MCC and Nepal: Focusing infrastructure with policy reforms

MCC focuses on three main principles: sound governance policies, country ownership and transparency

"Millennium" has now become a buzzword for development partners around the globe. Bilateral actors like the US and the multilaterals ones, primarily the UN, along with some non-profit, non-government and inter-government organizations have popularized the notion of ending poverty and creating a decent standard of living for people worldwide by launching various initiatives with clearly defined timelines. The main thrust behind this much-hyped development cooperation paradigm is that the world does not deserve to remain utterly unequal, indecently impoverished and indignantly intolerant in the 21st century.

UN Initiative of MDGs

Soon after the UN Millennium Summit (6-8 December, 2000) adopted the Millennium Declaration that enshrined the Millennium Development Goals (MDGs), "Millennium" became a widespread prefix to development "packages" announced both multilaterally and bilaterally. Millennium Declarations committed nations to a new global partnership to halve poverty and achieve MDGs by 2015 that included eight time-bound, quantified targets for addressing extreme poverty in its many forms; income poverty, hunger, disease, lack of adequate shelter and exclusion while promoting gender equality, education and environmental sustainability.

The Financing for Development summit held in Monterrey, Mexico in 2002 reaffirmed rich nations' commitment to provide resources to meet the Millennium Development goals, including the long-standing target of contributing 0.7% of their GNP to this effort, as part of Monterrey Consensus. The then UN Secretary General (UNSG) Kofi Annan commissioned a Millennium Project convening nearly 300 experts to recommend a "concrete plan of action for the world to achieve MDGs", entrusting Professor Jeffery Sachs as its Director. Under the Project, the Earth Institute (EI) of Columbia University, of which Professor Sachs was the Director, launched the first "Millennium Village" in Sauri, Kenya in 2004 to show "how the poorest and the most remote agricultural communities in extreme poverty can meet the MDGs through targeted, integrated investments in agriculture, health, education and infrastructure". The Project submitted its final report to the UNSG in 2005. The EI in partnership with Millennium Promise, a non-profit organization, and UNDP launched nearly 100 such Villages in many other countries in Africa with "fairly satisfactory" results, thereby prompting G8 donors to fund the consolidation and further expansion of this initiative throughout the continent.

The UN claims a admirable success in achieving the MDGs targets. Secretary General Ban Ki Moon stated in a report released by the UN last year that the "MDGs have made a profound difference in people's lives". The report claims that global poverty has been halved five years ahead of the 2015 timeframe. Ninety per cent of children in developing regions now enjoy primary education, and disparities between boys and girls in enrolment have narrowed. Remarkable gains have also been made in the fight against malaria and tuberculosis, along with improvements in all health indicators. The likelihood of a child dying before age five has been nearly cut in half over the last two decades. That means that about 17,000 children are saved every day. The target of halving the proportion of people who lack access to improved sources of water has also been met.

Nepal MDGs Progress Report 2013 points out that Nepal's commitment to achieving the MDGs, coupled with required policy reforms has borne fruit. Nepal is said to be on track and is likely to achieve most of its MDG targets, despite prolonged political instability. The targets for poverty reduction, maternal mortality, and boys and girls enrollment in primary education are either achieved or likely to be achieved. Even in areas where Nepal is lagging behind, particularly in sanitation, it has already internalized an acceleration framework in the form of the MDG Acceleration Framework (MAF) to mobilize adequate resources to expedite progress by 2015.

US Engagement through MCC

Two years after the UN Millennium Declaration was launched in the world's largest gathering, held in New York in 2000, the United States came out with its sincere commitment to engage in a concerted fight against poverty, inequality, political injustice and repression on a global scale. Born out of Inter-American Development Bank meeting on March 14, 2002, in Monterrey, Mexico - which preceded the Monterrey Financing for Development Summit - and built on the principle of "greater contributions from developed nations linked to greater responsibility from developing nations", the American engagement involves an increase in core development assistance from the United States by up to 50 percent, funded through a Millennium Challenge Account, which is administered by Millennium Challenge Corporation (MCC). The primary goal of MCC is therefore to support and assist the "nations that govern justly invest in their people and encourage economic freedom".

While addressing the meeting, former American President George Bush (2001-09) had this saying, to his credit: "This new compact for development can produce dramatic gains against poverty and suffering in the world. I have an ambitious goal for the developed world that we ought to double the size of the world's poorest economies within a decade. I know some may say that's too high a hurdle to cross. I don't believe so, not with the right reforms and the right policy. This will require tripling of current growth rates, but that's not unprecedented. After all, look at the dramatic growth that occurred in Asia in the 1990s."

This was indeed a welcome departure in American development aid policy administered solely till then by its aid management agency, USAID, created by President John F Kennedy in 1961 to administer "US civilian foreign aid". As its mission statement reads, USAID aims "to end extreme poverty and to promote resilient, democratic societies while advancing the security and prosperity of the United States." However, despite reaching out to the poor and underdeveloped countries on a global scale with a series of support programs, the US aid delivery mechanism invited some criticisms also, especially for not being driven by the recipient country needs and priorities and also for not complying and aligning to the host country's systems and institutions to the desired extent. Further criticism of mismanagement and misuse of its aid money in countries with poor governance also surfaced.

It can therefore be safely assumed that the realization of the need to improve its aid policy and mechanisms and also a growing global commitment to end poverty through the UN delivery systems were probably the factors that triggered President Bush to propose a new Millennium Challenge Account in March 2002 that was legitimized through a bill signed for creating the Millennium Challenge Corporation in January 2003. The move increasingly appealed to the developing world, and within a year, 16 countries were designated eligible to design proposals for MCC funding. Coming in March 2005, MCC signed its first agreement with Madagascar. Today, over 30 countries representing Asia, Africa and South America are engaged with MCC in different phases of their operation.

How it Works

MCC focuses on three main principles: sound governance policies, country ownership and transparency and measurement of results. It believes that providing money to a government is not always a solution. The money instead needs to be spent amidst a set of sound economic, political and social policies. It thinks that the most successful aid programs are built in consultation with citizens, civil society, NGOs, business and government. In a way, it reaffirms the Paris Principles of Aid Effectiveness with an added emphasis on ensuring the existence of the three pillars of society; economic, social and political and the process of eligibility for what it calls threshold, compact development, and compact implementation. The ranking and scoring of 20 indicators covering the three pillars have to be satisfactory in order to become eligible, meaning you need to have a sound "political system" as well as good social policies in place along with a prudent and stable macro-economic fundamentals if you are to get an approved scorecard for MCC support. The scorecard must be renewed each year with a satisfactory performance until the compact is signed.

Resources

MCC carries an attractive purse of resources. While on the "threshold" stage, a country receives 20 million USD on average that needs to be spent on "policy reforms" with a timeline of a year or so. After "graduating" to the "compact" stage, when the 'compact' or a 'package of prioritized, implementable and viable programs and projects' will have been developed, a country is entitled to receiving up to 750 million USD, but not less than 350 million USD at any rate. The general timeline to develop the 'compact programs' is two years and the implementation will continue for five years after that. Such programs are larger in scale and complexity, focus economic growth through investment in infrastructure backed by necessary policy reforms, and led by partner country with facilitation, technical support and oversight from MCC. It is noteworthy that the money comes all in grants, with no strings and conditions attached. Most of the resources have gone to the infrastructure sector, with transport sector alone consuming about one fourth of the total resource envelope, followed by Energy, agriculture and irrigation.

MCC and Nepal

MCC has been working with Nepal to develop a threshold program since FY 2012. During this period, Nepal made slow but steady progress in further institutionalizing democratic governance, and has now passed the MCC policy scorecard criteria for four consecutive years. The MCC Board selected Nepal as eligible for compact assistance in FY 2015. Selection for a compact offers Nepal a significant opportunity for poverty reduction in a critically important region.

During the threshold program development process, MCC and the Government of Nepal (GON) jointly completed a constraints analysis that identified the inadequate supply of electricity and the high cost of transport as binding constraints to economic growth in Nepal. Sector analyses and threshold program designs in the power and transport sectors benefited from extensive consultations throughout Nepal, including with the government as well as with the private sector, development partners, and civil society. A compact investment will build on the economic analysis and development work completed during eligibility for the threshold program.

These analyses demonstrate that the low availability of electricity has resulted in daily load-shedding, which creates significant costs for businesses because they are forced to invest in expensive alternative sources of power to meet their own needs. The high cost of transportation in Nepal is driven by the country's rugged terrain and landlocked geography, along with the poor quality and quantity of roads, a lack of competitiveness in the trucking sector, and costly customs procedures, resulting in expensive and unreliable transport of goods within Nepal and to international markets.

Given the work already completed during the threshold program development process, MCC expects Nepal to develop concept papers in FY 2015 that respond to the binding constraints described above.

Caveats

Nepal's development challenge is not limited to accessing resources from external development partners.. The major hurdle for us is to earn and sustain an effective "implementation capability" coupled with conducive "implementation environment". Resource constraint is certainly an issue, notably for developing and sustainably operating physical infrastructure. However, investment in hard infrastructure alone will not be enough unless Nepal seriously realizes its implementation deficiency and substantially improves it, by effecting and ensuring "governance reform and stability" through appropriate policy and institutional reforms.

On the other hand, if we put emphasis on "softer" sides of reforms, i.e. on enacting policies and erecting institutions only through a stack of consultant-generated reports with reiterated rhetoric lacking contextually implementable substance, we will miss the goal. We have been overloaded with a plethora of suggestions and recommendations for policy reforms of one type or another, and anything closer to cut-and-pasting will be a sheer waste of resources.

We therefore need to increase capital investment to accelerate economic growth and we need resources to be directly pumped in to growth-boosting, employment-generating and export-enhancing infrastructure projects such as roads and electricity rather than overly wasting precious aid resources in technical assistance paraphernalia.

MCC Compact development process should help us design and implement our priority infrastructure projects backed by necessary policy reforms, but with no reinvention of wheels.

Mr Gyawali, a former secretary of Nepal, has recently been appointed the National Coordinator for MCC by the Government of Nepal. The views expressed here are his personal.