On Thursday, the US government formally agreed to extend a grant of $500 million to Nepal to strengthen the energy and transport network. This is the biggest grant provided by a single development partner to Nepal. The fund is part of the $630-million “compact programme” designed by the US government agency, the Millennium Challenge Corporation (MCC), for Nepal. The Nepal government will contribute $130 million to roll out the compact programme.

A bulk of the investment—around $520 million—will be used to implement the Electricity Transmission Project, under which three power substations and 300 km of 400kV transmission lines, spanning east to west, will be built. Another $55 million will be used to implement the Road Maintenance Project, under which 305km of road segments will be maintained. The remaining amount will be used for activities like monitoring and evaluation of projects being implemented, hiring of procurement and fiscal agents, and covering other administrative expenses.

The MCC chose to support transmission lines and road maintenance projects in Nepal, as energy shortage and inferior transport network are two binding constraints for Nepal’s rapid economic growth. Also, the MCC has decided to maintain roads rather than build new ones, because a slew of development partners has poured money into building new roads, but nobody has really supported the country in maintaining the assets it already owns. This funding gap in the repair and maintenance of roads is increasing transport costs and, thereby, costs of doing business, as vehicles have to be repaired relatively quickly.

If things go according to plan, funds required to make the energy and road network robust will start flowing into the country within a year, upon establishment of Millennium Challenge Account, the project implementing agency. Nepal will then get five years to complete all the projects. If not, the funds will go back to the US.

Nepal has a long history of not completing projects on time. This occurs largely because of  a delay in preparation of detailed project design, land acquisition, establishment of project management offices and preparation of procurement documents. These factors are not likely to affect projects under the MCC, because these issues will be sorted out prior to rolling out the projects. Yet lack of proper coordination between various government agencies, delay in the resolution of unforeseen problems at the local level, failure to issue necessary permits on time, and the frequent transfer of project staff may hamper project implementation.

Nepal now has the opportunity to prove that it is serious about infrastructure development by completing the MCC projects on time. This will help Nepal win the confidence of other countries and prompt them to invest in the country to bridge the infrastructure gap that is keeping private investors at bay, limiting job creation and preventing the economy from expanding at an accelerated pace.