At stake is hundreds of millions in new loan money to a project already making losses
Thimphu Thromde willing to handover MLCPs for 22 years to banks if loan is not paid
Questions over actual cost escalation of project and due diligence over loans
KCR Pvt Limited, the private company that operates the two Multi Level Car Parks (MLCP) under a Public Private Partnership (PPP) with Thimphu Thromde has applied for around Nu 439 mn more in loans from a consortium of banks around a week ago.
This is though the two structures have been complete since July 2019 with occupancy certificates given by Thimphu Thromde then and commercial operations starting from August 2019.
At the same time, it has also come to the knowledge of this paper that Thimphu Thromde had earlier sent a letter to the banks saying that if the project fails in terms of not being able to pay back the total loans owed then the banks can have use of the two structures for 22 years.
Of the consortium, BoB as the lead bank has already given around Nu 450 mn in loans to the project since 2014. RICBL has given Nu 86 mn in loans and BNB has given a Nu 50 mn Over Draft. This is a total of 586 mn in loans given to KCR Pvt Ltd.
With around Nu 240 mn in interest the total loan is around Nu 826 mn already.
The Nu 439 mn being asked for is 75 percent of the Nu 586 mn loan loan which would push the total loan principal to Nu 1.025 bn and loan with interest to 1.265 bn if it is approved.
This basically means that hundreds of millions of bank money is now at stake with the collateral not being any private land or private assets that the banks can take over for good, but instead a 22-year lease agreement that may not even be enough to recover that money, going by the dramatic cost escalation of the MLCP project and its current revenue.
There are now important questions around the entire cost of the project and its escalation, how hundreds of millions were given in loans and how hundreds of millions more are being requested and is under process.
Irregular cost escalation
Going back to 2014, the International Finance Corporation (IFC), which was the main advisor of Bhutan’s first Public Private Partnership (PPP) project, using a study of international multi car parks and study by qualified engineers came up with a USD 8 mn or Nu 480 mn cost for the two MLCPs coming up with around 550 car parks and 20 percent commercial space.
The estimate by the IFC took into account the amount of steel, concrete, design, other inputs and the seismic zone of Bhutan and its requirements.
The IFC given this cost of construction and the returns said the project would be financially viable. IFC had also pointed out that Thimphu Thromde would not have to give any funds from its side or a Viability Gap Funding.
This estimate was made available to the Thimphu Thromde in 2014 which raised no objections to this figure or re-checked with its own engineering and project staff.
In fact, the project manager for the MLCP project was an architect from Thimphu Thromde and the Thromde also had a civil engineer on the team.
When KCR Pvt Ltd won the project bid in September 2014 its main FDI partner which is CE Construction from Nepal with extensive experience in this field internationally and especially in Nepal had come up with a design that estimated a Nu 478 mn cost.
However, subsequently, both the Thimphu Thromde and KCR Pvt Ltd claimed that several design changes were made by Thimphu Thromde that led to increase in the cost of the project.
By now both Thromde and KCR had already jointly decided against the IFC recommendation to have an independent firm to monitor the construction and such cost escalation issues.
Both KCR and Thimphu Thromde in earlier interviews with the paper claimed the design submitted by CE Nepal was not adequate and that of an ‘ordinary building’.
But this flies in the face of the estimate done by IFC that after research and calculation had estimated the cost to be USD 8 mn or Nu 480 mn in 2014.
It also flies in the face of the detailed design done by CE Construction estimating the cost at Nu 478 mn after having extensive experience in this field.
A question is also on why a project that was estimated at Nu 480 mn had its cost shooting up only after it was awarded to a private company and how its actual cost was not known before the bid.
Earlier, an expert who is familiar with the project and had seen Thromde’s changed design on paper said it was ‘overdone.’
The Thromde and KCR said that the pillar size had changed, more foundation work had been done, the cement mix had changed and that there were design changes.
A source familiar with the project said the pillar size had increased from 500 mm to 600 mm in one MLCP, the thickening of the foundation was not for the whole building as claimed but only a section or block, there were only some design changes on the north facing façade, the M 40 cement mix had been increased to M 30, there was a redesign of one exterior ramp and redesign of shear walls.
An engineer who did not want to be name said that even with the above changes the project cost should not have escalated so much.
Again, the absence of an independent firm to review and monitor these changes and cost makes it difficult to confirm if these changes were really needed or even implemented on the ground for that matter and their cost.
A former employee of KCR had said that the Thromde engineer was hardly on site to monitor the construction.
The expert familiar with the project questioned the cost escalation when the parking space was still 550 and the built up area had not increased.
The IFC was involved in the project until six months after the bid, but the IFC was not informed about the project cost estimate shooting up. Also, a copy of the final concession agreement signed between KCR and Thromde was also not made available to IFC though it witnessed the signing.
Basis of Nu 439 mn new loan not clear
With the project cost being increased from Nu 478 mn after Thromde’s claimed design changes the KCR Pvt Limited approached the RICBL for funding in 2014 which was then under the former CEO Namgay Lhendup.
The RICBL approached the BoB and BNB for consortium financing.
In 2014 KCR came to the consortium lead bank BoB saying the project cost would be Nu 600 mn and so secured 70 percent funding with 30 percent supposed to be equity. This 70 percent actually comes to Nu 420 mn loan but the banks released additional amounts over time to support the project coming close to around Nu 586 mn which is above the 70 percent limit and coming to 83.3 percent.
A person in the know said that the consortium and especially BoB as the lead bank kept financing even above the 70 percent limit as a lot of money had already gone into the project and they did not want the project to fail.
The KCR has now claimed that the project cost has escalated to around Nu 850 mn.
According to a reliable source the Nu 439 mn additional loan being sought is based on the cost escalation of the project and also claims by the project that it needs to create commercial space including space for the vegetable vendors.
However, on the ground the 20 percent commercial space has already been created including shops and a hotel in MLCP 1 so it is not clear what additional commercial space is being created given that the Thromde and government have both rejected the KCR request to increase the commercial space to 35 percent.
As for the space for vegetable vendors the structures created are mainly wooden partitions and KCR had told the reporter a few weeks ago that the cost of the wooden partitions would be around Nu 3 to Nu 5 mn.
An obvious question also is that if the project was completed in July 2019 successfully with no loans from any other sources then why did KCR wait for 16 months to apply for more loans citing cost escalation for an already completed project.
Concerns in BoB but loan still being processed
According to a reliable source news reports by The Bhutanese has created some degree of concern within BoB, the largest lender and lead bank, over issues around the MLCP but the larger viewpoint in BoB seems to be to go ahead and do the due process of the loan application. BoB’s share of the Nu 439 mn would be Nu 337.5 mn, RICBL is 64.5 mn and BNB is 37.5 mn.
The loan will undergo due process by the BoB which will then put it to a management credit committee which will then do a final presentation to the board which is now the norm for major projects.
Now this is where there are questions around the level of due diligence in the project. When the two structures and project was complete 16 months ago, when commercial units are already largely complete and where vegetable sheds do not cost much an additional loan of Nu 439 mn is still being applied for and even processed.
This is especially when the project has already declared themselves not making revenue and the only mortgage is a concession agreement.
Of the 22-year concession agreement two years is already over with only 20 years left.
Questions over equity of the project
Apart from the loans, there are now questions on the equity of the project or the money brought in by KCR. The Nepal based company CE Construction which until recently owned 54 percent of the project had pumped in Nu 107 mn equity. Meanwhile KNG owned by Namgay Penjore and the father-in-law of the Lyonpo Karma Donnen Wangdi (who had transferred his shares before joining politics) had pumped in 50 mn.
However, despite completing the two structures and investing Nu 107 mn the Nepal based company mysteriously wanted to withdraw and get back its equity citing that it faced restrictions in sending forex from Nepal to Bhutan. It pulled out in June 2020 in violation of FDI rules.
This raises the question of why the company would withdraw after investing and completing a project.
CE Construction on its website has listed all its projects but this does not include the MLCP Parking project. The Bhutanese made repeated calls to CE Nepal and asked why the company had withdrawn from the project and even left behind contact numbers of the paper but there was no response.
The paper managed to contact a staff in CE Construction who said she was aware of the company designing a MLCP in Bhutan and they had an employee in Bhutan who later left. However, she said she did not know about any investment made by CE Construction which would only be privy to the senior management which did not respond to the queries of The Bhutanese despite several calls and messages.
In addition to the above, KCR had earlier claimed that Shacha of Rinson construction has brought in Nu 100 mn equity and so is holding 65 percent of the shares.
It is not clear how CE Nepal held 54 percent shares for Nu 107 mn while Shacha Construction now holds 65 percent shares in place of CE Construction for Nu 100 mn.
When the paper asked the KCR CEO on how, where and when Shacha had brought in the Nu 100 mn equity the CEO said that facet is not important. He claimed the company now has Nu 260 mn of equity.
However, this includes the Nu 107 mn equity that the company is supposed to return to CE Construction by 2022 effectively making it debt and reducing the actual claimed equity to Nu 157 mn.
With the banks already financing the project way above the standard loan of 70 percent increased to 83.3 percent, for the additional loan of Nu 439 mn the project needs to show an additional equity of 131.7 mn just for this loan which it has not so far.
The claimed Nu 1.168 bn new price tag of the MLCP project also does not add up. It includes the Nu 586 mn in loan, Nu 240 mn in loan interest, Nu 107 mn in claimed equity by the Nepal partner, Nu 100 mn in claimed equity by Shacha and Nu 50 mn in claimed equity by KNG but that still adds up to only Nu 1,083 bn still leaving Nu 85 mn short.
The KCR CEO said that the remaining amount is in terms of the office assets and income like collection of parking fees.
KCR Pvt Limited has insured the two MLCPs for Nu 1.032 bn with Bhutan Insurance Limited on April 2020 at an annual premium of Nu 433,700.
The insurance is only till April 2021 for a year. Coincidentally it is in between this period that KCR has applied for the Nu 439 mn loan raising the question if this insurance for one year was done just to bolster it chances for the loan and also possibly cover any questions if the loan is approved.
The KCR CEO said that the final cost of the project in terms of construction cost is around Nu 850 mn not counting the Nu 240 mn loan interest component.
He said design changes by Thimphu Thromde led to cost increases and it also led to delays which further pushed up the overheads.
He said that creation of commercial spaces like shops and its partition and lights also led to costs though he said in the case of the hotel in MLCP 1 only the skeletal structure was provided and the internal walls and fittings were done by the person running the hotel.
On why the loan is being taken the KCR CEO said that no business in Bhutan run a business on its own but needs to take a loan. He declined to share the details of the loans being applied for.
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