MCC Clarification: There is no connection between MCC Nepal Compact and any military strategy

KATHMANDU: The Millennium Challenge Corporation (MCC) has clarified the government of Nepal on various issues being raised in Nepal about the US-funded project. In a letter to Finance Minister Janardan Sharma, the MCC has clearly stated that there is no connection between the MCC Nepal Compact and any military alliance or defense strategy as rumored in Nepal.

Similarly, the MCC has also responded and clarified different other questions that the Ministry of Finance had asked MCC to clarify last week. Below is the full text of the MCC clarification letter and response to the government:

1) Grants, assistance, gifts, etc. do not generally come with conditions between the donor and the recipient countries. The only concerns on the part of the donors is that such donations, gifis, assistance, and grants are not being misused. The declared or undeclared motives become clear with time and circumstances. What is the basis that the support under MCC is selfless?

MCC Response: MCC’s mission is to reduce poverty through economic growth. In Nepal, MCC’s goal is to increase and accelerate improvement in the lives of Nepal’s citizens. The MCC Nepal Compact is a grant for Nepal to complete the electricity transmission and road maintenance projects that the Government of Nepal itself selected as critical for Nepal’s economic growth. The agreed-upon terms and standards included in the MCC Nepal Compact are consistent with terms and standards included in MCC’s compacts with other countries and are necessary to ensure that compact projects are completed within the five-year timeline to high technical and environmental standards and that there is no misuse of funds. Absent any misuse of funds that violate the terms of the compact, the funding does not need to be repaid.

2) There are 22 criteria specified in the threshold regarding providing grants to Nepal. The ‘Nepal Growth Diagnostic’ had concluded that the country lagged far behind in most of the criteria specified to meet the threshold. It seems that the countries achieving a threshold of more than 75 percent are eligible to receive the grant. But in the case of Nepal, not even 50 percent has been met. It seems that there is policy categorization of countries receiving grants. What is the basis for claiming that Nepal is not prioritized under a military strategy?

MCC Response: First, the U.S. law that governs MCC prohibits MCC from using funding for any military purpose; the compact is explicit about this legal prohibition. Therefore, there is no connection between the MCC Nepal Compact and any military alliance or defense strategy. Second, the MCC process for selecting partners as compact eligible is based on statutorily prescribed criteria that specifically does not include any military factors. To be considered for eligibility by MCC’s board of directors, a country must: (1) be classified as a low income or lower middle-income country by the World Bank, and (2) pass the annual MCC country scorecard that focuses on the country’s commitment to just and democratic governance, investing in people, and economic freedom. These criteria are outlined in the publicly available reports produced each year by MCC and that apply equally to all countries: the Candidate Country Report and the Selection Criteria and Methodology Report. Nepal was selected as eligible to develop a compact program with MCC in December 2014, in recognition of the country’s consistently strong performance on the MCC country scorecard and its continued commitment to democratic governance, Full information on MCC’s country selection process .

3) Was the agreement with MCC concluded as per Nepal’s own needs and request? After the CPN (Maoist) entered the peace process, subsequent to the Comprehensive Peace Agreement, Government of Nepal had formed Nepal Growth Diagnostic Task Force-lo analyze the problems in Nepal’s development. Accordingly, a 10-member team led by Mr. Chiranjibi Nepal was formed under the coordination of the Ministry of Finance. With MCC designated as the aency to support it on behalf of the United States of America, a team of 9 representatives from MCC and USAID under the leadership of MCC’s Bradley Cunningham was said to provide support to the study. It published a report in May 2014. Il seems clear that the project was selected under the U.S team’s priorities on the basis of that report. What is the reality?

MCC Response: All projects funded by the MCC Nepal Compact were selected by the Government of Nepal, in consultation with Nepal’s private sector and civil society, as projects that are important for Nepal’s own economic growth. The Government of Nepal team that led the selection of projects received support from a team of U.S. government staff coordinated by MCC. All transmission lines included in the MCC Nepal Compact, for example, were identified as needs in Nepal’s Transmission Masterplan 2015 and later reconfirmed in the updated 2017 plan. Recognizing the importance of the project to Nepal’s development, the Government of Nepal designated the Electricity Transmission Project in the MCC Nepal Compact as a Project of National Pride.

Why is there a need to call an ordinary type of grant to be provided by the United States and received by Nepal an ‘international agreement?’ According to the Constitution of Nepal and Nepal’s laws, we are free to conclude treaties and agreements with any country based on our national interesi. In order to subordinate that, MCC agreement has been classified as an international agreement in an attempt to weaken the Constitution and laws of Nepal. What ground is there, as per Section 7.1 of the agreement, to claim that it not so?

MCC Response: The Constitution of Nepal prevails over the MCC Nepal Compact. MCC compacts with all MCC partner countries are international agreements governed by the principles of international law. Based on MCC’s experience in other countries, a compact’s status as an international agreement is critical to ensuring that implementation can proceed without delay, which is particularly important given the limited five-year implementation period of a compact. In practical terms, the status of an international agreement means that the implementation of compact projects will proceed in accordance with laws of Nepal except in the rare instance where local law conflicts with a specific provision of the compact. In such a case, compact projects will be implemented according to the mutually agreed upon terms of the compact and the Constitution of Nepal. Notably, the Government of Nepal, through the Ministry of Law, Justice and Parliamentary Affairs, reviewed all terms of the MCC Nepal Compact, including Section 7.1, and concluded that the compact provisions do not conflict with the laws of Nepal.

5) Many agreements related development, construction and investment do not seem to require parliamentary ratification. Why this particular agreement needs parliamentary ratification? After parliamentary ratification, an agreement becomes a law. All the conditions mentioned in it become the law. As long as that law exists, MCC has a statutory right to maintain control in influencing treaties, agreements, economic investments, development models and state affairs of Nepal. Is it not for the purpose of maintaining that control, as per Article 5.5 of the agreement, the parliamentary ratification has been proposed?

MCC Response: As clarified in response to Question 4, all MCC compacts are international agreements. During compact development, MCC asks each partner government what their country’s domestic law requires in order for the compact to have the status of an international agreement that will avoid any specific conflicts with domestic law. For Nepal, the Government, through Nepal’s Ministry of Law, Justice and Parliamentary Affairs, concluded that, under Nepali law, parliamentary ratification is required for the compact to be such an international agreement.

6) After parliamentary ratification of the agreement, why is parliamentary approval not required for the agreement’s parts, the implementation agreement, or amendments to the project? It is an attempt to provide legal status to such a provision in order to arbitrarily change the content of the agreement and create a pressure to enforce it. How can one be convinced that the main reason for this is not due to the strategic location of Nepal in global politics and conflict and the intention to use that strategic location?

MCC Response: The MCC Nepal Compact was signed in September 2017 following extensive discussions between MCC and the Government of Nepal, including Nepal’s Ministry of Law, Justice and Parliamentary Affairs. Compact Section 6.2(b) allows for modification by mutual agreement of certain aspects of the compact annexes in limited circumstances, which can be necessary from time to time to reflect changing project realities and dynamics. Section 6.2(c) specifically provides that any such modifications are not ‘amendments’ and do not need parliamentary ratification. Amendments are those changes that impact the main body of the compact agreement or alter the allocations of funding, the implementation framework, monitoring and evaluation framework, or the tax exemption provisions. The signed MCC Nepal Compact cannot be amended at this time.

7) The agreement does not state anywhere that MCC is under the Indo-Pacific Strategy (IPS). Is MCC under the IPS? This matter is not mentioned in the agreement with MCC. But, it has become a key part of the US national security strategy in global politics. It is a fact that US aid and investment has been mobilized under the US Department of Defense by according supremacy to US security in the post 2001 period. US officials visiting Nepal have disclosed that the MCC falls under the Indo Pacific Strategy of May 1, 2019. So, how can it be said that MCC is not under IPS?

MCC Response: No, the MCC Nepal Compact is not an agreement under the Indo-Pacific Strategy. MCC compacts are agreements between MCC and the partner government. The strong relationship between the United States and Nepal long pre-dates the Indo-Pacific Strategy.

8) Is Nepal a member of IPS or has it become a member or can it become a member of it? In view of the objectives of IPS, Nepal cannot participate in it as per Nepal’s constitution, law, and foreign policy. As our international relations are guided by a non-aligned foreign policy based on the Panchsheel Principles, we cannot join any faction or coalition (military or nonmilitary). The primary objective of IPS is military and non-military alliance against terrorism. Countries participating in IPS have a policy of strengthening joint military activity and armaments. Page 38 of the Indo Pacific Strategy Repori, June 2001 states that Nepal joined IPS in December 2018. Similarly, page 36 of the report mentions that there have been frequent discussions between US military officials and Nepal Army officials on joint military exercise. Hence, what is this?

MCC Response: The MCC Nepal Compact is not an agreement under the Indo-Pacific Strategy. MCC compacts are agreements between MCC and the partner government. Any decision by Nepal regarding the Indo-Pacific Strategy is separate and independent from the MCC Nepal Compact.

9) MCC was formed in 2004 but IPS was formed in 2017, how is it possible for MCC to be put under IPS? First of all, after 2001, the United States of America replaced its previous aid strategy by adopting the strategy of mobilizing the aid only under the U.S. national security strategy. The National Security Strategy of December, 2017, National Security Strategy Report of June, 2019 and Indo-Pacific Report of November 2019 state that the military and non military alliances in the Indo-Pacific region would be strengthened and assistance including MCC would be mobilized under IPS. Can’t it therefore be said that this agreement is under IPS? In this regard, decisions of the meetings of the Quadrilateral Security Dialogue (QUAD), comprising of the U.S., Japan, India, and Australia, have been made public.

MCC Response: MCC was established in 2004 with a singular focus on poverty reduction through economic growth in countries that are committed to democratic values such as rule of law, investing in their people, and economic freedom. The MCC Nepal Compact is not an agreement under the Indo-Pacific Strategy, nor is it a part of any military strategy of the United States.

10) Why have the agreements signed after the MCC Compact not been made public? The original agreement has accorded the authority to make other agreements and implement them directly without having to be brought before the People’s representative body. How can one believe that such sub-agreements or correspondences would not be uncontroversial when original agreement itself contains controversial provisions? For instance, the implementation agreement signed between Finance Minister Yubaraj Khatiwada and MCC Vice President Anthony Welcher on September 29,2019 has not been made public yet. Without any provision in the main agreement, Millennium Challenge Account, an autonomous body free from government interference, has been formed as per the Government formation order. Arrangements have been made to restrict any change, direction, or mobilization without MCC’s permission. In addition to it, MCA is required to submit its reports to MCC. Is there no room for suspicion that undue provisions motivated by MCC’s self-interest are the reason for not making such agreements public?

MCC Response: The compact is the primary document that governs the compact program, and no subsidiary agreements between MCC and the Government of Nepal can conflict with it. The establishment of MCA-Nepal as the accountable entity is indeed discussed in the compact itself, and the Government of Nepal established MCA-Nepal in 2018. (MCC partner countries establish an implementing entity to oversee, manage, and implement the grant demonstration of MCC’s commitment to country ownership.) MCA-Nepal is governed by a board of directors composed of Nepal government officials and members of Nepal’s private sector, civil society, and community leaders. The Program Implementation Agreement, signed on September 29, 2019, has been publicly available since signing, including on the MCA-Nepal website (

Fiscal Nepal |
Wednesday September 8, 2021, 09:29:52 PM |

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