MILLENNIUM CHALLENGE COMPACT
BETWEEN
THE UNITED STATES OF AMERICA
ACTING THROUGH
THE MILLENNIUM CHALLENGE CORPORATION
AND
THE FEDERAL DEMOCRATIC REPUBLIC OF NEPAL
ACTING THROUGH
THE MINISTRY OF FINANCE
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Compact nepal and mcc, Study Guides, Projects, Research of Management Theory
Agreement between Nepal and MCC
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2019/2020
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MILLENNIUM CHALLENGE COMPACT
BETWEEN
THE UNITED STATES OF AMERICA
ACTING THROUGH
THE MILLENNIUM CHALLENGE CORPORATION
AND
THE FEDERAL DEMOCRATIC REPUBLIC OF NEPAL
ACTING THROUGH
THE MINISTRY OF FINANCE
MILLENNIUM CHALLENGE COMPACT
TABLE OF CONTENTS
- ARTICLE 1. GOAL AND OBJECTIVES.................................................................................. Page
- Section 1.1 Compact Goal
- Section 1.2 Project Objectives
- ARTICLE 2. FUNDING AND RESOURCES
- Section 2.1 Program Funding
- Section 2.2 Compact CDF
- Section 2.3 MCC Funding
- Section 2.4 Disbursement
- Section 2.5 Interest...................................................................................................
- Section 2.6 Government Resources; Budget
- Section 2.7 Limitations on the Use of MCC Funding
- Section 2.8 Taxes
- ARTICLE 3. IMPLEMENTATION
- Section 3.1 Program Implementation Agreement
- Section 3.2 Government Responsibilities
- Section 3.3 Policy Performance
- Section 3.4 Accuracy of Information
- Section 3.5 Implementation Letters
- Section 3.6 Procurement and Grants
- Section 3.7 Records; Accounting; Covered Providers; Access
- Section 3.8 Audits; Reviews
- ARTICLE 4. COMMUNICATIONS
- Section 4.1 Communications
- Section 4.2 Representatives
- Section 4.3 Signatures
- ARTICLE 5. TERMINATION; SUSPENSION; EXPIRATION
- Section 5.1 Termination; Suspension
- Section 5.2 Consequences of Termination, Suspension, or Expiration
- Section 5.3 Refunds; Violation
MILLENNIUM CHALLENGE COMPACT
PREAMBLE
This MILLENNIUM CHALLENGE COMPACT (this “ Compact ”) is between the United States of America, acting through the Millennium Challenge Corporation, a United States government corporation (“ MCC ”), and the Federal Democratic Republic of Nepal (“ Nepal ”), acting through its Ministry of Finance (the “ Government ”) (individually, a “ Party ” and collectively, the “ Parties ”). Capitalized terms used in this Compact will have the meanings provided in Annex VI. Recognizing that the Parties are committed to the shared goals of promoting economic growth and the elimination of poverty in Nepal and that MCC assistance under this Compact supports Nepal’s demonstrated commitment to strengthening good governance, economic freedom and investments in people; Recalling that the Government consulted with the private sector and civil society of Nepal to determine the priorities for the use of MCC assistance and developed and submitted to MCC a proposal for such assistance to achieve lasting economic growth and poverty reduction; and Recognizing that MCC wishes to help Nepal implement the program described herein to achieve the goal and objectives described herein (the “ Program ”); The Parties hereby agree as follows: ARTICLE 1. GOAL AND OBJECTIVES Section 1.1 Compact Goal. The goal of this Compact is to reduce poverty through economic growth in Nepal (the “ Compact Goal ”). MCC’s assistance will be provided in a manner that strengthens good governance, economic freedom, and investments in the people of Nepal. Section 1.2 Project Objectives. The Program consists of the projects described in Annex I (each a “ Project ” and collectively, the “ Projects ”). The objective of each of the Projects (each a “ Project Objective ” and collectively, the “ Project Objectives ”) is to: (a) Increase electricity consumption by facilitating power trade and by improving the availability and reliability of electricity supply in Nepal’s electricity grid; and by facilitating power trade, and (b) Maintain road quality across the strategic road network.
2
ARTICLE 2.
FUNDING AND RESOURCES
Section 2.1 Program Funding. Upon entry into force of this Compact in accordance with Section 7.3, MCC will grant to the Government, under the terms of this Compact, an amount not to exceed Four Hundred Fifty-Nine Million Five Hundred Thousand United States Dollars (US$459,500,000) (“ Program Funding ”) for use by the Government to implement the Program. The allocation of Program Funding is generally described in Annex II. Section 2.2 Compact CDF. (a) Upon the signing of this Compact, MCC will grant to the Government, under the terms of this Compact and in addition to the Program Funding described in Section 2.1, an amount not to exceed Forty Million Five Hundred Thousand United States Dollars (US$40,500,000) (“ Compact CDF ”) under Section 609(g) of the Millennium Challenge Act of 2003, as amended (the “ MCA Act ”), for use by the Government to facilitate implementation of this Compact, including for the following purposes: (i) financial management and procurement activities; (ii) administrative activities (including start-up costs such as staff salaries) and administrative support expenses such as rent, computers, and other information technology or capital equipment; (iii) monitoring and evaluation activities; (iv) feasibility, design, and other project preparatory studies and activities; and (v) other activities to facilitate Compact implementation as approved by MCC. The allocation of Compact CDF is generally described in Annex II. (b) In accordance with Section 7.5, this Section 2.2 and other provisions of this Compact applicable to Compact CDF will be effective, for purposes of Compact CDF only, as of the date this Compact is signed by MCC and the Government. (c) Each Disbursement of Compact CDF is subject to satisfaction of the conditions precedent to such disbursement as set forth in Annex IV. (d) If MCC determines that the full amount of Compact CDF available under Section 2.2(a) exceeds the amount that reasonably can be utilized for the purposes set forth in Section 2.2(a), MCC, by written notice to the Government, may withdraw the excess amount, thereby reducing the amount of the Compact CDF available under Section 2.2(a) (such excess, the “ Excess Compact CDF Amount ”). In such event, the amount of Compact CDF granted to the Government under Section 2.2(a) will be reduced by the Excess Compact CDF Amount, and MCC will have no further obligations with respect to such Excess Compact CDF Amount.
4 (a) for assistance to, or training of, the military, police, militia, national guard or other quasi-military organization or unit; (b) for any activity that is likely to cause a substantial loss of United States jobs or a substantial displacement of United States production; (c) to undertake, fund or otherwise support any activity that is likely to cause a significant environmental, health, or safety hazard, as further described in MCC’s Environmental Guidelines and any guidance documents issued in connection with such guidelines (collectively, the “ MCC Environmental Guidelines ”); or (d) to pay for the performance of abortions as a method of family planning or to motivate or coerce any person to practice abortions, to pay for the performance of involuntary sterilizations as a method of family planning or to coerce or provide any financial incentive to any person to undergo sterilizations or to pay for any biomedical research which relates, in whole or in part, to methods of, or the performance of, abortions or involuntary sterilization as a means of family planning. Section 2.8 Taxes. (a) Unless the Parties specifically agree otherwise in writing, the Government will ensure that all MCC Funding is free from the payment or imposition of any existing or future taxes, duties, levies, contributions or other similar charges (but not fees or charges for services that are generally applicable in Nepal, reasonable in amount and imposed on a non- discriminatory basis) (“ Taxes ”) of or in Nepal (including any such Taxes imposed by a national, federal, state, local, or other governmental or taxing authority of or in Nepal). Specifically, and without limiting the generality of the foregoing, MCC Funding will be free from the payment of (i) any tariffs, customs duties, import taxes, export taxes, and other similar charges on any goods, works or services introduced into Nepal in connection with the Program; (ii) value added tax, sales tax, excise duty, property transfer tax, and other similar charges on any transactions involving goods, works or services in connection with the Program, (iii) taxes and other similar charges on ownership, possession or use of any property in connection with the Program, and (iv) taxes and other similar charges on income, profits or gross receipts attributable to work performed in connection with the Program and related social security taxes and other similar charges on all natural or legal persons performing work in connection with the Program except (1) natural persons who are citizens or permanent residents of Nepal and (2) legal persons formed under the laws of Nepal (but excluding MCA-Nepal and any other entity formed for the purpose of implementing the Government’s obligations hereunder). (b) The mechanisms that the Government will use to implement the tax exemption required by Section 2.8(a) for certain principal taxes are set forth in Annex VII. Such mechanisms may include exemptions from the payment of Taxes that have been granted in accordance with applicable law, refund or reimbursement of Taxes by the Government to MCC, MCA-Nepal or to the taxpayer, or payment by the Government to MCA-Nepal or MCC, for the benefit of the Program, of an agreed amount representing any collectible Taxes on the items described in Section 2.8(a).
5 (c) If a Tax has been paid contrary to the requirements of Section 2.8(a) or Annex VII, the Government will refund promptly to MCC (or to another party as designated by MCC) the amount of such Tax in United States dollars or the currency of Nepal within 30 days (or such other period as may be agreed in writing by the Parties) after the Government is notified in writing (whether by MCC or MCA-Nepal) that such Tax has been paid. Failure to refund such amount within the specified time will result in interest accruing on the unpaid amount in accordance with Section 5.4. (d) No MCC Funding, proceeds thereof or Program Assets may be applied by the Government in satisfaction of its obligations under Section 2.8(c). ARTICLE 3. IMPLEMENTATION Section 3.1 Program Implementation Agreement. The Parties will enter into an agreement providing further detail on the implementation arrangements, fiscal accountability and disbursement and use of MCC Funding, among other matters (the “ Program Implementation Agreement ” or “ PIA ”); and the Government will implement the Program in accordance with this Compact, the PIA, any other Supplemental Agreement and any Implementation Letter. Section 3.2 Government Responsibilities. (a) The Government has principal responsibility for overseeing and managing the implementation of the Program. (b) With the prior written consent of MCC, the Government will designate an entity to be established through a formation order issued by the Council of Ministers of Nepal, as the accountable entity to implement the Program and to exercise and perform the Government’s right and obligation to oversee, manage and implement the Program, including without limitation, managing the implementation of Projects and their Activities, allocating resources and managing procurements. Such entity will be referred to herein as “ MCA-Nepal ,” and will have the authority to act on behalf of the Government with regard to all Program activities. The Government hereby also designates MCA-Nepal to exercise and perform the Government’s rights and responsibilities to oversee, manage, and implement the activities defined in the Amended and Restated Initial Engagement Technical Assistance Grant Agreement, dated July 20, 2016. The designation contemplated by this Section 3.2(b) will not relieve the Government of any obligations or responsibilities hereunder or under any related agreement, for which the Government remains fully responsible. MCC hereby acknowledges and consents to the designation in this Section 3.2(b). (c) The Government will ensure that any Program Assets or services funded in whole or in part (directly or indirectly) by MCC Funding are used solely in furtherance of this Compact and the Program unless MCC agrees otherwise in writing. (d) The Government will take all necessary or appropriate steps to achieve the Project Objectives during the Compact Term (including, without limiting Section 2.6(a), funding all
7 (iv) no more than a commercially reasonable price, as determined, for example, by a comparison of price quotations and market prices, will be paid to procure goods, works, and services. (b) Unless MCC otherwise consents in writing, the Government will ensure that any grant issued in furtherance of the Program (each, a “ Grant ”) is awarded, implemented, and managed pursuant to open, fair and competitive procedures administered in a transparent manner acceptable to MCC. In furtherance of this requirement, and prior to the issuance of any Grant, the Government and MCC will agree upon written procedures to govern the identification of potential Grant recipients, including, without limitation, appropriate eligibility and selection criteria, and award procedures. Such agreed procedures will be posted on the MCA-Nepal website. Section 3.7 Records; Accounting; Covered Providers; Access. (a) Government Books and Records. The Government will maintain, and will use its best efforts to ensure that all Covered Providers maintain, accounting books, records, documents and other evidence relating to the Program adequate to show, to MCC’s satisfaction, the use of all MCC Funding and the implementation and results of the Program (“ Compact Records ”). In addition, the Government will furnish or cause to be furnished to MCC, upon its request, originals, or copies of such Compact Records. (b) Accounting. The Government will maintain and will use its best efforts to ensure that all Covered Providers maintain Compact Records in accordance with generally accepted accounting principles prevailing in the United States, or at the Government’s option and with MCC’s prior written approval, other accounting principles, such as those (i) prescribed by the International Accounting Standards Board, or (ii) then prevailing in Nepal. Compact Records must be maintained for at least five years after the end of the Compact Term or for such longer period, if any, required to resolve any litigation, claims or audit findings, or any applicable legal requirements. (c) Access. Upon MCC’s request, the Government, at all reasonable times, will permit, or cause to be permitted, authorized representatives of MCC, the Inspector General of MCC (“ Inspector General ”), the United States Government Accountability Office, any auditor responsible for an audit contemplated herein or otherwise conducted in furtherance of this Compact, and any agents or representatives engaged by MCC or the Government to conduct any assessment, review or evaluation of the Program, the opportunity to audit, review, evaluate or inspect facilities, assets, and activities funded in whole or in part by MCC Funding. Section 3.8 Audits; Reviews. (a) Government Audits. Except as the Parties may agree otherwise in writing, the Government will, on at least a semi-annual basis, conduct, or cause to be conducted, financial audits of all disbursements of MCC Funding covering the period from signing of this Compact until the earlier of the following September 30 or March 31 and covering each six-month period thereafter ending September 30 and March 31, through the end of the Compact Term. In addition, upon MCC’s request, the Government will ensure that such audits are conducted by an
8 independent auditor approved by MCC and named on the list of local auditors approved by the Inspector General or a United States–based certified public accounting firm selected in accordance with MCC’s Guidelines for Financial Audits Contracted by the Millennium Challenge Corporation’s Accountable Entities issued and revised from time to time by the Inspector General (the “ Audit Guidelines ”). Audits will be performed in accordance with the Audit Guidelines and be subject to quality assurance oversight by the Inspector General. Each audit must be completed and the audit report delivered to MCC no later than 90 days after the applicable audit period, or such other period as the Parties may otherwise agree in writing. The requirements of this Section 3.8(a) do not preclude the Office of the Auditor General of Nepal from conducting audits of MCA-Nepal. (b) Audits of Other Entities. The Government will ensure that MCC financed agreements between the Government or any Provider, on the one hand, and (i) a United States nonprofit organization, on the other hand, state that the United States nonprofit organization is subject to the applicable audit requirements contained in the Uniform Administrative Requirements, Cost Principles and Audit Requirements for Federal Awards, issued by the United States Office of Management and Budget; (ii) a United States for-profit Covered Provider, on the other hand, state that the United States for-profit organization is subject to audit by the applicable United States Government agency, unless the Government and MCC agree otherwise in writing; and (iii) a non-US Covered Provider, on the other hand, state that the non-US Covered Provider is subject to audit in accordance with the Audit Guidelines. (c) Corrective Actions. The Government will use its best efforts to ensure that each Covered Provider (i) takes, where necessary, appropriate and timely corrective actions in response to audits, (ii) considers whether the results of the Covered Provider’s audit necessitates adjustment of the Government’s records, and (iii) permits independent auditors to have access to its records and financial statements as necessary. (d) Audit by MCC. MCC will have the right to arrange for audits of the Government’s use of MCC Funding. (e) Cost of Audits, Reviews, or Evaluations. MCC Funding may be used to fund the costs of any audits, reviews, or evaluations required under this Compact. ARTICLE 4. COMMUNICATIONS Section 4.1 Communications. Any document or communication required or submitted by either Party to the other under this Compact must be in writing and, except as otherwise agreed with MCC, in English. All such documents or communication must be submitted to the address of each Party set forth below or to such other address as may be designated by any Party in a written notice to the other Party.
10
ARTICLE 5.
TERMINATION; SUSPENSION; EXPIRATION
Section 5.1 Termination; Suspension. (a) Either Party may terminate this Compact without cause in its entirety by giving the other Party 30 days’ prior written notice. MCC may also terminate this Compact or MCC Funding without cause in part by giving the Government 30 days’ prior written notice. (b) MCC may, immediately, upon written notice to the Government, suspend or terminate this Compact or MCC Funding, in whole or in part, and any obligation related thereto, if MCC determines that any circumstance identified by MCC, as a basis for suspension or termination (as notified to the Government in writing) has occurred, which circumstances include but are not limited to the following: (i) the Government fails to comply with its obligations under this Compact or any other agreement or arrangement entered into by the Government in connection with this Compact or the Program; (ii) an event or series of events has occurred that makes it probable that any of the Project Objectives will not be achieved during the Compact Term or that the Government will not be able to perform its obligations under this Compact; (iii) a use of MCC Funding or continued implementation of this Compact or the Program violates applicable law or United States Government policy, whether now or hereafter in effect; (iv) the Government or any other person or entity receiving MCC Funding or using Program Assets is engaged in activities that are contrary to the national security interests of the United States; (v) an act has been committed or an omission or an event has occurred that would render Nepal ineligible to receive United States economic assistance under Part I of the Foreign Assistance Act of 1961, as amended (22 U.S.C. 2151 et seq.), by reason of the application of any provision of such act or any other provision of law; (vi) the Government has engaged in a pattern of actions inconsistent with the criteria used to determine the eligibility of Nepal for assistance under the MCA Act; and (vii) the Government or another person or entity receiving MCC Funding or using Program Assets is found to have been convicted of a narcotics offense or to have been engaged in drug trafficking. Section 5.2 Consequences of Termination, Suspension, or Expiration. (a) The Parties agree that they will endeavor in good faith to consult the other Party in the event of a termination under Section 5.1(a).
11 (b) MCC may reinstate any suspended or terminated MCC Funding under this Compact if MCC determines that the Government or other relevant person or entity has committed to correct each condition for which MCC Funding was suspended or terminated. (c) Upon the suspension or termination, in whole or in part, of this Compact or any MCC Funding, or upon the expiration of this Compact, the provisions of Section 4.2 of the Program Implementation Agreement will govern the post-suspension, post-termination or post- expiration treatment of MCC Funding, any related Disbursements and Program Assets. Any portion of this Compact, MCC Funding, the Program Implementation Agreement, or any other Supplemental Agreement that is not suspended or terminated will remain in full force and effect. Section 5.3 Refunds; Violation. (a) If any MCC Funding, any interest or earnings thereon, or any Program Asset is used for any purpose in violation of the terms of this Compact, then MCC may require the Government to repay to MCC in United States Dollars the value of the misused MCC Funding, interest, earnings, or asset, plus interest within 30 days after the Government’s receipt of MCC’s request for repayment. The Government will not use MCC Funding, proceeds thereof or Program Assets to make such payment. (b) Notwithstanding any other provision in this Compact or any other agreement to the contrary, MCC’s right under Section 5.3(a) to obtain a refund will continue during the Compact Term and for a period of (i) five years thereafter or (ii) one (1) year after MCC receives actual knowledge of such violation, whichever is later. Section 5.4 Late Payment Interest. If the Government fails to pay any amount under this Compact or the Program Implementation Agreement when due (including amounts under Section 2.8(c) and 5.3(a)), interest will be paid on such unpaid amount. Interest will accrue on such unpaid amount at a rate equal to the then current US Treasury Current Value of Funds Rate, calculated on a daily basis and a 360-day year from the due date of such payment until such amount is paid in full. Any such payment will first be credited against interest due, and once the interest due amount is extinguished, then payments will be credited against outstanding principal. Section 5.5 Survival. The Government’s responsibilities under this Section and Sections 2.7, 2.8, 3.2(f), 3.7, 3.8, 5.2, 5.3, 5.4 and 6.4 will survive the expiration, suspension or termination of this Compact, provided that the terms of Section 2.8 will survive for only 120 days following this Compact’s expiration. ARTICLE 6. COMPACT ANNEXES; AMENDMENTS; GOVERNING LAW Section 6.1 Annexes. Each annex to this Compact constitutes an integral part hereof, and references to “ Annex ” mean an annex to this Compact unless otherwise expressly stated.
13 Section 6.7 References to Laws, Regulations, Policies, and Guidelines, References to Compact Expiration and Termination. (a) Each reference in this Compact, the PIA or any other agreement entered into in connection with this Compact, to a law, regulation, policy, guideline or similar document will be construed as a reference to such law, regulation, policy, guideline or similar document as it may, from time to time, be amended, revised, replaced, or extended and will include any law, regulation, policy, guideline or similar document issued under or otherwise applicable or related to such law, regulation, policy, guideline or similar document. (b) Each reference in this Compact, the PIA or any other agreement entered into in connection with this Compact, to the Compact’s “expiration” refers to the date on which the Compact Terms ends if the Compact is not terminated earlier, which in accordance with Section 7.4 is five years after its entry into force. Each reference in any of the aforementioned documents to the Compact’s “termination” refers to the Compact ceasing to be in force prior to its expiration in accordance with Section 5.1. Section 6.8 MCC Status. MCC is a United States government corporation acting on behalf of the United States Government in the implementation of this Compact. MCC and the United States Government assume no liability for any claims or loss arising out of activities or omissions under this Compact. The Government waives any and all claims against MCC or the United States Government or any current or former officer or employee of MCC or the United States Government for all loss, damage, injury, or death arising out of activities or omissions under this Compact, and agrees that it will not bring any claim or legal proceeding of any kind against any of the above entities or persons for any such loss, damage, injury, or death. The Government agrees that MCC and the United States Government or any current or former officer or employee of MCC or the United States Government will be immune from the jurisdiction of all courts and tribunals of Nepal for any claim or loss arising out of activities or omissions under this Compact. ARTICLE 7. ENTRY INTO FORCE Section 7.1 Domestic Requirements. The Government will proceed in a timely manner to complete all of its domestic requirements for this Compact to enter into force. The Parties understand that this Compact, upon entry into force, will prevail over the domestic laws of Nepal. Section 7.2 Conditions Precedent to Entry into Force. Before this Compact enters into force: (a) the Program Implementation Agreement must have been signed by the parties thereto; (b) The Government must have delivered to MCC: (i) a letter signed and dated by the Principal Representative of the Government, or such other duly authorized representative of the Government acceptable to
14 MCC, confirming that the Government has completed its domestic requirements necessary for this Compact to enter into force and that the other conditions precedent to entry into force in this Section 7.2 have been met; (ii) a signed legal opinion from the Minister of Law and Justice of Nepal (or such other legal representative of the Government acceptable to MCC), in form and substance satisfactory to MCC; (iii) complete, certified copies of all decrees, legislation, regulations or other governmental documents relating to the Government’s domestic requirements necessary for this Compact to enter into force, which MCC may post on its website or otherwise make publicly available; (c) MCC will not have determined, at the time of this Compact’s entry into force, that the Government has engaged in a pattern of actions inconsistent with the eligibility criteria for MCC Funding; and (d) The conditions set forth in Annex V have been satisfied. Section 7.3 Date of Entry into Force. This Compact will enter into force on the date of the letter from MCC to the Government in an exchange of letters confirming that MCC and the Government have completed their domestic requirements for entry into force of this Compact and that the conditions precedent to entry into force in Section 7.2 have been met to MCC’s satisfaction. Section 7.4 Compact Term. This Compact will remain in force for five years after its entry into force, unless terminated earlier under Section 5.1 (the “ Compact Term ”). Section 7.5 Provisional Application. Upon signature of this Compact, and until this Compact has entered into force in accordance with Section 7.3, the Parties will provisionally apply the terms of this Compact; provided that, no MCC Funding, other than Compact CDF, will be made available or disbursed before this Compact enters into force. ARTICLE 8. ADDITIONAL GOVERNMENT COVENANTS Section 8.1 Covenant for the Electricity Transmission Project. The Government will ensure the full and expeditious cooperation of all relevant Government entities to ensure that all land acquisition, site access, and forest clearance required to implement the Compact is provided in a timely manner, and consistent with all MCC policies. SIGNATURE PAGE FOLLOWS ON THE NEXT PAGE
ANNEX I
PROGRAM DESCRIPTION
This Annex I describes the Program that MCC Funding will support in Nepal during the Compact Term. A. PROGRAM OVERVIEW
1. Background and Consultative Process. (a) Background. Nepal was initially selected by MCC’s Board of Directors to develop a threshold program in December 2011 based on the strength of its performance on MCC’s policy indicators following a period of civil and political unrest in Nepal from 1996-2006. Before a threshold program was finalized, MCC’s Board of Directors selected Nepal in December 2014 to develop a compact. In this selection decision, MCC’s Board of Directors recognized Nepal’s efforts to establish rule of law and democratic institutions and highlighted the importance to the United States and South Asia of a politically stable and economically-growing Nepal. Much of the work prepared for the threshold program, such as the constraints analysis, and certain power and transport policy and institutional analyses, were completed shortly after Nepal was selected to develop a compact and were repurposed for development of the compact. Since December 2014, MCC and the Government have focused on developing a compact to address the identified constraints to growth in Nepal. Following consultations with the private sector, civil society, and development partners, the Government and MCC ultimately agreed to focus on two of the identified constraints: inadequate supply of electricity and the high cost of transport. Investment in Nepal’s electricity sector is particularly critical due to the impacts of inadequate supply, as Nepal has historically suffered from the worst electricity shortages in South Asia. Demand for electricity has historically exceeded domestic electricity supply, resulting in load-shedding particularly during the dry winter months when hydropower generation is low. The under-supply of electricity is further exacerbated by high losses in transmission and distribution. Low availability of electricity creates significant costs for businesses, which have to run generators on expensive imported fuel. With regard to the high cost of transport, this constraint has significant economic impacts due to the land-locked and mountainous nature of Nepal, as well as its reliance on cross-border trade. The Program will focus on road maintenance, which suffers from insufficient funding and ineffective technical and management practices. (b) Consultative Process. Since being selected to develop a compact, the Government’s efforts in Nepal have focused on development of a compact designed around the identified constraints. Throughout the compact development process, the Government has engaged civil society, trade associations, development
Annex I- 2 partners, political parties, and other relevant communities and stakeholders to seek their support, guidance, and feedback in project design and risk mitigation. To ensure the investments proposed for the Nepal Compact have the widest political support and the greatest potential for impact, MCC has worked closely with the United States Agency for International Development (“ USAID ”) and the United States Department of State, as well as the Government of India and a variety of development partners, to identify and design the investments described further in this Annex I.
2. Description of Program and Beneficiaries. (a) Program Description. The Program focuses on two key binding constraints to economic growth – the inadequate supply of electricity and the high cost of transport. The root causes of Nepal’s power sector problems have contributed to low and slow investments in the electricity value chain, leading to a shortage of electricity caused by: slow expansion of domestic generation; low levels of electricity imports due to inadequate domestic and cross-border transmission infrastructure; and high technical losses in the system. The Program intends to alleviate the inadequate supply of electricity by increasing the flow of electricity from existing and future generation plants into the network, while also facilitating electricity trade with India. In combination, these elements are expected to reduce load-shedding and make new sources of domestic generation become financially viable. In addition, proposed technical assistance is intended to strengthen the planning and regulatory environment, thereby promoting enhanced private sector investment in the longer term. With regard to the high cost of transport, which has significant economic effects due to the land- locked and mountainous nature of Nepal and its reliance on cross-border trade, the root cause analysis identified the potential causes as insufficient funding for the creation and maintenance of roads, inefficient customs and border enforcement, an inefficient trucking industry, and inadequate road coverage. The Program will focus on addressing insufficient funding for road maintenance by improving technical and management practices. Funding for road maintenance as well as technical assistance will be provided to the Department of Roads (the “ DOR ”) and to the Roads Board Nepal (the “ RBN ”) – which is the agency responsible for collecting and allocating road maintenance funds – to assist with the prioritization of investments. (b) Beneficiaries. The Program is expected to benefit more than five million households (approximately 23 million people) by the end of the Compact Term, as detailed below: