| August 17, 2018
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MCC looking deeper into investment on energy and transport sectors

MCC looking deeper into investment on energy and transport sectors
Fatema Z Sumar is the Regional Deputy Vice President for Europe, Asia, the Pacific, and Latin America at the Millennium Challenge Corporation’s (MCC) Department of Compact Operations. She oversees all MCC compacts within this geographic portfolio, including MCC compacts with El Salvador, Georgia, Moldova, Kosovo, Jordan, Nepal, Mongolia, Indonesia, and the Philippines.

Sumar was in Kathmandu last week to hold discussions on development of the compact program. During her visit, she met with the Prime Minister K P Sharma Oli, ministers, and high-level government officials and representatives from the energy and transport sector to learn about the environment for MCC’S investment. Kuvera Chalise and Susheel Bhattarai caught up with Sumar and talked on various issues regarding MCC. Excerpts:

What was your impression of the ongoing discussions with Nepal regarding MCC?

Let me tell up front before I turn to MCC, it was a very exciting week in the relationship between the United States and Nepal. We had both the lifting of the travel warning [from the US State Department] and signing of the Trade Preference Act [by US President Barack Obama], and now we have significant progress on the compact development phase of MCC for Nepal. So, I am very pleased and honored to be part of a very important week between the United States and Nepal. Let me turn to the MCC Compact. As you know, the
MCC board of directors selected Nepal as eligible to develop the compact back in December 2014.


MCC uses very strict criteria on how it chooses countries.

We only work with a handful of countries around the world that have demonstrated a strong commitment to democratic rights, economic freedom, and rule of law.

Nepal has passed our scorecard… with strong marks. The people of Nepal should feel very good about the direction the country is moving toward, despite the challenges.

We are now in the phase of compact development. It typically lasts between two to three years.  Within that phase, we look first at a constraint analysis of what are the binding constraints holding economic growth here in Nepal. We have finished that analysis.
We then look at what the root causes driving those constraints are. We have now finished that analysis too.

From there, we look at the proposed sectors and projects that the government would like us to consider. They have passed now on that information to us.

The purpose of my visit this week was to have discussions with the Nepali government on the specific areas between these sectors that we would like to consider with a more detailed due diligence and feasibility study.

So, at this point we have not made a decision on what the final compact will look like, though we had very good discussions with a wide range of officials -- everyone from the prime minister and key government ministers to key secretaries and below within the government, with business leaders, the civil society and others -- on what the specific areas would be like.

What are the sectors that have been finalized till now?

I am pleased to announce that we jointly agreed during this visit that the MCC Compact will focus and look into what is possible in both energy and transport sectors.

Within energy, we have agreed that MCC will consider proposed investment focusing on areas that address the insufficient supply of electricity, particularly transmission lines and other parts of the energy value chain.

On the transport sector, we have agreed that we will consider proposed investments that address proper road maintenance, rehabilitation and critical upgrades because these are the areas that significantly reduce travel-time and transport costs.

In terms of what is coming up we will now take this information and our teams will consider which area within these constraints they would like to do due diligence and feasibility studies. That will now take place over nine to twelve months.

We will then take what we learned from that process and make decisions based on MCC’s investment criteria of what projects and what sectors we will ultimately choose to invest here in Nepal. We will take that information and the recommendations to the MCC board of directors chaired the Secretary of State of the United States John Kerry for recommendation and approval.

Only after that phase will we know the specific sectors and projects and the level of spending.

Was there any change in the course of discussion in the aftermath of the Indian economic blockade as the incident revealed difficulty in border-crossing for supplies?

We always take more recent information for better results.

But the fundamental constraints have remained the same, which is that the cost of transport is high.

There are many reasons for it. Actually we say there are four broad areas: not enough roads, bad quality of roads, issues with border crossings, and issues with inefficient trucking system.

So, that’s something on the table and could be improved for better facilitation of border crossing, and customs process. In fact, that is the subject of due diligence and feasibility study for the next few months.

When you talk about scorecards, will there be any change in your program for Nepal if our scores drop next year?

The scorecard is a very important tool that all countries can use to measure the progress in key areas.

We will look at the scorecard very closely every single year throughout the period of the compact development program and during its implementation.

For Nepal to qualify for the compact development program, Nepal must pass the scorecard continuously.

On December this year, the MCC board of directors will again look to see if Nepal passes the scorecard in the process of making the decision of whether or not to select Nepal as eligible to continue to with the compact.

The scorecard can, and should be, also used to hold the leaders accountable on how the country is doing across the key areas in economic freedom, investment in people and ruling justly.

It is designed so that it can be compared to the other similar countries. The other point is that the scorecard is very important for the board, particularly for compact development, but even in compact implementation.

An agreement for five years will be signed between your government and our government.

After we move on to the implementation phase -- the third phase of this project lifecycle called ‘entry into force’, then we will have five years to actually start implementing these proposed projects.

With the end of the five years, with no exceptions, as part of legislation of the Congress, we will complete.

The money will be done. We will not be spending any money. So, it creates a very strong incentive in areas that have been difficult to address in the past, to create the right types of incentives, for stakeholders, to get the job done because they do not want to leave the money on the table at the end of the day. During the process of implementation, we will still look at the scorecard to make sure the country is moving in the right direction with additional criteria like a broader political health and democratic rights.

We know this is been a turbulent period for Nepali politics and democracy. We want to keep making sure you move in the right direction peacefully with the right parameters. This is an incentive to help your leadership move in the right direction.

Every year during the selection years, the country has to pass the scorecard. We have not signed the compact yet, we have only designed it. But after signing the agreement, we will look overall, however we check the scorecard during that phase, we will look at the boarder political and economic health of the country.

What will be the role of the private sector in the MCC Compact program?

When we talk about private sector participation, there are three factors: trying to engage them in goods and services, and construction; the second part is within the program, there is opportunity for private sector engagement -- like the private sector could be engaged in road maintenance on the performance-based contract, or like existence hydropower could bring their capital and the MCC team might put up a little bit of capital to help them recuperate, if the investment is worthwhile; and the third one is about MCC creating an enabling environment for the sector that, after we leave, should be strong, and the private sector just can come and do business.

If you have the right laws, and the rules of the games are clear -- like how power purchase agreements are done, then the private sector is automatically going to come and participate in that sector and industry.

Yes, we invest in infrastructure and parallelly, we will also be asking the government to do reforms related to that sector so that the private sector drives investment, increasing competition and efficiency.

Our ultimate goal is to create an enabling environment. We are here and we will be gone, but we want to leave a legacy -- a sustainable opportunity in that sector.

MCC invests in difficult sectors that are challenging for the government and others. So, its signaling also effects potential new investors -- new partners here in Nepal, in the region or also overseas -- to come and invest.

For example, we have talked about the energy sector. Everyone knows that Nepal is sitting on tremendous energy potential that can drive the whole continent. We also know the binding constraints, so we want to see if we can help be the change agent to help think differently on how to succeed. To succeed, we alone will not and cannot do this. We can only succeed together with the government and our partners, including the media, civil society, private sector, business and youth leaders, can help us create an enabling environment for the investment to succeed.

Our ultimate goal is not to be a donor agency that stays here forever and has to continuously intervene.

We are very different and a unique type of business model. We come with a limited term, an amount of time where everything will be run and executed not by us and not by the Americans, but by Nepalis and the Office of Millennium Challenge Corporation Nepal.

During implementation, it will be run by an entity that will be set up by the government called the Millennium Challenge Account Nepal composed completely… one hundred percent… by Nepalis. They will run and implement this program with the highest fiscal and procurement standards and transparency with very strong oversight on behalf of the US government. We hold your government accountable and you make us accountable.
 
When talking about reforms by our development partners, a section of the society is always suspicious whether some strings are attached or not? How about MCC’s policy reforms?

Unlike other development partners, we work in a very small amount of countries around the world on purpose.

The reason we are so selective is that we think to succeed in what we are trying to do is quite ambitious, you have to have the enabling environment here, and the commitment to want to make change, otherwise it is business as usual.

We are talking about reforms that are less about strings attached and much more about commitment of the government to its own people, about the type of conditions it needs to create to reduce poverty here in Nepal and boost economic growth for its people. We all know how tough it is to make those changes here. We are not coming in promising to solve it, we will not magically transform [the conditions] but we are excited about the opportunities in key areas.

We will go very deep into one sector in particular and change some things in other sectors about the possibilities depending on our feasibility study. This is an opportunity. A very few countries around the world are selected and you are one. And you should be very proud of that. You have to be proud about the opportunity of the 100-percent-amount grant facility, no loans and no concessional assistance that many countries want but do not get. This is the US taxpayers’ money. Use this opportunity wisely. Use it to push the reforms you want to change your society. It is leverage for the people of Nepal.

We need you as a partner to succeed. We work transparently.

There is a lot of potential in Nepal. There is tremendous potential… and challenges, and the county is ready for investment and change.
Nepal is the first country in South Asia that has been selected for the MCC Compact program. So many people in the region are looking what is happening here in Nepal.