Kathmandu, June 6

The Ministry of Finance (MoF) has prepared the first draft of the Public Private Partnership (PPP) Act, which, once enforced, will replace the Act on ‘Private Financing in Build and Operation of Infrastructure’ — commonly referred to as the BOOT (Build, Own, Operate and Transfer) Act.

The draft was originally prepared by international consulting agency, Deloitte Touche Tohmatsu India, for the MoF, after incorporating recommendations laid by concerned stakeholders.

“We recently invited concerned officials of the National Planning Commission, the Ministry of Physical Infrastructure and Transport, the Ministry of Energy, the Ministry of Education, Office of Kathmandu Metropolitan City and Town Development Fund, among others, for a discussion on PPP Act. Deloitte has now prepared the draft of the Act by encompassing their suggestions,” a senior MoF official privy to the matter told The Himalayan Times.

The government had formally started preparing the draft of the PPP Act after the Cabinet, on October 9, endorsed the PPP Policy. The Policy was prepared after holding discussions with various stakeholders for over two years.

“The provisions laid in the PPP Policy are very comprehensive, so it wouldn’t be very difficult for us to draft the Act,” the official said, without disclosing the timeframe required to prepare the final draft.

The government has long been trying to promote PPP to engage private sector in development of various physical infrastructure projects, like roads, bridges, airports, hydroelectric and irrigation plants, and transmission lines.

Under PPP model, government works as a facilitator to expedite implementation of projects and sometimes works as an equity partner, while private sector mobilises required financial resources and expertise to complete projects. Once such projects are complete, developers operate them for certain years, during which they recoup investment and generate profit. The projects are then handed over to government free of cost and in a good working condition.

To encourage the private sector to build projects under PPP modality, the Act, in line with provision laid in PPP Policy, will incorporate mechanism to provide viability gap funding to project developers. Viability gap is the difference between revenue required to make a project commercially viable and revenue that is expected to be generated upon project’s completion.

In simple words, if the cost of building a toll road stands at Rs five billion and toll collection after a certain period is expected to hover around Rs 3.5 billion, the viability gap is Rs 1.5 billion.

Since the private sector does not want to invest in development of such loss-making projects, governments in many countries extend financial support, or viability gap funding, to developers so that projects of strategic importance could be built.

Also, the Act will include a provision on creation of a revolving fund for land acquisition to facilitate project developers.

As per the PPP Policy, the government cannot sign an agreement with the project developer unless 80 per cent of the land required for the project has been acquired. The developer later has to recompense the government, fully or partially, or pay royalty or rent for the land based on the nature of the project.

To further increase participation of the private sector in PPP projects, the Act is also expected to extend tax relief to developers and create a mechanism to enable the private sector to obtain long-term financial resources.

Among others, the Act is also expected to incorporate provision on sharing of risks and benefits proportionately between the government and the private developer during and after the construction of projects.