The much-delayed Melamchi project designed to boost Kathmandu Valley's drinking water supply is set to roll again with the appointment of a new Chinese contractor.

The project had faced uncertainty and delay ever since the Korean contractor, Haniel Koneko demanded cost over-runs due to Maoist threats and walked out without finishing even five percent of the work on the access road. Koneko was demanding Rs 100 million extra as compensation while its bid amount was Rs 450 million.

Negotiations between Koneko and the Melamchi Water Supply Project (MWSP) were deadlocked for over a year and construction ground to a halt. The government finally terminated the contract with Koneko last year, seized its performance guarantee of Rs 50 million and called for new bids. The China Civil Engineering Corporation (CCEC) was chosen over five Chinese, Indian and Japanese bidders.

The controversy even dragged MWSP officials to the corruption watchdog, CIAA and the National Vigilance Centre which began an investigation. "We think we have been able to convince the commission and the centre that everything is above board," one MWSP official told us.

The project and its main creditor, the ADB, seem happy with the selection of the Chinese company and say its Rs 1 billion bid is "quite reasonable". Koneko, they say, had quoted an artificially low amount to be selected with the intention of "padding it up with overruns" later. Bidders have used loopholes in the FIDIC contracts in the Kali Gandaki and Middle Marsyangdi projects to quote low and demand high variation costs once selected. MWSP and ADB officials say there is less chance of this happening with CCEC and hope the project can now resume construction of the access road.

But whether CCEC will live up to expectations remains to be seen. For one thing, Sindhupalchok is a heavily Maoist-affected area and it is accepted wisdom that construction can only resume with the blessings of the rebels.

When completed in 2010, the $500 million project will bring 170 million litres of snowmelt from the Melamchi Khola to Sundarijal through a 2 km tunnel. The project can be expanded to 500 million litres daily by adding more rivers at the intake. Progress has been delayed because the access road to the headworks are not finished yet. Only once the road is ready can foreign engineers come for the tunnelling phase.

The project also needs to implement a distribution plan for Kathmandu Valley through private contractors for which several new legislations and amendments to existing acts are needed. Melamchi's donors want the laws in place before tunnel work begins.

MWSP officials said they are preparing to invite tender for the appointment of the contractors of tunnel construction. "We will call for the tender by August," said Dhruba Bahadur Shrestha, executive director of MWSP.

Since the first 20 km of the tunnel construction is being funded by Norwegian and Swedish governments in grant and mixed credit, contractors of only those two countries will be allowed to bid. With the Asian Development Bank funding the last seven km of the tunnel construction, international bidding will be allowed for that part.

The government is not able to meet even half the current demand for 200 million litres a day in Kathmandu Valley. However, critics say the Melamchi project is too expensive and cheaper alternatives like building storage reservoirs inside the Valley have not been adequately explored.