The Bhutanese Leading the way.
The question now is if the government should foot a private company’s bill indirectly by giving more concessions
The International Finance Corporation (IFC) as the main advisor and facilitator of the Multi Level Car Parks (MLCPs), among its many functions, did two important things.
The first is that it researched and came up with a cost estimate of the MLCPs project based on the minimum requirements for a safe parking structure that would accommodate 550 cars with requisite amount of steel, concrete and other inputs at USD 8 mn which came to around Nu 480 mn in 2014.
Even the bidding company KCR came up with an estimate of around Nu 478 mn at the time. This estimate was drawn up by CE Construction Pvt Ltd of Nepal which was the main FDI partner holding 54 percent of KCR and had extensive experience in Nepal among other places.
The second thing is that IFC recommended to the Thimphu Thromde and the KCR Pvt Ltd to hire a Monitoring Consultant to monitor the construction phase of the project. This independent consultant using the Concession Agreement between the Thromde and KCR as its guide would ensure that the required inputs go in, look at design changes and would also look at additional costs among other things.
The recommendation by the IFC for the consultant was also made keeping in mind the limited capacity of an already overstretched Thimphu Thromde whose engineers have to monitor an array of projects and private constructions. Another factor was that this was Bhutan’s first PPP project including both public resources and private investment.
The consultant was supposed to be paid 50:50 by the Thromde and KCR.
Thromde and KCR rejected independent consultant and cost balloons
However, both the Thimphu Thromde and KCR decided to not have the independent consultant.
The KCR CEO Namgay Penjore said they said no as it was felt that since the Thromde Office was right next to the two MLCPs, and it would be additional cost as both the company and Thromde had its own engineers.
The Thrompon Kinlay Dorjee also said that it was about hiring one independent engineer and not a firm and there could have been issues if that engineer is not ethical.
However, a reliable source said that IFC had given the option of hiring an entire firm too.
With no monitoring consultant the KCR submitted detailed drawings and design estimates approved by Thimphu Thromde that significantly pushed up the cost of the project, well above what IFC and even KCR itself had initially projected.
The cost almost trebled from Nu 478 mn in 2014 to Nu 1.168 bn by 2019, including the financing cost. At least that is what the KCR claims and is supported by the Thimphu Thromde.
Asking the government to share the private cost through concessions
KCR and to an extent the Thromde has been using the basis of this increased cost as an argument to increase the concession period from 22 to 30 years and also waive off the concession payment for one year of commercial operations.
KCR is also using this as a reason to ask for increasing the commercial space from the current 20 to 35 percent.
The Thromde is also planning to convert free parking spaces in the urban core area and hand it over to KCR which has asked for around 200 such parking lots.
In the end, the government is faced with a situation in a Public Private Partnership project where the private party which had to construct the project on its cost is claiming a much higher completion cost and asking for concessions to recover this cost.
Concessions which would cost the public treasury in terms of potential revenue lost with concession fees being waived off, the concession period being increased (delaying government ownership) and also increasing commercial space and reducing parking areas which would reduce parking fees to be paid to the government.
On the issue of the cost going up the KCR CEO said the initial costing done by CE was like that of an ordinary building which would be Nu 1600 to Nu 1800 per square feet but when the detailed design was done the cost was going up much higher. He said that 800 mm of rafting had to be done on the foundation throughout and it was like building a bridge from the foundation to the top. He said the Thromde also made design changes on column size, rod and seismic zone changes.
The Thrompon supporting the KCR assertion said that a lot of changes were made from the initial estimates of 478 mn. He said that when the design was submitted everything changed from the foundation to the column size to the concrete mix pushing up costs.
The Thrompon said another factor for the costs going up was the delay in the project due to the FDI company not being able to send in dollars due to forex restriction from Nepal. He said there was no money to even buy the construction materials at times.
The Thrompon also said the initial estimates was like any other building but the structural engineers of Thimphu Thromde did not find that design acceptable and so changes had to be made.
Overdone design and poor monitoring
An expert familiar with the project and the design said that the design of the Thimphu Thromde was ‘overdone’ which would have pushed up costs.
The expert said the IFC’s initial assesment had already factored in seismic safety. The expert also said that cost must have also gone up as the company may have overspent on certain commercial aspects like a hotel in MLCP 1 which is not the responsibility of the government.
A former employee of KCR on the condition of anonymity said that there was only one thromde engineer for both the sites and that engineer was not at the site full time but only came occasionally to give certain approvals. “It was like a Thromde engineer occasionally monitoring a private construction,” the ex-employee said.
KCR and Thrompon says project should not fail
When the paper asked the KCR CEO on how could the Nu 1.168 bn cost estimate could be taken to be true or even verified the CEO said that KCR had done an internal audit twice. He said the Thromde had also monitored the construction.
The CEO said that of the 1.168 bn around Nu 740 mn was in bank loans with 500 mn as the principal loan and Nu 240 mn as the interest. He said that around Nu 107 mn had been invested as equity by the Nepal partner who had now withdrawn and his place has been taken by Shacha Construction which put in around 100 mn. He said the KNG company owned by him and his partner (formerly Lyonpo Karma Donnen and now his father-in-law) had put in equity of 50 mn.
He said that currently the MLCP, including the road parking in the urban core area, which is part of the same package was currently generating only around Nu 2.5 mn per month of which around 1.1 mn half had to be given to Thimphu Thromde. He said that ideally the MLCP should be making around Nu 8 mn a month so that it can meet its loan obligation once the Nu 5 mn per month loan payment starts from June 2021.
The CEO said this is why the project is requesting the government to increase the concession period and commercial space. He said for now as per the concession agreement the parking fee is supposed to be increased from Nu 15 to Nu 20 in the core area for 30 minutes as soon as the MLCP is done which can hugely increase revenue, but it has not been done as while the Thromde can make changes it requires an approval from the Ministry of Finance.
However, there is a dichotomy here as while KCR is complaining the parking fee has not been increased by Nu 5 despite completing the project, KCR has not paid one year’s concession fees after starting commercial operations saying the construction is still on. The Thromde is also recommending waiver due to poor occupancy.
The Thrompon making an argument to make the project viable said that if the projects cannot pay the bank loans, then the banks would take over the project and start auctioning the building. He asked if the government would buy back the project at Nu 1 bn. He said that rather then the project failing the main aim should be to ensure the project succeeds.
Expert says govt should not entertain claims
The expert who is familiar with the project and was formerly associated its inception, on the condition of anonymity, said, “The government should not entertain such claims to make the project viable in a PPP project as the private sector takes the risk.”
He said that current issues should not come up as the bidding company had agreed to pay Nu 12,345.67 per year per parking slot and this should have factored in the cost of construction and profits. He said that a 20 percent commercial space being provided was to make the project viable.
“The Thromde does not need to get into nitty-gritty measurements as their concern should only be on getting the 550 parking slots and they should not listen to anything beyond that,” said the expert.
He said this is not a conventional construction project where the government pays for certain escalations. He said in this project the government’s only role is getting the parking spaces and giving the agreed to concessions and it is up to the private party on how much they want to spend above the requirements be it in a hotel or other structures.
He also said he finds it difficult to see how a Nu 478 mn project escalated to around three times the rate with the parking space still being the same 550 slots. He said this is where an independent monitoring consultant firm would have made all the difference and given an independent feedback on what actually happened.
On what would happen if the banks took over the project the expert said that the Concessions Agreement had already been mortgaged to the banks (BoB and RICBL) and they would only need take over the concession of the two structures for 22 years along with the core parking area.
He said the land is still owned by Thromde and that cannot be taken away.
The banks can then either run the concession agreement or auction it to bidders and it would still revert back to the Thromde after the Concession Period.
The expert said that the government should not bear losses and if need be allow the project to fail. He said that there cannot be risk free business in Bhutan for the private sector.
