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Finance 663 International Finance, Spring 1 2014 Team Pancha: Chris Freeman, Nabin Khanal, Waqas Satti, Abhinav Upreti, Grace Webster

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

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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

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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

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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

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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

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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

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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

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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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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

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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

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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

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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

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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

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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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