The government of Nepal and Millennium Challenge Corporation (MCC), a United States foreign aid agency, signed a contract to make a total investment of $500 million, the largest single foreign aid in history, with the objective of reducing poverty through growth. MCC and the government identified inadequate electricity supply and high cost of transportation as the main constraints to economic development in Nepal and agreed to invest this amount in such areas.

However, some of the articles in the contract are creating a clear demarcation between lawmakers in the House of Representatives. Some ruling party lawmakers are severely decrying the contract in public, arguing that the MCC Compact is part of a military stunt by the US under the Indo-Pacific Strategy to imperialise Nepal and strategically stifle northern neighbour China. It has created an abrupt outburst of chauvinism in Nepal with hardcore opponents arguing that the country's sovereignty is at stake.

National interests

David J Ranz, Acting Deputy Assistant Secretary for the Bureau of South and Central Asian Affairs at the US State Department, has said it is one of the most important initiatives under the Indo-Pacific Strategy. In fact, a document published by the US State Department argues that MCC is a results-oriented development assistance under the strategy which has granted some $2.3 billion to Indo-Pacific nations since 2004. Nepal has to be clear if it perceives the Indo-Pacific Strategy to be a threat to the national interest. If not, this issue is nothing but a useless argument.

As far as the US is concerned, the MCC website explicitly states that it not only supports stability and prosperity in partner countries but also enhances American interests. This should neither be seen as a problem nor arouse conspiracy theories. Both the US and Nepal obviously have their own interests. In fact, what is important is to overtly state the mutual interests of both countries. This will wipe out unnecessary arguments and enhance the accountability of the contract.

Arguments have also been extended that MCC is part of a military stunt which the US Embassy has firmly denied. But the MCC Compact itself contains no military component. Some people have exaggerated the statements in Article 2 (Section 2.7a) which, in fact, prohibit governments from spending the funds on military activities. Even then, there are US military bases in some countries that have received MCC grants. MCC has signed contracts with 49 countries worldwide.

A report published by the US Department of Defense states that the US seeks to ‘establish US Army Pacific-led Land Forces Talks’ with Nepal. Since MCC remains sceptical about such issues, it is difficult to argue that it is part of a military stunt. Therefore, US overtures of a military contract are not the problem, the issue is the future consequence of Nepal not opting for a further military relationship. Will the MCC investment then be threatened? This is where the government has to be clear; MCC can at any time suspend the contract under Article 5 (Section 5.1).

Part of the opposition to some articles in the MCC contract is a result of miscommunication, and part of it is due to a real concern for national sovereignty. These articles include issues of intellectual property, of the power of auditing, termination and suspension, MCC vs the constitution, and the question of Indian approval, among others. The issue of granting irrevocable and perpetual rights to intellectual property (Article 3, Section 3.2f) needs revision. No government should provide such a right to any foreign organisation. However, the issue of auditing seems to be exaggerated. The article does not prohibit the government from conducting audits of MCA-Nepal (Article 3, Section 3.8a).

The termination clause (Article 5) also needs to be revised. It says, ‘Either Party may terminate this Compact without cause in its entirety by giving the other Party 30 days’ prior written notice.’ The phrase 'without cause' is suspicious. In Nepal, where persons facing serious charges are known to be appointed to high government positions, this article can easily lead to suspension of the contract. MCC has suspended or terminated contracts with Madagascar, Tanzania and Mali due to security reasons.

Article 7 (Section 7.1) which says that MCC will prevail over the domestic laws of Nepal needs to be revised. Another vague issue is the stipulation which states that ‘the Government must have submitted a plan, in form and substance acceptable to MCC, and consented to by the government of India’ (Annex V). This is vague because it is not clear if all projects need Indian approval or just the Butwal-Gorakhpur cross-border transmission line project, which does directly concern the southern neighbour. If the former is true, it needs serious concern and revision.

Should Nepal sign the pact?

Though some of the clauses and articles have garnered a great deal of attention from different stakeholders, the economic benefits cannot be overlooked. The MCC Compact has come at a time when the country is striving to woo foreign investment. The country seriously needs foreign investment in electricity transmission and road connectivity.

MCC is not only about benefitting in the areas of high voltage electricity supply and road connectivity, but also about informing the rest of the world that Nepal is a place to invest. MCC minutely examines economic freedom, governance, investment security and other issues that are of great concern to foreign investors. This is why economists have not been found resisting this grant: this project has largely garnered support from economists. The economic benefits of ratifying the MCC Compact clearly outweigh the costs. Therefore, Nepal should not let this massive investment go. If necessary, the government should work on the controversial articles and sort them out as soon as possible.