The build-own-operate-transfer (BOOT) financial arrangement has been used around the world to fund important infrastructure in partnership between government and private investors. In this financing model, the private investor upfronts the initial investment cost and expects to be repaid over some time period. The investor has an expected rate of return before underwriting the project.
Guyana’s government – particularly the pre-2015 and post-2020 PPP/C – has sold this financial arrangement as one where the government undertakes no risk or financial obligation. The public is often told that the government is not upfronting any money; as a result, the builder-owner-operator bears the financial burden and risks. If it sounds too good to be true, it is.
For starters, I completely understand the foreign exchange constraint the government faced prior to the oil and gas sector. Guyana faced a persistent foreign exchange crunch and the infrastructure deficit has been enormous. These days one of those constraints, the foreign currency one, is at least partially less binding as Guyana enjoys unprecedented hard currency inflows in the form oil royalties plus profit share. The oil rents should cause the government to fundamentally rethink infrastructure funding. In the case of Guyana, BOOT now has a competition in the form of revenues flowing into the Natural Resource Fund.
So far, the government seems sure to continue with the BOOT arrangement. Recently, Mr. Winston Brassington disclosed that the new cost of the Amaila hydroelectric project is US$700 million. I find it hard to believe that cement, steel, aluminium and other materials used to make the power plant are cheaper today than the previous attempt back in 2013 when it was priced at US$860 million. But, I am not writing today to argue over my disbelief. The column intends to underscore some overzealous selling points in support of the BOOT financing method in light of the fortuitous oil rents.
In my column of February 13 (“The withdrawals from the Natural Resource Fund, the new Demerara Bridge and more”), I outlined a simple principle for judging whether a project should be financed by money from the NRF or BOOT. I will use a simple numerical example to illustrate the rule of thumb I mentioned in the said column. Assume that the government has two options to fund a hypothetical project that costs US$100 million. It can seek BOOT financing for US$100 million. Or it can withdraw the same amount from the NRF to fund the project. Assume further that the BOOT financing attracts a repayment of US$130 million in interest over 10 years. Also, assume, that keeping the money in the NRF would have earned Guyana US$30 million after 10 years. From the numerical example, therefore, it clearly makes no sense to rely on the BOOT. Losing US$30 million in interest over 10 years is better than having to repay US$130 million after over 10 years.
It should be noted that a BOOT arrangement is used only when investors can earn a stream of revenues as a repayment. It will not, for example, work to fund a new sewage system, build new drainage canals or finance the new roads to ease the traffic congestion on the East Bank of Demerara. It is impossible for a private investor to earn a stream of revenues from a sewage system or a drainage canal; and it is logistically costly to toll each access point of a public road.
In some ways, a BOOT financial framework has some similarities to someone buying a coupon bond. That person (the investor) hands over or upfronts an amount of money (the principal) to the borrower. The investor expects a stream of annual coupon payments and at maturity the repayment of the principal that was initially provided. With some differences, a car or mortgage loan has a similar structure. The bank pays upfront for the home or car and the borrower repays the principal and interest over a few years. The borrower could default; hence, the bank has a bad loan on its books.
That’s precisely what the proposed BOOT for Amaila does. China Railway upfronts the cost to build the Amaila plant and it expects to be repaid by GPL (hence, the Guyana government) over a 20-year period. That repayment takes the form of a power purchase agreement at a price of US$0.077 per kWh. GPL will then retail the power at US$0.15 kWh, thus making a nice profit margin for the government. Implicitly, therefore, it is Guyanese consumers who are going to bear the repayment cost of the project – as presently conceptualised. The mark-up between what China Rail gets and what the consumers pay for electricity can be seen as an implicit tax that refunds the project over 20 years. Nevertheless, if GPL indeed sells power for US$0.15 kWh, there is a welfare improvement for all Guyanese – regardless of whether it comes from a wind farm, Amaila or natural gas plants (the present price is about US$0.32 per kWh).
The scenarios explained above indicate that although the government does not fork out the initial amount to fund the project, it is responsible over the long-term for repaying the implicit external debt. The logic is simple: Amaila is a foreign currency liability that has to be funded over 20 years once the BOOT method is activated.
In technical terms, the BOOT structure for Amaila is nothing more than a typical time value of money problem: Guyana does not pay upfront, but does so over 20 years. Exactly how much is repaid is quite interesting given recent news reports. Regardless of the fluctuations of the flow of river, GPL has to purchase the full capacity (165 MWh) at US$0.077 per kWh. In such a scenario, my back-of-the-envelope calculation tells me that the government makes an annual repayment of US$111.3 million per year for 20 years (US$2.2 billion). In present value terms – assuming an interest rate of 10% – the government repays US$947.3 million, which is not too shabby an investment for China Rail.
The government continues to sell BOOT-funded projects by noting a few favourable features. For example, after 20 years the Amaila hydroelectric dam – initially a liability or debt to Guyana – becomes an asset or is fully owned by government until it reaches 100 years. However, why not fund the project to make it a national asset from the very beginning if it is so important for energy security? Guyana is expected to have over US$12 billion by 2030 in the NRF.
The government should be commended for considering a portfolio of energy sources: natural gas, hydro, solar and wind. The Hope Beach wind farm appears to be a good opportunity with that investor hoping for the identical power purchase agreement of US$0.077 per kWh. Incentivising businesses and families to have solar panels on their roof tops is another opportunity in the making. Natural gas power plants can be built without incurring the sunk cost (US$900 million) of pipelines at the bottom of the sea.
While this essay focused on the purely financial terms, I still harbour much doubts about Amaila’s environmental merits. The 23 sq. km reservoir will release methane for years to come. Methane release from natural gas power plants are much easier to measure and control to 0% leaks. This is not the case for a flooded reservoir. I am not comfortable clearing virgin forests for running 270 km of transmission lines. The trees are much more valuable standing than making place for transmission lines that will likely use inferior building materials. As the climate continues to warm, places that were not susceptible to forest fires will become so, as a recent study indicates. Power transmission lines are a main source of forest fires in California.
Comments can be sent to: tkhemraj@ncf.edu
