By C. A. Chandraprema Courtesy The Island

The controversy over the involvement of the Millennium Challenge Corporation (MCC) in Sri Lanka has now come to a head. MCC was created in the early years of the new millennium by the Bush Administration as an aid distribution programme for developing countries that are inclined to ‘govern justly, invest in their people and encourage economic freedom’. The formation of the new body was in recognition of the fact that the US development assistance programmes, which existed at the time, had consistently failed to meet their stated goals. Despite decades of economic aid, most recipients are poorer now than they were before first receiving development assistance. From 1980 to 2000, the United States had disbursed $167 billion in aid to 156 developing countries; but among the 97 countries for which reliable economic data for that period are available, median per capita gross domestic product (GDP) had declined from $ 1,076 in 1980 to $ 994 in 2000!  The MCC is thus supposed to be an experimental programme that seeks to explore new strategies to improve the effectiveness of development assistance programmes.

We now have the honour of being one of the guinea pigs testing out the efficacy of the aid programmes of MCC. One complicating factor is that the American aid organisation will be investing only USD 480 million in Sri Lanka in a situation where the government’s foreign borrowing through sovereign bonds during the first half of this year alone was USD 4.5 billion. With a government that has borrowed not tens of millions but tens of billion of US Dollars during a period of three or four years, a grant of 480 million is too small even to register on the scale. At the time the Millennium Challenge Corporation was created in the early years of this millennium, 300 or 400 million USD was considered a colossal amount of money in Sri Lanka.

The pledge of a concessionary loan from China of USD 300 million to build the first phase of the Norochchcolai power plant during the last years of the Chandrika Kumaratunga government was welcomed at that time as a major breakthrough. Since that time, much water has flown under the bridge and Sri Lanka has moved from being a low income country to an upper middle income country and the government that came into power in January 2015 commenced an era of mega foreign borrowings to pay for the election related government expenditure they incurred to win the 2015 August Parliamentary election. A grant of 480 million USD would have been a significant aid package during the Rajapaksa government. The present government would borrow 480 million USD in a single afternoon through the issue of Sri Lanka Development Bonds.   

According to MCC criteria, countries must qualify as low income or lower middle income countries according to the World Bank’s classification in order to be eligible for MCC grants. On the 1st of July this year, the World Bank classified Sri Lanka as an upper middle income country with a per capita income in excess of $ 3,895. However, by that time the MCC grant for Sri Lanka had already been passed and in any event according to MCC criteria, when a country’s classification changes, it wil retain its former classification for a further two years.   

Veil of secrecy over MCC project

As with everything else, the controversy over the MCC project is largely due to the lack of transparency in the doings of the government. Ironically, the MCC in selecting partner countries, uses an indicator that measures a country’s commitment among other things, to the freedom of information. Yet the very thing that is missing about the agreement that has been entered into by this government and the MCC is information! One would think that when the Opposition and members of the general public begin to voice misgivings about a deal that the government has struck with some foreign party, the first thing any government should do is to immediately launch a programme to explain to the public what the deal is about and how it is supposed to benefit Sri Lanka.

The controversy over the MCC has now been at the forefront of political discourse for months but the government has done nothing to enlighten the public the benefits that it is supposed to bestow on Sri Lanka. As of now, all that the public knows is that the USA will be giving Sri Lanka a grant of $480 million to carry out the work involved. This grant was the ‘silver lining’ that Finance Minister Mangala Samaraweera Mangala saw in the dark cloud that covered Sri Lanka after the Easter Sunday bombings. All that the public knows about this project is the limited information that is available on the MCC website. What the website says is that MCC seeks to assist the Sri Lanka Government in addressing two of the country’s binding constraints to economic growth, namely, inadequate transport logistics infrastructure and planning; and lack of access to land for agriculture, the services sector, and industrial investors.

The MCC website further states that the Transport Project aims to increase the relative efficiency and capacity of the road network and bus system in the Colombo Metropolitan Region and to reduce the cost of transporting passengers and goods between the central region of the country and ports and markets in the rest of the country. The stated goal of the Land Project is to increase the availability of information on private land and underutilized state lands or all land in Sri Lanka to which the government is lawfully entitled or which may be disposed of by the government, in order to increase land market activity. The MCC Land Project is supposed increase tenure security and tradability of land for smallholders, women, and firms through policy and legal reforms. The picture that the public has of the transport project is that a road transport corridor is to be set up between the ports of Colombo and Trincomalee with the Americans having an interest in the port of Trincomalee.

Neither the government nor the MCC has published anything that would enlighten the public any further. Even though money has been allocated for this project, nobody has seen a proper project description or a diagram of how that effect is to be achieved. While the Mahaweli project was being built, everybody knew what was being built and where. If the ‘efficiency and capacity of the road network and bus system in the Colombo Metropolitan Region’ was to be improved and ‘the cost of transporting passengers and goods between the central region of the country and ports and markets in the rest of the country’ was to be reduced, that would give the government a much-needed boost and one would think that they would have turned this into one of their main trumps in their re-election bid as well. Yet the government has been inexplicably secretive about the whole MCC project. The government’s silence on what exactly is going to be done under this project is what is fuelling speculation and suspicion.

If it ain’t broke, why fix it?

The goal of the Land Project has been explicitly stated as seeking to increase the availability of information on private land and underutilized state lands or all land in Sri Lanka to which the government is lawfully entitled or which may be disposed of by the government. The aim was to increase land market activity. The Land Project is supposed to increase tenure security and tradability of land for smallholders, women, and firms. The target clearly is state owned land. In Sri Lanka, we have freehold properties that belong to individuals or companies and then there is state owned land a portion of which is utilized directly by the government and a portion which remains allocated for other purposes of the republic such as forest reserves and the like and another potion of state land is held by the public under lease or licencing arrangements.

It is obviously the latter that the MCC is targeting. Even though such state owned lands have been alienated to individuals under licensing or long term lease arrangements, the tenants on these lands enjoy security of tenure because the government will not simply kick them off the land if it is cultivated and used productively. The lease holder or lisencee will be adequately compensated before the government takes back a state land which has been given to private individuals for farming or other purposes. We almost never hear of even the smallest of smallholders being unreasonably evicted from state owned land that had been leased or given to them on a license by the state. Furthermore, the state owned land given out to individuals can change hands and be sold. There is a separate market for leasehold or licenced land holdings with the price being somewhat lower than in the case of freehold land.

Such land can also be passed down from generation to generation provided the land had been utilized productively. When the  Department of Rural Development and Land Reform in South Africa proposed an overhaul of the country’s land holding system, what they proposed was that state land be under lease-hold and private land be under freehold with limited extent while foreign ownership should be linked to productivity and partnership models with South African citizens. That is much like the system that prevails in Sri Lanka at present. If something is not broken, why try to mend it? Admittedly, recipients of state owned land on lease will face issues when trying to raise money from banks with the land pledged as surety. Banks prefer freehold land. Only the high value customers with a proven track record would stand a chance of being able to raise money by pledgeing a lease on a state owned land as surety. In such an environment, startups would have little or no chance.

However, one would think that this was a problem that had to be dealt with at the level of the banks instead of trying to give leaseholders freehold tenure. If leaseholds on state land can be bought and sold between citizens of Sri Lanka and their only problem is the inability to use that lease as collateral, the answer to that can’t be the wholesale transformation of such lands into freehold tenures. There is besides, the well-founded fear that if state owned lands which are at present farmed by individuals on leasehold or lisencing arrangements are turned into freehold properties, it will not be long before unscrupulous elements lay their hands on these lands creating a landless rural population.

The fact that the land is owned by the state discourages fragmentation of the land and strategic buying up of cheap land by organized parties as what happened in Palestine before the creation of Israel. In a country like ours, this is a paramount consideration when discussing land policy. In this country, even a leasehold land has a monetary value which is below the value of a similar freehold property and the banks should be encouraged to lend to leaseholders at least to the extent of the reduced value of the land without turning away leaseholders wholesale. When we look at the Land Rights and Access indicator of the MCC we see that the kind of land reform that they have in mind would be applicable to countries in sub-Saharan Africa which don’t even have governments worth the name rather than countries like ours.

The MCC’s Access to Land indicator assesses the extent to which the institutional and legal framework provides secure land tenure and equitable access to land in rural areas. They look at the extent to which the law guarantees secure tenure for land rights of the poor; the extent to which the law guarantees secure land rights for women and other vulnerable groups; the extent to which land is titled and registered etc. Sri Lanka has no major issues with regard to any of those benchmarks. The MCC also looks at how long it takes to register property and the time taken to transfer the property title from the seller to the buyer so that the buyer can use the title for expanding business, as collateral in taking new loans, or, if necessary, to sell to another business. Sri Lanka does not have any major issues with regard to such matters either.

The MCC also looks at the cost to register property as a percentage of the value of the property. The latter is one area where vast improvement is needed in Sri Lanka not because of the cost in registering the land per se, but in the duties charged by our exploitative government on land transactions which drives up the transaction cost. That however is a matter that only the Sri Lankan government can address. The exorbitant duties charged on land transactions goes for the maintenance of the white elephants known as the provincial councils. Most people doing land transactions would have found that the provincial council does not necessarily accept the cost of the land as stated on the deed but they do a valuation on their own and the tax that has to be paid is calculated on the basis of that estimated value. The only genuine problem that Sri Lankans have with regard to land tenure and other issues is the exploitative attitude of the government which seeks to make a killing off land transactions.  

The MCC states that secure land tenure gives people long-term incentives to invest and to use land as collateral for loans. Sri Lanka’s rand reform laws enacted in the 1970s was instrumental in fixing a ceiling on land ownership. According to the Land Reform Laws No:1 of 1972 and No: 39 of 1975 brought by the then SLFP government, the maximum extent of agricultural land which may be owned by any person, was twenty-five acres of paddy land and fifty acres of other agricultural land. There have been strident calls for the abolition of this ceiling in order to encourage commercial agriculture. That too is not something that would require the intervention of a foreign donor organization.

Cloak and dagger development work

The MCC, which uses an indicator that measures a country’s commitment to the freedom of information in order to qualify for a programme, has been very reticent with information on what exactly it is doing in Sri Lanka. The MCC freedom of information indicator measures a government’s commitment to enable or allow information to move freely in society. This indicator is based on the degree of press freedom; the status of national freedom of information laws; and a measure of internet filtering. The MCC website even has a lecture on how information flows relate to growth and poverty reduction. The following is what the MCC says about the importance of free information flows:

“Governments play a role in information flows; they can restrict or facilitate information flows within countries or across borders. Many of the institutions (laws, regulations, codes of conduct) that governments design are created to manage the flow of information in an economy. Countries with better information flows often have better quality governance and less corruption. Higher transparency and access to information have been shown to increase investment inflows …”

The MCC uses several indicators to measure a country’s eligibility for grants including the freedom of information mentioned earlier. Among the other indicators are the following:  Ruling Justly – prevalence of free and fair electoral processes; political pluralism and participation of all stakeholders; government accountability and transparency; freedom from domination by the military, foreign powers(!), totalitarian parties, religious hierarchies and economic oligarchies; and the political rights of minority groups. Civil Liberties – freedom of expression and belief; association and organizational rights; rule of law and human rights; and personal autonomy and economic rights.

Government Effectiveness – the quality of public service provision; civil servants’ competency and independence from political pressures; and the government’s ability to plan and implement sound policies, among other things. Rule of Law – the extent to which, the public has confidence in and abides by the rules of society; the incidence and impact of violent and non-violent crime; the effectiveness, independence, and predictability of the judiciary; the protection of property rights; and the enforceability of contracts. Control of Corruption – “Grand corruption” in the political arena; the frequency of petty corruption; the effects of corruption on the business environment; and the tendency of elites to engage in “state capture,” among other things. 

There are also some economic indicators such as the following: Fiscal Policy – government borrowing as a percent of the GDP averaged over a three year period. Inflation – The most recent average annual change in consumer prices. Regulatory Quality – the burden of regulations on business; price controls; the government’s role in the economy; and foreign investment regulation. Trade Policy – openness to international trade based on average tariff rates and non-tariff barriers to trade.

Land Rights and Access – the institutional, legal, and market framework to provide secure land tenure and equitable access to land in rural areas and the time and cost of property registration in urban and peri-urban areas.

According to Sri Lanka’s scorecard for 2019 published on the MCC website, Sri Lanka has passed the tests for Political Rights, Civil Liberties, Control of Corruption (!!), Government Effectiveness (!!!) and the Rule of Law. SL has failed the tests for the Freedom of Information (which is not surprising given how little information there is about what MCC is doing in Sri Lanka.) When it comes to the economic indicators, SL has passed the tests for Inflation, Regulatory Quality, Trade Policy, Business Start-Up, but failed on Fiscal Policy, Land Rights and Access to Credit.