The concept of BOOT

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The Contested Landscapes of the Nam Theun, Lao PDR
Australian Mekong Resource Centre

The concept of BOOT

Some in the finance industry have called it the financing phenomenon of the decade. Certainly it is a global phenomenon, and the Lao PDR has not escaped the attention of the Build-Own-Operate-Transfer (BOOT) industry. Estimates vary, but in East Asia alone, the total value of private infrastructure investment in BOOT type schemes in 1996 alone was thought to be in the order of US$50 billion.

In April 1998, the Australian Mekong Resource
Centre was co-organiser of a conference that
focused on critical aspects of BOOT developments
in Australia and in the Mekong Region. The
conference, called 'BOOT: In the public interest?
The Australian experience of Private
Infrastructure' was hosted by the Australian Centre
for Independant Journalism (ACIJ). Transcripts of
talks are available at the ACIJ web site 'Signposts'.

The concept of BOOT involves an arrangement by which a private developer builds an infrastructure facility using limited or non-recourse financing in return for the right to operate the facility and charge users a fee in order to generate a commercially acceptable rate of return (15% or more) on investment. The private developer owns and operates the project for a specified amount of time, usually 25 to 30 years, after which ownership is transferred to the government without compensation. Typically BOOT projects are highly geared, for example the Nam Theun 2 hydropower project has a debt to equity ratio of 70:30. Financing is typically 'engineered' into complex financing packages involving multiple financiers (co-financing), and guarantees and insurance being provided by governments, export credit agencies and/or development banks. Financing is done usually on a limited or non-recourse basis which means that borrowings remain on the balance sheet of the company that owns the project and security for the loans is limited to the project itself. Revenues generated by the project repay project debt and provide the required rates of return demanded by the investors/financiers.
The majority of BOOT projects involve multi-national consortiums with a large number of partners, each of which usually brings with it a particular form of expertise needed at differing stages of the project. For example, the Shlapak Group who is developing the Nam Ngum 2 and Nam Ngiap hydropower projects in Laos consists of 9 partners with differing areas of expertise (see right). Apart from the attraction of 'something for nothing', that is the government does not use its own funds to build the project, an important aspect of the BOOT concept for governments is that it allows certain risks to be passed on to the private sector.	Photo: Andrew Wyatt Shlapak Group consortium signage in Vientiane, Lao PDR.
While the BOOT approach can shift risks which governments are ill equipped to handle to the private sector, for example the risk of construction cost and time overruns, design faults and operating cost overruns, the provision of guarantees and taking an equity stake in projects by governments negates much of the risk shifting advantages that proponents of the BOOT concept claim are possible. In the Lao hydro industry, guarantees have been used and the government typically takes a 25% equity stake in BOOT projects. The equity position that the Lao government takes in its BOOT hydropower projects is unusual in the BOOT industry. Since the early 90s, BOOT has been at the forefront of the Multilateral Development Banks' (MDB) advise to developing countries on how to fund and develop their infrastructure. The approach has been sold by the banks under the benign term of "public-private partnerships" that belie the unequal balance in negotiating power, skill and knowledge between governments and the private sector that is often characteristic of these complex developments. Yet the approach has been unleashed on unsuspecting governments whose already weak regulatory capacity require further expensive help in the way of foreign experts and advisers who advise and negotiate on behalf of governments. The concept of BOOT is so radically different to the traditional way in which infrastructure was developed, yet after almost a decade of promotion it is only recently that the MDBs have begun thinking of the need to redesign regulatory systems that will account for the unique nature of BOOT infrastructure. However this rethinking of regulatory systems has yet to make its way into the field of environmental regulation.