US believes China behind delay of $500m grant project in Nepal
Washington has warned top Nepalese leadership that the failure to meet commitments on the Millennium Challenge Corporation (MCC) compact could affect bilateral relations
The United States believes that China has “actively fomented or encouraged or funded or facilitated” a disinformation campaign in Nepal against a $500-million dollar US grant project, and has warned Nepal that its failure to meet or renege on its commitments to the US by February 28 will have an impact on the US-Nepal bilateral relationship, a state department spokesperson has said. The US has also said it would also be “deeply disappointing” if “outside influence and corruption” led to a failure to ratify the project.
The Millennium Challenge Corporation (MCC)-Nepal compact, signed in 2017, is focused on increasing the supply of electricity, enabling cross-border electricity trade between India and Nepal through transmission lines, and road maintenance.
Five years since it was signed, despite what the US says have been repeated assurances from all of Nepal’s political parties, Nepal’s Parliament has not ratified the compact. Critics of the compact in Nepal see it as a part of the US’s Indo-Pacific military strategy – a narrative many in Washington see as having been encouraged by China – while the US has repeatedly clarified that the project has no military component, predates the evolution of the Indo-Pacific strategy, and was initiated at the request of the Nepal government, with the support of all of Nepal’s parties.
Last week, The Kathmandu Post reported that US assistant secretary of state for South and Central Asia Donald Lu had warned Nepal’s top leaders – Prime Minister Sher Bahadur Deuba, his coalition partner Maoist chairman Pushpa Kamal Dahal “Prachanda”, and leader of the opposition KP Sharma Oli – about the implications of the delay. But this is the first time that Washington has articulated, in the most explicit terms yet, how it sees Kathmandu’s delay in ratifying the grant project and its impact.
The role of “outside influence”
When asked about the US’s position on the political controversy around MCC in Nepal, a state department spokesperson said, “Whether the Nepali government ratifies the MCC electricity-transmission project is a sovereign decision for Nepal to make…Should outside influence and corruption cause parliament not to ratify, it would be deeply concerning for the US, and a loss for the people of Nepal.”
The spokesperson confirmed that the US had categorically asked Nepal to decide by February 28 – pointing out that this was the timeframe PM Deuba and Prachanda has asked for in their letter to MCC back in September 2021 to “fulfill their commitments to MCC”.
“February 28 will be the conclusion of that five-month period, at which time the Compact must be ratified or rejected,” the spokesperson said.
Asked specifically if the US believed that the propaganda against MCC in Nepal had been “actively fomented or funded or encouraged or facilitated, or all the above, by China”, the spokesperson said, “Yes. We have been concerned about disinformation campaigns surrounding the MCC Compact, as we are concerned with disinformation everywhere. Should outside influence or corruption have influenced parliamentarians’ actions to vote against this electricity-transmission project, it would be a deeply disappointing and a loss for the people of Nepal.”
When asked if the US had told the Nepali leadership that the failure to ratify the MCC would have implications for the wider US-Nepal relationship, including bilateral assistance and support through other multilateral agencies, the spokesperson said, “The Government of Nepal’s choice to fulfill, or renege on its commitments to the US would have an impact on any diplomatic bilateral relationship. Should outside influence and corruption have caused the decision not to ratify, it would be deeply concerning for the US and a loss for the people of Nepal.”
Referring to this year being the 75th year of diplomatic relations between Nepal and the US, and saying that US had stood with the Nepali people through longstanding development aid and foreign assistance, the spokesperson added, “Naturally, governments which provide foreign assistance, foreign investors, and international financial institutions will see if Nepal decides not to ratify a USG offer of $500M for an electricity-transmission project. They will make future assistance and investment decisions accordingly.”
The history of the project
Explaining the background of the project, a senior US administration official said that MCC’s partnership with Nepal began back in 2011 when Nepal had asked for assistance. MCC first selected Nepal for a smaller threshold grant, and then for a larger compact in December 2014. The MCC-Nepal compact was signed three years later, in September 2017, with a $500 million US commitment and a $130 million commitment by Nepal.
The senior administration official said, “I can tell you in no uncertain terms that the MCC grant program received an incredible amount of positive support from each prime minister, each finance minister and members from every major political party. And to put this into context during this timeline, MCC worked with eight different administrations and prime ministers.”
The official said that after the signing, the Nepal government led the preparations including the setting up of an independent electricity regulatory commission and the designation of the electricity transmission project as a project of national pride. Then, Nepal asked MCC to wait till 2019 for ratification.
The official said, “This was the first time an extension was sought by the government. To put it in context, in the large majority of our projects, the implementation, the construction phase, begins 18 months after the compact has been signed. In Nepal’s case, it has been five years already since the signing and it hasn’t been ratified yet.”
2019 was also when, the official said, the US began noticing signs of the misinformation campaign.
“The compact was wrongly understood as part of the Indo-Pacific strategy’s military component; we started to see social media posts saying that MCC was somehow related to the military and infringes on the country’s sovereignty. This is categorically and completely false as MCC is prohibited by its act and US legislation to be involved in any, any military related assistance.”
This, according to the senior official, was “the first domino” in a “long and a sophisticated misinformation campaign” designed to undermine MCC in Nepal and deliberately slow down the ratification process.
“What we see now is an environment where the compact has been further weaponised into internal Nepali politics. This led to several more requests from the government for delays on ratification throughout 2020 and 2021.”
The irony, according to the official, was that in bilateral meetings with concerned US officials, each Nepali leader, including Deuba, Prachanda and Oli, “vouched their support for the compact in its original form”.
“In fact, they each stated that the compact will be great for the people of Nepal and a key element to unlocking the country’s economic potential.”
Last year, the US conveyed to Nepal that the MCC board of directors – which, among others, includes secretary of state Antony J Blinken – was concerned “over the continued request for extensions and the government’s inability to ratify the compact”. It was after this that Deuba and Prachanda, in September 2021, wrote to MCC seeking a four to five-month timeframe, which ends on February 28.
In public, Prachanda continued to oppose the MCC in its current form.
The India dimension
Asked if the US would like India, given its special relationship with Nepal and given the fact that the project has a cross-border element, to use its presence and leverage in Nepal to encourage Nepali political actors to ratify MCC, a state department spokesperson said, “Whether the Nepali government and leaders ratify MCC is a sovereign decision for Nepal to make, as a democratic nation, and Nepal’s decision alone.”
But India has been aware of the project and its details. The senior administration official quoted above said, “India, as well as so many other countries in South Asia had so much to gain from the ratification and completion of this compact… South Asia is one of the most least economically integrated regions in the world, which is ironic given its energy potential. The region has made great strides over the years to start connecting the grid and facilitating both trade flows, but also the policy and institutional reforms that actually have to connect both sides of the line. So, you know, not only India, but other countries in the region have so much to gain from this compact going forward.”
The official added that in conversations with India – both during the design of the compact and subsequently – there was “tremendous appreciation for economic stability” in Nepal as well as possible creation of “economic and energy opportunities at a really significant scale”.
The official added that there had already been efforts to strengthen cross-border regional energy trade. “So here, I think, both the Indian government and the Indian private sector can really see and realise the opportunities from regional energy integration and trade. And a lot of the conversations we have had with the Indians and with the government of India historically on this compact have really emphasised that shared approach around stabilising a regional energy grid, which can reduce poverty for millions throughout South Asia, which is a win-win scenario here.”
The dynamics in Nepal
A top Nepali government functionary, who did not wish to be named, confirmed that Nepal’s political class had got the US message and the ruling coalition was working out a mechanism to take the MCC to Parliament and get it ratified.
“The US is right on this. MCC has become hostage to our internal politics, especially Prachanda’s opposition. PM Deuba is committed to MCC. He is finding a way to both save his government and coalition, as well as pass the MCC within the stipulated timeframe.”
Reports on Monday suggested that Nepal’s government may table the MCC in Parliament on Wednesday for ratification given the US deadline, but there has been no confirmation yet.
When asked why Nepal’s political class had been unable to take a decision on MCC and operationalise it, Amish Raj Mulmi, one of Nepal’s sharpest political analysts and author of All Roads Lead North: Nepal’s Turn to China, said, “Leaders opposed to the MCC believe the MCC is not in Nepal’s favour due to certain clauses that allow the treaty to supersede Nepal’s laws, and that it is part of the Indo-Pacific Security Strategy that intends to encircle China. This kind of information has filtered down to the public, and Nepal’s political leaders, especially those who oppose the project, are unwilling to table the treaty in Parliament due to the upcoming elections, where the MCC, it is believed, will be a major campaign issue.”
When asked how the US warning is being seen in Nepal, Mulmi said that there had been widespread concern that the US had said non-ratification would affect larger bilateral ties.
“The US is Nepal’s second oldest bilateral partner, as well as Nepal’s largest development assistance partner and many have seen the misinformation around MCC harming Nepal-US ties. But Nepali commentators have also made it clear that implementing the MCC is a sovereign choice as with any other grant mechanism, and while the US should not have linked the MCC to larger ties, its non-implementation will not affect bilateral ties. There is also widespread belief that the US warning was categorical on corruption, financial action task force on money laundering, and Nepal’s human rights record, with the last being directed at Prachanda.”
He added, “The American warning has shaken the Nepali polity enough for the ruling coalition to file an impeachment motion against the Chief Justice — this was a long-time demand of the Maoists and the UML (Socialists), the anti-MCC elements of the coalition, in order to secure an agreement to table the MCC motion in Parliament.”