A meeting of the board of directors of Millennium Challenge Account-Nepal on August 16 fixed August 30 as the date for the Millennium Challenge Corporation compact’s entry into force.

Nepal’s Parliament ratified the much-debated MCC compact in February last year, following an agreement in 2017 between the government and the Millenium Challenge Corporation. The MCC Compact signing had opened the way for the United States to invest $500 million in Nepal’s power and transport infrastructure.

With Kathmandu’s contribution, a 400kV transmission line will be built and a part of the East-West Highway will be improved using the MCC grant, and as much as $197 million from the Nepal government.

Here’s a look at the much-awaited entry into force of the US aid pact.

What happens on the EIF date?

The MCC is sending one of its vice-presidents for the entry into force ceremony. “MCC vice-president of Compact Operations Cameron Alford will make a visit to Nepal to mark the start of the MCC Nepal Compact,” the US embassy said in a written reply to the Post.

On the day of entry into force, a letter of exchange will be signed and exchanged between the two sides, said an official at the MCA-Nepal, a special purpose vehicle formed to implement the MCC projects.

Nepal and the US had initially agreed to set the entry into force date of the MCC Compact for June 30, 2020. But the delay in the ratification of the compact by Nepal’s Parliament amid a controversy threw the US assistance into uncertainty.

The US officials had unofficially blamed a Chinese disinformation campaign against the MCC as a major factor behind the controversy.

Amid intense pressure and diplomatic efforts from the American side, Nepal’s House of Representatives ratified the MCC Compact on February 27 last year along with a 12-point interpretative declaration to pacify the protesters.

What does the EIF mean?

The compact implementation runs for exactly five years from the day it begins and then the projects will be handed over to Nepal, according to MCA-Nepal. “After five years, the money stops flowing from the MCC for the implementation of the MCC Compact projects,” said an MCA-Nepal official.

A few provisions of the Compact survive beyond the handover stage. An additional 120 days has been set aside to close offices, to meet the requirement of monitoring the project’s performance to ensure the intended outcomes are met and for maintenance or accounting purposes, according to the MCA-Nepal.

Progress before entry into force

On August 24, the MCA-Nepal published the progress made in preparatory works before the EIF on its website.

As per the update, five of the six conditions set in the compact agreement required for its implementation have been met.

Among them, the conditions including the declaration of the electricity transmission project as National Pride Project; law establishing the Electricity Regulatory Commission; signing of Project Implementation Agreement (PIA); operational work plan and agreements between Nepal and the Indian governments for cross-border transmission line; and compact ratification by Nepal’s Parliament have been fulfilled.

The MCA-Nepal said sufficient progress on land acquisition and forest clearance for project site access is expected by August 30. Land acquisition for the Ratmate substation is complete while the Nepal Electricity Authority (NEA) has provided land for the New Butwal and Damauli substations.

As much as 104 hectares of land will be acquired for towers in 10 districts for the 315 km transmission line corridor. Land freeze notices have already been issued in a few districts. There is a plan to issue similar notices in nine districts prior to the implementation, the MCA-Nepal said.

“We plan to complete the land acquisition process before awarding the construction contracts so that the contractors can be instantly mobilised in the field,” said the MCA-Nepal official.

When it comes to forest clearance, as many as 73 consultations were held with community forest users groups and leasehold forest users groups in nine affected districts.

Will land acquisition and forest clearance be problematic?

Since the awarding of the contract, it took the Nepal Electricity Authority 13 years to complete the 220kV Bharatpur-Bardaghat transmission line projects in mid-August. More than two years were spent on acquiring land for two transmission towers, even though all other towers had already been built.

Likewise, a planned substation at Lapsiphedi, Kathmandu meant for the 400kV Naya Khimti-Barhabise-Lapsephedi transmission line is also uncertain because of obstruction. Many other transmission projects faced local obstructions, which caused delays in completion.

The MCA-Nepal also expects challenges in land acquisition, which has been common in similar projects in recent years. “It will not be surprising if the MCA-Nepal faces challenges in the process of land acquisition, based on the experiences of similar other projects,” the MCA-Nepal said in a written reply recently.

“But we are hopeful that the process will be as smooth as in Ratmate because of the unique Rehabilitation Action Plan and Livelihood Restoration Program, which we are going to implement for the project-affected people.”

An official of MCA-Nepal said the MCA-Nepal would compensate not only for lands but also for houses, cattle, trees and sheds, benefiting the affected people more.

The MCA Nepal expects four types of challenges—landowners demanding higher compensation; disturbance in tree-cutting from forest user groups; local governments bargaining for their interests; and compensation rate determination for right of way lands.

It expects the biggest challenges in securing land for the right of way.

As the value of the land that falls under the right of way of the transmission line decreases sharply and as such lands cannot be used for commercial purposes, landowners are often reluctant to leave the land for right of way.

But a senior MCA-Nepal official said that as much as 315 km transmission line falls in rural areas with sparse settlements, and hence they don’t expect stiff challenges.

Political challenges

The MCC compact overcame its biggest political challenge when Nepal’s House of Representatives ratified the pact in February last year amid fierce street protests. Ever since its ratification, the agreement has faced little or no protests. The politicians who once fiercely protested the compact are now silent.

The US embassy said in a written response to the Post that the US government was excited by the progress of the Nepal-led MCC Compact—made possible by continuous support from broader stakeholders, successive governments, and political parties over the duration of the MCC’s work in Nepal.

Big political parties—ruling as well as opposition—are largely silent on the matter. But a few Maoist splinter groups have announced protests and called people to oppose the US assistance, claiming that it would affect the country’s sovereignty and its non-aligned foreign policy.

The Nepal Communist Party (NCP) led by Netra Bikram Chand, on August 22, announced a series of protests from August 23 to August 28, opposing the compact’s entry into force.

Issuing a statement, Chand vowed to prevent the implementation of the MCC projects, calling the compact an American strategy to check China and India. On the same day, the Revolutionary Communist Party Nepal, another Maoist splinter group, appealed to the people to help scrap the MCC Compact Agreement and end the programme, saying it goes against Nepal’s national interests and non-alignment policy.

What is the MCA-Nepal’s perception?

In the written response to the Post, the MCA-Nepal said that after the parliamentary ratification, the political environment for the programme has been adequately positive. “The leading political parties in the government and opposition are affirmative, and the government line agencies are cooperating constructively,” it added.

Dev Gurung, a senior leader of the ruling CPN (Maoist) Centre, who was also at the forefront of protests against the MCC, said he was ready to follow his party’s decision on the MCC Compact. “We ratified the MCC Compact along with a 12-point interpretation stating that it is not under the IPS.”

He said that if the US wants to implement the programme without any hindrance, it should endorse Nepali Parliament’s interpretative declaration. But the government nonetheless appears firm on implementing the compact.

In late May, it promised an extra $67 million in funding to implement the transmission line projects under the compact, particularly additional works demanded by the NEA.

An official of MCA-Nepal said the government deciding to set aside extra money for the MCC project was a demonstration of its commitment to the compact. “Our assessment is that dealing with the local people will be more challenging than the political hurdles we face at the moment,” said the MCA-Nepal official.

What made the compact controversial?

Some US officials put the MCC under the umbrella of the Indo-Pacific Strategy (IPS). In November 2019, the IPS document mentioned the MCC as a tool to enhance American economic prosperity.

This increased the political unease in Nepal. Questions were raised about whether the MCC Compact was a development programme or a US geopolitical tool.

Nepal has adopted a non-aligned foreign policy and the mention of MCC in the IPS document worsened the political environment and complicated its parliamentary ratification.

In July 2019, the government registered the MCC Compact at the Parliament Secretariat. At the same time, an internal power struggle erupted in the erstwhile Nepal Communist Party jointly headed by KP Sharma Oli and the current prime minister, Pushpa Kamal Dahal, and the MCC became a political hot potato.

Will the projects be completed on time?

In late May, the MCA Nepal notified that as many as six Indian companies submitted bids to build the transmission line project in a three-package bidding.

It also said the contracts would be awarded after the compact’s entry into force. “It will take around two to three months for the evaluation of the bids and the contracts will subsequently be awarded,” said an official of the MCA-Nepal.

But completing a project on time might be challenging given the wretched history of transmission projects in Nepal. Some of the country's hydropower projects are spilling power because of the delay in transmission line construction.

“Nepal’s spending capacity in mega infrastructure projects has consistently been poor and it will be a Herculean task to complete MCC projects on time. But we can also set an example for other projects,” the MCA-Nepal official added.