MCC Sri Lanka Land Compact: Avoid it being a ‘Grant Trap’

l1By Prof. Nimal Gunatilleke

After the release of the ‘Executive Version’ of the Millennium Challenge Compact, between the United States of America (acting through the Millennium Challenge Corporation) and the Socialist Republic of Sri Lanka (acting through the Ministry of Finance), and its accompanying ‘Constraints Analysis’ document on the website of the Ministry of Finance of Sri Lanka, in early November, a number of reviews are beginning to appear, on public websites on its benefits (some organized by pro-US think tank, Advocata Institute) as well as those on likely disadvantageous, or detrimental impacts.

This is, indeed, a healthy trend for the conscious public to get a balanced understanding of this compact. This is specially so because the ACTA, SOFA and MCC agreements are considered together by some critics as ‘Unholy Trinity” during the period leading to the recently held presidential elections, in Sri Lanka.

However, some of these reports seem to have thrown the baby with the bath water, while the others apparently have strived to keep the baby with the bath water. Although there were many politically charged report, from both sides, I was able to read only a very few essays which have specifically addressed the substantive technical issues of the MCC Sri Lanka Compact draft agreement – the executive version available on the Government websites.

Having written two reviews on the MCC Sri Lanka Compact earlier on (The Island, 03 May, 2019, and 15 July, 2019) before the release of the above agreement, I now wish to add my own perspective on some substantive technical issues, specially in relation to environment and socio-cultural impacts of the proposed Land Compact of the MCC, in addition to addressing related sovereignty issues which were also raised by some other writers.

Almost all the concerns have been raised on the Land Compact rather than on the Transport Compact of the MCC. However, both have been prepared on the strength of an independent Constraints Analysis Report, assimilated using a threshold grant and submitted in 2017. Interestingly, it was prepared using a ‘Growth Diagnostics’ model (developed by a Harvard University research team) which is ‘predicated on the idea that wholesale policy transformation into a western-style market economy may be excessively burdensome and even counter-productive for poor countries to prioritize challenges to a country’s development’.

According to this economic model, the ‘idea that wholesale policy transformation into a western-style market economy’ (meaning a lead to a ‘grant trap’?) need to be avoided. Instead, the model proposes that a country should conduct a diagnostic assessment, concentrating on the policy reforms necessary to achieve economic growth which should be less burdensome in addressing the challenges facing a country’s development. I wish to examine the documents, available to us on public media, in the light of the above statement of the Growth Dynamics of the MCC Sri Lanka Land Compact.

There are also a number of critical assessments of the MCC Compact programme, by independent international scholars (https://www.tandfonline.com/doi/abs/10.1080/01436597.2017.1401463?scroll=top&needAccess=true&journalCode=ctwq20), as well as those who had been associated with the programme since its inception two decades ago reflecting on their personal experiences in handling these compacts worldwide (www.CarnegieEndowment.org/ pubs; https://fas.org/sgp/crs/row/RL32427.pdf ). Also there is a recent review on ‘Millennium Challenge Corporation: Overview and Issues’ published by the US Congressional Research service, prepared for Members and Congressional Committees (https://crsreports.congress.gov/)

RL 32427), updated on 03 October, 2019. These are freely available on the web and I have taken those also into consideration during the preparation of this essay.

Sustainable Economic Growth

At a time when the United Nations is assertively promoting ‘Sustainable Development Goals’, worldwide, the ‘economic development and economic growth’ referred to in this nationally important MCC Sri Lanka document with far reaching consequences, we hope that the Compact – the Land Compact, in particular, – is very sincerely aligned with the ideals of the UN Sustainable Development Goals (SDGs) which Sri Lanka is legally bound to implement.

The SDG No. 08 says – ‘Sustainable economic growth will require societies to create the conditions that allow people to have quality jobs that stimulate the economy while not harming the environment. Job opportunities and decent working conditions are also required for the whole working age population. There needs to be increased access to financial services to manage incomes, accumulate assets and make productive investments. Increased commitments to trade, banking and agriculture infrastructure will also help increase productivity and reduce unemployment levels in the world’s most impoverished regions’.

The overall MCC Compact Goal in Section 1.1 of Article 1 says ‘ The goal of this Compact is to reduce poverty through ‘ economic growth’ in Sri Lanka. MCC shall provide assistance in a manner that strengthens good governance, economic freedom, and investments in the people of Sri Lanka’.

To what extent the factors contributing to the ‘sustainability’ of the proposed economic growth models have been taken into consideration, in the preparation of successive scorecards for Sri Lanka from 2016 -2019 (under Good Governance??), need to be explained to reassure the Sri Lankan public of its alignment with the SDGs and accompanying green growth.

The MCC claims that it has formally adopted the International Finance Corporation’s ‘Performance Standards on Environmental and Social sustainability’ and once again we sincerely hope that the ‘economic growth’ in the Article 1 of the MCC Compact agreement, refers to ‘sustainable economic growth’, recognizing Sri Lanka’s alignment with the relevant SDGs and Aichie Biodiversity Targets, while being a Global Biodiversity Hotspot.

It is my view that this aspect should be further developed before signing the agreement, through the engagement of forums of Sri Lankan professionals familiar with the current trends in the MCC performance Indicators on 1. Ruling Justly, 2. Investing in People (e.g. Natural Resource Protection and Health Expenditure) , and 3. Economic Freedom (e.g. Land Rights and Access) which were used in the preparation of Constrains Analysis Report (2017) for Sri Lanka. Most of these documents being under preparation since 2016, they caught the public attention that they deserve, only a few months ago.

Country Reports vs.Reports in scorecard preparation

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These scorecards, on which the Constraint Analysis most likely have been prepared for the country as a whole, have been sourced from the country reports prepared by the WHO, Columbia Centre for Int’l Earth Science Info Network/ Yale Centre for Env. Law and Policy (CIESIN/YCELP) – and IFAD/IFC. It is not clear as to what extent these indicators have been scored in a sub-regional context of the targeted seven districts of the MCC Land Compact.

In Sri Lanka, climatic and associated socio-cultural-livelihood contrasts are clearly evident in the seasonal South-west and the 1.seasonal rest of the country. As such, land rights and access (e.g. cascade irrigation systems – a Globally Important Agricultural Heritage System), 2.) natural resource protection (e.g. Global Hotspot of Biodiversity, ecological corridors for megafauna, riverine forest formations) and 3.) Health expenditure (resulting from severe agro-chemical pollution e.g. CKDU) particularly in Dambulla, Anuradhapura, Polonnaruwa and Trincomalee regions need to be analyzed separately to achieve more robust scorecards using local expertise leading to the preparation of the Constraints Analysis report thus aligning with the relevant SDGs.

Based on the Constraint Analysis Report prepared by the Government of Sri Lanka and the MCC (in partnership with Harvard University’s Centre for International Development), three binding constraints acting as most severe hindrances to economic growth have been identified;

1. Policy uncertainty, especially regarding revenue collection and tax policy;

2. Transport bottlenecks, particularly in the Western Province; and

3. The difficulty of the private sector in accessing land for commercial purposes.

Large-scale Commercial agriculture vs. Cascaded Tank-Village Systems – Ellangawas

As I said at the beginning of this essay, much of the criticism has come in respect of the land compact, which apparently is paving way for removing constraints on accessing both government and privately owned land in the above districts of ‘Wew bendi Rajya’ – ancient agricultural heritage of ‘reservoir kingdom’. The constraint analysis seem to have taken in to consideration both the distribution of small tanks and river basins (Figure 6.1 of the Constraints Analysis Report – page 34) in their planning exercise and the maps included therein acknowledged as those from IWMI and CGIAR are reproduced here.

Figure 6.1 of Constraint Analysis Report – River Basins and Locations of Small Tanks in Sri Lanka reproduced together with map representing areas of CKDu Prevalence (from Govt. sources)

As evident from this figure, most of these small tanks, the very foundation of the ingenious ancient irrigation system ensuring landscape and livelihood security to local populace, are concentrated within the districts that are being apparently considered for medium and large-scale private sector development projects. These Cascaded Tank-Village systems or ‘ellanga gammana’, master-pieces of sustainable irrigated agricultural systems have been designated as ‘Globally Important Agricultural Heritage System (GIAHS) by the FAO of the United Nations in April 2018.

The disused or abandoned cascade systems of Anuradhapura, Polonnaruwa, Matale and Kurunegala districts are being systematically restored at present with both national and international sources of funding. These landscape restoration initiatives are being considered as a solution to climate change adapted agriculture and also to reduce heavy agro-chemical pollution that has knocked down the backbone of the traditional agricultural heritage of these rural communities. As such, they have been given high priority by the Government for their rehabilitation.

The Constraint Analysis of Sri Lanka Compact is very critical on the restrictions on land parcel size, the absence of land titles, and longstanding laws affecting rural land use all it claims to reduce agricultural productivity and rural well-being. It goes on to say that unlike other comparator countries, Sri Lanka restricts private ownership of agricultural land to 50 acres per person, which obviously prevents economies of scale from being realized in the case of large private sector agricultural investment.

Our concern is that how the privately driven medium and large scale commercial agricultural (or other industrial) enterprises proposed in the Land Compact could be realistically super-imposed on these sophisticatedly designed small holder-dominated traditional agricultural landscape mosaics.

Medium and large scale commercial agricultural enterprises, usually taking to cultivation of a few commercial crops of promising export markets, are reputed to be aiming at maximizing their profits while externalizing their environmental and social costs. There is already evidence from some of the already established commercial plantations in these areas, that the water availability for small-scale farming communities being reduced as a result of competition for water at the same time contributing to increasing ground water pollution from heavy use of agrochemicals in these commercial plantations.

Issues of this nature should be resolved before the agreement is signed. A case in point is reported in the evaluation brief on the implementation of the Moldova MCC Compact, titled ‘ Removing barriers to high-value agriculture in Moldova’.

Evaluation brief of the Moldova compact is indeed an eye-opener for Sri Lanka, thus avoiding it being a ‘Grant Trap’.

($259 million from 2010 – 2015 – file:///D:/Ecosystem%20Services%20&%20their%20valuation%20-%20MCC/2019%20-%20MCC/Economic%20value%20of%20land%20-%20%20MCC/Oct-Nov%202019/Moldova%20compact%20-%20evalbrief-20190022199-mda-agriculture.pdf)

Under ‘MCC Learning’ section of this Moldova compact evaluation, the Evaluation Brief goes on to say the following: ’Instead of rebuilding old Soviet irrigation systems, designed to irrigate large areas of land, irrigation systems could have been designed better to serve the existing situation in Moldova, where many farmers have small plots of land and are hesitant to cooperate. Greater farmer consultation in the design phase would have facilitated understanding farmer needs’

Therefore, modernization of ancient irrigation systems in the ‘wew bendi rajya’ in North Central Sri Lanka by introducing innovative technologies and management practices of organic agriculture including inland fisheries redevelopment into small-holder farming community programmes, could be considered as promising private sector ventures as opposed to large-scale high through-put commercial agriculture.

Designing a judicious blend of these widespread traditional agricultural systems, with modern innovative technologies incorporating the updated MCC Environmental Guidelines, would, indeed, be a challenge under article 2.7c of the MCC Sri Lanka Compact Agreement. Some local enterprises are already engaged in such organic agricultural ventures by regrouping marginalized local farmer communities to produce environmentally certified products and purchasing them at a premium price for export.

Economic Corridors

There are a number of punching and counter-punching bouts on the issue of developing ‘economic corridors’ under the MCC Sri Lanka Land Compact. As I mentioned in my earlier articles in The Island (May 03 and July 15), the spatial space of the MCC Sri Lanka Land Compact is in most part overlaps with that of Colombo – Trincomalee economic corridor development project of the then Megapolis Development Ministry, in accordance with the new National Physical Plan 2050.

Under Section 2.6 of the MCC Agreement (Government Resources; Budget), it says that the Government shall not reduce the normal and expected resources that it would otherwise receive or budget from sources other than MCC for the activities contemplated under this Compact and the Programme. This means, at least to me, that although the MCC Sri Lanka is not involved in designing an economic corridor from Trincomalee to Colombo, its program activities complements with those of the Megapolis ministry and the denials of an economic corridor by MCC is no more than a matter of political and diplomatic squabble.

Interestingly however, the first economic corridor for this region has been proposed almost a half a century ago as reported by the eminent town and country planner, Prof. Willie Mendis, in 2009. Even at that time, about 3/4ths of development and economic growth stemmed from a 50-mile wide corridor formed between two lines connecting Chilaw—Kuchchaveli, and Bentota—Katankudy. Accordingly, the corridor was clearly identified as the stomach or ” belly” for powering Sri Lanka’s economic growth and development. At that time it held about 70% of Sri Lanka’s population, and 35% of its land area. (Figure 2).

Prof. Willie Mendis’s following comments on the Colombo – Trincomalee economic corridor is even more valid in today’s context, if judicious sustainable development programs taking lessons from the environmental and socio-economic sustainability outcomes of Mahaweli Development Project could be designed to suit the needs of the 21st century in a country driven primarily by a small-holder economy:

‘Colombo’s primacy has been considered to be overwhelmingly biased towards further polarization of development in the south-western seaboard of the island. This situation favored the shift of policy to the provinces beyond the west end. Its centerpiece was the multi-purpose Accelerated Mahaweli Development Project which embraced a large spatial envelope in the north-western and north-central provinces of the country. The telescoping of its completion, in 1978, to six years was an impetus for spatial planners to propose it’s integration with the Colombo—Trincomalee Development Axis.

However, for whatever reason, this did not happen, and its missed opportunity is now history. The downside was the relegation to the backburner of it’s strategic component of constructing a rapid transit connection between Colombo and Trincomalee, through the aforementioned ” belly”. Its route trace offered the potential for triggering the spread of development activity in the north and south of the country. Its envisaged spur on the Habarana-Vavuniya-Jaffna route was an opportunity to transform the economic landscape of the north, due to it’s rapid connectivity with the markets in the south.

However, as emphasized in a recent report on ‘Integrated Spatial Planning and Analysis to Prioritize Biodiversity Conservation in Sri Lanka’ by Environmental Foundation (Guarantee) Limited and the National Biodiversity Secretariat of Ministry of Mahaweli Development and Environment, Sri Lanka (December 2017), there is an urgent need to identify and spatially map the biodiversity conservation priorities so that they can be integrated in to the mega-development plans like those of the MCC Land Compact and the Economic Corridor projects of the Megapolis Ministry. Doing so will minimize land allocation conflicts and minimize and mitigate the impacts from hurriedly designed socio-economic development projects.

I have already dealt with the related issues on the likely impacts of increase tenure security and tradability of land and the urgent need for improving the valuation of state and private lands in a ‘green economic milieu’ in my previous article on the 15th July in The Island newspaper. A sustainable green economic growth is what Sri Lanka is yearning for amidst a plethora of environmental problems it currently faces. It is rather intriguing how a green score card (77% -&79%) for environment protection has been obtained for years 2016-2019 during the preparation of the Constraint Analysis Report.

 Sovereignty Issues

This aspect has been sufficiently dealt with in several previous articles including those by Neville Laduwahetty and Rusiripala Tennakoon which demand explanatory responses from the proponents of the Land Compact for the benefit of the interested public.

Elaborating further on what they have said, I wish to draw the attention of the public on Article 5 Section 5.1b of the Compact Agreement on Termination;Suspension;expiration of the MCC Compact (pages 13 and 14). There are eight sub articles i-viii describing circumstances ‘but not limiting to them’ as a basis for suspension or termination. A constitutional legal expert can perhaps analyze this better as to what degree Sri Lanka is going to be bound in the context of its sovereignty issues.

Furthermore, under Section 5.3a on Refunds; Violation it says ‘ If any MCC funding , any interest or earnings thereon, or any programme Asset is used for any purpose in violation of the terms of this Compact, then MCC may require the Government to repay MCC in United States Dollars the value of misused MCC funding, interest, earnings, or asset, plus interest thereon in accordance with Section 5.4 within thirty (30) days after the Government’s receipt of MCC’s request for repayment’.

Although the MCC Sri Lanka Compact, as a whole, is a total grant to Sri Lanka, the clauses as given under Article 5 seem to make this Agreement serious inroads in to Sri Lanka’s sovereignty and if violated, the consequences seem to be very severe, at least in my humble non-legal opinion (Section 5.3 on page 14). It is not a simple case of giving a ‘free lunch’ as some people claim. If that is the case, is there a way to avoid this seemingly a ‘Grant Trap’?

We have been informed that the Hambantota Harbour deal has been flawed and need to be re-negotiated and do not know at what cost. The MCC Sri Lanka Compact being a so called outright grant hailed as a once-in-a-lifetime freebie, it is better to be careful of the pitfalls from these ‘free lunches’ from the very outset.

The MCC has a past record of suspending or terminating threshold programs in Yemen (2005) and Niger (2009) due to deteriorating selection criteria performance, and in Mauritania (2008) after a coup triggered automatic aid prohibitions. Compacts in Nicaragua and Honduras were each partially terminated due to governance concerns, and the Armenia compact was also put on hold for similar reasons in 2008, though the Board did not suspend it. Coups in Madagascar (2009) and Mali (2012) each led to in wholesale termination. Sri Lanka need to be mindful of what happened in these country contexts. Independent evaluations on these are available on the web to take lessons from their failures.

Land Special Provisions Act:

The Land Special Provisions Act (LSPA) proposed in relation to 2(a) (iv) (a) Registration of Absolute Land Grants Sub-Activity is expected to define the process of the Government shall use for this conversion of State Lands to private domain, creating a marketable and bankable title to this land in the name of the land holder. However, due to Provincial Councils being dissolved at present, the possibility that this bill may need PC consent, GOSL has withdrawn this bill. Therefore, the paragraph 2(a)(iv)(a) need to be removed according to GOSL sources.

This indeed has given a yet another window of opportunity to critically reexamine the impacts, legal or otherwise, of this LSPA on other existing Acts such as Mahaweli Authority Act of 1979.

Conclusion

Taking all the above into consideration, it is better to take a step back and be very clear of the selection criteria performance agreed upon by the previous Government in the context of the policy directions of the newly elected Government. The eight sub articles i-viii in the Sri Lanka Compact Agreement describing circumstances ‘but not limiting to them’ as a basis for suspension or termination need to be re-examined before signing the final version of the MCC agreement (which may be different from what we have been commenting upon) , the accompanying Project Implementation Agreement (PIA) , any other Supplemental Agreement and any Implementation Letters which provide further details on the implementation arrangements, fiscal accountability and disbursement described in Article 3 section 3.1 of the current Executive version of the Compact Agreement. The latter documents are not yet publicly available for comments.

The author of this article is a Professor Emeritus at Peradeniya University and a Fellow of the National Academy of Sciences of Sri Lanka. He can be contacted at nimsavg@gmail.com

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