The Melamchi Water Supply Projectcharvey/Teaching/663... · 2014-03-05 · Melamchi Water Supply Project (MWSP) Kathmandu Valley • Supply water to Capital City w/ 2.5 MM population

The Melamchi Water Supply Project

An effort to quench the ever growing thirst of the Kathmandu Valley

Finance 663 International Finance, Spring 1 2014Team Pancha: Chris Freeman, Nabin Khanal, Waqas Satti, Abhinav Upreti, Grace Webster

Outline

• Nepal• Melamchi Water Supply Project (MWSP)• Stakeholders• Financing• Risks• The Dilemma

Intl. Finance. Team Pancha: Freeman, Khanal, Satti, Upreti, Webster2

Nepal

3

28M+ people comprising more than 100 ethnic groups

Percent of Nepal’s workforce employed in agriculture:

75%

End of a decade long civil war in 2005

Transition from a Constitutional Monarchy to a Democratic

Republic in 2008

Percent of Nepal’s population living below the poverty line:

25%

Hydropower potential:42,000 MW (10th largest)

Intl. Finance. Team Pancha: Freeman, Khanal, Satti, Upreti, Webster

Nepal2007/2008 2013/2014

Government Structure Constitutional Monarchy Democratic Republic

GDP $12.5 billion $18.7 billion

FDI – Total Amount $15 million $290 million

Inflation 12.6% (208th worldwide) 8.3% (187th worldwide)

Intl. Finance. Team Pancha: Freeman, Khanal, Satti, Upreti, Webster 4

0 5 10 15 20 25

1980‐1984

1985‐1989

1990‐1994

1995‐1999

2000‐2007

2008

FDI inflows to Nepal (US$ million)

Melamchi Water Supply Project (MWSP)

Kathmandu Valley• Supply water to Capital City w/ 2.5 MM population

• Improve existing treatment and distribution system

Melamchi Valley• Melamchi River as source• 170 MLD (45 MGD)• Social and Environmental Support

Tunnel27.5 km (17 miles)

5Intl. Finance. Team Pancha: Freeman, Khanal, Satti, Upreti, Webster

MWSP Project Timeline

1987‐90• Feasibility study

1998•MWSDB established

2000•Nepal signed $464 MM loan with ADB

& WB

2001•Project commences

2002•WB pulls out leaving

$133 MM funding gap

2008•Project

restructured, ADB extended loan

2009•China Railway 15

Bureau Group contracted

2012•Agreement with CR 15 cancelled, 6.3 km

completed

2013•New Italian

contractor selected

2014•$38.1 MM extra

funding need

2016•New expected completion date


MWSPProject structure and goals

Sub Project 1: Melamchi River Diversion

• Melamchi Water Supply Development Board (MWSDB) as project management agency

• $235.32 MM

• Construct Melamchi tunnel (27.5 km) to supply 170 MLD (45 MGD) water

• Improve Social and Environmental conditions – construction of health care center, schools, forest nursery

Sub Project 2: Kathmandu Valley Water Supply and Sanitation

• Kathmandu Upatyaka KhanepaniLimited (KUKL) – implementation agency

• Leased assets and operating license from Kathmandu Valley Water Supply Management Board (KVWSMB) – the asset owner

• $64.08 MM

• Improve distribution and treatment system network in Kathmandu Valley

• Adjust existing water tariff structure


StakeholdersStakeholders Current funding and roles

Government of Nepal• $90.6 MM• Ministry of Urban Development chairs MWSDB• Ensures counter party funding

Asian Development Bank• $137.0 MM @ 1-1.5% p.a. for 32 yrs• Monitors loan covenants• Supervises the overall project implementation

Japan Bank for International Cooperation

• $47.5 MM @ 1% p.a. for 30 yrs• Support for water treatment plant upgrades

Japan International Cooperation Agency

• $18.0 MM @ 1% p.a. for 30 yrs• Support for shallow groundwater wellfield near KTM

Nordic Development Fund• $10.5 MM @ 1-1.5% p.a. for 32 yrs• Support for diversion tunnel construction

OPEC Fund for International Development

• $13.7 MM @ 1% p.a. for 20 yrs• Support for access road construction in Melamchi Valley


StakeholdersAsian Development Bank

The Asian Development Bank aims for an Asia and Pacific free from poverty. Approximately 1.7 billion people in the region are poor and unable to access essential

goods, services, assets and opportunities to which every human is entitled.

• 67 member countries• $165 billion capital base

– Borrowing on the world market– Member country contributions

• Tiered financing structure


StakeholdersAsian Development Fund

• Represents 25% of Asian Development Bank’s financing• Very low interest rate loans and grants for ADB's poorest member countries

• Performance‐based allocation policy guides the allocation of resources:– Macroeconomic and structural policies– Governance and public sector management– Policies and institutions promoting equity and inclusion– Performance of its portfolio of ongoing projects and program

• Encourage private sector reform and participation in member countries



Stakeholders ADB country ratings

Stakeholders ADB Loan Features


FinancingSources

Original cost: $464mm Restructured cost: $355mm

ADB26%

JBIC11%

JICA4%NDF

2%OFID3%

GON26%

SIDA5%

NORAD6%

World Bank17%

ADB39%

JBIC13%

JICA5%

NDF3%

OFID4%

GON25%

Additional Financing Required[PERCENTAGE]


FinancingUses

Use Amount AdditionalFinancing Needs Total

Infrastructure development 213.1 19.8 232.9

Social and environmental support 7.2 - 7.2

Project implementation support 53.5 8.9 62.4

Taxes & duties 20.4 2.9 23.3

Contingencies 17.6 5.9 23.5

Financing charges during implementation 5.5 0.6 6.1

Total 317.3 38.1 355.4Figures in US$ millions


FinancingCost of capital

• ADB assigned 7.95% as the project cost of capital– ADB granted loan at 1% to 1.5%– Assumed 10% as the nominal cost of capital according to Nepal savings

rate bonds– Adjusted for 1.9% inflation

• True project cost of capital– ADB used NPR denominated bonds as proxy for sovereign risk– FX exposure not accounted for– Project specific risk not accounted for


FinancingValuation

Market Rate Subsidized Rate

Cost of Equity 20.35% 20.35%

Cost of Debt 19.73% 1.38%

Weighted Average Cost of Capital 19.91% 6.91%

Jan 2014 Project NPV $84,725 $589,819

PV of Subsidies $505,094

Project IRR 12.5%


Figures in US$ millions

Project risks

Sovereign Risk

• Currency Risk: Pegged to Indian Rupees which has been volatile. Puts pressure on dollar reserves.

• Political Risk: History of political turmoil. Impacts the commitment of multilateral agencies to the project.

• Legislative Risk: Disputes between parties could need to be solved internationally in International Court of Arbitration.

Operational Risk

• Project delays: Project has already been delayed many times. Additional delays could lead to cost overruns in the current high inflationary environment.

• Operating Costs: Debt servicing will require that the project generates strong operating cash flows which implies higher water tariffs.

Reputational Risk

• Displacements: Project will result in displacement of communities.

• Potential reputational risk for the ADB as a lead funding provider to the project.


The Dilemma

• Should the MWSDB approach ADB for additional $25mm funding? – Additional funding needed to cover the cost overrun in tunnel construction

– GON already committed $13.1mm in additional equity funding

• What about getting private investors involved?– Equity investment?– Would they be willing to bear the risks?


The DilemmaGetting private investors involved

Pros• Frees up government and ADB

dollars for other critical areas of economy

• Transfers risk away from public partner to private entity

• Provides diversification to investors• Greater accountability and long‐

term efficiencies• Opens the door for future private

investors

Cons• Limited number of investors willing

to fund long‐term projects due to illiquidity

• Private investors seek high returns for bearing risks, which may not always come to fruition

• Approval process at this stage may be lengthy


The DilemmaKnocking on ADB’s door…again

Pros• Concessionary financing• Strong existing relationship• Strategic geopolitical location• Previous lack of domestic

support

Cons• Underlying problems still exist• Funds could go to other

development projects• Need to stimulate private

sector investment


The DilemmaWhat happened

• MWSDB approached ADB for additional $25 MM funding in Jan 2014

• ADB approved the loan in Feb 12, 2014 to complete the tunnel

• Completion date stays 2016


A long wait ahead?


APPENDIX

23

Melamchi tunnel


Documents

The Melamchi Water Supply Projectcharvey/Teaching/663... · 2014-03-05 · Melamchi Water Supply Project (MWSP) Kathmandu Valley • Supply water to Capital City w/ 2.5 MM population