A US gift of USD 500 million to strengthen Nepal’s infrastructure has led to unprecedented controversy. Between 2012, when Nepal first applied for the grant, its signing in 2017 and most recently its ratification on 27 February 2022, the grant has sharply divided the country.
In February, concern about the aid from the Millennium Challenge Corporation (MCC), the youngest major US development agency, sparked riots in the streets. The protests, which were supported by two parties of the coalition government and inflamed by charged political statements from both sides, were suppressed using tear gas and water cannons. The controversy even threatened the stability of Nepal’s current five-party coalition government.
Recent events have also laid bare the new rivalry playing out between the US and China at the cost of small countries caught in the middle.
The MCC grant has two major components: USD 400 million for a 315-kilometre 400 kilovolt (kV) electricity transmission line from Lapsiphedi to Ratmate in Kathmandu, to Butwal via Damauli, and USD 52 million for a road-building project.
USD 49 million is allocated for evaluation, monitoring and other administrative expenses.
The Nepal Electricity Authority is building another 135-kilometre 400 kV line from Butwal to Gorakhpur in neighbouring India, where Nepal hopes to sell electricity.
A brief history of aid to developing countries
To understand the context, one first has to step back and reflect on the changing nature of foreign aid in a world where the post-second world war global order is no longer completely dominated by the US. At the height of the cold war in the mid-1960s, when the US constituted 60% of the world’s GDP, the US built transmission lines in Kathmandu that still operate today, carrying power from Indian, Chinese and Russian-built hydropower plants to the capital city. Today, the share of the US in global GDP in purchasing power parity is 16%. China has the biggest share, at 19% (India ranks third at 7%).
The other aspect to consider is changing development priorities. Aid evolved as an institution and a major industry in the aftermath of the second world war, with what was called the First World (US-led industrialised countries) not wanting the Third World (in today’s parlance Global South) to become part of the Second World (Communist block). This was known as Bretton Woods 1, named after the New Hampshire village where victorious allies met to determine the framework of the post-war economic order. There was a major shift in 1971 (known as Bretton Woods 2) when US President Richard Nixon did away with its foundational gold standard and made the US dollar (and the US’s right to print it with virtually no limits) the foundation of international reserve currency for trade.
With the collapse of the Soviet Union and the end of the cold war in 1991, the core reason for giving aid to Third World governments also collapsed, ending the Age of Aid. Aid was then transformed into promoting (western) market-led economic development and social transformation led by international non-governmental organisations through their national recipient NGOs.
Alas, it was not to last. The financial and social crises in developed countries, coupled with the rise of East Asian economies, religious militancy in the Middle East and the military rejuvenation of Russia has brought the world to what is called Bretton Woods 3, where real commodities like oil, gold and other rare minerals are coming back as the primary carriers of trade value instead of the US dollar.
The birth of the MCC
The MCC has to be looked at against this global background. US political and foreign policy circles had often criticised the ineffectiveness of both USAID and multilateral institutions such as the World Bank – even though US interests were dominant within them, especially after the end of the cold war. But it was only after the September 2001 attacks that US President George Bush formalised the MCC as a new aid agency, bypassing USAID and other Bretton Woods 1 outfits. Documents from the US defense and state departments as well as the White House, visiting US officials and those in Washington DC itself make it amply clear that MCC is the soft arm of an Indo-Pacific Strategy aimed at isolating China, Russia and Iran.
Nepal oblivious to risks posed by MCC agreement
Neither Nepal’s aid-addicted finance ministry nor its politicians leading the government bothered to seriously examine the weaponisation of aid as they signed multiple memorandums of understanding and agreements with visiting US MCC delegations since formally applying for the grant in 2012.
They woke up only after civic voices began to protest against its many provisions that were seen as against the national interest. These provisions ranged from clauses putting the agreement above Nepali laws; of exempting MCC officials from prosecution under Nepali laws; of not going against US policies (a broad phrase that can be interpreted in multiple ways); of subscribing to US values such as economic liberalism even though Nepal’s constitution defines the country as “socialism-oriented”; of exporting Nepali hydropower to a monopsony market in India, rather than using it for Nepal’s own commerce and industry; and of bypassing Nepal’s established transmission line building authority – the Nepal Electricity Authority (NEA) – to create a new US-controlled outfit.
In economics, a monopsony is when a single buyer controls the market, and is potentially able to manipulate prices and terms to its convenience. Nepal sells electricity only to India and has limited negotiating powers to set prices and terms.
Maybe most critical were the high costs. Since 2011, Nepal’s NEA has been building a 400 kV transmission line at NPR 38 million/km as part of an ongoing World Bank funded project. The MCC is planning to build transmission lines at NPR 160 million/km, four times the cost. One difference is hillier terrain, but that cannot explain the disparity entirely. Moreover, Nepal has to contribute USD 130 million of its own, run the project with that money and only have it reimbursed in instalments after passing 20 “score sheet” criteria of good governance determined by the MCC. Critics have pointed out that if the transmission line was built at Nepal’s going market rate, Nepal’s contribution of USD 130 million would more than suffice without needing the MCC grant.
Last year, US President Joe Biden suggested that “democratic countries” should have an infrastructure project response to China’s Belt and Road Initiative. But the MCC has degraded democracy in Nepal, with the small country seen as subservient to a vicious tug-of-war between the US and China. In February 2022, senior US officials warned that America would be forced to review its relations with Nepal unless the MCC grant was approved by the Nepali parliament, prompting a generally reticent China to ridicule it as a gift followed by an ultimatum.
The MCC has degraded democracy in Nepal, with the small country seen as subservient to a vicious tug-of-war between the US and China
The deal was pushed through with so few checks that it was only after the agreement was signed by the finance minister in September 2017 that the finance ministry bothered to ask the Ministry of Law, Justice and Parliamentary Affairs what the legal implications of the agreement were. (The finance minister was then posted to the US as ambassador – seen as a reward – but recalled a few months later when the Nepali government fell.) The law ministry replied in January 2019 that provisions stating MCC would supersede Nepal’s laws and constitution needed to be approved by parliament, something that had never been required of any aid project previously. When the government tried to table the agreement in parliament, the speaker did not cooperate. He was forced to resign later that year following allegations of sexual assault (he was subsequently exonerated).
Then Nepal slipped into another crisis – one of a series over the last 15 years – that had far-reaching consequences for the MCC. The ruling party, which enjoyed a nearly two-thirds majority in parliament, was split by a Supreme Court decision in March 2021 annulling the merger of two former communist parties. Their merger was widely believed to have been engineered by China (not least because the Chinese Communist Party conducted political trainings for this merged outfit). When Prime Minister KP Sharma Oli ordered the dissolution of the parliament and called for fresh elections, the court ordered that his rival from the opposition Nepali Congress, Sher Bahadur Deuba, “be appointed PM by 5PM next day” and reinstated parliament five days later.
The diplomatic pressure by the US, Chinese taunts and the extraordinary clauses that seemingly override Nepal’s sovereignty present obvious problems for accountability and transparency
This change in regime accelerated the continued push for the MCC. Deuba formed a five-party coalition with the Maoists as the biggest faction. Its common minimum programme did not mention passing the MCC as its agenda, and its Maoist partners were officially opposed to tabling it. But it was passed on 27 February 2022 without any meaningful debate in parliament. The only change was a one-sided “interpretive declaration” redefining what the clauses of the treaty mean, something that has no international legal validity and to which the US has not given its official agreement.
A complicated road ahead for the MCC in Nepal
Given the wide social and political polarisation the MCC story has generated in Nepal, it is hard to say if it has achieved any of its objectives, or what those objectives even were. The economics of the project make little sense. The diplomatic pressure by the US, Chinese taunts and the extraordinary clauses that seemingly override Nepal’s sovereignty present obvious problems for accountability and transparency. Most problematically, the opaque manner in which it has been shoved through make a mockery of democracy.
As the single biggest aid project in Nepal in recent years, the transmission line has already become a lightning rod for strong opinions. As it progresses, and the many issues of implementation, financing and accountability become more apparent, it is likely to raise more controversy, not less. This is an ominous start for the US’s Indo-Pacific strategy in Nepal, and even more problematic for Nepal itself.