Nepal has emerged as one of the top 10 low income developing countries (LIDCs) to attract investment in infrastructure projects built under Public-Private Partnership (PPP) model, says a latest International Monetary Fund (IMF) report.

Nepal has so far attracted $1.2 billion in 12 infrastructure projects operating on PPP model, which is 1.2 percent of the country’s gross domestic product (GDP), says the latest IMF Policy Paper on ‘Macroeconomic Developments and Prospects in LIDCs’.

With this investment, Nepal has become the eighth biggest LIDC to attract investment in PPP projects, mostly in the energy sector, such as Kabeli-A hydroelectric plant.

Altogether 60 countries with low per capita income across the globe have been identified as LIDCs. These countries, ranging from Laos and Bangladesh to oilrich Nigeria and fisheries-dependent Kiribati, account for about one-fifth of the world’s population.

Improving infrastructure investment is a key pillar in development strategies of most of the LIDCs and is seen as integral to achieving the 2030 Sustainable Development Goals.

Better infrastructure services can raise productivity, crowd in private investment, and facilitate integration of the rural population into the national economy, says the report.

PPP is often seen as the vehicle to bridging the infrastructure gap in LIDCs where governments generally do not generate adequate revenue to fund many projects on their own and refrain from resorting too much on debt financing that can widen fiscal deficit.

Under the PPP model, the government works as a facilitator to expedite implementation of projects and sometimes works as an equity partner, while the private sector mobilises financial resources and expertise to complete the projects.

Once such projects are complete, developers operate them for certain years, during which they recover investment and generate profit. The projects are then handed over to the government free of cost and in a good working condition.

Because of these leverages, the Nepali government has been trying to promote PPP in the country to bridge the infrastructure gap. In this regard, the government last year introduced PPP Policy, which includes provisions on project preparatory fund and viability gap funding. Currently, the government is drafting PPP Act and other related guidelines.

Asia attracted more than half of PPP investment in LIDCs, with Laos emerging as the leader, reflecting the role of hydroelectric projects exporting electricity under long-term power purchasing agreements, primarily with Thailand.

Yet these investments, like in Nepal, are concentrated in the energy sector. There has been some involvement in transportation projects, notably in sub-Saharan Africa, says the report, but little engagement in the water and sanitation sectors, where direct state provision remains the dominant modality.

Also, the central government is the main counterpart of the private sector in PPP projects in LIDCs, with minimal participation of sub-national levels of government. About a quarter of PPP projects in LIDCs involve multilateral development banks participation and financial support, largely in the form of direct loans and credit enhancements, including political risk coverage and partial credit guarantees.

“Improving LIDC infrastructure to support growth requires action on multiple fronts,” says the IMF report, adding, “Policymakers must strike a balance between borrowing to finance investment and maintaining debt sustainability.”

Where fiscal risks limit room for debt financing, additional resources need to be mobilised through accelerated domestic resource mobilisation and concessional external financing, further says the report.

“Strengthening public investment management capacity is essential to improving the returns from investment outlays. Expanded engagement by private investors is important for scaling up, but requires concerted efforts to improve the regulatory and macroeconomic environment while delivering policy predictability over the medium term.

Multilateral development banks and development finance institutions have worked to do in better targeting their interventions to leverage private investment, including through well-designed and scalable risk mitigation measures.”