Colombo, February 27: The Nepalese parliament on Sunday passed the Millennium Challenge Corporation (MCC) compact with the United States by a voice vote. The opposition Communist Party of Nepal (United Marxist Leninist) led by former Prime Minister K.P.Sharma Oli stayed away vowing to oppose the controversial deal. The deal had been hotly debated since September 2017 with Communists and nationalists citing sovereignty issues.
Earlier in the day, the ruling coalition decided to ratify the compact. It is significant that the US had threatened to review relations with Nepal if the MCC pact was not accepted by February 28.
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The Nepali Congress leader Ram Chandra Poudel informed the media on Sunday, February 27, that the ruling coalition’s meeting held earlier in the day had decided to ratify the project after the Nepali Congress-led government headed by Prime Minister Sher Bahadur Deuba clarified that the MCC project is a purely financial deal and not a military one at all.
The meeting was attended by Prime Minister Sher Bahadur Deuba, Communist Party of Nepal (Maoist Center) Chairman Pushpa Kamal Dahal, Communist Party of Nepal (Unified Socialist) Chairman Madhav Kumar Nepal, Samajwadi Party Chairman Upendra Yadav and other top leaders of other coalition parties.
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The parliamentary ratification brings the curtains down on the controversy over the signing of the MCC. The compact was requested by Nepal and acceded to by the United States in 2017. But it could not be presented to the Nepalese parliament (the House of Representatives) because of opposition from the various communist parties including the Maoist Center, which is now part of the Deuba government. The opposition had indulged in demonstrations against it portraying it as anti-national, an abridgement of sovereignty and as a precursor to a military alliance with the US.
Recently, when the Center-Left government of the Nepali Congress wanted to present it to parliament for ratification, the Maoists protested and threatened to walk out of the government and engineer its downfall. Prime Minister Deuba then approached the opposition CPN (UML) leader K.P.Sharma Oli and tried to get his support as he had been a supporter of the MCC at one point in time.
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Meanwhile, the US Assistant Secretary of State, Donald Lu, warned that the compact would be cancelled if it was not approved by February 28. He further warned that the US would review its relations with Nepal, if the pact was not concluded.
It was this threat that forced the Nepali Congress government to table the compact in parliament, even as coalition partner Maoist Center threatened to leave the government. Deuba began talks with the opposition leader K.P.Sharma Oli to form a new alliance. Subsequently, due to Donal Lu’s threat, the Maoists came on board albeit on the 11 th. hour.
The MCC compact aims to maintain road quality, increase the availability and reliability of electricity, and facilitate cross-border electricity trade between Nepal and India. Nepal faces extensive economic development challenges caused by an inadequate supply of electricity and high transportation costs. The MCC envisages the construction of 300 km of high voltage power lines, equivalent to one-third the length of Nepal, including a link to the Indian border to facilitate electricity trade. Construction of three substations to help transform power from one voltage level to another for further transmission or distribution to customers is also envisaged.
The compact involves technical assistance to strengthen the Electricity Regulatory Commission in areas such as tariff setting, rule-making, dispute resolution, and economic and technical regulation to help bring transparency, efficiency, inclusive consultation and competition to the power sector. It will also help the Nepal Electricity Authority improve its transmission operations.
Poor road maintenance in Nepal makes travel and transport of goods challenging and expensive. The high cost of transport has significant economic effects in a landlocked and mountainous nation that relies on cross-border trade. To address the high cost of transport, the MCC Road Maintenance Project aims to maintain road quality across the strategic road network, preventing further deterioration of Nepal’s road network. The MCC will also introduce new pavement recycling technology to Nepal. The MCC also provides for training and capacity strengthening for the Department of Roads and Roads Board to improve the administration of road maintenance.
Yawning Infrastructure Gaps
According to a study done by the World Bank (Nepal Infrastructure Sector Assessment- 2019), the country’s consumption of electricity is one-fifth of the South Asian average. Load shedding imposed economic costs of US$ 1.6 billion per year between 2008 and 2016. The government has set an ambitious target of installing 3 gigawatts (GW) of generation capacity in three years, 5 GW in five years, and 15 GW in 10 years. But a two-fold to four-fold increase in investment is needed to meet the projected demand in the country and utilize the sector’s export potential.
This needs finance. But Nepal’s domestic private sector does not have the capacity to mobilize large amounts of long-term financing and appraise and manage the significant technical, hydrological, and environmental risks of large-scale projects. Nepal’s electricity imports from India have increased fourfold since 2010 and now comprise more than a third of the electricity consumption in the country. The government expects electricity demand to increase at a compound annual growth rate of 12.0%, implying a doubling of electricity consumption every six years.
From 2010 to 2017, Nepal’s electricity sector achieved investments of US$ 527 million per year on average. To keep pace with demand, electricity sector investments would need to accelerate to an average of US $1.3 billion to US$ 2.1 billion annually between 2018 and 2040. The total investment need in the power sector for the forecast period of 2018 to 2020 was estimated at US$29 billion to US$46 billion.
Incremental investments of between US$ 0.5 billion and US$ 1 billion might be required annually in large, export-oriented hydropower projects
In Nepal, the Strategic Road Network (SRN), the primary road network, covers 13,060 km. The SRN includes national highways, feeder roads, and a few urban roads of national importance. About 40% (5,300 km) of SRN roads are national highways, which are considered commercial road infrastructure; of these, 60% are blacktop roads. Nationwide, 53% of roads are blacktop. The rest are gravel (16%) or earthen roads (31%). The road density of the SRN is 9.26 km per 100 square meters (m2), compared with 50 km per 100 m2 for the SRN and local road network together.
Transport costs are high due to poor road quality at high gradients, leading to long journey times and high fuel consumption. Commercial vehicles face constraints, including inadequate road width, narrow road curvatures, and high gradients. The quality of the roads, including poor pavement, also directly affects vehicle operation cost.
A survey assessing pavement condition found that national highways were 77% bad or poor. Likewise, the condition of feeder roads was found to be 82% bad or poor. Similarly, the cost and time related to transport/logistics is an issue highlighted by many stakeholders, for example in the agribusiness value chain.
Highly dispersed production locations, low road density, and poor road quality create high access-to-market costs and increased levels of post-harvest losses. Poor transport infrastructure also increases the cost of transacting among regional, central, and border markets, fragmenting Nepal’s value chains and undermining the competitiveness of Nepalese products.
The road sector has suffered from chronic under-investment, creating a high investment backlog. According to a study carried out by the National Planning Commission in early 2017, Nepal needed to invest 2.3 to 3.5% of GDP annually in transport infrastructure during 2010-20. As per the Strategic Investment Plan prepared by the Department of Roads (DOR) and the Ministry of Physical Infrastructure and Transport (MOPIT), the subsector required US$ 6.5 billion between 2016 and 2020.
While it is granted that the MCC will be able to meet only a small part of the need for electricity and roads, it is still a much-needed contribution. Giving assent to the MCC will on the hand secure funds and better management practices and on the other cement friendship with the US and India so as to balance relations with China.