Opinion: The biggest US-funded project in Nepal has creating turmoil and undermined its democracy

A US gift of $500 million to strengthen Nepal’s infrastructure has led to unprecedented controversy. Between 2012, when Nepal first applied for the grant, its signing in 2017 and most recently its ratification on February 27, the grant has sharply divided the country.

In February, concern about the aid from the Millennium Challenge Corporation, the youngest major American development agency, sparked riots in the streets. The protests, which were supported by two parties of the coalition government and inflamed by charged political statements from both sides, were suppressed using tear gas and water cannons. The controversy even threatened the stability of Nepal’s current five-party coalition government.

Recent events have also laid bare the new rivalry playing out between the US and China at the cost of small countries caught in the middle.

Brief history

To understand the context, one first has to step back and reflect on the changing nature of foreign aid in a world where the post-second world war global order is no longer completely dominated by the US.

At the height of the cold war in the mid-1960s, when the US constituted 60% of the world’s gross domestic product, the US-built transmission lines in Kathmandu that still operate today, carrying power from Indian, Chinese and Russian-built hydropower plants to the capital city. Today, the share of America in global GDP in purchasing power parity is 16%. China has the biggest share, at 19% (India ranks third at 7%).

The other aspect to consider is changing development priorities. Aid evolved as an institution and a major industry in the aftermath of the second world war, with what was called the First World (US-led industrialised countries) not wanting the Third World (in today’s parlance Global South) to become part of the Second World (Communist block). This was known as Bretton Woods 1, named after the New Hampshire village where victorious allies met to determine the framework of the post-war economic order.

There was a major shift in 1971 (known as Bretton Woods 2) when US President Richard Nixon did away with its foundational gold standard and made the US dollar (and the US’s right to print it with virtually no limits) the foundation of international reserve currency for trade.

With the collapse of the Soviet Union and the end of the cold war in 1991, the core reason for giving aid to Third World governments also collapsed, ending the Age of Aid. Aid was then transformed into promoting (western) market-led economic development and social transformation led by international non-governmental organisations through their national recipient NGOs.

Alas, it was not to last. The financial and social crises in developed countries, coupled with the rise of East Asian economies, religious militancy in the West Asia and the military rejuvenation of Russia have brought the world to what is called Bretton Woods 3, where real commodities like oil, gold and other rare minerals are coming back as the primary carriers of trade value instead of the US dollar.

Birth of MCC

The Millennium Challenge Corporation has to be looked at against this global background. US political and foreign policy circles had often criticised the ineffectiveness of both the United States Agency for International Development and multilateral institutions such as the World Bank – even though US interests were dominant within them, especially after the end of the cold war. But it was only after the September 2001 attacks that US President George Bush formalised the Millennium Challenge Corporation as a new aid agency, bypassing USAID and other Bretton Woods 1 outfits.

Documents from the US defense and state departments as well as the White House, visiting US officials and those in Washington DC itself make it amply clear that Millennium Challenge Corporation is the soft arm of an Indo-Pacific Strategy aimed at isolating China, Russia and Iran.

Potential risks

Neither Nepal’s aid-addicted finance ministry nor its politicians leading the government bothered to seriously examine the weaponisation of aid as they signed multiple memorandums of understanding and agreements with visiting US Millennium Challenge Corporation delegations since formally applying for the grant in 2012.

They woke up only after civic voices began to protest against its many provisions that were seen as against the national interest. These provisions ranged from clauses putting the agreement above Nepali laws, of exempting Millennium Challenge Corporation officials from prosecution under Nepali laws, of not going against US policies (a broad phrase that can be interpreted in multiple ways), of subscribing to US values such as economic liberalism even though Nepal’s constitution defines the country as “socialism-oriented”, of exporting Nepali hydropower to a monopsony market in India, rather than using it for Nepal’s own commerce and industry and of bypassing Nepal’s established transmission line building authority – the Nepal Electricity Authority – to create a new US-controlled outfit.

Maybe most critical were the high costs. Since 2011, the Nepal Electricity Authority has been building a 400 kV transmission line at 38 million Nepalese rupee/km as part of an ongoing World Bank-funded project. The Millennium Challenge Corporation is planning to build transmission lines at 160 million Nepalese rupee/km, four times the cost.

One difference is hillier terrain, but that cannot explain the disparity entirely. Moreover, Nepal has to contribute $130 million of its own, run the project with that money and only have it reimbursed in instalments after passing 20 “score sheet” criteria of good governance determined by the Millennium Challenge Corporation. Critics have pointed out that if the transmission line was built at Nepal’s going market rate, Nepal’s contribution of $130 million would more than suffice without needing the Millennium Challenge Corporation grant.

Undermining democracy

Last year, US President Joe Biden suggested that “democratic countries” should have an infrastructure project in response to China’s Belt and Road Initiative. But the Millennium Challenge Corporation has degraded democracy in Nepal, with the small country seen as subservient to a vicious tug-of-war between the US and China.

In February, senior US officials warned that America would be forced to review its relations with Nepal unless the Millennium Challenge Corporation grant was approved by the Nepali Parliament, prompting a generally reticent China to ridicule it as a gift followed by an ultimatum.

The deal was pushed through with so few checks that it was only after the agreement was signed by the finance minister in September 2017 that the finance ministry bothered to ask the Ministry of Law, Justice and Parliamentary Affairs what the legal implications of the agreement were. (The finance minister was then posted to the US as ambassador – seen as a reward – but recalled a few months later when the Nepali government fell.)

The law ministry replied in January 2019 that provisions stating Millennium Challenge Corporation would supersede Nepal’s laws and constitution needed to be approved by Parliament, something that had never been required of any aid project previously. When the government tried to table the agreement in Parliament, the speaker did not cooperate. He was forced to resign later that year following allegations of sexual assault (he was subsequently exonerated).

Then Nepal slipped into another crisis – one of a series over the last 15 years – that had far-reaching consequences for the Millennium Challenge Corporation. The ruling party, which enjoyed a nearly two-thirds majority in Parliament, was split by a Supreme Court decision in March 2021 annulling the merger of two former communist parties.

Their merger was widely believed to have been engineered by China (not least because the Chinese Communist Party conducted political training for this merged outfit). When Prime Minister KP Sharma Oli ordered the dissolution of the Parliament and called for fresh elections, the court ordered that his rival from the Opposition Nepali Congress, Sher Bahadur Deuba, “be appointed PM by 5 pm next day” and reinstated Parliament five days later.

This change in regime accelerated the continued push for the Millennium Challenge Corporation. Deuba formed a five-party coalition with the Maoists as the biggest faction. Its common minimum programme did not mention passing the Millennium Challenge Corporation as its agenda, and its Maoist partners were officially opposed to tabling it.

But it was passed on February 27 without any meaningful debate in Parliament. The only change was a one-sided “interpretive declaration” redefining what the clauses of the treaty mean, something that has no international legal validity and to which the US has not given its official agreement.

Complicated road ahead

Given the wide social and political polarisation the Millennium Challenge Corporation story has generated in Nepal, it is hard to say if it has achieved any of its objectives, or what those objectives even were. The economics of the project make little sense. The diplomatic pressure by the US, Chinese taunts and the extraordinary clauses that seemingly override Nepal’s sovereignty present obvious problems for accountability and transparency. Most problematically, the opaque manner in which it has been shoved through make a mockery of democracy.

As the single biggest aid project in Nepal in recent years, the transmission line has already become a lightning rod for strong opinions. As it progresses, and the many issues of implementation, financing and accountability become more apparent, it is likely to raise more controversy, not less. This is an ominous start for the US’s Indo-Pacific strategy in Nepal, and even more problematic for Nepal itself.

This article first appeared on The Third Pole.