The Melamchi Water Supply Project
An effort to quench the ever growing
thirst of the Kathmandu Valley
Finance 663 International Finance, Spring 1 2014
Team Pancha: Chris Freeman, Nabin Khanal, Waqas Satti, Abhinav Upreti, Grace Webster
Outline
•
•
•
•
•
•
Nepal
Melamchi Water Supply Project (MWSP)
Stakeholders
Financing
Risks
The Dilemma
2
Intl. Finance. Team Pancha: Freeman, Khanal, Satti, Upreti, Webster
Nepal
28M+ people comprising more
than 100 ethnic groups
End of a decade long civil war in
2005
Percent of Nepal’s workforce
employed in agriculture:
75%
Transition from a Constitutional
Monarchy to a Democratic
Republic in 2008
Percent of Nepal’s population
living below the poverty line:
Hydropower potential:
25%
42,000 MW (10th largest)
3
Intl. Finance. Team Pancha: Freeman, Khanal, Satti, Upreti, Webster
Nepal
2007/2008
2013/2014
Constitutional Monarchy
Democratic Republic
GDP
$12.5 billion
$18.7 billion
FDI – Total Amount
$15 million
$290 million
12.6% (208th worldwide)
8.3% (187th worldwide)
Government Structure
Inflation
FDI inflows to Nepal (US$ million)
2008
2000-2007
1995-1999
1990-1994
1985-1989
1980-1984
0
5
10
15
20
Intl. Finance. Team Pancha: Freeman, Khanal, Satti, Upreti, Webster
25
4
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
•
•
•
Tunnel
Melamchi River as source
27.5 km (17 miles)
170 MLD (45 MGD)
Social and Environmental Support
5
Intl. Finance. Team Pancha: Freeman, Khanal, Satti, Upreti, Webster
MWSP Project Timeline
1987-90
1998
2000
2001
• Feasibility study
• MWSDB established
• Nepal signed $464
MM loan with ADB
& WB
• Project commences
2002
2008
2009
2012
• China Railway 15
Bureau Group
contracted
• Agreement with CR
15 cancelled, 6.3 km
completed
• WB pulls out leaving
$133 MM funding
gap
2013
• New Italian
contractor selected
• Project
restructured, ADB
extended loan
2014
2016
• $38.1 MM extra
funding need
• New expected
completion date
6
Intl. Finance. Team Pancha: Freeman, Khanal, Satti, Upreti, Webster
MWSP
Project 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 Khanepani
Limited (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
7
Intl. Finance. Team Pancha: Freeman, Khanal, Satti, Upreti, Webster
Stakeholders
Stakeholders
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
8
Intl. Finance. Team Pancha: Freeman, Khanal, Satti, Upreti, Webster
Stakeholders
Asian 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
Intl. Finance. Team Pancha: Freeman, Khanal, Satti, Upreti, Webster
9
Stakeholders
Asian 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
10
Intl. Finance. Team Pancha: Freeman, Khanal, Satti, Upreti, Webster
Stakeholders
ADB country ratings
11
Intl. Finance. Team Pancha: Freeman, Khanal, Satti, Upreti, Webster
Stakeholders
ADB Loan Features
12
Intl. Finance. Team Pancha: Freeman, Khanal, Satti, Upreti, Webster
Financing
Sources
Original cost: $464mm
World
Bank
17%
NORAD
6%
Restructured cost: $355mm
Additional
Financing
Required
11%
ADB
26%
ADB
39%
GON
25%
SIDA
5%
JBIC
11%
GON
26%
JICA
NDF 4%
OFID 2%
3%
OFID
4% NDF
3% JICA
5%
JBIC
13%
13
Intl. Finance. Team Pancha: Freeman, Khanal, Satti, Upreti, Webster
Financing
Uses
Use
Infrastructure development
Amount
Additional
Financing Needs
Total
213.1
19.8
232.9
7.2
-
7.2
Project implementation support
53.5
8.9
62.4
Taxes & duties
20.4
2.9
23.3
Contingencies
17.6
5.9
23.5
5.5
0.6
6.1
317.3
38.1
355.4
Social and environmental support
Financing charges during implementation
Total
Figures in US$ millions
14
Intl. Finance. Team Pancha: Freeman, Khanal, Satti, Upreti, Webster
Financing
Cost 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
15
Intl. Finance. Team Pancha: Freeman, Khanal, Satti, Upreti, Webster
Financing
Valuation
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
Project IRR
$505,094
12.5%
Figures in US$ millions
16
Intl. Finance. Team Pancha: Freeman, Khanal, Satti, Upreti, Webster
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
Reputational Risk
• Project delays: Project has
already been delayed many
times. Additional delays
could lead to cost overruns
in the current high
inflationary environment.
• Displacements: Project will
result in displacement of
communities.
• Operating Costs: Debt
servicing will require that
the project generates
strong operating cash flows
which implies higher water
tariffs.
• Potential reputational risk
for the ADB as a lead
funding provider to the
project.
17
Intl. Finance. Team Pancha: Freeman, Khanal, Satti, Upreti, Webster
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?
18
Intl. Finance. Team Pancha: Freeman, Khanal, Satti, Upreti, Webster
The Dilemma
Getting private investors involved
Pros
Cons
• 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 longterm efficiencies
• Opens the door for future private
investors
• 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
19
Intl. Finance. Team Pancha: Freeman, Khanal, Satti, Upreti, Webster
The Dilemma
Knocking 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
20
Intl. Finance. Team Pancha: Freeman, Khanal, Satti, Upreti, Webster
The Dilemma
What 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
21
Intl. Finance. Team Pancha: Freeman, Khanal, Satti, Upreti, Webster
A long wait ahead?
22
Intl. Finance. Team Pancha: Freeman, Khanal, Satti, Upreti, Webster
APPENDIX
23
Melamchi tunnel
24
Intl. Finance. Team Pancha: Freeman, Khanal, Satti, Upreti, Webster