Business

MCC Compact: To sign or not to sign

 

– Is a $ 450 M grant too good to let go or too good to be true?

By Madhusha Thavapalakumar and Uwin Lugoda

In April this year, Sri Lanka was selected as a recipient of the five-year $ 480 million Millennium Challenge Corporation (MCC) grant by the US, which has the aim of “reducing poverty through economic growth”, and is the largest grant funding in Sri Lanka’s history.

The grant seeks to assist Sri Lanka in addressing two of the country’s perennial constraints to economic growth; one being inadequate transport logistics infrastructure and planning and the other, a lack of access to land for agriculture, the services sector, and industrial investors.

Therefore, if received, this grant could transform Sri Lanka’s economic landscape by revolutionising the island’s transport network and its land utilisation. However, this “if” is substantial, and expanding by the day.

Although selected as a recipient, Sri Lanka is yet to accept this offer; it must sign the MCC Compact with the US. Over the past few months, there was passionate and heated debate on the merits and potential risks of this compact, both on political platforms and economic forums. Therefore, the signing, as of now, is on hold.

As the views of politicians on issues such as this are often driven by party stances, the views of economists, diplomats, and independent analysts must be treated with more serious consideration. Hence, this article is an attempt to gain a holistic idea of the pros and cons of the MCC Compact. Is it a pathway to prosperity or a geopolitical booby trap?

The MCC

However, before dwelling on that question, it would be instructive to gain an understanding of what the MCC is. An independent foreign assistance agency, MCC was established by the US Congress in 2004 with the vision of helping fight global poverty by providing grants to developing countries.
Its official website states that it “provides time-limited grants promoting economic growth, reducing poverty, and strengthening institutions. These investments not only support stability and prosperity in partner countries but also enhance American interests”.

Since its inception, the MCC has provided grants amounting to around $ 14 billion to its partner countries and has signed compacts with 33 countries which span Africa, Latin America, and Asia. Out of these 33, only four are from Asia – Mongolia (2007), Philippines and Jordan (2010), and Nepal (2017).

The main focus areas that come under the MCC grant are roads, agriculture, energy, health, education, community services, water supply, and sanitation to name a few. It offers recipient countries the choice on which areas among these it could utilise the grant. The grant agreement is jointly developed by both the donor and the recipient, alongside the private sector and civil society.

Selection process

The MCC has a very competitive selection process that takes into account the performance of its partner countries, and first focuses on three factors: Whether the country has good governance, economic freedom, and whether the incumbent government invests in its citizens. If this criterion is met, it goes on to consider a country’s performance through several third-party indicators, the opportunity it has to reduce poverty and generate economic growth within the country, and the availability of funds. While the MCC Board’s determination of eligible countries is based primarily on its scorecards, the website states that it may also consider supplemental information if needed.

For the purpose of funding, the MCC divides its candidates between lower-income and lower-middle-income countries, with no more than 25% of compact assistance being provided to the lower-income group. The income of these candidate countries is determined by the World Bank’s classification of these two groups.

For instance, in 2017, the per capita gross income of $ 3,955 was taken as the cut-off figure. As a result, the MCC transmitted an annual notification containing 83 eligible candidate countries for 2018 to the US Congress on April 2017. The revised list contained 66 lower-income countries and nine lower-middle-income countries, one of which was Sri Lanka.

Countries such as Mongolia, Burkina Faso, Lesotho, Senegal, and Tunisia became eligible in 2018 alongside Sri Lanka. Out of these, Mongolia, Burkina Faso, and Senegal were in the running for the second time, having finished their first compact with the MCC.

The MCC publishes a scorecard of the countries concerned, and for most performance indicators, each country is judged against its peers in their respective income groups, and requires a score just above the medium to pass that indicator.

Over the years, there have been a number of candidate countries that were unable to obtain an MCC grant. This has been due to factors such as not adhering to democratic practices, corruption, political tension, and human rights violations to name a few.

The selected countries, if they agree to participate, then sign a compact with MCC. This is the stage at which Sri Lanka has currently stalled.

Fund utilisation

Sri Lanka has opted to utilise the grant on developing transportation and land utilisation, considering the economic benefit it could provide the country in the long run. Accordingly, the compact will be composed of two projects: a transport project and land project. Together, the two projects are expected to benefit 11.3 million people, which accounts for 54% of Sri Lanka’s population.

The Sri Lankan Government will establish a local entity staffed by locals to co-ordinate implementation. The entity will be accountable to a Sri Lankan board of directors comprised of eight government officials and three representatives from the private sector and civil society.

Transport project

The $ 350 million transport project has an estimated economic rate of return of 19% and seeks to increase the relative efficiency and capacity of urban and provincial transport infrastructure in the Western, Sabaragamuwa, and Uva Provinces.

The transport project aims to increase the relative efficiency and capacity of the road network and bus system in the Colombo Metropolitan Region and reduce the cost of transporting passengers and goods between the central region of the country and ports and markets located across the rest of the country.

The total cost for this project is $ 350 million and includes three components: advanced traffic management ($ 160 million), bus service modernisation ($ 50 million), and rural transport activity ($ 140 million).

The advanced traffic management system includes efficiency optimisation of 205 km of urban road networks, technology for vehicle detection and real-time analysis of traffic flow data, an interconnected traffic signal system, a bus priority system across the network, civil work improvements to 132 junctions in greater Colombo, and expanded pedestrian crossings and improved sidewalks.

The bus service modernisation component of the transport project will look at the automation of fare collection systems, implementation of single schedules for bus operators on any given route, implementation of GPS bus tracking, and the improvement of accessibility and safety for women, seniors, and disabled people.

The rural transport activity component will look at upgrading 131 km of the inter-provincial road network via the Uva, Sabaragamuwa, and Central Provinces, connecting the economically lagging central region with ports and markets in the Western Province, strengthening the capacity for road maintenance, developing new financing mechanisms for road maintenance, and funding and introducing road safety measures.

Land project

The total cost of the land project is $ 67 million and will be conducted in eight districts in Sri Lanka. The project has an estimated economic rate of return of 30% and aims to expand existing government initiatives to increase the availability of spatial data and land rights information.

The goal of the project is to increase the availability of information on private land and underutilised state land or all land in Sri Lanka to which the Government is lawfully entitled or which may be disposed of by the Government in order to increase land market activity.

The land project would increase tenure security and the tradability of land for smallholders, women, and firms through policy and legal reforms.

The land project will assist the Government in mapping and surveying state land, and entering data in the Government’s e-state Lands Information Management System, which is a $ 23.4 million activity.

The project has also allocated $ 6.5 million for strengthening the capacity of the Government to enable them to accurately assess state and private lands, $ 11.4 million to provide training and equipment to digitise deeds and other land records thereby preventing damage, loss, and theft, $ 6.7 million for research in support of measures to improve land administration policies, and $ 19.3 million to improve tenure security for all land holders by assisting the Government in moving properties from the Deeds System to the Title Registration system through the Government’s Bim Saviya Programme.

Sri Lanka-MCC history

As Sri Lanka is keeping the US waiting by postponing the signing of the compact, this is a complete reversal of roles for the two countries. Sri Lanka has been eyeing the MCC grant for years, but had never been selected.

It was one of 16 countries selected as eligible to request for development assistance funds from the Millennium Challenge Account (MCA) in 2004. Within 10 days of the announcement of the selection of MCA-eligible countries, five MCC delegations departed for consultations in the 16 selected countries and found that 10 of the countries complied with the stated criteria. However, Sri Lanka was not among these, having scored far below the median on fiscal policy.

Then in November 2007, the MCC website stated: “In light of the ongoing security concerns in Sri Lanka, MCC will consider a resumption of compact due diligence activities when there is a greater prospect for success of our mission.” A proposed funding of nearly $ 590 million was on hold pending improvement in the security situation.

For the 2008 selection process, the MCC Board added the Philippines and Malawi to their list of countries eligible to apply for a compact. The two countries that had appeared in the past were absent in the 2008 list. Sri Lanka was left out because of the resurgent civil strife that would make a compact problematic.

Long time coming

In fact, efforts to obtain this grant which finally proved fruitful in April, began over three years ago. In December 2016, the MCC Board of Directors selected Burkina Faso, Sri Lanka, and Tunisia for new compacts which were five-year grants, to encourage economic growth and reduce poverty. Sri Lanka, which was selected in December 2015 for a threshold programme, transitioned into the compact programme after showing continued improvement on its scorecard, including demonstrated progress on democratic rights.

For Sri Lanka, the Board recommended that MCC explore investments that address obstacles to economic growth, both domestic and regional, while recognising the need for statutory authority to optimise regional impact.

In May 2017, President Donald J. Trump delivered his fiscal year 2018 Budget proposal to Congress, including $ 800 million for MCC. This was said to provide the agency the resources it needed to support grants to new partner countries, including Sri Lanka.

In September 2018, an MCC delegation visited Sri Lanka to continue progress on the proposed MCC compact – a large-scale five-year grant programme. The proposed MCC Compact for Sri Lanka qwas in the final stage of development. The compact was expected to be negotiated with the Government of Sri Lanka in the next few weeks.

However, the 51-day political crisis Sri Lanka went through in October last year put the MCC grant in limbo. The final agreement was scheduled to be signed in Washington DC on 17 December last year, but was not signed as the MCC withheld it until the political issues in the country were resolved.
In February this year, a delegation from the MCC visited Sri Lanka to gather information and assess the current situation, officially resuming the hold. Before the proposed compact can move forward, the MCC’s Board of Directors had to review and approve the programme. Two months later, a few days after the Easter Sunday terrorist attacks, the Board of Directors of the MCC announced that it had finally approved the five-year compact with Sri Lanka.

Good or bad?

The debate around the pros and cons of the compact were encapsulated at a public discussion organised by Pathfinder Foundation titled “Separating the Baby from the Bathwater: Evaluating the Millennium Challenge Corporation-Sri Lanka Compact”. The discussion was held on Friday, 9 August at the BMICH.

The discussion featured former UN Permanent Representative of Sri Lanka and former Ministry of Foreign Affairs Secretary Dr. Palitha Kohona, Verité Research Executive Director Dr. Nishan de Mel, Lakshman Kadirgamar Institute Executive Director Dr. Ganeshan Wignaraja, and independent analyst and author Neville Ladduwahetti, with Pathfinder Foundation Chairman Bernard Goonetilleke acting as the moderator.

Speaking through the lens of a development banker and economist, Dr. Wignaraja pointed out several benefits of the MCC Compact, one of the biggest being the fact that this is a grant and not a loan.

“This is a grant, which means it is money that doesn’t have to be paid to the MCC, and it came out of a very competitive process. The amount of $ 480 million is very significant; it’s equivalent to $ 22.43 for every Sri Lankan.”

Dr. Wignaraja explained that if it had been a loan, Sri Lanka would have had to pay hefty interest alongside the initial loan. Assuming that the rate of interest would be 6.3% – the interest rate at which the first loan for the Hambantota Project was taken – he stated that Sri Lanka would have a total debt of $ 651.5 million for the use of $ 480 million.

Another benefit Dr. Wignaraja pointed out was the rebalancing of the sources of development finance for the country.

“The good news for Sri Lanka is it’s an upper-middle-income country, and the bad news is we are heavily reliant on foreign development assistance of different types, mainly because we have a twin deficit problem – a Balance of Payment deficit and a budget deficit – and we have a very low tax base alongside very high government spending. These are historic issues for the country.”

He stated that this is inherently risky for an upper-middle-income country such as ours, because it leaves the country vulnerable to external shocks.

“If there is a problem in a funding-source country, like China which has recently been going through growth deceleration and trade tensions with the US, being exposed to this makes us vulnerable.”
Dr. Wignaraja stated that a developing country should diversify its sources of finance for better economic management, and the MCC Compact will help Sri Lanka do that.

He also mentioned that the MCC Compact would help Sri Lanka rebalance geopolitical interest away from a perceive dependence on China.

Verité Research Executive Director Dr. Nishan de Mel, another panellist at the discussion, stated that he was very impressed with the way the MCC put forward $ 450 million with the recommendation that most of it go into public transport.

Having engaged with the MCC through Verité Research at the early stages on discussions pertaining to the aspect of transportation in Sri Lanka, de Mel stated that the MCC understood that increasing the amount of roads and cars was not a recipe for developmental success.

“I have not seen any organisation take the challenging task of trying to transform our public transportation for the better. What excites me most about the MCC Compact is the opportunity, which I would hate to see us miss, to radically transform the system of public transport in our country.”

Taking the opposite stance on the issue, former UN Permanent Representative of Sri Lanka and former Ministry of Foreign Affairs Secretary Dr. Palitha Kohona spoke about his thoughts on the MCC.

Dr. Kohona stated that while the grant is a great for the country, he doesn’t completely trust the MCC to be a truly independent organisation.

He questioned whether the MCC is purely an initiative of the US Government or if there are any other politics at play. He stated that when the MCC pulled out of Sri Lanka in 2008, the reasons given weren’t convincing, and he believes that politics played a bigger role than economics or development.

Dr. Kohona charged that the MCC is not a totally altruistic organisation, but a tool in helping the US Government pursue its different objectives, which could include political objectives.

Another concern he raised was that US Congress had never approved the total amounts requested by the MCC, thus raising the question of whether the amount approved for a single country would be available at the end of the day.

“There are some 60 countries hoping to get something out of this cake, and Congress is there fidgeting around to decide the size of the cake,” said Dr. Kohona.

Another problem Dr. Kohona pointed out was the extensive impact on domestic legal framework, through the granting of immunities to the US Government and its employees operating under the compact.

He stated that these will then impact Sri Lanka’s land laws and the financial management of the country, with the Government being required to provide resources to ensure the compact is implemented properly.

“The compact is not just another contract; it is a treaty with the US Government which is represented by the MCC, and the Government of Sri Lanka represented by the Ministry of Finance and Mass Media. The problem with a treaty is that it’s governed internationally and not domestically. It is very clear that this document impacts a whole range of domestic laws, regulations, and practices, but it is going to be governed by international law. The question is, in the case of a dispute or disagreement, where do you go for a solution?”

Independent analyst and author Neville Ladduwahetti also expressed his reservations about the compact, questioning whether it had any sort of connection with the economic corridor between Colombo and Trincomalee.

“There is no concern about who funds the Colombo Trincomalee corridor; my only concern is the provincial link between Colombo and the Eastern Province, which, essentially, is Trincomalee. With this MCC Compact, we are essentially revising the 2011-2013 National Physical Plan that covered five metro regions with a concept based on growth corridors. But there is also a significant variation from the plan that was approved earlier, i.e. when the revised National Physical Plan is compared against the MCC Compact. There’s a link between the Colombo-Trincomalee economic corridor and the MCC Compact.”

Speaking on the land project, Ladduwahetti added that the Government presented the State Lands Special Provisions Bill to Parliament in order to grant absolute titles for state lands held by citizens who are holders of grants or instruments of disposition.

He noted that since the Bill applies only to recipients of lands already granted, a certain proportion would have benefited from the existing schemes, while others would have found the asset to be a burden due to personal reasons.

“While the proposed Bill would benefit both groups, the latter group would more likely be inclined to sell their assets and be relieved of the burden. However, a compelling counterargument is that since state land belongs to the Republic, and therefore to the people, the Bill would bring privilege to those citizens granted absolute clarity, at the expense of others. Therefore, discrimination will occur, going against Article 12 of the Constitution of Sri Lanka.”

Benefit to the US

US Ambassador to Sri Lanka and Maldives Alaina B. Teplitz, at a recent event, noted that the US gains nothing from this Compact beyond the development of Sri Lanka as a trading partner and a consumer of US exports.

“It will not surprise you that from the American perspective, a thriving, growing Sri Lanka will be a more dynamic market for US goods and services. After all, we are already Sri Lanka’s largest trading partner and number one export destination,” she added.

She said that the MCC Compact promotes business by helping improve economies, creating more opportunities for the private sector to compete and for communities to become prosperous.
The Ambassador also went to great lengths to allay fears that this was an agreement that comes with hidden strings attached.

“The ‘compact’ that you’ve been reading about in the media is a development assistance agreement. Nothing more, nothing less,” she said, adding that there has been “considerable misinformation” in the media regarding the grant.

She added that the US would not “own, control, or in any way administer any land under this agreement”.

In June, in response to a letter by National Joint Committee Co-President Lt. Col. (Retd) Anil Amarasekera raising concerns about the MCC Compact, MCC Sri Lanka Project National Co-ordinator/Consultant R. Siriwardhane too said that there will be no Sri Lankan land being provided to the US.

“Please note that there is no provision for leasing of 1.2 million acres of land under this compact to anyone. This is totally baseless and untrue.”

Other MCC compacts

El Salvador

The MCC and the Government of El Salvador signed a compact on 30 September 2014 to invest up to $ 277 million in regulatory reforms, education, and logistical infrastructure, with the goal of promoting economic growth and private investment in the country.

The El Salvador Government had committed to increase its productivity and competitiveness in international markets by partnering with the private sector to generate economic growth and poverty reduction in El Salvador, by addressing institutional, human, and logistical constraints to international trade in goods and services. The Government of El Salvador is contributing an additional $ 88 million to the five-year compact for a total investment of $ 365 million in three interrelated projects.

According to the MCC, the country’s first five-year compact, which was implemented between 2007 and 2012 with an initial investment of $ 461 million, is expected to benefit more than 700,000 Salvadorans over the next 20 years through improvements in education, public services, agricultural production, and transportation infrastructure.

Ghana

Through a $ 498 million compact, the MCC says it is helping the Government of Ghana transform the power sector through private sector participation and key policy and institutional reforms that will provide more reliable and affordable power to Ghana’s businesses and households.

The compact was signed in August 2014 and came into force in September 2016. The investment has already catalysed nearly $ 3 billion in new private investment that will support sustainable growth, including from a number of US businesses, according to the MCC.

The US is among Ghana’s principal trading partners, with bilateral trade between the two countries reaching $ 1.2 billion in 2015. The US noted that while Ghana has experienced strong economic growth over the past 10 years, the power sector had not kept up with increasing demand from businesses and consumers. A lack of affordable and reliable power is a real barrier to doing business in the country, holding back Ghana’s potential for private investment and partnership with American businesses, it said.

Liberia

The $ 257 million five-year compact was signed in October 2015 and came into effect in January 2016. The MCC Compact with Liberia aims to encourage economic growth and reduce poverty in Liberia by addressing the inadequate access to reliable and affordable electricity in the country and the poor quality of road infrastructure.

The compact includes: funding for the rehabilitation of the Mt. Coffee Hydroelectric Plant, development of a training centre for technicians in the electricity sector, supporting the creation of an independent energy sector regulator, building capacity and strengthening institutions for a cost-effective approach to nationwide road maintenance, and contributing matching funds for periodic road maintenance.

According to the MCC, the compact will significantly enhance Liberia’s participation in the US Government’s Power Africa initiative. As at compact development, only 2% of the population had access to the electric grid, and 84% of Liberians were living on less than $ 1.25/day.

This partnership was designed to complement the US Government’s efforts to help Liberia recover from the Ebola outbreak, since the Government’s efforts to address the epidemic required reallocating resources planned for the development of the energy sector. Over the next 20 years, the MCC expects 528,000 people to benefit from the compact.

Morocco

The MCC’s $ 450 million Morocco Employability and Land Compact supports two Moroccan government priorities that will contribute to economic growth and investment in the country: employability and land productivity. The compact was signed in November 2015 and came into force in June 2017.

Morocco’s consistent economic and political stability has contributed to continuous economic growth and significant poverty reduction over the past decade. Although poverty trends are improving, regional inequality is considerable, with an urban/rural divide in access to public services and economic opportunities, according to the MCC.

Morocco has critically low rates of gender equality and one of the lowest female labour force participation rates in the world. By supporting policy and institutional changes that will improve Morocco’s investment environment and by creating models for engagement with the private sector, the compact’s employability and land projects aim to address both the supply and demand sides of the labour market.

The Government of Morocco is strongly committed to carrying out these policy and institutional reforms and will make a financial contribution of $ 83 million toward the compact, the MCC noted.

Conclusion

Transport infrastructure is a necessary condition for economic growth and poverty alleviation. A study by the University of Moratuwa estimated that there were 1.9 million trips per day along the main road corridors connecting Colombo with its suburbs, and the number is expected to increase to 4.5 million trips per day by 2035.

The study further estimated the economic cost of the congestion, reflected in lost time as a result of longer commutes, to be Rs. 400 billion per year in 2014, and stated it would increase to Rs. 1.8 trillion in 2020. Well-functioning transport infrastructure could save up the billions that get buried under the congestion.

According to a study by the Land Use Policy Planning Department of Sri Lanka, the total land area of Sri Lanka is 6,552,500 hectares. Even though a very large portion of these lands have been utilised for multiple purposes from a productivity point of view, the situation is unsatisfactory.

According to the Census of Agriculture 2002, there were 139,465 families not owning any lands. This has led to encroachments on state lands and an increase in rural/urban migration. Hence, solutions to these problems have to be sought through land use planning.

Therefore, a proper, well-planned policy on land utilisation will address these issues and ensure the productivity of lands at a higher level while supporting economic development of the country.

 

Photos: Pradeep Dambarage and Krishan Kariyawasa