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
Transcript
Slide 1
Finance 663 International Finance, Spring 1 2014 Team Pancha:
Chris Freeman, Nabin Khanal, Waqas Satti, Abhinav Upreti, Grace
Webster
Slide 2
Nepal Melamchi Water Supply Project (MWSP) Stakeholders
Financing Risks The Dilemma Intl. Finance. Team Pancha: Freeman,
Khanal, Satti, Upreti, Webster 2
Slide 3
3 28M+ people comprising more than 100 ethnic groups Percent of
Nepals 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 Nepals population living
below the poverty line: 25% Hydropower potential: 42,000 MW (10 th
largest) Intl. Finance. Team Pancha: Freeman, Khanal, Satti,
Upreti, Webster
Slide 4
2007/20082013/2014 Government StructureConstitutional Monarchy
Democratic Republic GDP$12.5 billion $18.7 billion FDI Total
Amount$15 million $290 million Inflation12.6% (208 th worldwide)
8.3% (187 th worldwide) Intl. Finance. Team Pancha: Freeman,
Khanal, Satti, Upreti, Webster4
Slide 5
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 Intl.
Finance. Team Pancha: Freeman, Khanal, Satti, Upreti, Webster
Slide 6
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 6 Intl. Finance. Team Pancha: Freeman,
Khanal, Satti, Upreti, Webster
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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
Slide 8
StakeholdersCurrent 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
Slide 9
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 Intl. Finance.
Team Pancha: Freeman, Khanal, Satti, Upreti, Webster
Slide 10
Represents 25% of Asian Development Banks 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
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Webster
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Webster
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Original cost: $464mmRestructured cost: $355mm 13 Intl.
Finance. Team Pancha: Freeman, Khanal, Satti, Upreti, Webster
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UseAmount Additional Financing Needs Total Infrastructure
development213.119.8232.9 Social and environmental support7.2 -
Project implementation support53.58.962.4 Taxes &
duties20.42.923.3 Contingencies17.65.923.5 Financing charges during
implementation5.50.66.1 Total317.338.1355.4 Figures in US$ millions
14 Intl. Finance. Team Pancha: Freeman, Khanal, Satti, Upreti,
Webster
Slide 15
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
Slide 16
Market RateSubsidized Rate Cost of Equity20.35% Cost of
Debt19.73%1.38% Weighted Average Cost of Capital19.91%6.91% Jan
2014 Project NPV$84,725$589,819 PV of Subsidies$505,094 Project
IRR12.5% 16 Intl. Finance. Team Pancha: Freeman, Khanal, Satti,
Upreti, Webster Figures in US$ millions
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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 Intl. Finance.
Team Pancha: Freeman, Khanal, Satti, Upreti, Webster
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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
Slide 19
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 19 Intl. Finance.
Team Pancha: Freeman, Khanal, Satti, Upreti, Webster
Slide 20
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
Slide 21
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
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Webster
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Webster