Responses by MCC to Consolidated Clarification Questions from Government of Nepal

Responses by Millennium Challenge Corporation to Consolidated Clarification Questions from Government of Nepal Regarding the Millennium Challenge Compact 

1) Grants, assistance, gifts, etc. do not generally come with conditions between the donor and the recipient countries. The only concern on the part of the donors is that such donations, gifts, 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 and Nepal's eligibility for the grant is available on MCC's website at: www.mcc.gov/who-we select. 

3) Was the agreement with MCC concluded as per Nepal's own needs and requests? After the CPN (Maoist) entered the peace process, subsequent to the Comprehensive Peace Agreement, the Government of Nepal had formed Nepal Growth Diagnostic Task Force-lo to 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 agency 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. 

4. 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 interest. 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 is 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 the 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 to development, construction and investment do not seem to require parliamentary ratification. Why this particular agreement needs parliamentary ratification? After parliamentary ratification, an agreement becomes 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 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, the 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 a 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 Report, 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 exercises. 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 controversial when the original agreement itself contains controversial provisions? For instance, the implementation agreement signed between Finance Minister Yubaraj Khatiwada and MCC Vice President Anthony Welcher in 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, 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 (www.mcanp.org). 

11) What are the controversial sections and/or issues in the agreement and how should they be clarified? 

a) How justifiable is the provision of Section 2.8 of the agreement to exempt the project staff from receiving an international level of remuneration and benefits, from all kinds of taxes? Can Nepalese citizens enjoy similar privileges in other countries? Does not such a provision weaken the state's law system? 

MCC Response: The tax exemption provision of the compact ensures that the full $500 million is available to implement the projects for the benefit of the Nepali people. It is our understanding that the provision is generally consistent with tax treatment in other grant agreements with the Government of Nepal and complies with Nepal's tax laws. 

b) As per Section 3.1) of the agreement, the project will be implemented with 26 per cent contribution from Nepal but the intellectual property generated from that will fully belong to the MCC. Doesn't this provision undermine Nepal's sovereignty? With such a provision Nepal would lose the conclusions derived from its geographical, environmental, and geological knowledge and research together with the patent rights. Would this be beneficial and just? 

MCC Response: The Government of Nepal owns all intellectual property created in connection with the compact program. MCC has no ownership right to any such intellectual property. 

c) Section 3.7 of the agreement requires that all the original records of the project need to be submitted an MCC. Would this not be against the country's internal security system and privacy? In addition to it, would it not lead to a situation where the technical experts inside the country would face humiliation? 

MCC Response: The objective of Section 3.7 is to ensure the Government of Nepal will use best efforts and agreed-upon standards to maintain all records and documents regarding the project, including to ensure no misuse of funds. Consistent with international auditing standards, the compact provides MCC with the right to access such documents for verification purposes. 

d) How appropriate is the provision of Section 3.8 that allows recognition to the audit conducted by United States-based or the United States certified public accounting firm undermines and invalidate the existence and legitimacy of Nepal's Auditor General? Doesn't it mean that the state's existence and structure is unrecognized? Wouldn't such a provision and process deny the right of auditing of the State? 

MCC Response: No, that is not what Section 3.8 means. Section 3.8 specifically states that the office of the Auditor General of Nepal can conduct audits of MCA-Nepal and has, in fact, already done so. 

e) Section 5.1(a) has provisioned that MCC may terminate the funding arrangement by giving 30 days prior written notice to the Government of Nepal. Terminating the project work midway would make a negative impact as a whole. After spending the supplemental capital on the part of Nepal, would this provision not create the possibility of the program being left stranded and creating a fiscal burden to the economy in case MCC terminates funding without any reasonable cause at any time or leaves the project in an incomplete state whenever it feels so? 

MCC Response: As sovereign nation partners, both the Government of Nepal and the Government of the United States, acting through MCC, have the individual ability to terminate the compact with 30 days' notice. The intention of both parties, however, is to complete project implementation within the compact term and thereby maximize the benefit for the Nepali people. Generally, suspension or termination of a compa only occurred due to instances of significant political upheaval such as coup d'état, an invasion, or significant political violence against the population. 

Can't the MCC abandon the overall project under the pretext of any circumstances under Section 5.1(b)? 

MCC Response: As sovereign nation partners, both the Government of Nepal and the Government of the United States, acting through MCC, have the individual ability to terminate with 30 days' notice. MCC's intention is to work with the Government of Nepal to complete project implementation within the compact tern to maximize the benefit for the Nepali people. Generally, suspension or termination of a compact has only occurred due to instances of significant political upheaval such as coup d'état, an invasion, or significant political violence against the population. 

g) Every state signs a treaty or agreement subject to its own constitution and law. Agreements cannot be signed beyond one's own constitution, laws, and policies. An agreement that is signed in a manner that it becomes hostage to future policies and laws will pose an obstacle for signing assistance and investment agreements with any other country. In such a situation, the provision in Section 5.1(b) (iii) about terminating the agreement if there is a violation of applicable law or United States policy, whether now or hereafter in effect not make it look like Nepal's own existence and sovereignty is under U.S. control and as a result of that does it not appear that sovereignty is undermined? 

MCC Response: Section 5.1(b)(iii) of the compact underscores that MCC funding cannot be used for anything that violates the laws or policies of the United States. That clause, therefore, limits the use of MCC funding but does not impose any requirement or limitation on the sovereignty of the Government of Nepal using non-MCC funding. The MCC Nepal Compact does not affect or limit Nepal's sovereign right to sign assistance or investment agreements with any other countries. Moreover, as sovereign nation partners, both the Government of Nepal and the Government of the United States, acting through MCC, have the individual ability to terminate with 30 days notice. 

h) The conditions pursuant to Section 5.3(a) are in themselves inappropriate and contrary to national sovereignty. There is a provision that demands the value of the spent funds be repaid, along with interest, in United States Dollars if there is a violation of the terms of the agreement. But how can we be clear about how and who will determine whether there has been a violation of the terms? 

MCC Response: The compact is a mutually negotiated and signed document. The determination of any potential misuse of funds or other violation would be based on the terms of the compact, and factual findings by independent third parties, such as auditors. 

i) MCC's main agreement does not contain a provision for any tribunal. MCC decides itself whether any event is in accordance with the agreement or not. Can any agreement of our national interest signed with any other country, with which the United States does not share a good relationship, be considered an agreement that is contrary to the one signed with the MCC? For example, the United States has been referring to China as a revisionist power, Russia as a revitalized malign actor, and North Korea as a rogue state. Section 6.3(b) contains a provision that could lead to an allegation that the relations and investment relationships with those countries have the spirit that would be contrary to the agreement. How can this be explained? 

MCC Response: Section 6.3(b) provides that in the event of any conflict or inconsistency between the compact and any other agreement between the parties regarding the program, the compact will prevail. This means that this provision only applies to those other agreements between MCC and the Government of Nepal related to the compact program; it does not impact the Government of Nepal's agreements with other countries or entities. MCC recognizes that Nepal has relationships and agreements with many other donors and countries; all of these relationships and agreements are separate and independent from the MCC Nepal Compact. 

Pursuant to Section 5.5, MCC will be around as long as the project survives. According to Sections 2.7,2.8,3.200,3.7,3.8.5.2,5.3,5.4 and 6.4, MCC would remain in place even after five years of completion of the project. Therefore, what is the actual timeframe for MCC to return? 

MCC Response: The implementation period for compact projects is five years and begins upon entry into force. MCC's presence in the country will wind down after the five years compact implementation period. The few provisions of the compact that survive beyond the five-year term relate to areas such as assessment of grant effectiveness, auditing, and evaluation objectives. For example, MCC will still collaborate with the Government of Nepal after the five-year implementation period to evaluate the projects' success, and report on compact funding; however, there will be no physical MCC office in Nepal. 

k) Can the agreement be amended and modified or not and is parliamentary ratification required if that is the case? The agreement does not contain any provisions for the terms of the main agreement to be modified. The statements from U.S. officials that the main agreement cannot be amended have already become public. Section 6.3(c) has a provision that programs can be amended or modified without ratification from parliament. The MCC makes modifications itself and does this not mean that the provisions of the main agreement are amended without the information of the Parliament? 

MCC Response: The MCC Nepal Compact was signed in September 2017 following extensive discussions between MCC and the Government of Nepal. The MCC Nepal Compact cannot be amended at this time. MCC's response to Question 6 provides further information on amendments and modifications. 

1) The provision of section 6.3(6), that in the event of any conflict or inconsistency between the Compact and any other agreements, the Compact will prevail appears to prohibit the agreements that have already been entered into with others or even those that will be signed in the future. In particular, it appears as if this is a form of pressure applied towards not allowing the implementation of the agreements and understandings that have been entered into with China under the BRI. It appears necessary to clarify what impacts the agreement with MCC has on the agreements with other countries. 

MCC Response: The MCC Nepal Compact does not affect Nepal's agreements with other donors or countries. Specifically, the compact governs the partnership between MCC and the Government of Nepal. Section 6.3(b) clarifies that only any other agreement between MCC and the Government of Nepal would be secondary to the compact in the event, there is a conflict between the compact and the other agreement between MCC and the Government. 

m) According to Section 6.4, this agreement with MCC is termed as international law. 

What are the reasons behind terming this agreement as international law, in view of the weaknesses in Nepal's administrative system and monitoring system, in a manner that there will adversely impact Nepal's law, system of governance and sovereignty? The offering of a grant by the MCC and the acceptance of it by Nepal is an issue that can be concluded through the process of general correspondence. No correspondence can be a treaty or agreement. Is there any other intention in stating that it is, in fact, an agreement? 

MCC Response: As clarified in response to Question 4 and Question 5, all MCC compacts with partner countries are international agreements. The Constitution of Nepal prevails over the MCC Nepal Compact. Implementation of compact projects will proceed in accordance with the laws of Nepal except in the rare instance where local law conflicts with a specific provision of the compact, in which 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 Nepal law. 

n) It is mandatory for a citizen of any country to abide by Nepal's prevailing laws and rules within the boundaries of Nepal. Even within the extradition treaty, an accused criminal entering another country can be handed over to the relevant country if there has been an Extradition Treaty agreement between the two countries. Otherwise, any country, being a party to international law, can initiate the proceedings. Does the provision of Section 6.8 that anyone working under the MCC Project will be immune from the jurisdiction of all courts and tribunals regardless of the crime committed intends to create a provision that none of the laws of Nepal will apply to the foreigners working for the project? 

MCC Response: The U.Ş. government guarantees diplomats at the Embassy of Nepal in Washington, DC, including the ambassador, certain protections in the United States. In this same way, Section 6.8 allows the Government of Nepal to reciprocate the same protections to MCC staff in Kathmandu. This immunity is standard in diplomatic relationships. Critically, immunity for MCC employees from the jurisdiction of Nepal's courts and tribunals under Section 6.8 applies only to claims or losses arising out of activities or omission under the compact. 

o) What impact do Section 7.1 Thar Nepal's laws will be void to the extent of their conflict with the Compact will have on our sovereignty? Our laws are of four categories - (1) the constitution as the main law, (2) the acts formed by Parliament, representing the sovereign people, (3) the rules framed by the government under the mandate of the Acts promulgated by the Parliament, and (4) the Precedents of the Supreme Court. Compliance with all of these laws is mandatory for anyone residing within the country's boundaries. Can a letter/correspondence from an ordinary employee of the MCC form the basis to even suspend Nepal's constitution and laws? It is very important to be clear about this. 

MCC Response: The Constitution of Nepal always prevails over the MCC Nepal Compact. Additionally, 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 Nepal law. 

p) According to Section 7.7, the MCC will remain for five years after the day of its implementation? What will happen after that? 

MCC Response: The implementation period for compact projects is five years, starting at entry into force; MCC's presence in the country will wind down after this period. A 120-day period after the end of the compact term will be utilized to complete the administrative closure of the program. MCC's response to Question 11G) provides more details regarding this topic. 

q) There is a provision that the land required for the projects will be acquired through the Government of Nepal's matching fund; that the MCC projects will have the ownership of the land; and that the MCC law will apply to the projects. Who actually has ownership over the land and until when? 

MCC Response: Undoubtedly, the land required for projects will only and always be owned by the Government of Nepal or the entities of the Government of Nepal. The Government of Nepal maintains ownership and sovereignty over the land, regardless of the funding source. Lands, equipment, and assets acquired with MCC grant funding will not be owned by MCC or any other United States government entity