It should be Nepal's biggest-ever infrastructure project: a $500 million scheme to bring snow melt through a 27-km tunnel to augment Kathmandu Valley's water supply. But its fate hangs in the balance as key donors link it to a rollback of the royal takeover.

Technically the project has been controversial because of criticism that cheaper alternatives are available, that it lavishes investment on an already-pampered capital and Melamchi Valley villagers want to be compensated.

But all that pales in comparison to the scandal that has erupted over the Royal Commission for Corruption Control's conviction last month of former prime minister Sher Bahadur Deuba and his works minister Prakash Man Singh on charges they got kickbacks on the contract to build a road to the project site.

Coming after the February First royal move, the conviction has raised allegations of a political witch-hunt against Deuba and Singh. Norway, which had suspended new aid money to Nepal until democracy is restored, also announced on 20 July it was pulling out of Melamchi, which is also funded by the Asian Development Bank, Swedish aid agency SIDA and the Japanese Bank for International Corporation, among others.

Donors will meet in Kathmandu soon to decide Melamchi's fate. "The review meeting will see if the project is still viable," explains the ADB's Nepal country director Sultan Hafeez Rahman. This is obviously not going to be an ordinary review and insiders say will be a make-or-break meeting. If the mindset of some of its major donors is anything to go by, the project is doomed.

"Only a miracle can save it now," a senior official of one of Melamchi's donors told us. Donors, who were already angry at the crackdowns after February First, see the arrests of Deuba and Singh as politically-motivated. That is said to be the reason Norway pulled out its nearly $25 million contribution to the tunneling component of the project, which has left a serious shortfall.

"We have been provided with no evidence that suggests that there was corruption in the Melamchi project as claimed by the RCCC," said Kikkan Haugen, charge de affaires at the Norwegian Embassy. "We have no reason for not believing the ADB report that said that there was no corruption."

The Norwegian assistance was valued not just for its money but also for its expertise in digging long tunnels.
As lead donor the ADB has acquired a copy of the RCCC verdict for examination. An official at ADB headquarters in Manila told us this was to "see what our internal investigation missed out and what the RCCC found". After its own internal probe in May, the ADB said it found no evidence of corruption in the road construction contract, which was the focus of the royal commission's investigation.

The bank official said whether the bank's tallying of its findings and the RCCC verdict would match or not, the process that would follow would be a long legal tangle. "That might take quite a long time," he said adding that until the bank gets through the legal process, it would not resume the project work, if at all.

The ADB is sensitive to allegations of corruption in projects it funds and claims to have elaborate measures in place to safeguard transparency and integrity,so it is sure to go through the RCCC verdict with a fine tooth comb.
The bank has pledged $120 million for the project that aims to pipe in 170 million litres of water a day to the Kathmandu Valley from the Melamchi Khola just outside the Langtang National Park. The valley needs 200 million litres of water daily but during dry season its leaky and obsolete distribution system can't even supply 100 million litres a day.

Whatever the ADB's own findings, project funding from bilateral donors is now tied up with a rollback by King Gyanendra of his 1 February takeover. Given the mood in the donor community, the upcoming meeting is sure to bring bad news for the government.