The Melamchi Water Supply Project

Transcription

1 The Melamchi Water Supply Project An effort to quench the ever growing thirst of the Kathmandu Valley Finance 663 International Finance, Spring 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 2

3 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% Percent of Nepal s population living below the poverty line: 25% Transition from a Constitutional Monarchy to a Democratic Republic in 2008 Hydropower potential: 42,000 MW (10 th largest) 3

4 Nepal 2007/ /2014 Government Structure Constitutional Monarchy Democratic Republic GDP $12.5 billion $18.7 billion FDI Total Amount $15 million $290 million Inflation 12.6% (208 th worldwide) 8.3% (187 th worldwide) FDI inflows to Nepal (US$ million)

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) 5

6 MWSP Project Timeline Feasibility study MWSDB established Nepal signed $464 MM loan with ADB & WB Project commences WB pulls out leaving $133 MM funding gap Project restructured, ADB extended loan China Railway 15 Bureau Group contracted Agreement with CR 15 cancelled, 6.3 km completed New Italian contractor selected $38.1 MM extra funding need New expected completion date 6

7 MWSP Project structure and goals Sub Project 1: Melamchi River Diversion Melamchi Water Supply Development Board (MWSDB) as project management agency $ 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

8 Stakeholders Stakeholders Government of Nepal Asian Development Bank Japan Bank for International Cooperation Japan International Cooperation Agency Nordic Development Fund Current funding and roles $90.6 MM Ministry of Urban Development chairs MWSDB Ensures counter party funding $ % p.a. for 32 yrs Monitors loan covenants Supervises the overall project implementation $47.5 1% p.a. for 30 yrs Support for water treatment plant upgrades $18.0 1% p.a. for 30 yrs Support for shallow groundwater wellfield near KTM $ % p.a. for 32 yrs Support for diversion tunnel construction OPEC Fund for International Development $13.7 1% p.a. for 20 yrs Support for access road construction in Melamchi Valley 8

9 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 9

10 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

11 Stakeholders ADB country ratings 11

12 Stakeholders ADB Loan Features 12

13 Financing Sources Original cost: $464mm NORAD 6% SIDA 5% World Bank 17% GON 26% ADB 26% JICA NDF 4% OFID 2% 3% JBIC 11% Restructured cost: $355mm GON 25% Additional Financing Required [PERCENT AGE] OFID 4% NDF 3% JICA 5% JBIC 13% ADB 39% 13

14 Financing Uses Use Amount Additional Financing Needs Total Infrastructure development Social and environmental support Project implementation support Taxes & duties Contingencies Financing charges during implementation Total Figures in US$ millions 14

15 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

16 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 $505,094 Project IRR 12.5% Figures in US$ millions 16

17 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. 17

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? 18

19 The Dilemma Getting 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 longterm 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 19

20 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

21 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

22 A long wait ahead? 22

23 APPENDIX 23

24 Melamchi tunnel 24