India for hiking budget for each small project in Nepal to Rs240 million

 Nepal has requested India to reduce the ratio of Indian content requirements for the implementation of development projects under the Line of Credit (LoC), citing bureaucratic hurdles that are delaying project implementation.

The Department of Roads said in its Annual Progress Report 2022-23 that it has asked India to reduce the Indian content requirements to 30 percent from the existing 50 percent.

According to the department, the mandatory provision of buying 50 percent of Indian components is delaying implementation of the LoC-funded projects because of bureaucratic hurdles.

Such a request has been sent to Nepal's finance ministry through its line ministry (the Ministry of Physical Infrastructure and Transport) and the issue was also raised during the bilateral talks with India, according to the department. “India has shown no eagerness to do so,” the department.

Officials at the department said that they have been lobbying for the reduction of Indian content for the past several years and the issue was also raised during the 10th India-Nepal Line of Credit (LOC) Review Meeting held in August.

“We have to present evidence that the goods were brought from the Indian market. This should be certified by an Indian authority, which takes a long time,” said Sushil Dhakal, director general of the department.

For example, a master list of goods to be bought from the Indian market should be prepared and prices fixed to calculate the value of Indian components. “At times, variations in prices may occur during the procurement of goods and this impacts the assessed value of Indian content. In such cases, the new prices should also be validated. And this process takes a long time,” said Dhakal.

According to him, the procurement process takes longer compared to the time taken during the purchase of goods from the domestic market,” he added.

He said the contractors are themselves struggling to meet this requirement.

India has so far approved four LoCs—worth $100 million, $250 million, $550 million and $750 million—totalling $1.65 billion, according to the Indian embassy.

“These LoCs are dedicated towards infrastructure development as prioritised by the Nepal government,” it said. So far, the LoCs have financed over 40 road projects (1,105 km completed), six projects in hydropower and transmission lines, and several others in housing and reconstruction, said the embassy in August.

Power transmission infrastructure in Nepal has been augmented with major LoC projects, such as the Koshi Corridor (220 kV), Modi Lekhnath (132 kV), Solu Corridor (132 kV) and the Dhalkebar-Bhittamod (400 kV) projects.

The Indian government has also agreed to fund Bheri Corridor, Nijgadh-Inaruwa and Gandak Nepalgunj Transmission lines and associated substations under Indian LOC at an estimated cost of $679.8 million, according to the embassy.

The LoC is provided by the Export Import Bank of India (Exim Bank), with the main aim of financing development projects in other countries while ensuring that equipment, goods and services are bought from the Indian market.

Various road projects under the LoC 1 and LoC 2 have been completed but a number of projects under the LoC 3 are still being implemented, according to the department.

Under the LoC 3, as much as $340.42 million was allocated for roads. The road office has awarded 12 road contracts to contractors while two others are yet to be awarded. Charikot-Jiri road section built under LoC 3 has been completed while improvement of Gulariya road, Krishnanagar-Chandrauta and Sahajpur-Bogtan road under the East-West Highway have also been completed.

But many other projects like Lamahi-Ghorahi-Tulasipur, Mudhe-Charikot, and Balaju-Ranipauwa-Trishuli are facing delays, according to the department.

“Most projects being implemented under the LoC are facing bureaucratic delays due to the condition on Indian content,” said Dhakal. In 2014, the southern neighbour had reduced the Indian content requirement quota after Nepal’s continuous complaint.

When Nepal’s late Prime Minister Sushil Koirala visited India in November 2014, the Indian side had agreed to lower the Indian content requirement for LoC to 50 percent from over 75 percent. Likewise, India had opened the door for a joint venture company between Nepal and India to take up the LoC-funded projects.

It is not only Nepal where the LoC funded projects are facing problems due to the Indian content requirement. In February this year, India had agreed to lower the Indian content requirement for LoC in Bangladesh.

According to a report in The Business Standard, India had agreed to lower the requirement to 50 percent from 75 percent amid strong demands from the Bangladeshi side. Likewise, the two sides also proposed implementing the LoC-funded projects through joint ventures between Bangladeshi and Indian companies, changing the old provision of exclusive implementation by Indian contractors.

At a time when China and the US are expanding their influence in Nepal by increasing financial assistance and aid, Nepal’s southern neighbour, India, is set to increase the budget for each “small development project” from the current Rs50 million to Rs240 million.

Finance Minister Prakash Sharan Mahat confirmed to the Post that his ministry has given a nod to increasing the grant disbursed under the Indian small development project scheme. A memorandum of understanding on the increase will soon be signed, said Mahat.

India had initially proposed a grant of IRs150 million or NRs240 million for each project, but now the Ministry of Finance has trimmed it to Rs200 million, according to finance ministry sources. Nepal proposed slashing the aid amount as it has to bear 20 percent of the project cost, a financial burden the government currently lacks funds to cover, sources said.

Although the Cabinet is yet to approve the Indian proposal, given the decline in foreign aid, assistance, and grants by several bilateral and multilateral donor agencies, the government is considering it, a finance ministry official said. The finance ministry has given final touches to the text, which will soon be tabled in the Cabinet.

The finance ministry has forwarded the text of the MoU to the Prime Minister’s Office for Cabinet’s approval, a secretary at the Prime Minister’s Office told the Post.

The Indian side, during the time of Prime Minister Pushpa Kamal Dahal’s India visit in May-June, had insisted and communicated that it wanted to significantly increase the budget being disbursed under the small development project scheme in Nepal.

According to a bilateral arrangement, the scheme, which was launched in 2003, had to be renewed every three years. But after its renewal in 2014, no project under it had been implemented until 2017. The scheme was extended in 2017 and later again in 2020 with some amendments.

According to the Ministry of Urban Development, with the change in the country’s governance system, the responsibility for project implementation was handed over to the respective district coordination committees.

“As the Constitution of Nepal 2015 barred direct donations of funds to the local level, there was a hiatus in project implementation for a long time. The Cabinet decision of December 23, 2019 approved the new implementation modality and appointed the implementing agencies, paving the way for the resumption of project implementation,” stated the ministry.

As per the new modality, the Ministry of Federal Affairs and General Administration (MoFAGA) acts as the coordinating agency between local governments and the Nepal-based Indian embassy. The project proposals that the MoFAGA receives from local governments are sent to the Ministry of Finance, which forwards them to the Indian embassy for implementation.

“After this, a tripartite agreement has to be signed among the MoFAGA, Indian embassy, and the local unit concerned for project implementation. This modality provides that the local government should bear 20 percent of the total project cost,” said the urban development ministry.

As the cost of the construction materials has gone up, daily wages of workers in construction and other sectors have shot up, Rs50 million that India was providing for a project has become insufficient, given the demands from the local level for executing medium-level infrastructure projects, another finance ministry official said.

With the new increased budgetary arrangement, the scope of the projects will increase, the official added.

India has been building schools and hospitals and other small projects under the scheme. The proposed adjustments will address resource gaps for the execution of internal infrastructure projects or acquiring necessary equipment for the projects in accordance with Nepal’s proposal.

An Indian embassy official confirmed to the Post their proposal for a significant budget increase under the small development project scheme, but did not share the details. “We have already forwarded our proposal to the government and are waiting for their final decision,” the official said on the condition of anonymity as the matter is in the hands of the government of Nepal.

Both China and the US have increased their disbursement in Nepal for various projects in the recent past and their aid, grant, and economic assistance besides the Chinese Belt and Road Initiative and the US Millennium Challenge Nepal Corporation, have significantly increased.

“Not to be left behind by China and the US, the southern neighbour has committed to scaling up the scope of the projects from small- to medium-level development projects, which will also meet our developmental appetite,” said the secretary at the prime minister's office who is familiar with this proposal.

Formerly known as small development project scheme, the Indian side has rebranded it as High-impact Community Development Projects (HICDPs). Initially launched in November 2003, the Indian Embassy extended economic assistance to various projects at the local level, including schools, colleges, and hospital buildings under the scheme.

Amid the political turmoil, India used to allocate funds for small projects individually based on requests from relevant stakeholders. The formal agreement to this effect was signed and formalised through an MoU in August 2008 after the first elections to the Constituent Assembly.

HICDPs are short-gestation projects with a maximum financial outlay of NRs50 million, according to the Indian embassy website.

Since 2003, over 535 HICDPs have been taken up by the government of India of which 476 have been completed while 59 are ongoing, and the total cost of all projects is around NPR 11.55 billion, the website said.

The MoU is scheduled to be signed ahead of the visit of India’s External Affairs Minister S Jaishankar’s Nepal planned for the first week of January, officials said.

Finance Minister Mahat said that there is a mechanism within the government that will channel and execute the projects. “There is a mechanism for selecting projects, starting from the local level up to the ministry. We are looking for grant and economic assistance for small and medium-size infrastructure projects that this new proposal will fulfil,” said Mahat.