The government of Nepalwill sign a $630-million investment agreement with the Millennium Challenge Corporation (MCC), an independent US government agency working to reduce global poverty through economic development, in September to build a robust energy and transport infrastructure in the country.

Of the total investment, $500 million will come in the form of grant from the MCC while the remaining $130 million will be contributed by the Nepal government. This is the biggest grant assistance being offered by the US government to Nepal and the single biggest grant amount that the country is receiving from development partners operating in Nepal.

The investment will be used to address two binding constraints to economic growth: inadequate supply of electricity and the high cost of transportation, according to Fatema Z Sumar, MCC’s regional deputy vice president for Europe, Asia, the Pacific and Latin America.

“We hope the support will crowd in private investment and unlock potential for higher economic growth in Nepal,” Sumar, who is currently on a visit to Nepal to discuss final provisions of the proposed grant assistance, told journalists on Friday.

Of the investment being made in Nepal, a bulk, or $520 million, will go towards development of 300 km of 400kV transmission lines from eastern to western parts of the country and three power substations. Another $55 million will be used to maintain 305 km of road segments; 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 project related to the energy sector is expected to have an impact on at least 72 percent of the households currently connected to the grid, while maintenance works on around 300 km of road segments will benefit 205,000 households across the country, according to the MCC. The projects being implemented by the government and the MCC will also generate a number of business opportunities for the private sector. “The MCC will open doors for private companies to work in [energy and transport] projects,” Sumar said, adding, “There will be opportunities to work in the areas of procurement, design, supervision and environmental management as well.”

One of the conditions of the MCC programme is that all projects must be completed exactly after five years of their implementation date. If not, the funds will go back to the US. “So, when the five-year clock starts ticking, we have to be prepared to execute all the projects and complete them on time and within the budget,” said Sumar. These conditions are going to be tough for the Nepal government meet as it has a history of delaying project implementation, which generally leads to cost overruns.

The MCC board of directors selected Nepal for its “compact programme” in December 2014. Nepal was selected for the MCC programme because of the progress made by the country in upholding democratic rights, rule of law and economic freedom, and controlling corruption. Since Nepal’s selection, the Nepal government and the MCC have been scouting projects that can provide highest economic rate of return and reduce the incidence of poverty in Nepal.

To sign the final agreement in September, the Cabinet will now have to approve the MCC programme. The document will then have to be endorsed by the MCC board of directors and the US Congress. 

“These are key next steps for signing of the deal,” said Sumar, adding, “Once the deal is signed, the Nepal government will have to finalise all issues related to land acquisition, introduce regulatory reforms, including passage of the Electricity Regulatory Commission, and take other key steps that will be required to complete the projects in five-year period.”

PROJECTS WITH MCC SUPPORT

Transmission line projects

400kV Hetauda-Ratmate

400kV Ratmate-Damauli

400kV Damauli-Butwal

400kV Ratmate-Lapsiphedi

400kV Butwal-Gorakhpur

(Nepal segment)

Power substations

Ratmate

Damauli

Butwal

Road maintenance projects

Charali-Phidim

Dharan-Basantapur

Hetauda-Bhimphedi

Amelia-Tulsipur

Tulsipur-Salyan

(under consideration)