bigger.
    I can remember the New American Schools Development 
Corporation under the first President Bush, where David Kerns 
and I raised $50 million private dollars to give to break-the-
mold schools and 700 applied and 14 were chosen. I think of the 
private entrepreneurial sector we have in our country, where 
startups occur all the time and they are always looking at the 
people who have a lot of money to try to do things the way that 
people with a lot of money want them to do it.
    I was trying to think of any lesson from that and the two 
that I thought of were these: It seems to me that you have got 
double objectives here. One is to introduce a way of thinking 
to people in a way that is attractive to them. You are clearly 
doing that with your indicator ratings, so you have got people 
thinking differently.
    But to succeed it seems you need to have 5 years from now 
and 10 years from now a success story. It may only be one 
success story. It might only be two success stories. But it 
seems to me that that would need to be a success. Of all the 
new companies that start in America, most of them fail. Of all 
those 700 schools that applied to New American Schools 
Development Corporation, only 14 were chosen and some of them 
did not do very well.
    So I would like to ask you to look down the road in two 
ways. One would be, how will you work to make sure that, given 
the uncertain amount of money and the large number of 
countries, that you end up 5 or 10 years from now with one or 
two or three real success stories?
    Second, what will you do with everybody who does not make 
it? Is there some help--is there some way you can say to 
someone who comes close but does not make it that, 
congratulations, you have really gotten to an important point 
now, and here is a plateau that you have reached or an area you 
have reached, and here are a number of things that we can do. 
We are not able to give you the grant that you sought, but we 
can assist with all of these other things, give you a stamp of 
approval, and cause that country to feel good about having 
participated, rather than to have the government that got 
everybody excited be embarrassed and get thrown out of office 
in the subsequent election.
    Mr. Applegarth. It is a wide-ranging question, Senator. One 
thing I would say, we are not having to encourage our partner 
countries to think bigger. I think we are trying to encourage 
them to focus at this point. But I think we really cannot wait 
5 years or 10 years to show demonstrable success.
    We are seeing successes on the policy side and I cited a 
couple of them. What is most important is where we really do 
have meaningful impacts on poverty reduction in the areas we 
are working in, and growth. Inherent in what we are trying to 
do in our basic compact proposals with the government is to 
build in intermediate term benchmarks and objectives, where we 
can see tangible linkages in terms of outcomes and results to 
this investment that we are making.
    So if we have to wait 5 years before we do that, I think we 
are not being ambitious enough. I think we really do need to 
tie it to the projects.
    In terms of countries that are close on the eligibility 
side, we have that platform. It is the threshold program, where 
we do agree to work with them to take their proposals. If they 
are willing to tackle corruption in their country and give us a 
proposal that looks like we can provide some help, we will. The 
same thing in terms of rule of law. If they need training of 
judges or other kind of things, we will try to do that to help 
them.
    In countries where we have successful compacts and ongoing 
programs, if they get off track, as long as the country 
commitment is there, we will do midcourse corrections. I think 
that is inherent in the kind of operational involvement and 
monitoring that we are trying to do. At the end of the day, 
though, I would like to see some tangible results besides the 
policy reforms we encourage.
    Senator Alexander. In terms of those that do not quite make 
it, do you have a name for them? What do you call them? I mean, 
what do you say in your letter when you say no?
    Here is why--I am not trying to be tricky with you. I am 
thinking of No Child Left Behind. You know, many schools were 
very good schools, but they had a few kids who did not learn, 
so they did not make the grade. So they were suddenly called, 
quote, ``failing schools.'' That really made everybody feel 
very bad in that school. That was not really a good name.
    I was thinking of an award or a designation for countries 
that apply, go through a process, get to a point, but do not 
get all the way. I think it is--maybe you have thought that 
through and you have that in mind or maybe you are not to that 
point yet. But I would think about that, because to elected 
officials back in various countries it could make a big 
difference whether they have something to brag about for having 
made this effort.
    And funding huge amounts of money, the 13 countries plus 7 
threshold countries, that will be hard to do. So you are going 
to have some who went a long way in the direction that you 
hoped they would go, but do not succeed. So I am thinking of 
different levels of success, that is all I am encouraging.
    Mr. Applegarth. Well, I think you have put your finger on 
first the importance of the funding, that we get just as many 
good proposals as we can. Right now we are focused on getting 
good proposals, not on those who submit a proposal that does 
not work. We did rebrand, what I think you called them ``near-
miss countries,'' to be the ``threshold countries,'' because we 
felt that was a more looking-forward process or offered more 
opportunity.
    In terms of countries that submit proposals that are well 
thought through and that we could not fund, I would rather not 
contemplate that possibility, frankly. The others we will deal 
with in the course of the conversations with the governments. 
By being selected and recognized, they already have achieved 
something in their neighborhoods and I think in the world, but 
we would like to have it backed up with a good program.
    Senator Alexander. Yes, but if you are going to fund well a 
few good projects, you are going to have a number of other 
projects that are not funded, that may be OK but not the best. 
Otherwise you would be dribbling out a fairly insignificant 
amount of money among a lot of--we have got 63 potential 
countries, more than 13 plus 7. I guess I have made my point.
    Mr. Applegarth. I think you have. We are really asking the 
countries to focus first on the kinds of things that really are 
country-transforming, to use our MCC resources for those 
things, rather than things that others, particularly other 
donors, could do.
    I also believe--I do not have any evidence, I do not have 
any proof of it, but I have to believe--that if a country has 
gone through this process well and had a good consultative 
process and prepared good proposals, that somehow or other we 
will have other donors at least coming in to help on some of 
it. Still it is not a perfect solution in the absence of our 
full funding, but it is a step. That is what we will try to do.
    Senator Alexander. Maybe there can be a very specific 
process for those, like an all-American first team and an all-
American second team and both are honored in their home towns, 
one more than the other. But maybe you can have a specific 
process for the all-American second team or all-whatever it is 
second team, that takes them to other donors and other places.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Alexander.
    Let me just follow up on some of the points my colleagues 
have asked. You talked about good proposals. How do countries 
go about attempting to either guess or estimate what we will 
see as a good proposal, and how inclusive are these proposals? 
Do countries ask for help, in say, education, sort of back-to-
back with infrastructure, or banking reform, or what have you?
    In other words, there is probably a long list of reforms 
that could occur in many of the candidate countries. How do 
they surmise what the tide will bear? They could present to you 
a $5 billion proposal out of a single country for the $1 or $2 
billion that you have to distribute. Is there any sense of 
restraint on the part of the countries? Do you counsel them as 
to what your fair share might be, and therefore how you ought 
to tailor this proposal so that it somehow meets probability?
    Mr. Applegarth. First, the nature of the proposals, then I 
will come back to the second part of your question, Mr. 
Chairman. We are seeing, as I mentioned in my opening remarks, 
a variety of proposals. I think, generalizing that we have seen 
a number of sort of integrated rural development proposals, 
where countries have been very thoughtful in targeting a 
particular area or region after a consultative process, where 
they are not looking at a single intervention or support, but 
combining agricultural extension, training farmers in good crop 
rotation techniques, plus diversifying crops, to be more 
responsive to what the competitive market would be asking for.
    The Chairman. Rural development is often an area countries 
look at.
    Mr. Applegarth. Right, that, put together with drip 
irrigation, combined with building rural roads so they can get 
the products out to the market, and frequently combined with a 
major road leading to a port or somewhere else where they can 
essentially have products that meet world standards.
    The Chairman. So this is a business plan of how that 
country's GNP might increase, both from production, 
distribution, movement, ports, trade, what have you?
    Mr. Applegarth. Right, and we are seeing a lot of that. We 
are also seeing a number of water management proposals or 
elements of proposals in a very broad base. Some of the 
countries are quite rainfall-deprived, and if one can really 
bring methods of water catchment and storage and avoiding loss 
of use that could really impact the rural poor and others quite 
a lot. So that is one element of the kinds of things we are 
seeing and that we are having to evaluate.
    We are in evaluating the proposals focused right now on 
really picking the best and the countries understand that. They 
realize they got through the first stage of this competition, 
but essentially they got to the Sweet 16. To get to the Final 4 
or 8, there are still some more hurdles to go through, and they 
understand that we really will be picking and can only pick the 
very best of the proposals. That is what we are really 
encouraging them to do, to focus on those.
    That is what we are trying to do, work with them to really 
understand which are the best in terms of poverty reduction and 
growth and which are ready to go, so that we begin to have an 
impact and right away. If something is a good idea but it is 
going to take 2 to 3 years of detailed planning, let us put 
that aside for the moment on the grounds of trying to get 
something done now so that they can feel tangible success and 
we can begin to have an impact in the country.
    The Chairman. Even after you get, as you say, to the 
quarter-finals, or the semi-finals, and what have you, is it 
probable that you may pick up from some other countries that 
are not in the Final 4 or 8 elements that you can fund, that 
are part of a more general plan, but at the same time that are 
perhaps an integral stepping stone or foundation for what might 
occur later on if they are more successful?
    Mr. Applegarth. Yes, I would hope so, either on a stand-
alone basis or in coordination with other donors or other parts 
of the U.S. Government.
    The Chairman. I was intrigued by your response on the 
private investment side, because some proponents of the 
Millennium Challenge Corporation would say that, in fact, the 
Federal Government may invest this money that you have talked 
about, but the real future for the countries that are involved 
comes in private investment. This is how the world discovers 
these countries, but even more importantly--it has probably 
discovered them already, it has discovered that they have a lot 
of problems, including corruption and difficulty with their 
basic institutions, whether they be legal or banking or so 
forth.
    Through your application process, through the rigors of 
their looking at the 16 criteria, through how the world is 
looking at them as they make these internal reforms and 
adjustments, it is very conceivable that the path toward 
private investment, whether it be the United States or European 
or Japanese or what have you, may not be totally cleared away, 
but might become much happier.
    Again and again, as we dealt with the breakup of the Soviet 
Union, Ambassador Strauss went over there. He talked to the 
Russians about the fact that you have to have rule of law; 
there has to be contract law, and courts that adjudicate 
disputes fairly among all the parties, and minority 
stockholders, as well as a number of other things that American 
investors are going to look for, European investors that are 
closer by. Some people may make investments anyway, with all 
the risks, expecting confiscation and so forth.
    I remember one gentleman in Russia, an American investor, 
who invested in over 100 different enterprises. I said: Well, 
why have you scattered these investments? He said: Well, 
because of the law of averages; I expect that tens of these are 
going to be confiscated, or that I will simply lose some 
authority. But if you have 100 some may survive.
    Now, most investors are not prepared to do this. Their 
boards of directors are not in that business. That is 
speculation. But to the extent that, through the process that 
you are bringing about here, countries do the right thing for 
themselves, then the path is really cleared for a lot of things 
to occur.
    I have no idea what you do presently in terms of your 
public relations, within your house organs, the things that you 
broadcast to the world, even the things that you send over to 
this committee. But some of these stories, both anecdotal and 
actual, need to be told. In other words, right along with your 
judgments about who gets the money and whether they use it 
well, maybe even more fundamental in terms of American history 
or relations with these countries will be these internal 
adjustments that are occurring, some of them induced by you or 
by our State Department or by our businesses. Some reporting of 
what is occurring would be advisable.
    Most of us on this committee--and we follow other countries 
more than many of our colleagues do--are usually unaware, until 
there is a report in the Washington Post or The Times of 
something that has happened, and then we clip it out and say: 
Well, this is good news.
    But it occurs to me that your group that is examining these 
issues daily is much more prescient and knowledgeable about 
those developments and could make them known in ways that would 
be very important for MCC and its talented people, as well as 
for the other countries themselves. You could communicate that 
somebody is paying attention, that this is actually being said 
outside of the walls of the conversations you are having.
    All that has certainly already occurred to you and your 
staff. What sort of action have you been able to take on those 
ideas. What do you intend to do?
    Mr. Applegarth. We do a number of things, Mr. Chairman. 
First, public outreach here and in our eligible countries is 
very important to us. We had, I think it was our fourth, public 
meeting 2 weeks ago. Each of these meetings I think has been 
standing room only. More important, we are globally webcasting 
them, so you can----
    The Chairman. When was the last meeting that you held?
    Mr. Applegarth. The last one was I think Friday the week 
before last.
    The Chairman. Where?
    Mr. Applegarth. The last two we have had at the General 
Services Administration auditorium here in Washington. I know 
there are several people in the hearing room today, that I saw 
at the meeting. We encourage that. We have--we use the Web, not 
only for webcasting, but we also use it as our primary means of 
communication, so that everything we do from reports to country 
evaluations to the indicators to the methodology is all on the 
Web.
    The Chairman. On your Web site?
    Mr. Applegarth. On the Web site. That is visible. People 
can see it. We solicit comments. The Web site is www.mcc.gov.
    We have an e-mail list to which people can subscribe. They 
get notices of the meetings. We put all of our compact 
guidelines on there. We have had Q's and A's as questions have 
come in from members of the public and countries. We try to 
provide guidance. We have used the Web to solicit comments on 
our criteria for methodology and selection. So we see that as a 
key part of what we are doing.
    In our eligible countries, in certainly every trip I take, 
I have asked that we build into the travel schedule an 
opportunity to both meet with, not just government officials or 
people in the capital, but to have some event that is truly 
out, touching or involved with people in the countryside or 
elsewhere, so that other people can identify within the 
country.
    In addition, we always try to arrange some sort of an 
interview or media event with the largest local language 
newspaper. We are not talking about the international press, 
but the papers or the media that are viewed by local people, 
both to talk about what we are doing and encourage consultation 
and also because we see it as a strong public diplomatic impact 
in terms of the United States.
    The Chairman. Great. Well, I appreciate that. I thank you 
for giving the call sign, www.mcc.gov. I suspect viewers or 
listeners of our hearing will be interested in that and may in 
fact visit the Web site.
    But I would just say, do not be sparing in giving only the 
good news. Give a careful analysis of what you are finding, 
because the rigor of your criteria does make a difference to 
the potential recipients, as well as to those that are now 
forming proposals, as you imagine.
    Let me just ask, is there a good relationship with USAID? 
How is your relationship going with those folks?
    Mr. Applegarth. I think it has exceeded not only our 
expectations, Mr. Chairman, but also our hopes. We have a very 
strong working relationship with the USAID. As you know, 
Administrator Natsios is a board member. He personally, but 
also the members of his senior management team, are actively 
involved in what we are doing. They provided us briefings from 
their country teams here before we ever visited the countries 
in May. We are working with them and they will be administering 
the threshold program for us.
    In addition, the people, mission leaders and mission teams 
in countries, have been very helpful to us in countries in both 
providing insights into what is actually going on in the 
country and as a source of knowledge and experience. It has 
been quite constructive and I think one of our success stories, 
if you like.
    The Chairman. Well, that is really good to hear. As you 
remember, the initial hearings on the whole concept did not 
dwell on this subject, but it was an important issue: How does 
USAID fit into this? We explored whether the Director should be 
on the MCC board, and how he comes together with you in your 
responsibilities. So I am pleased that you have worked out a 
good relationship personally and institutionally with them. 
That is certainly reassuring.
    To what extent do you depend upon USAID personnel in the 
countries? As Senator Feingold's questions raised, you have a 
relatively small staff, in terms of people who are actually out 
in the field. Presumably you rely upon USAID and maybe other 
people from the embassies. Can you describe a little bit the 
monitoring as you use other United States personnel there?
    Mr. Applegarth. I think one of the merits of trying to 
build an organization with a small staff is that it really does 
encourage you to be focused and disciplined to really take 
advantage of the other resources out there. If you have 
unlimited staffing and resources, you have a tendency to build 
your own bureaucracy, your own little empire, and that is 
clearly not my motivation or the way that I think MCC works. So 
both by predilection and I think by design, we must work with 
not only USAID but others, and we really try to do it.
    So far the USAID teams, in-country teams, have been helpful 
to us in providing introductions to key opinion leaders in the 
country outside of governments, showing us examples of success, 
where their programs have particularly been helpful in some of 
the areas that the governments are likely to include in their 
proposals, whether it is agricultural extension or policy 
reform, governance, rule of law. You can go country by country 
and talk about specifics of how that has worked--true on-the-
ground cooperation, people working together.
    I think as we go forward doing due diligence we will 
obviously take full advantage of USAID's knowledge of the 
countries, of what is going on, solicit their views and 
opinions as we evaluate compacts, and then use them in terms of 
our lessons learned in terms of how we monitor and prepare the 
monitoring and evaluation pieces, particularly their experience 
in country, what particularly needs to be, both what works well 
in that country and what we need to be watching out for.
    So our door is open in terms of consultation. More than 
that, we are proactively seeking that help.
    The Chairman. You have completed 8 months by and large of 
life of the MCC. How much of the $994 million that was 
appropriated for the fiscal year did you spend? What is your 
general accounting at this point?
    Mr. Applegarth. Our expenses, our spending so far, has been 
for our startup expenses and administration I think we have 
obligated as of the end of the year about $6 million, of which 
$3 or $4 million has been disbursed. For programs, we have not 
disbursed anything. We are just getting the compact proposals 
in and evaluating them.
    But you will see significant expenditures under those 
programs over the coming fiscal year as we go forward.
    The Chairman. Starting the 1st of October?
    Mr. Applegarth. Yes, as we sign our initial compacts and 
begin to have funding flow into those compacts. That funding, 
as you know, is what we call no-year funding. So that funding 
will be disbursed over the life of the compact.
    The Chairman. Finally, you had the criteria. I remember 
this was a part of the discussion during the authorization of 
the agency. Has there been any argument or subsequent amendment 
of the criteria? Have you found that some are more useful than 
others? Probably so, but have you found some that ought to be 
added or subtracted? What sort of reaction have you received as 
you have asked them to measure up to these criteria?
    Mr. Applegarth. We have made changes. As you know, we have 
pretty high standards for adopting an indicator. We really want 
it to be prepared by a third party, a credible third party, so 
that it is clear that it is not subject to politics or U.S. 
Government intervention. We want it to be done at an arm's 
length basis. We want it to be rigorous analytically in the way 
it is put together. We want it to be transparent in terms of 
the methodology, so that we and the members of the public can 
comment and suggest improvement.
    We also want it to be linked to policies, and it is 
something that governments know, since we are really talking 
about policy reform, encouraging countries to make good 
policies. We want to be measuring things that they can act on 
and have an impact on in an intermediate timeframe.
    Last, we want them to have broad country coverage. You can 
find a perfect indicator; but if it covers only three or four 
of our candidate countries, it really is not very helpful to 
us.
    Against that backdrop, we made two small amendments to the 
criteria for this year, between 2004 and 2005. All of our 
criteria need improvement. We are seeing that improvement now 
that folks are paying attention I think the fact that we have 
gotten the attention and there is a lot of comment going on, 
means we are seeing those who prepare the indicators improve 
those individual indicators and we are evaluating--we are 
seeing those improvements, as well as considering others.
    The Chairman. What were the amendments that you made?
    Mr. Applegarth. The two we made this year, one was, as I 
mentioned in my opening statement, to change a measure of 
primary school completion rates or graduate rates in the 
country, to focus more particularly on girls primary school 
completion rates. It has been demonstrated through research 
over the last several years and since at least the late 1990s 
that there is a clear linkage between girls primary education 
rates and poverty reduction and growth. It was only recently 
that the data has reached a sufficient standard that we felt we 
could use it as an indicator, but we did adopt it for this 
year.
    We made one other change, which we had as a measure of 
economic freedom; the measure of inflation rates, for which the 
cap was at 20 percent. We have lowered it to 15 percent as a 
better measure of economic performance. We will look at whether 
we will lower it further. The academic research is actually 
mixed as to whether it would be really productive to reduce it 
below that, but that is one of the things we are evaluating.
    The Chairman. That is an interesting point. Probably there 
is some economic debate. Anecdotally, I remember visiting in 
Turkey years ago. The ministers there were pointing out that we 
have at one and the same time perhaps the largest growth rate 
and the largest rate of inflation. This is extraordinary and 
probably beyond the bounds of the criteria that you have just 
mentioned, certainly as regards the inflation side and also the 
growth actually in a couple of years, too.
    So obviously you have to temper this with your own 
experience. Turkey was not proposing itself in those days for 
this economic assistance. But it is simply an interesting fact 
in the governance of countries.
    Mr. Applegarth. Well, it is an important fact for us, Mr. 
Chairman. You put your finger on the dilemma. We do not want to 
simply build into the indicators nice ideas. OK, we really want 
to have them be credible; we think there has to be a linkage to 
poverty reduction and growth. If we are going to encourage 
countries to adopt particular policies or move in a certain 
area, we want as strong a case as possible that those 
indicators and those policies lead to poverty reduction and 
growth, because that is what we are about.
    The Chairman. Our public diplomacy section of the committee 
would ask, at the end of the day, after all this is said and 
done, are there more persons in any of these countries who 
would answer a question of approval or disapproval of the 
United States any differently? Granted, when polling many 
people in foreign countries, often the answer depends upon the 
question. If they were asked, do you like the foreign policy of 
the United States, do you like its military policy, do you like 
its President, or what have you, or do you like sort of 
generally the American people as a whole, usually the American 
people turn out fairly well, but the rest do not do so well in 
most countries.
    Now, the problem, obviously, will not go away, and we are 
not attempting to buy favor. But I am curious about to what 
extent this whole process of the interesting criteria, the idea 
of increasing governance, possibly some private investment in 
addition to actual funds, makes any difference. Is there some 
anecdotal evidence that in the countries in which we are now 
most active, there has been more support for our general 
ideals? These ideals are what we are trying to promulgate here, 
namely, an end to corruption, or openness for girls going to 
school, or a lot of other things that you are suggesting.
    Is this having an impact?
    Mr. Applegarth. I think it has. As I mentioned in my 
opening remarks, at least one government has specifically tied 
some anti-corruption legislation to the prospects for MCC 
qualification. Another country which did not qualify--it became 
an election issue by the opposition to the fact that they did 
not qualify--and why they did not qualify became a subject of 
debate.
    If you read the headlines, you would think the U.S. is 
being vilified around the world. I do not think that extends to 
the American people, but as a nation. I can just tell you, in 
the countries where we are operating, there is genuine 
enthusiasm, not only at the leadership level, but at the people 
level, about what the United States is doing and what this 
means and the kind of excitement it has created, because of the 
combination of ideas and innovations we represent and the 
concept of country ownership.
    The Chairman. I appreciate your personal testimony and 
likewise the work of your colleagues in the MCC, because this 
is good news. It needs to be shared. We hope that we can 
schedule regular hearings so that there will be opportunities 
to followup on what happens to the proposals that we are 
discussing today, as well as further developments in those 
countries that have advanced, in which you make awards, in 
which people actually are doing things. It is a story that 
needs, I think, constant amplification.
    So this committee is, if not quite a cheerleader for you, 
nonetheless pretty close to that. This is a very important 
mission, we believe. We thank you very much for your 
preparation for this hearing today, and for your testimony.
    Mr. Applegarth. Well, thank you, Mr. Chairman. As I said, 
both you and your colleagues here on both sides of the aisle 
have been very important to our being able to do what we are 
able to do. We already have some anecdotes of success, but the 
more opportunities we have to tell about them and the more 
stories that we have, we will certainly make an effort to get 
them out there, because this is a good news story. We are 
having real impact and trying to get at it in a way that people 
understand and appreciate that it is an important part of what 
we are trying to do.
    So thank you for the opportunity today and I look forward 
to meeting with you again.
    The Chairman. Thank you very much.
    [Whereupon, at 11:35 a.m., the committee adjourned, to 
reconvene subject to the call of the Chair.]

                              ----------                              

       Responses to Additional Questions Submitted for the Record

 Responses of Hon. Paul V. Applegarth to Additional Questions for the 
              Record Submitted by Senator Richard G. Lugar

    Question 1. Given our experience with the Iraq Stabilization and 
Reconstruction fund, the Committee is interested in your disbursement 
scheme. Firstly, how do you plan to disburse MCA funds? Will it be 
through national governments or will some funding go directly to 
program implementers? Secondly, will you create trust funds into which 
the Corporation will deposit money? And lastly, will you distribute 
resources only upon satisfactory implementation of earlier stages of 
the project?

    Answer. Fiscal accountability is a key element of Compact 
development, implementation and oversight. Thus, MCC is devoting 
particular attention to the mechanisms and processes that will need to 
be in place to assure that funds are managed and accounted for properly 
and procurements are undertaken in a fair, open, and transparent 
manner.
    As in many elements of the MCC approach, the lessons of development 
assistance over the last few decades have shaped the MCC fiscal 
accountability strategy. MCC is developing an approach pursuant to 
which it is expected that in many cases, governments will designate and 
reach agreement with MCC on a financial accountability mechanism that 
will be responsible, on behalf of the country government, for the 
financial management of MCC funds granted pursuant to a Compact.
    In guidance to eligible countries posted on the MCC Web site, the 
concept of a financial accountability mechanism is explained and it is 
noted that different approaches could be used in its establishment. 
Possible examples include:

   a government ministry using existing government financial 
        systems,
   the establishment of separate financial management units and 
        accounts within government,
   an existing government financial system or new government 
        financial management unit, augmented by an outside financial or 
        auditing institution,
   the use of a private accounting firm or financial 
        institution, or
   the establishment of a trust managed by an independent party 
        to oversee and account for MCC program funds.

    In reaching agreement with the country government on an appropriate 
financial accountability mechanism for the MCC-funded program in a 
country, MCC will be guided by the following principles:

   The mechanism should result in maximum transparency of 
        financial transactions and activity.
   The mechanism should have clear lines of authority and 
        responsibility to assure accountability. Performance standards 
        should be clear.
   The mechanism should produce maximum integrity of financial 
        information and assurance the funds are used for the purpose 
        intended.
   The MCC will seek, wherever possible, to build upon existing 
        systems, mechanisms, and previous assessment work whenever 
        possible.
   The mechanism should, wherever possible, build capacity that 
        will remain in place at the end of a program.

    While we anticipate that a signed Compact will typically obligate 
funds for the country's program over the lifetime of the agreement, 
cash disbursements will be made periodically (for instance, quarterly) 
by MCC into the separate account, taking into account the performance 
of the program to date. The financial accountability mechanism will 
certify cash requirements and financial reports underlying disbursement 
requests, prior to review and approval by MCC.
    Annual audits of the use of MCC funds granted under Compact by 
auditors approved by MCC's Inspector General will be required. In 
addition, concurrent audits may be used when deemed necessary. Also, 
MCC staff or outside experts will periodically review the financial 
accountability mechanisms in-country to assure that they are operating 
as agreed.

    Question 2. Could you please describe your efforts to recruit and 
hire an MCC staff that is a diverse representation of America with 
respect to gender, race and ethnicity?

    Answer. MCC's short-term goal is to staff up as quickly as possible 
with the highest caliber personnel, in order to meet the organization's 
ambitious goals of both establishing its operations and delivering 
assistance as soon as possible to eligible countries. To do this, MCC 
has advertised in The Washington Post, The Economist, and The Legal 
Times, as well as on MCC's own Web site. In addition, MCC recently 
entered into a contract with Korn/Ferry International, a recruitment 
firm that specializes in hiring executives and managers for 
associations, government, not-for-profit and economic development 
organizations nationwide. Korn/Ferry International will be assisting 
MCC's Human Resources staff in the recruitment and interviewing 
candidates for various positions. Korn/Ferry received the American 
Council on Education (ACE)--Network Leadership Award of 2001 for 
promoting the advancement of women in senior level positions within 
higher education.
    Over the medium- and long-term, as MCC continues recruit staff that 
meet the needs of its mission, MCC expects to build a workforce that is 
a diverse representation of America.

    Question 3. Will you please discuss your vision for the threshold 
program? How did you arrive at the decision to allocate $40 million of 
FY04 appropriations for threshold country assistance?

    Answer. The Threshold Program is a very important part of MCC's 
Mission. By targeting funds exclusively at policy reform, it is focused 
on MCC's fundamental objectives. IT is directed toward a limited number 
of countries that have not yet qualified for Millennium Challenge 
Account (MCA) assistance but have demonstrated a significant commitment 
to meeting the eligibility criteria. The Threshold Program is designed 
as an added incentive to countries committed to reform, and will be 
used to assist such countries in moving toward future MCA eligibility. 
Participation in the Threshold Program does not guarantee that a 
country will become eligible for MCA assistance in the future. 
Likewise, countries may become eligible for future MCA funding without 
participating in the Threshold Program.
    The U.S. Agency for International Development (USAID), in 
partnership with MCC, will take the lead in implementing the Threshold 
Program. Other U.S. agencies and departments may play an implementation 
role as well.
    Countries that have been selected by the Board as eligible for FY04 
Threshold Program assistance have been invited to submit proposals for 
policy and other reforms necessary to improve performance on the 
indicators. MCC and USAID, along with other U.S. agencies where 
appropriate, will then evaluate proposals and determine which of these 
proposals merit MCC funding. The evaluation process will be rigorous 
and there is no guarantee that a Threshold Program for any particular 
country will be approved and funded.
    The decision to begin the program with funding of up to $40 million 
was undertaken by the Board when program parameters were being 
developed, to enable MCC and USAID to continue their planning efforts. 
MCC retains the option of returning to the Board for additional funding 
(up to a total of 10 percent of the amount appropriated, as permitted 
in the legislation) should the threshold proposals dictate that 
increased funding levels are warranted.

    Question 4. Previously, MCC officials have indicated that the 
amount of assistance awarded will vary among countries, but will be of 
sufficient size to make the MCC grant either the largest or second 
largest aid program on average. Is this still the mission of the 
Corporation?

    Answer. MCC's goal is reduce poverty and spur sustainable economic 
growth. MCC's allocation and funding decisions will be driven by the 
quality of each country's proposal rather than by the number of 
eligible countries that submit proposals. Being among the largest 
providers of assistance in a country will allow MCC to be an effective 
incentive, to command the attention needed for breakthrough country 
proposals, and to galvanize the political will essential to success. 
For that reason, it has been suggested that MCC would have to be one of 
the two or three largest donors in any given country.
    That is why the administration requested $2.5 billion for the MCC 
in FY 2005. As a recent GAO study concluded, with the full $2.5 billion 
in FY 2005, together with the $1 billion appropriated in FY04, MCC 
would have resources to fund meaningful compacts with only 8-14 
countries in its first two fiscal years of operation. Appropriations 
below this amount requested by the administration, will either require 
reductions in the MCA programs (making the MCC a relatively minor 
player in some countries) or force the MCC to withhold funding from 
good proposals from MCA countries. Such reductions would undercut the 
MCA's incentive and effectiveness in achieving its goal of having a 
significant impact on poverty reduction and economic growth.

                                 ______
                                 

 Responses of Hon. Paul V. Applegarth to Additional Questions for the 
            Record Submitted by Senator Joseph R. Biden, Jr.

    Question 1. How does the Millennium Challenge Corporation (MCC) 
measure or assess civil society's level of involvement in developing 
country proposals? How will you determine whether or not the non-
governmental organizations that are involved are truly broadly 
representative of civil society, or whether there were others who 
should have been consulted and were not? How does the MCC evaluate 
whether or not women's civil society organizations have been adequately 
involved in the development of proposals? What steps will the MCC take 
if it determines that countries did not adequately involve civil 
society in the development of proposals?

    Answer. MCC has made clear to governments, as well as its citizens, 
that the quality of the process used to set development priorities for 
MCA assistance will be an important factor in our evaluation of their 
program proposals. To reinforce that message, MCC has posted its 
guidance for developing a program proposal on the web in local 
languages of the eligible countries, making the guidance available to 
potential participants in the consultative process. MCC staff has 
visited all of the eligible countries--some several times--and has met 
with a broad range of society including the private sector, NGOs, 
representatives of civil society, parliamentarians, opposition parties 
and others to determine whether they had a meaningful opportunity to 
participate in the process.
    If a consultative process has been open, meaningful and 
transparent, it will include a broad range of society, including women 
and women's organizations. We have asked countries to provide 
information about the process used and groups and institutions involved 
in their program proposals.
    As we continue to evaluate the process through our due diligence 
reviews, we will seek to find out such things as to what extent were 
citizens able to participate in the process, and if not, what were the 
constraints they faced; how were their views sought; to what extent 
were views taken into account; whether they were provided adequate 
notice of the timing and location of meetings; whether they fully 
informed about how to contribute to the process; whether they provided 
an adequate opportunity to provide input; whether a broad range of 
societies views were represented in the process; whether certain groups 
were disadvantaged.
    As part of its due diligence process, MCC will also consult with 
others in country that will likely have views on the quality of the 
process such as the Embassy and USAID mission and other bilateral and 
multilateral donors. If it is determined that the process was not open 
and inclusive and does not reflect the priorities of the country, MCC 
may reject a program proposal until an appropriate process can be 
undertaken.

    Question 2. Section 609(b)(D) of the Millennium Challenge Account 
(MCA) authorization requires that all Compacts identify the intended 
beneficiaries. This was done to encourage eligible countries to think 
about how their work will involve and impact different parts of the 
population, including women and girls. How has the MCC prepared itself 
to evaluate whether countries have undertaken this analysis and if 
proposals reflect such analysis? How will the MCC respond if the impact 
of a project on beneficiaries--specifically women and girls--is not 
evident in proposals? Will the MCC be asking countries to design 
projects such that they take into account the specific needs of women 
and girls?

    Answer. MCC has communicated clearly to the eligible countries the 
requirement that all proposals identify the intended beneficiaries and 
has encouraged countries to include elements in their programs that 
impact women and girls. MCC will conduct a comprehensive due diligence 
review of each proposal submitted by a MCC eligible country. An 
important component of such review will be an analysis of the impact 
the proposed MCC program would have on the intended beneficiaries, 
including women and girls.

    Question 3. What happens with countries which are determined to be 
eligible to submit a proposal, but do not conclude a Compact with the 
MCC in the same fiscal year? Do they have to compete again for 
eligibility or can they conclude a Compact in the subsequent year?

    Answer. A MCC eligible country is not required to conclude a 
Compact within the same fiscal year in which it became eligible. Since 
MCC has ``no year'' funding, funds that are not obligated by MCC in FY 
04 can carry over to subsequent fiscal years. As a result, a FY 04 
eligible country would be permitted to enter into a Compact in a 
subsequent year, so long as there is remaining FY 04 funding that has 
not yet been obligated under Compacts concluded earlier with other FY 
04 eligible countries. If the country is selected in the subsequent 
fiscal year then it is also eligible to compete for that fiscal year's 
funding, though it can have only once Compact in place at a time.

    Question 4. Unlike other assistance programs, the MCA is designed 
to let countries determine their own priorities. However, there are 
certain priorities that the U.S. government has, such as reaching the 
poorest communities, minorities or other under-represented groups, that 
are not always the priorities of governments. How, specifically, will 
the MCC balance the goal of letting countries set their own priorities 
with the need to ensure that our assistance dollars are being spent on 
projects we consider priorities?

    Answer. As investors using U.S. taxpayer dollars, we are not 
pushing any particular sector or project, but instead MCC seeks to help 
countries find the best investment opportunities for poverty reduction 
and growth. By design, MCC is focused on the poorest countries in the 
world. The MCC wants to give these countries an opportunity to escape 
the cycle of dependency and actively change the economic path of their 
country and part of our strategy is that this is best accomplished by 
allowing them to take ownership of the success of the program. In order 
to reflect the priorities of a country--not just the government--MCC 
places a strong emphasis on civic and private sector participation in 
setting priorities and then implementing these priorities. We will 
evaluate program proposals on that basis. We will also evaluate whether 
the proposed programs will lead to broad based poverty reduction and 
economic growth based on concrete evidence.

    Question 5. As I understand it, the MCC is not making any proposals 
available to the public until a compact has been finalized. Some 
country governments have made their proposals public; however, many 
have not. In the spirit of transparency and for the sake of encouraging 
the continued engagement of civil society, will you encourage 
governments to make their proposals public?

    Answer. Transparency in the countries' proposal development process 
is a fundamental MCC principle. MCC requires that all proposals reflect 
the results of a broad-based consultative process within the country 
that includes civil society and the private sector. MCC encourages 
countries to make their proposals public; however, the final decision 
as to when to make a proposal public is up to the countries themselves.

    Question 6. The MCC just announced seven countries as eligible to 
participate in the MCA Threshold Program. How were these countries 
selected? In particular, why was Uganda selected? The government in 
power intends to push a constitutional change to allow President Yoweri 
Museveni--who has been in power since 1986--to run for a third term, 
despite consistent and concerted diplomatic efforts by the U.S. 
government to encourage President Museveni to step down.

    Answer. The Threshold Program is directed toward a limited number 
of countries that have not yet qualified for Millennium Challenge 
Account (MCA) assistance but have demonstrated a significant commitment 
to meeting the eligibility criteria. The Threshold Program is designed 
as an added incentive to countries committed to reform, and will be 
used to assist such countries in moving toward future MCA eligibility. 
Participation in the Threshold Program does not guarantee that a 
country will become eligible for MCA assistance in the future. 
Likewise, countries may become eligible for future MCA funding without 
participating in the Threshold Program.
    The Millennium Challenge Corporation's (MCC) Board of Directors 
recently invited seven countries to apply for FY 2004 MCC Threshold 
Program assistance: Albania, East Timor, Kenya, Sao Tome and Principe, 
Tanzania, Uganda, and Yemen. The MCC Board of Directors selected the 
seven countries as eligible for FY 04 Threshold Program assistance 
based on their demonstrated commitment to meet the MCA eligibility 
criteria, including improvement of their scores on sixteen publicly 
available policy indicators in three general categories: ruling justly, 
investing in people, and encouraging economic freedom.
    In considering countries for the FY 04 Threshold Program, the Board 
favored countries that had to improve upon two or fewer indicators to 
qualify cleanly under the MCA eligibility criteria; i.e., by improving 
on two or fewer indicators the country would score above the median on 
half of the indicators in each policy category, would score above the 
median on the corruption indicator and would not score substantially 
below the median on any indicator. In addition, the Board reviewed 
whether countries that passed this screen also demonstrated a 
commitment to undertake policy reforms that would result in 
improvements in deficient MCC policy indicators. Finally, a Board 
decision was made to limit the number of threshold countries to 7 to 9 
countries due to limited initial resources and program staff at both 
MCC and USAID.
    In the case of Uganda we are aware of the concerns to potential 
changes in the Ugandan constitution and we will continue to monitor 
developments closely. It should be emphasized that Uganda's selection 
as a threshold candidate does not guarantee that funding of any nature 
will be provided. Rather, all potential threshold candidates will be 
required to demonstrate that they are willing to take tangible steps to 
address failing indicators. These types of reforms require leadership 
and commitment, and the responsibility lies with the countries. If 
Uganda, and the other threshold candidates, want to undertake this 
challenge and opportunity then we should be prepared to support their 
efforts.

    Question 7. The MCC has conveyed its intention to lower the 
inflation rate indicator from the 20 percent used in FY 2004 to 15 
percent and is considering a further reduction to 10 percent in FY 
2006. Can you explain the motivation for lowering the inflation 
indicator and how lower inflation rates will contribute to the overall 
MCA goals for sustained economic growth and poverty reduction?

    Answer. Among a variety of factors in choosing indicators, the MCC 
is looking for those that have a clear theoretical or empirical link to 
economic growth and poverty reduction, and are policy-linked. There is 
a great deal of research that shows that higher rates of inflation are 
especially harmful to the poor, who are the least able to protect 
themselves. It is sometimes referred to as a highly regressive tax. In 
addition, inflation leads to distortions in relative prices and the 
decisions based on them, which tends to harm the investment climate. 
Inflation is also clearly an important measure of a country's monetary 
policy.
    MCC's indicators are used to rank country's policies against each 
other. Given the difficulties of a relative scale to determine an 
inflation median, MCC has used a hurdle rate for that particular 
indicator. MCC was concerned that the 20 percent rate used in FY2004 
was not as meaningful as originally intended and given the importance 
of an investment climate and monetary policy to a country's growth 
potential--we lowered it to 15 percent.

    Question 8. How will factors such as poverty reduction and economic 
growth be weighed in determining the merit of a country's MCA proposal? 
How will you judge a country proposal's effect on short-term and long-
term impacts on both poverty and economic growth?

    Answer. The goal of the MCA is to reduce poverty. It seeks to do 
this by increasing the economic growth of recipient countries. This 
requires an emphasis on investments that raise the productive potential 
of a country's citizens and firms and help integrate its economy into 
the global product and capital markets.
    A country's proposal should make the link between the program 
suggested and the desired outcomes, and we will conduct economic 
analysis to try to determine those impacts. In order to promote a 
sustainable, long-term economic growth and poverty reduction, in our 
due diligence process we will also look at issues such as: efforts to 
mitigate potentially negative environmental impacts; the quality of 
public consultation and level of public support for the proposed 
activities; identification of the expected beneficiaries; and the 
quality and capacity of local entities to manage the funds in an 
accurate, transparent, and efficient manner to implement the proposal. 
In addition, we will look at program proposals to see if they have 
concrete, measurable goals and benchmarks that can be used to assess 
progress toward those goals and so we can adequately evaluate the 
impact of the assistance.

                                 ______
                                 

 Responses of Hon. Paul V. Applegarth to Additional Questions for the 
               Record Submitted by Senator Jon S. Corzine

    Question 1. What were the criteria used to select the Threshold 
Countries? What was the basis for determining that each of these 
countries had demonstrated a `significant commitment'' to meeting the 
eligibility requirements?

    Answer. The Threshold Program is a very important part of MCC's 
Mission. By targeting funds exclusively at policy reform, it is focused 
on MCC's fundamental objectives. The program is directed toward a 
limited number of countries that have not yet qualified for Millennium 
Challenge Account (MCA) assistance but have demonstrated a significant 
commitment to meeting the eligibility criteria. The Threshold Program 
is designed as an added incentive to countries committed to reform, and 
will be used to assist such countries in moving toward future MCA 
eligibility. Participation in the Threshold Program does not guarantee 
that a country will become eligible for MCA assistance in the future. 
Likewise, countries may become eligible for future MCA funding without 
participating in the Threshold Program.
    The Millennium Challenge Corporation's (MCC) Board of Directors 
recently invited seven countries to apply for FY 2004 MCC Threshold 
Program assistance: Albania, East Timor, Kenya, Sao Tome and Principe, 
Tanzania, Uganda, and Yemen. The MCC Board of Directors selected the 
seven countries as eligible for FY 04 Threshold Program assistance 
based on their demonstrated commitment to meet the MCA eligibility 
criteria, including improvement of their scores on sixteen publicly 
available policy indicators in three general categories: ruling justly, 
investing in people, and encouraging economic freedom.
    In considering countries for the FY 04 Threshold Program, the Board 
favored countries that had to improve upon two or fewer indicators to 
qualify cleanly under the MCA eligibility criteria; i.e., by improving 
on two or fewer indicators the country would score above the median on 
half of the indicators in each policy category, would score above the 
median on the corruption indicator and would not score substantially 
below the median on any indicator. In addition, the Board reviewed 
whether countries that passed this screen also demonstrated a 
commitment to undertake policy reforms that would result in 
improvements in deficient MCC policy indicators. Finally, a Board 
decision was made to limit the number of threshold countries to 7 to 9 
countries for FY04 due to limited initial resources and program staff 
at both MCC and USAID.

    Question 2. Please describe the relative roles of the MCC, USAID 
and any other government agencies in administering Threshold Country 
assistance. How will this assistance be structured to achieve the goal 
established in the MCA legislation of helping each country become fully 
eligible for MCA assistance? For instance, will countries that do not 
meet the criteria with regard to corruption but have demonstrated a 
commitment to reform receive assistance in the form of anti-corruption 
programs?

    Answer. The U.S. Agency for International Development (USAID), in 
partnership with MCC, will take the lead in implementing the Threshold 
Program. Other U.S. agencies and departments may play an implementation 
role as well.
    Countries that have been selected by the Board as eligible for FY04 
Threshold Program assistance have been invited to submit proposals for 
policy and other reforms necessary to improve performance on the 
indicators. MCC and USAID, along with other U.S. agencies where 
appropriate, will then evaluate proposals and determine which of these 
proposals merit MCC funding. The evaluation process will be rigorous 
and there is no guarantee that a Threshold Program will be approved and 
funded.
    Qualifying for the MCA will continue to depend on a country's 
performance on the MCA selection criteria. Change will not be easy and 
it may take time for improvements to be reflected in a country's 
indicator scores. Improving performance on the MCA indicators will 
require strong political commitment and leadership over a sustained 
period of time. Specifically, in regards to the corruption indicator, 
we would expect countries that performed poorly on this indicator would 
make this a central focus of their threshold program proposals.

    Question 3. Please describe efforts to make the compact process 
transparent in each of the eligible countries? What policies does the 
MCC have in place to promote transparency, e.g. outreach to civil 
society, posting of information on government web sites?

    Answer. MCC has made clear to governments, as well as their 
citizens, that the quality of the process used to set development 
priorities for MCA assistance will be an important factor in our 
evaluation of their program proposals. To reinforce that message, MCC 
has posted its guidance for developing a program proposal on the web in 
local languages of the eligible countries, making the guidance 
available to potential participants in the consultative process. MCC 
staff has visited all of the eligible countries--some several times--
and has met with a broad range of society including the private sector, 
NGOs, representatives of civil society, parliamentarians, opposition 
parties and others to determine whether they had a meaningful 
opportunity to participate in the process. We have used the media 
(radio, TV, and print) to reach out to a broad base of citizens in 
eligible countries. Finally, we maintain a regular dialogue with U.S. 
and international NGOs working in these countries, who are supportive 
of this process and are working with local NGOs to improve their 
capacity to participate.
    Based on feedback from these groups, for example, we have recently 
included on our Web site a link to eligible countries' government 
points of contact and their Web site. Some governments have already 
posted their program proposals on their Web sites to enable public 
comment. Once we have reached a Compact agreement with countries, it 
will be posted on MCC's Web site.

    Question 4. Has the MCC considered incorporating within its 
compacts a concrete role for civil society and NGOs to assist in the 
monitoring and evaluation of projects?

    Answer. MCC believes that civil society and NGOs have an important 
role in the monitoring and evaluation of projects--whether formally or 
informally--which is a key reason for posting Compact agreements on the 
web and other means to make them publicly available. Making the 
specific program and budget information publicly available will enable 
the intended beneficiaries and other interested parties to monitor 
progress. Eligible countries are to propose the monitoring and 
evaluation system that will be employed on the program. This may rely 
on NGOs for monitoring and evaluation work, depending on government and 
NGO capacity. MCC will evaluate the monitoring and evaluation plans and 
capacity, as part of the overall review of the program proposal.

    Question 5. Has the MCC considered developing a tool for direct 
feedback, either through the Internet or via a civil society forum, 
from individual citizens and NGOs in recipient countries who witness 
waste, fraud or misuse of funds?

    Answer. We are working with U.S. and international NGOs that have 
in-country offices and good contacts within these countries. We have 
also developed direct communications with NGOs, civil society groups, 
private-sector individuals, and individual citizens in the countries 
and have encouraged them to provide this type of feedback once a 
program has been initiated. We have a web-based mechanism for 
submitting comments and questions and have already received helpful 
feedback. USAID Missions and U.S. Embassies have served as an 
additional vehicle for communicating questions, concerns or comments 
and it is likely that MCC will post one or more representatives in some 
of the Compact countries.

                                 
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