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Bhutan: Promising sectors for Public Private Partnership (PPP) Projects and Key Challenges

PPP National Workshop in Bhutan

Organized by UN ESCAP

19-20 August 2014

Page 2

Agenda

Critical Success Factors for PPPs and Bhutan’s score 1

PPP-able components and factors for infrastructure sectors

Key infrastructure sectors of Bhutan and their PPP-ability 3

Way forward for Bhutan 4

2

Page 3

Critical Success Factors (CSFs) for PPP Projects are…

Successful PPP

Project

Strong Legal/

Regulatory

Framework Robust Risk

Allocation

Framework

Economic &

Financial

Viability

Adequate

Government

Support

Well

developed

Financial

Market

Transparent

& Fair

Procurement

Process

Stable

Political

Situation &

Will

Strong &

Matured

Private

Sector

Stakeholders

Participation

& Interactions

PPP Act/Law, Sector specific laws,

Regulatory bodies

Sector specific Standardized

Concession Agreements

Value for money analysis,

Demand Supply gap, Willing

of user to pay, Taxation

incentives, Interest rates

Viability Gap Funding and

other fiscal support, Quick

decision making & approval

granting framework

Large number of private firms with sufficient

technical and financial capabilities,

Enabling environment for Consortium

Platform for interaction between Authority,

Private players and End users

Lesser fluctuation of

Government, Awareness

amongst political leaders, Policy

and Vision Documents

Standardized RFQ/RFP with

international benchmarks

related to procurement

Large number of commercial banks,

Support from Multilaterals, Foreign

Direct Investment (FDI), Involvement

of Pension and Insurance funds,

Specialized lending institutions

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Bhutan’s scores on CSFs for PPP Projects…

PPP Projects in

Bhutan

Strong Legal/

Regulatory

Framework Robust Risk

Allocation

Framework

Economic &

Financial

Viability

Adequate

Government

Support

Well

developed

Financial

Market

Transparent

& Fair

Procurement

Process

Stable

Political

Situation &

Will

Strong &

Matured

Private

Sector

Stakeholders

Participation

& Interactions

No PPP Act/Law, Few sector specific policies/ laws

and regulatory bodies (such as for power sector)

Absence of Standardized Concession

Agreements (CAs); However, risks are

allocated diligently

Huge demand-supply gap,

Taxation incentives as per

Fiscal Incentive Policy;

However, low traffic volume

is a concern

Financial support through the

Druk Holding and Investments

(DHI); However, lack of

capacity for fiscal and other

support

Limited number of eligible local

private firms

Limited interactions between Authority,

Private players and End users

Very stable government,

Bhutan Vision 2020 documents

and other such documents

have been prepared

No standardized RFQ/RFP;

However, procurement is

done as per the procurement

manual of RGoB

Limited number of commercial banks,

Huge dependency on support from

Multilaterals, Underdeveloped

Pension and Insurance funds

Weak

Moderate

Strong

*Scoring is based on our perception

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Besides CSFs there exists sector specific PPP-ability factors…1/2

Sectors PPP-able Component Sector specific PPP-ability Factors

Roads and

Highways

Road stretch – 2 lane, 4

lane, etc. Traffic volume, User paying capacity, Tariffs/

User charges, Regulations (safety) Urban

Transport

Mass Transport System

(BRTS), Parking

Airports Terminal Building,

Runways

Investment size, FDI permissibility, Traffic

volume, User paying capacity, Tariffs/ User

charges, Regulation (economic & safety)

Tourism Tourism circuit and related

infrastructure

Tourist arrivals, Accessibility, Demand

estimates, User charges

Industrial

Estates / Parks

SEZs, Industrial

Townships/ Parks Demand estimates

Healthcare Hospitals, Medical College Availability of Manpower, Demand estimates,

Government’s insurance policy (for

healthcare) Education Institutes, Education City

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Besides CSFs there exists sector specific PPP-ability factors…2/2

Sectors PPP-able Component Sector specific PPP-ability Factors

Water Supply &

Sanitation

Treatment (WTP, STP,

CETP), Metering, NRW

reduction, SWM

Availability of raw water, Demand estimates,

Cluster approach, User paying capacity, User

charges, Regulation

Power / Energy Generation, Transmission,

Distribution

Availability of raw material (water, coal, solar,

etc.), Investment size, FDI permissibility,

Demand estimates, Tariffs/ Charges,

Regulation

Other PPP-ability factors include: Government support (CAPEX, VGF, Land

acquisition, Real estate for cross subsidy/sweetener), Sector specific act/ policy

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PPP-ability factors also determines the model/ structure of the PPP project…1/2

1. Roads & Highways 2. Urban Transport (Bus)

3. Airports 4. Power/ Energy

►BOT-Toll

►BOT-Annuity

►OMT (O&M and Transfer)

Model

►Cost plus/ Gross cost/ Net

cost contract (Rolling stock)

►Service / Management

Contracts

►BOT Concession

►OMT (O&M and Transfer)

Model

►DBFOT Concession

►DBFOT Concession

►BOT/ BOO

►Distribution Franchisee

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PPP-ability factors also determines the model/ structure of the PPP project…2/2

5. Tourism 6. Water & Sanitation

7. Healthcare 8. Education

►BOT-Annuity Model

►Service/ Management

Contract

►DBFOT/ BOT (Hotel

Management Institutes)

►Service/ Management

Contracts (Metering, Billing,

Collection, STP)

►BOT Concession (Bulk water

supply/ Distribution network)

►DBFOT/ BOOT

►BOO/ BOT (Telemedicine/

Telehealth/ Mobile Health

Clinic/ Hospitals)

►Management contracts

►BOO/ BOOT (ITIs, Model

schools)

►Service contracts (Computer

Education, ICT in schools)

►DBFOOT (Education city)

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Key infrastructure sectors of Bhutan to be assessed for PPP-ability include…

Key Sectors

Roads and Transport

(including Airports and

Urban Mass Transport)

Power / Energy

Urban Infrastructure

Tourism

Healthcare

Education

Bhutan Vision

2020

Education, Health, Economic Growth &

Development, Transport Communication &

Information, Urban strategy, Water Supply &

Sanitation, etc.

Economic

Development

Policy (EDP),

2010

High end education and health services,

Tourism and hospitality, Agro-processing, Hydro

electricity and Renewable energy,

Film and media, Mass transportation, Railways,

highways and ropeways, Waste Management

Services, Industrial estates and SEZs

Interim

Framework for

PSP in

Infrastructure,

2010

Airports, Multi-dwelling residential buildings,

Non-residential buildings, Highways, Bridges,

and Tunnels, Outdoor sport and recreation

facilities, Industrial estates and IT Parks,

Economic and Knowledge cities, Dry Ports

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PPP-ability assessment of Key Infrastructure Sectors Roads and Highways

1 Need: Huge dependency on the East-West National Highway (new roads needed)

Roads are susceptible to blocks due to natural calamities (O&M required)

2 Key Issue(s): Commercial viability would be a concern due to low traffic volume and low user paying capacity

Land acquisition could be a challenge considering capping on forest land

Existing PPP Project 11th FYP Targets for PPP Projects

Nil ►Construction & Maintenance of 81 km roads

►O&M of 1,000 km of existing roads

3 Key Favorable Factor(s): Government support (Tax incentives, VGF, etc.)

Up to 100% Foreign Investor’s Equity permissible

BOT-Toll

BOT-Annuity

OMT

¿

Page 11

PPP-ability assessment of Key Infrastructure Sectors Urban Transport

1 Need: Huge increase in traffic in cities in last few years (Mass transport system required)

2 Key Issue(s): Low population base could result in commercial unviability of project


Nil ►Bus Rapid Transit (BRT) system with high capacity buses

(60 seats) for Thimphu

3 Key Favorable Factor(s): Low investment and sufficient demand in urban areas

Up to 74% Foreign Investor’s Equity permissible

Net cost contract

(Rolling stock)

Service/ Management

Contract

BOT (Bus stand,

parking, etc.)

Cost plus/ Gross cost

(Rolling stock)

¿

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PPP-ability assessment of Key Infrastructure Sectors Airports

1 Need: Air passenger traffic estimated to get doubled while air cargo traffic estimated to get tripled in next 5 years

Lack of efficiency in airports O&M

2 Key Issue(s): Absence of stringent Tariff/ User charge regulations



Nil ►Expansion and operation of Paro international airport

►Expansion and operation of three domestic airports

3 Key Favorable Factor(s): Up to 100% Foreign Investor’s Equity permissible

OMT

DBFOT

(Brownfield)

DBFOT

(Greenfield)

¿

Page 13

PPP-ability assessment of Key Infrastructure Sectors Power / Energy

1 Need: Strong and reliable demand of power from India

2 Key Issue(s): Size of investment could pose hindrance in raising finance for the project


Dagachhu Hydro Power

Corporation

►Development of 4 Hydro Power Projects

3 Key Favorable Factor(s): Abundance of raw material

Existence of Bhutan Sustainable Power Development Policy 2008 and regulatory authority

Foreign Investor’s Equity permissible

DBFOT

Concession

BOT/ BOO

Distribution

Franchisee

¿

Page 14

PPP-ability assessment of Key Infrastructure Sectors Urban Infrastructure (Water Supply & Sanitation)

1 Need: Water leakages, Huge NRW, Poor coverage of services

Huge solid waste generation in major cities

2 Key Issue(s): Absence of stringent Tariff/ User charge regulations


Integrated MSWM for

Thimphu

►Implementation of water supply and other projects

►Development of housing units / residential societies

3 Key Favorable Factor(s): Sufficient population base in Thimphu and Phuentsholing for O&M contract

Distribution network, STP, etc. already existing

Low investment size, Foreign Equity permissible

OMT (24X7 Water

supply, WTP, STP)

BOT/ BOO (Bulk

Water)

DBFOT (SWM)

BOT/ BOO (Water

supply & sewerage) ¿

¿

Page 15

PPP-ability assessment of Key Infrastructure Sectors Tourism

1 Need: Tourist arrival per annum estimated to get more than doubled in next 5 years

2 Key Issue(s): Development of tourism dependent on improvement of accessibility via roads and airports

Lack of trained manpower also a concern


Nil ►Development of Hotel and Tourism management training

Institute


Tourism Policy and benchmark for hotel tariffs/ charges exist

BOT-Annuity Model

(Tourism Circuit)

Service/ Management

Contract

DBFOT/ BOT (Hotel,

Institutes)

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PPP-ability assessment of Key Infrastructure Sectors Healthcare

1 Need: Shortage of health personnel and infrastructure facilities

2 Key Issue(s): Lack of price benchmarking


Attracting manpower could be a huge challenge


Nil ►Development of Hospitals cum research centres

►Development of Waste treatment plants at hospitals


National Health Policy provides guidelines for private participation in healthcare services

BOO/ BOT

(Tele-health)

BOO/ DBFOT

(Hospitals)

Service/ Management

contracts

Page 17

PPP-ability assessment of Key Infrastructure Sectors Education

1 Need: Shortage of education infrastructure facilities

2 Key Issue(s): Land acquisition could be a challenge considering capping on forest land

Attracting manpower could be a huge challenge


Bhutan Education City ►Development of Education / Knowledge city

3 Key Favorable Factor(s): 100% Foreign Investor’s Equity permissible

Tertiary Education Policy provides guidelines for private participation in tertiary education services

BOO/ BOOT (ITIs,

Model schools)

Service contract

(ICT in schools)

DBFOOT

(Knowledge city)

¿

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To increase the PPP-ability of projects, Bhutan needs to assess its approach towards...

► Key aspects to be considered while trying to improve upon the PPP-ability of projects in Bhutan:

Legal and

Regulatory

Framework

Institutional

Framework

Capacity

Building

Financial

Reforms

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Thank You Abhaya Agarwal Partner - Infrastructure and PPP

Ernst & Young LLP 6th Floor, Hindustan Times House, 18-20, Kasturba Gandhi Marg, New Delhi, Delhi 110 001, India

Phone: +91 11 4363 3000 Email: [email protected]