Brent Willey, Nilu Puri Basnyat, Ram Charitra Sah

Our three member research team is in the process of gathering information by reviewing project documents and interviewing project and government officials, donor representatives and project affected people paying particular attention to what Melamchi Water Supply Project (MWSP) will mean to the poor in the Kathmandu Valley.
In general, MWSP is a major, multi-faceted water supply project aimed at improving service and delivery of water to the Kathmandu Valley. The four major components of the MWSP are:

· Infrastructure Development of the Water and Wastewater System
· Social and Environmental Issues
· Institutional Reforms
· Organizational Structure for Project Implementation

Updated Summary of Project

1) Recent Update of Infrastructure Components

a) Melamchi Diversion Scheme (MDS): Comprises a 18 km main access road (MAR), 4 adit access roads (AAR) 25 km total length, upgrading of a 22 km approach road (UAR), a diversion weir, a desanding basin at the intake, a two part 26.5 km tunnel, Power Transmission Line (PTL) and substation.

Progress Status: Pace of construction activities of the MAR has increased, 75% completed. Temporary access North of Chanaute is built. Blasting issues remain a security concern and is hindering progress in a certain section. The AAR work resumed in November but the progress is very slow. Conflict with contractor, Hanil Koneko, brought a halt to the progress altogether from February 17 to March 25, 2002. The UAR bid evaluation is ongoing. The redesign of the road is resulting in substantial changes in work volume. The technical bid evaluation for the PTL was submitted to ADB for approval. The notice for land acquisition was published. The technical proposal for the Melamchi Diversion Tunnel was evaluated and is under consideration by the Board. The PQ evaluation of the construction contractors was submitted to the Board.

b) A Water Treatment Plant (WTP): Situated at Mahankal near Sundarijal with an initial capacity of either 85 MLD or 170 MLD but could be expanded to 510 MLD in the future.

Progress Status: The design and bid document preparation phase is completed. The consultants have been demobilized and further work has been deferred for the time being. The tender award date, however, is delayed due to the different controversial design options presented in SAPI II Report, land acquisition issues, and a clause that suggests that the tender will only be awarded after the management contractor is selected. The start of the construction is currently scheduled for 2006, and is dependent on the commencement and completion dates of the tunnel Contracts.

c) Bulk Distribution System (BDS): Bulk transmission mains to transfer water to a yet undetermined number of reservoirs.

Progress Status: The supervision consultant recruitment process has been deferred due to controversial findings presented in the SAPI studies, land acquisition issues, and a clause that suggests that the tender will only be awarded after the Kathmandu Valley Water Authority has been set in place.

d) Wastewater System Improvements (WSI): Planned rehabilitation of existing sewer networks and wastewater treatment plants.

Progress Status: The short-listing of applications from consulting firms for the design and construction supervision of WSI was completed in the last FY 2001/2002, and has been evaluated. Both the short-listing and RFP are waiting for the Board's approval. This work has been considered to be of lesser priority in comparison to the other critical activities of the project. It has been jointly decided by HMG/N and the donors to defer WSI activities until the DNI strategy is finalized.

e) Distribution Networks Improvements (DNI):

The SAPI II study indicates the improvement works have to be implemented in stages. And in the zoning plans proposed under SAPI II, the distribution systems within the municipalities of Kathmandu and Lalitpur will be divided into 5 large distribution zones by major rivers and municipal boundaries. Each of these large zones will then be further divided into a number of medium distribution zones.

The spatial priority of DNI is also recommended under SAPI II, which is based on existing water supply conditions in that a higher priority has been given to areas where existing supply conditions are less favorable, except for the first priority area. SAPI study selected the area to be supplied from the Min Bhawan elevated tank as being the first priority area for DNI. This area includes 'Area 1a' and 'Area 1b' proposed for implementation of the Manohara Demonstration Scheme, and lies in Zone III.

Design Concept: It is proposed that water from the Bansbari and Mahankalchaur reservoirs should be distributed through a Skeletal Distribution System (SDS). The SDS has been configured through a hydraulic analysis so that there will be a minimum head of 20 m at every location along side the Ring Main. The distribution system after SDS comprises of the primary, secondary and tertiary distribution mains. It is therefore necessary to keep the total head loss in these distribution mains to be smaller than 10m so that there will be a minimum remaining effective head of 10 m at the ends of tertiary distribution mains.

Progress Status: As part of the supplementary activities, JBIC undertook Special Assistance for the Project Implementation (SAPI) study to formulate basic strategies for DNI. A water use survey was conducted by NGO Forum for SAPI Phase II Study and the results indicated the average domestic water demand under intermittent supply was 80 lpcd and about 112 lpcd for 24 hour supply. Based on these results a clearer development strategy for the DNI/BDS implementation has emerged.

The total cost of the BDS was reduced to 33.1 m US$ from the previous BDS estimate of 43.5 m US$ with two service reservoirs of total capacity 40,000 cu. m and a smaller diameter transmission main of 1200mm. The cost of the Skeletal Distribution System (SDS) is 21.6 m US$ and the DNI for 6 priority areas was estimated at 101 m US$. The total cost thus comes to 155.7 m US$ for BDS, SDS, DNI. The HMGN, donors and MWSDB have yet to decide on the recommendations of the SAPI Phase II report.

After the World Bank withdrawal from its previous funding commitments the new funding sources for the DNI are yet to be finalized. However, ADB and JBIC have indicated that they will facilitate to resolves the funding issues.

2) Recent Update on Institutional Reforms

Until recently, the NWSC has been engaged in investment planning, regulation and operation and hence also not been able to perform all the responsibilities as per the expectation. This needs splitting of its role and responsibilities through the proposed reform. All these three responsibility are proposed to separately and autonomously perform by the creation of three additional institutions. The civil society role is felt important to make sure reliable water supply in the valley through its constructive critical support. A short-term international experience in managing water supply will be augmented for the improvement of the newly created institution responsible for the water supply and wastewater management through a financially binding performance based management contract (MC).

The new institutional reform includes creation of Water Authority (WA), Water Utility Operator (WUO) and National Water Supply Regulatory Board (NWSRB) as shown in figure given below.
WA owns the assets and responsible for investment planning and water supply development, licensing, policy and performance reporting. WA is governed by a board including representatives of HMGN, the 5 municipalities in Kathmandu Valley, the 3 district development committees in Kathmandu Valley, professional associations, the business community, and civil society.
WUO will be established as a limited liability company under the provision of the Company Act 1997, responsible to provide water and wastewater service in Kathmandu valley accordance with license provision given by WA. The four shareholders of the WUO Company include HMGN, municipalities, civil society, and a trust representing the interest of employees.
National Water Supply Regulatory Board (NWSRB) will monitor MC and WUO and fix water tariff.

3) Recent Update on Project Finance and Tariff Reforms

Costs

The initial project funded cost for the Melamchi Water Supply Project is $464 million while the most recent adjusted cost estimate is $478 million. The increase is largely due to additional security issues at the site, approximately $8.3 million, which will have to be funded by HMG/Nepal. Revised project cost estimates could increase due to international market cost, inflation, change in rate of interest and costs associated with delays. Project cost estimates increase by $1.5 million for each month delay on major civil work.

At present there are committed funds with identified donors of $386.4 million. There is a funding gap of almost $92 million mainly due to the departure of the World Bank. ADB and JBIC are assisting HMG/Nepal in pursuing alternative funding sources to replace the credit which World Bank was to provide. According to ADB sources, this gap will be likely be funded partly by ADB and partly by other donors, possibly Japan. Currently, Loans constitute 57.24%, Grants 15.96% and HMG/N 26.80% of funding for the project. Recently proposed tariff changes are as follows:

Tariff

One of the principal institutional reforms to be addressed with the Melamchi Water Supply Project is the restructuring of water tariffs. The Nepal Water Supply Corporation (NWSC) has not been able to adequately recover its operating costs due to a variety of factors including extensive leakage in the system, lack of working meters, a woefully inadequate billing system and highly subsidized tariffs.
Ÿ By July 2004, the NWSC or the Water Utility Operator (WUO) will introduce a new system of tariffs which intends to start addressing systematic deficiencies by recovering true operation costs. Tariff proposals include the following:
Ÿ No change in the subsidized minimum volume of 10m3 (10,000 liters) per month for the first three years, e.g. 2005-2007;
Ÿ No increase in the minimum volume charge of Rs. 50 per month for the first three years;
Ÿ A standard volumetric charge for metered residences of Rs. 15 for 2005, Rs. 19 for 2006 and Rs. 23 for 2007 - the volumetric charge indicates water which has been used in excess of the minimum volume;
Ÿ An increase in the basic un-metered tariff for residential customers of Rs. 360 per month - this charge is intended to motivate consumers to request meters;
Ÿ Corresponding changes to the minimum charges and un-metered tariffs for non- residential customers and larger pipe sizes - the recommendation is for a uniform volumetric tariff of Rs. 30m3 to be held until the residential volumetric tariff catches up;
Ÿ It is expected that both the residential minimum volume tariff as well as the volumetric tariff will increase after 2007;
Ÿ The minimum volume will eventually decrease as service improvements are provided ultimately dropping to 5m3;
Ÿ Standpipes to receive a bulk supply tariff of 70% of standard volumetric charge for one year after which time communities will have to form water user groups or rely upon franchisees to manage standpipes, otherwise these sources of water will be shut down;
Ÿ As service improvements are made to specific sectors, as defined by increased water pressure and water delivered on a fixed schedule for at least eight hours per day, tariff will be levied at 150% of volumetric charge for basic service;
Ÿ The Government will have power to intervene to limit tariff increases for reasons of national policy but will be required to compensate the WUO and/or the Management Contractor.

Connection costs
Although water tariffs will inevitably go up to reflect a cost-recovery approach to the management of Kathmandu Valley's water supply system, connections costs should go down. There is a pro-poor provision in the proposed changes for connection costs, which are significantly lower than current charges, and which should allow for more low income families to receive piped water from the central system. The proposed revised charges for new connections are as follows:
Ÿ A standard charge, not in excess of Rs. 2,000, for any new connection up to 30 meters from the main line. This charge will cover all costs other than the cost of the meter and the customer deposit which is currently Rs. 1000;
Ÿ The charge for connections of more than 30 meters from the main line will be based on the standard charge plus a per meter charge for the length of the connection in excess of 30 meters but less than 50 meters from the main line. For connections of more than 50 meters, consumers will be responsible for the full cost of placing the connecting pipe. The WUO will be responsible for making the connection to the distribution network and the installation of meters at the customers' premises;
Ÿ Payment of the connection charge can be made in monthly installments over a period of one year;
Ÿ Beginning July 16, 2005 the WUO will require that new customers pay an initial deposit of not more than three months' consumption for 20m3 (20,000 liters) per month at the standard residential tariff - this comes out to Rs. 600 based on the volumetric tariff of Rs. 15m3 which has been proposed for 2005 and the minimum volume charge of Rs. 50;
Ÿ The creation of a Low Income Consumer Unit (LICU), under the new Management Contractor, has been proposed to deal with consumer complaints that might otherwise not receive attention. By the end of 2005, the LICU will review the issue of multiple connections per house (such connections are currently not permitted by NWSC) and possibly request the WUO to alter its restrictions on the supply of water to multi- occupancy houses.

Meters
An essential component of the tariff restructuring plan is the installation of high quality meters for all consumers in Kathmandu Valley. As part of the Proposal for Adjusting Water Tariffs in Kathmandu, the proposed details on meters are as follows:
Ÿ Meters will be made available on a rental basis and the cost will be added to the tariff. The monthly meter rental amount will not be more than 1.5% of the list price of the meter;
Ÿ There will be a choice of meters including a displacement meter which will cost about $20 to purchase and a "smart meter" which will run approximately $35;
Ÿ The WUO will publish a price list for such meters including an allowance for up to a 10% mark-up on the bulk procurement cost;
Ÿ Customers may purchase or rent either the displacement or smart meter;
Ÿ The purchase cost of a meter may be paid in monthly installments over a one year period.

Levy
A levy will be established for residents of 14 VDCs in the Melamchi Valley which are affected by the diversion of water to the Kathmandu Valley. A levy has not yet been established but will likely entail a fixed remuneration per cubic foot of water diverted.

Sewerage Charge
There is no proposed change in the sewerage charge which is currently set at 50% of a given household's water consumption.