Sarah Rose is a policy fellow at the Center for Global Development (GIF). Her work, as part of the Center’s US Development Policy Initiative, focuses on US government aid effectiveness.
Previously, Rose worked for the United States Agency for International Development (USAID) in Mozambique as a specialist in the strategic information and monitoring and evaluation. She also worked at MCC, focusing on the agency’s country selection and eligibility processes.
Dr. Pramod Jaiswal, Strategic Affairs Editor at Khabarhub discussed with Sarah Rose, Policy Fellow at the Center for Global Development on Millennium Challenge Corporation and Nepal.
Why was Nepal chosen as MCC’s partner country? Why should MCC be desirable to countries like Nepal? What are the terms and conditions that Nepal has to abide by if the project gets ratified in the Parliament and why has MCC become a subject of controversy in many countries?
MCC’s partnership with Nepal extends back 10 years. MCC first selected Nepal to participate in a smaller program, called a “threshold program”, back in 2011.
So the threshold program just for a bit of background is a smaller amount of grant financing than the Compact which is of course what’s been signed in Nepal now. It’s usually just two to three years or so and it’s an initial step in many cases on the way to being eligible for a compact.
I think this needs to be based on the fact that MCC works only with countries that are committed to good governance and MCC has tried its hardest to assess this impartially and comparatively looking across eighty or so low and lower-middle-income countries that could be candidates for MCC assistance.
For countries to be considered for funding they need to be able to meet certain standards on these scorecards that MCC has compiled.
These scorecards are compilations of 20 different policy indicators from independent sources, places like the Freedom House, the World Bank, from UN agencies they’re not produced by MCC themselves or the US government for that matter and these indicators measure aspects of governance, of economic policy and social investment.
Going back to 2011 MCC selected Nepal at the time because it did meet the criteria for eligibility on the scorecard but it hadn’t done so consistently in the past and so the goal of the threshold program, in that case, was to initiate the partnership in an acknowledgment of the strong bilateral partnership that the U.S has had in Nepal over many years and the trajectory that many were witnessing in Nepal at that time.
So then the goal is to initiate the partnership and get started on some of these initial steps that would ultimately feed into the development of a Compact, in particular, the analysis of constraints to growth that would help guide either what the investments would be under a threshold program or a Compact investment.
At that point, there were two options of how this was going to look- Nepal was either going to become eligible for a Compact or it would continue with its threshold program but actually they completed the constraints to growth but then in 2014, they didn’t proceed with the threshold program because MCC decided to select Nepal for a Compact instead.
It recognized that it had a very strong performance on the scorecards across time as well as strengthened democratic institutions recently as well.
And I think this is worth noting because it’s not easy to meet MCC scorecard criteria, there aren’t very many countries that do pass that screening, but Nepal has met those criteria on the scorecard again for 12 of the last 13 years and this makes it one of the best and most consistent performers among these 80 or so low and lower middle income countries that are MCC assessors.
So why should MCC be desirable to a country like Nepal? I think that’s a good question. I’m going to point to four things here.
The first is that it’s grant funding, so in Nepal’s case it’s 500 million dollars of grant funding, there’s nothing to be repaid, the government of Nepal, is putting in 130 million in co-financing toward the program objectives but the funds that are coming from MCC are pure grant money.
The second is that the Compact does respond to Nepali identified priorities, so investments in electricity transmission and road maintenance emerged as these key constraints to growth in this diagnostic that was conducted jointly by the teams of economists within the government of Nepal as well as within the United States government both from MCC and USAID as well.
And then the projects were ultimately selected by the government of Nepal in consultation with the Nepali private sector and civil society which helped inform that decision-making.
I think it’s worth noting too that the electricity transmission project which is included in MCC’s Compact reflects the priorities that were outlined in Nepal’s Transmission Master Plan that was created in 2014 and then updated a few years later.
In addition to this priority setting, the government of Nepal will play a lead role in implementing the Compact, the government has set up a unit to run the procurements and manage the contracts for the work and there’s also a completely Nepali oversight board that is set up as well with members of the government as well as members of the private sector and civil society who will help steer and manage the work of the Compact if it goes forward.
So, the third thing I want to mention is the benefits to the Nepali people, I haven’t done an independent analysis of this but just looking at MCC’s analysis done by their economist; it estimates that 23 million Nepalese will ultimately benefit from the investments and a little bit under half of those living on less than four US dollars a day.
The last thing I want to note about why this could be desirable to the people of Nepal and this goes back really to MCC’s founding as well.
When MCC was founded in 2004 there was this widespread skepticism about the effectiveness of foreign aid in general so critics, and there were a lot of critics, said there is too much aid being spent on bad projects, in service of poorly defined objectives, with no sense at all about what was achieved at the end and others pointed out that when you mix things like foreign policy goals with development goals- this pursuit of development outcomes gets muddled and sometimes undermined by foreign policy objectives.
So, MCC was founded very expressly in response to those criticisms of USAID. It was to have a singular focus which was poverty reduction and economic growth and this was notably separated from foreign policy goals and it was going to pursue measurable and cost-effective results and it does.
I spent a lot of my time at CGD exhorting the U.S Aid system to take results measurement a lot more seriously and to invest in it more and this is something where I think there’s a lot of room for improvement within the US government aid practices in general.
But MCC has been at the leading edge here, the economic analysis informs the sectors in which it’s going to invest. MCC uses cost-benefit analysis to determine which interventions are likely to yield the most value for money and then it rigorously evaluates the vast majority of the projects in its portfolio and you can see a summary of the agencies thinking about sort of the economic analysis the monitoring and evaluation plans in the Nepal Compact document itself, which is publicly available on MCC’s website.
Because MCC’s premise is really about measuring results, its overseers hold it accountable for doing so and that includes think tanks like the Center for Global Development but as well as the US Congress and so that doesn’t mean that all of MCC’s investments have really met their goals but they’ve also been transparent about that.
In contrast with the way too many aid programs, they are designed in an evidence-informed way with results really at the center.
So, I mentioned the Compact documents, there is a question about -what are the terms and conditions that Nepal would have to abide by if it gets ratified in the parliament and that’s a good question and so I would point again to the Compact- which is a publicly available document which does outline the terms and conditions and most of these are very similar across all of MCC’s Compacts.
They have to do with things like completing the project within 5 years, that’s something that’s mandated to MCC by our laws, things like adherence to environmental standards which are very similar to those that are used by the World Bank and other donors, and also pieces that say things like MCC can’t use funds to go towards things like military training because it’s prohibited by US law, that procurements must be open and competitive and that there’s no other misuse of funds.
The other requirement as part of Compacts is that for any country that signs a Compact with MCC, there is the expectation that the country would uphold those good governance practices according to the standards for MCC eligibility.
So the idea is that the country would continue to pursue the practices and policies of democratic governance, a sound economic policy that it had been pursuing at the time when it was selected and MCC has cut off programs in the past, when for instance countries have had a military coup or when there have been major crackdowns on civic and political participation so those kinds of things are also included in the Compact.
There are some specific conditions as well, it looks like there is an expectation that there would be a plan for the key financial and technical terms for the construction of the transmission line, that you require a passage or at least progress towards passage of the Electricity Regulatory Commission bill and things like that but again these are all included in the Compact.
I think this last question is an important one; why has MCC become a subject of controversy in many countries? I want to address that by saying that government officials, lawmakers, civil society organizations and other members of the public are right to scrutinize the deals and the contracts that their country enters into.
This is an important part of a democratic society and MCC only works with democratic countries and so in many ways, this healthy debate and discussion is to be expected and encouraged as well.
There are a few areas where those who are scrutinizing the MCC and Nepal Compact might raise questions as part of the research that they do.
These might be questions like you know- Does this have something to do with the US’s relationship with China? It’s not hard to observe that China and strategic competition occupies considerable space in US policy.
Other questions are like, are there national security or foreign policy dimensions to the Compact, MCC, after all, is an agency of the US government, it has a board of directors which is chaired by the US Secretary of State and to be honest, even within the United States there can sometimes be confusion about MCC’s role within sort of the broader aid apparatus and foreign policy apparatus as well.
So these are questions that are legitimate and should be asked but again to answer these, I would point back to MCC’s premise, why it was set up and how it’s different and so it was set up to very intentionally separate this pursuit of development from the pursuit of foreign policy, under the acknowledgment that the results that MCC development results, that MCC is tied to by law in the US Government, can get muddled when mixed with foreign policy.
There are times that these lines have been a little bit blurred. I can certainly give examples but there’s pushback when that happens within the United States and the main issue is that MCC’s goals which again it will seek to measure are really around these development objectives.
And again, as for the military question I want to reiterate that – MCC is restricted by law from using its funds for any military purpose and also that the Department of Defense does not sit on MCC’s board. I mean it’s right to ask questions.
It’s right to seek additional information but it’s also important to understand the angles and interests of those presenting arguments.
We’re lucky in many ways to live in an environment that is rich with so much information with a diversity of sources and points of view.
I mean I work at a think tank and so as someone who trades in ideas, I think it’s critical to have this rich environment for discussion and debate but the flip side of this of course is that it can be difficult to sift through and separate information from misinformation and this is true around the world.
And so again I think this brings me back to being grateful for the opportunity to have this session today to help share some facts and perspectives that we see from where we sit about MCC.
If Nepal does not approve MCC, what will Nepal lose? There is a fear in Nepal that if MCC is not passed it will isolate Nepal among the international community in general and the U.S in particular. How far is this true? Do you think it is likely?
MCC is one of the tools that the US government brings to bear in its relationships with other countries and quite frankly, it’s a relatively small tool as well and I wish I had the figures in front of me but I sense that USAID for instance which is the largest aid agency within the United States has a Nepal program- a fairly large program in Nepal as well.
There are other ways that the U.S engages with the Government of Nepal and the people of Nepal beyond the Millennium Challenge Corporation and so you know if the government of Nepal or the political leadership of Nepal were to choose not to proceed with the MCC Compact, that would not have ramifications for the rest of the relationship with the United States or with the international community at large but what Nepal would stand to lose would be this 500 million dollar in Grant Financing which it wouldn’t have to pay back, support for advancing some of these national priorities in electricity transmission and reducing the costs and time of transport to be able to exchange goods, be able to increase jobs, etc.
This grant program could benefit 23 million Nepali citizens and so that is the main cost in many ways. The cost is to the people that would stand to benefit from this grant investment but in terms of the broader ramifications as well again, I just want to highlight that MCC is one of the agencies within the US government that has relationships with partner countries.
MCC is highly politicized here in Nepal. It would not be surprising if it is not endorsed by Nepal’s parliament. If MCC fails in Nepal, should the United States government spend the same fund in the same sector – transmission line and roads- through USAID? What benefit would Nepal have received if Nepal had received those infrastructures through MCC, not USAID?
The Compact that’s on the table in Nepal is very much an infrastructure Compact looking at road maintenance, looking at an electricity transmission and part of the answer to that question is because these have been underfunded in a lot of ways and in particular there’s not a lot of grant financing that’s available for infrastructure projects.
There may be concessional lending that’s available for a lot of these infrastructure programs but again not as much grant financing that is out there. USAID in particular, just based on the way that it is set up and the laws and regulations that are around USAID, is that it is very constrained in how it spends its money.
The United States Congress dictates largely how USAID is going to spend its money in each country. A huge chunk of USAID money is reserved for things like global health, there are also educational programs, governance kinds of programs.
USAID has very little discretionary funding to be able to pivot from what congress has said that it needs to be spending its money on in particular areas, USAID has very little money for things like infrastructure projects to support things like road maintenance and electricity transmission.
And so my perspective is that it would be very unlikely that if the MCC Compact were not to go forward that USAID would be able to pick up a significant portion or much at all of the financing that would have been on the table from MCC.
What is America’s experience in dealing with the development projects under USAID? Is it different from MCC or do we have similar stories? Secondly, you may also share the experience of MCC and USAID or USAID issues in other countries where these institutions are working?
I think in many ways USAID and MCC have several shared objectives; they’re both development organizations and they both are looking to produce high-quality projects that can respond to needs in a particular country.
But I do want to highlight that way the two agencies go about things is a bit different, so the first is, again, the selection of countries so USAID works with 100 plus countries around the world and MCC works with, I don’t have the numbers in front of me, but maybe 20 at any given time.
Again, based on their selection criteria and the way that they develop programs is different as well and so you know when MCC starts a conversation with a country, the first thing they do is undertake these constraints to grow and say- What are your priorities?
What do we think is going to help move the needle on reducing some of these barriers that constrain the ability to have more jobs available or to grow the economy.
USAID is a little bit different, as I said, USAID has money that can respond to priorities as well but again because so much of its budget is dictated in many ways by the US Congress, it doesn’t come to an initial conversation in a blank slate kind of way.
So USAID may come to a particular country saying we have X dollars for global health and then within that, they can have a conversation with the government or civil society organizations or sub-national governments about what priorities might be within that. But again, there are very specific pockets of money that USAID has, even within global health, they have this large chunk of money reserved for combating HIV for instance.
Again, in many ways, MCC can come to that initial conversation, in a way that is more of a blank slate that enables more input from the country in terms of this participation.
Answering the question on whether USAID faced similar questions about how it’s spending its money in other countries? – I don’t have a lot of specific examples in my head of when that may have happened, I expect that it is probably true that there are questions about how USAID is spending its money.
I can think of a couple of examples, in Bolivia for instance, back in 2008-2009 perhaps, well I think maybe this wasn’t USAID but it was questioned about you know the extent to which democracy and governance programs that were supported by USAID were of broader concern to the ruling government at that time and so I think that there are some questions and controversy locally about that as well.
So certainly, when there is an international party that is working in partnership in a different country, there will be and should be questions about what that relationship looks like.
Again, I think this is part of being a democratic society and being involved as a responsible citizen, as a responsible lawmaker is to be able to ask some of those questions about what these relationships look like.
So, I think throughout history, there have been these kinds of questions that the United States as a provider of USAID have certainly faced.
But again the difference between USAID and MCC, I feel like I’m circling back now, but there are other differences between USAID and MCC that I think is worth pointing out too in the implementation.
And so with USAID and with MCC, they both rely on contractors to implement the projects but in the case of MCC it is this unit that is set up by the government that is running the procurements for those contracts, that is managing the contracts and in the case of USAID; it is USAID that was doing those things and so I think that’s another key difference too to bear in mind as well.
The MCC is delayed by years. How much does this delay cost Nepal or what has Nepal missed? And what are the gains for the US government if MCC get endorsed? If MCC succeeds in constructing the Electricity transmission line and road maintenance, how will it serve the American interest? How will it fulfill America’s interests?
You know in some ways there doesn’t have to be a cost either because there is still an opportunity to move forward with this project, at which point it would have been delayed but ultimately no cost would be incurred.
And certainly, over the last, I would say that MCC projects that have been in implementation have been slowed a lot by the global COVID-19 pandemic as well and so in many ways, the time is fortuitous as we hope within the next few years hopefully the world will emerge from the situation in which we find ourselves as a result of the COVID-19 pandemic.
I think it doesn’t have to be a lost opportunity at this point because there is still an opportunity to move forward. The question is about what does the US gain from the Compact success.
I think that’s a good question, part of MCC’s principles are that it is designed to be focused on development outcomes versus outcomes that are within the self-interests of the United States, but that said the United States of course like any country in the world, has an interest in economic growth worldwide because we do live in a globally interconnected economy and there are more opportunities globally, the more jobs there is the more commerce there is that’s available, again and it’s not necessarily just in the interest of the United States but it’s in the interests of all who may potentially trade with Nepal in the future.
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