Draft Public Private Partnership policy invites private sector to provide infrastructure and services

Two main economic challenges that have bedeviled the government is the weak condition of Bhutan’s private sector and also limited resources to provide a host of public infrastructure and services.

In an effort to address both of the above, the Ministry of Economic Affairs has come up with a draft Public Private Partnership (PPP) policy, which once approved by the cabinet will allow the government to partner with the private sector in providing infrastructure and services.

The idea according to the policy is to have an arrangement with the private sector companies whereby the private party  constructs, renovates, operates, maintains, manages an asset to provide services in accordance with agreed specifications.

The private party will assume the associated risks for a significant period of time and in return, receive financial remuneration according to agreed terms.

It also proposes a new Public Private Partnership Agency (PPPA) under the Ministry of Finance (See separate story on page 4).

Scope

The policy says there is already existing cooperation in transport and power generation but now it would like to look at other areas like education, health, social infrastructure, government services, public facilities etc.  It covers all infrastructure and services where the private sector is able to provide public infrastructure and services that results in cost effectiveness and efficient delivery for the public good.

Financial Assistance and subsidies

The government will provide grants, subsidies and other support in projects which are economically and socially viable but need additional capital for it to take off.

There will also be an explicit subsidy that is performance driven (based on private party achieving measurable outputs) and, if possible, targeted towards socio-economically disadvantaged users or groups of users. For this purpose, the MoF will issue guidelines setting the criteria for eligibility to receive funding and the procedure for applying, approving, disbursing and monitoring the use of funding

However, given that funds  are limited, only the highest priority projects will receive financial assistance.

Risk sharing support may be available where studies indicate that a project is considered financially viable but where there are higher than acceptable risks. However, PPP Agreements may include compensation to the government for providing contingent support if returns exceed the forecasted levels.

PPP revenue source

Revenue sources for the private party could include tariffs, annuity payments or a combination of both.

It says for many infrastructure projects, a user tariff based agreement is appropriate. Initial tariffs and subsequent tariff escalation are initially determined within feasibility studies to ensure a proper or market acceptable rate of return. There will be a competitive bidding process to minimize estimated tariffs and the subsequent escalation rate.

The proposed tariffs and basis for tariff escalation during the PPP term should be project-based as opposed to being sector-based and both should be written into the PPP Agreement.

Periodic or fixed payment structure will be for certain types of projects such as those without a direct revenue stream, with a weak revenue base, with a weaker than acceptable demand and with higher than acceptable risks.

Consultation

PPP projects will require specific consultation with the private sector including project developers, contractors and sources of finance to ensure that projects will be taken up by the market and be tendered competitively.  The consultations will also include consent and views of the end users like user satisfaction and grievances.

Project Entitlements

The policy says that the government shall start a focused program towards the development and deepening of financial markets for purposes of increasing access to long term finance. As a first step towards providing project finance for PPP projects, the government may seek line of credit from multilateral institutions. The line of credit may be extended to a designated bank within Bhutan which can lend onwards to projects. RGoB may also initiate the partnership with ADB or World Bank to enable them offer Credit enhancement products (CEPs) which are risk-sharing and mitigation instruments. In the long-term RGoB may commission technical assistance program to develop financial markets institutional arrangements for new financing instruments and long term local currency financing for PPPs.

The main project sponsors can exit from the project after the second year of project operation, but may not exit the project earlier without permission of the institution.

Land lease period shall be determined so as to recover the cost of investments subject to provisions of the Land Act 2007 and its amendments.

Provisions in the PPP agreement for compensation upon wrongful termination or resumption of lease will be valid and binding on the institution.

The project will also be entitled to incentives and other favorable treatment laid down in various policies of the government, including those under the Foreign Direct Investment Policy, the Economic Development Policy, the fiscal Incentives and any related rules or regulations.

Enabling environment

Appropriate amendments will be made to the Procurement Rules and Regulations, 2009 to make them conform to the PPP project procurement processes.

The government will enact a ‘Law of Contract’ at the earliest opportunity that will apply to PPP agreements. The rules, regulations and guidelines will be notified to make the Policy effective.

Monitoring and Evaluation

The Royal Audit Authority may conduct audits of all PPP projects based on agreed timelines or schedules with the implementing agency and Public Private Partnership Agency (PPPA).  The GNHC may consider evaluation of PPP projects as part of its evaluation program.

The implementing agency and PPPA shall bear primary responsibility to oversee the implementation and compliance of the PPP.

Day-to-day project monitoring during construction and operations will be done by implementing agency.

The implementing agency can request reports and external audits on the performance of the project.

A PPP Contract Monitoring Unit under PPPA shall be established to monitor all PPP contracts.

Unsolicited proposals by private proposers like project proposals that have not been identified or selected by the institutions or  government will not be accepted as entertaining them may result in lack of transparency, and lack of fair and equal treatment of potential bidders.

Growth

The policy says there is a close relationship between economic growth and infrastructure development as efficient infrastructure results in higher rates of growth by increasing and enhancing productive capacity.

It says that given the Government’s fiscal limitations, it will need to adopt supplementary and innovative methods by leveraging private sector resources to achieve its aims.

The government will pursue PPPs where they represent priority projects that are affordable to the government and end-users, and represent Value-for-Money, under the policy. The government under the policy pledges to protect the interests of the end-users, project affected and other stakeholders.

PPP market

The policy aims to create a sustainable PPP market in Bhutan which currently is almost non-existent.

To create this market the policy will establish uniform procedures across various sectors, ensure transparency in procurement and implementation of the PPP projects, promote priority projects, encourage innovation, ensure accountability and support development of viable PPP projects.

The government will undertake a program to identify PPP projects under a ‘PPP Program.’

Govt Role

The government’s functions in the PPP Policy will be to prepare guidelines, and standard agreements, hold consultations with stakeholders, provide technical assistance to Institutions proposing or implementing PPP and conduct training workshops and seminars for capacity building of the Institutions and private parties undertaking PPPs.

The government will also develop the process for project identification, conducting feasibility study, procurement, contract negotiation and management of PPP Agreements to be followed and implemented by Ministries, Departments and Public Entities.

Role of GNHNC and MoF

The Gross National Happiness Commission’s (GNHC) role shall be to monitor PPP projects as per the development priorities of Bhutan.  It will do review and assessment of all public infrastructure and service delivery projects during the five year planning process for using PPPs as a potential delivery method based on financial thresholds.

GNHC will review and endorse monitoring and evaluation reports and commission evaluations when necessary of PPP Projects.

The Ministry of Finance will ensure that the PPPs are undertaken in a fiscally responsible manner and that they are mainstreamed in the budgetary process. MoF will be the focal agency for co-ordination of all PPPs in the country.

It will advise on the approval of the project and its overall financial assistance requirements, reform the budgetary process to allow for appropriations specific to PPPs, develop necessary procedures on support and liabilities related to PPPs. It will also develop necessary procedures, guidelines and institutional capacity to establish and operationalize the Viability Gap Fund for certain PPPs.

Institutional accountability

The Institutions will have an ongoing role in managing and monitoring PPP projects during their development and operational phase. It will be responsible for ensuring that the PPP agreement is properly implemented, managed, enforced and monitored.

The policy importantly says that a PPP agreement does not divest the institution concerned of the responsibility for ensuring that such institutional function is effectively and efficiently performed in the public interest.

Contract management by Institutions will allow them to ‘regulate’ projects by drawing up comprehensive PPP agreements that address financial, technical and operational issues according to the policy.

A GNH PPP

All PPP projects must be in line with principles of GNH. Therefore the PPP projects must benefit institutions as a viable alternative infrastructure and service delivery option and users who will receive more accessible, affordable, reliable and safe services. It should also benefit society by supporting the furtherance of important societal and GNH goals, such as employment, environment, and social equity. It says it will also help private parties, as they will receive investment opportunities that are financially viable and bankable.

The policy says that the above benefits will be achieved through providing stronger governance as the focus will shift from budget expenditure administration by transferring substantial risk to the private parties.

It will also be achieved by faster project implementation by transferring construction risks to the private party. It will provide transparent procedures supported by a robust institutional framework, and enhanced accountability in project delivery based on firm contractual arrangements as non-compliance by the private sector will be penalized and may result in contract termination.

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