Build-Operate-Transfer (BOT)

....Can BOT model work for Ghana?

Abstract

Build-Operate-Transfer (BOT) is being hailed by industry, governments and multilateral banks as the wonder solution to financing large and medium size infrastructure projects such as dams and roads to create public infrastructure without draining the public purse. The author assesses the realities behind the BOT model.

Introduction

Investing in public infrastructure such as roads, bridges, ports, power plants, public utilities etc. is conventionally considered to be a necessary prerequisite for industrialization and economic growth, and has traditionally been the responsibility of governments, both in capitalist and socialist economies. Governments use tax revenue and/or loans from commercial banks or international finance institutions such as the World Bank to fund infrastructure investments. While the private sector is often sub-contracted to carry out construction work on infrastructure projects, governments have borne virtually all project costs and risks.

Given the current rapid industrialization in many developing countries, including Ghana, for a government to maintain adequate investments in infrastructure, which is very capital intensive, an enormous burden is placed on public finances. According to the World Bank, the developing countries now spend around US$200 billion a year on infrastructure investment, of which more than 90 per cent is government-sponsored. This emphasis on infrastructure investment has been a major cause of burgeoning government budget deficits and foreign debt, and cutbacks to sectors, such as health, education and social welfare. This often happen in connection with structural adjustment and other austerity programs imposed by creditors such as the World Bank and International Monetary Fund.

The past decade has seen a new global economic trend emerge, actively supported by the World Bank group, which emphasizes privatization, economic deregulation and reducing governments’ role in virtually all sectors of the economy. Supporting new mechanisms which enable direct private sector investment in infrastructure projects is part of this trend, and BOT is one model currently being promoted by the World Bank group, ostensibly as a strategy for increasing efficiency, reducing the drain on state revenue and enhancing private sector development. .

What is BOT?

Build-Operate-Transfer is a relatively new approach to infrastructure development, which enables direct private sector investment in large-scale projects such as roads, bridges and power plants. The theory of BOT is quite simple:

• Build- A private company or consortium agrees with a government to invest in a public infrastructure project such as a road or power station. The company then secures their own financing to construct the project.
• Operate-The private developer then owns, maintains and manages the facility for an agreed concessionary period, says 20 years, and recoups their investment through charges or tolls (eg. road tolls or electricity sales).
• Transfer- After the concessionary period the company transfers ownership and operation of the facility to the government or relevant state authority.

The argument for BOT

According to a recent World Bank report, increased private sector investment in infrastructure projects “offers the twin benefits of additional funds and more efficient provision...” This summarizes the thrust of the argument in favour of BOT, that is enabling the private sector to invest directly in infrastructure projects reduces drain on the public purse and as the private sector operates on a commercial basis, efficiency will also improve. It is a remarkably simple and seductive argument, and one, which can easily conjure up visions of ‘free’ development – public infrastructure being created without having to invest public money. It can also be argued that by encouraging foreign investment, BOT can help to facilitate effective technology transfer between countries, and thus foster the growth of a strong local private sector.

As part of the privatization strategy the World Bank and IMF have asked the Government of Ghana (GOG) to privatize the Tema Oil Refinery, permit more distribution of electricity, privatize Ghana Railways and ports as conditionality for more loan. (World Bank Country Assistance Strategy (CAS) June 29, 2001). Under World Bank guidance, several BOT projects have been started in Asia and more are in the pipeline. There are a lot of Ghanaian businesses that can team up in partnership with foreign investors and the GOG to implement BOT. So why haven’t the World Bank been promoting BOT in Ghana? In the past the reasons given were political and economic instability, lack of capital, trust and confidence in local management capabilities. Whether or not these reasons are still valid today remains a challenge for the GOG.

Possible BOT projects

The general description of infrastructure or development projects normally financed and operated by the public sector which could be wholly or partly undertaken by the private sector using BOT model in Ghana include, but not limited to, power plants, highways, dams, water supply, irrigation, telecommunications, transport systems, land reclamation, construction including, government buildings, public markets, warehouses, solid waste management, information technology networks and database infrastructure, education and health facilities, to name a few. Such projects can be undertaken by the private sector through contractual arrangements with the GOG and multinational bank financing.

The Ghana Cyber Group (GCG) can play role as an investor in some of these projects. For an example, the rural hospitals in Ghana have serious need for ambulance services. GCG can provide ambulance services to these hospitals using BOT model one region at a time in contractual arrangement with the GOG.

Incentives and Subsidies

Project risks include all eventualities, which cannot be definitively predicted and incorporated into the project costings. Given that infrastructure projects are sometimes involve cost over-runs, uncertain economic viability and social and environmental risks, private investors are reluctant to go near such ventures unless governments and/or international financial institutions are willing to provide various forms of subsidies. Typical subsidies include investment grants, low-interest loans, special tax exemptions, land grants, public financing of social and environmental mitigation measures.

Applying BOT model to develop infrastructure projects in Ghana makes good economic sense in the long term, considering the current political and economic conditions and the World Bank’s lending conditionality. The GOG’s budget for the year 2001 proposes to establish “ a strong partnership between the public and the private sectors as a way to ensure the realization of Golden Age for the private sector in the era of globalization.” This is a welcoming commitment. But the budget also indicates weakness in the industrial sector and in the over all macro-economic activities in the face of total debt stock of US$7.5 billion of which US$5.8 billion is external and US$1.7 billion domestic. The GOG cannot sustain these huge debts and be able to compete in the global market place without developing an alternative means of financing infrastructure projects.

After years of economic control under the World Bank and IMF, one can expect that the GOG has come to the realization that massive infrastructure designed and financed with donor and or borrowed funds controlled by the IMF are not always the choice or the priority of the beneficiary countries and that in most cases, these projects do not provide real benefits to the local people. It is said, “ no people can benefit by or be helped under institutions which are not the outcome of their own character.” BOT projects well selected and coordinated by the public and private sectors in Ghana could transform the government role from one of direct/creditor investor to one of facilitating and brokering private sector investments.

To ensure this relationship, the GOG should recognize the indispensable role of the private sector as the main engine for national growth and development and put in place foreign investment laws and policies that will provide the most appropriate incentives to mobilize the private resources for the purpose of financing the construction, operation and maintenance of projects normally financed and undertaken by the government. Such incentives, aside from financial incentives, should include providing a climate of minimum government regulations, procedures and interferences plus specific undertakings in support of the private sector.

Technology Transfer

One of the expected spins off BOT is technology transfer. Proponents argue that BOT can facilitate transfer of technology and skills and thus strengthen local private sector development. This is not guaranteed especially in the low-income countries, because there is a scant incentive for a private developer to pay more than lip service to technical training and skill transfer programs. Expectation for technology transfer should be part of the project selection, evaluation, planning and the contractual arrangement between the government and project proponents. Negotiations for incentives to proponents of infrastructure projects should consider type of technology and skills that can come out the projects and develop innovative and sustainable approaches to transfer the technology. This can be achieved by forging closer relationship with the developers and the transfer- agents of the technology, including the Universities and public institutions.

Who benefits?

The ultimate question is, who really benefits from privatized infrastructure projects? Who determines what infrastructure is needed, and who should shoulder the costs and risks for infrastructure development?

In many cases infrastructure projects respond primarily to the needs of industry, the private sector and general economic growth, and are justified on the theoretical premise that everyone will eventually benefit from economic growth and industrialization. Privatization thus becomes a new mantle for the 'trickle down theory. ' Meaning that, the country, the public and taxpayers will all benefit economically and environmentally.

Traditionally the private sector will naturally be most interested in those projects and enterprises, which have the greatest potential to be commercially profitable. Projects which are not commercially viable, even though they may be equally or even more vital for the provision of essential public service will be left for governments and taxpayers to finance. Therefore, project selection for BOT model and the benefits to be derived must be the cardinal concern of the government during negotiations. In a declared HIPC like Ghana, a well designed and managed BOT model can be an alternative mechanism for getting private sector funds and improved efficiency into essential public investment projects. Countries in Asia with similar economic conditions as Ghana are actively implementing BOT model. The World Bank and the multinational banks are promoting BOT. The GOG has had over thirty years experience of similar model with VALCO. It was not a perfect arrangement but it has contributed a lot to the Ghanaian economy over the years. What the GOG has with the World Bank/IMF is not worked. BOT can be the next best alternative. I believe that it is worth trying.

....Can BOT model work for Ghana?

Abstract

Build-Operate-Transfer (BOT) is being hailed by industry, governments and multilateral banks as the wonder solution to financing large and medium size infrastructure projects such as dams and roads to create public infrastructure without draining the public purse. The author assesses the realities behind the BOT model.

Introduction

Investing in public infrastructure such as roads, bridges, ports, power plants, public utilities etc. is conventionally considered to be a necessary prerequisite for industrialization and economic growth, and has traditionally been the responsibility of governments, both in capitalist and socialist economies. Governments use tax revenue and/or loans from commercial banks or international finance institutions such as the World Bank to fund infrastructure investments. While the private sector is often sub-contracted to carry out construction work on infrastructure projects, governments have borne virtually all project costs and risks.

Given the current rapid industrialization in many developing countries, including Ghana, for a government to maintain adequate investments in infrastructure, which is very capital intensive, an enormous burden is placed on public finances. According to the World Bank, the developing countries now spend around US$200 billion a year on infrastructure investment, of which more than 90 per cent is government-sponsored. This emphasis on infrastructure investment has been a major cause of burgeoning government budget deficits and foreign debt, and cutbacks to sectors, such as health, education and social welfare. This often happen in connection with structural adjustment and other austerity programs imposed by creditors such as the World Bank and International Monetary Fund.

The past decade has seen a new global economic trend emerge, actively supported by the World Bank group, which emphasizes privatization, economic deregulation and reducing governments’ role in virtually all sectors of the economy. Supporting new mechanisms which enable direct private sector investment in infrastructure projects is part of this trend, and BOT is one model currently being promoted by the World Bank group, ostensibly as a strategy for increasing efficiency, reducing the drain on state revenue and enhancing private sector development. .

What is BOT?

Build-Operate-Transfer is a relatively new approach to infrastructure development, which enables direct private sector investment in large-scale projects such as roads, bridges and power plants. The theory of BOT is quite simple:

• Build- A private company or consortium agrees with a government to invest in a public infrastructure project such as a road or power station. The company then secures their own financing to construct the project.
• Operate-The private developer then owns, maintains and manages the facility for an agreed concessionary period, says 20 years, and recoups their investment through charges or tolls (eg. road tolls or electricity sales).
• Transfer- After the concessionary period the company transfers ownership and operation of the facility to the government or relevant state authority.

The argument for BOT

According to a recent World Bank report, increased private sector investment in infrastructure projects “offers the twin benefits of additional funds and more efficient provision...” This summarizes the thrust of the argument in favour of BOT, that is enabling the private sector to invest directly in infrastructure projects reduces drain on the public purse and as the private sector operates on a commercial basis, efficiency will also improve. It is a remarkably simple and seductive argument, and one, which can easily conjure up visions of ‘free’ development – public infrastructure being created without having to invest public money. It can also be argued that by encouraging foreign investment, BOT can help to facilitate effective technology transfer between countries, and thus foster the growth of a strong local private sector.

As part of the privatization strategy the World Bank and IMF have asked the Government of Ghana (GOG) to privatize the Tema Oil Refinery, permit more distribution of electricity, privatize Ghana Railways and ports as conditionality for more loan. (World Bank Country Assistance Strategy (CAS) June 29, 2001). Under World Bank guidance, several BOT projects have been started in Asia and more are in the pipeline. There are a lot of Ghanaian businesses that can team up in partnership with foreign investors and the GOG to implement BOT. So why haven’t the World Bank been promoting BOT in Ghana? In the past the reasons given were political and economic instability, lack of capital, trust and confidence in local management capabilities. Whether or not these reasons are still valid today remains a challenge for the GOG.

Possible BOT projects

The general description of infrastructure or development projects normally financed and operated by the public sector which could be wholly or partly undertaken by the private sector using BOT model in Ghana include, but not limited to, power plants, highways, dams, water supply, irrigation, telecommunications, transport systems, land reclamation, construction including, government buildings, public markets, warehouses, solid waste management, information technology networks and database infrastructure, education and health facilities, to name a few. Such projects can be undertaken by the private sector through contractual arrangements with the GOG and multinational bank financing.

The Ghana Cyber Group (GCG) can play role as an investor in some of these projects. For an example, the rural hospitals in Ghana have serious need for ambulance services. GCG can provide ambulance services to these hospitals using BOT model one region at a time in contractual arrangement with the GOG.

Incentives and Subsidies

Project risks include all eventualities, which cannot be definitively predicted and incorporated into the project costings. Given that infrastructure projects are sometimes involve cost over-runs, uncertain economic viability and social and environmental risks, private investors are reluctant to go near such ventures unless governments and/or international financial institutions are willing to provide various forms of subsidies. Typical subsidies include investment grants, low-interest loans, special tax exemptions, land grants, public financing of social and environmental mitigation measures.

Applying BOT model to develop infrastructure projects in Ghana makes good economic sense in the long term, considering the current political and economic conditions and the World Bank’s lending conditionality. The GOG’s budget for the year 2001 proposes to establish “ a strong partnership between the public and the private sectors as a way to ensure the realization of Golden Age for the private sector in the era of globalization.” This is a welcoming commitment. But the budget also indicates weakness in the industrial sector and in the over all macro-economic activities in the face of total debt stock of US$7.5 billion of which US$5.8 billion is external and US$1.7 billion domestic. The GOG cannot sustain these huge debts and be able to compete in the global market place without developing an alternative means of financing infrastructure projects.

After years of economic control under the World Bank and IMF, one can expect that the GOG has come to the realization that massive infrastructure designed and financed with donor and or borrowed funds controlled by the IMF are not always the choice or the priority of the beneficiary countries and that in most cases, these projects do not provide real benefits to the local people. It is said, “ no people can benefit by or be helped under institutions which are not the outcome of their own character.” BOT projects well selected and coordinated by the public and private sectors in Ghana could transform the government role from one of direct/creditor investor to one of facilitating and brokering private sector investments.

To ensure this relationship, the GOG should recognize the indispensable role of the private sector as the main engine for national growth and development and put in place foreign investment laws and policies that will provide the most appropriate incentives to mobilize the private resources for the purpose of financing the construction, operation and maintenance of projects normally financed and undertaken by the government. Such incentives, aside from financial incentives, should include providing a climate of minimum government regulations, procedures and interferences plus specific undertakings in support of the private sector.

Technology Transfer

One of the expected spins off BOT is technology transfer. Proponents argue that BOT can facilitate transfer of technology and skills and thus strengthen local private sector development. This is not guaranteed especially in the low-income countries, because there is a scant incentive for a private developer to pay more than lip service to technical training and skill transfer programs. Expectation for technology transfer should be part of the project selection, evaluation, planning and the contractual arrangement between the government and project proponents. Negotiations for incentives to proponents of infrastructure projects should consider type of technology and skills that can come out the projects and develop innovative and sustainable approaches to transfer the technology. This can be achieved by forging closer relationship with the developers and the transfer- agents of the technology, including the Universities and public institutions.

Who benefits?

The ultimate question is, who really benefits from privatized infrastructure projects? Who determines what infrastructure is needed, and who should shoulder the costs and risks for infrastructure development?

In many cases infrastructure projects respond primarily to the needs of industry, the private sector and general economic growth, and are justified on the theoretical premise that everyone will eventually benefit from economic growth and industrialization. Privatization thus becomes a new mantle for the 'trickle down theory. ' Meaning that, the country, the public and taxpayers will all benefit economically and environmentally.

Traditionally the private sector will naturally be most interested in those projects and enterprises, which have the greatest potential to be commercially profitable. Projects which are not commercially viable, even though they may be equally or even more vital for the provision of essential public service will be left for governments and taxpayers to finance. Therefore, project selection for BOT model and the benefits to be derived must be the cardinal concern of the government during negotiations. In a declared HIPC like Ghana, a well designed and managed BOT model can be an alternative mechanism for getting private sector funds and improved efficiency into essential public investment projects. Countries in Asia with similar economic conditions as Ghana are actively implementing BOT model. The World Bank and the multinational banks are promoting BOT. The GOG has had over thirty years experience of similar model with VALCO. It was not a perfect arrangement but it has contributed a lot to the Ghanaian economy over the years. What the GOG has with the World Bank/IMF is not worked. BOT can be the next best alternative. I believe that it is worth trying.