In Sri Lanka, with 'great power competition' comes great headaches for MCC

BURLINGTON, Vt. — A proposed $480 million Millennium Challenge Corporation compact in Sri Lanka has become a key political issue in the country — and a referendum on development cooperation with the U.S. in a strategically important part of the world.

After years of preparation, MCC’s board of directors approved the compact in April 2019. It proposes to upgrade transportation infrastructure in the Colombo metro region and to improve land management through mapping, valuation, and improvements to the country’s land registry.

The proposed compact had the Sri Lankan administration’s support until it was voted out of office in November in favor of a president, Gotabaya Rajapaksa, who is viewed as more nationalist and friendlier toward China. Rejecting the MCC compact — on the basis that it would risk Sri Lanka’s national sovereignty and national security — was a central issue in Rajapaksa’s winning campaign. After taking office, the president in January appointed a review committee to revisit the compact and produce a report detailing its potential costs and benefits.

Under President Donald Trump’s administration, U.S. development engagement has grown increasingly tied to America’s geopolitical and economic competition with China. The administration has championed a “clear choice” agenda, which seeks to convince development partners that U.S. government assistance comes with greater benefit and less risk than what China offers through its Belt and Road Initiative and other international infrastructure financing efforts.

The U.S. government would seem to have a clear example of that risk in Sri Lanka, where Beijing was able to secure a 99-year lease over the Hambantota Port after Sri Lanka struggled to make debt payments to the Chinese creditors who financed its construction.

Despite that recent experience, the country does not appear to view the U.S. as a purely benign alternative to China. Instead, Sri Lanka might offer an early example of what happens when geopolitical competition intensifies and global powers force countries to choose between them.

This escalation poses a challenge for U.S. development institutions that were not built to engage in the competition between the great powers, according to Daniel Runde, senior vice president at the Center for Strategic and International Studies in Washington.

“The first 10-plus years of the MCC were carried out at a moment when there was no great power competition with China,” Runde said.

“We’re going to increasingly see, in Southeast Asia, South Asia, and Africa contexts ... countries that are MCC-potential-compact countries [begin] thinking twice about taking MCC money, not because MCC is good or not — it’s excellent — but because these countries now have more options than they had 20 years ago and because China is a much more intense competitor than they were in these countries 20 years ago,” he said.

Runde added that since some of these countries have been “burned by China” through unfavorable investments in the past, they might be inclined to put the U.S. government “in the same category.”

An MCC spokesperson wrote to Devex that the MCC compact “is designed to support Sri Lanka in building a more prosperous future for its people,” but did not weigh in on how the agency is managing programs in response to increased competition with China.

“An estimated 11 million Sri Lankans would benefit from the compact which addresses foundational economic issues in the country — transport infrastructure and land administration — to reduce traffic congestion in Colombo, improve public transportation and roads, and support long-existing Sri Lankan Government programs to safeguard land records, and strengthen land rights for Sri Lankan citizens,” the spokesperson wrote.

On Wednesday, Sri Lanka will hold parliamentary elections — which have been delayed twice due to the coronavirus pandemic — and many expect the president’s older brother, Mahinda Rajapaksa, to secure control of the Parliament and cement his family’s power over the country’s political trajectory. Some observers describe the Rajapaksas as “unapologetic authoritarians.”

U.S. Ambassador to Sri Lanka and Maldives Alaina Teplitz told journalists in June that the U.S. government is waiting for Sri Lanka to complete its political transition with these parliamentary elections before seeking a final determination about the status of the proposed compact.

“We’ve respected the president’s decision to review all assistance proposals and to review this grant proposal as well,” Teplitz said.

“With such a significant amount of money that the United States is willing to provide … we do have some oversight obligations as well. We want to ensure there is accountability in the process of spending that money and procuring the services that will be needed to implement the projects, and so that’s why there’s also a framework for providing the grant,” she added.

Some politicians and civil society groups have linked the proposed MCC compact to other, more overtly security-related agreements, such as the U.S. Status of Forces Agreement, which creates the framework for U.S. military personnel to enter Sri Lanka and which some critics have seen as an effort to create a U.S. military foothold or even an eventual base in the country. U.S. officials have described the latter assertion as “blatant misinformation.”

“Signing MCC will ensnare Sri Lanka in a costly geo-political conflict between the US and China and endanger our sovereignty,” wrote the Alliance for Economic Democracy, a group of trade unionists, farmers, fishers, students, academics, and activists, in 2019.

“We, as citizens of a formerly colonised country, highlight the importance of decolonisation and demilitarisation of the Indian Ocean,” it added.

In recent months, China has made a large and highly visible effort to support Sri Lanka’s — and many other countries’ — response to the COVID-19 pandemic, including a $500 million concessionary loan agreement signed in March.

“Sri Lanka is at a decisive historical juncture, facing new forms of geopolitical rivalry and external military, political and economic as well as cultural intervention, primarily involving overt and covert expansionist efforts of the US, China and India,” wrote Asoka Bandarage, an expert on colonialism in Sri Lanka, in the Asia Times news outlet earlier this year.

“The small, beleaguered country is struggling to safeguard its sovereignty, its territorial integrity and its very ecological survival,” she added.

Civil society groups have also charged that the land component of the project could lead to displacement of small agricultural producers and land grabs by export-oriented corporations.

“Some of these proposals are in line with land reforms pushed by the World Bank and other development aid programs since the mid-1990s. They ignore the importance of small-scale agriculture despite obvious failure of large-scale, export-oriented, corporate agri-business across the world,” the Alliance for Economic Democracy wrote.

Sri Lanka is not the only country where MCC appears caught between China and the U.S. A similar debate over the fate of an MCC compact is now also underway in Nepal, where critics view the aid program as a similar threat to national sovereignty and part of a White House Indo-Pacific strategy that will force the country to detach from China.

Those in favor of U.S. engagement say the White House should see both cases as evidence of a need to step forward, not backward, in a region where development programs are taking on greater geopolitical weight.

“Given the similar anti-U.S. tactics used in both countries [Sri Lanka and Nepal], both MCC programs being stuck is less about MCC but is more a sign of the administration's lack of influence in the region,” said a U.S. development expert with knowledge of the compacts, who requested anonymity due to the sensitivity of the issue.

“The State Department and NSC [National Security Council] need to take responsibility for that,” the expert added.