July 2005
COVER STORY

Investment Opportunities In Public Private Partnership Model

By Gaurav Man Sherchan & Madan Lamsal

For the private sector complaining of the lack of business opportunities and for the financial institutions hungry for invertible project proposals, the Public-Private Partnership (PPP) model can be a viable option to consider.

With a fast growing urban population and resultant expansion in urban areas, the municipalities and the government are finding it difficult to arrange resources needed for the fast growing requirements of the urban amenities. Same is the case of infrastructures, like road, outside the urban areas.

A new solution being considered for the problem is the Public-Private Partnership model. And this is offering a good opportunity for both the private sector business houses as well as the banks and financial institutions.

However, most of the banks were found to be unaware about it. The CEO of a big private sector bank retorted “PPP, what?” when New Business Age asked him about the exposure of his bank in PPP projects. One bank (Nabil) was found to have invested in a bus park project in an urban area taking the municipality-owned land as collateral. This seems to be the only one instance of a bank financing such projects so far.

Neither have the big business houses taken up such projects. Though the local chambers and some small businessmen have taken up a few small projects, the experience has not been remarkable so far. However, these experiments have helped the stakeholders to understand the concept of PPP and pinpoint the shortcomings in the existing legislative and administrative framework.

Here we present the highlights of some viable PPP projects and case studies to derive learnings from the experiment so far.

Opportunities in PPP:

Solid Waste Management (SWM):

The volume of solid waste is growing with the increasing population, posing SWM as a major challenge for all municipalities –particularly for the larger towns. As per KMC’s estimates in 2001, KMC generates a total of 975 m 3 of solid waste per day out of which 77 percent is household waste while the remaining is commercial, institutional and street waste. The management of solid waste is not only a logistic challenge for KMC. It is also an opportunity for private sector business.

Though involving small entrepreneurs has drastically reduced the cost of collection as well as brought about dramatic improvements in the environment, KMC still ends up spending a massive Rs. 132 million per annum in SWM excluding the capital investment made for 110 vehicles and equipment. KMC spends 64 percent of its total expense in SWM in street sweeping alone. This severely limits its capability to make investments in other areas.

In this context, a large private investor could be helpful to KMC in reducing the burden while the private sector could benefit from a business with a large turnover. Similar to practices in Biratnagar, private sector organisations can take up the responsibility of SWM services in Kathmandu from primary collection to final disposal. While service fees should remain the ultimate source of revenue, KMC in the initial years can contribute partially for a fixed number of years on a diminishing basis to make up for the non-paying service users.

On the basis of available information, it has been estimated that approximately Rs. 130 million per annum can be raised as revenue from households and commercial/institutional collection if 75 percent of the services users are brought into the SWM net. If this proportion is 100 percent, the service provider can raise approximately Rs. 170 million per annum. With better efficiency in operations and adoption of cost cutting measures, the expenses that KMC is currently incurring (Rs. 130 million) can be drastically brought down. This shows that it would be a very lucrative business for the private investors. To bring about further efficiency in operations, the same private investor could also take up the responsibility of SWM in Lalitpur Sub Metropolitan City. SWM can be a viable business opportunity for small investors in the smaller towns.

Recycling and Composting:

In addition to SWM, recycling and composting is also an attractive area for investment. While the project could also be attractive to a third party, it would, however, make more sense for the party already involved in SWM to also undertake recycling and composting as it would be a vertical integration for the venture. The cost of production would be lower for the party as no cost would be incurred in procurement of waste which means better margins. To reduce costs, the party will have to encourage segregation of biodegradable and non-biodegradable waste at the household level, similar to the practice in developed countries.

The market potential for composting and recycling of both biodegradable and non-biodegradable waste is vast. The demand for organic fertilisers in the recent years has witnessed a boom worldwide as well as in Nepal due to the growing popularity of organic farming. On the other hand, due to limited recycling units in Nepal, recyclable waste is being exported to India. Hence, recyclable waste can either be directly exported or recycled products could be made in Nepal itself.

Drinking Water:

61 percent of the urban households have access to piped water (BCHIMES 2000, CBS) and 46 percent of the urban households have piped water in their houses (Department of Health Services, 1999). While the access to piped water in urban towns is itself very low, the percentage of population actually receiving the required amount of water can be said to be very low.

Though the responsibility of providing drinking water in many of the developed countries is with the private sector, in Nepal it still remains within the domain of the Nepal Water Supply Corporation (NWSC), a government owned corporation. As NWSC has not been able to cater to the demand of the Kathmandu Valley, a thriving water business (transported through tanker trucks) has emerged which is only within the reach of the upper class households while the lower order households rely on a few buckets of water to meet all their daily needs.

World Bank had earlier made attempts to give NWSC on a lease contract but abandoned the idea as it generated very little interest. Building on the efforts of the World Bank, ADB is supporting the government to give NWSC on a management contract that will focus on developing a strong management system and cost recovery system that will eventually pave the way for a lease contract.

The community people of Dhulikhel Municipality have already taken control of the situation by taking up the responsibility of providing water for themselves and have even managed to rake in a handsome saving of Rs. 5.7 million over a period of 10 years while the government owned DWC is facing difficulties making ends meet, let alone being able to provide water to all the households.

The point to be noted is that if the responsibility of providing drinking water is handed over to the private sector, it can better manage the available water resources and provide water to a greater number of households making a handsome profit in the process. A few local entrepreneurs from Butwal Municipality stated: “We are ready to invest a few crore rupees in setting up a proper filtering plant if the government gives us a purchase agreement, similar to that for electricity.” The demand for water cannot be questioned at least in KMC and LSMC as every household would be more than ready to pay at least Rs.100 per month if they are assured of regular supply of drinking water - a minimum Rs. 225 million turnover per annum at 100 percent coverage.

Transportation:

The total length of roads in Nepal is 16,042 kilometres (Economic Survey 2003-04) of which only 29 percent is blacktopped. The government has not been able to adequately expand and maintain the transportation network as required.

HMG has already stated in the 10 th plan that it will encourage both national and foreign investors in the development of roads and necessary transportation infrastructure through BOT/BOOT arrangements. Though no concrete developments have been witnessed on a national level, private sector entrepreneurs and civil society are already working in partnership at the local level, i.e. bus terminal development and management under the BOT/BOOT arrangement or service contracts, financial sharing by civil society in road construction etc.

Some opportunities for national investors with or without partnership with foreign investors or foreign investors are:

Toll highway : Toll highways have been built with private sector participation in the developed countries since long. But the concept has yet to take off in Nepal. Even India already boasts of multi-lane super highways built by the private sector. Officials say that the government is keen on developing the congested Kathmandu-Banepa highway into a multi-lane toll highway with the participation of the private sector.

Urban roads development and maintenance: KMC spends approximately Rs. 15 million on road development and maintenance. The condition of roads is, however, far from satisfactory. At a time when even the big construction companies are short of work, urban road development and maintenance can be an attractive PPP project for both the municipality and the construction companies.

Transportation management: As the municipalities have already realised the need for managing transportation within their jurisdiction, municipal authorities in KMC and Butwal have developed bus and truck terminals and they are already working in partnership with private sector entrepreneurs for further development and management of these terminals under the BOT arrangement. Municipalities such as Itahari and Siddarthanagar have also developed such terminals and are interested to hand over management under the PPP concept. In municipalities such as KMC, Biratnagar and Birgunj which have high trade volumes, opportunities for developing commercial transportation terminals are very good.

Electricity Distribution:

Though the private sector is already involved in electricity production in both urban and rural areas, it is yet to be involved in the distribution of electricity. Across the world, the responsibility of electricity distribution has already been handed over to the private sector. Though HMG maintains a monopoly in electricity distribution till date, a new law has been drafted and is under discussion to allow private sector companies to also engage in electricity distribution.

The contract for electricity distribution could be given for a large area or for certain pockets and the private sector could also undertake the responsibility of network expansion and maintenance. The financial viability of this venture can never be in question.

Entertainment theme park:

The business of entertainment parks in Nepal has a long history as we see mobile entertainment parks in towns across the country. In Kathmandu, various entertainment centres have sprung up but they all are small in size. The old entertainment park at Exhibition Road was also leased out to the private sector but as the party simply rented out the space on an as-is basis, traffic plummeted and the facility was eventually closed.

An entertainment park has a good market potential among both Nepalis and tourists. The government should promote the development of an international standard entertainment theme park in partnership with the private sector as it would not only provide relief to the entertainment starved Nepalis but could also help to lengthen the stay of foreign tourists. Disneyland, USA, alone gets Rs. 5 lakh tourists in a year, something Nepal as a country has not been able to achieve.

As partnership to the project, the government should provide land to the party on a long-term lease, provide long-term loan at low interest rates and assist in international marketing promotions. On the part of the private sector, it should work towards developing an entertainment theme park of international standards and target domestic tourist as a cushion but develop strategies to promote the facility as a regional recreational centre.

Some PPP Case Studies:

BMC-SILT Environmental Service (P.) Ltd., Biratnagar:

BMC-SILTES is the first Nepali private sector company to work in partnership with the municipality to manage municipal solid waste. The partnership between Biratnagar Municipal Corporation (BMC) and the SILT Environmental Service (P.) Ltd was formed to develop a self-sustainable integrated municipal solid waste management system based on local traditional technological know-how, environmentally friendly management of hazardous and industrial waste and promotion of renewable energy and organic farming. SILT is also working in ward 14 and 15 of Kathmandu Metropolis (KMC).

As a partner to the project, BMC shared the initial capital investment and operational cost but its role in operations was limited to enforcing of rules and regulations in its area of jurisdiction and monitoring and evaluating the work. The scope of work for BMC-SILTES is waste collection (door-to door waste collection and street sweeping), waste transportation and final disposal (recycling and composing as well). The tariff for door-to-door waste collection ranges from Rs. 20 to Rs. 1,000 per month. The involvement of the private operator in Solid Waste Management (SWM) has proved to be a boon for the 30,000 plus households of the town as it has not only helped in maintaining a clean and health environment but has also provided direct and indirect employment opportunities and utilises resources that would have normally gone to waste.

The company still faces the problem of fee collection and is currently evaluating various alternatives for ensuring that all households pay for the service. Despite all the problems, BMC-SILTES has been able to successfully maintain a healthy financial position and is looking forward to better days ahead.

Rani Talau, Nepalgunj:

Constructed in the early 18 th century by Colonel Lok Bahadur Thapa (founder of Nepalgunj) in remembrance of his deceased wife, Rani Talau (Pond) was once a symbol of beauty, but it became a victim of urbanisation and received open drains and sewage. Then, Mayor Dhawal Shumsher Rana and the newly elected board resolved to restore it to its former glory and invested Rs. 2.5 million – 60 percent loan from the Town Development Fund (TDF), 20 percent from Ministry of Local Development (MLD) and the remaining 20 percent from Municipality funds and from contribution by the local community. The project was still short of Rs. 1.6 million required for providing water to the pond.

After its restoration, the area was handed over to a local private operator under a competitive bidding (as per the Financial Regulations under Local Self Governance Act - LSGA). The private operator committed to pay Rs 1 lakh as royalty per annum to the municipality and planned to raise revenues by charging entry fees, boating fees, etc. The private operator was only responsible for its management and basic maintenance while the municipality was responsible for replenishing water in the pond. As it was only spread over a small area of one hectare, the private operator felt that it required more recreational facilities if it were to operate successfully.

However, the contract agreement didn’t specify who was responsible for the development of the required infrastructure. Over time, the traffic to the area decreased and the project was eventually discarded by the private party at the end of two years.

Ghadiarwa Pond, Birgunj:

Ghadiarwa pond, located at the heart of Birgunj Municipality was a marsh land until it was beautified at a cost of Rs. 31.4 million. After its renovation, the facility housed a musical fountain, a Surya temple, a beautiful garden, an RCC approach bridge, toilets and the pond with boating facility.

The municipality opened the gates to the public from 2056/10/13 at a modest entry fee of Rs.5. The people were required to pay separately for various other services offered. The municipality was able to generate maximum traffic in the first six months of its operations. While the project was noted to be a major success, it immensely increased the management burden on the municipality.

So, it decided to hand over the management of the facility to a private operator through competitive bidding. The amount was Rs. 3.52 million to be paid over a period of two years in eight installments. The craze for visiting the facility lasted for another six months only.

The contractor thus only paid the next two instillments and paid the third instalment partially. As the agreement was a traditional type of contract, there was no room for amendment to suit the changed situation, though such room would have been available had the contract been under the PPP arrangement. Eventually, the private operator backed out from its commitment and the municipality could not bind the party to the contract as it had not taken any security.

Drinking Water, Community Users Group, Dhulikhel:

Built at a cost of Rs. 37.6 million, jointly funded by HMG (4.5 percent), the German government (94.5 percent) and the community (Rs.3 lakhs) under the initiation of the local people, it can be said to be among the most successfully operated PPP projects in Nepal.

The project was handed over to the users committee (registered under Water Resource Act 2049) in 2050 B.S. The users committee and HMG government worked parallel for one year before its official handover. After 10 years of operation, the project is supplying safe drinking water to 904 taps (877 private connections and 27 public taps) benefiting 8,600 people of the municipality.

The users committee operates like a public company with the users as its shareholders. The core management team consists of nine members elected by the users committee. The project currently employs 16 technical staff, prepares an annual plan based on which the annual budget is prepared and ratified by the general assembly of users. Water users committee supervises the system thoroughly twice a year and conducts necessary maintenance works.

Due to its professional management system, quality service, transparency and accountability, it has been able to increase the number of users from a mere 200 to 900 households and generate Rs. 5.7 million in savings.

Overhead Bridge, Kathmandu:

As the influx of vehicles continue to grow at a rapid pace, traffic congestion and traffic related accidents in Kathmandu metropolitan area have soared to undesired levels. Kathmandu Metropolitan Corporation (KMC) thus constructed four overhead bridges in the central area of the city to provide relief to both vehicle drivers and pedestrians.

But KMC found it difficult to properly attend to their maintenance. It had to spend at least Rs. 1.5 lakhs as annual maintenance. So, KMC entered into a contract with Innovative Concept P. Ltd (IC) as a lease with Wrap Around PPP for 20 years in 2057/07/01. As a part of the agreement, IC was given the responsibility for maintaining the existing overhead bridges and developing six more overhead bridges over three years costing an estimated Rs. 20 million and pay a royalty of Rs. 1.2 lakhs per year, with an increment of 5 percent per year. KMC on its part was required to specify the location for the overhead bridges, provide land and coordinate with other line agencies to assist IC. In exchange, IC was given the authority to sell advertising space and rent out shop space in the overhead bridges.

After three years, only one overhead bridge has been built by IC at Bhadrakali. Though KMC had approved the design for the overhead bridge at Ratna Park more than two years ago, it could finalise the negotiation with the government offices concerned only recently. Due to the delay, IC is facing losses as the cost for construction material shot up and the lease period lessened.

IC had finally started construction work in Ratna Park – Bagh Bazaar junction recently but it is again on hold as KMC was unable to finalise negotiation with the Nepal Electricity Authority for the dispute on the land to be used.

Public Toilet, Hetauda:

Adarsha Tole Bikash Sangstha (ATBS), a TLO has been operating two public toilets in the vicinity of the Hetauda Bus Park under lease with Wrap Around (BOT) PPP modality since 2059 B.S. Though the same public toilets were earlier being managed by a local contractor who was paying a yearly royalty of Rs. 1.5 lakhs per annum to the municipality, it had become a source of environment pollution and social ills, i.e. drug abuse, kidnap, fight, rape, etc.

ATBS developed a detailed financial and technical proposal that included rehabilitation of the existing toilets, development of a bathing facility for transit passengers and a small beautiful garden. Utilising the loan of Rs. 3 lakhs provided by the municipality and reinvestment of its profits, ATBS has almost completed its rehabilitation and extension programme by investing approximately Rs. 0.5 million excluding the financial contribution made by ATBS towards local development.

Due to the drastic improvement in services, users were found to be willing to pay for the service and it was thus able to make an operating profit of Rs.327,827 in five quarters.

Though the municipality had been earning Rs. 1.5 lakhs as royalty from the earlier private operator, the partnership with ATBS has proved to be very successful from both the monetary and the social point of view. The municipality has already added infrastructure worth almost Rs. 0.5 million while it has been successful in providing healthy sanitation services to transit passengers and improve the condition of the local area.

This shows that such public toilets can also be successfully run by small private operators in other municipalities at a handsome profit. KMC has already given its approval for the operation of 20 public toilets to two private operators.

Bottlenecks for PPP:

• Inadequate legal provisions: The government has already developed much of the necessary legal policies and regulations that support and encourage PPPs. While this is praise-worthy, the procurement process is still against the spirit of PPP. Provisions in the Local Self Governance Act (Financial Administration) state that the contracts can only be awarded to the highest bidder in case of revenue collection and lowest bidder in case of service contracts. Other aspects are not given enough attention.

• Lack of proper financing mechanisms: The financial institutions in Nepal still work under the traditional practice of only giving out short-term loans (five years) to bankable projects at high interest rates. The nature of PPP projects is, however, different from normal business initiatives in many ways. They may require large amounts of capital for which the private party may not be able to provide adequate collateral to the banks. Similarly, such projects are spread over a long period of time (upto 99 years) but are a secure form of business as the government provides it with the necessary security ruling out competition. Though it was believed that development banks would fill in the gap for capital required, the expectation is not met. The Central Bank thus needs to make special arrangements to finance PPP projects. The government and the private sector should also explore other financing mechanisms such as debentures, bonds, equity from general public, etc.

• Transparency: Lack of transparency has been an issue of concern, particularly in the procurement process. The stakeholders are not involved in the conceptualisation of the project and the procurement process is hardly made public (bidding and evaluation criteria). Though many may blame the government for the lack of transparency, it should also be pointed out that the private sector parties with vested interests support such operations. The private sector has never fallen behind in taking advantage of the government’s shortcomings.

• Accountability: Both the private sector and the government move forward aggressively when it comes to taking benefits but have been found to shy away from shouldering responsibility and accountability. In the process, the risks that have to be shouldered have been found to be either forgotten (which will present problems later) or undertaken by a party that may not be able to shoulder the burden. In both cases, the project is to suffer. The government bodies have been found to be never accountable for not delivering their commitments made in the contract which leads to a loss of trust by the private sector. However, the private sector is also found to violate the trust by backing out from projects if they have not made any collateral security.

• Mitigation and Arbitration: Amajority of the PPP projects have been awarded with great optimism that the project will be a runaway success and no conflicts between the partners will arise in the future. Therefore, the parties to the contract have laid down no clauses for mitigation and arbitration. Therefore, solving conflicts becomes a major hassle. The law provides for appointing a mitigator to first try and resolve the conflict and, if the mitigator fails to satisfy both parties to the contract, then go in for arbitration. However, such provisions that provide a win-win situation have been rarely put in the contract documents.

• Lack of adequate planning: The concept of developing a business plan/feasibility study is perceived to be a document to be prepared to obtain loans from financial institutions. But many of the entrepreneurs in Nepal take planning as a waste of time as a result of which they develop revenue models based on unrealistic market assumptions. The cause of failure or slow progress for many of the PPP projects has been inadequate planning.

• Lack of management vision and skills: Both the government and the private sector parties lack the essential management and technical skills necessary for operating in a PPP environment. While the management skills of the private sector are no doubt superior to that of the government officials, the private sector have been found to be lacking professional management skills in many of the functions. Though the influx of professional MBAs and the like have brought about major changes in the way business is done, our business entrepreneurs still fall behind when specialised management skills are required.

• Stakeholder participation: Participation of the stakeholders in all phases of the projects creates ownership to the project. The government/municipal bodies usually keep both private sector and civil society isolated from the project for fears unknown. On the other hand, private sector enterprises were also found to have initiated projects without consulting relevant stakeholders due to which projects have failed to garner public support. The slaughter house project in KMC are still facing opposition from Khadgis because they have failed to take their views into consideration.
  
  In light of the experience of PPP projects undertaken in Nepal till date and learnings from other countries, the following points should be noted:

• The project should be beneficial for all stakeholders.

• The project should create value for its customers, an issue that should be carefully analysed during the planning phase.

• A detailed and realistic business plan should be prepared.

• All parties should work towards creating a working two-way communication channel.

• The various types of risks should be identified beforehand and the project should be allocated to only that party which has the capacity to manage such risks. A risk management strategy should be developed before commencing operations.

• The contract should be legally binding to the government/local body, private party as well as the service users. There should be a provision for holding the parties accountable if any of the party to the agreement doesn’t deliver according to the spirit of the contract, even if it is the government/local bodies.

“We’re here to stay” Keshab Kuwar President, BMC Siltes - Keshab Kuwar President, BMC SILTES Have your efforts in Solid Waste Management (SWM) been fruitful? Though many challenges do exist, I would say that we have been very successful in managing the entire SWM process in Biratnagar sub-metropolitan city. We had to earlier fund our Biratnagar operations from other business portfolios but we don't have to do that now. Though the rate of progress has been slow, our project is considered to be a model in Nepal, the region and even globally. What are some of the major challenges in SWM? The condition in Kathmandu and Biratnagar are very different. People in Kathmandu understand the value of SWM services and are also ready to pay for the services (only 10 percent don't pay). The majority of the people in Biratnagar have no concept that polluters have to pay; only 25 percent of the households pay for the services. The interesting fact is that even industrialists are hesitant to pay Rs.20 per month. We thus have to rely on the funds provided by the municipality. Hence, the major challenge outside Kathmandu is to bring everyone under the service net. Though we are making some money in Kathmandu, we are just breaking even in Biratnagar. Are you receiving the necessary support from the municipal authorities? Yes and we are also using their infrastructure to carry out our operations. The only time we might face a little bit of difficulty is when the top official of the municipality changes. The new person may not be fully aware about PPP. Do you think there is a good scope in solid waste management? People have become millionaires by selling things that people throw away as waste. Unlike in other industries, we can charge for the collection of solid waste as well as create products out of the waste through recycling and composting. Opportunities in SWM are limitless; more so in a place like Kathmandu where the volume of waste generated is enormous. You said that you are not making much profit. Will you continue to work in this sector then? We have already done a lot of research in the area of solid waste management and with our experience we plan on developing an ideal system for SWM in Nepal and henceforth replicate it in other towns as well. And yes, we are here to stay.

“Hasty moves in PPP may bring unpleasant results” Purusottam Man Shrestha National Program Manager PPPUE/UNDP In your experience, where does Nepal stand in context to PPP? Main stakeholders understand the PPP concept now. There is strong commitment shown by the government. Some very important legislative and administrative arrangements required for PPP interventions are in place now but there is still more to do. The operational PPP projects are emerging in various municipalities. The challenge now is to attract medium and large-scale investments. HMG has invited domestic and foreign investors for medium and large scale PPP projects. However, there has been very limited interest. Why? We now have the essential policy and regulations for PPP, but we still need to make more arrangements if we want to get medium and large-scale investments. What do we need to do now? We first need to introduce standard PPP procurement system which is different from the traditional procurement system. We also need to develop a financial mechanism to fund PPP projects. A strong capital market and a favourable banking system are pre-requisites for investment in PPP projects. Further, we should work towards institutionalising PPP both at the central level and the local level. PPP projects usually require inter-ministerial coordination. So, the government needs to make an institutional arrangement that facilitates the process. Plus, the present human resources may not be able to rationalise the PPP vision. They need to be trained in specific PPP subjects. Building trust between the government and the private sector is crucial. Hasty moves in PPP may bring unpleasant results. From your experience, what are some of the attractive investment avenues? Road maintenance, electricity distribution, drinking water production and distribution, urban solid waste management should be attractive in my opinion. However this is a subject, which needs detailed analysis and complete homework. Can PPP projects really be pro-poor? Yes, very much so. Pro-poor component has to be built in while structuring a PPP project. Certain PPP projects can also be undertaken in partnership with the community and user groups through the community contracting system, which will address the concerns of the poor community as well as providing them with some income-generating opportunities. The concept of targeted procurement system in PPP projects is very important in this regard.

PPP: Legislative Framework Following laws are formulated with provisions for PPP BOT Act/Regulation PPP Policy for Local Bodies PPP Guideline for Local Bodies Amendment in LSGR – provision for PP sector partnership promotion committee (local bodies)