Kathmandu, February 26

The Asian Development Bank (ADB), the major financier for the Melamchi Water Supply Project, has said it would not support the $355.4-million project if the government reappoints the Italian company to complete the unfinished work by bowing down to the firm’s fresh demands.

This statement comes at a time when Water Supply Minister Bina Magar has expressed keen interest to reengage Cooperativa Muratori Cementisti di Ravenna (CMC), the Italian contractor, in the much-awaited Melamchi Water Supply Project, which will bring 170 million litres of water per day to houses located inside Ring Road of Kathmandu valley where water is in short supply. She has expressed this intent despite knowing that CMC had abandoned the project in December after it faced severe financial problems in its home country, which pushed it to the verge of bankruptcy.

“We understand the government is assessing the pros and cons of all alternative options to complete the project as early as possible,” ADB’s Urban Development Specialist Vivian Castro-Wooldridge told The Himalayan Times. “[But] in the current context, going for rebidding with repackaging of the remaining works would be a better option,” she said, indicating that the ADB is not in favour of water supply minister’s proposal to rehire CMC. “We hope the government will take a decision that is in the best interest of the project so that the ADB is able to continue its support to this very important project.”

If the ADB steps away from the project at this juncture it may not show interest to finance the second phase of project, under which additional 340 million litres of water would be brought from Yangri and Larke per day to houses located outside the Ring Road of the valley.

This is the first time the Manila-based multilateral lender had made its views public on latest problems faced by the project.

The ADB has been working with the government on the long-delayed project since 2000. When works first started, project completion deadline was set for September 30, 2006. Over the years, the project has faced numerous hurdles, leading to its delay.

The last time the project had faced a severe problem was in 2012 when the Chinese contractor abandoned the project like CMC did. But by July 2013 the problem was resolved, as the project had roped in CMC as the new contractor.

When CMC completed excavation of the 26km tunnel last April, a crucial component of the project, which is key to carrying water from the Melamchi River in Sindhupalchowk district to Kathmandu, many were finally hopeful about completion of the project. But with CMC deserting the project, a new problem has cropped up.

Minister Magar told the Parliament last Friday that her first priority was to reappoint CMC, because ‘the project would be further delayed if the government restarts the procurement process to hire new contractors’. She had made this comment after a team dispatched by her met with CMC representatives in Singapore. During the Singapore meeting, CMC had agreed to give continuity to the project on condition that the government fulfil its fresh demands, according to sources.

One of the conditions of the Italian contractor is that the government provide it compensation of around Rs one billion for keeping it idle since December. Officials have called it a ‘ridiculous’ demand, as the contractor itself had abandoned the project on December 17. CMC also wants the government to revoke its decision to seize the performance bond of Rs 2.1 billion. It has also said it would need Rs 1.5 billion to complete head works — which is crucial to divert water to Kathmandu — as against the previous cost estimate of Rs 900 million.

If all these demands are fulfilled, the government will have to fork out over Rs 6.5 billion, according to a project official.

“If the government agrees to the company’s conditions it would set a terrible precedent in Nepal. This will send a message in the international market that a foreign company can bid low on the contract in Nepal and re-negotiate the rate through variations and manipulations.

This is not acceptable,” another source said.

Yet, the possibility of the government agreeing to CMC’s fresh conditions cannot be ruled out as it had previously gone out of the way to support the Italian firm.

For example, the government had previously provided advance payment of around $8 million to the Italian contractor in three instalments to address cash-flow problems faced by the company. This was a bit unusual because advance payments are only given once after the contractor begins work. What was also unusual is that the ADB had also agreed to release these payments.

The advance payments, according to a source, were made on condition that they would be recouped from CMC after 80 per cent of the contract work was executed. But that did not happen. “We were able to finally recover that amount after the issue went to the court,” a project official said.

Earlier, CMC had also stopped reimbursing sub-contractors even after the government released the payment. For example, an Indian vendor, which was working on hydro-mechanical gate, was supposed to receive payment of around $100,000 from CMC. CMC told the government about this and the payment was released.

“But the Indian vendor never received that payment, meaning the money went to Italy,” the source said, adding, “There is no guarantee that the Italian company would complete the work even if the government rehires it after fulfilling all its demands.”

CMC has currently filed for bankruptcy and an Italian court is expected to hear its case on April 6.

If it is declared bankrupt it will have to pay back creditors based on priority and if adequate assets are left it can restructure itself before starting operations on a much smaller scale than now.

Since it is not known whether CMC will continue to exist after April 6, ADB has recommended that a ‘political decision be made to use existing vendors and suppliers to complete the project’. These vendors and suppliers, as per a project official, can complete most of the work except head works.

If this process is followed, works can start at the project site within May and since water from Melamchi can be temporarily diverted to Kathmandu without completing head works, Melamchi River water can flow out of taps in the valley as early as August or September, sources said.