MCC Compact : Costly Delay to Nepal’s Economic Development

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MCC Compact : Costly Delay to Nepal’s Economic Development


Four years ago, when the government signed an agreement with the Millennium Challenge Corporation (MCC), the US foreign assistance agency, for USD 500 million Compact, there was competition among the political parties and their leaders to claim the credit for clinching the deal and securing the largest grant ever from the US.

But, when it came to creating the groundwork for the implementation, the same political parties are sharply divided over the deal.

The MCC Compact, commonly known as the MCC, has now become a bone of contention not only within political parties but also among the broader public. Rarely has other foreign assistance come under the spotlight like the MCC Compact.

While analysts welcome public scrutiny over foreign support that often come with strings attached, there are worries that the rumours and misinformation that dominate the MCC could prove costly for the country that plans to utilise the USD 500 million grant to build the longest electricity transmission line and repair over 100 km of strategic roads.

If things had gone according to plan, the MCC Compact would have already been in the process of implementation now. However, the current political bickering over the MCC has cast uncertainty over the fate of the largest ever US grant. With the formation of the new government led by Nepali Congress President Sher Bahadur Deuba, there were hopes that the MCC Compact would be high on his agenda. As the MCC Compact was first signed when Deuba was the Prime Minister in September 2017, it was expected that he would prioritise its implementation. That possibility is increasingly looking remote now.

In its Common Minimum Programme, the government has conspicuously excluded the MCC to appease a coalition partner CPN (Maoist Center) that has stood against the US funding.

This power politics is not only putting the largest foreign grant (upfront foreign contribution from a partner country) at stake, but also likely to dampen the country's dream to export its surplus electricity in the lack of transmission infrastructure to facilitate Nepal’s planned India interconnection.

Unlocking Hydropower Potential
Nepal plans to utilise the grant mainly to construct transmission lines to expand the high voltage transmission backbone inside Nepal and the Nepal side of a second cross-border transmission line with India as well as other infrastructures under the Electricity Transmission Project. Part of the grant will finance the Road Maintenance Project to strengthen the quality of Nepal's strategic road network.

Successfully exporting Nepal's surplus energy to India and Bangladesh now depends on the transmission line as well as other infrastructures that the government plans to build with the support of the MCC Compact. Realising how critical the transmission line is for unlocking its hydropower potential, the government--following a long study--had selected the Electricity Transmission Project to be financed from the MCC Compact.

With more and more hydropower projects coming online, the supply of electricity will soon surpass domestic demand. In fact, the country is already in a position to export its hydroelectricity to India during the rainy season. While the domestic consumption capacity may not increase significantly anytime soon, the only option to prevent the electricity from going to waste will be to export the surplus energy to India or Bangladesh. To export the surplus energy to neighbouring markets, a mega highway for evacuating power produced by various hydropower projects export is required. The Compact will fund the construction of a double-circuit 400 kV transmission line of 315 km to provide a vital missing link for different river basins to the existing high voltage grid in Nepal along with three substations. This transmission line will help in evacuating electricity produced from various old and new hydropower projects and link it to Gorakhpur in India.

Currently, there is only the Dhalkebar-Muzaffarpur cross-border transmission line that connects Nepal to India. Due to the transmission line’s capacity to handle 1,000 MW, it will be impossible to evacuate more electricity when Nepal's electricity production increases.

Power producers say that the transmission infrastructure is crucial for Nepal to unlock its hydropower potential.

"It does not matter whether it's built with the support of the MCC or from other sources or the government's own internal resources, the government must build the transmission line and other infrastructures," says Shailendra Guragain, Immediate Past President of Independent Power Producers' Association, Nepal. "It is frustrating that the transmission line or hydropower sector is suffering from the irrelevant debate or unnecessary controversy created about the MCC Compact," he adds.

Nepal Compact's Development
MCC Compact did not come out of the blue. Nor were the projects for the MCC Compact picked randomly without any feasibility study or assessment as is the case for many projects in Nepal which are pursued mostly to serve the interests of a political leader or party. Identification and selection of projects under the Compact followed a long process. Adequate time was given for the project preparation.

According to MCC, it is a donor that emphasises on country ownership and focuses on impact. The recipient country identifies priorities for sustainable economic growth and poverty reduction and develops investment proposals in broad consultation. Following the signing of the Compact, MCC Country establishes a local entity and oversees all aspects of the implementation. In Nepal, Millennium Challenge Account Nepal (MCA Nepal) has been established as the implementing agency.

A diagnostic study conducted in Nepal in 2013-2014 concluded that the energy and transport sectors should be the focus of the MCC support as these were the two major binding constraints for higher economic growth in Nepal. After the MCC selected Nepal for the Compact in December 2014, it opened its office in Nepal and conducted feasibility studies to identify the projects. In collaboration with authorities and other stakeholders in Nepal, the MCC submitted the projects to its board in Nepal in November 2016. Negotiations followed between Nepal and the MCC delegation in Washington DC in June 2017 before the MCC Board of Directors approved the Nepal Compact Program in August 2017. The Compact was signed in September 2017 between the then Finance Minister Gyanendra Bahadur Karki and MCC Acting CEO Jonathan Nash at the State Department in Washington DC.

The Compact was hailed as a 'game changer' for Nepal's energy sector and overall development. Most of the leaders and political parties jostled with each other to claim the credit for their roles in securing the largest grant from the US. However, the exuberance remained short-lived. There were some conditions and precedents in the Compact that had to be met for the entry to come into force. Some of the conditions, particularly the ratification of the Compact from the parliament, became the initial reasons why eyebrows were raised among the political leaders and parties. Opposition voices against the MCC Compact snowballed. Misinformation, criticisms and rumours engulfed the MCC Compact.

While some political parties and leaders are now toeing the line of terminating the MCC Compact, others chose to remain silent on the debate. The whole process now remains at a standstill as political parties bicker over the ratification of the MCC Compact from the parliament. Until and unless the MCC Compact gets ratified by the parliament, it does not enter into force.

The entry into force date is important as it officially starts the five-year clock for implementing the Compact. MCC compact comes with strict requirements on time and budget. The Compact must be completed within five years from the entry into force date and there is no possibility of extra funding. If the Compact is not completed within five years, the unspent fund will also return to the MCC. After Nepal met most of the other conditions, there were preparations for taking the programme into implementation or entry into force from June last year. The five-year clock has not been started yet owing to the delay in the parliamentary endorsement of the Compact. Most of the other conditions including designation of the Electricity Transmission Project as a national Pride Project, passage of legislation related to the Electricity Regulatory Commission and formation of the commission have already been met.

Now, whether the MCC Compact will be ratified by the parliament to bring the Compact into operation is still anyone's guess.

Stalled Process, Uncertain Fate
After the political squabbling over the ratification of the MCC Compact, the government had written to the MCC to put on hold the process for the entry into force.

However, the then government led by KP Sharma Oli decided to request the MCC to postpone the date for the entry into force after the MCC Compact was opposed in his own Nepal Communist Party (NCP). Not only was the MCC Compact openly criticized by many leaders of the main governing party, a taskforce formed by the NCP comprising the then Minister for Foreign Affairs Pradeep Kumar Gyawali as a member had also came up with a report which concluded that the MCC Compact should be endorsed only after amending some of its provisions. In line with the recommendation of the party committee, the then government decided to put on hold the process to implement the MCC Compact. There has not been any progress towards the implementation of the compact since then.

While the Compact was registered at the parliamentary secretariat last year, it is yet to be tabled for ratification. The current coalition government has neither taken any steps towards finding a political consensus for the ratification of the MCC Compact nor has it made its position clear over the grant. Though the government has kept mum about the MCC Compact, House Speaker Agni Prasad Sapkota's recent public statement on the MCC indicates that he would not put the MCC Compact up to a vote.

But the question is, how long can this stalemate go on for?

While the US or its funding agency MCC has remained largely positive towards Nepal for continuing with the compact despite all the criticisms and controversies, there is a risk of Nepal losing the grant if the country remains indecisive on the MCC Compact for a long time.

In its statement issued on June 29 last year, the US Embassy in Kathmandu said that the availability of the funding is not open-ended. “Accepting this grant is Nepal’s choice but the availability of the funding is not open-ended.  Tangible, near-term steps in Nepal are necessary to ensure the continued viability of the program,” read the statement.

What interest does the US have in Nepal?
 One of the main reasons why some critics have been asking the government to tread cautiously on the MCC Compact is due to its possible link to the US Indo-Pacific Strategy. While the US characterises the Indo-Pacific Strategy as a policy to protect and advance a free, open and secure Indo-Pacific region, many believe it as a strategy of the US to counter or prevent China's growing global clout or influence through its Belt and Road Initiative (BRI). Any association or tilting towards the Indo Pacific Strategy stands against Nepal's non-alignment foreign policy, according to diplomats. They say that it has not been made clear whether the MCC Compact is an initiative under the Indo Pacific Strategy. Some conflicting statements from US government officials only added to the confusion.

However, US Ambassador to Nepal Randy W Berry dismisses such concerns.

"The criticism actually started when people started saying that the MCC and the Indo-Pacific Strategy are interlinked. This is a part of the disinformation. Of course, the United States is going to devise and offer a programme that is consistent with its policies. Way too much has been made of labels here," said US Ambassador Berry, in a recent TV interview. "It is too reductionist, too easy to simply link up a couple of phrases that are often misunderstood and point in the wrong direction. We know that the MCC itself came into operation in 2002. Discussion on this compact with Nepal commenced in 2012, and the compact was signed in 2017. All of this predated this concept known as the Indo-Pacific Strategy," he clarified.

MCC officials say that the MCC Compact is recognition of the progress Nepal has made in establishing rule of law, democratic institutions, and investment in its people. For the US, the MCC Compact is an opportunity to help Nepal build its capacity to deliver critical services to its people to benefit the economy, regional security and the broader global community. They say that they do not have any hidden or secret interests that they want to pursue in Nepal through the MCC Compact.

Experiences from other countries
Though Nepal is the first country in South Asia to receive the grant from the MCC, over three dozen countries have already benefitted from the MCC funding.

According to MCC, the US foreign assistance agency has formed partnerships in 48 countries to implement the Compact. The Tanzania Compact signed in 2008 was the highest with a USD 698 million grant for the Energy Sector Project to improve its electricity service and coverage by increasing the power transmission capacity and electricity companies. However, another proposed compact for Tanzania was suspended by MCC in 2016 amid concerns about the country's commitment to democracy and free and fair elections, according to a statement of the MCC.  

MCC also terminated its USD110 million compact in Madagascar in 2009 'due to an undemocratic transfer of power'. Another country from where the MCC was pulled back was in Mali where it was providing a grant of USD 460 million through the compact. However, the military coup in Mali that directly conflicted with the partner country's commitment to democratic governance and rule of law prompted the MCC to terminate the compact in 2012, according to the MCC. 28 compacts have already been completed after their implementation while compacts in eight other countries are under the development cycle. Six countries are currently implementing the Compact. Including Nepal, three countries have signed the compact and are in the process for its implementation.

Critics in Nepal celebrated the abortion of the Sri Lanka Compact in December last year. Though the MCC Board and Sri Lanka approved the compact in 2019 amidst an opposition-led disinformation campaign portraying the partnership as a ploy to subvert Sri Lanka's sovereignty, another government in 2020 formed a committee to review the compact agreement. The committee came up with the recommendation that the government reject it unconditionally. The growing dispute over the compact in Sri Lanka led to a pull back of the MCC from the island country.

"The Sri Lankan government’s posture was inconsistent with the strong demonstrations of country ownership MCC requires from its partner countries and an indication of its unwillingness to be an adequate partner to MCC. MCC’s Board has since voted to discontinue the proposed compact with Sri Lanka," read the 2020 annual report of the MCC.

Criticisms and disinformation campaigns in Nepal are not different than the ones in Sri Lanka and misinformed criticisms due to malicious information like the US is planning to build a military base or subverting the country's sovereignty have also fueled the opposition of the compact, say MCA-Nepal officials.

Though there are worries that the Nepal Compact could face a similar fate, officials say that MCC so far is satisfied with the Government of Nepal's commitment towards the partnership.

Power Politics
There have been inconsistent and often conflicting responses by political leaders to the MCC Compact in recent years. The compact was initiated upon the request of Nepal. Nepal will have to contribute USD130 million to the Compact in addition to the USD 500 million in grant from the MCC.

Almost all political parties have remained in the government in the process of requesting, initiating, developing or signing the compact. Almost all political parties, when in power, have expressed a desire to implement the MCC Compact in Nepal. However, the process of the implementation has become uncertain as political parties remain divided over the ratification of the MCC Compact. Experts say that political leaders who defend the MCC Compact when they are in the government are quick to criticise it after getting ousted from the power. This flip-flop of political leaders has also fuelled the anti-MCC sentiment. After failing to push the MCC Compact through the parliament for ratification for nearly three years while holding a majority, CPN (UML) Chairman KP Sharma Oli questioned the government recently at Parliament about the position of the government.

“Did you forget the MCC? You have 165 votes. Are you going to ratify, reject or remain silent on the MCC?” former Prime Minister Oli asked recently.

Though the main governing Nepali Congress is in favour of ratifying the MCC Compact, other major parties--both in the government and opposition--are sharply divided over the ratification of the MCC Compact. This will make it difficult for the MCC Compact to get ratified by the parliament. However, the MCC Compact's parliamentary endorsement cannot be completely ruled out if the current coalition government gives priority to forge a consensus on the MCC Compact. Even if there is no consensus, the MCC Compact has a chance to muster a majority in the parliament if it is put up for votes as there are lawmakers from both side of the aisles who are in favour of taking the US grant.

Failure to do so could not only lead to the termination of the largest grant but also hurt the hydropower sector which has potential to transform the economy. Some even warn that the whole political debacle risks tarnishing Nepal’s reputation as a reliable development partner.

“The MCC has been a subject of tussle between political parties and within the parties also. This has unnecessarily dragged Nepal-US ties to controversy,” says Nishchalnath Pandey, a foreign policy analyst. “We saw that the Nepal Communist Party (NCP) was itself divided and its leaders were for and against the MCC when they were in power. Thus, they played the role of the government as well as the opposition,” adds Panday, who is also Director of the Centre for South Asian Studies (CSAS) Nepal.   

There are also worries that the lack of a broader political consensus on crucial development programmes could also dent Nepal’s investment climate as highlighted by a recent report issued by the US Department of State. "The Government of Nepal's slow progress in securing Parliamentary ratification for the Compact and implementing it has not sent a good signal to potential investors," reads the report entitled '2021 Investment Climate Statements: Nepal'.

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