By DNR Samaranayaka –
One of the foreign agreements that had received much attention in Sri Lanka recently is the Millennium Challenge Corporation (MCC) agreement. The MCC, also known as MCC compact, was established in 2004 by the US Congress during the tenure of late US president, George Bush. It was established with the objective of providing development assistance to low income countries. Every year, a country is selected for this grant through a rigorous process and the eligibility depends on a number of factors. Its focus is mainly on countries which are free of corruption and without human rights violations. The MCC selects the development project suitable to the country based on the local situation and, once it is selected, the project is designed by the MCC itself. A cost benefit analysis is also carried out to decide the economic impact of the project to the country.
Sri Lanka is the 17th country to receive this grant. Under this agreement, Sri Lanka is to receive US$ 480 million for two development projects: a transport management project and an agriculture project. Of the previous 16 countries that received this grant, most have successfully completed the MCC agreement although a few countries have later withdrawn from the agreement.
In the case of Sri Lanka, however, there is a strong opposition to this agreement. Unlike in other countries, where this agreement has been successfully implemented, the situation in Sri Lanka is different. The problem In the case of Sri Lanka is that the MCC is linked to two other agreements: Acquisition and Cross Service Agreement (ACSA) and States of Forces Agreement (SOFA). Of these, the ACSA has already been signed. These three agreements could give the US certain degree of control which can have a serious impact on Sri Lanka’s sovereignty. This agreement has generated a large number of articles and seminars opposing the signing of this agreement.
The Americans are pushing hard to get the MCC agreement signed since the beginning of 2019. The present American Ambassador, Ms Alania B. Teplitz, on several occasions gave ultimatums to the government to accept the MCC project or lose the grant. So far this has not happened despite nearly a year passing since the agreement was forwarded to the Sri Lankan government by MCC officials. This agreement was about to be signed by the leaders of the former government when it was abandoned due to the starting of a hunger strike by a Buddhist priest against the signing of the agreement. In response to the hunger strike, President Gotabaya Rajapaksa announced that he will not implement the agreement when he becomes the president after the presidential election. It ended the hunger strike as well.
Millennium Challenge Corporation (MCC) Compact agreement
Sri Lanka’s eligibility for the MCC compact was first announced in December 2016 by the directors of the MCC; it received the final approval from the Board on April 25, 2019. As noted above, countries that are eligible to receive this five year grant from the MCC are normally fall within the low income category. Out of the 17 countries, including Sri Lanka, that had received this agreement so far, eleven countries had a per capita income between US$ 461 (Madagascar) and US$ 2482 (Honduras) in 2018. Five countries, including Sri Lanka, had a per capita income above US$ 4,000 in the same year. In 2016, Sri Lanka was on the border between low income and middle income category. With a per capita income of US$ 4,103, Sri Lanka was elevated to an upper middle income country in 2018. The selection of Sri Lanka to receive this grant appears to have not been made on the basis of per capita income, but on some other grounds favourable to the US. Most of the countries that had received this grant in the past are relatively poorer than Sri Lanka and many more countries which had not received this grant still remain under the low income threshold. Sri Lanka is also not totally free of corruption since political corruption in the country has become a common subject of frequent discussions. The US and other Western countries have also alleged human rights violation against Sri Lanka, particularly during the last phase of the LTTE separatist’s war.
The MCC proposes to address two development constraints for Sri Lanka under this agreement: inadequate transport logic and planning and lack of access to land for agriculture, service sector and industrial investors. The first is to improve the efficiency of the transport system, reduce travel time and operation costs and increase the efficiency of transport services. The second is about land management with the objective of reducing constraints to the use of the land for productive activities. Out of the US$480 million grant, US$ 350 million (73%) is allocated for the transport project. The agriculture project receives US$ 67 million (14%) and the balance US$ 30 million (13%) for administrative expenditure.
States of Forces Agreement (SOFA)
The States of Forces Agreement (SOFA), also known as Visiting Force Agreement (VFA), is the most detrimental agreement to the country. It simply focuses on turning Sri Lanka under the authority of the US government. Furthermore, it expects the Sri Lankan government to facilitate the handover of our sovereignty to the US to operate according to their wishes without any interference by the Sri Lankan government. The US officials involved in this project as well as the contractors and other personnel working with the US government are free to enter or leave the country without checks by the Sri Lanka border control agencies. While on duty all foreign personnel wear their official uniforms. They do not pay taxes and are exempted from customs inspections. The most dangerous aspect of the SOFA agreement is that Sri Lanka becomes a logistic hub which comes to operation in the event of a war where the US is involved. As a logistic hub, it allows the US to use Sri Lanka without any constraints or objections of the Sri Lankan government or its people. The SOFA will allow the US government to turn Sri Lanka as a base of the US government. This agreement is not being signed yet as the former president refused to put his signature on the agreement. He wanted the incoming government to make a decision as he has already been subjected to criticisms for signing the earlier agreement.
Acquisition and Cross Service Agreement (ACSA)
The first ACSA agreement was introduced to Sri Lanka in 2007 for a seven year period. It allowed the US military vessels to use our air and sea ports. In 2017, another agreement was signed which was much more comprehensive than the one before. Compared with the 2007 agreement, which consisted of only six pages, the 2017 agreement has 50 annexes, covering 80 pages. These annexes are said to contain rules and regulations that Sri Lanka should follow during its operation in Sri Lanka. It allows the US military agencies to use air and seaports without the supervision of the Sri Lankan authorities. It is claimed that this agreement has not been given any publicity and not even a discussion in the Sri Lankan parliament. It was hurriedly signed by the then US ambassador to Sri Lanka Atul Keshap in 2017. As the head of state, President Sirisena signed the agreement, on behalf of Sri Lanka, on August 4, 2017. He, however, later claimed that he did not read the agreement and did not know what was in the agreement. Whether he read the agreement or not makes no difference since he would not have understood the contents of the agreement. Ranil Wickremasinghe has said that there is no difference between the 2007 agreement and the 2017 agreement. If the two are similar, what was the reason that they used 80 pages with 50 annexes in 2017 instead of seven pages as in 2007?
MCC is part of the total package
As mentioned earlier, a number of MCC projects have been successfully implemented in other countries. In these countries, the MCC was not linked with other agreements and what they implemented was simply the projects outlined in the MCC. In Sri Lanka, the approval of the MCC automatically gives approval to the other two agreements as well. This means that Sri Lanka will be bounded by the three agreements, allowing the US to operate in the country without any objections from the government. This situation is very likely to generate a serious opposition in the country from the people to these US operations. It can also lead to economic and political instability in the country.
US is not willing to consider the MCC project only. They use the MCC as a precursor to get the approval for the other agreement which is not yet signed. Even in the case of MCC, Sri Lanka does not play a major role in implementing the project. As noted earlier, the project has been designed by the MCC and it will be implemented under the authority of the MCC. This grant is not directly available to the country but it is used to cover the expenses of the two projects. Since the Sri Lankan government does not have any control of the project, the MCC can make changes to the plan as they wish. The government can, however, benefit from this project since it will improve the foreign reserves.
Economic benefits of the MCC projects
A cost benefit analysis used frequently to evaluate economic viability of development projects has also been carried out by the MCC to assess the economic benefits of the two MCC projects, noted above. The results of the Internal Rate of Returns (IRR) show that roads project has an IRR of 19% and the agriculture project 26%. On the basis of these IRR’s, most people would consider investing on both projects as the rate of returns of both are very impressive. The high IRR appears to have influenced the former minister of Finance, Mr. Mangala Samaraweera, to declare that Sri Lanka should support the implementation of this project as it brings huge benefits to the country.
Although IRR is the methodology that is frequently used in the evaluation of development projects, it is not without short comings. These shortcomings mostly occur in the calculation of benefits. The IRR is calculated by taking into account the amount of the investment and the discounted monetary benefits that result from the investment of the project. The discounting brings the future monetary benefits equal to its present value. The rate of discount that brings the discounted benefits equal to the investment is the IRR. The benefits are not known at the beginning of the investment, rather they are estimated by using various assumptions. The estimated IRR depends on the assumptions that are used.
If the benefits are jacked up, the IRR can go up. Usually a cost benefit analysis is conducted after the project is finalized and the approval of the project is granted by the authorities. At this stage, the IRR procedure is used simply to rubber stamp the project. Although the IRR is useful, it cannot be used as the sole indicator to determine the value of the project. In addition to the IRR, the sensitivity tests are also important to determine the adverse effects on the estimated IRR from unforeseen problems and disasters. The MCC has not released the details of the IRR to consider its methodology of evaluation by the Sri Lankan economists.
Impact on poverty
Poverty alleviation is one of the key objectives of the MCC compact. The location of the project, however, is in the region where the poverty is not a serious issue. It is not easy to confine poverty to a particular region since it is unevenly distributed with some regions having larger concentration of poor households than others. In 2017, Sri Lanka’s national average of per capita income was US$ 4,073. Out of the nine provinces, the Western Province had the highest provincial per capita income of US$ 5,260 while the Eastern Province had the lowest per capita income of US$ 2,801. The Northern Province accounted for the second lowest per capita income of US$ 3,098. It appears, therefore, that if poverty alleviation is one of the main objectives of MCC, then the focus of the project should have been either the Eastern or the Northern Province.
The target of the MCC, as most analysts have pointed out, is the 200 km corridor extending from Colombo to Trincomalee for the agriculture project. It is claimed that 85% of the land in this corridor is owned by the government and most of this land is currently used by people in the area for agriculture related activities. The MCC is focusing on making these lands more productive by consolidating them into large landholdings. Most analysts feel that the main objective of the agriculture project is to open the door for foreign investors to purchase land in this region. It is estimated that Sri Lanka has nearly 14 million individual land units and only about 10% of this number has been so far surveyed by the Lands Department since the survey was started more than 15 years ago. The president has given an order recently to expedite the land ownership survey. Once the land survey is completed, it is likely that the current users of these lands could be the owners of the land they occupy. It is also possible for the foreign investors to persuade the current owners to sell the land to them if higher prices are offered. This is one of the key issues for the objections to the MCC agreement.
Americans entry into the Asian region
It is becoming clear that the US interests in the Asian region is growing since the beginning of this decade. It is primarily due to the changing geopolitical situation in the region. The rise of China as a super power within a period of less than 50 years is the biggest threat to the US. In the 1970’s, China, under the president Den Xiaoping, started transforming the Chinese economy into an industrial economy with the help of technology transfer from the west. This change attracted a lot of foreign investments from the US, Europe and Japan, and today it is the second largest economy in the world. Its rise as an economic power further strengthened under the present president Xi Jing Ping Peng. It had over 750 million labour force in 2017 indicating the size of the economy and its economic power. China is also expanding its influence in the developing world with what is known as the ‘debt diplomacy’’ or lending for infrastructure development in Asia, Africa and Latin America. Its rise in sea power and dominance in maritime operations, especially in the south China region and beyond, remains a serious problem to the entire region.
The expansion of Chinese power, especially in the Asian region, is the main reason that US wants to have some control in this region. For the US, Sri Lanka is the ideal place because of its location and its instability due to various problems such as weak governments, stagnant economy, communal problems, debt crisis, and corruption. These make Sri Lanka easily accessible to the US.
The relationship between Sri Lanka and the US changed since the beginning of this century, which is driven by the influence of the Tamil Diaspora in the US. They began to exert pressure on the US to impose sanctions for human rights violation during the LTTE war in Sri Lanka. The US also played a decisive role at the UNHRC by supporting resolutions brought against Sri Lanka about war crime allegations by Various Countries where a large Tamil population is domiciled. In the recent past, the US involvements against Sri Lanka has significantly reduced, and it also does not represent the UNHRC anymore. There is no guarantee, however, that it is not going to support resolutions against Sri Lanka in the future. After Yahapalanaya took office in 2015, the US joined with Sri Lanka to investigate war crime allegations during the last stage of the LTTE war and it resulted in sending a number of service men to jail. This action by the Yahaplanaya was a significant factor that led to the loss of Yahaplanaya at the presidential election.
Government’s response to this agreement
As noted above, the Ranil’s government almost signed the MCC agreement if not for the intervention of Gotabaya Rajapaksa who promised to throw away the MCC agreement. Ranil always goes out of the way to satisfy his masters and he is willing to accept any proposition about our country coming from leaders of powerful countries. Most of the parliamentarians in the Yahaplanaya government and even in the cabinet do not have the capacity to understand the ramifications of these agreements; they simply agree with what Ranil says, whose only interest is to remain in power. Mangala Samaraweera, former minister of finance, supported the project arguing that it gives a high IRR and therefore it brings a lot of benefits to the country. He also said that the US buys 25% of our exports and therefore Sri Lanka is obliged to sign this agreement to acknowledge the support extended by the US. This point had also being raised by a member of MCC to push the project to be approved by the government. This argument, however, has no relevance to this issue since the exports to the US are determined by the demand for our goods and services by the people in the United States. The US government has nothing to do with it, but if we are selling Military hardware to the US, then it is a completely different issue.
Although Gotabaya Rajapaksa earlier said that the MCC agreement will not be signed, he changed his mind after becoming the president, and made a decision to appoint an expert panel to review the project. The panel, which consisted of four experts, has submitted its final report to the president. As reported in the media, the committee’s recommendation was not in favour of signing the agreement. Immediately after the announcement was made by the Committee, Mr Keheliya Rambukwella, a minister of the Rajapaksa government, announced that the government will not sign this agreement. Mr. Rambukwella’s statement followed by another statement from Mr Bandula Gunawardana, the government spokesman; he said that the MCC agreement will be signed after its unfavourable clauses are removed. Since the two agreements are contrary to one another, it is very important that the government clarify as to which statement is correct. If this does not happen, the people in the country will begin to feel that the government is trying to mislead the public and has already committed to signing the agreement.
A number of US State department officials have been visiting Sri Lanka since the presidential election and they have been engaged in various discussions with the Sri Lankan community. The purpose of these appears to be to convince Sri Lankans that MCC agreement benefits Sri Lanka greatly. At a recent discussion by a group of Sri Lankans and some of the US State Department officials, one of the US officials, referring to this agreement, has said that ‘there is no such thing as a free lunch’. This comment, reported in the media, is said to be in response to a question from a reporter about what the US gets from this agreement.
According to a recent news item in a Sinhala newspaper (Mawbima), the documents that are needed to sign this agreement are already prepared and ready. The US is very confident that the Sri Lankan government will sign this agreement.