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The Melamchi Water Supply Project

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)

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The Melamchi Water Supply Project

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  1. 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

  2. Outline • Nepal • Melamchi Water Supply Project (MWSP) • Stakeholders • Financing • Risks • The Dilemma Intl. Finance. Team Pancha: Freeman, Khanal, Satti, Upreti, Webster

  3. Nepal • 28M+ people comprising more than 100 ethnic groups • 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: • 25% • Hydropower potential: • 42,000 MW (10th largest) • End of a decade long civil war in 2005 Intl. Finance. Team Pancha: Freeman, Khanal, Satti, Upreti, Webster

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

  5. 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 Tunnel 27.5 km (17 miles) Intl. Finance. Team Pancha: Freeman, Khanal, Satti, Upreti, Webster

  6. MWSP Project Timeline Intl. Finance. Team Pancha: Freeman, Khanal, Satti, Upreti, Webster

  7. MWSPProject structure and goals Sub Project 1: Melamchi River Diversion Sub Project 2: Kathmandu Valley Water Supply and Sanitation Kathmandu UpatyakaKhanepani 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 • 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 Intl. Finance. Team Pancha: Freeman, Khanal, Satti, Upreti, Webster

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

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

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

  11. Stakeholders ADB country ratings Intl. Finance. Team Pancha: Freeman, Khanal, Satti, Upreti, Webster

  12. Stakeholders ADB Loan Features Intl. Finance. Team Pancha: Freeman, Khanal, Satti, Upreti, Webster

  13. FinancingSources Original cost: $464mm Restructured cost: $355mm Intl. Finance. Team Pancha: Freeman, Khanal, Satti, Upreti, Webster

  14. FinancingUses Figures in US$ millions Intl. Finance. Team Pancha: Freeman, Khanal, Satti, Upreti, Webster

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

  16. FinancingValuation Figures in US$ millions Intl. Finance. Team Pancha: Freeman, Khanal, Satti, Upreti, Webster

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

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

  19. The DilemmaGetting private investors involved Pros 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 • 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 Intl. Finance. Team Pancha: Freeman, Khanal, Satti, Upreti, Webster

  20. The DilemmaKnocking on ADB’s door…again Pros Cons Underlying problems still exist Funds could go to other development projects Need to stimulate private sector investment • Concessionary financing • Strong existing relationship • Strategic geopolitical location • Previous lack of domestic support Intl. Finance. Team Pancha: Freeman, Khanal, Satti, Upreti, Webster

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

  22. A long wait ahead? Intl. Finance. Team Pancha: Freeman, Khanal, Satti, Upreti, Webster

  23. Appendix

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

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