Uniting agriculture and nature for poverty reduction

Build Operate Transfer and private sector led hydropower development: assessing benefits and risks

Dr. Nathanial Matthews

Research CoordinatorWater, Land and Ecosystems

Uniting agriculture and nature for poverty reduction

Models of PPP

• BOT – Build Operate Transfer• DBFO – Design Build Finance

Operate • Concession Lease• Corporatization• BTO – Build Transfer Operate• Lease• BOO – Build Own Operate

Uniting agriculture and nature for poverty reduction

Characteristics of BOTs• Typically involves private sector handling all the financing,

design, construction and operation of an infrastructure project for a concessionary period of usually 20-50 years.

• The private operator runs the infrastructure at a rate of return high enough to service debts and afterwards to generate a profit of approximately 15% or more.

• BOT structures tend to be complex. Within the BOT contract there are dozens of fees, guarantees, loans and contracts needed between each actor

• BOT projects restrict investors from removing their equity when they please, so large consortium are generally formed to spread exposure.

General Contractor

Design Electro-mechanical EquipmentCivil Works

General Contractor

Share Holder Loaner

Operator

Governmental

O & M Contract

Turn-key contract

Project Co.

Uniting agriculture and nature for poverty reduction

A Brief History of BOT and privatized infrastructure

• The Suez Canal was the world’s first BOT project, built at a final cost of US$18 million in 1868.

• Privatized infrastructure expanded in the 1970s and was widely adopted from the 1990s onwards.

• Notable examples include the US$19 billion Channel Tunnel, the US$17 billion Taipei Transit System and the US$15 billion Kansai Airport.

• Expected to reach USD $4 Trillion by 2017 driven mainly by weakened public finances, increased private capital seeking long-term, low-risk, inflation-protected returns that are better insulated against economic cycles.

Uniting agriculture and nature for poverty reduction

Benefits

• Harness new investment• Not total privatization• Transfer risk• Innovate• Find efficiencies• Public control maintained• Provide a vehicle to open markets to international

and regional investment and development• Can allows funding outside of political economies

Uniting agriculture and nature for poverty reduction

Challenges

• Opportunities for investors to profit through construction or service supply may incentivize investments with weak returns.

• Governments with weak capacity may absorb risks and provide private sector guarantees such as supplying security, water flows, fuel, or electricity.

• Complexity can result in a range of environmental, socio-economic, financial, and political risks being undervalued, overlooked, or misidentified.

• Business norms tend to impede project transparency and participatory processes.

Uniting agriculture and nature for poverty reduction

Examples from the Mekong

• Over 25 MoUs signed with Lao PDR in the late 1990s• A tendency to favour large-scale, capital intensive

projects over smaller-scale initiatives• Lack of ownership over environmental and social

mitigation• Multi-purpose dams are rarely considered • Construction quality has varied – such as in Vietnam• Lack of transparency and participation, some

developers work towards this, others do not

Uniting agriculture and nature for poverty reduction

Future• A recognition that privatized infrastructure can have significant

public impact, so the notion of risk and uncertainty need to be adequately explored

• BOT/PPPs are an important way forward, but governments need capacity to handle the investment.

• BOTs that consider long-term costs as well as short-term benefits (decommissioning, sediment build up etc).

• Stronger monitoring and evaluation of projects post construction.• Longer term commitments and ownership of environmental and

social impacts• All energy development has trade-offs – privatized infrastructure

is the present and future of hydropower – need to keep working towards better hydropower.