There is serious controversy about the proposed Millennium Challenge Compact (MCC) bilateral treaty (Compact) with the Government of Sri Lanka (GOSL). The Compact has not been signed by the parties and does not have legal force or effect, as yet. This analysis seeks to clarify the key provisions in the Compact, and its Annex 1, [...]

Business Times

Analysis of the MCC with the government of Sri Lanka


There is serious controversy about the proposed Millennium Challenge Compact (MCC) bilateral treaty (Compact) with the Government of Sri Lanka (GOSL). The Compact has not been signed by the parties and does not have legal force or effect, as yet.

File picture of traffic in Colombo.

This analysis seeks to clarify the key provisions in the Compact, and its Annex 1, and their legal effect. It will not attempt to opine on the various assumptions drawn from the Compact and publicised in the media, except as tangential references.

The MCC is a US government corporation, acting on behalf of the US Government and created in 2004. Its objective is to provide grants to qualified countries to eradicate poverty and ensure sustainable development. Sri Lanka qualified to receive grants from the MCC.

The Compact is in the “form” of a bilateral treaty between the MCC and the GOSL. In the case of Sri Lanka, the Compact contemplates a grant of US$447,500,000 (Programme Fund) to fund two key projects, namely – the Transport Project and the Land Project (the Programme).

The Compact

The Compact is between the US government (acting through MCC), and the GOSL. The Compact consists of the agreement and 4 annexes that constitute integral parts of the Compact.

There are many standard provisions in the Compact that are commonly seen in many grant agreements. Nevertheless, some important provisions need to be highlighted.

Article 1, Section 1.2 states the objectives of the programme are: “(a) To increase the relative efficiency and capacity of the road network and bus system in the Colombo Metropolitan Region (CMR) and to reduce the cost of transportation to facilitate the flow of passengers and goods between the central region of the country and ports and markets; and (b) to increase the availability of land and underutilised state lands in order to increase land market activity.”

Article 3, Section 3.1 requires the conclusion of a Program Implementation Agreement (PIA) between the MCC and GOSL that will provide details on the implementation arrangements, fiscal accountability, disbursement and use of MCC funding. This is a key agreement and the proper parties to it should be the MCC and the prospective implementing agency – MCA-Sri Lanka, rather than GOSL, as indicated.

Article 3, Section 3.2(a), specifies that GOSL bears the “principal responsibility for overseeing and managing the implementation of the Programme” and that the GOSL must create an independent company entitled MCA-Sri Lanka “limited by guarantee” under the Sri Lanka’s Companies Act No.7 of 2007, which will be the “accountable entity to implement the Programme…..”. Hence, the entire onus for the implementation of the Programme, will be on GOSL, and not the MCC.

The MCC, however, requires under Section 3.3 that in addition to “undertaking the specific policy, legal and regulatory reform commitments identified in Annex 1, the GOSL shall seek to maintain and improve its level of performance under the policy criteria identified in Section 607 of the MCA Act, and selection criteria and methodology used by MCC”. Given this requirement, it would operationally be stifling for MCA-Sri Lanka to exercise constant vigilance to ensure compliance with the MCA Act, which is, US law, for every transaction. Rather, adding a “reasonable efforts to comply” phrase here, would ensure timely execution of activities under the Compact.

The Termination clauses (Article 5) are clearly vital. The key clause is Section 5.1 that states in relevant part:

“(a) Either Party may terminate this Compact without cause in its entirety by giving the other Party thirty (30) days’ prior written notice”.

For the GOSL, present or future, the above provision gives it the right to terminate the Compact, without giving any reason.

Of course, the MCC, and naturally, as the grantor, can immediately terminate the Compact by written notice to the GOSL for reasons that include, the failure of GOSL to comply with its obligations or commitment under the Compact; and the use of MCC Funding or continued implementation of the Programme that violates applicable law or US Government policy, or its national security interests.

The consequences of Termination, Suspension or Expiration of the Compact, are clearly stated under Section 5.2 and appears to follow standard practice in grant agreements.

Under Section 6.4, the governing law of the Compact is stipulated as international law. This is because the Compact is a treaty between two states and a treaty cannot be subject to any municipal law. The implication here is that in the event of a dispute about the interpretation of the MCC, the applicable law will be international law, and not the municipal law of either the US or Sri Lanka.

Section 6.8 grants to the MCC sovereign immunity, since the MCC is a US government owned Corporation. Thus, the US Government or MCC, or any of their current or former employees, will be immune from suit in any court or tribunal in Sri Lanka while undertaking responsibilities in their official capacity. Such immunity clauses are standard in many grant agreements.

However, it would have been useful to have included a provision that deems it, in the interest of diplomatic comity, and for sustaining the Programme, to engage in good-faith negotiations, prior to unilateral termination, either by GOSL or MCC.

Finally, Article 7 concerning Entry into Force of the Compact is important to note, given the perception that GOSL was attempting to “rush” through the signature of the Compact.

The Conditions Precedent to Entry into Force stipulated under Article 7.2 are critical to the MCC having force of law in either country. Thus, the Compact requires that: the PIA must be signed by the Parties thereto; a letter signed by a duly authorised GOSL representative confirming completion of all necessary domestic requirements for the Compact to enter into force be provided; and a signed legal opinion from the Attorney General of Sri Lanka, be submitted. It is not evident, as yet, that the Conditions Precedent has been satisfied.

Annex I (Project Description)

This annex, one of five, to the Compact describes in length the two Projects to be funded by the MCC during the term of the Compact.

1. The Transport Project

The core objective of this project is to “increase the relative efficiency and capacity of the road network and bus system in the Colombo Metropolitan Region (CMR) and to reduce the cost of transport in order to facilitate the flow of passengers and goods between the central region of the country and ports and markets” through three key activities. This is to be accomplished by upgrading physical roadway networks, modernising the traffic systems, and, among other factors, ensuring long-term sustainability of the transport infrastructure, and improve the safety and security of passengers using the public transportation system.

The three activities are, the Advanced Traffic System (ATMS); the Bus Transport Service Modernisation (BTSM) and the Central Ring Road Network (CRRN). They seek to decrease relative travel time through utilisation of enhanced technology and civil engineering work and introduction of a traffic management system; increase the quality and speed of bus transportations by adopting institutional and regulatory reforms; and reduce the cost of transportation of people and goods by improving the existing road network in and around five selected provinces.

In accomplishing the objectives of the Transport Project, the MCC states that the Transport Project has been designed in close coordination and cooperation with other bilateral donors including the World Bank. Nothing in the design, or implementation of this project can lead to a conclusion that the MCC is creating a “corridor” from West to the East to effectively divide the country.

Land Project

The objective of this project is “to increase the availability of information on private land and under-utilised state lands in order to increase land market activity”. It would “increase tenure security and tradability of land for smallholders, women, and firms through policy and legal reforms”. The project is designed to build on existing government initiatives such as, the Electronic State Land Information Management Systems (eSlims); the e-Land registry system (eland Registry) and the Bim Saviya that was an initiative undertaken in 2005 to move from deeding of land to establishing land title, guaranteed by GOSL.

Of these, an activity under the Compact that may draw objective criticism could be the Land Grant Registration aspect. Here, the grant will support GOSL’s efforts “to convert permits and grants in state land to “absolute land grants” and be registered as freehold rights in land”. Since, this activity will “support the conversion of state lands to the private domain, creating a marketable and bankable title to this land in the name of the land holder”, it could be fairly argued that an under-regulated ability for the government to dispense state land could lead to allegations of corruption, discrimination, land speculation and unfair political gain. Since, the anticipated passage of the Land Special Provisions Act (LSPCA) is expected to define the process for land grants, it would be in the interest of GOSL to include criteria in it that would clearly and transparently provide the qualifying criteria for land grants. But nothing in the Land Project can lead to an assumption that the MCC obligates the GOSLto sell or grant land to foreigners or foreign firms. It can only happen, if at all, under the applicable land laws of Sri Lanka, such as the LSPCA.


What is very important is that both projects are critical to the overall economic development of Sri Lanka and in sectors that urgently require modernisation. Even if there are concerns that can be drawn, those concerns can be assuaged for the following reasons.

First, the termination clauses enable both parties to terminate the MCC without cause with 30-day notice by one party to the other. The MCC, however, can terminate it immediately for the causes cited in the text and referred to earlier.

Second, the obligations and responsibility of implementing the two projects rest entirely with GOSL. The MCC will not, in any way, be involved. MCA-Sri Lanka will be GOSL’s primary agent responsible for exercising the Government’s rights and obligations to oversee, manage and implement the Projects under the Compact. It will have complete “operational and legal independence and full decision-making autonomy….”.

Third, the Compact still requires that specified Conditions Precedent, including referral to the Parliament, be satisfied prior to it having full legal force and effect in Sri Lanka. There is no evidence that the Conditions Precedent has yet been satisfied. Therefore, there is sufficient time for GOSL to still reconsider.

It would be seriously inimical to the economic development of Sri Lanka, if the Compact is jettisoned merely for reasons that are assumptions drawn outside of the text of the MCC, than for concerns based on any developmental and technical shortcoming, of which there are few, or of minor concern. Given that it is also a grant than a loan, it will not add to the enormous debt burden that the GOSL already carries well into the future.

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