MELAMCHI FIASCO HAS JAPANESE WONDERING ABOUT

C O N F I D E N T I A L SECTION 01 OF 02 KATHMANDU 001035 SIPDIS SIPDIS MANILA PLEASE PASS TO ADB E.O. 12958: DECL: 05/25/2017 TAGS: PGOV PTER PREL ECON EAID ADB ABLD JA NP SUBJECT: MELAMCHI FIASCO HAS JAPANESE WONDERING ABOUT NEPAL'S CREDIBILITY Classified By: Ambassador James F. Moriarty. Reasons 1.4 (b/d). Summary -------------- ¶1. (C) On May 24, Japanese Ambassador Tsutomu Hiraoka indicated to the Ambassador that Japanese soft lending may be affected by recent mishandling of the Melamchi Water Supply Project by Minister of Physical Planning and Works Hisila Yami. Her decision to refuse to award the management contract to a private British firm, Severn Trent, had led the Asian Development Bank to announce it intended to pull out of the project. It had also thrown the credibility of the Government of Nepal (GON) into question. The two Ambassadors discussed other effects of Maoist leadership within the ministries they controlled, and the likelihood of a Constituent Assembly election in the near future. Melamchi Reveals Maoist Intent -------------- ¶2. (C) In a May 24 meeting with the Ambassador, Japanese Ambassador Tsutomu Hiraoka shared the Ambassador's concerns about Minister of Physical Planning and Works, and Maoist, Hisila Yami's nullifying of the contract award for the Asian Development Bank (ADB)-sponsored Melamchi Water Supply Project. The USD 350 million project, to which ADB had committed USD 165 million, was intended to provide an increased water supply and improved water delivery infrastructure to the Kathmandu Valley. The Ambassador noted that Yami's actions in canceling the management contract with private British firm Severn Trent Water International had led the ADB to state its intent to withdraw funding from the project. This would hurt both the residents of Kathmandu and the Government of Nepal (GON),and revealed the Maoist economic agenda. The Ambassador encouraged Japan, in its role as one of the principal shareholders in the Asian Development Bank, not to go along with Yami's attempt to substitute a Maoist-approved local body to manage Kathmandu's water supply. The Ambassador also assured the Japanese Ambassador that, should Hiraoka choose to meet with the Maoist Minister to critique her handling of the Melamchi project, Washington would not look askance. Japan's Soft Lending at Risk -------------- ¶3. (C) Hiraoka told the Ambassador that he had not yet received clear instructions from his government, but there was clearly growing doubt in Tokyo, especially at the Ministry of Finance, about the GON's credibility. Japan was adopting a "money-lender's logic" about dealings with Nepal. Hiraoka said he had informed Finance Minister Dr. Ram Saran Mahat that, if the Melamchi project did not go well, there could be implications for other Japanese-funded projects, such as the Upper Seti hydropower storage project. Hiraoka had explained as well that all soft lending from Japan could be at risk. Maoists Modifying Ministries -------------- ¶4. (C) Hiraoka commented on the changes Maoists had been making within the Ministries they controlled, such as adding "advisors" and changing civil service personnel. The Ambassador indicated that the Maoists had begun sending people to several ministries as early as June 2006, apparently in expectation of controlling some of these ministries, as was now the case. Both Ambassadors noted the atmosphere within Maoist-headed ministries had become noticeably less friendly to donors and less polite overall. Election Monitors: Should Japan Plan? -------------- KATHMANDU 00001035 002 OF 002 ¶5. (C) The Japanese Ambassador asked what the Ambassador thought of the likelihood of a Constituent Assembly election in November. The Ambassador responded that the political parties understood the need to hold a free and fair election in a timely manner, but suggested that the international community needed to push the GON to do whatever it took to accomplish this task. Hiraoka indicated that Japan might send approximately ten election experts/monitors, a little before the election. He noted that Japan had received a request from the GON for monitors, but would want a request from the UN before sending anyone. Without an election date, Tokyo had not yet made any serious plans. Pondering Real Estate? -------------- ¶6. (U) Hiraoka inquired about U.S. plans to sell the current Embassy compound and commented on its excellent location right next to the Japanese chancery. He noted that his residence was a long drive from the Japanese Embassy. (Comment: Hiraoka appeared to be mulling the possibility of trying to convince Tokyo to buy the property. End Comment.) Comment -------------- ¶7. (C) The Ambassador plans to meet soon with the Asian Development Bank's new resident representative, an American, who arrived a week ago, just as Melamchi was heating up. The Melamchi water project is vital for the future of Kathmandu. If a face-saving way can be found to resolve the current impasse, that would be fine. The Ambassador will urge the new ADB Resident Representative not to take any steps that would weaken the project to appease a Maoist Minister who has overstepped her bounds. On May 24, Foreign Minister Pradhan agreed with the Ambassador that the Maoist Minister should not be able to jeopardize such an important infrastructure project, and added that the Cabinet would be discussing possible next steps. She gave no indication, however, that her Maoist Cabinet colleague was prepared to back down (or that the ADB could be persuaded to reinstate its loan). MORIARTY