Government Preparing to Take Additional Loan of Rs 5.5 Billion for Nagdhunga Tunnel Project

The government is preparing to take an additional loan of Rs 5.5 billion for the Nagdhunga Tunnel Project. The first-of-its-kind project in Nepal is currently being built at a total cost of Rs 22 billion, including a Rs 16 billion loan from the Japanese government.

Of the total investment, the Government of Nepal has contributed Rs 6 billion, primarily compensation for land acquisition. According to officials, the additional borrowing is being considered due to additional works following design changes, cost overruns related to construction delays, and insufficient funds allocated for additional financing of consultancy services. 

The Nagdhunga Tunnel project was inaugurated on October 21, 2019, with an initial completion target of 42 months, or mid-April 2023. The project is being financed largely through a concessional loan from Japan, and the government is now preparing to secure the additional loan from the same source, officials at the Department of Roads said. However, a formal agreement on the additional loan has yet to be signed.

“We initially took a loan of Rs 16 billion. Now an additional Rs 5.5 billion is being proposed,” a department official said. “The increase is mainly due to higher construction and consultancy costs, as well as possible compensation claims from the contractor. While the financing arrangement has not been finalized, preparations are underway.”

Construction of the tunnel was affected in its early phase by the Covid-19 pandemic. The project also faced repeated disruptions due to protests by local residents, who halted work on several occasions by raising various demands. In some instances, construction was stopped for nearly a month. In February-March 2025, work had to be resumed with the deployment of security personnel after locals obstructed the project for 28 days.

Under the contract provisions, contractors are entitled to claim compensation for delays caused by factors other than natural disasters or extraordinary circumstances. Accordingly, the construction company, Japan’s Hazama Ando Corporation, has submitted compensation claims for the Nagdhunga project.

Officials said design variations and additional structures—mainly auxiliary facilities within the tunnel—have increased the project cost.

“The contractor has repeatedly submitted compensation claims, which have not yet been verified,” the official said. “While we have rejected the claims so far, the contractor has not withdrawn them.” A team of three experts is currently reviewing the claims. If approved, compensation payments will be covered through the proposed additional loan.

Following delays caused by the pandemic, the project deadline was extended to October 2025. However, as construction could not be completed within the revised timeframe, the deadline has now been further extended to mid-May 2026, according to Project Chief Sanjay Nepal.

The project’s main tunnel, measuring 2.5 kilometres, achieved a breakthrough on April 15, 2024. The Department of Roads has initiated the process of selecting a service provider to operate the tunnel once construction is completed.

The project has already issued global tenders twice to appoint an operator, with the deadline for the second round expiring on Wednesday. The first tender was not opened citing the need for revisions to some issues, prompting for the second call. Under the revised terms, international bidders are required to partner with a Nepali service provider under a joint venture arrangement. The bids will be opened on Wednesday, officials said.

Project Chief Nepal said it would take around two months after the bid opening to complete evaluations and finalize the remaining procedures. The tender process and document evaluation are expected to be completed by mid-March, after which trial of vehicle operations is planned.

By then, landslide management work at the western portal in Dhading is also expected to be completed. The government granted the contractor a six-month extension in between mid-October and mid-November after a new design was required for slope stabilization at the site. The Japanese contractor is currently working to complete the landslide management within the extended period.

In addition to landslide mitigation, construction of toll plazas is also underway. A total of five toll plazas—located at the eastern portal (Kathmandu side) and the western portal (Dhading side)—are being built as part of the project.