US-funded Nepal Compact to be effective from June 2020The $500m project entails building power lines and roads in regions of strategic importance.
Millennium Challenge Account-Nepal on Thursday announced that the $500 million Nepal Compact signed between Millennium Challenge Corporation of the US and the Nepal government would go into effect on June 30, 2020.
Viewed by many in Nepal as a counter-initiative under the Indo-Pacific Strategy of the US administration against China's Belt and Road Initiative, the multimillion dollar project entails building power lines and roads in regions of strategic importance under what is called the Electricity Transmission Project and Transportation Project.
Earlier, the Compact was expected to enter into force by September 2019.
Issuing a statement on Thursday, the implementing agency said that the implementation method requires that enough time be allotted to the project preparatory phase so that all conditions for successful project delivery are met prior to the implementation activities.
“Following 'Entry into Force', all implementation activities must be completed within five years, as there are no provisions for time extension or cost increase,” said Millennium Challenge Account-Nepal.
Of the conditions precedent over implementation of the project, the government has already declared the transmission project as a national priority project and legislation has been passed forming the Electricity Regulatory Commission this year. The conditions are two of the six prerequisites of entry into force.
The Compact is yet to be ratified by Parliament, and Nepal and India are yet to enter into an agreement to build a cross-border transmission line under the Electricity Transmission Project.
According to Millennium Challenge Account-Nepal, the detailed design work, finalisation of the transmission line alignment, and tendering as well as planning of the contractor selection process are progressing well.
The Compact, which has been tabled in Parliament for ratification to ensure that it prevails over domestic laws, includes two components—the construction of about 300 km of 400 kV electricity transmission lines and three substations and technical assistance for the power sector, and technical assistance to improve the road maintenance regime, and road maintenance work on about 300 km of the strategic road network in the southern plains.
"The project (transmission) will expand and strengthen the high voltage electricity transmission network to support new investments in generation. And it will add a second high capacity cross-border transmission line to facilitate electricity trade with India," said the US donor.
Also, according to Millennium Challenge Corporation, Nepal struggles with poor road quality, inefficient customs and border enforcement, an inefficient trucking industry, and poor road coverage. The road project will encourage the expansion of Nepal’s transportation sector in addition to the periodic maintenance of up to 305 km of the country’s strategic road network.
As per the clauses of the Compact, once it enters into force, the projects must be concluded within five years from the date or else the funds will go back to Millennium Challenge Corporation.
In 2017, the US donor had committed to provide $500 million and the Nepal government had agreed to put up an additional $130 million for the purpose.
According to Millennium Challenge Account-Nepal, a body set up by the Cabinet to implement the project, the Compact aims to help spur investments and accelerate economic growth by increasing availability and reliability of electricity, maintaining road quality and facilitating power trade between Nepal and India.
In a first step in project implementation prior to entry into force, the implementing agency in May had requested prospective contractors to come forward and share information on the 400 kV transmission lines and construction standards and modalities.
However, for the compact to be fully effective, there must be an agreement between Nepal and India on building the 400 kV New Butwal-Gorakhpur transmission line.
Despite multiple high level meetings, the neighbours are yet to strike an accord on the implementation and financing modality of the power lines, a major component of the Electricity Transmission Project under Nepal Compact.
Last January, Nepali and Indian electricity authorities had decided to examine funding and implementation options for the Indian portion of the transmission line within three months, however, discussions have stalled of late.
The two sides had then agreed to evaluate options for the implementation of the line through a joint venture of Indian and Nepali entities with a 50:50 equity of grants and interest-free loans from the respective governments. An agreement on the proposed investment modality is yet to be reached.
In July, officials of the power utilities of both countries had met in Delhi and had decided to push the issue of the New Butwal-Gorakhpur power line to the seventh secretary-level meeting between energy officials of Nepal and India.
Nearly a month after the anticipated date of the seventh secretary-level meeting expected to resolve issues regarding cross-border transmission lines, the meeting is nowhere in sight.
"We have not received any word on fixing a date for the Joint Working Group and Joint Steering Committee meet from our Indian counterparts yet," said Prabin Raj Aryal, spokesperson for the Energy Ministry. "The meeting, which was earlier slated for June, has been delayed owing to the Indian elections and secretarial-level changes in the Indian bureaucracy."
Also, no concrete terms on the implementation of the infrastructure project has been fixed, apart from a broad agreement in January that the lines would be built by a commercial entity. Talk of a commercial entity had surfaced after the Indian side rejected Nepal’s proposal to build the power line under a government-to-government financial model.
Officials now have proposed to form a joint venture between Indian and Nepali entities with an equal portion of grants and interest-free loans from the respective governments. But an agreement on the proposed investment modality is yet to be reached because of questions over the commercial viability of the arrangement.
According to Aryal, the Energy Ministry is evaluating financing options and is in no position to call a meeting or set a date without receiving word from the Indian side.
Millennium Challenge Account-Nepal has also made plans to start the bidding process for the execution of the 400 kV transmission line under the Electricity Transmission Project.
“Millennium Challenge Account-Nepal intends to publish a Specific Procurement Notice and release the bidding document with the final Scope of Work and Employer’s Requirement by October-November 2019,” the organisation said.
There are five components in the transmission project—one segment starting from the northeast of Kathmandu at Lapsiphedi and extending to the west of Kathmandu near Ratmate, a second segment from Ratmate to the industrial town of Hetauda located south of Kathmandu, a third segment from Ratmate to Damauli in the west, a fourth segment from Damauli to Butwal in the southwest, and a fifth segment from Butwal to the Indian border which is part of the cross-border transmission line.
The Energy Ministry has also accorded high priority to the project as it will allow efficient distribution of surplus power and imported power to high energy consuming cities like Bhairahawa, Butwal, Pokhara and Narayangadh.
Also, the lines can be used to evacuate energy produced in the Kali Gandaki, Marshyangdi and Trishuli corridors where there is a high concentration of power schemes.
As per a report issued by the National Renewable Energy Laboratory’s Strategic Energy Analysis Centre of the US in April, Butwal is a strategic location for cross-border energy trade between India and Nepal because of its proximity and ability to connect with India’s Uttar Pradesh state and the Northern Regional Load Dispatch Centre via Gorakhpur where power demand is high during the monsoon.