MLCP project is too big to let it fail: Finance Minister

MoIC Minister declared his conflict of interest and did not participate in cabinet meet on MLCP says MoF Minister

The Finance Minister Lyonpo Namgay Tshering said that while it is too early to say whether the Multi Level Car Park project (MLCP) project will fail or do well he said that the MLCP project is too big to fail.

Earlier, an expert who had been involved with the project said that if MLCP cannot be a commercial success it should be allowed to fail.

The expert had said that the banks can takeover the 22-year Concession Agreement mortgaged with it and run it or auction it to some other operator. The expert pointed out the the land would still belong to the government, the project would anyhow revert to the government and private sector cannot have risk free business.

Why it cannot fail

The Finance Minister said that he cannot agree with this expert view. He said that this is the first of its kind project and if the project fails then the loan taken from BoB and other banks would be at stake which would hamper cash flow and liquidity.

He said that the government cannot turn a blind eye to this and so something needs to be done to allow the project to recoup its money and to be able to pay the banks.

The minister said that while this is not the headache of the government, which should not interfere with how the promoters do, but if the request is genuine then something needs to be done as per the Concession Agreement. He said that if there are hiccups in the Concession Agreement then it needs to be sorted out between Thimphu Thromde and KCR Pvt Ltd.

Lyonpo said that the MLCP PPP project is an innovative development project where a private company builds a project and hands it over after operating it.

He said it is the first project of its kind and the government does not want the project failing as it can shake public confidence in future PPP projects.

Lyonpo said that the project failing is also not in the interest of the government in the context of COVID-19 and its impacts.

He said ideally everyone should operate as per the agreement and concessions would have to be seen at a later stage. In response to a question on if the government is saying the project is too big to fail he said, ‘it is too big to let it fail.’

The Finance Ministry is the parent organization that supervises PPP projects and Thimphu Thromde and KCR would have to put up any matters to it, including requests for concessions.

Concessions and waivers

Bhutan’s first Public Private Partnership (PPP) project in the form of the MLCP between the Thimphu Thromde and KCR Pvt Ltd has been claiming an almost 200% increase in construction cost from the original estimate (478 mn to 1.1 bn) and an inability to fill up the parking lots at MLCP 1 and 2.

Though just in its first year of operation of a 22-year concession period the Thromde and KCR want various and early concessions from the government to make the project a commercial success.

The cabinet in June waived of Nu 8.153 mn in revenue owed by KCR to Thimphu Thromde for a two-year delay in the project on the request of both KCR and Thimphu Thromde.

The Ministry of Economic Affairs in violation of the FDI rules also allowed the 54% majority FDI partner to pull out before the three year period.

Thimphu Thromde wants another Nu 4.413 mn of its share of the revenue, it was supposed to get from the two MLCPs for the first year of operations, to also be waived off.

KCR has requested the commercial space to be increased from the current 20 percent to 35 percent but though it did not get formal support from Thimphu Thromde for this the conversion of several MLCP parking areas into lots for 270 vegetable vendors effectively increases the commercial space to 35 percent and more.

The Thimphu Thromde supported and put forward the KCR company’s proposition to increase the concession period from 22 years to 30 years.

The 23rd June, 2020  cabinet decision says that regarding the extension of the concession period for the MLCP, the Cabinet is of the view that it is too early to assess and conclude on the viability of the business of MLCPs and therefore decided to take it up at an appropriate time.

The Finance Minister said that the request for increasing the concession period came from the Thimphu Thromde to the ministry which oversees PPP projects. He said that the ministry independently could not take a position on this and so the matter was forwarded to the cabinet.

The minister, however, said that he had stated to the cabinet that the concession period cannot be blindly increased as the period is for 22 years and anything can happen.

He said the request for increasing the concession period from 22 years to 30 years was based on the assumption that the company cannot recover its costs in 22 years.

However, Lyonpo said that this scenario might change in the future as the parking fee is increased over a period of time. He said that the 22-year period will also see different governments. He said it is too early to determine the fate of the project as the ministry taking a 2019 baseline of occupancy and revenue had done a study and the revenue of the project can either get better or worse.

The minister also made it clear that on issues like concessions in the future the project is essentially between Thimphu Thromde and KCR and that the Thromde as the owner of the land the PPP partner would have to take a call.

He also said it is up to the Thromde to increase parking fees.

KCR in addition to the two MLCPs was also given the entire parking in the core urban area of Thimphu.

On the cost of the project increasing by almost 200 percent Lyonpo said it is easy to verify as the Thromde would know about the various alterations. Lyonpo said he heard that the built up area had increased.

On the commercial space effectively being increased to 35 percent and beyond due to more than 50 percent of the CFM in the process of being shifted to the MLCP the minister said that this is a temporary measure in the pandemic.

Addressing Conflict of interest

Lyonpo also said that the June cabinet meeting that decided on the MLCP saw the MoIC Minister Karma Donnen Wangdi declaring his conflict of interest and leaving the cabinet meeting before the meeting on the MLCP started.

Lyonpo Karma Donnen Wangdi was one of the shareholders of the MLCP project until he transferred his shares to his father-in-law before joining as a DNT candidate in 2018.

The Finance Minister said that the current cabinet had learnt from the conflict of interest issues during the time of the first government when the former minister Lyonpo Yeshey Zimba had sat in the cabinet meeting that had decided on fiscal incentives for the Le Meridien hotel.

He said in the current cabinet they have a practice where the agenda of the cabinet meeting is read out and if any of the ministers have a conflict of interest then they declare it and excuse themselves from the meeting.

Expert says not too big to fail

The expert said that increasing the concession period right after building the project would have attracted charges of in-transparency around the bidding process as other bidders or potential bidders would then say they would have bid or bid higher if they knew the concession period is going to be increased.

While around 5 companies showed some interest in the end only two companies made the final bids. The other company which was a domestic one was disqualified at the technical level itself and its financial bid was never opened leading to KCR winning the bid.

The RAA in a report pointed out various issues around the bidding process and also how Thimphu Thromde is only getting a small part of the parking revenue.

The expert said that a study has shown that internationally around 50 percent of PPP projects fail even before the concession agreement is signed and there are those who fail after it too.

The expert also did not agree with the terminology of being ‘too big to fail’ saying that the Concession Agreement has no clause where the government guarantees the private partner will not make a loss or that the private partner would give extra revenue to the government if it made profits. 

The expert said that the land belongs to the tax payers. The expert also questioned what kind of monitoring has been put in place by Thromde to see the extent of the loss. 

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