The Ministry of Finance has declined to further extend the agreement on the Small Development Projects undertaken by the government of India as the terms of agreement between the two countries expire on Saturday.

Since Saturday is a public holiday, a decision whether or not to extend the deadline should have been taken on Friday. But the ministry, while declining to give an extension to the projects, is preparing to write to the Indian Embassy conveying that due to some constitutional provisions, new political dispensation after the local elections, formation of the local federal units and a lack of institutional arrangements, the agreement is not extended now but once the institutional arrangements are made, the two sides can discuss how to move ahead.

Launched in November 2003, the projects are popularly known as “umbrella agreement”, on the basis of which the Indian Embassy has been extending assistance to various projects at the local level, including schools, colleges and hospital buildings. The political leadership has also been divided over giving exclusive rights to India to directly disburse projects worth up to Rs50million at the local level.

The Nepal-India Economic Cooperation programme has an outlay of over Rs76 billion with more than 529 large and small projects, completed or currently being implemented, in all the districts of Nepal. These developmental projects, undertaken in response to local needs and in partnership with the government of Nepal, are in the sectors of education, health and infrastructure development. Projects with a total outlay of less than Rs50 million are termed as Small Development Projects (SDPs).

Senior government officials said Prime Minister Sher Bahadur Deuba also expressed concern over the issue and asked for suggestions on the matter. Dinesh Bhattarai, foreign relations adviser to the PM, said he has asked the Foreign Ministry to prepare a briefing on the matter.

Finance Ministry officials said top political leaders have expressed concerns time and again about the agreement but they informed them about the constitutional obligation and the lack of institutional arrangements in relation to the grants. The issue came to the fore ahead of Prime Minister Deuba’s upcoming visit to India. New Delhi is concerned over the expiring agreement given the volume of investment from the southern neighbour.

Another senior Finance Ministry official said the ministry had concluded after an internal discussion that the modality of India-funded projects should be modified. “This is not only due to constitutional compulsion or the lack of institutional arrangements. It is about aid effectiveness. We need aid and assistance from India but its modality should be changed.”

Signed in 2003 during the premiership of Surya Bahadur Thapa, the agreement allows the local bodies to reach out directly to the Indian Embassy with proposals to receive up to Rs50 million in grants for small development projects.

But with the old structure being replaced by a new one as a result of the local level elections, officials at the Finance Ministry were in a state of uncertainty. The new system bars the local units from accessing funds directly from any bilateral or multilateral donor.

After the election of new local councils, the memorandum of understanding with the Indian side has become void since the new constitution only allows the local units to receive direct grants from the central government or the provincial government.

The ongoing projects will continue, the official explained, “but for the new ones, we have to either wait until the provincial elections or make a full-fledged institutional arrangement”.

According to the official, the Indian side has to reach an agreement with the central government that would allow disbursement of grants to the projects on the basis of separate agreements between the Indian side and the concerned local units.

After the Finance Ministry’s explanation, the Indian side requested the Nepali side to approve an extension until new arrangements are made so as to allow old projects to continue without signing new agreements.

Some political leaders have questioned the way India got exclusive rights to distribute projects, expressing fears that China or another country might also seek similar leverage from Kathmandu.

The Indian side has also put forth a proposal—to extend the current provision up to January until the elections to provincial parliaments are held, according to the official.

The Nepali side has extended the agreement in June 2006, August 2008, August 2011 and August 2014.