Decoding MCC; what refusal to implement entails

Gandhi Pandit
Senior Advocate & Founding Partner, Gandhi and Associates

“If the Compact is not ratified, we might face difficulties in receiving aid from the US and her allies in future and also lose credibility among foreign investors. If we mess up and reject it, we won’t be able to obtain aid of this amount from China, India, EU and the US. In our context where a large chunk of our development budget is financed by foreign aid, an adverse impact on aid mobilisation will hamper our development activities”

The government of Nepal and the United States Millennium Challenge Corporation (MCC) have signed an agreement called Millennium Challenge Compact to mobilise $500 million grant from the US along with a $130 million counterpart fund for the installation of 312-km high-capacity transmission line and around 100 km of road upgradation. There are several provisions in the Compact that need to be fulfilled before it can be implemented and parliamentary ratification is one among them.

The previous government had registered the Compact in the parliament some two-and-a-half years back for its ratification. However, it has not been tabled for parliamentary discussions yet despite the massive debate raging in the public domain. In a recent development, the MCC Headquarter, on February 3, sent a letter to Prime Minister Sher Bahadur Deuba and former Prime Minister and a major partner of the ruling coalition, Pushpa Kamal Dahal, mentioning that if there is no concrete action by February 28, the MCC Board meeting which is scheduled for March will take a decision on whether to continue the engagement with Nepal.

Resultantly, the government is now under pressure to take forward the Compact after negotiations with political parties represented in the parliament. In the ensuing environment, Business 360 caught up with Senior Advocate Gandhi Pandit, who is also the Founding Partner of Gandhi and Associates, to learn about the legal aspects of the Compact. Excerpts:

The Millennium Challenge Corporation has set the deadline of February 28, 2022 for the Compact to be ratified by the Parliament. The pact which was signed in September 2017 has remained in limbo despite being registered in the parliament two-and-a-half years ago. How will it be taken it forward?

The Millennium Challenge Compact has an objective of economic development of Nepal and the US government has agreed to provide $500 million as grant. In September 2017, the Compact was signed to mobilise the US government’s aid to instal high-voltage transmission line including cross-border electricity trade infrastructure with India and upgradation of specified road sections. The US authorities who were present during the initial negotiation with Nepal had tried to incorporate the provision of parliamentary ratification eyeing the smooth continuation of project implementation by consequent governments. The Nepali authorities had convinced them that there would not be any hassle from the consequent governments to take this forward.

People are confused at present because initially, there was no provision of parliamentary ratification, so why did the need arise later when the project implementation agreement (PIA) was signed?
It comes as an obligation while abiding to our national law. The Nepal Treaty Act 1990 has a provision of parliamentary ratification for two types of treaties – first is constituted in Nepal’s Constitution section (279) namely the treaty of (a) peace and friendship, (b) defence and strategic alliance, (c) boundaries of the State of Nepal, and (d) natural resources, and the distribution of their uses; and the second is bilateral treaties which have a condition of parliamentary ratification. Apart from the aforementioned treaties, all the power rest with the Nepal Council of Ministers (Cabinet) to ratify, accede to, accept or approve treaties/agreements where Nepal or the government of Nepal is a party. Treaties where Nepal government is a party that is signed by the GoN or ratified by the parliament considering the GoN is party will be effective as law. Section (9) of the Nepal Treaty Act has provision that ‘in case of the provisions of a treaty, to which Nepal or Government of Nepal is a party upon its ratification accession, acceptance or approval by the parliament, inconsistent with the provisions of prevailing laws, the inconsistent provision of the law shall be void for the purpose of that treaty, and the provisions of the treaty shall be enforceable as good as Nepali laws’.

Regarding the parliamentary ratification of the Millennium Challenge Compact, both the governments had agreed based on the advice of the Ministry of Law, Justice and Parliamentary Affairs; the previous government led by KP Sharma Oli had registered the Compact in the parliament. In this scenario, there should be no debate on the requirement of parliamentary ratification; all the rights are reserved with the parliament on whether to accept it or not. It is duty of the Speaker of the House of Representative to bring it up for discussion in the parliament and members of the parliament will then decide. It can’t remain in limbo further.

Nepal had approached for this aid and our various governments since been engaged with MCC since the last decade to obtain compact funding. What is the likely impact if the Compact is not ratified?

The major impact is Nepal will lose credibility in the international arena. Such indecisiveness is shameful for a sovereign country. We need to have more in-depth discussions before signing such agreements/treaties but once it is signed, the country should be speaking in one voice. Nepal government had sought this aid and Millennium Challenge Corporation agreed to provide it based on Nepal’s eligibility on the threshold set by them. We are not the only country who has sought this aid; there are dozens of developing and least developed countries seeking this aid. Many countries have executed projects under this grant scheme and some have been implementing the second compact. Nepal is one of the countries that will receive such a huge fund in terms of the amount agreed. Very few have received a similar chunk of aid from a single compact. We should ratify the Compact from the parliament and convey this information to the latter to mobilise aid in specified infrastructure development activities.

If the Compact is not ratified, we might face difficulties in receiving aid from the US and her allies in future and also lose credibility among foreign investors. If we mess up and reject it, we won’t be able to obtain aid of this amount from China, India, EU and the US. In our context where a large chunk of our development budget is financed by foreign aid, an adverse impact on aid mobilisation will hamper our development activities. As a result, the country’s private sector and some representatives of civil society and media and others are asking political parties to not allow other countries to meddle in our internal affairs. We must accept any cooperation that is aligned with our priority for development as Nepal has limited revenue sources that is insufficient for development financing. Also, we have been mobilising our revenue only in recurrent expenditure and to pay back foreign loans.

The Speaker of the House of Representatives has been reportedly seeking political consensus among all major political parties to take MCC forward. Your thoughts.

The Speaker should be careful about the dignity of the parliament and parliamentary process. He is the leader of the parliament who has been appointed from amongst the 275 members of parliament and his role must be neutral. There are parliamentarians who represent both the ruling and opposition parties and they should be allowed to discuss and take a decision. The Speaker can’t hijack the right of the parliament. It is the business of the government to seek political consensus for successful ratification. The Speaker, in fact, should not worry about it. If they start seeking consensus among political parties on any business registered by the government, it will later be difficult for the ratification of any Bill or proposal. The Speaker must honour the Constitution of Nepal and cannot create any obstruction in the name of national consensus for proposals that can be decided by a simple majority. Apart from the treaties mentioned in section 279 of the Constitution, all the agreements/treaties and bills can be ratified by a simple majority of the parliamentarians present in the parliament in the parliamentary session of the particular day.

There are rumours that the Compact prevails over the Constitution of Nepal. Is it true?

We are going to mobilise the aid for high-voltage transmission line to enhance the supply system as well as for energy trade and road upgradation. For this purpose, section 7.1 of the Compact states it will prevail if there is contradiction with prevailing domestic laws. This will be only for the execution of these two projects. For example, the provisions could contradict with domestic laws in land acquisition, procurement, formation of electricity regulatory commission and others that are related only with the project execution. This doesn’t mean the Compact will be the document with higher authority and US laws will be implemented. It respects the sovereignty and Constitution of Nepal and only the provisions of concerned laws that are attracted in project execution will be nullified to the extent it contradicts with the provisions of the Compact. We should understand that it simply means the new law will prevail where it contradicts with a previous law. As we are going to accept Compact as a law, its provisions will be valid if the provisions of domestic laws are inconsistent with Compact. The provision of section 7.1 and section 9 of the Nepal Treaty Act, 1990 are similar. I have mentioned before that the provision of the treaty will prevail in condition of inconsistent provisions in the prevailing domestic laws. How can we imagine that the government will compromise with sovereignty and the Constitution for aid worth $500 million? The Nepal government had also sought clarifications from the MCC Headquarter in September 2021 and it has already made it clear that the Compact honours the sovereignty and Constitution of Nepal. The letter sent by MCC Headquarter with answers sought by the GoN can be considered as the annex of the main agreement. If we are not politically biased, then there is no problem based on legal ground regarding the MCC Compact. We should accept the aid happily if it comes by abiding with our Constitution and sovereignty and as per the national interest; if it collides with our national interest and doesn’t respect our Constitution and sovereignty, we should not even accept aid from our neighbours India and China. There could be competition among political parties, however we should not politicise our national interest and foreign relations. It will be deadly.

Some political parties feel the Compact with the US has some security interest and it is part of the Indo-Pacific strategy?

There has been massive spread of misinformation and disinformation. We have to first understand what Indo-Pacific strategy is. The MCC law does not allow security activities in projects of MCC cooperation. It is always good to be alert and discuss and try to understand the sensitivity. Section 2.7 of the pact clearly states, ‘MCC Funding is not used for any purpose that would violate United States law or policy including assistance to training of the military, police, militia, national guard or other quasi-military organisation or unit’. This is why if there is any suspicious activity or it collides with our national interest instead of the core objective of developing infrastructure, Nepal government can unilaterally terminate the Compact with prior information of one month. Nepal will not have to pay any penalty for the money spent before the termination of the agreement but the US can take back the unspent fund and interest accrued of that unspent amount.

Does Nepal have the right to audit the expenses of Millennium Challenge Account (MCA) Nepal, the entity formed by the government of Nepal to execute the projects?

MCA Nepal has been established as a development board under the Ministry of Finance as per the Development Board Act 1956 led by the Secretary of the Finance Ministry. The grant will be deposited in the bank account of MCA Nepal which will spend the money on the desired projects. The US government is providing the grant from the taxes paid by the US citizens so they must be accountable to their citizens. They wish for the money to be spent properly and also have a proper audit. The Compact has envisioned audit by three types of institutions: Financial Comptroller General Office, Auditor General Office, and an audit firm selected by the GoN through competitive bidding.

The end of Section 3.8 (a) of the Compact states, ‘The requirements of this Section 3.8 (a) do not preclude the Office of the Auditor General of Nepal from conducting audits of MCA-Nepal.’ Three types of agencies can carry out audits of MCA Nepal like I have mentioned above.

It is said Nepal government will not have the right to use the intellectual property created through this project…

This logic has no substance. The intellectual property created through this project will be in the ownership of Nepal government. The first ownership will go to the GoN. If you go through section 3.2 (f), it is clearly mentioned, ‘The government of Nepal grants to MCC a perpetual right …..’.; it means the government of Nepal has ownership of it and only the owner can grant the right to other parties. Without having ownership, how can the GoN grant the right to MCC? As the intellectual property is going to be created in a project financed through MCC grant, what is wrong granting them the right to use that intellectual property?

There has been politicisation regarding obtaining approval of the Government of India for the execution of Compact?

That is a wrong statement. In section 7.2, there is a provision of Conditions Precedents; though the agreement has been signed the latter must abide by the three pre-conditions for it to be implemented. Following the signing, the GoN had to send a letter confirming that it has completed its domestic requirements including the Compact agreement is in accordance to the Constitution and prevailing laws. If the government had sent a letter stating the Compact was not compliant with domestic laws, the agreement would not have moved forward. This also means the US Government does not want to include provisions that collide with the provisions of the Constitution and Nepal’s national interest. Similarly, it also mentions about the right of way or clearance of land acquisition at the project sites so that there is no obstruction during project execution or when the five-year project execution deadline starts ticking. The Compact has not said Nepal has to seek India’s approval to execute the Compact; the only thing is Nepal should first agree with India to construct cross-border transmission lines. As we are going to construct 18 km transmission line for cross-border electricity trade, the grant will not be properly used if Nepal and India do not reach an agreement to construct cross-border transmission line. That is why it has a precondition of cross-border transmission line agreement. The government has completed all the preconditions and the final one is that the government has to send a letter mentioning that the parliament has ratified the Compact. Then only will the Compact come into effect.

It is said that American laws will prevail once the Compact comes into effect after parliamentary ratification? Does this argument have any ground?

It is a fake argument. Section 6.4 of the Compact has a provision of governing law and it has said ‘This Compact is an international agreement and as such will be governed by the principles of international law’. If there is any dispute between two parties in compact implementation, it will be resolved on the basis of international law. Back in July 2016, the government had signed an agreement to obtain funds from MCC that was related to the Nepal Growth Diagnostics, in which the government accepted to abide by New York State’s law as the governing law. The Nepal government then had no right to terminate the agreement of 2016, without any valid reason. However, for the Compact signed in September 2017 by erstwhile Finance Minister, Gyanendra Bahadur Karki and MCC Acting CEO Jonathan Nash, international law will prevail; in this regard the Vienna Convention on the Law of Treaties (1969). Nepal and US are both parties to the Vienna Convention. Article 27 of the Vienna Convention on the Law of Treaties states that ‘A party may not invoke the provisions of its internal law as justification for its failure to perform a treaty’. The US government also can terminate the Compact unilaterally with prior information of one month if it thinks there are some activities that are against prevailing US laws/future laws and principles. The Compact doesn’t create any liability on Nepal despite termination from any party though the US has the right to pull back its fund and interest accrued after termination. In the past, we have signed agreements with different development partners accepting British law in arbitration and other laws as governing laws instead of international law.

For how long will the Compact prevail after the projects are completed in five years?

The Compact has only a few survival clauses and the remaining provisions will be nullified. The survival clauses are on the use of intellectual property and also for taking back unspent grant following the audit. On the other hand, the transmission line and road built through the MCC aid can’t be used against the US, such as military activities to serve the interest of other countries. This is an international template of agreements followed by most nations so we should be afraid of following it.

Critics of MCC opine that Nepal will not have the right to fix electricity tariff and it will be a US government entity that will fix it. Is it true?

This just shows the height of propaganda against the MCC aid. The Electricity Regulatory Commission was formed to welcome the private sector in electricity generation, transmission and distribution. It promotes fair competition among the utilities apart from the state-owned Nepal Electricity Authority. This fair competition among the utilities will end the monopoly of NEA.

Foreign policy is the jurisdiction of the government. Why do political parties stage protests against some policies?

It is complete anarchy. Political parties must understand the sensitivity of foreign relations. Rather than staging protests on the street, they should keep their views in parliament in a disciplined manner. The MCC has clearly conveyed its message that the deadline for the parliamentary ratification is February 28. More than four dozen countries have obtained the Compact funding and benefited from the execution of various projects. I feel some political parties do not have the right intention. Some of them are seeking amendments in the Compact, however, they’ve not come up with anything substantial that needs to be amended in the provisions of the Compact.


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