MILLENNIUM CHALLENGE CORPORATION (MCC) BOARD

UNCLAS SECTION 01 OF 06 STATE 133489

SIPDIS
ALSO FOR USAID (PDELP/JLANGE)
USTR FOR EBRYAN
TREASURY FOR BPELTON

E.O. 12958: N/A
TAGS: EAID PREL PGOV ETRD ECON KMCA MCC
SUBJECT: MILLENNIUM CHALLENGE CORPORATION (MCC) BOARD
SELECTS COUNTRIES FOR FISCAL YEAR 2009


1. Action request for action addressees (FY09 MCA Compact
Eligible and Threshold Eligible countries) in paragraph 11.


2. SUMMARY. The Millennium Challenge Corporation's (MCC)
Board of Directors met December 11, 2008, and selected three
new countries -- Indonesia, Zambia, and Colombia -- as
eligible for Millennium Challenge Account (MCA) Compact
assistance for fiscal year 2009 (FY09). The Board also
selected one new country, Liberia, as well as a formerly
Compact-eligible country Timor-Leste, as eligible for a
Threshold program. This cable provides guidance on the FY09
MCC selection process as well as talking points for:

-- all countries (paragraph 12),
-- new Compact-eligible countries (paragraph 13),
-- new Threshold countries (paragraph 14),
-- Paraguay, which was reselected for a Stage II Threshold
program (paragraph 15),
-- countries currently implementing Compacts (paragraph 16),
-- candidate countries not selected for FY09 (paragraph 17),
and
donor countries (paragraph 18).

For additional talking points, please contact MCC. Letters
from MCC CEO Ambassador John Danilovich will be provided
separately by email for delivery by Posts to heads of
government of FY09 MCA Compact eligible and Threshold
eligible countries. During the December 11 Board meeting,
the Board expressed ongoing concerns about policy performance
in Armenia and suspended the Nicaragua Compact program due to
policy concerns. END SUMMARY.


3. MCC's Board of Directors met December 11, 2008, to select
countries as eligible for MCA Compact and Threshold
assistance for FY09. The Board selected three new Compact
eligible countries: Indonesia, Zambia, and Colombia. The
Board also re-selected five countries that are developing but
have not yet signed Compacts: Jordan, Malawi, Moldova, the
Philippines, and Senegal. The Board did not reselect three
countries that were previously eligible to develop Compacts
but had not yet finalized an agreement: Bolivia,
Timor-Leste, and Ukraine. The Board selected Timor-Leste to
participate in a Threshold program. The MCC this year
discontinued the practice of annually making eligibility
determinations for countries with signed Compacts since MCC's
legislation does not require reselection every year in order
for countries already implementing their compacts to continue
their programs.


4. The Board selected two countries as Threshold eligible:
one new country, Liberia, and one formerly compact-eligible
country, Timor-Leste. The Board also reselected Paraguay for
Stage II Threshold eligibility. Paraguay was made eligible
for Stage II assistance last year but has not yet signed an
agreement and needs 2009 funds to continue program
development. The Board did not re-select Yemen for Threshold
eligibility.

BACKGROUND
--------------


5. MCC supports programs that aim to reduce poverty and
promote sustainable economic growth in the poorest countries
of the world that have demonstrated a broad commitment to
sound development policies. This commitment is measured by
performance on 17 independent, third-party indicators grouped
into three broad policy categories: Ruling Justly, Investing
in People, and Economic Freedom. In determining eligibility,
the Board considers whether a country performs above the
median relative to its income-level peers on at least half of
the indicators in each of the three categories and on the
Corruption indicator. The Board also weighs heavily
countries, performance on the three democracy indicators
(Political Rights, Civil Liberties, and Voice and
Accountability). To address limitations of the indicators --
including gaps, time lags, trends and other factors not
adequately captured -- the Board takes into account
supplemental quantitative and qualitative information.

STATE 00133489 002 OF 006




6. The Board also considers the opportunity for economic
growth and poverty reduction and the availability of funds
appropriated for MCC. Regardless of the fiscal year of
initial selection, there is no guarantee that any
MCA-eligible country will reach a Compact agreement with MCC
or will receive funding. Compact finalization also depends
on the quality of the country's program proposal and the
funds available to MCC.


7. Candidate Countries: MCC's Board of Directors identified
93 candidate countries for FY09 from which eligible countries
could be selected and 11 countries that are not candidates
due to statutory restrictions. The 93 candidate countries
identified for FY09 fall into two groups:

-- Low Income Countries (LICs),defined as countries with a
Gross National Income (GNI) per capita of $1,785 or less, and
-- Lower Middle Income Countries (LMICs),defined as
countries with a GNI per capita of $1,786-$3,705.

Income group classification cutoffs are adjusted annually.
There are 64 LIC candidates and 29 LMIC candidates this year.
The LMIC category was introduced in FY06 and is accompanied
by a legislative restriction on funding; LMICs can only
compete for up to 25% of compact funds in a given fiscal
year. Candidate countries are listed on the MCC website
(www.mcc.gov).


8. New Compact eligible countries: MCC will assign a point
of contact in January to provide Posts with guidance on the
Compact development process for FY09.


9. Threshold Programs: Countries that have not been
selected as Compact-eligible but are close to meeting the
indicator criteria and have demonstrated a commitment to
making the policy reforms necessary to qualify may be
selected as eligible to participate in a Threshold Program.
Threshold programs provide eligible countries with an
opportunity to apply for financial support for reforms they
propose that are intended to improve policy performance in
areas where there are weaknesses, as evidenced in the
indicators. For more on Threshold programs, please see the
relevant section on MCC,s website (www.mcc.gov). Selection
for a Threshold program does not bar countries from being
considered for Compact eligibility. Updated guidance on
developing Threshold proposals for FY09 will be posted on
MCC,s website shortly.


10. Armenia and Nicaragua: The Board reiterated its
concerns about the status of democratic governance in Armenia
and underlined its expectations that the Government of
Armenia fulfill commitments to implement substantive reforms.
The Board noted that it would again review Armenia's
performance and examine continued collaboration with the
country during its March meeting. The Board voted to suspend
assistance under the MCC Compact in Nicaragua because of
actions taken by the Nicaraguan government that are
inconsistent with MCC,s eligibility criteria. MCC will
therefore not approve disbursements for activities not
already contracted by MCA-Nicaragua. The political
conditions leading up to, during, and following recent
elections in Nicaragua were not consistent with MCC
requirements that include a commitment to policies that
promote political freedom and respect for civil liberties and
the rule of law. The Board called on Nicaragua to develop
and implement a comprehensive set of measures to address
concerns regarding the government's commitment to democratic
principles. The Board will review the response of the
Nicaraguan government and determine subsequent actions at its
next quarterly Board meeting in March 2009. All posts may
draw from this paragraph and a press release available on
MCC,s website as background for discussions with host
governments. MCC will also make press guidance available to
PAOs.


11. ACTION REQUESTED: All posts may draw on the background
points in paragraph 12, as appropriate. MCC CEO Ambassador
John Danilovich has notified the Ambassadors of Indonesia,
Zambia, Colombia, and Liberia, of their countries,
eligibility and requests that Posts deliver the points in
paragraph 13 (Indonesia, Zambia, and Colombia) and paragraph
14 (Liberia, Timor-Leste),along with a letter from CEO

STATE 00133489 003 OF 006


Danilovich informing the leaders of these countries of the
results. MCC will send the text of the letter to each Post
separately by email. MCC has contacted Posts in reselected
countries, and a letter to the head of state regarding their
reselection is forthcoming. MCC will also contact and send
letters to countries previously selected as eligible to
develop a Compact, but not selected this year (Bolivia and
Ukraine),as well as to countries currently implementing
Compacts. MCC will provide additional country-specific
talking points as needed. Embassy Asuncion may refer to the
Stage II Threshold program points in paragraph 15; Posts in
countries currently implementing Compacts may refer to the
points in paragraph 16; and Posts in candidate countries that
were not selected may draw on points in paragraph 17. MCC
will provide additional country specific points as needed.
Posts are encouraged to deliver information about new country
selections to donors, drawing on the general background
information contained in paragraph 18. Questions from Posts
or host governments regarding selection can be directed to
MCC,s Office of Development Policy at
developmentpolicy@mcc.gov or 202-521-3926.


12. BACKGROUND/GENERAL POINTS FOR ALL COUNTRIES:

-- The Millennium Challenge Corporation's Board of Directors
has selected three new countries -- Indonesia, Zambia, and
Colombia -- as eligible to submit a proposal for MCA compact
assistance for Fiscal Year 2009, based on their performance
on democratic governance, economic freedom, and investing in
people indicators. Selection for Compact eligibility is a
recognition of countries for their policy performance in
these three broad areas.

-- The Board of Directors used data from 17 independent,
third-party indicators to assess the degree to which the
country's political and economic policies serve to support
broad-based, sustainable economic growth. The Board also
took into account additional quantitative and qualitative
information to adjust for gaps, time lags, or other
weaknesses in the data to inform its eligibility
determinations. The Board also considered MCC,s ability to
impact and stimulate economic growth and poverty reduction in
a country, as well as the availability of funds.

-- MCC,s report to the U.S. Congress explaining the Board's
determination of MCA-eligible countries will be posted on
MCC,s website (www.mcc.gov) in the next few days.

-- The Board also reviewed the performance of MCC,s current
Compact development partners. Countries that are developing
Compacts but have not yet signed agreements were considered
for reselection so that they could be eligible for 2009 funds
and continue Compact negotiations. The Board reselected five
countries to continue developing their Compacts: Jordan,
Malawi, Moldova, the Philippines, and Senegal.

-- The Board did not reselect three countries that were
previously Compact eligible: Bolivia, Timor-Leste, and
Ukraine. (Specific talking points can be made available upon
request.)

-- The Board also selected Liberia and Timor-Leste as
eligible to submit a proposal for assistance under Threshold
programs. Threshold programs help countries that have not
been selected as Compact-eligible but are close to qualifying
and have demonstrated a commitment to address areas where
they fall short on the indicators. Paraguay, which was
selected as eligible for a Stage II Threshold Program last
year but has not yet signed an agreement, was reselected to
continue developing its program.


13. ADDITIONAL POINTS FOR INDONESIA, ZAMBIA, AND COLOMBIA AS
NEW MCA COMPACT ELIGIBLE COUNTRIES:

-- Congratulations on being selected as eligible for MCA
Compact assistance. This is recognition of the good policies
your government has put in place in the areas measured by
MCC,s indicators and your country's commitment to ruling
justly, investing in its people, and encouraging economic
freedom. Experience shows that good policies in these areas
are important contributors to development success.

-- A letter from MCC Chief Executive Officer Ambassador John

STATE 00133489 004 OF 006



J. Danilovich will provide official notification of selection
and invite your country to submit a proposal for an MCA
compact program.

-- While being selected is recognition of relatively good
policy performance, assistance is not guaranteed and will be
contingent on, among other things, continued strong policy
performance.

-- including performance on MCC indicators, the successful
negotiation of a mutually agreeable Compact between your
country and MCC, approval of the Compact by the MCC Board,
and the availability of funds to MCC.

-- To help your country get a solid start, MCC will be in
contact with your Ambassador in Washington to provide
guidance on working with MCC and the specific steps to
developing a Compact proposal for MCA funding.

-- Development of the MCA proposal is your responsibility.
The ultimate success of our partnership depends in part on
your commitment of human, financial and technical resources
to develop a quality proposal.

-- MCC will evaluate your proposal based on its contribution
to economic growth and poverty reduction, the quality of the
consultative process that informed its development,
commitments to policy improvements relevant to the proposed
MCA-program, and other factors. MCC encourages a continuous
dialogue between MCC and your country's counterparts
throughout the proposal and Compact development process.

-- MCC representatives look forward to discussing all of
these issues during an upcoming trip to your country to
discuss the program with a broad range of stakeholders both
within and outside government.


14. ADDITIONAL POINTS FOR LIBERIA AND TIMOR-LESTE AS NEW
THRESHOLD COUNTRIES:

-- MCC is built on the premise that aid is most effective
when it reinforces sound political, economic, and social
policies. We believe sound policies are key to encouraging
domestic and foreign investment and increased trade -- the
real engines of economic growth.

-- MCC is committed to supporting those countries that are
themselves committed to good governance, sound micro- and
macroeconomic policies that support the development of the
private sector, and investments in their people, including
health, education, and sound natural resource management, as
these policies create favorable conditions for sustainable
economic growth.

-- The selection of eligible countries for Threshold programs
was based on performance in these areas. The indicators were
used to provide a measure of countries, policies and whether
the government has created the conditions that are linked to
broad-based sustainable economic growth.

-- Liberia and Timor-Leste have been selected as eligible to
participate in Threshold programs. A letter from MCC Chief
Executive Officer Ambassador John J. Danilovich will provide
official notification of your selection for a Threshold
program.

-- Threshold programs are for countries that do not meet the
indicator criteria for MCA Compact eligibility but are close
to doing so and have demonstrated a commitment to addressing
the policy areas where there are weaknesses. These programs
provide financial support to bolster those reform efforts in
order to help you qualify for future MCA compact eligibility.

-- Please identify a point of contact within your government
with whom MCC can correspond and provide greater information
about Threshold programs by January 31. Please notify
Threshold Programs Managing Director Monica Kladakis (tel:
202-521-3923, email: KladakisMV@mcc.gov) at MCC as soon as
this point of contact has been identified.


15. ADDITIONAL POINTS FOR PARAGUAY:

-- MCC is committed to supporting those countries that are

STATE 00133489 005 OF 006


themselves committed to good governance, sound micro- and
macroeconomic policies that support the development of the
private sector, and investments in their populations, as
these policies create favorable conditions for sustainable
economic growth.

-- Although Paraguay is not yet Compact eligible, we commend
you for the progress made on your Threshold program. Last
year, the Board decided to continue supporting Paraguay's
reform efforts by inviting it to submit a Stage II Threshold
Country Plan (TCP).

-- The Stage II TCP submitted by the Government of Paraguay
in September is currently under review. We look forward to
our continuing partnership.


16. ADDITIONAL POINTS FOR COUNTRIES CURRENTLY IMPLEMENTING
COMPACTS:

-- MCC,s Board has decided that once MCC makes a commitment
to a country through a signed, five-year Compact agreement,
MCC will no longer select this country as eligible on an
annual basis during the term of the Compact.

-- However, MCC and its Board of Directors continue to
closely evaluate each country's policy performance throughout
the life of the Compact. Once MCC has made a commitment to a
country through a signed Compact, MCC will continue to work
with that country as long as it does not demonstrate a
pattern of actions inconsistent with the eligibility criteria
(i.e., a &significant policy reversal8).

-- If it is determined that a country has demonstrated a
significant policy reversal, the Board can hold it
accountable by applying the Suspension and Termination
Policy.

-- Countries interested in second Compacts, after the
expiration of their current Compact, will need to be selected
as eligible for funding. While the specific criteria upon
which countries will be evaluated for second Compact
eligibility have not yet been finalized, they will likely
entail a combination of policy performance and successful
implementation of the first Compact.

-- For Benin, Cape Verde, El Salvador, Georgia, Madagascar,
Mali, Morocco, Mozambique, Namibia, and Vanuatu: Countries
that do not meet the indicator criteria, but have not
demonstrated a significant policy reversal will receive an
invitation from MCC to participate or continue participation
in the policy improvement process. Countries participating
in the policy improvement process are asked to develop and
implement a forward-looking action plan that outlines the
steps they plan to take to improve performance on certain
policy criteria. They then are expected to periodically
report on progress made on the plan.


17. ADDITIONAL POINTS FOR COUNTRIES NOT ELIGIBLE FOR MCA
ASSISTANCE FOR FY09:

-- MCC is built on the premise that aid is most effective
when it reinforces good governance, investments in health,
education, environment, and economic freedom. We believe
sound policies are key to encouraging domestic and foreign
investment and increased trade -- the real engines of
economic growth.

-- MCC is committed to supporting those countries that are
themselves committed to good governance, sound micro- and
macroeconomic policies that support the development of the
private sector, and investments in their populations, as
these policies create favorable conditions for sustainable
economic growth.

-- The selection of eligible countries was based on
performance in these areas. The indicators were used to
provide a measure of countries, policies and whether the
government has created the conditions that are linked to
broad-based sustainable economic growth. (Embassies may wish
to customize this talking point by looking at the
country-by-country scorecards on the MCC website. If
specific talking points are required, please contact MCC.)


STATE 00133489 006 OF 006


-- The MCC Board's decision applies only to U.S. assistance
under the Millennium Challenge Account (MCA),not to
assistance provided by other U.S. agencies, including the
Agency for International Development (USAID).

-- In order to qualify for MCA assistance in future years,
countries would need to focus on their efforts to improve
policies which support ruling justly, economic freedom, and
investments in their people, as measured by MCC,s 17 policy
indicators.


18. ADDITIONAL POINTS FOR DONORS (for use with donors in
eligible countries and by Posts in donor countries):

-- MCC is providing all MCA Compact eligible and Threshold
program countries with an official letter notifying them of
their selection. The letter to newly eligible countries will
invite them to submit a proposal for an MCA Compact or a
Threshold program concept paper, as applicable, and advise
them of MCC,s intention to travel to these countries.

-- MCC will also provide guidance on the MCA proposal and
Compact development process. Guidance documents are available
on the MCC website (www.mcc.gov).

-- MCA assistance is not guaranteed but will be contingent on
continued strong policy performance, the successful
negotiation of a mutually agreeable Compact between the
eligible country and MCC, approval of the Compact by the MCC
Board, and the availability of funds to MCC.

-- The quality of the country's MCA proposal -- including,
among other factors, how well the country has demonstrated
the relationship between the proposed priority areas and
economic growth and poverty reduction, the quality of the
consultative process that informed its development, and
commitment to continued policy improvement relevant to the
proposed MCA program -- will influence the speed with which a
Compact can be negotiated and the amount and timing of any
MCA assistance, as well as any recommendation to the Board to
approve a Compact.

-- Coordination with other donors is a priority for MCC.
MCA-eligible countries will bear the responsibility, in the
first instance, for ensuring that MCA programs are well
coordinated with the efforts of other donors and their own
budgetary expenditures. All Compact proposals will be
required to describe the relationship between the proposed
MCA-program and the activities of other donors and the host
government itself. MCC will work directly with other donors
to ensure that this coordination is working.

-- In addition, outreach to and the involvement of various
stakeholders is a critical part of the MCC process. During
visits to newly eligible countries, MCC teams hope to meet
with representatives of central, regional, and local
governments of host countries as well as parliamentarians and
opposition leaders, civil society, the business sector, and
bilateral and multilateral donors.

-- We look forward to opportunities to discuss MCC with donor
representatives in capitals, MCA countries, and Washington.
Questions from bilateral and multilateral donors may be
directed to MCC,s Managing Director for Donor and
Multilateral Relations, Richard Morford, at MorfordRA@mcc.gov.
RICE