A Critical View of The Build-Operate-Transfer Privatisation Process in Asia

ASIAN JOURNAL OF PUBLIC ADMINISTRATION VOL 19, NO 2 (DECEMBER 1997) 203-243
A CRITICAL VIEW OF THE BUILD-OPERATE-TRANSFER PRIVATISATION PROCESS IN ASIA
PAUL HANDLEY
Since the late 1980s the "build-operate-transfer" concession, orBOT, has become a popular option in Asiafor infrastru.ctu.ral privatisation. The experiences ofseveral years suggest that BOT schemes are by nature too complex and fragile, and too highly prone to politicisation, to enable governments in developing countries to achieve the quick, efficient, and privately financed supply of infrastructure as intended by this method of privatisation. Across Asia the number ofunqualified BOT successes has been few. A much greater number of attempted projects has been characterised by lengthy delays, chronic disputes, and.frequently,failure to ever get underway. Even in the case of those which do proceed, the state often fails to attain its principal goals.
Introduction In the mid- 1980s, many Asian countries turned to the privatisation of infrastructure to overcome problems which threatened to constrain economic growth. The use of private sector management and capital in transport, power, water and sewage, and telecommunications services was seen as a way of obtaining and maintaining infrastructural facilities more quickly and cheaply that traditional, state-led methods.
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Asian Journal of Public Administration
Various privatisation approaches such as corporatisation, public flotations, straightforward sell-offs of state-ownedenterprises(SOEs), and so on, became popular options in many countries in Southeast and South Asia. One important approach for building new infrastructural facilities is the build-operate-transfer (BOT) concept. In a BOT project, private investors - the "sponsors" - receive a concession to finance, build, and operate a facility over a set period of time, in exchan ge for the right to charge the users of the facility at a rate which makes the investment commercially viable. At the end of the concession period the facility is turned over to the state. The goals of the state in a BOT-style privatisation are to obtain infrastructural facilities with greater efficiency and speed, without the state taking on the adherent financial responsibility. The BOT system requires a facility to pay for itself on a commercial basis, through implementation of the "'user-pays" principle. Private investors take on the long-term risks of financing, developing, and managing an infrastructural facility based onpotential commercial rewards. Governments in the Asian region have latched on to the BOT concept as an important alternative for enhancing economic growth and development, or at least as a quick fix for problems associated with the demand for the establishment of infrastructural facilities. However, achieving the basic BOT goals has proven to be difficult, as examples in Thailand, Malaysia, Indonesia, China, and South Asia have demonstrated. The World Bank noted in a 1995 report, with specific reference to Asia, Despite much talk about private investment in infrastructure, there is little action in most countries. Neither the governments nor the private sector are satisfied with progress to date.1 In practice BOT projects have proven to be by nature highly complex in design, finance, and management. Compared to traditional methods of infrastructural development, they involve a large number of interested participants - both from the private sector and the state with conflicting agenda. To make a project work, the government must establish an environment conducive to risk-taking by private
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Budd-Opcrate-Transfer Privatisation Process in Asia
sector sponsors and financiers, most of whom maintain views on what constitutes acceptable risk and reward which are strikingly different from those held by governments. Futhermore, governments often proceed with BOT projects without a thorough understanding of the concept. There are also problems of misplaced goals and the politicisation of the project by vested interests (arising from antiprivatisation ideology, the self-preservation behaviour by state entities, and so on). Empirical experience shows that in their effort to make a project proceed governments frequently provide subsidies to investors and take on project risks themselves rather than simply creating an environment conducive to private sector investments. In short, governments tend to engage in activities which they seek to avoid in the first place through the conception of the BOT mode of privatisation. A particular complexity which differentiates BOT schemes from other forms of privatisation relates to financing. BOTs usually involve project-finance methods. This in turn entails difficult risk-management techniques which are sorely inadequate in developing country environments. The result is that increasingly, because commercial banks are wary of such projects, the lion's share of financingis coming from foreign governments through their export credit agencies and foreign investment insurance corporations. This raises the unexplored question of the relationship of the foreign government-owned export credit agencies, which are investing in and lending to BOT projects, to the recipient country governments which offer the BOT projects for bidding and establish the environment for the investments. Is this a new form of essentially government-to-government financing? Secondly, one has reason to suspect that the goals of the principal project participants may be to sell equipment and services, rather than to develop and manage infrastructure for the recipient countries in the long run. Beyond these problems, there is the question of lost opportunity. Because of the foregoing difficulties, BOT projects are usually long in gestation. This defeats the goal of the expeditious provision of urgently needed services or facilities which justifies the use of BOT in the first place. In many cases, projects never proceed to the physical development stage. The result is a considerable loss of both time and
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money, and an often significant diminution of the theoretical advantage of the BOT concept. More broadly, these issues raise a question as to whether infrastructure can be truly and successfully privatised on a fully commercial basis. The BOT process, in requiring the private sector to take long-term risks for purely commercial gain, is in some respects denying the non-commercial goals and benefits which traditionally have driven governments to develop infrastructural facilities. The apparent need for governments to continue providing subsidies and accepting financial risk to induce private investment in BOT projects suggests this element is still strongly present, and impinges on the goals of privatisation. This is significant in the overall debates over privatisation and the nature of public and private interests in infrastructural development. While a substantial body of literature has been produced on privatisation since the 1980s, little has been directed towards the BOT method. Most attention has gone towards state asset sell-offs, corporatisation of SOEs, and issues of regulation, with BOTs being generally treated as an extension of this. However, experience suggests that the BOT process is of a very different order and requires more direct study and assessment. There is adequate evidence in the world that some concessionised infrastructural projects can work. However, the severe financial problems of the world's largest BOT project, the Eurotunnel, demonstrates the difficulty of implementing the concept even in a mature environment, where investors and financial institutions are able to absorb the problems. In Asia, the experience so far suggests that the costs and difficulties of achieving the goals of BOT privatisation in a developing country might very well outweigh the promised benefits. One economist has relabelled the concept "build-operate-litigate."2 Cases of the successful use of BOT and the various measures of success must be contrasted with the significant number of projects that has never got off the ground as well as those which, once under way, have become political and financial liabilities for the governments concerned. In the first part of this article, I shall describe the dynamics which brought about the turn to BOT-type privatisation in the late 1980s in Asia, and then portray the important components of a BOT project,
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Build-Operate-Transfer Privatisation Process in Asia
drawing attention to its complexities and potential problems. In the latter part, I shall give a number of examples from the region. The first set of examples shows the particular circumstances and ingredients which made a handful of BOT projects successful. The second and larger set of examples demonstrates, by contrast, the greater frequency and commonality of governments' inability to achieve their aims through the BOT projects. The focus of my discussion will be on road, power, mass transit, and port developments. Telecommunications are deliberately avoided, because the fairly uniform success worldwide of BOT projects in this area indicates significantly different dynamics at work in that sector.3 Motivations for BOT Privatisation Historically, infrastructural development in Asia has been initiated, financed, and managed by the government. Criteria for determining projects comprised various social, political, and economic development goals; rarely was financial or commercial rate of return aprimary consideration. Project finance and risks were directly undertaken by the government, and an implementing state agency or enterprise would contract out to the private sector (or another SOE) for supply and construction. For these suppliers and builders, the principal risk was simply the government's ability to pay. This was usually determined before the launch of a large infrastructural project. The main sources of financing in this process were government tax revenues and state-guaranteed borrowings, including both official development loans and commercial financing.4 During the 1980s, bilateral and multilateral development financing (mostly concessional) rose sharply in importance for the building of infrastructure, compared with publicly guaranteed commercial borrowings.5 Soft bilateral and multilateral loans were less costly, and had longer maturities, for borrowers. In addition, the lenders' deeper involvement in the development stage was seen as enhancing the efficiency and quality of the projects. The best illustration of this is the relatively seamless development of infrastructural projects under the aegis of the Japanese government's Overseas Economic Cooperation Fund (OECF). The OECF
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was the largest single source of foreign loans to many governments in Southeast Asia over the past two decades.6 OECF lent specifically in yen at particularly attractive terms, even in comparison to World Bank and other concessional lenders: typically OECF offered thirty-year maturity, with a ten-year grace period, and at an interest rate of 2-3 per cent. Although they were often extended in annual lump sums, OECF loans were allocated to a specific list of projects predetermined by the lender and the recipient government, usually based on project priority and "readiness." The largest portion of OECF funds went to large infrastructural projects.7 As a matter of policy Tokyo tied these loans to the use of Japanese consultants and contractors for project design and construction (though local firms were often employed as subordinate partners).8 This method reduced project completion risk as it ensured that projects would be completed on time, uniformly to relatively high Japanese standards, and within budget. Such an arrangement ostensibly solved the problems which frequently confronted large infrastructural projects funded by other bilateral/multilateral concessional lenders, where supervisory and accountability functions were not as strong and where projects frequently degenerated into politicised contracting and rentseeking controversies. With project completion risk minimised, the remaining issue was the recipient government's ability to repay the loans. As in most cases the government was a developing country's most credit-worthy borrower, this risk would have been assessed at the outset of the process. Additionally, the process was driven by the belief that infrastructural development was a key component leading to overall economic development, and thus would ultimately enhance the government's capacity to make repayments. Under this format the commercial aspects of the operation of the facility were of minimal consideration. User tariffs, if implemented, were first based on the marginal cost-pricing system, usually focusing on the short-run marginal costs: user levies were calculated on the basis of the minimum that would sustain operating costs for such components of the facility as fuels (in the case of power plants), labour, and maintenance. Frequently the long-term costs of capital were excluded from this arrangement, as they were absorbed by central government budgets. The second important factor is whatever user
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charges that were imposed had to be politically, economically, and socially acceptable.9 By the mid-1980s, however, developing Asia was finding it increasingly difficult financially to continue this method of infrastructural development. A regional recession forced governments to adopt a more conservative stance in relation to foreign debt and current budget imbalances. This led to an examination of other options for financing and developing high-cost infrastructural provisions, including reviewing the inefficiencies of the government's dominant role in infrastructural development and management.10 This situation was compounded by the unexpected steep revaluation of the Japanese yen. This had two important effects. The first was that it ignited a mass move by Japanese industries to rebase production facilities offshore, mostly to China and Southeast Asia. This was followed by South Korean, Hong Kong, and Taiwanese industries, which were also hit by currency appreciations, severe inflation, and a tight labour market. This put pressure on developing Asia to improve infrastructural facilities, as an adequate physical infrastructure was seen by the East Asian investors as an important factor in their choice of a location for their projects. Conversely, recipient countries also came to link infrastructural development with their ability to attract foreign investment and sustain economic growth. The incoming investment stimulated strong economic growth, especially in export industries, resulting in an acceleration in demand for more infrastructural services and facilities. In most countries the state sector was seen as neither financially nor managerially able to meet the rise in demand. Even Thailand's respected power monopoly, the Electricity Generating Authority of Thailand (EG AT), which had a high capacity for self-financing and a respectable record in satisfying demands, was seen to be incapable of keeping up on its own with Thailand's 15 per cent per annum rise in electricity consumption. In extreme cases, such as electric power generation and telecommunications services in the Philippines and Indonesia, the inability to meet pent-up demand translated into lost opportunities as direct investors went elsewhere. The second effect of the climb of the Japanese yen was a sharp rise in the cost of servicing yen-based debt, such as that from OECF
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lending. Most of the Asian countries which had benefited greatly from cheap OECF loans also tied their currencies to the American dollar. Just at the time when developing Asia required greater (governmental) resources to enhance economic expansion, their financing costs on old debt shot up.11 In sum, the economic boom that started in 1987 had placed a huge demand for the expansion and improvement of the physical and economic infrastructure in Asia. Governments in the region recognised this but were often unable to respond adequately. Average East Asian investment in infrastructural development lose from 3.6 per cent of the Gross Domestic Product in the 1970s to 4.6 per cent in the 1980s. The pace quickened with total investment rising 40 per cent in a two-year period, from US$39.6 billion in 1990 to US$55.1 billion in 1992, Yet the latter figure still only constituted 4.7 per cent of the Gross Domestic Product on average. In East Asia, the World Bank projects, infrastructural investment over the period from 1995 to 2004 will need to reach at least 6.5 per cent of the Gross Domestic Product, or US$130 billion in 2000 alone.12 In order to meet this demand, governments have turned to privatisation. Where in the West the privatisation trend has at least been partially rooted in ideological beliefs (for instance, that of Margaret Thatcher's government in Britain), in Asia, generally speaking, it has been chosen for more fundamental functional goals. These include: the rapid and efficient satisfaction of demand for infrastructural services, in order to sustain economic growth; the improvement in the implementation and management of infrastructural development so as to maximise the return on investment and reduce the fiscal pressures on government; the restriction of the growth of the public bureaucracy and the SOEs; the inculcation into the public ol the "user-pays" principle, so that infrastructural facilities can become more selffinancing. Common options for privatisation include the corporatisation of S OEs; making already-corporatised SOEs public; and the sale or lease of state infrastructural assets directly to the private sector for purposes of operation and expansion. For new infrastructural projects, the BOT method has been a favourite course of action. BOT has several attractive features from the government's point of view. First, it is the
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private sector sponsors of the project which bear the financial burden of development. Second, the scheme is driven by commercial incentives. Hence, the sponsors tend to undertake the quickest and most efficient way of installing the infrastructural facilities and to manage them better. Third, the scheme enables the government to achieve its goals of infrastructural development without expanding the state sector. And finally, taxes and/or royalties arising from the privatisation process, as well as the improvement in operating efficiency generally, can help increase government's income from the development of infrastructure. Across Asia the BOT concept has become hugely popular, especially in capital-stricken countries. In China and the Philippines, initial BOT projects proved to be good ways of dealing with emergency situations. Thailand, Malaysia, and Indonesia, and in their wake Pakistan, India, and others have also latched onto the concept. Even in some of the region's least developed areas, such as China's Yunnan province, Vietnam, Cambodia, Laos, and Myanmar, leaders spoke avidly, if somewhat naively, of developing their infrastructure through BOT projects.13 The character of this enthusiasm, however, was not to see BOT development as part of a long-term process requiring systemic changes, but instead as a one-off, quick-fix solution to infrastructural bottlenecks. As for the long term, few governments seem to accept the principle of private infrastructure. These countries have been encouraged by multilateral organisations like the World Bank, the International Finance Corporation, the Asian Development Bank, bilateral aid donors, and private sector finance institutions, all of which from the late 1980s have begun to make more capital available for private infrastructural development. For example, the World Bank, the Export Import Bank of Japan, and the governments of France, Italy, and the United States of America joined together to form the Private Sector Energy Development Fund to help finance private power BOT projects. Perhaps more importantly, bilateral aid donors have also increased their own support, both loan- and equity-wise, through such state-backed export credit agencies as the United States Export Import Bank and the KFW Bank of Germany. This reflects national initiatives to export equipment and services to rapidly growing economies in Asia, and the focus has been
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on BOT programmes. Commercial banks too increased their own funding available for lending to private infrastructural development, and several privately managed Asian funds have been assembled to seek investment opportunities in Asia, such as the US$1.1 billion AIG Asian Infrastructural Fund, backed by the AIG Insurance Group and the Government of Singapore Investment Corporation; and the US$ 1 billion Asia Infrastructural Fund, sponsored by the Peregrine Group, the Soros Group, the Asian Development Bank, and the International Finance Corporation. The Structure of BOT Projects BOT is not a new form, though codifying it as such is relatively recent and can be attributed to Turgut Ozal of Turkey in the 1980s. Concessionised infrastructural development was employed for projects such as a 1782 water system in Paris and the Suez Canal which opened in 1869.14 Since the early 1980s the concept has been applied to power generation, telecommunications, sewage and water, bridges and toll roads, and other facilities in the United States of America, England, and Latin America. The Anglo-French channel tunnel, the Eurotunnel, built in the early 1990s, became probably the largest ever BOT project. This experience demonstrates the feasibility of the concept. But the Eurotunnel project also reflects the complexity and dangers inherent in the BOT approach: the project has been a financial disaster for investors, sponsors, and bankers, requiring long and costly restructuring. In Asia the concept has been present as well. In 1970 it was proposed in Thailand for a new airport, with American sponsors, until allegations of corruption led to the project's cancellation.15 More importantly, private concessionised infrastructure lias long been in place in Hong Kong: the private China Light and Power has been providing electricity since early this century, and more recent successful projects including the cross-harbour tunnels. In principle a BOT concession provides a transfer of right to the sponsor (the leading or principle investor) to invest, build, manage, and maintain an infrastructural facility, as well as to levy user charges on that facility, for the period of the concession. Concessions can be granted for any period, with power-generating facilities often in the
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ten-to-twenty year range, toll roads in the twenty-to thirty-year range, and the Eurotunnel, fifty-five years. This structure is not dissimilar to the well-established "production-sharing contract concession" model of the petroleum industry. In the latter case, an oil company sponsor receives rights from a government to explore and develop hydrocarbon reserves, and then to reap the benefits of the free market sale of any oil and gas discovered.16 There are several variations of the BOT format, and the most significant difference among them lies in the issue of ownership of the infrastructural facilities and equipment. The "build-own-operatetransfer" (BOOT) scheme refers to an arrangement whereby the sponsor possesses ownership of the facility during the operating period of the concession, only at the end of which is ownership (as well as operating and financial control) turned over to the state. On the other hand, BTO (build-transfer-operate) refers to a concession where ownership of the facility is transferred to the government upon completion of construction and/or installation. For the remaining period of the concession, the sponsor retains the right to operate the facility and reap the financial rewards. The difference can be important. In a BOOT programme, the facility itself can be collateralised by lenders to the project, so that even if the facility is immovable, they have a stronger ownershipbased claim to the revenues from it should project sponsors and operators face financial difficulty. In a BTO project, risk increases because the facility is not available as collateral. The project is therefore more heavily dependent on the strength of the concession contract in providing and guaranteeing access to project revenues as well as the general stability of the operating environment. Experience has shown that a BTO arrangement often represents the standing, usually statutory claim by the state, or a state-owned enterprise, on facility ownership rights, which can extend to or involve the operation and use of the facility (such as control over staffing and handling of tariff receipts). Such a claim represents implicit and explicit barriers and resistance to the privatisation process, and frequently results in political challenges to a BOT project. Another version is the "build-own-operate" (BOO) programme. In this the time limit on the concession is eliminated, providing private
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sponsors the ownership and operation rights to the facility in perpetuity. Yet other BOT variants include aspects of revenue-sharing with the government; government-provided subsidies and support to enhance commercial viability; and the sponsors leasing or contracting existing facilities, often with the responsibility to rehabilitate and expand them. The important identifying criterion of a BOT is that it is a project that can be economically and operationally "ring-fenced." That is, it can be isolated from related operations so that its revenue streams and cost basis can be clearly identified and assessed. This is crucial not only for determining the commercial viability of a project but also for its successful launching and management. Beyond this, from the standpoint of sponsors and investors, there are several aspects which are essential to making a BOT project successful. These include: a recognition by the government, in all its parts, and the public generally of the legitimacy of private operation of infrastructural facilities; a recognition of the usei-pays principle as central to the success of a BOT project; a fair and attractive rate of return for sponsors; the enforceability of the concession contract, including a transparent regulatory environment and a suitably developed legal system that assures fair dispute resolution; and assurances of payment in cases where the principal buyer of the project's service or product is a state-owned-enterprise, as in independent electricpower producer BOTs. Secondary requirements to a project's success include exclusivity, assured convertibility or repatriation of profits, availability of exit paths for sponsors and investors, and clear avenues of conflict resolution. Since the mid-1980s when Asian countries began to experiment with the BOT concept, it has not been difficult for governments and sponsors to enter into negotiations for a BOT concession based on mutually agreed goals which satisfy both sides. On the other hand, finalising a strongly-structured, bankable concession contract which adheres to the same goals throughout the lifetime of the concession has proven extremely difficult. Governments and private sponsors maintain different views on what constitutes risk and w hat is fair reward. The number of project participants directly dependent upon the BOT
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concession contract is usually large, and harmonising their interests and assuaging their perceptions of risk is a very complex task. Thus assembling a legally and financially viable contract which satisfies all participants can be very time-consuming and politically contentious, and it is at this point that many prospective BOT projects fall apart. This complexity, illustrated by the matrix of mutually dependent contractual agreements that must be harmonised, is in sharp contrast to the simplicity of the traditional, fairly seamless process of government-driven OECF funded-projects (see Figure 1). In the BOT matrix, the project company is built upon the concession contract with the government. All other participants have contractual agreements with the project company and these agreements rely on the strength and enforceability of the concession contract. The presence and agreement of each of the other participants is vital to proceeding with theproject. To balance the interests of the participants is particularly difficult, because often they pursue competing goals. An alteration in any of the agreements or the operating environment can affect the strength and viability of the project company, especially if it negatively impacts on the project's cash flow, and can thus affect every other agreement in the matrix. The most vulnerable part of the matrix, and thus the hardest to satisfy to complete a concession deal, is that involving the financiers. Their role in taking essentially large private-sector risk gives the BOT programme a dimension which more traditionally-financed infrastructural projects do not involve. This is not a significant ingredient in other methods of privatisation, and failure by governments to recognise this is, along with the user-pays challenge, one of the most formidable barriers to successful BOT programme implementation. BOT schemes are usually funded on a project finance basis. That is, financing is based mainly or wholly on the assets and cash flows of the project, with limited or no recourse to collateral external to the project. The key aspects of project finance then are identifying and managing all potential risks which would threaten access to assets and cash flows. The techniques of risk management in project finance are well developed. But they face particular challenge in a developing country with a weak legal system, a shaky financial system (thus
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TRADITIONAL INFRASTRUCTURAL PROJECT, BILATERAL ODA (OECF MODEL)
J a p a n e s e Government: Funding
OECF
Irrplementing Agency: State-owned Enterprise
Turnkey Contractors
BOT INFRASTRUCTURE PROJECT MATRIX
Governmsnt
State-owned Enterprise Operators Suppliers ^ Sponsors \ PROJECT COMPANY
r
Insurers 1 / Financiers (Fuel suppliers) /
Investors
(Offtake buyers)
Figure 1
A Comparison of Traditional and BOT Infrastructural Projects
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requiring substantial foreign capital for the project), a lack of policy consensus on privatisation, and potential political instability. Satisfying the requirements of domestic financiers in a BOT programme can be time-consuming; in the case where foreign capital participation is high, a tougher examination of the project's potential and its risks, and a more strenuous process of due diligence, are required. It involves, for example, matching government's desires for private sponsors and their bankers to accept a twenty-to-thirty-year risk on a BOT project and commercial banks' willingness to provide finance on an eight-totwelve-year basis only. There are numerous examples of this difficulty. It took more than three years to complete the financing of Pakistan's US$ 1.8 billion Hub Power BOT project. That followed nearly seven years of project development. In Thailand, the inability to complete financing contributed to the collapse of the first Bangkok skytrain project in 1992, after three years of project development and contract negotiations.17 In Laos, the Nam Theun II hydroelectric dam developed by a FrenchAustralian consortium was still unable to complete its financing in late 1996, two years after the consortium won the contract for the project. Beyond the problem of finance, Figure 1 only partially depicts the complexities of structuring a BOT project. Various participants bankers, suppliers, contractors, and managers - have multiple roles in the project, especially when they double as shareholders. This can place participants at odds with one another, even to the extent of undermining the goals of the privatisation arrangement. For instance, it is common that principal sponsors are also suppliers of equipment or services, like construction contracting, for the project. As such they are often less than committed when compared to sponsors driven by long-term income prospects. In the case of the Hong Kong construction firm Hopewell Holdings' pioneering Shajiao B power plant in China, the primary interest appeared to be to recover capital costs as the construction contractor to the project rather than to take a longterm risk on the income from power sales. Likewise, an important motivating factor for the American natural gas company Enron to develop the Dabhol power plant project in Western India was to secure a long-term sales outlet for natural gas which the company had discovered in the Middle East. Frequently, power generation equip217
ment suppliers take significant equity in independent power producing BOT projects. Project bankers can also have multiple roles and goals. Lead bankers to a BOT project often have a great incentive to complete the deal as advisers to the project. Because fees for project finance advice and conclusion of the deal can easily run in tens of million of US dollars, this role can be far more lucrative to the bank than the more risk-laden long-term project loan. The desire to structure a strong deal can therefore be modified by a greater motivation to simply complete the deal. A further complexity of interests can be seen by disaggregating the sources of finance for projects. Both bankers and investors can comprise various foreign and local commercial institutes, and, increasingly, bilateral and multilateral institutions such as the Asian Development Bank, the International Finance Corporation, Japan's OECF, and various industrialised country export credit and related insurance agencies have come to play a part in the financing process. Each player maintains a different profile for its interests and a different perception of the risks involved. The project matrix is particularly sensitive to the impact of political change, making the role of the government and its agents crucial. By nature, whether in the public or private sector, big-ticket infrastructural projects are highly political; BOT projects seem to be even more so. They involve changing the pattern of infrastructural consumption, especially in instituting user-pays principles. Anything like this can create a contentious political issue that can evoke ideological battles over privatisation and disputes over fair user rates for infrastructural facilities. Privatisation necessarily reduces or removes control over infrastructural development and management from bureaucrats, stateowned-enterprises, and other political players. State-owned-enterprises, which in many countries can be important centres of political power, may in particular feel intensely threatened by privatisation, and their resistance has been known to create political instability.18 For instance, national unions in India instigated court challenges to, and organised street protests against, the award of BOT concessions for telecommunications development. In China, ministries with power
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over electricity generation fought the development of BOT power projects. In Thailand, the state power monopoly successfully delayed privatisation for six years, despite having entered into governmentforced negotiations with prospective independent BOT power producers. In addition to popular and bureaucratic resistance to BOT programmes, the money involved in large infrastructural projects often makes them ostentible targets of economic competition between politically powerful private sector participants, bureaucrats, and politicians. One Hong Kong-based international power company representative said in 1995, "In virtually every country in the region, private power has been leaped upon as a means of enrichment."19 The competition for benefits in infrastructural development can affect the stance of political actors and leaders, and push them to move in directions with possibly adverse consequences for a project. In the case of wholesale changes of government - as occurred in the Dabhol power plant case in 1995 - privatisation policy reversals, in response to popular, bureaucratic, and political or rent-seeker sentiments, can be real threats to projects.20 The ability of these interests to damage and destabilise a project, or prevent it from even getting started, is particularly pronounced and common when a country's very first BOT project is a large one. A large project (and projects valued at more than US$1 billion are increasingly common) creates an overly weighty test of the commercial, political, and legal environment: the higher the cost, the more risks there are, and the more participants are involved in sharing the risk. Creating a consensus to supporting the BOT goals is especially difficult. Given the amount of capital involved, every interest, challenge, and risk becomes magnified. Successful BOT Projects The complexity described in the foregoing section places the onus on project sponsors and governments to focus on their basic goals obtaining infrastructure which is privately financed and with greater efficiency - and attempt to build a project structure that adequately mitigates the risks of not attaining those goals. Several BOT projects demonstrate the success of this.
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China's Shajiao B Power Plant Project Located in the Hong Kong border area of China's Guangdong province, the US$550 million, 700 megawatt Shajiao B project was developing Asia's first large independent power producer (IPP) programme. In 1984 the local government of the fast-growing area, realising it urgently needed better power generation capacity, accepted a proposal by Hong Kong construction firm Hopewell Holdings to develop a plant on a BOT basis.21 Risks were high because the BOT structure was very new to Asia and China had no policy on foreign investment into infrastructural development, which was controlled by the country's state-owned enterprises. The project proceeded on the basis of Hopewell founder and chief executive Gordon Wu's good relations with government officials and state enterprises in both Beijing and Guangdong. In addition, the government shouldered a significant portion of the risk, while offering disproportional rewards to Hopewell. A governmentowned investment unit became a significant equity partner, and another state-owned entity guaranteed power purchase payments and foreign exchange risks. Meanwhile Hopewell, which was the major contractor to the project as well, arranged that it (as equity partner) would be paid a large cash bonus and preferential share of tariff receipts (compared to other investors) for beating the construction deadline. This amounted to more than US$50 million.22 These payments ensured that, for Hopewell, Shajiao B would make an estimated 25-30 per cent return on equity, thus reducing its capital exposure very quickly. In essence, China's acceptance of a very high level of profitability and very early payback for the sponsors, in return for the latter's commitment to provide new power capacity rapidly, made the project work. Philippine's Private Power Project Faced with extensive power blackouts which made investors bypass the country, and bound by severe financial difficulties, the government of the Philippines found in the late 1980s that it would be easier to focus on the basic essentials that would attract private investment
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into BOT power generation plants. As a result, the country has had the most successful independent power producing BOT programme in the region. In 1987 the government declared policy support for private power BOT projects and ended the monopoly of the National Power Corporation, Napocor. This created a strong legal base for BOOT projects (as opposed to BTO) and increased confidence among investors. The government's ability to take these steps demonstrated the high degree of consensus in the public and private sectors in the country over the basic need to obtain more power, whatever the costs. From there, success was based on making the procurement of new generating capacity, through private investment, virtually the sole aim of the BOT programme. Regarding pricing of the power, the government simply required that it be reasonable, so that it would be cheaper than the costs of industrial consumers supplying their own. This then allowed negotiations to concentrate on what the sponsors and their financiers would require in terms of benefits to follow through with their investment. Recognising the perceived high-risk environment of the Philippines which might discourage investors, Manila was committed to guaranteeing Napocor's payments as purchaser of the power, and also guaranteeing against foreign exchange risk. Only later, when the environment for BOT projects was proven to be stable, did the government begin to address the issue of competitive pricing on top of supply. At the beginning, the larger projects were also conducted on a negotiated basis. But by 1994, Manila was able to regularise the process by holding competitive bids for new plants. Yet another important aspect of the programme was the benefits of starting with small BOT projects. As in the case of China, Hopewell was the first foreign company to venture into this area in the Philippines. But in southern China, Hopewell already had well-developed political and business relations with the local government through engagement in previous projects. This encouraged the company to proceed with the large Shajiao plant. A newcomer into the Philippines, the company was more cautious, first negotiating in 1988 a concession for a 210 megawatt plant, Navotas. While that was under development, in 1990 Hopewell and other sponsors also installed several small barge-mounted power generating plants to sell power to Napocor. All this helped to prepare the political and commercial environment for
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later, larger projects. The Navotas contract became, in late 1990, the partial basis for the country's progressive BOT law. Thailand's Second Stage Expressway (SSE) Project Although most often cited as an example of the dangers of BOT projects, Bangkok Expressway Company Ltd. (BECL)'s SSE project started and ended reasonably successfully. While the substantial problems in the process (described below) cannot be ignored, the elements of success are indisputable. The SSE is a US$1.1 billion, thirty-two kilometre inner-city toll road. The thirty-year BOT concession was awarded to a Japanese construction company, Kumagai Gumi, in 1988, in a detailed concession contract with the state agency, the Expressway and Rapid Transit Agency of Thailand (ETA), that explicitly declared the principles of the sponsor undertaking the costs of building the road in exchange for earning revenues on predetermined user tariffs. With a bidding process set on clear goals and an apparent general support for the BOT approach, it took only twelve months for the final concession contract to be concluded. Financing was successfully arranged within another year. In 1993, BECL completed the main portion of the road on schedule, and when the SSE opened, income flows from users more than validated the projections made at the beginning: the road was profitable and self-funding. The company proved that the private sector could far outperform ETA in construction time and costs, without recourse to government financing or equity. In 1995 BECL was successfully floated on the stock exchange of Thailand. Thailand's Power Projects In 1995 Thailand's EGAT issued a call for bids for independent power producers to develop a series of BOT electricity generation projects. The aim of the programme was to acquire generation capacity of three to five thousand megawatts spread over several separate plant concessions, under different sponsors or investors. The terms of reference were seen by several bidders to be among the most progressive and
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well-focused in the region. The call attracted more than thirty proposals. With the advice of a team of independent experts, and on the basis of a clear and transparent point system, the bids were to be weighed and evaluated. Given that Thailand's energy supplies were adequate, but that over the long-term there was a perceived need for greater efficiency and less reliance on government investment and management, the focus of the tender was on getting reliable power supplies at the best possible price. Beyond that, plant locations, design, and fuel were left to the bidders, though in assigning point values, the government indicated clear if not absolute preferences. The result was the large number of bids, offering competitively low power sales prices which surprised and pleased both those conducting the process and the bidders themselves.23 The terms of reference were announced in early 1995, and by the end of 1996 bidders were close to finalising concession negotiations and preparing for financing. The process could have gone faster, according to those weighing the bids, had there not been so many attractive and competitive proposals. The results suggested that Thailand could achieve a fairly quick and efficient way of creating new power capacity - at not just one but several plants - at internationally competitive sales prices. Such success was rooted in the long process of consensus-building among participants and the government at large, and strengthened by the openness of the terms and the decision-making process. This helped protect the programme from inevitable challenge by vested political and business interests: on two occasions attempts by very senior politicians and their business cronies to hijack the process were shrugged off.24 However, the process was not flawless. An important consensus problem which cropped up suggests just how hard it is to establish a strong BOT programme. For environmental reasons the government had expressed a preference for natural-gas-fuelled plants, without ruling out coal or oil. (Gas plants simply earned slightly higher points in the fuel category). However, Thailand's monopoly gas distributor, the state-owned Petroleum Authority of Thailand, neither had firm gas reserves or gas acquisition plans, nor standard sales contracts to be able to commit supplies to the bidders. This left gas-plant bidders in a situation wherein they were unable to certify their fuel supply source
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with the bid committee. This in turn made them uncompetitive. The consequence was that non-gas plants came to lead the field.25 Unsuccessful BOT Projects The successful projects described above appear to demonstrate the ease of achieving desired results, principally by keeping a focus on the BOT programme's core goals. However, a greater number of projects have failed to achieve their goals. In those cases, one can discern the recurrent patterns of undue delay in project completion, of governments absorbing project risks and expenses, and of projects being aborted altogether. Generally, the problems which can be identified fall into four broader categories: a lack of consensus within the government and society over privatisation in general or a project in particular; the inability of governments to remain focused on their basic goals in privatisation; the tendency for governments to enter into agreements with sponsors without detailed study or a transparent, competitive bidding process; and the willingness of governments to absorb costs and risks which should be assumed by private sector sponsors. These problems are by no means mutually exclusive. Some of the examples discussed below illustrate the presence of more than one of these problems. In the case of one, the Indonesian Paiton project, all four problems can be detected. Lack of consensus within the recipient government andsociety leads to lengthy delays in project launch and implementation, leaving the BOT projects structurally weak and unduly risky 1. Pakistan's Hub Power Project Initiated in 1985, Hub is a US$1.8 billion, 1,300 megawatt oil-fired power generation project that was initiated on the basis of strong encouragement by the World Bank. It was Pakistan's first BOT project. Given the country's chronic political instability, weak finances, and inadequate legal system, the environment was not exactly conducive to such a large project. A series of conflicts, indicating a
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lack of consensus on the project's goals, and how they could be achieved, meant a delay of nine years before the concession and its financing could be arranged and construction start. The first of the four power generation units only began operation in mid-1996.26 2. Thailand's Mass Transit System Project In 1986 the Thai cabinet undertook to develop a Bangkok urban mass transit system under the BOT concept. The result of unresolved competition between bureaucrats and politicians was that by 1992 three separate, competing systems had been awarded on a BOT basis, each with its own bureaucratic and political backers, and each reducing the commercial viability of the other.27 Because of this, the first, awarded in 1988, dropped out in 1991, and the government moved to find a new sponsor. Meanwhile, the lack of detailed plans and contracts on the other two systems, and sustained opposition from supporters of competing systems, made them very difficult to finance. By mid-1996, when all three systems were supposed to have been operating - and when traffic congestion had become a serious economic problem - the two projects which survived were each less than 20 per cent completed and were still facing financing difficulties. One of the projects (Hopewell's) was looking for a buyer. Meanwhile, the government had moved ahead with a new plan for the first link of a subway that would be paid for by the government under traditional terms, partially financed by the OECF. 3. India's Telecommunications and Power Project In 1991, India's federal government in Delhi established a policy to implement BOT programmes in the power and telecommunications sectors, among others. In 1992 the first "fast track" power projects were awarded in principle. However, the projects were slowed down immensely by resistance from state-owned enterprises and the state governments, at the level of which projects would be awarded and supervised. In 1995, for instance, telecommunications workers in several states lodged court challenges to BOT privatisation in that sector. Also in 1995, a change in government in the Maharashtra state
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led to the internationally publicised freezing of the US$920 million first-stage 695 megawatt Dabhol BOT power plant which was already under construction. In mid-1996, contract conflicts and court challenges continued to delay the plant. Similar bureaucratic and stateowned enterprise resistance, among other problems, delayed the construction of a US$ 1.1 billion power plant sponsored by Cogentrix Energy Inc. and China Light and Power in Mangalore.28 4. China's Power Project In contrast to India, China's provinces initiated private power BOT projects with foreign sponsors in the early 1990s, in the wake of the success of the Hopewell Shajiao B project. After scores of projects went into negotiations around the country, Beijing registered its disagreement with the fundamentals of the BOT process, in part by announcing a cap on the level of profits that could be reaped from privatised projects. This halted the whole BOT process because Beijing retained approval powers on foreign investment projects worth more than US$30 million. The central government's objections reflected in part disagreements over whether the state or private sector should control power production; and in the case of the latter, which ministry (industry or electric power) should govern the BOT power scheme. 5. Thailand's Power Project The success of Thailand's power BOT programme is noted above. However, nearly a decade had elapsed from the time the government first proposed private BOT power projects to the time when the progressive 1995 programme could be devised. The policy was strongly resisted by the state power monopoly, the EGAT. Although officials from the EGAT entered into negotiations with potential sponsors between 1989 and 1994, including companies from Canada, France, and Australia, they failed to conclude any agreements. The potential sponsors believed that the EGAT had deliberately set forth unacceptable terms.29 Unlike China, Pakistan, or Indonesia, Thailand was fortunate that the EGAT was itself able to, barely, keep up with
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rising power demand on a fairly high self-financing basis, so that the ten years of delay in the implementation of the BOT policy did not have significantly adverse affects on the country. 6. Indonesia's Power Project Lack of consensus has not prevented Indonesian BOT power generation projects from going ahead. It has however left a looming structural problem which renders them unstable. The sole buyer and distributor of power generated by private power producers is the state power agency, Perusahaan Listrik Negara (PLN). PLN, according to various sources, was opposed to the BOT process and was only permitted a peripheral role in negotiations that brought about several small gas-fired plants (related to oil company natural gas developments) and the P.T. Paiton Energy Co., the first large BOT project. The problem is not only attitudinal, but also structural. PLN is not able on a financially independent basis to expand its power generation capacity or extend its very weak distribution networks. The new private power projects only exacerbate the problem. PLN would be forced to buy power from Paiton at a rate of 5-10 per cent higher than its own power rates for consumers, when the plant is completed in 1998. In effect, this means that the government, through PLN, would be subsidising Paiton, thus negating the primary objective of the BOT process. Meanwhile, the power PLN receives from the private gasfired plants on a take-or-pay basis cannot all be sold because of bottlenecks in the distribution network.30 The result of such a situation is that, on April 21, 1995, when Paiton was to sign its financing package with its banks, PLN unilaterally announced the cancellation of their power purchase agreement with the concession company. The move would have effectively nullified the entire deal, had senior government officials not intervened to overrule PLN's action. According to a Jakarta-based power industry source who had been involved in the project, the act demonstrated the extremely fragile nature of the Paiton project.31 7. Malaysia's Power Project In Malaysia power generation BOT projects were also built upon a
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weak industrial structure. In 1992 the government handed out a number of concessions to separate sponsors, and the state power monopoly, Tenaga Negara Bhd., had to sign power purchase agreements with all. This accelerated the development of power generation capacity. But, at the government's order, Tenaga had to pay the private producers plant-gate prices that were roughly the same as Tenaga's own sales price to the public, less delivery costs. It meant that profitable Tenaga was delivering the private power io consumers for free, and paying the private concessionaires more for the power than Tenaga's own production costs.32 This became a more significant problem when national power capacity far outran supply in 1995, due to expansion by both the private producers and Tenaga. With the oversupply of power, and its commitment to buy the power of the independent producers, Tenaga had to take less power from its own plants. This would effectively further encroach on its own profitability and create potentially serious conflicts. Inability to establish or adhere to clear, fundamental BOT goals leads to lengthy delays in launching a project or programme, less competitive and more costly services, or missed goals altogether 1. China's Power Project As noted above, in 1994 China forced dozens of BOT power project negotiations to a halt by declaring that the rate of return on investment for independent power producers should be limited to 12 per cent. This was partly in reaction to reports that China's BOT pioneer Hopewell Holdings made 25-30 per cent return on its Shajiao B project. China ostensibly based the 12 per cent figure on its own avoided costs, that is, the estimated costs for the state to invest and build its own plants. These estimates would have been highly questionable; few countries are able to accurately measure avoided cost, particularly centrallyplanned economies such as China.33 Moreover, the 12 per cent figure hardly took into account the high-risk environment of China. Western power company officials based in Hong Kong have remarked that, even in the United States, 16 per cent is considered a fair return. In China, one argued, the minimum rate of return should be at least 23 per
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Build-Operate-Transfer Privatisation Process m Asia
cent. In focusing on the return, rather than simply obtaining expanded and reliable power capacity at the lowest possible price, the Chinese government made it more difficult for strong and successful projects to be put in place. 2. Indonesia's Power Project The Paiton project, as mentioned above, carried a very high sales price for the power produced at the outset (at US 8.6 cents per kilowatthour). The country's second and third BOT projects were awarded at lower prices, but still much higher than the rate of 5.6 cents per kilowatt-hour that Thailand received in its competitive bidding process. The difference reflects the Indonesian government's inability to remain focused on obtaining the cheapest and most efficient supply of power for the country. It had in fact been distracted by many other issues. For instance, Paiton was required to build various infrastructural facilities extraneous to the plant's functioning; to use specific contractors; and to purchase equipment from certain designated companies. These requirements prevented the sponsor from pursuing the most efficient development of the plant, thereby forcing it to increase capital costs by, according to one power sector analyst, at least US$200 million. This made concession and financing negotiations more difficult.34 The result was that, to make the project commercially viable on a BOT basis, the power prices had to be set at an uncompetitively high level. 3. Thailand's Second Stage Expressway Project The SSE was a successful BOT project. However, it was nearly destroyed by a loss of focus on the commercial user-pays principle. During the construction of the project, the government had an undertaking to steadily increase the 10 baht (US$0.40) toll on the existing First Stage Expressway (FSE) in increments, so that when the combined FSE-SSE opened in 1993, the system tolls could be set at the contracted 30 baht without bringing about a politically risky shock to users. The 30 baht would be shared on a 66 and 33 per cent basis between operating company BECL and the concession-granting agency, the ETA.
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In the event, the government did not implement the staged toll increase plan. By the time the system was to start operation in March 1993, the cabinet decided that a sharp increase in the tolls was unreasonable and could be politically inexpedient. Only a 20 baht toll was therefore agreed upon. Such a rate would reduce the scheduled income of both the BECL and the ETA, thus compromising both organisation's financial viability. (ETA would have lost its ability to cover its current costs, much less long-term debt and land acquisition burdens). BECL's bankers reacted by freezing financial disbursements, and the ETA demonstrated that it no longer supported government policy or the BECL concession. Thus the unwillingness of the government to follow through on the user-pays principle caused the original consensus surrounding the project to break down. Several months of negotiations were unable to rebuild the consensus, because, according to BECL officials and its bankers, the Thais could not focus on the fundamentals needed to make the project work. The BOT matrix could not be restored. Eventually the road was opened by force by the government (ironically, at the 30 baht toll rate) and principal sponsor Kumagai Gumi sold its shares to a group of Thai banks and investors in 1994. The new investors accepted the deal but only as long as the government abided by the original contract. The project's subsequent cash flow demonstrated that it had a strong commercial viability as originally expected.35 4. Indonesia's Toll Road Project In Indonesia several urban BOT toll roads have been constructed in Jakarta and in 1995 the government undertook to offer nineteen segments of proposed toll roads across Java as BOT projects. But the government has avoided redressing two core issues which have made the deals and the environment commercially unattractive. The principal barrier to success is the government's inability to affirm the user-pays basis of the concessions. By law the setting and increasing of tolls is a prerogative of the Indonesian President, and the government has taken the stance that while increases can be promised in principle, they cannot be contractually guaranteed. This has not been a problem for the private Jakarta toll roads, which have been built
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by companies owned and managed by the children of President Suharto. For the most part, their frequent requests for toll increases have been granted, though in 1995 a request was met with very rare public attack in the Indonesian parliament, resulting in a lengthy delay before the increase was finally granted. This incident serves to underline the political nature of the detemination of toll rates. The issue was the main reason why the British company Trafalgar House spent six years (from 1988 to 1994) trying to negotiate a concession contract for a rural Java toll road. In the end Trafalgar accepted the Record of the President's support for existing concessions, and was able to finance their project. However, the six years spent on negotiating the project were much more than it would have taken to build the road. The second issue challenging the government's ability to create commercially viable concessions is that, for the cross-Java highway sections, the government insists that land acquisition be pre-funded by the sponsors, and that the land will remain in state hands.36 Because land acquisition is a lengthy and unpredictable process, potential investors in Jakarta consider this requirement as putting project expenses and risks at an unacceptable level. 5. India's Power Project Already four years into the negotiation process in 1996, the US$1.1 billion, 1,000 megawatt Cogentrix power project in Mangalore was being delayed not only by bureaucratic infighting and public resistance, but also by constant attempts on the part of the government to renegotiate the price and other specifications. After setting specifications and pricing, and obtaining the sponsors' agreement, the government would then alter its position and make the requirements tougher. It was alternatively willing and unwilling to provide a crucial payment guarantee on power sale.37 The problems reflected a lack of consensus within the government on the principal goal of the BOT project which was simply to obtain privately financed power generation capacity at a reasonable price. Continued negotiations indicated a new focus on the appropriate level of profitability for the concession-holders. This represented a deviation from the original purpose of the use of the BOT concept in power supply.
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Lack of transparency, competitive bidding, or detailed planning in awarding concessions leads to untenable projects, lengthy conflicts, and missed goals 1. Malaysia's North-South Highway Project One of Malaysia's first BOT privatisation programmes, the 1,000 kilometre, North-South Highway (the operating company is known as PLUS or the Projek Lebuhraya Utara Selatan) is widely lauded as a success. What should be pointed out, however, is that although the road was indeed completed, the government ended up absorbing much of the financial costs. The BOT sponsor was to take over and complete the road, nearly half of which had already been built by a state-owned enterprise at a cost of three billion ringgit. Despite an open tender for the project in 1985, it was awarded to the third-runner among the bidders, a company attached to the ruling political party.38 The two superior bidders had proposed better terms for the overall cost for completion, requirements for government financing, required toll rate, and concession period, demonstrating the original terms of reference did focus on the fundamental goals of the BOT process. The outcome was a legal challenge which delayed final contract signing for more than two years, until March 1988. (In that period the state itself could have made substantial progress in completing the road). Financing PLUS took more time because international bankers found it too risky as a limited-recourse BOT company. As a result the government provided a 1,650 million ringgit subsidised loan, nearly half of the projected costs. In the event, the road was completed in 1993, at a cost of more than 6,000 million ringgit for the section built by PLUS, which was far above projection.39 In the process the government had found it necessary to continue its intervention in the form of support and subsidy for PLUS, including unscheduled toll increases to help the project's cash flow. 2. Hopewell's Projects in Thailand, Pakistan, and Indonesia Hong Kong's Hopewell was successful in its first power projects in
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China and the Philippines. However, its deals on power projects in Pakistan and Indonesia and its US$3 billion mass transit project in Bangkok failed to materialise. Essentially, Hopewell's Gordon Wu had agreed to take on projects with the top levels of the leadership in these countries on a personal-relationship basis. Prior to these agreements, project details were not determined and consensus in the government was not established. Additionally, Hopewell proposed very large projects in countries with which the company was not familiar. These countries also had no real experience with BOT projects. This rendered the projects risky, and left the governments without a firm commitment by Hopewell to proceed. As a result, in Thailand, Hopewell's 1990 concession for a US$3 billion mass-transit project was by 1996 (the planned opening date) less than 10 per cent complete, lacking in financing, and available for purchase. Hopewell had started with an incomplete design (including routing) and faced competing projects, an uncooperative government agency (the State Railways of Thailand), and political and commercial opposition. In Pakistan and Indonesia the power projects which Hopewell proposed between 1993 and 1996 had also failed to proceed. In 1994 the company was awarded a BOT concession in Indonesia for the Tanjung Jati power plant which by 1996 was threatened with cancellation due to lack of progress. 3. India's Dabhol Power Plant Project The secretive, non-competitive bidding process on the basis of which Enron Development Corporation concluded this huge first BOT project left it vulnerable to attack in what was originally a highly politicised environment. Estimated plant costs were in fact far higher per unit of capacity than other comparable plants. When the Maharashtra state government which awarded the concession was replaced in elections by another political faction in early 1995, the project was frozen on grounds that it was uncompetitive and over-priced. This resulted in at least eighteen months of delay and a higher overall project cost, whereas a more open process of awarding the concession, or competitive bidding, could have at least mitigated these difficulties.
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4. Indonesia's Power Project Indonesia's private power project was launched on the basis of private, secretive negotiations in 1988. The result was a number of false starts as the first companies involved in negotiations were replaced by new ones for commercial and political reasons. For the Paiton project, the original sponsors were replaced twice before the government was able in 1992 to negotiate seriously with Mission Energy Corporation, Paiton's principal sponsor. Similar problems arose in the case of the Tanjung Jati and other proposed power plants. The Paiton experience was not only a matter of an extremely long gestation period but also that of a high power price contracted. The broaderresult was that there was a seven-year delay to the process of establishing a sorely needed power plant. 5. Thailand's Don Muang Tollway Project Don Muang Tollway was a 20 kilometre BOT tollroad connecting inner Bangkok with its main airport. It was awarded in 1988 to a consortium of well-known Thai businesses on a hurried, negotiated basis. It was opposed by significant sectors of the bureaucracy, and plans for its connection with other major road arteries in Bangkok were unresolved when the concession was granted.40 Financial and traffic projections undertaken by the sponsors were highly flawed, and the sponsors' own capital base was weak. Financing was only completed two years after the concession was awarded, and only when the government ordered the state-owned Krung Thai Bank to become the core lender. Krung Thai' s management argued that the project was not viable. In the event, construction delays and rising costs left the road more than two years behind schedule. It was also constructed at a cost which was about 50 per cent above the estimate when it partially opened in late 1995. Connections with other roads had become a serious political problem, and original traffic projections proved overoptimistic by a factor of two. As a result of these considerations, the tollway's sponsors could hold little hope for capital recovery. In early 1996, banks froze further disbursements. The sponsors then demanded that the government intervene to save the project (and their
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DuUd-Operate-Transfer Privatisation Process in Asia
equity). In response to this, the government ordered in mid-1996 another state bank to refinance the road with subsidised loans. 6. Indonesia's Jakarta Toll Road Project As mentioned above, these toll roads were developed successfully by companies controlled by children of the President. Financing was provided mainly by subsidised state banks, and as the roads proceeded, toll increases were provided by the President at the request of the companies; in 1995-96, tolls on the inner-city road were increased three times. This evoked popular resentment against the concessions and the toll-setting mechanism, making these matters politically charged. High risk environment leads to governments absorbing most risks while private sector sponsors and financiers still retain the right to rewards 1. Pakistan's Hub Power Project Because of the lengthy delays and high risks inherent in the environment, the Pakistan government ended up absorbing much of the project risk of the Hub Power BOT programme. The government took on a US$582 million loan from the World Bank to support the project. In addition it had to take significant equity participation and to guarantee fuel supply and power off-take agreements, as well as provide protection against foreign exchange risk. In an indirect way, the government was also liable for the foreign government agency (and World Bank)'s financial commitments to the project, which together constituted 70 per cent of total project cost, some of which passed through the Pakistan government. Total private sector investment, then, was very limited. 2. Indonesia's Paiton Project The risks and high costs of the Paiton power BOT project were mainly undertaken by foreign government institutions, as commercial banks
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and private sponsors clearly considered the risk too high. Of the US$1.9 billion financing package, US$900 million was supplied by the Export-Import Bank of Japan. A further USS540 million was supplied by the US Export-Import Bank, and another US$200 million from the United States government's Overseas Private Investment Corporation. Commercial banks, on the other hand, supplied only US$274 million. Loan insurance was also provided by foreign government institutions. The heavy foreign government involvement implies that the onus is on the Indonesian government to make the project work. The sponsors have taken only short-term equity risks on the project. According to project sources, the main shareholder, the Mission Energy of the United States of America, w mid recover much < of its equity in project management fees, including a sizable bullet payment at the commissioning of the plant. A second major shareholder, the supplier of the power plant itself, is financed by United States Exim Bank credits, leaving it with little risk on the sales of equipment. (Presumably profits on the equipment will cover a substantial portion of its equity exposure). The third main shareholder, the key Indonesian partner (a relative of the President) is the principal fuel supplier to Paiton. This company's 15 per cent equity was prefinanced by a state bank which will itself only be repaid out of Paiton' s profits. Upon the commissioning of the plant, the company expects to further reduce sponsors' risk by floating the company on the stock exchange. The implications are that first, by the time the plant is operating, principal sponsors will have reduced their equity exposure to almost nothing, and second, the principal holders of risk will be foreign and local government financial institutions, which will, in case of default, be forced to confront the Indonesian government to redress their losses. 3. China's Shajiao B Project The success of the Shajiao B project is undermined by the lack of a long-term commitment to the project by the sponsor, Hopewell. Upon the completion of project construction, Hopewell received a bonus of US$50 million from the concession company, in addition to its
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Burfd-Operate-Transfer Privatisation Process in Asia
substantial construction fees. Hopewell also gained preferred access to power sales receipts in the first year or more. These contributed to Hopewell's (not necessarily the concession company's) 30 per cent or more return on investment in the project, and Hopewell was able to further cover its exposure by floating a subsidiary holding of its investment in Shajiao B on the Hong Kong stock market. It is fair to say this rapid reduction of Hopewell's exposure is a reaction to the high-risk environment of the project. However, the securing of the sponsors' long-term financial commitment to the project can also be seen as a challenge for the government. Indeed, in 1995-1996 Hopewell was reported to be willing to consider the sale of the Shajiao B project along with its other power projects, suggesting it never intended to be a long-term participant in the power generation industry in China. 4. India's Dabhol Project Like Paiton, the Dabhol project was mainly financed not by commercial banks or the equity of the principal sponsor, but by government financial institutions. Of the US$920 million required for the development of the project at the first stage, US$398 million was supplied by two American government institutions, and then another US$295 million by Indian banks, mainly government-controlled banks led by the Industrial Bank of India. Commercial bank financing amounted to US$150 million, indicating the commercial banks' perception of risk. When the project became entrapped in controversy, the American government's pressure on Delhi implied that the Indian government was expected to assume some kind of financial responsibility. 5. Malaysia's Bakun Dam Project Bakun Dam is a US$5-6 billion, 2,400 megawatt hydroelectric power BOT project in Sarawak state, Eastern Malaysia. It was awarded on a negotiated basis in 1994 to the Ekran Bhd. group, a large timber exporter. Highly controversial for social and environmental reasons, and with its energy efficiency and commercial feasibility subject to question, the project shows signs of high risk. This is reflected in
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Ekran's own approach. According to press reports in mid-1996, financing of the project will be mainly covered by foreign government export credit agencies and government insurers, and by Malaysian government-controlled financial institutions. Aside from Ekran's one-third share, equity will also be taken up mainly by Malaysian government-controlled institutions. Funding for construction before completion will be based heavily on the cash flow from harvesting 80,000 hectares of forest where the reservoir will be, for an estimated US$500 million to US$1 billion in potential income. The project is also to be floated on the Malaysian stock exchange early in the construction period. Ekran itself has named its subsidiary and related companies as the main subcontractors of the project. Meanwhile it demanded a US$400 million "project management" fee for itself, which has been defended by the Prime Minister.41 The implication is that, by the time the dam begins to produce power, the main sponsors will ha\ e recovered all of their costs and more, without any exposure to risks associated with the operation of the power facility. Those who are exposed - presumably banks and minority investors - will be forced to look t o the government to ensure a fair return. Conclusion Privatisation of infrastructural development and management is clearly desirable and necessary in many situations. The BOT structure has proven viable. Developing an understanding of the goals of privatisation and of the BOT approach is clearly an important part of the process of negotiating a country's first BOT projects. As Thailand's power sector demonstrates, a healthy understanding of and consensus on the concept can ultimately be established, with positive long-term effects. However, the difficulties of making especially large projects work in countries with developed economies, policies, and legal structures - and the Eurotunnel is a suitable example - suggest that the introduction of a BOT form of privatisation into a country which has not had experience in handling large-scale projects, which has a very high-risk environment, and which urgently needs infrastructural facilities, is not necessarily the ideal solution.
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The difficulties confronting many BOT projects are generic, rather than country or project-specific. They also span a broad range of political systems. The notoriety which Thailand has received for its highway and mass transit project management is as exaggerated as is the reputation of Malaysia's success. Among the ostensible successes, one has to take note of Indonesia's award of the lion's share of infrastructural BOT programmes to companies with direct links to the President's family, the leading role that state-owned banks have in financing these companies, and the other grant of government supports as needed.42 Likewise, in Malaysia where BOT privatisation has been hailed as the most successful, one must consider the award of concessions through non-transparent, uncompetitive means to politically-favoured firms, and the state-directed, non-commercial financing of these projects.43 In both countries questions need to be raised as to the success of achieving the basic goals of privatisation. The principal issue is the lengthy and costly delays in developing what is often urgently needed infrastructure. If the lack of infrastructural facilities does indeed inhibit investment and retard economic development, then these delays, and their costs, must be taken into account in judging whether the BOT approach is preferable to other methods of financing and building a country's infrastructure. A second issue is that it is not always clear who is absorbing the risks, and who is reaping the rewards in many of these projects. Some projects appear to have been used to place rewards in the hands of the private sector while the state simply alters the nature of its own riskabsorption. The emergence of export credit agencies as both lenders and equity investors in private infrastructural projects is also an important and unstudied trend. Is this still government-to-government risk, in the same way that bilateral soft loans for infrastructural development in the past was? The foregoing list is by no means a definitive list of Asia's BOT projects. The discussion should not be construed as suggesting that there are not other successful projects in the region,44 nor is it meant to demonstrate that traditional methods of infrastructural development and management are superior. The examples are intended to show that, in the difficult environment of most developing countries, the challenges of creating a successful BOT infrastructural project
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might easily outweigh the benefits which this form of privatisation promises. In addition, because of their reliance on long-term, commercially-based financing arrangements, BOT privatisation schemes are substantially different from other, more successful forms of privatisation such as corporatisation and asset sales. As such they necessarily involve greater risks and often untenable responsibilities for recipient governments.
NOTES 1. World Bank, Infrastructure Development in East Asia and the Pacific (Washington DC: World-Bank, 1995), p.l. 2. Jim Rohwer, Asia Rising (Singapore: Butterworth-Heinemann Asia, 1995). 3. Studies have shown that telecommunications projects have much higher rates of return, based on lower sunk capital costs and the ability to charge consumers high unit prices. See World Bank, World Development Report 1994: Infrastructure for Development (New York: Oxford University Press, 1994). 4. Worldwide, 90 per cent of these financing arrangements are carried out or intermediated by the government, See ibid., p.89. 5. Ibid. 6. Alan Rix, Japan's Aid Program (Canberra: Australian Government Publishing Services, 1987); and Nigel Holloway, ed., Japan in Asia (Hong Kong: Review Publishing Co., 1992). 7. At the end of 1994, the outstanding balance of OECF loans worldwide was 8,026 billion yen. Of that 78 per cent was to Asian countries. The top five OECF borrowers are Asian (Indonesia, China, Philippines, India, and Thailand, respectively). Worldwide, over half of OECF loans were allocated to electric power and gas, transportation, and telecommunications. Excluding OECF commodity loans, the share of project loans to those categories of infrastructure was 66 per cent. In Asia the level was close to 70 per cent. 8. OECF officially ended the tied aspect of projects in the late 1980s, but the practice effectively continues even today. See Rix, Japan's Aid Program; and Holloway, Japan on Asia. 9. However, some government-developed infrastructural facilities are often able to produce a strong commercial return. Besides telecommunications systems, electricity generation can also, as the case of Thailand demonstrates, meet all criteria and remain self-financing and profitable. See Phisit Pakkasem, "Privatization in Developing Countries: The Experience of Thailand," paper presented at the ADB Conference on Privatisation Policies, Manila, 1985.
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liudd-Operate-Transfer Privatisation Process in Asia
Conference on Privatisation Policies, Manila, 1985 10. Ng Chec Yuen and Robert Wagner, "Privatization and Deregulation in Asean," Asean Economic Bulletin, March 1989, and Ng Chee Yuen and Toh Kin Woon, "Privatization in the Asian-Pacific Region," Asian-Pacific Economic Literature, November 1992. 1 1. Holloway, Japan in Asia 12. The US$130 billion figure is the lower case, the World Bank's "baseline scenario" suggests at least US$150 billion for 2000. Both are "indicative" investment requirements, not likely to be achieved, especially if economic growth is unexpectedly slow. Frequently in an economic slowdown, the first thing sacrificed by governments is infrastructural spending. See World Bank, World Development Report, 1994. 13 The author's own interviews in 1993 with officials such as Laos' Deputy Prime Minister at the time, Khampoui Keoboulapha, and Yunnan's Provincial SecretaryGeneral, Wu Guangfan, revealed such enthusiasm 14 C. Walker and A J. Smith, eds , Privatized Infrastructure The Build Operate Transfer Approach (London- Thomas Telford Publications. 1995), and Charles Schcll, cd., Project and Infrastructure Finance in Asia (Hong Kong Asia Law and Practice, 1995). 15. Far Eastern Economic Review (FEER), October 22, 1973. 16. There arc two important differences, however. Oil exploration is extremely risky, and most developing countries readily recognise they cannot afford the resources required; and there are existing global pricing standards for hydrocarbons, whereas user-pricing can vary extensively for infrastructure 17. The project was contested by Canada's Lavalin group and a consortium led by the Leighton Engineering group 18. R.S. Milne, "Privatization in the ASEAN States. Who Gets What, Why, and With What Effect?" Pacific Affairs (Spring 1992) 19. Paul Handley, "Hard Truths about Asian Infrastructure," Institutional Investor (November 1995). 20. Discussion of the political nature of infrastructural development and privatisation can be found in R.S. Milne, "The Politics of Privatisation in the ASEAN States," Asean Economic Bulletin, (March 1991); Milne, "Privatisation in the ASEAN States: Who Gets What, Why, and With What Effect?" Handley, "Hard Truths about Asian Infrastructure"; Asian Law and Practice, Project and Infrastructure Finance in Asia (Hong Kong: Asia Law and Practice, 1995); and Edmund Terence Gomez, UMNO's Corporate Investments (Kuala Lumpur: Forum Enterprise, 1990). 21. Hopcwell later transferred its power units into a subsidiary, Consolidated Electric Power Asia Ltd (CEPA). 22. The early completion bonus was designed as an important core benefit for the sponsor, rather than simply an additional incentive the target was based on how long it normally took Chinese state-owned enterprises to build a similar plant, rather than more professional Hopewell, making it easily achievable. Hopewell beat the target by more than six months 23. Interview with National Energy Policy Office head, Dr Piyasawat Amranand, 241
24. In July 1995 the cabinet moved to replace EGAT's entire board, except for one person, with new persons including business cronies of cabinet members. Public reaction and a threatened strike by EGAT staff forced a reversal of the decision. Later, in early 1996, the Prime Minister asked the committee reviewing the bids to meet with losing bidder the TPI Group, which made an unsuccessful argument to be included in the winners' short list. 25. Yet the process forced PTT to begin to address its shortcomings, and the gas power plant bidders were to be favoured in a scheduled second round of bids. 26. Confidential interview with a senior adviser to the project, August 1995. 27. These were the "Skytrain," negotiated by the Expressway and Rapid Transit Authority of Thailand with Canada's Lavalin group from 1987 to 1991, after which the concession was cancelled; the Hopewell's combined road/rail/mass transit project awarded by the Ministry of Transport and Communications and the State Railways of Thailand in 1990, which was less than 10 per cent completed in 1996 (when it was to be up and running); and the "Tanayong" or BTSC concession for an elevated light rail awarded by the Bangkok Metropolitan Area government in 1992, but which was by mid-1996 only on the verge of securing financing, and less than 20 per cent completed. 28. Asian Wall Street Journal (AWSJ), September 20, 1996. 29. Based on interviews with government officials, and power sector representatives, between 1988 and mid-94 in Thailand. The EGAT told potential sponsors that it would not make long-term commitments to buying the power they generated; that it required control of the fuel supplies (including pricing) to the power plant; and that other conditions, considered unacceptable by the industry, were to be met. 30. A well-placed energy sector source in Indonesia in August 1995 said the PLN was paying US$80 million a year to the independent producers for power it could not sell onwards, because of its poor distribution network. 31. Confidential interview with power industry figure, Jakarta, August 1995. 32. Christine Hill, "A Dam Too Far," Institutional Investor (December 1995). 33. For instance, according to Thai energy planner Piyasawat Amranand, the relatively advanced and progressive Thai power agency EGAT could not estimate accurately its own avoided costs as a means of analysing and comparing bids by private companies for independent power producer concessions licenses in 1995. (Given the prevalence of rent extraction in state-driven projects, few slate-owned enterprises would be willing to provide an accurate estimate of their costs, because it would only indicate inefficiencies and corruption). 34. Comparing the costs of differing power plants is of course not a precise measurement, but energy industry executives note that competitive costs for plants in 1995 were roughly US$1 million per megawatt of capacity. The Managalore, India BOT project of Cogentrix is roughly 1,000 megawatt for US$1.1 billion. Paiton is almost double the unit cost, at US$2.5 billion for 1,230 megawatt. 35. This account is based upon numerous interviews by the author with principals in the case; see Paul Handley, "Thailand Case Study: The Second Stage Expressway" in Schell, Project and Infrastructure Finance in Asia.
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way" in Schell, Project and Infrastructure Finance in Asia. 36. As such the land would not be available for commercial use by the concessionholder, which might enhance the project's commerciahty. 37. FEER, September 26, 1996. 38. Gomez, UMNOs Corporate Investments. 39. Hoon Lim Siong, "The Great Construction Rush," Asian Money (September 1995). 40. For instance, the project assumed a link into the BECL-ETA Expressway, though neither of those parties had agreed 41. AWSJ, September 30, 1996. 42. Projects fitting this description include several telecommunications concessions, the Jakarta mass transit system, and two port concessions. 43. Other such projects include a new causeway between Singapore and Johore Bahru; other toll roads; Kuala Lumpur area mass transit; the private power producers; and the large water pnvatistion Indah Water Konsortium. 44. There are a number of small, successful toll roads and power plants in China, for instance; and many larger projects which are fashioned as private sector, foreigninvested infrastructural concessions, but which in practice are joint ventures between foreign capital and companies and authorities owned by the state which retain control over the infrastructure.
Paul Hundley reported for Far Eastern Economic Review from Jakarta, Hong Kong, and Bangkok between 1985-93 From 1994 until the present, he has been a regional correspondent for Institutional Investor, based in Bangkok. This paper was written with the support of a research fellowship from the Asia Research Centre, Murdoch University, during 1996. The author would like to thank Richard Robison and Garry Rodan of the Asia Research Centre for their advice and support, and Guy Altree and John Palumbo of Delta Associates for their critical comments.
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A Critical View of The Build-Operate-Transfer Privatisation Process in Asia

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ASIAN JOURNAL OF PUBLIC ADMINISTRATION VOL 19, NO 2 (DECEMBER 1997) 203-243

A CRITICAL VIEW OF THE BUILD-OPERATE-TRANSFER PRIVATISATION PROCESS IN ASIA

Asian Journal of Public Administration

Budd-Opcrate-Transfer Privatisation Process in Asia

Asian Journal of Public Administration

Build-Operate-Transfer Privatisation Process in Asia

Asian Journal of Public Administration

Budd-Operate-Transfer Privatisation Process in Asia

Asian Journal of Public Administration

Build-Operate-Transfer Privatisation Process in Asia

Asian Journal of Public Administration

Dudd-Operate-Transfer Privatisation Process in Asia

Asian Journal of Public Administration

Build-Operate-Transfer Privatisation Process in Asia

Asian Journal of Public Administration

TRADITIONAL INFRASTRUCTURAL PROJECT, BILATERAL ODA (OECF MODEL)

Irrplementing Agency: State-owned Enterprise

BOT INFRASTRUCTURE PROJECT MATRIX

State-owned Enterprise Operators Suppliers ^ Sponsors \ PROJECT COMPANY

A Comparison of Traditional and BOT Infrastructural Projects

Build-Operate-Transfer Privatisation Process in Asia

Asian Journal of Public Administration

Build-Operate-Transfer Privatisation Process in Asia

Asian Journal of Public Administration

Build-Operate-Transfer Privatisation Process in Asia

Asian Journal of Public Administration

Build-Operate-Transfer Privatisation Process in Asia

Asian Journal of Public Administration

Build-Operate-Transfer Privatisation Process in Asia

Asian Journal of Public Administration

Budd-Operate-Transfer Privatisation Process in Asia

Asian Journal of Public Administration

Build-Operate-Transfer Privatisation Process m Asia

Asian Journal of Public Administration

Build-Operate-Transfer Privatisation Process in Asia

Asian Journal of Public Administration

Budd-Opcraie-Transfer Privatisation Process in Asia

Asian Journal of Public Administration

DuUd-Operate-Transfer Privatisation Process in Asia

Asian Journal of Public Administration

Burfd-Operate-Transfer Privatisation Process in Asia

Asian Journal of Public Administration

Budd-Operate-Transfer Privatisation Process in Asia

Asian Journal of Public Administration

liudd-Operate-Transfer Privatisation Process in Asia

Asian Journal of Public Administration

Build-Operate-Transfer Privatisation Process in Asia

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