Millennium Challenge Corporation
April 2, 2012
The Millennium Challenge Corporation (MCC) is an innovative and independent U.S. foreign aid agency that is helping lead the fight against global poverty. Created by the U.S. Congress in 2004 with strong bipartisan support, MCC is changing the conversation on how best to deliver smart U.S. foreign aid by focusing on good policies, country ownership, and results.
MCC forms partnerships with some of the world’s poorest countries, but only those committed to good governance, economic freedom, and investments in their citizens. MCC provides these well-performing countries with large-scale compact grants to fund country-led solutions for reducing poverty through sustainable economic growth. MCC compacts range from $65 million to nearly $700 million per country.
Incorporating private sector participation into MCC compact investments can help ensure sustainability and mobilize additional sources of funding. MCC’s Private Sector Toolkit (available at http://www.mcc.gov/privatesector) details four models of private sector participation in MCC compacts: private finance of infrastructure, outsourced management, social service franchising, and output-based aid.
MCC’s overall objective is to improve developmental outcomes by pursuing alternative aid assistance approaches that move beyond projects that are identified, developed, financed, executed, and operated by the public sector. Private sector participation in MCC’s existing portfolio is concentrated in outsourced management of assets constructed or rehabilitated with compact funding. Examples include:
• Leases and management contracts for water supply networks in Mozambique following compact-funded construction.
• A private concession of Benin’s Port of Cotonou South Wharf following compact-funded landside and waterside improvements.
• Co-financing, construction, and operation of new rural electricity lines, connections, and extensions in El Salvador with Arlington, Virginia-based AES Corporation.
MCC expects future compacts to increasingly mobilize private debt and equity finance while incorporating increased risk transfer to the private sector.
Leveraging Resources for Economic Growth
MCC’s strategic vision is to: (1) increase the supply of well-structured projects that can attract commercial debt and equity financing and (2) to help foster capital market development by mobilizing banks and institutional investors. Furthermore, MCC may fund improvements to the enabling environment through support for sector policy reforms and institutional strengthening.
Accordingly, MCC’s operating strategy for private sector participation in MCC compacts is three-fold:
• Partners: Enhance MCC’s strategic operational collaborations with development partners, based on respective institutional comparative advantages.
• Platforms: Explore alternative approaches to project origination (e.g., challenge grants), development (e.g., outsourcing to developers), and implementation (e.g., output-based aid).
• Products: Use grants for viability gap funding to buy down capital expenditures, and facilitate downstream project financings by using credit enhancements like partial risk/credit guarantees.
Through private sector participation in compacts, MCC hopes to draw more broadly on partners to leverage MCC resources and to stimulate new investment and new development practices. These partnerships, although often complex and challenging to structure, offer the possibility of mobilizing additional resources for development and promoting greater program effectiveness and sustainability—providing an opportunity to substantially increase the impact of MCC-funded projects.
To learn more about private sector participation in MCC compacts, please visit www.mcc.gov or send an email to info@mcc.gov.