Public Private Partnership

in Transport Infrastructure

nfrastructure development in most developing countries suffers from insufficient funds. Thus, joint efforts between
the Government and private sector in infrastructure development has been a trend in many countries. Public Private
Partnership (PPP) in infrastructure development can take place in the following forms: Build Operate Transfer
(BOT), Service Contract (SC), Management Contract (MC), Annuity Contract (AC), Special Project Vehicle (SPV)
contract, and Community or User Group or Nongovernmental Organizations (NGOs) based contracts. There are several
variants of BOT, such as: Build and Transfer (BT), Build Own Operate and Transfer (BOOT), Build Transfer and
Operate (BTO), Lease Operate and Transfer (LOT), Lease Build and Operate (LBO), and Develop Operate and Transfer
(DOT). However, the discussion here focuses more on BOT projects.
In Nepal, the concept of BOT first emerged in 1994. It took another five years till 1999 for the Governmentat the
cabinet levelto first approve BOT policy in the Roads Sector. In 2001, BOT policy was followed by a comprehensive
policy covering all kinds of public infrastructures, called Public Infrastructure Build Operate and Transfer Policy
2001/02 (BOT Policy). Thereafter, on 22 August 2003, BOT ordinance named Private Investment in Infrastructure Build
and Operate 2003/04 (BOT Act) was promulgated and was updated in 14 February 2004. Furthermore, in 2004, the
Ministry of Local Development (MoLD) issued PPP Policy 2003/04 for Local Bodies. Thus, a common framework for
infrastructure development under BOT system was established in Nepal.
The objective of BOT policy is to attract domestic and international investors for infrastructure development.
Similarly, the objective of BOT Act is to provide reliable and economical services to the people by involving private
sector in the build, operate and transfer of infrastructure in accordance with the liberal economic policy adopted by the
Government.
BOT projects involve many agencies and companies, which include: government agencies, consultants, contractors,
toll companies, suppliers, experts, investors, and operation and management companies. Financing for BOT can be made
available from commercial banks, multilateral banks, export credit agencies, institutional investors, and special investors.
BOT projects have been successful in many countries, such as, Malaysia, France, China and India. In India, due to
various policy initiatives for attracting private sector investments, several PPP/BOT projects have been completed, while
many are going on, and others are in the pipeline.
Successful BOT projects in foreign countries have also shown a greater participation of governments of host
countries, and both private and government agencies share risks associated with a project.

Past Efforts on Transport Infrastructure Related BOT in Nepal

In 1994, the Governments endeavor to involve private sector in Kathmandu-Hetauda Fast Track Road, and to
construct an international airport at Simra did not bear any results.
Efforts to award the development of Lumbini International Airport on BOT basis was ineffective.
Even after six years of completion of the cargo complex at Tribhuvan International Airport (TIA), Civil Aviation
Authority of Nepal (CAAN) has been unable to award operation of the complex to a private party owing to a lack of
well outlined BOT rules.
The Manakamana Cable Car is a very successful private sector venture related to transport infrastructure.
In the year 2000, Kathmandu Municipality awarded two contracts: (i) a 45-year contracton the basis of DOT system
to develop and operate a bus park, and (ii) a 20-year contract to build overhead bridges in Kathmandu under the
LOT system.

Potential PPP/BOT Projects in the Transport Sector

 PPP model can be applied to the following prospective mega projects: (i) Kathmandu-Terai linkthat could be
constructed using various routesby a high speed surface transportation system, which could either be an expressway
or a railway; (ii) international airport at Nijgadh in Bara district.
In 2001, the Ministry of Physical Planning and Works (MoPPW) long listed seventeen BOT projects in the road sector.
Five of the long listed projectsshown in table 1were identified to have attractive financial results. Toll charge was
indicated as the main source of revenue.
Periodic maintenance of the Strategic Road Network (SRN) can be based under DOT.
Where traffic is heavy, local bodies can apply BOT approaches in case of Local Road Network (LRN). Whereas in low
traffic LRN, PPP based on annuity contract or BOT with central or local government grants or financial incentives
could be applied.

Table 1: Summary of Financial Analysis of Short Listed BOT Road

Projects
(in NRs millions)

S.N.
1
2
3

Road

4
5

Kanti Rajpath
Birgunj-Jitpur
Kathmandu, Outer
Ring Road
Janakpur-Jayanagar
Sitapaila-Dharke

Length
(km)

Analysis
Period
(years)

60
19
72

25
25
25

25
25

25
25

Construction
Cost

Payback
Period
(years)

FIRR
(%)

B:C

1,137
270
5,680

29
26
26

5.5
4.9
4.7

5
6
6

355
605

20
27

3.1
4.8

9
6

%= percentage, B:C= Benefit/Cost ratio, FIRR=Financial Internal Rate of Return, S.N= Serial Number
Source: Nepal Engineering Consultancy Services Center Limited (NEPECON), 2001.

Constraints
Policy

The National Transport Policy 2001 encourages private sector involvement in the development of transport
infrastructure, but the policy is yet to be fully implemented.
The prevailing rules and requirements of the Public Works Directives are too demanding and inhibit domestic
contractors and consultants from participating in the International Competitive Bidding (ICB) contracts.
Policy constraints concerning the consulting industry are (i) absence of legal instruments to deal with consultancy
services, (ii) nonexistence of a focal ministry or a consultancy industry promotion center, (iii) inadequate
representation of consultancy firms in national forums, (iv) lack of quality based selection system, and (v) a higher
level playing field for government owned consultancy firms.
BOT Policy and BOT Act have several differences, which need to be harmonized to make BOT more attractive to
private sector and NGOs.
PPP Policy 2003/04 is very generic and does not address practical issues concerning (i) maximum period of
concession agreement; (ii) procurement process; (iii) financing mechanisms; and (iv) facilities and protection from the
Government.
Legal Aspects
Even though BOT Act was promulgated to promote transparency, competition and to minimize risk, the Act could lead
to nontransparent procurements.

 Hydropower BOT projects are not covered under the comprehensive BOT Policy, which does not include income tax
holidays, tax and duty rebates. These concessions are required to attract foreign investment in transport infrastructure.
Updated BOT Act is intended for central level works and does not involve private sector in local bodies. On the other
hand, despite its incomplete framework, the Local Self Governance Act 1999 (LSGA) has provisions for involving
private sector, NGOs and user committees. Thus, the BOT Act lacks a separate chapter for issues relating to local
bodies.
BOT agreements signed by some municipalities do not conform to the normal BOT process and principle. Besides,
civil servants avoid BOT procurement because BOT Act has not developed standard regulations, guidelines and
documentation.
Institutional Aspects
There is an absence of a full time BOT Committee at each ministry and a dedicated BOT Project Office for each
BOT/PPP project. The existing high level nine member Coordination Committee (CC) is not adequate for BOT
projects.
The CC lacks proper coordination with various government agencies, and the BOT Project Office is not sufficiently
empowered to implement, evaluate and expedite BOT projects.
Agencies, such as Department of Roads (DoR), Department of Local Infrastructure Development and Agriculture
Roads (DoLIDAR) that are related to the maintenance of roads are not oriented towards functioning in a flexible,
autonomous and commercial environment.
After a few BOT projects are awarded, necessity for a regulatory agency will arise. The proposed agency will (i) adjust
toll charges or concession periods; (ii) regulate tariff of transportation services; (iii) support development of surface
transport infrastructure; and (iv) prepare standard procurement documents for central and local level works.
Administration
BOT projects are constrained by lack of annual planning and budgeting. Other constraints include a lack of
regulations, guidelines, documentation, and monitoring.
The following steps will need to be taken as confidence building measures to successfully award BOT projects: (i)
Governments objective and scope of work will have to be clarified; (ii) Potential BOT projects will have to be
identified; and (iii) Information on BOT projects will have to be disseminated.

Recommendations
Start at least two to three BOT projectswhich would serve as model projectsat the central level, and three to five
PPPs at the local level.
Prepare a list of potential PPP projects at the central and local level, and publicize the importance of PPPs at both
levels.
Amend BOT Policy and Act to form an umbrella PPP Policy and Act, and include PPP under the local body. The
umbrella Policy should encourage involvement of private sector. Also, regulations pertinent to specific sectors may be
prepared by related sectoral ministries under the umbrella PPP/BOT Policy and Act.
Define public transport infrastructures in the PPP Policy and Act.
Formulate BOT/PPP regulations and include all concessions that are granted by the Government in the Act itself.
Prepare strict guidelines for (i) BOT awards and Memorandum of Understanding (MoU) agreements so that all private
parties are treated in a fair manner; and (ii) model concession agreements for BOT, Build Operate and Own (BOO),
BTO, SPV, Annuity, Shadow Toll, request for proposal (RFP), expression of interest (EOI), and PPP projects.
Make provisions for BOT/PPP in Local Body Financial Rules.

 Model concession agreements should have provisions for the following: (i) Give full compensation to the
concessionaire if the Government terminates an agreement; (ii) Develop a formula for toll rate revision every three
years based upon consumer price index (CPI), traffic volume, and actual costs; (iii) Grant permission to investors to
commercially develop areas surrounding the project site; and (iv) Assure investors of attractive financial returns.
Create a full time BOT Committee in MoPPW and MoLD, and delegate it with necessary authority and budget. Also,
establish a separate BOT Project Office for each BOT project.
Form a separate Regulatory Agency responsible for all types of surface transport infrastructure.
Establish a separate Road Development Fund with provisions for collecting user charges for LRN.
Strengthen the existing road agencies so that they can (i) identify maintenance needs, (ii) appraise BOT/PPP projects,
(iii) identify type of PPP and the need for funding, (iv) make business plans, and (v) contribute to sustainability of
transport infrastructure.
Organize regular trainings on BOT system for the officials of the MoLD, Ministry of Culture, Tourism and Civil
Aviation, Ministry of Finance and National Planning Commission. Similarly, extend trainings to selected
Municipalities, District Development Committees and Village Development Committees.
Address concerns of consulting and contracting agencies.
Relaxon a case to case basisSingle Borrower Limit imposed by Nepal Rastra Bank to facilitate domestic
financing of PPP.
Policy makers should take into account remittance from abroad for financing of short-term PPP projects.

The Economic Policy Network is an undertaking of the Ministry of Finance with Asian Development Bank support. It supports the
preparation of policy papers based on participatory dialogue in the areas of (i) macroeconomic management; (ii) international trade,
investment, and employment; (iii) infrastructure development; and (iv) tourism, agriculture and regional development.
This policy brief is an abstract of the policy report Prospects and Approaches to Public Private Partnership in Transport
Infrastructure prepared by B.B. Deoja, R.P. Adhikari, and B.R. Pande on behalf of the Federation of Contractors Associations of
Nepal. It has been edited for clarity and brevity. Please refer to the original report for a comprehensive discussion on issues and
recommendations. Full version available at: http://www.mof.gov.np/economic_policy/pdf/Prospects_Approaches.pdf
Economic Policy Network
Ministry of Finance, Singha Durbar Kathmandu, Tel: 4211353, E-mail: epn@mof.gov.np
Web: www.mof.gov.np
EPN Team:
Advisory Committee Chairperson: Mr. Narayan Silwal
Focal Unit Chief: Mr. Bimal Wagle
Team Leader: Mr. Dipendra Purush Dhakal
ADB Project Officer: Mr. Shahid Parwez
Edited by: Mr. Samtenla Sherpa and Mr. Arun S. Rana
2006 Government of Nepal/Asian Development Bank