[Federal Register Volume 82, Number 187 (Thursday, September 28, 2017)]
[Notices]
[Pages 45318-45321]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-20847]


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MILLENNIUM CHALLENGE CORPORATION

[MCC FR 17-05]


Notice of Entering Into a Compact With the Federal Democratic 
Republic of Nepal

AGENCY: Millennium Challenge Corporation.

ACTION: Notice.

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SUMMARY: In accordance with Section 610(b)(2) of the Millennium 
Challenge Act of 2003 (22 U.S.C. 7701-7718), as amended, and the 
heading ``Millennium Challenge Corporation'' of the Department of 
State, Foreign Operations, and Related Programs Appropriations Act, 
2017, the Millennium Challenge Corporation (MCC) is publishing a 
summary of the Millennium Challenge Compact between the United States 
of America, acting through MCC, and the Republic of Nepal. 
Representatives of MCC and Nepal signed the compact on September 14, 
2017. The complete text of the compact has been posted at: https://assets.mcc.gov/content/uploads/compact-nepal.pdf.

    Dated: September 25, 2017.
Jeanne M. Hauch,
Vice President and General Counsel, Millennium Challenge Corporation.

Summary of the Nepal Compact

Overview of MCC Nepal Compact

    MCC's Board of Directors has approved a five-year, $500 million 
compact with Nepal aimed at reducing poverty through economic growth. 
The compact seeks to assist Nepal in addressing two binding constraints 
to economic growth: (i) Inadequate supply of electricity; and (ii) high 
cost of transportation. The compact will address these binding 
constraints by investing in two projects: The Electricity Transmission 
Project and the Road Maintenance Project.

Background and Context

    Nepal's economic growth, labor productivity, and gross domestic 
product per capita are among the lowest

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in South Asia. A decade of civil and political unrest from 1996 to 2006 
continues to shape the social, economic, and political landscape of the 
country. The people of Nepal continue to deal with the fallout from a 
series of devastating earthquakes in 2015 that killed nearly 9,000 
people and pushed an additional million below the poverty line. Almost 
half a million people leave the country each year for economic 
opportunities elsewhere. In September 2017, Nepal will hold the final 
phase of a three-phase local, democratic election in hundreds of 
municipalities throughout the country. These local elections are the 
first in 20 years and the first to be held since Nepal ratified its 
constitution in 2015, a critical step in continuing to foster 
transparency and accountability in government.
    The proposed compact is designed to address the underlying causes 
of two binding constraints to Nepal's growth: Inadequate supply of 
electricity and high cost of transportation. Nepal suffers from the 
worst electricity shortages in South Asia, and new investment in 
Nepal's electricity sector is critical to achieve economic growth. Only 
half of the demand for electricity can be met by the nation's grid, 
which has resulted in load-shedding of up to 18 hours a day during the 
dry winter months when hydropower generation is low. The constraints to 
growth analysis found that the low availability of electricity creates 
significant costs for businesses that must run generators on expensive 
imported fuel. The availability of electricity is further reduced by 
Nepal's constrained ability to import power when needed and the high 
level of losses in transmission and distribution system.
    The transportation sector has also suffered from Nepal's past 
political instability, inadequate investment, weak planning, and poor 
project execution. These factors have contributed to poor road quality, 
inefficient customs and border enforcement, an inefficient trucking 
industry, and inadequate road coverage. The Government of Nepal 
recognizes that investments in this sector are needed to reduce 
transportation costs and promote economic growth.

Compact Overview and Budget

    After MCC selected Nepal as eligible for threshold program 
assistance in December 2011, MCC and the Government of Nepal conducted 
a constraints to growth analysis. When MCC's Board of Directors 
selected Nepal as eligible to develop a compact in December 2014, MCC 
and the Government of Nepal used the analysis completed for the 
threshold program to develop the proposed compact.
    MCC and Nepal identified four binding constraints and agreed to 
focus the proposed compact on the two best suited for MCC's assistance: 
The inadequate supply of electricity and the high cost of 
transportation. The proposed compact seeks to address the selected 
constraints by investing in two projects: the Electricity Transmission 
Project and the Road Maintenance Project.
    Nepal is already undertaking significant investments in the 
generation and distribution portions of the power sector value chain. 
The proposed Electricity Transmission Project therefore seeks to 
strengthen the transmission portion of the value chain, which has been 
weakened by historic underinvestment and poor implementation. The 
Electricity Transmission Project plans to add approximately 300 
kilometers to the high-voltage transmission backbone inside Nepal, 
complete the Nepal portion of the second cross-border transmission line 
with India for increased electricity trade, and provide technical 
assistance aimed at improving the sustainability of Nepal's power 
sector. The compact will also support Nepal's establishment of an 
independent and capable power sector regulator, which is essential for 
maintaining open, non-discriminatory access to a transmission network 
with transparent pricing and clear rules of engagement.
    The Road Maintenance Project focuses on improving Nepal's road 
maintenance regime by providing technical assistance to key actors 
within the transportation sector. The Road Maintenance Project also 
includes an incentive-matching fund to encourage the expansion of 
Nepal's road maintenance budget, in addition to the periodic 
maintenance of up to 305 kilometers of the country's strategic road 
network.
    The following summary describes the components of Nepal's compact. 
The MCC investment for the compact is $500 million, with an additional 
$130 million committed by Nepal to support the compact program.

------------------------------------------------------------------------
                                                               Total
                        Component                          (millions $)
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1. Electricity Transmission Project.....................           398.2
    1.1 Transmission Lines Activity.....................           228.2
    1.2 Substation Activity.............................           114.0
    1.3 Power Sector Technical Assistance Activity......            22.4
    1.4 Project Management Activity.....................            33.6
2. Roads Maintenance Project............................            52.3
    2.1 Technical Assistance Road Maintenance Reform....             7.1
    2.2 Strategic Road Maintenance Works................            45.2
3. Monitoring and Evaluation............................             9.5
    3.1 Monitoring and Evaluation Activities............             9.5
4. Program Administration and Oversight.................            40.0
    4.1 MCA-Nepal Program Administration................            23.4
    4.2 Fiscal Agent, Procurement Agent, Audit..........            16.6
                                                         ---------------
        Total MCC Contribution..........................           500.0
            Government of Nepal Contribution............           130.0
                                                         ---------------
                Total Program Investment................           630.0
------------------------------------------------------------------------


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Nepal Compact Budget

Project Summaries
    The Electricity Transmission Project: The objective of this project 
is to spur economic activity and growth by improving the availability 
and reliability of electricity supply in Nepal's power grid, thus 
increasing per capita electricity consumption. This project includes 
four activities:
     Transmission Lines Activity. This activity will focus on 
the construction of an estimated 300 kilometers of high voltage 
transmission lines in Nepal, providing a vital missing link to the 
existing high voltage grid. Most of the proposed transmission lines 
traverse mountainous terrain, starting near the Kathmandu Valley, 
moving to the west and then southwest to the Indian border. The 
particular lines were selected following careful analyses and 
feasibility studies that weighed their technical and economic merit, 
their importance in meeting Nepal's medium and long term electricity 
supply goals, and their consistency with Nepal's domestic and cross 
border transmission investment plans. The transmission line route was 
selected to minimize impact on people and sensitive geographic areas, 
to the extent possible. Moreover, the activity includes funding for 
certain community benefit-sharing activities in order to further 
mitigate potential social impacts from construction of the transmission 
lines. Potential activities include rural electrification through off-
grid solutions and community empowerment programs.
     Substations Activity. This activity is complementary to 
the Transmission Lines Activity. The proposed compact contemplates 
constructing three substations. In combination with the transmission 
lines, these substations would help evacuate and transmit power 
collected from three major river basins where large hydropower projects 
are under construction by investors, many of which are private. The 
substation near Butwal would be the starting point for the transmission 
line to the Indian border and power grid.
     Power Sector Technical Assistance Activity. This activity 
seeks to strengthen the proposed power sector regulator (Electricity 
Regulatory Commission) to help bring transparency, efficiency, and 
competition to the power sector. The activity would help Nepal embed 
experts within the Electricity Regulatory Commission to improve the 
skills of this nascent agency in areas such as rule-making, dispute 
resolution, and economic and technical regulation. This activity would 
also help the Nepal Electricity Authority improve its transmission 
operations and prepare for oversight from the new independent 
electricity regulator. This will help establish a regulatory cost 
recovery system, improved grid operations, and better power system 
planning within the Nepal Electricity Authority.
     Program Management and Technical Oversight Activity. This 
activity is designed to complement the Transmission Lines and 
Substation Activities by supporting project management, environmental 
and social impact assessment, and engineering and technical 
supervision. This will allow the compact to properly implement the 
proposed infrastructure investments while complying with MCC's 
technical, environmental, and social standards.
    The Road Maintenance Project: The objective of this project is to 
avoid future increases in transportation costs across Nepal's road 
network by preventing further deterioration of maintained roads and to 
improve the administration of road maintenance. This project has two 
activities:
     Technical Assistance Activity. This activity is planned to 
build capacity for the Department of Roads and Roads Board Nepal in (1) 
improved data collection; (2) preparation of appropriate road 
maintenance plans and cost estimates; (3) improved prioritization of 
periodic maintenance; (4) improved contracting and contracting 
management; and (5) improved project management.
     Strategic Road Maintenance Works Activity. This activity 
seeks to complement and build upon the Technical Assistance Activity by 
incentivizing additional government spending on road maintenance. The 
activity would establish a matching fund to provide $2 for every $1 
Nepal spends above its current average annual amount for road 
maintenance, up to a total of $15 million annually for three years. The 
activity would additionally provide for the physical maintenance of an 
initial 305 kilometers out of the 2,000 kilometers of Nepal's strategic 
road network.
Economic Analysis
    The proposed Electricity Transmission Project has an estimated 
economic rate of return of 12 percent. The investment in Nepal's 
transmission system is expected to affect all grid-connected consumers, 
which represent 72 percent of Nepali households. With a projected 
population in 2024 of 31.5 million people, an estimated 23 million 
individual beneficiaries living in five million households are expected 
to benefit from this project. Fifty-two percent of the potential 
beneficiaries are estimated to be female.
    The estimated economic rate of return for the Road Maintenance 
Project is 29 percent. The 305 kilometers of roads proposed by Nepal 
for periodic maintenance under the compact are spread across five road 
segments in five geographic areas. The Project is expected to benefit 
approximately 924,000 people in 205,000 households.
    MCC anticipates that there will be overlap in the beneficiaries of 
the two proposed projects and thus ultimately expects the compact to 
benefit approximately 23 million individuals.
Policy Reforms and the Compact
    MCC will require certain conditions to entry into force of the 
compact in order to ensure sustainability of compact investments. For 
example, given the proposed compact's focus and the clear need for a 
second cross-border transmission connection with India, MCC will 
require that technical and financial arrangements for the construction 
of the complementary investment in India be finalized before entry into 
force of the compact. This requirement is expected to be further 
strengthened through conditions regarding the Nepal portion of the 
cross-border transmission line that must be met for certain compact 
disbursements.
    The proposed compact includes several key reform elements, 
supported by technical assistance activities in each project. The Power 
Sector Technical Assistance Activity includes conditions to help Nepal 
create a transparent and efficient electricity market. MCC believes 
that the establishment of the Electricity Regulatory Commission as an 
independent and capable regulator is essential for maintaining open, 
non-discriminatory access to a transmission network with transparent 
pricing and clear rules of engagement for all power market 
participants, particularly investors in generation projects. The 
compact proposes to increase the utility's planning, operations, and 
cost recovery mechanisms to help ensure the sustainability of the 
proposed investments. Strengthening the utility's transmission 
operations should ensure its viability if Nepal decides to spin off or 
merge those operations with an independent transmission company. MCC 
has conditioned the entry into force of the compact on satisfactory 
progress toward parliamentary approval of a bill to establish the 
Electricity Regulatory Commission. Further, funding for the Power 
Sector Technical Assistance Activity will only be provided if the 
Electricity Regulatory

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Commission bill has been passed by the Nepali parliament.
    For the Technical Assistance Activity in the Road Maintenance 
Project, MCC will provide compact funding for maintenance works only if 
Nepal increases its own historically low spending levels on road 
maintenance. The compact is expected to incentivize Nepal to increase 
its spending for road maintenance significantly by making MCC funding 
conditioned on increased Nepal spending.

[FR Doc. 2017-20847 Filed 9-26-17; 11:15 am]
 BILLING CODE 9211-03-P