Millennium Challenge Corporation (MCC) grant dilemma: The Pathfinder compromise

The Pathfinder Foundation from its inception has been an active contributor and participant in the economic policy and the development dialogue of the country. When the Millennium Challenge Corporation (MCC) was established in 2004, we were keen to assess whether Sri Lanka could meet the stringent criteria and qualify for an outright grant that would send a strong signal beyond borders that Sri Lanka is moving in the right direction.

The objective of this Pathfinder Foundation paper is to discuss the parameters of the grant which would enable policymakers to explore possible alternatives to the framework of the proposed draft agreement, thereby ensuring Sri Lanka’s development goals are served without compromising its national interest and sovereignty.   

After the end of the separatist war and with the Yahapalanya Government getting elected under the leadership of President Sirisena and Prime Minister Wickremesinghe, Sri Lanka again qualified for an MCC threshold (smaller program) and in 2016 as an MCC compact country. Following negotiations led by the Secretary of Finance and key Government officials, the MCC Board and the US Congress gave approval for the compact in April 2019. In the face of mounting criticism from Opposition politicians, a section of civil society and the media, the then-Government seemed to have delayed the process. 

Over the past few months, our print and electronic media and in particular social media have been inundated with stories about the proposed agreement with the MCC. Some of these obviously were deliberate falsehoods created by people with vested interests. Will the grant improve road transport eliminating traffic bottlenecks and result in efficient land administration, as the MCC and its supporters claim or is it a ploy to manipulate Sri Lanka’s land administration or lack of it, in order to build a Colombo-Trincomalee land corridor for the benefit of the US military? 

Politicians have either directly contributed to the confusion or tried to benefit from the confusion. The MCC project, like the Port City Project in 2015, became politicised and was made into a major campaign issue at the Presidential Elections in 2019. Adding to this was the lack of transparency in the Yahapalana Government that led to no reliable and verifiable information on the MCC, which in turn fed into the misinformation mill that spun out of control, with fake news spreading across social media, leading to many conspiracy theories. 

Now Sri Lanka has another chance to reset the MCC agreement under newly-elected President Gotabaya Rajapaksa, who has appointed a Review Committee of eminent personalities to review the draft agreement and provide recommendations by April 2020. 

The committee presented an interim report at the end of February. Based on that report, the Cabinet Ministers decided not to go sign the agreement as it was.

The Pathfinder Foundation believes that the final Committee Report will provide a new basis for renegotiating the agreement, ensuring protection of our national security and sovereignty.

What is MCC?

MCC is a United States foreign assistance agency that works independently, like USAID, with a mission to “reduce poverty through economic growth”. To date, the MCC has provided $ 13 billion in grants to 29 countries, including Nepal, Indonesia, Mongolia, and the Philippines from Asia. It is a well-known fact that donor assistance comes with a price and development assistance grants from all major donors such as Japan, China, India or the US, while helping Sri Lanka, are also aimed at strengthening their own geopolitical interests.  

The US Congress founded the MCC in 2004 as an alternative to this cynical model. It does not have a ‘Buy America’ policy, but gives opportunities to the host country’s private sector to implement projects through open, competitive bidding similar to the World Bank procurement process.   

The following is the submission made by Pathfinder Foundation Executive Director Luxman Siriwardena to the Cabinet-appointed committee, chaired by Prof. Lalithasiri Gunaruwan, which comprises Nalaka Jayaweera, Dr. D.S. Jayaweera and Nihal Jayawardhana on 4 March 2020 at the Prime Minister’s Office in Colombo 7.

So why is there opposition from some influential parties and groups in Sri Lanka to the MCC Agreement? Is it because the MCC agreement was poorly negotiated and hence conditions are adverse to Sri Lanka or is there opposition in the country to the aid framework of the MCC and its sponsor the U.S.? Or else, has the alleged lack of transparency lead to various misinformation and misinterpretation? Whatever the reasons, what is clear is that there is widespread opposition to the agreement and there is a need to recognise and respond to that situation.

Based on the Pathfinder Foundation’s reading of the publicly available draft MCC agreement, some of the public concerns are justified. Therefore, for Sri Lanka to accept this agreement, there must be certain changes to ensure that the country’s sovereignty is not undermined and its national interests are not compromised.

At the same time, the country cannot afford to reject Rs. 85,000 million ($ 480 million) outright when Sri Lanka has so many debt obligations to meet and development goals to achieve. 

When was MCC invited to Sri Lanka?

When the MCC was established in 2005, Sri Lanka was among the first group of countries that qualified for assistance, as good governance is the main requirement to be eligible for MCC assistance. In the first round of MCC assistance, there were only 16 countries that qualified, while over 100 countries received traditional USAID assistance. This was a significant achievement as Sri Lanka passed 13 out of the 17 scorecard indicators.  

President Mahinda Rajapaksa’s PA Government partnered the MCC from 2005 to 2007 to design a program of rural road rehabilitation, rural electrification and the development of small and medium enterprises. But then, the war intensified and the MCC put the program on hold due to the security situation, as it would have been too risky for MCC staff to implement the projects.  

In 2015, the Yahapalanaya Government of the Sirisena-Wickremesinghe regime recommenced negotiations to secure the MCC grant again as Sri Lanka qualified again after the war-related destruction. However, the country had to go through the MCC process of applying for a new grant. From 2015 to April 2018, there was a Compact Development Team based at the then-Prime Minister’s Policy Development Office which coordinated this rigorous process.  

Do we need MCC grant money?

Back in the late 20th Century, Sri Lanka was designated a low-income country and therefore was entitled to grants and loans on concessionary terms from multilateral donor agencies. However, today Sri Lanka is not entitled to such loans and grants and has to borrow on commercial rates to fund some of its development projects. Sri Lanka currently has an external debt of $ 55 billion and in this year alone will need to make payments of $ 3.6 billion. 

As shown in the graph, grants as a percentage of Government revenue have gradually gone down since the 1980s and amounted to only $ 68 million in 2018. Sri Lanka is today an upper middle-income country, and so we will receive fewer grants from donors. The grants component will decline further and soon Sri Lanka will have to borrow more from international markets at commercial rates.

The MCC grant of Rs. 85 billion or $ 480 million is one of the largest ever Sri Lanka has negotiated with any country.

What are the MCC projects? 

Taking into consideration the development of public and private sector enterprises, the Yahapalana leadership identified the transport and land sectors as key areas for MCC support. Based on the then-Government’s priorities, the Pathfinder Foundation learns that the process included a joint constraint analysis, root cause analysis, concept note and project proposal to the MCC based on extensive consultations with the Ministries of Finance, Land, Transport, Megapolis, Highways, Women and Children and public institutions like the Road Development Authority, Urban Development Authority, Colombo Municipality Council, Survey General’s Department, etc. and with the private sector and civil society. 

The detailed Government proposal with shortlisted potential activities was reviewed by the MCC investment Committee. Then there were intensive negotiations between the Sri Lankan Government negotiating team and MCC, and the final draft agreement was approved by the MCC Board and the US Congress. 

Since 2014, traffic and travel time in Colombo has nearly doubled, with average speeds now at 8 km/hr. By 2035, speeds will reduce to less than 1 km/hr. on average on all major roads in Colombo, if nothing is done. Similar traffic situations and bottlenecks are experienced in all other major cities. According to the University of Moratuwa, the opportunity cost of traffic congestion to the Sri Lankan economy will total Rs. 1.847 trillion annually next year. The $ 350 million MCC transport project is designed to reduce traffic congestion on all major transport corridors in and out of Colombo through an advanced traffic management system; modernise the bus service in the Western Province to make it safer, more reliable and more comfortable; and upgrade interprovincial roads to better connect people and goods in the central region with ports and markets. This part of the project appears to be the least controversial.

The most controversial is the land component of the project. Most, if not all, critics believe or pretend to believe that the objective of the land component is for the Americans to own Sri Lankan land in the designated districts. The MCC land project may be considered as funding for programs we already have: Bim Saviya, improving land valuation and the survey department and digitalising deeds. 

The $ 67 million land administration project is to scale up existing historically under-resourced Sri Lankan Government initiatives in several districts by inventorying state lands, digitising records for efficient and speedy land-related delivery of land transactions and strengthening land tenure security, especially for smallholders and women that will give farmers, small businesses and people flexibility to improve their livelihoods for their families. 

The issue of land rights and the need for proper titling has been on the agenda of many successive governments since the early 1980s. Grants and permits have been issued under the Swarnabhoomi, Jayabhoomi, Rathnabhoomi and Ranabhoomi programs. But there are over 1.4 million hectares of alienated State lands across the country without survey plans. 

We, as the Pathfinder Foundation, are proud to claim that the land titling and distribution among farmers who use land, was first publicly demanded by us, under the Sanvada Program implemented in 2007. We commissioned a study on this issue by Dr. Ranjit Wanigaratne, a renowned geographer and a senior university academic. The Pathfinder Foundation also conducted several studies and held stakeholder consultations in 2007 on the land rights issues affecting the country and demand for freehold titles by the farmers and small and medium enterprises in the North Central Province.  

Empirical evidence from many cross-country studies reveal that proper implementation of land titling and improvement of transport efficiency have many multiplier effects on the overall efficiency of the performance of the economy. Both these components are likely to add advanced technology and technical know-how in the implementation process.  

President Gotabaya Rajapaksa is already giving leadership to expedite the implementation of his vision to improve the service delivery of essential Government services. We Sri Lankans know how technology used for Government service delivery improved our lives in getting a passport, a driving license, a birth certificate or a national identity card within a few hours and allowed us to pay our vehicle revenue license in real time. Wouldn’t such a service be a game-changer through the automation and digitalisation of land related institutions in Sri Lanka?  If there is the slightest indication of a land grab by Americans or any other entity, or plans to establish military bases, the Pathfinder Foundation uncompromisingly objects to such clauses in no uncertain terms. 

If we accept the grant, how can we protect our sovereignty?

The Pathfinder Foundation believes that the legal implications of the MCC agreement need a thorough legal analysis by carefully scrutinising the draft agreement. In this regard, the Government legal experts, in particular the Attorney General’s Office, must review the agreement and remove any undesirable clauses, if any. Based on our study of the agreement, we recommend the following to be considered by the Government before accepting the MCC grant, taking into consideration the national sovereignty and economic development of Sri Lanka: 

Districts: according to the agreement, the land project will focus on seven districts. But these are not the only districts where poverty is at its worst, and where land reform will benefit most people. These selected districts ironically led to the perception that the MCC was to build an economic corridor between Colombo and Trincomalee and facilitate a land grab by foreigners. We suggest that the current Government, based on its priorities if necessary, select new districts that will have the highest impact to create economic growth and development. 

Ministries: the land project would work with many ministries that cover land, although the very problem with land administration is fragmentation of responsibility. President Rajapaksa has repeatedly indicated the need for a “citizen-centric digital government” and the Information and Communication Technology Agency (ICTA) is well-positioned to lead efforts to make us a technology-based society, including programs to digitise land records. That would reduce fraud and also reduce the time taken to complete land transactions. The Pathfinder Foundation proposes that the MCC-funded land component is brought under the purview of the ICTA. 

The Millennium Challenge Account (MCA): The MCC implementation must be carried out by Sri Lankans and provide only observer status to officials of the donor agency. Of course, the Pathfinder Foundation found that almost all other previous USAID projects were mainly managed by US contractors and were not overseen or managed by the Sri Lankan Government. In fact, USAID procurement guidelines are used for all tenders, and payments are made directly to contractors and not to the Government, and USAID approval of all major actions is required. In that sense, even the proposed implementation method under MCC is an improvement in localising the management of the development assistance. But currently, it will be a “company limited by guarantee”. Why would we have a company to implement this grant?  The Pathfinder Foundation recommends that the Government decide what form the MCC implementation structure will take, whether it’s a trust, a non-profit or under a Government ministry.

Legal due diligence: Pathfinder would like to repeat that the Government must employee legal experts of the highest calibre to ensure that the MCC agreement, for that matter any agreement with foreign countries or institutions, is well scrutinised to ensure that Sri Lanka’s national interests are not compromised. Any provisions that would harm the country’s independence, sovereignty and national security must be excluded.  

With regards to acceptance or rejection of any offer of grants, we should not throw out the baby but only the dirty bathwater. Let us hope that the Government will explore the possibility of negotiating the compact to produce a favourable outcome and give a strong signal to the world that Sri Lanka, under the new administration, is in business.

We Sri Lankans, including the political leadership, should come to terms with the fact that we cannot afford antagonistic relations with any major power, whether it is America, China, Europe or even India. On the other hand, we must manage our relationships with major powers with conflicting interest following the advice of the late Chairman Mao on correct handling of contradictions to the advantage of Sri Lanka.