MANILA, PHILIPPINES – A delayed water-supply project in Nepal that includes tunneling 26 kilometers through a mountain to ease chronic water shortages in Kathmandu looks set to proceed, after the Asian Development Bank (ADB) agreed to new terms for the project for which it is the lead financier.

ADB initially agreed to support the Melamchi Water Supply Project in 2000, but changes since then have seen the cost lowered from $464 million to $317.3 million with careful prioritization and phasing of the project components. Work was delayed by political circumstances and challenges engaging private sector partners.

The project is essential for Kathmandu’s 1.5 million residents, most of whom receive piped water for only a couple of hours a day. Many people rely on alternative water sources such as shallow wells, public taps, rainwater, tankers, or bottled water – which are expensive.

"This project is the only realistic way to obtain a sustainable, long-term supply of drinking water for Kathmandu Valley," said Leonardus Boenawan Sondjaja, Head of the Project Administration Unit of the Urban Development Division of ADB’s South Asia Department.

"While the need to address the water crisis is growing, the changing circumstances surrounding the project required adjustments in scope and implementation arrangements."

ADB is providing a loan of $137 million equivalent for the project. Other donors are the Japan Bank for International Cooperation, the Japan International Cooperation Agency, the Nordic Development Fund and the Organization of Petroleum Exporting Countries Fund for International Development. The Government of Nepal is contributing $90.6 million.

The biggest civil works package under the project is the 26-kilometer water diversion tunnel. The tunnel will divert 170 million liters of water daily from the Melamchi River to Kathmandu Valley to ease chronic water shortages in that area.

The project also involves the development of a water treatment plant as well as a bulk water distribution system. Existing distribution networks will be rehabilitated under the project, while access roads to project facilities are being built and will also serve as farm-to-market roads. Another important component is support to mitigate potential social and environmental impacts and improve the living conditions of project affected people.

As part of adjustments made to the project, its implementation will be split into two subprojects, with the water diversion tunnel under the first subproject and the water supply and sanitation segment under the second.

ADB agreed to remove a loan covenant requiring the award of a private sector management contract to support the new utility as a precondition for awarding the tunnel civil works contract. This will enable the two subprojects to be implemented in parallel without delay while a new private sector manager is recruited under the restructured contractual arrangements.

ADB approved adjustments to the two loan components under the Kathmandu Valley Water Services Sector Development Program, which complements the Melamchi Water Supply Project. The program is designed to support reforms and institutional development in the water services sector and promote private sector participation. ADB will maintain a $15 million loan it approved in December 2003, but the program will adopt a new management support plan.