By P.K.Balachandran
Nepal is a vigorous multi-party democratic country with extensive devolution of power going up to the grassroots level. Regular elections are invariably followed by a peaceful transfer of power. However, the country has become a by-word for fickle political loyalties and frequent governmental changes. Writing in The Diplomat in April 2021, Peter Gill pointed out that 20 governments had ruled Nepal between 2000 and 2021, the highest turnover rate in South Asia. And because of political preoccupations, Nepal has lagged behind other countries in the South Asian region.
In September 2017, the US government’s Millennium Challenge Corporation (MCC) signed a US$ 500 million compact with the Government of Nepal. But this pact has not been implemented yet because it could not be submitted to parliament for sanction. The MCC had become a political hot potato because the various communist parties, both within and outside the coalition governments, opposed it on “nationalistic grounds” seeing it as a surrender of sovereignty to the US.
Recently, the US Assistant Secretary of State, Donald Lu, warned that the compact would be cancelled if it was not approved by February 28, and that the US would also review its relations with Nepal. This threat forced the Nepali Congress government led by Prime Minister Sher Bahadur Deuba to table the compact in parliament, even as coalition partner Maoist Center threatened to leave the government. This made Deuba have talks with the opposition United Marxist-Leninist party led by K.P.Sharma Oli to form a new alliance. Whether the talks are successful or not, what is indisputable is that Nepal needs the MCC to improve its woefully inadequate infrastructure in terms of electricity and roads.
MCC Nepal
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.
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 the 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 during 2008–16. 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 in- vestment need in the power sector for the forecast period of 2018 to 2020 was estimated at US$29 billion to US$46 billion. This included total investments of more than US $16 billion in transmission and distribution and US$2 billion in solar and wind energy during 2018 to 2040. Moreover, incremental investments of between US$ 0.5 billion and US$ 1 billion might be required annually in large, export-oriented hydropower projects
Roads
In Nepal, the Strategic Road Network (SRN), the primary road network, covers 13,060 kms. 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.
Likewise, the annual funding allocation for SRN maintenance in the past five years has been, on average, 60% short of the annual requirement. The current sources of funding are primarily the annual budget allocation and grants and loans from development partners On an average, the funding gap was 68% between 2014 and 2018. In addition, of the allocated budget, actual spending by the RBN was on average 81% between 2012 and 2017.
Based on various government agencies’ plans, the Government of Nepal estimates an annual funding requirement of US$1.15 billion per year until 2025 to meet the investment backlog in the country’s road infrastructure. Financing from a variety of sources will be required to meet this gap.
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.
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