MCC Nepal Compact – An insight

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MCC Nepal Compact – An insight

The need for infrastructure in Nepal’s overall development of energy sector is undebatable. With billions being invested in power projects in Nepal at present and in the absence of adequate power transmission infrastructure, the electricity generated will have no use but to be wasted. Nepal Electricity Authority (NEA) has already highlighted the fact time and again. Transmission lines are vital to get a return on investment in the 3,000 MW (under construction) and additional 3,000 MW (at various stages of development) projects being currently built in different parts of the country. The investments being made in power generation will be at risk if transmission lines are not constructed on time and it will have a huge impact in the country’s economy. Given this context, the transmission line to be constructed by Millennium Challenge Account Nepal Development Board (MCA-Nepal) under the Millennium Challenge Corporation (MCC) Nepal Compact as a part of the Transmission System Development Plan of Nepal, is a welcome relief and will help address the infrastructure inadequacies in the energy sector.

MCC Nepal Compact
The MCC Nepal Compact is a five-year USD 500 million grant agreement signed between the Nepal government and MCC on 14 September 2017 for a program that aims to increase the availability and reliability of electricity, maintain road quality and facilitate power trade between Nepal and the region to help spur investments and accelerate economic growth. The Nepal government is investing an additional USD 130 million in the program, for a total of USD 630 million.

The Compact development was supported by all governments in Nepal from 2011 and is in Nepal’s national interest. Nepal had to qualify and compete worldwide for the MCC compact fund and received the grant after having met MCC’s rigorous conditions for good governance, economic freedom, and investing in citizens, so this is not mere generosity on the part of the US government. The electricity transmission and road maintenance projects under the Compact are priorities set by Nepal in consultation with civil society, private sector and numerous other stakeholders. A joint team of economists working on behalf of the governments of Nepal and the United States conducted extensive due-diligence analysis for several years, proactively engaging a wide array of stakeholders both within and outside of the Nepal government. This extensive and inclusive analysis concluded that there are four main binding constraints to economic growth in Nepal: policy implementation uncertainty; inadequate supply of electricity; high cost of transport; and challenging industrial relations and outdated labor laws and regulations. Agreeing with these findings, the Nepal government highlighted power and transport infrastructure development as priority
sectors for intervention.

Projects and its Benefits
The Electricity Transmission Project aims to increase electricity consumption by improving the availability and reliability of electricity supply in Nepal’s electricity grid and to facilitate cross-border power trade with India. MCA-Nepal will build around 315 kilometers of double circuit high capacity 400 kV transmission lines and three new electricity substations at Ratmate in Nuwakot, Damauli in Tanahun and Bhumahi in Parasi (Bardaghat Susta West). The 400kV transmission line will also connect with two other substations under construction by NEA at Lapsiphedi in Kathmandu and Hetauda in Makwapur. The project, which includes Nepal’s second major planned India interconnection (Butwal - Gorakhpur transmission line), will be another significant component of Nepal's electricity transmission infrastructure.

Technical assistance to strengthen the performance of Nepal’s power sector will also be provided under the project. The estimated economic rate of return is around 12 percent and at least 72 percent of households that are currently believed to be connected to the electricity grid, approx. 23 million people will benefit. The construction of the project will create more than seven thousand full-time jobs over the three and half year construction period. During the operation phase, it will generate four hundred full-time new permanent jobs for Nepali workers for the lifetime of the project.

The Road Maintenance Project aims to strengthen road quality across Nepal’s road network through technical assistance and capacity building of the Department of Roads (DoR) and Roads Board Nepal (RBN), and periodic road maintenance works on up to 305 km of the country’s strategic road network including a matching fund to encourage the expansion of Nepal’s road maintenance budget. Current practices in the maintenance of Nepal’s roads will be enhanced with interventions that will include pavement improvement techniques and safety enhancement features. New pavement improvement technologies being adopted are Full Depth Recycling (FDR) and Superpave asphalt concrete, which follows the principle of recycling existing pavement material. The project has selected the Dhankhola-Lamahi section of the East-West Highway as a pilot.

After the success of this pilot and based on positive results, MCA-Nepal will exercise the technology along Lamahi- Shivakhola section of the East-West Highway. At present, the total road segment proposed for maintenance in the East-West Highway is approx. 77 km.  The estimated economic rate of return is around 29 percent and approx. 900 thousand individuals will benefit. An estimated 650 thousand man-days of works would be created during implementation period.

Conditions Precedent
The Compact has set forth six primary conditions that the Nepal government must meet for the implementation phase to begin (referred to as Conditions Precedent). The six Conditions Precedent are: Declaration of the Electricity Transmission Project as a National Pride Project; Passage of legislation to create an Electricity Regulatory Commission; Signing of a Project Implementation Agreement; Completion of a plan in agreement with the Government of India for the cross-border transmission line from Butwal, Nepal to Gorakhpur, India; Ratification of the Compact by the Parliament; and Site access to all project construction sites with Environmental Impact Assessment (EIA) approval and sufficient progress on land acquisition and forest clearance. Out of the six, four have already been met with the October agreement for cross-border line between Nepal and India. Parliamentary ratification, which has been delayed for more than two years and access to site are the two major remaining conditions that will be required to ensure Nepal can access the funds allocated to implement the program on time.

Preparatory Phase Vs Implementation
MCC’s Compacts around the world require that enough time is allotted to the project preparatory phase so that all conditions for successful project delivery are met prior to the implementation activities. The preparatory and implementation phases of the MCC Nepal Compact are two distinct stages in the execution of the agreement. Since the projects have to be completed within an agreed timeframe of five years with no provisions for time extension or cost increase, MCC has adopted a two-phased implementation model, i.e., the preparatory phase and implementation phase.

The preparatory works ensure readiness for the implementation phase but are not part of program implementation. The targeted date for taking the program on implementation i.e. the Entry into Force (EIF) was previously set for 30 June 2020.

Prevalence of the Agreement Over Domestic Laws
The Compact does not intend to be above or replace any of laws of Nepal. The reason that it will prevail over the domestic laws of Nepal is simply to ensure the provisions under the Compact remain effective for the implementation of the Compact. Given that the Compact has a strict five-year implementation period, any legislative changes in the country during that time can adversely affect the timely delivery of these projects. For example, if there are changes in the Land Acquisition Act of Nepal, the timeline of Compact implementation could be affected. Another example of this, is the provision for the procurement of all goods, works, and services, to be in accordance with the MCC Program Procurement Guidelines rather than Public Procurement Act of Nepal.

Agreement with Government of India
The cross-border transmission line is a critical component of the Electricity Transmission Project. In developing the Compact and determining the conditions precedent, MCC actively engaged with both governments of Nepal and India to identify areas of mutual interest and synergies. Consultations in 2015 and 2016 highlighted both countries’ focus on cross-border electricity trade and the importance of several cross-border transmission lines, particularly the Butwal-Gorakhpur transmission line. To ensure that the line would connect to the Indian grid – so that Nepal can export excess electricity in the future or import per Nepal’s needs – MCC and Nepal agreed to this condition precedent during the signing of the Compact.

India has to agree to a plan to build infrastructure within its own territory. On 15 October 2019, Nepal and India agreed to the financing and ownership framework that will govern the implementation of the Butwal – Gorakhpur cross-border transmission line. With respect to route alignment, design, tendering and construction of 315 km of 400 kV transmission lines and three substations within Nepal, Nepal does not need to have any prior or subsequent agreements with a third country. 

Intellectual Property Rights
The Nepal government will own all the intellectual property rights (IPRs) generated during the projects and may give the right to use its intellectual property to any other body including to MCC based on necessity and utility. As per the Compact agreement, the government will merely allow MCC to use the intellectual property and by allowing such use, Nepal does not have to relinquish its right to intellectual property. Section 3.2 (f) of the Compact clearly highlights Nepal’s authority over all intellectual property.

Audit and Termination
The Office of the Auditor General of Nepal can audit the projects of the Compact at any given time, in contrary to the ongoing public debate on whether the audits are only limited to the US government. The Formation Order, 2074 BS, issued by the Nepal government mentions in Section 11 that MCA-Nepal will be audited by the Auditor General of Nepal. Section 3.8 (a) of the Compact also clearly states the provision for any auditing by the Nepal government. For the past years, the Auditor General of Nepal has been auditing all the expenditures of both MCA-Nepal and the Office of the Millennium Challenge Nepal (OMCN), which was created to develop the Compact and MCA-Nepal. Additionally, the US government or the government of Nepal can terminate the Compact by giving 30 days’ prior written notice. Section 5.1 (a) in the Compact clearly states that the agreement can be terminated by either party. If the government of Nepal wishes, it has the right to terminate the agreement without any cause.

Exemption from Taxes and Immunity
The assistance provided under the MCC agreement is a tax-free grant. MCA-Nepal, the Compact implementation body created under Development Board Act, 2013 by an executive order of the Nepal’s Cabinet, does not pay any tax as it is a non-income generating body. Any equipment, goods or services procured through the grant are exempt from the payment of taxes and duties. However, MCA-Nepal staff pay taxes in accordance to the income tax regulations. The immunity for MCC employees from the jurisdiction of Nepal’s courts and tribunals applies only to claims or losses arising out of activities under the Compact and does not extend to non-project activities. This immunity is typical in diplomatic relationships, and also applicable to Nepali diplomats serving abroad. This immunity is in line with immunity provided to other aid agencies such as representative employees of World Bank (WB), Asian Development Bank (ADB), and Asian Infrastructure Investment Bank (AIIB).

MCC Funding
MCC funding provided under the Compact is a grant, which does not have to be paid back through people’s taxes, unlike most infrastructure programs based on loans that accrue interest. The MCC model allows countries to focus on improving their economic growth without worrying about repayment. It is therefore in Nepal’s interest to use grant assistance compared to loans. The MCC Compact agreement does not require Nepal to sign-up for any alliance. More importantly, the US government legislation on MCC clearly prohibits the use of MCC funding for training of military or any other security forces. This has also been reflected in the Compact in Section 2.7(a). The Compact’s sole focus is to help Nepal for economic growth and poverty reduction.  

(Bisht is Executive Director of MCA-Nepal.)










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