Nepal set to bag biggest foreign grant from US

July 02, 2017

The Kathmandu post, 2 July 2017

Nepal is all set to bag the biggest foreign grant amount in its history with the government wrapping up negotiations on “compact program” with the United States. The deal will pave the way for the country to tap a funding pool of $500 million (approximately Rs52 billion).

If things move ahead as planned, the grant pledged by the US via the Millennium Challenge Corporation (MCC), an independent US government agency working to reduce global poverty through economic development, will start entering Nepal as early as the end of September.

The fund, among others, will be used to extend electricity transmission network by around 300 km and maintain up to 300 km of roads in the next five years

. These efforts are expected to make Nepal’s energy and transport infrastructure robust, enabling the country to attract more domestic and foreign investment, and gear up for higher trajectory of economic growth.

“We have completed grant negotiations with the MCC... only a few minor issues are left to be settled,” Baikuntha Aryal, head of the International Economic Cooperation Coordination Division at the Ministry of Finance, who is currently in Washington, DC, told the Post over the phone. “We are looking forward to signing the final grant agreement with the MCC before the US fiscal year ends in September.”

Once the final deal is sealed, the government and the MCC will fix a date to roll out the projects. 

“All projects must be completed exactly after five years of their implementation date. If not, the funds

will go back to the US,” said Aryal. 

The MCC board of directors selected Nepal for its “compact program” in December 2014. Since then, the Nepal government and the MCC have been scouting projects that can provide a highest economic rate of return and reduce the incidence of poverty in Nepal.

After conducting a thorough study, the MCC has agreed to support two broad projects in Nepal—Electricity Transmission Project (ETP) and Road Maintenance Project (RMP).

The ETP incorporates a plan to add approximately 300 km of high-voltage transmission lines in the country. Most of the proposed transmission lines traverse hilly terrain, 

starting from close to the Kathmandu Valley and moving to the west and then southwest to the Indian 

border, says a notification sent to the US Congress on May 30. This will have an impact on at least 72 percent of the households currently connected to the grid.

One of these projects includes construction of 400kV Butwal-Gorakhpur cross-border transmission line. The transmission line stretches 135 km and 20 km of that falls in Nepali territory. The MCC will help the government to build the transmission line that falls in the Nepali territory.

The MCC will also help the government to build three power substations to evacuate and transmit power collected from three major river basins where large hydropower projects are under construction. 

Also, support would be extended to strengthen the capacity of the proposed power sector regulator (Nepal Electricity Regulatory Commission), help Nepal Electricity Authority improve its transmission business, and enhance skills in project management, environmental and social impact assessment and engineering and technical supervision. 

Under the road maintenance component, the MCC will help Nepal execute maintenance works on around 300 km of roads, benefiting 205,000 households across the country. To incentivise additional government spending on road maintenance, a matching fund would be established to provide $2 for every $1 the Nepal government spends above its current average annual amount for road maintenance.

The MCC had focused on road maintenance rather than the construction of new roads, as a slew of development partners have extended funds to expand road network in the country, with very few focusing on maintaining assets Nepal already possesses. 

This lack of focus on repair and maintenance is increasing transport cost because vehicles have to be repaired early while raising road safety issues.

The road maintenance project also aims to build capacity of the Department of Roads to ensure high-quality data are collected; appropriate road maintenance plans and cost estimates are prepared; maintenance works are conducted periodically; and contracts and projects are managed in effective and efficient manner.

The entire cost of implementing these projects hovers around $630 million.

Of this, $500 million will be provided by the US government. The remaining $130 million will have to be mobilized by the Nepal government, according to Aryal.