MCC Termination - who pays compensation to countries like Nepal ?

Since assuming office for the second time on January 20, U.S. President Donald Trump has continued to cause one shock after another across the world. Under his slogan of "Making America Great Again," he has been rapidly cutting off grant assistance to third-world countries, including Nepal. Now the question remains- who would pay the compensation to Developing countries like Nepal for such a huge investment of uncertainity ? Isn't it a deadtrap itself ?

It has already been a few months since he, through the Department of Government Efficiency (DOGE) led by Elon Musk, shut down USAID, which had a 74-year-long history. With over NPR 265 billion (around USD 2 billion) worth of projects underway in Nepal, the closure of USAID has severely impacted areas ranging from schools to health posts.

After the blow from the closure of USAID, Nepal has now faced another major setback. The DOGE, under Musk’s leadership, has also decided to terminate the Millennium Challenge Corporation (MCC). DOGE has decided to close most MCC programs worldwide. MCC, which had already been postponed in January, is now permanently shut down, dealing a significant blow to underdeveloped countries like Nepal, Mongolia, Senegal, and Ivory Coast. In these countries, some projects were still ongoing amidst uncertainty, but now they too will be closed. As a result, the investments Nepal had made under the MCC are now at risk of going to waste, like water poured onto sand.

Nepal had signed a $500 million agreement with the MCC in 2017, in which the Nepal government had committed to contribute an additional $197 million. Under this agreement, projects included the construction of a 315-kilometer-long 400 kV electricity transmission line and the upgrading of road infrastructure.

However, on January 20, 2025, U.S. President Trump issued an executive order suspending all foreign aid programs for 90 days. As a result, projects under both USAID and MCC were affected. On February 14, the MCC informed the Government of Nepal via email that all payments had been halted.

The U.S. government's aid policy review process under Trump's leadership has now made the future of ongoing projects in Nepal uncertain. Nepal now faces the challenge of finding alternative sources to continue the projects from which the United States has withdrawn. According to the Ministry of Finance, the relevant agencies are currently exploring alternative measures to ensure the continuity of these projects.

Prime Minister Says – Do Not Rely on Others

After the U.S. raised a red flag, Prime Minister KP Sharma Oli himself has taken the stance that Nepal should no longer depend on foreign support. Speaking this last Saturday on 26th April, after having meeting with the US ambassador Dean R. Thompson on 24th April morning, he emphasized that Nepal must not look to foreign countries for its development. Addressing a meeting of the UML parliamentary party, he referred to the shutdown of the American assistance program (MCC) while making his remarks.

"The agreement signed with the U.S. government and passed by the parliaments of both countries—the Millennium Challenge Corporation (MCC)—has now been terminated unilaterally by the U.S. side. Nepal should now pursue its development without relying on others," he said to UML leaders.

With USAID already shut down before the MCC, Prime Minister Oli has now openly voiced that Nepal should not depend on foreign assistance. When the U.S. pressured Nepal's political parties to implement the MCC, the internal disputes caused deep polarization within society. However, now that the U.S. itself has betrayed Nepal, those who had supported MCC are maintaining a conspicuous silence.

The suspension of the $900 million MCC project in Nepal has raised serious concerns about the future of projects that had already begun. Under this agreement, the U.S. had pledged $550 million and Nepal $350 million. The MCC Compact was ratified on Falgun 15, 2078 (late February 2022), but only came into effect on Bhadra 13, 2080 (August 30, 2023). Now, with the termination of MCC, Nepal has once again been deceived by the U.S.

The MCC had been launched with a plan to complete electricity transmission line construction and road maintenance projects within five years. However, before any substantial visible progress in physical infrastructure could be made, the U.S. locked down the MCC project itself.

Based on a document prepared by Musk-led DOGE, Trump had already halted a $20 million project intended to support the implementation of fiscal federalism in Nepal. Referring to that funding, Trump had labeled it a "fraud."

Additionally, a $19 million project intended for biodiversity conservation in Nepal has also been canceled. In fact, all USAID-supported programs, which had been operating in Nepal since 1951 through grant assistance, have now been completely shut down.

In his Executive Order on January 20 regarding the reassessment and restructuring of foreign aid, Trump stated, "America will no longer blindly distribute money to other countries' citizens without any returns."

According to the Nepalese Ministry of Finance, before the closure of USAID, there were 56 American-supported programs operating in Nepal, involving the expenditure of U.S. dollars through 35 non-governmental organizations and 21 programs.

Aid Had Increased Before Trump's Return

Just on Poush 19 (early January), the Millennium Challenge Corporation (MCC) had announced an additional aid package of NPR 6.8 billion. According to the MCC Board of Directors, this amount was added to support projects under the $900 million (NPR 92 billion) MCC Compact that came into effect in Bhadra 2080 (August 2023). Under this agreement, the U.S. government had pledged $500 million (approximately NPR 66.43 billion) in grants, while the Nepalese government had committed an additional $197 million (approximately NPR 26.17 billion).

Initially, the estimated cost of the project was $630 million (around NPR 83.7 billion), but it was later revised to $697 million (around NPR 92.6 billion).

Additional Aid Announced

MCC had only recently, on Poush 19, announced the provision of an additional NPR 6.8 billion in aid. This additional funding was intended for projects under the MCC Compact worth approximately NPR 92 billion, which had come into operation since August 2024. As previously mentioned, the U.S. government was providing $500 million (NPR 66.43 billion) and the Nepalese government $197 million (NPR 26.17 billion) to implement the project.

The initial cost estimate was $630 million (NPR 83.7 billion), which was later revised to $697 million (NPR 92.6 billion).

A year ago, the U.S. Department of State’s Integrated Strategy for Nepal had already stated: "Due to internal political challenges and foreign disinformation campaigns with ulterior motives, ratification of the MCC Compact was delayed until February 2022. The United States will now focus on its implementation."

Reports themselves indicated that the MCC project, seen by many as part of a geopolitical game aimed at antagonizing northern neighbor China, had failed to deliver the expected benefits to the Nepalese people.

While the U.S. Department of State had asserted in its Nepal strategy that it would focus on implementation after the delayed ratification due to internal politics and disinformation campaigns, the MCC project slowed down and eventually came to a complete halt. Even though American officials aimed to facilitate electricity trade and improve road quality through MCC, the Nepalese public's persistent doubts, and the project’s geopolitical undertones involving China, meant that Nepal never fully reaped the intended benefits—and now, the project has been entirely shut down.

What Was the Progress of MCC?

Nepal was selected for the MCC (Millennium Challenge Corporation) Threshold Program during the tenure of then-Prime Minister Dr. Baburam Bhattarai on Magh 5, 2068 BS (January 19, 2012). Twelve years have passed since then, and although the program was ratified by Parliament and moved toward implementation, MCC was ultimately shut down without achieving substantial progress in the three years following parliamentary approval.

When the MCC Compact officially entered into force (Entry into Force – EIF) on Bhadra 13, 2080 BS (August 30, 2023), MCC’s Vice President for Compact Operations, Cameron Alford, visited Nepal. According to the agreement, the projects under MCC were supposed to be completed within five years of EIF (i.e., by Bhadra 13, 2085 BS / August 30, 2028). However, in the 19 months since the five-year countdown began, only preliminary works had been completed.

Even after EIF, the Millennium Challenge Account Nepal Development Board (MCA-Nepal) was unable to move the selected projects into the construction phase. Without completing key preliminary tasks like contracting, land clearance, compensation, and tree-cutting, President Trump shut down the MCC projects globally, including Nepal's, despite there being no domestic obstacles after parliamentary ratification. Especially in areas like electricity transmission lines and road upgrades, no significant progress was visible before the closure.

MCA-Nepal could not complete land acquisition and related processes even within 1.5 years. Although tenders for electricity lines and roads were invited, the process faced cancellations and extensions. When re-tendering efforts were underway, the MCC program was permanently halted.

What were the projects?

MCA Nepal had signed agreements for the construction of two 400 kV GIS substations: the new Butwal Substation in Nawalparasi (Bardaghat Susta West) district, and the Ratamate Substation in Nuwakot. The agreements for these projects were made on Baisakh 27 and Jestha 32, 2081 BS (corresponding to May–June 2024 AD). However, before work could even begin at either site, the entire project was shut down.

MCA Nepal had signed an agreement on Ashoj 12, 2080 BS (September–October 2023 AD) for consultancy services related to supervision engineers for the construction of the transmission lines and substations.

Under the technical assistance component of the Energy Sector of the Electricity Transmission Project, an agreement was signed on Ashar 31, 2081 BS (July 2024 AD) to provide full-time consultancy services to the Electricity Regulatory Commission.

In the one and a half years since entering the implementation phase, MCA Nepal got stuck in land acquisition processes under the Land Acquisition Act, 2034 BS (1977 AD) for building 856 transmission towers across nine out of the ten affected districts. Among these, only Dhading, Makwanpur, and Nawalparasi (Bardaghat Susta West) had completed compensation rate determination for the land. No progress was made in the other districts.

Compensation determination was still pending in Chitwan, Palpa, Nawalparasi (Bardaghat Susta East), Nuwakot, Tanahun, and Sindhupalchok, where transmission line towers were planned to be built. Although tree enumeration had been completed in nine of the ten affected districts, tree cutting was still pending.

Regarding the road improvement projects:

An environmental assessment report had been prepared for upgrading a 40-kilometer section of the East-West Highway from Dhankhola to Lamahi in Dang district. It had been planned to use a climate-friendly technology called "Full Depth Reclamation" — for the first time in Nepal — during the road upgrade. However, the work could not proceed. Similarly, there had been no physical progress on the 36-kilometer road section from Narayanghat to Muglin in Chitwan district either.

Investment

Under the MCC agreement, the United States had committed a total grant of 550 million dollars. With Nepal's government contributing an additional 197 million dollars, the total program cost amounted to 747 million dollars. However, both sides later increased their investments, raising the total to 900 million dollars.

Out of this, a plan was made to repair and maintain up to 130 kilometers of strategic road networks with an investment of 54.9 million US dollars. However, this work could not proceed. The goal to improve the quality of Nepal's strategic road network through the arrangement of a Matching Fund also remained limited to paper.

Regarding the electricity transmission project, it was stated that a total investment of 582.4 million US dollars would be made. The United States had stated that this project was intended to improve the electricity transmission system and increase domestic electricity consumption. This project had been surveyed with the aim of building infrastructure from near the Chinese border in the north down to the Indian border at Rupandehi. The project had prepared to construct a cross-border transmission line from New Butwal to Gorakhpur in India, which was viewed suspiciously in Nepal.

The project had signed agreements for constructing a 315-kilometer-long, double-circuit 400 kV transmission line (including some quad-circuit towers).

Substations

Under the Electricity Transmission Project, the construction of three new 400 kV capacity indoor gas-insulated substations (GIS) had been planned. These were to be:
Ratamate Substation at Belkotgadhi Municipality in Nuwakot,

New Damauli Substation in Tanahun,

New Butwal Substation at Bhumi in Nawalparasi West.

However, these plans have now fallen apart.

There was also a plan to connect the under-construction transmission lines to the substations of Nepal Electricity Authority located at Lapsiphedi in Kathmandu and New Hetauda in Makwanpur. Even though contracts had been awarded for the construction of three substations and an 18-kilometer transmission line from New Butwal to the Indian border under the MCC projects, the program was shut down before any work could begin.

On the other hand, since the bidding process for the 297-kilometer transmission line had to be repeated, work could not start. Similarly, before the bidding could be completed for the 77-kilometer road maintenance project from Bhaluwang to Shivkhola in Dang, the MCC program was halted.

Initially, during the agreement phase, the estimated cost for the transmission line was 234.5 million US dollars. However, only last Falgun (February–March 2025 AD), an additional 50 million dollars were added, raising the cost to 284.5 million dollars (around 39 billion Nepali rupees).

The estimated cost for substations was 99 million dollars (around 13.5 billion rupees) and for road maintenance, 52.3 million dollars (around 7.16 billion rupees).

MCA Nepal had organized a program where 85 representatives from 53 companies were invited to clarify bid-related documents regarding livelihood restoration for those physically and economically displaced by the project. In this regard, a call for bids was announced on Mangsir 28, 2081 BS (December 2024 AD), setting the deadline for submitting proposals by Magh 3, 2081 BS (January 17, 2025, AD), for the implementation of the Livelihood Restoration Plan.

MCA-Nepal had originally estimated the construction of the double-circuit transmission line under MCC support to cost 220.6 million US dollars. However, the lowest bid submitted was 365.9 million US dollars — about 66% higher than the estimated cost — resulting in the cancellation of all tenders.

Despite canceling the tenders, it took about seven months to initiate a new tender process and award new contracts. However, even after awarding the contracts, actual work did not progress, raising doubts that the project could be completed within the stipulated five years.

According to the agreement, all works under the MCC project were required to be completed within five years. However, even after one and a half years into the implementation phase, there had been zero physical progress. As a result, MCC projects, including in Nepal, were effectively frozen globally.

MCA-Nepal had tendered the project under a model where the selected company would be responsible for the design, supply, delivery, installation, testing, and commissioning of the transmission line. The condition was that the selected company would have to prepare its own design for constructing the transmission line. Under this precondition, acquisition of land for 856 towers was necessary. In addition, a 46-meter-wide right-of-way corridor along the transmission line had to be secured.

Furthermore, permission from the Council of Ministers was required to count and cut trees along the transmission line route and under the towers, covering 122 community, government, and various other types of forests.

However, complications intensified when MCA-Nepal declared that Nepal’s Public Procurement Act and Regulations would not apply to its projects. As a result, due to the non-compliance with the Public Procurement Act, the cost estimates and rates were mismatched, leading to the rejection of all bids in the first phase and halting the progress of the work.

Budget Could Not Be Spent

By the end of the fiscal year 2080/81 (2023/24), physical progress in the MCC project was only 6.6 percent. According to the Ministry of Finance data up to the point of project closure, a total of 6.11 billion rupees had been spent.

MCA-Nepal has not yet publicly released the expenditure details for the fiscal year 2081/82 (2024/25). The spending for the last fiscal year 2080/81 was disappointing. A budget of 10.84 billion rupees had been allocated for infrastructure development under MCA-Nepal for that year.

However, MCA-Nepal managed to spend only about 2.48582 billion rupees. Of this, 407.09 million rupees were spent from the Government of Nepal’s treasury, while 2.048582 billion rupees were spent from the MCC fund.

Project Halted Due to Land Acquisition Issues

Under MCA-Nepal, 1,471 hectares of land were required for the construction of the electricity transmission line and substations. Among them, land acquisition was successful only for the Ratamate Substation.

In Belkotgadhi Municipality, Nuwakot, 20.27 hectares of land were acquired, and compensation totaling 1.4684685 billion rupees was paid to those affected.

For the construction of the New Damauli and New Butwal substations in Tanahun and Butwal respectively, Nepal Electricity Authority was supposed to provide the land. Additionally, around 104 hectares of land in 10 districts were needed for the construction of transmission towers. MCA-Nepal could not accomplish this task either.

One of the conditions set in the MCC Compact — securing land acquisition and compensation for the transmission line and road expansions, ensuring rights to use land within forest areas, and ensuring access to project sites — remained unmet.

China May Benefit After MCC’s Closure

With the closure of the MCC, it is being assessed that China could now benefit in Nepal. Before the MCC was halted, Nepal had already signed an agreement with China in Mangsir (November–December 2024) to advance Belt and Road Initiative (BRI) projects.

While China had already begun advancing billion-rupee projects for buffalo farming under BRI in Nepal, the United States has now been seen as betraying Nepal. In this situation, diplomatic analysts argue that America's move has made it easier for China to expand its influence in Nepal.
Viewpoint from Ministry of Finance Official

According to a senior official from the Ministry of Finance, the impact of the MCC's suspension is much greater than that of the suspension of USAID projects.

He explained that USAID projects mostly affect off-budget sectors, meaning funds spent on education and health through non-governmental organizations. When USAID activities stopped, NGOs and INGOs were severely affected, and the activities of star-rated hotels (which hosted seminars and programs funded by USAID) came to a halt.

According to him, USAID used to organize major programs and seminars in big hotels. Now, such activities have ceased. Of the funds received from USAID, about 35% would be taken back by Americans in the form of technical assistance.

However, the suspension of the 500 million-dollar MCC project has had a direct blow to road and transmission line construction. "It has a huge impact. Now, the government must invest entirely from its own resources. Alternative funding sources must be explored," said the finance official. "After the closure of the MCC, we have instructed the officials here to prepare an exit plan within two or three days," he added.

According to him, despite one and a half years of MCC implementation, spending had not met expectations. "There was no significant expenditure because infrastructure construction could not take place. We have already directed that any remaining liabilities be covered using MCC funds," the official stated.

(Prepared by centre for policy research)
29th April 2025