Governments worldwide struggle to provide essential public goods like urban infrastructure and quality services amid growing populations. In least-developed and geologically fragile countries like Nepal, these challenges are intensified by financial constraints, climate-induced disasters and political and regulatory uncertainty. To achieve middle-income status and meet the Sustainable Development Goals (SDGs) by 2030, Nepal requires annual investments of around $17 billion, with more than half allocated to infrastructure. The government’s 16th Periodic Plan estimates a total investment need of $81.71 billion, with over 65 percent expected from the private sector. The disparity between Nepal’s investment needs and its actual achievements necessitates mobilising private-sector investment and expertise.

Public-Private Partnerships (PPPs) offer a viable solution, linking infrastructure gaps and enhancing public service delivery. They can address financing shortfalls, improve efficiency and drive innovation by leveraging the strengths of both public and private sectors. These partnerships involve long-term collaboration, with shared risks and returns between the government and private investors. Despite global success stories, Nepal has yet to fully tap into the potential of PPPs, with progress in identifying, structuring and executing PPP projects remaining slow over the years.

PPPs in Nepal

To promote PPPs, the Government of Nepal has implemented key measures, including the enactment of the Public-Private Partnership and Investment Act 2019 (PPPIA) and its 2020 regulation Public-Private Partnership and Investment Regulation (PPPIR). These serve as national-level umbrella legislation, with the Investment Board as the central agency for promoting and managing PPP initiatives. The introduction of the Hydropower Policy 2001 and the Public Infrastructure Build-Operate-Transfer (BOT) Policy 2001 marked significant milestones in building private-sector participation in infrastructure development. Additionally, enacting the Private Financing in Build and Operation of Infrastructure Act (2006) paved the way for energy projects under the Build-Own-Operate-Transfer (BOOT) modality.

Despite notable success in attracting private investment in hydropower through BOOT contracts, PPP development in other infrastructure sectors remains slow. Furthermore, provincial and local governments are still in the early stages of adopting PPP models, limiting broader implementation across the country.

Strengthening legal and policy frameworks

The PPPIA 2019 offers a comprehensive legal foundation for the development and management of PPP projects, applicable at all levels of government. To unlock its full potential, the government must establish and implement essential directives and procedures.

One key provision, the Viability Gap Funding (VGF) mechanism under Section 43, is designed to support economically significant projects that may not meet financial return criteria. Despite its importance, the VGF remains unimplemented. To operationalise it effectively, the government should allocate dedicated annual funds, set transparent selection criteria and prioritise investments in critical sectors.

Additionally, Transaction Advisory Services (Rule 6 of the PPPIR) require a well-defined framework to engage professional organisations, including international financial institutions. These services are vital for the identification, structuring and development of large infrastructure projects, a practice that is widely adopted internationally to attract investment in PPP projects. The Investment Board should prioritise sectors for PPP projects per Section 19 of the Act and publish a pipeline of viable projects based on survey studies to boost investor confidence.

Government agencies must also explore alternative PPP models beyond the traditional BOOT approach. The Hybrid Annuity Model (HAM), which has been successful in India’s transport infrastructure sector, could be adopted to Nepal’s needs. However, the PPPIA does not adequately address payment mechanisms such as availability-based payments and hybrid models, which are critical for encouraging private-sector participation.

The PPP Policy 2015, formulated before the 2015 Nepali Constitution, must be revised to align with the federal structure and the objectives of the 16th Periodic Plan. Furthermore, harmonising investment-related laws will provide greater clarity and predictability for private investors, strengthening Nepal’s overall PPP framework.

Risk mitigation and financing

For successful PPPs, government agencies must be willing to share both risks and returns. Attracting private-sector investment requires a thorough assessment of project risks and return profiles, along with the provision of essential support mechanisms. Credit enhancement measures, including guarantees, can help mitigate financial uncertainties, while hedging facilities should be made available to protect investors from currency and interest rate fluctuations.

It is necessary to fully operationalise the Hedging Regulation 2022 through institutional arrangements and consultations with relevant stakeholders. Additionally, the government must engage with development financial institutions to access risk mitigation products tailored to the specific needs of PPP projects.

Beyond risk mitigation, securing proper financing is crucial for sustaining PPP projects. The government plays a pivotal role in structuring these initiatives by raising capital through market instruments, such as issuing project bonds for commercially viable ventures, or securing subsidised loans from development finance institutions for projects with both financial and social value. Additionally, alternative financing mechanisms, including land value capture, tax increment financing, and the issuance of green and social impact bonds through the development of debt markets, should be actively explored and promoted.

Portfolio of bankable PPP projects

Similarly, the government must develop a well-structured portfolio of bankable and credible PPP projects to attract serious investors. Investors are not solely interested in standalone projects but seek long-term investment opportunities within a diverse project pipeline. A transparent and well-prepared portfolio enhances investor confidence.

A dedicated fund should be established to identify and conduct feasibility studies for potential PPP projects. Development partners can provide project readiness support, ensuring that proposed ventures meet international investment standards. While greenfield (new) projects often receive the most attention, brownfield (existing) projects offer equally compelling opportunities. Institutional investors, such as pension funds, insurance companies and sovereign wealth funds tend to favour brownfield projects, as they come with fewer uncertainties related to land acquisition and regulatory approvals.

Building institutional capacity

The adoption of PPPs represents a shift from traditional procurement methods to a more collaborative governance model that requires long-term cooperation between the public and private sectors. Public officials must be equipped with the necessary skills to manage complex PPP procurement processes and oversee contracts.

Political leadership also plays a crucial role in the success of PPPs. Elected representatives should be sensitised to the unique nature of PPP procurement, which demands long-term commitment, consistency in policy and regulatory stability.

The road ahead

Effective adoption and implementation of PPPs could significantly bridge gaps in infrastructure and improve public service delivery in Nepal. If managed strategically, PPPs have the potential to bring much-needed private investment and expertise, accelerating the country’s progress towards middle-income status and SDG targets. However, this requires strong political will, institutional reforms, and a commitment to build an enabling environment for private-sector participation.