Nepal, MCC sign largest grant agreement

Nepal has signed a long-awaited deal with the Millennium Challenge Corporation (MCC) to mobilise $500 million grant for the development of energy and road transport sector, which are considered the major constraints for the economic growth of the country.
Finance minister Gyanendra Bahadur Karki and acting chief executive officer of the MCC Jonathan Nash signed the pact, on behalf of the Government of Nepal and US Government’s MCC respectively, in US Department of State’s Treaty Room in Washington DC today.
The signing ceremony was attened by US deputy secretary of State John J Sullivan, Nepal’s ambassador to US Dr Arjun Kumar Karki, US ambassador to Nepal Alaina B Teplitz and senior officials from both the governments.
"I am pleased to be one of the signatories of this Compact Agreement that opens up an additional avenue of US-Nepal bilateral relations and economic cooperation," finance minister Gyanendra Bahadur Karki said after the signing ceremony.
"Today, as we sign this $500 million MCC compact with Nepal, we are celebrating a new chapter in the US-Nepal partnership,” MCC acting chief executive Jonathan Nash said, adding that this compact is designed to spur economic growth and private investment, and open new markets to benefit the economy, regional security and the broader global community.
According to head of the International Economic Cooperation Coordination Division
Baikuntha Aryal, the US government’s grant will be instrumental in transforming the economic landscape of the country through development of electricity transmission line via major load centres of the country to Indian border, which will also facilitate cross-border electricity trade. "The upgradation of major highways will be the lifeline for country’s economic development," he added.
Nepal will be able to mobilise $630 million – $500 million from MCC and $130 million counterpart fund – for the installation of 300-km high voltage electricity transmission lines along with three substations of 400 kV and maintenance of roads with total length of 305 km that would help spur economic growth and reduce poverty in Nepal.
"These projects need to be implemented within five years from the starting date of project, otherwise the money will go back to the US,” Aryal said. "Nepal government is responsible for land acquisition, resettlement and right of way clearance to implement the projects."
The Nepal Compact – MCC’s first compact in South Asia – aims at strengthening Nepal’s energy sector, improve regional energy connectivity, and control transportation costs to encourage growth and private investment for job creation. MCC’s investment is expected to benefit about 23 million people.
The MCC had selected Nepal for a smaller threshold programme in December of 2011. The MCC and government had analysed economic growth constraints and jointly prepared a policy improvement programme based on the results. Given Nepal’s strong performance in its MCC policy indicator scorecard through 2014, MCC’s board of directors selected Nepal to be eligible to develop a compact, a larger grant-based investment.
Nepal first passed the MCC scorecard – as it met at least 10 of a set of 20 indicators ranging from child health to fiscal policy to government effectiveness – in late 2014 before the MCC’s board officially approved Nepal for a compact – in December 2014 – and the deal has been in development since then.
A group of MCC and local economists first worked on a growth diagnostic to identify binding constraints that were impeding private sector investment. They had identified power and transportation as key barriers for Nepal's economic growth.
On the basis of the study, the compact programme is investing in an Electricity Transmission Project (ETP) and a Road Maintenance Project (RMP). The ETP is expected to transform power sector by expanding and strengthening the high voltage electricity transmission network to support new investments in generation and allow greater cross-border electricity trade. Likewise, the RMP is expected to improve the road maintenance regime and complement existing efforts to build new roads by other parties.
Out of the $500 million, $398.2 million will be spent on the electricity transmission project while $52.3 million has been allocated for the transportation project. The remaining fund of $49.5 million is for the monitoring and evaluation and programme administration, according to the MCC, an independent US government agency working to reduce global poverty through economic development.
Office of the Millennium Challenge Nepal (OMCN) – a Nepal government office which coordinates development of MCC programme – in coordination with MCC, had finalised the projects that are going to be implemented under the MCC grant.

Identified Energy projects
Transmission line and substations (400 kV)
Lapsifedi (Kathmandu)-Damauli (Tanahu)
Galchhi (Dhading)-Hetauda (Makawanpur)
Damauli (Tanahu)-Sunwal (Nawalparasi)
Three substations (of 400 kV) at Galchhi, Damauli and Sunwal (India border)

Road maintenance
Mechi Highway
Koshi Highway
Sagarmatha Highway
Tribhuvan Rajpath (Bhaise-Hetauda section)
Bhaise-Bhimphedi
Amelia (Dang) to Tulsipur (Dang)