The Melamchi Water Supply Projectcharvey/Teaching/663... · 2014-03-05 · Melamchi Water Supply...
Transcript of The Melamchi Water Supply Projectcharvey/Teaching/663... · 2014-03-05 · Melamchi Water Supply...
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
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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 $290 million
Inflation 12.6% (208th worldwide) 8.3% (187th worldwide)
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0 5 10 15 20 25
1980‐1984
1985‐1989
1990‐1994
1995‐1999
2000‐2007
2008
FDI inflows to Nepal (US$ 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)
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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
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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
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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
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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
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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
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Stakeholders ADB country ratings
Stakeholders ADB Loan Features
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FinancingSources
Original cost: $464mm Restructured cost: $355mm
ADB26%
JBIC11%
JICA4%NDF
2%OFID3%
GON26%
SIDA5%
NORAD6%
World Bank17%
ADB39%
JBIC13%
JICA5%
NDF3%
OFID4%
GON25%
Additional Financing Required[PERCENTAGE]
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FinancingUses
Use Amount AdditionalFinancing Needs Total
Infrastructure development 213.1 19.8 232.9
Social and environmental support 7.2 - 7.2
Project implementation support 53.5 8.9 62.4
Taxes & duties 20.4 2.9 23.3
Contingencies 17.6 5.9 23.5
Financing charges during implementation 5.5 0.6 6.1
Total 317.3 38.1 355.4Figures in US$ millions
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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
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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 $505,094
Project IRR 12.5%
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Figures in US$ 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.
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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?
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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
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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
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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
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A long wait ahead?
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APPENDIX
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Melamchi tunnel
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