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
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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
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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
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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
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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?
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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?
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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
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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