In Nepal, as in all other MCC Compact countries, the Compact must have the status of an international agreement and hence shall prevail over domestic laws in case of conflict in its execution. To enforce this requirement for the Compact Agreement to prevail over Nepal's domestic laws, the legal opinion of the Nepal's Ministry of Law and Justice relying on the provisions of the Nepal Treaty Act, 2047 (1990) is that the Compact requires parliamentary ratification. Nepal’s parliament has ratified many other international agreements in the past. The Government of Nepal agreed to this requirement when signing the Compact in 2017 as one of the actions that the Government must take for “Entry Into Force” of the Compact (the milestone marking the beginning of the five-year implementation period). Many other MCC partner countries, including Mali, Moldova, Mongolia, Senegal, Tanzania, Zambia, Morocco, Ghana, Niger, Cote d’Ivoire, and Namibia, have had their Parliaments ratify their Compact.
No, the Compact will not prevail over Nepal’s constitution. In formal communication and exchanges between Government of Nepal and MCC, it has been comprehensively clarified that the Constitution of Nepal is inviolable. Ratification of the Compact is critical to ensuring that Compact implementation can proceed as designed by the government without delay, which is particularly important given the limited five-year implementation period. The Compact’s status as an international agreement in Nepal (as would be the result of ratification) ensures that its implementation can go ahead unaffected from future change in domestic laws.
The Compact and the Program Implementation Agreement (PIA) set forth several conditions to entry into force and to disbursements of MCC funding. These conditions support compliance with the terms of these agreements. A subset of these conditions relate to specific project matters. The project-related conditions were agreed upon between MCC and the Government of Nepal during Compact design and negotiations after careful analysis of the risks related to each project component. These project-related conditions support safe, timely, efficient, and effective implementation of the projects based on carefully designed project schedules. Time and cost overruns are common in large infrastructure projects. MCC’s model tries to minimize these challenges through several measures, one of which is completion of all preparatory activities such as approvals, permits, clearances, and resettlements prior to the mobilization under construction works contracts. The conditions are included in the documents at these links: the Compact and the Program Implementation Agreement
Country ownership is a feature of all MCC Compact programs and means that MCC partner countries lead in the design and implementation of the program. Partner countries work with MCC to design Compact programs during the development phase. The government then delegates the responsibility to oversee and manage the implementation of the program to a designated entity named the Millennium Challenge Account (MCA). In Nepal, this is Millennium Challenge Account Nepal (MCA-Nepal), a development board formed by an executive order under the Nepal’s Development Board Act, 2013 BS (1956 AD).
Nepal and MCC worked together over many years to develop a Compact program. First, Nepal was determined to be a candidate for MCC Compact funding and then was selected by MCC’s Board of Directors as eligible to develop a Compact. Only a few countries are selected as eligible each year and Nepal’s selection reflected its strong performance on MCC’s “scorecard,” which tracks countries’ performance on indicators, based on a third party data in three categories: economic freedom, ruling justly, and investing in people. Once Nepal was selected as eligible, the Government of Nepal engaged with MCC to identify constraints to Nepal’s economic growth and then to design a Compact program that addressed key constraints. On September 14, 2017, Government of Nepal and MCC signed the Nepal Compact.
After Nepal was selected by MCC’s Board of Directors as eligible to develop a Compact, economists from Nepal and MCC worked together to determine Nepal’s constraints to economic growth, a report on which was published in 2014. Of the four primary constraints identified, the Government of Nepal and MCC decided to focus the Compact program on two: inadequate and unreliable electricity supply and the high cost of transportation. The constraint analysis was followed by a detailed feasibility study in 2016, narrowing down the scope of the Compact program to electricity transmission and road maintenance.
In developing the Compact, the Government of Nepal and MCC sought investments aligned with the Government of Nepal’s priorities, and identified a crucial gap in the high voltage transmission corridor holding back the growth of Nepal’s power market. Furthermore, cross-border transmission interconnections to increase cross-border electricity trade was identified as a priority in the transmission masterplan of 2015. This masterplan calls for a total of five transmission line interconnections between Nepal and India, including the Butwal-Gorakhpur interconnection. If the transmission corridor gap is unaddressed, much of the electricity generated in Nepal, including from hydropower, would be wasted, representing substantial financial loss for Nepal.
Throughout the Compact development process, the Government of Nepal and MCC engaged civil society, trade associations, development partners, political parties, and other relevant communities and stakeholders to seek their support, guidance, and feedback in project design and risk mitigation.
The strong and long-standing relationship between Nepal and MCC predates the Indo-Pacific Strategy (IPS). The MCC Nepal Compact – a $500 million grant – does not require Nepal to join any U.S. organizational entity or initiative. The Compact is an agreement between the U.S. Government through MCC and the Government of Nepal.
MCC funding under the Nepal Compact is authorized for the specific program needs detailed in the Compact, and the program design and budget were developed long before IPS was announced.
No, Compact procurements are not limited to U.S. companies; they are open to international bidders. Pursuant to Section 3.6(a) of the Compact, procurement of goods, works and services by MCA-Nepal must use MCC’s Program Procurement Guidelines (PPGs). The PPGs require that “open, fair, and competitive procedures must be used in a transparent manner to solicit, award, and administer contracts and to procure goods, works, and services.” MCC’s PPGs, which are similar to the World Bank’s and Asian Development Bank’s procurement guidelines, do not include preferences for American companies, and maximize transparency and fairness through open competition. In fact, historically most firms selected to work on MCC projects have not been American firms. MCA-Nepal has carried out outreach events in Kathmandu and New Delhi to connect with potential contractors globally.
The Government of Nepal will own all intellectual property developed as part of implementing the projects under the Compact, and does not have to give it up after the Compact is over. Under the Compact, the Government also grants MCC an unrestricted right to use the intellectual property to ensure that MCC can continue to use this information to improve its work in later Compacts. Neither the Government of Nepal nor MCC has to pay any royalties for use of the intellectual property, and neither has restrictions on using it. More information can be found in Section 3.2(f) of the Compact, and a definition of intellectual property is found in Annex VI.
No, the MCC Compact does not require approval of the Government of India. It does only require that the Government of Nepal come to an agreement with India on a plan for building approximately 120 kms of transmission line in Indian territory to connect to the transmission lines built in Nepal. (Once the plan is in place, the line will be paid for through equal equity investments from both Nepal and India, further supplemented by lending from financial institutions. These investments will be recovered through revenues earned from wheeling charges collected from open access users.)
Compact investments would be unwise without joint agreement between Nepal and India on a plan to build a transmission line from Butwal, Nepal to Gorakhpur, India. A large portion of the economic benefit of the line is for it to be able to export electricity from Nepal to India. A cross-border transmission line would allow this ease of energy transmission between the neighbors.
MCC and the Government of Nepal both have audit rights to the use of Compact funding. In fact, Nepal’s District Treasury Controller Office and the Office of Auditor General have conducted a financial audit of the Compact. The express authority to conduct audits is provided to the Government in Section 3.8 (a) of the Compact, which gives Nepal’s Auditor General the authority conduct audits of MCA-Nepal. MCC must approve the auditor as a safeguard to ensure that they are up to a high professional and ethical standard.
Section 5.1(a) of the Nepal Compact states that either Nepal or the US can unilaterally terminate the Compact at any time by informing the other in writing with 30 days’ notice.
Out of the 47 Compacts signed since MCC started, only two have been terminated. The two, in Mali and Madagascar, were both canceled because of the countries’ armies openly interfering in the democratic processes of the countries. These two exceptional events show that terminating a Compact is not something that MCC does regularly.
The MCC Nepal Compact has not been amended. After years of joint Government of Nepal and MCC development of the program and extensive, detailed negotiations between the Government and MCC, the Compact was signed in September 2017. Before MCC signs a Compact, it receives approval from the MCC Board of Directors and consults the U.S. Department of State and Congress. Any amendment to the Compact would require approval from the MCC Board of Directors and consultation with the U.S. Department of State and Congress. Therefore, Compact amendments are rare.
The annexes of the MCC-Nepal Compact may be modified when deemed necessary. However, these modifications are not amendments. Only certain aspects of the annexes can be modified; key components of the Compact program are not able to be modified, such as: the project objectives, the amount of MCC grant funding, the amount of Government contribution, and the length of the Compact term. MCC and the Government have made limited modifications to the annex since Compact signing that clarified the investment program and support efficient and successful program implementation.
Large infrastructure projects are typically funded by loans, with small portions as grant or equity. The MCC funding under the Compact is provided as a 100% grant, which does not have to be paid back. This is an extremely rare model of infrastructure financing. Loan funding from development finance institutions such as the World Bank or the Asian Development Bank can be made available by Government of Nepal, but would add a debt repayment burden on the Government and the Nepali citizens. The introduction of a new funding agency at this stage would undercut the work since 2014, resulting in additional time and cost considerations (including loans and interest payments).
MCC will respond to inquiries and will provide clarification where necessary. In August 2017, Nepal and MCC negotiated the Compact in good faith with a genuine interest in boosting Nepal’s economy, while keeping the national interest and sovereignty of each country in mind. The Compact negotiations included careful analysis of each Compact provision by representatives of both the Government of Nepal and MCC and the Compact should forward as is.
As of March 2020, the total expenditure on Nepal Compact project has been approximately $16 million, out of which Government of Nepal’s contribution is about $4 million as appropriated in the budget allocation. It is necessary that a large infrastructure project is appropriately studied, surveyed, and scoped as part of a due-diligence exercise that prepares the project adequately for timely implementation. This can also be understood as project preparation cost that is incurred irrespective of whether the project actually moves towards construction, considered as “sunk cost.” The preparatory expenses are accepted norms for identifying, selecting and setting standards for the project. It will not be possible for a project of this magnitude to be completed within five years without appropriate preparatory work. The following activities make up the total project preparation cost spent thus far:
- Feasibility studies
- Setting up of project office
- Hiring of project staff
- Project technical design
- Project environmental and social impact assessment and mitigation design
- Community consultations
- Pegging of transmission corridor
- Transmission route survey
The US$500 million Compact will bring significant benefits to Nepal. The Compact aims to increase the availability and reliability of electricity and maintain road quality—helping to spur investments, accelerate economic growth, and reduce poverty. The Compact will help support the Government of Nepal in its efforts to better deliver critical services to its people, ease the movement of goods around the country, and open up new opportunities for private investment. The contribution of an additional US$130 million to the Compact from the Government of Nepal—the single largest up-front contribution commitment in MCC’s history—will enable even greater impact. If the Compact implementation start date is delayed, these expected benefits will also be delayed, which would be an economic loss for Nepal. Besides the financial loss, there is also the reputational cost in Nepal’s ability to stand by an agreement it has already signed, which may weigh on the international community’s decision to invest in Nepal.
No. All MCC funding, including the project preparation funding expended to date, is grant funding that does not need to be repaid if properly used in accordance with the relevant grant agreement.
The Compact is an international agreement between MCC and GON. As such, it is governed by principles of international law. Regarding the reference to U.S. law, the Compact states that Compact funds cannot be used for a purpose that would violate United States law or policy, or that are contrary to the national security interest of the United States. All MCC funding is subject to these limitations, as MCC, a U.S. government agency providing U.S. funding as grant assistance, cannot fund any such law or policy violations.
MCA-Nepal was established by the Government of Nepal with approval from the Council of Ministers. MCA-Nepal is located in Kathmandu and its staff are primarily Nepali nationals, though other nationalities are also represented. MCA-Nepal is overseen by a Board of Directors with the following members:
- Finance Secretary, Ministry of Finance (Board Chair)
- Joint Secretary, Ministry of Energy
- Joint Secretary, Ministry of Physical Infrastructure and Transport
- Executive Director, MCA-Nepal
- Managing Director, Nepal Electricity Authority
- Civil Society Representative
- Private Sector Representative
MCA-Nepal is managed by an Executive Director, who is supported in the day-to-day work of MCA-Nepal by directors, officers, and other staff.
The Government of Nepal plays a central role in program implementation. MCA-Nepal, established with approval from the Council of Ministers, is a Government of Nepal entity. Furthermore, as noted above, governments officials are a majority of the members on MCA-Nepal’s board of director. In addition, relevant Government of Nepal entities are “project partners” with MCA-Nepal, playing a supporting role in implementing compact projects based on their relevance to the project. MCA-Nepal engages regularly with these key government experts to advance the implementation and overall sustainability of the compact-funded work. For example, Nepal Electricity Authority is one partner for the Electricity Transmission Project.
The level of opposition to the compact in Nepal has been an element of surprise to MCC, given that the two countries jointly developed the compact over nearly three years, and it was supported by all the major Nepali political parties during that time. The Nepal Compact appears to be embroiled in a domestic political conflict primarily within the ruling party. With MCC’s core principle of transparency, a significant size of the population has been able to learn about the compact. However, malicious disinformation of the compact by a few has led to widespread and misinformed criticism of the carefully considered legal clauses, which are part of internationally accepted treaty language. The local population appears to rely more on social media for their daily news, compared to television, online news sites, newspapers, and radio. Social media has been seen to be unreliable source of information compared to other mediums and has even been seen to promote forged news, and the open source nature of social media makes it difficult to regulate against such malpractice.
The effectiveness of MCC assistance enables it to partner with countries and institutions to carry out projects that meet real, identified local needs and ensure their sustainability. The United States (US) is the largest donor country, with official development assistance (ODA) at US$34.6 billion in 2019, according to the Organization for Economic Co-operation and Development (OECD). The United States Government provides aid to other countries to support global peace, security, economic development, and other development efforts, and to provide humanitarian relief during times of crisis. MCC’s assistance to Nepal is consistent with US Government’s aid objectives and the agency’s mission of reducing poverty through economic growth. While MCC does not seek nor require anything in return for the MCC grant, it is in the U.S.’s interest to have an economically stronger partner in Nepal.