Energy market relates to everyone, no matter people or company need to live on it. So the governments deal with it very carefully, especially when they decide to involve private sector in the provision of public infrastructure and related services. There are three popular ways of privatization of energy market- BOT, BOO and BOOT. In this report, it states the key features of each method at first. Then three cases from three countries are provided. The Malaysian case provides a fail example of BOT, but the Chinese and Egyptian cases are the success examples. After the cases, it finds out that there is no "one size fits all" method in the field, and the government can choose any method of privatization. However, no matter what method government chooses, it should maximum the benefits of the public.
Energy market is very important for everyone, because people needs energy (e.g. gas and electricity) to live, and companies need energy to operate. In the past, the energy market is controlled by the government. But recently, in many countries, high growth in the demand for power (etc.electricity, gas) plus limited capital for power plant construction, has led to consideration of independent private power generation. Especially, in the mid-1980s, many Asian countries turned to the privatization of infrastructure to overcome problems which threatened to constrain economic growth (Smith, 2010). In this report, it will first introduce three popular ways of structuring private power projects- BOT, BOO and BOOT. After that, three cases will be provided, two from Asia and one from Egypt. And at the end of the report, a conclusion will be given.
Three of the most popular ways of structuring private power projects are: build-own-transfer (BOT) or build-own-operate (BOO). Projects structured this way allow countries to develop new power plant capacity without major capital investment by the government. Industrial growth in developing countries is the major reason for electricity demand growing at 10 percent to 15 percent or more per year. Electricity, for instance, under BOT a plant is constructed and operated for a predetermined period of time by a private electric power company. At the end of a specified period the plant is transferred to the country's electricity generating authority at no cost. Usually, a power plant has approximately another 10 years of life when it is handed over. A BOO developed power plant, on the other hand, is built and operated by the private electric power company for the life of the plant(Smith, 2010).
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 (Mcmullan, 2010).
The "build-own-operate transfer"(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. It is a form of project financing, wherein a private entity receives a concession from the private or public sector to finance, design, construct, and operate a facility stated in the concession contract. It enables the project proponent to recover its investment, operating and maintenance expenses in the project. Due to the long-term nature of the arrangement, the fees are usually raised during the concession period. The rate of increase is often tied to a combination of internal and external variables, allowing the proponent to reach a satisfactory internal rate of return for its investment (Handleya, 1997).
In Asia, the governments 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 Malaysia.
In Malaysia power generation BOT projects were built upon a 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 to consumers for free, and paying the private concessionaires more for the power than Tenaga's own production costs. 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.
Actually, 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 user-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 electric power 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 (Hill, 1995).
For example, the flowing case of china seems much more successful.
-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) program. In 1984 the local government of the fast-growing area, realizing 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. 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 government owned 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. 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 (Handleya, 1997).
Apparently, not all countries are the same. In some countries, such as Egypt, Canada, Australia and New Zealand, the term used is Build-Own-Operate-Transfer (BOOT).
Egypt had installed generating capacity of 17.06 gigawatts (GW) as of 2004, with plans to add 4.5 GW of additional generating capacity by 2007 and 8.38 GW by 2012. Around 84 percent of Egypt's electric generating capacity is thermal (natural gas), with the remaining 16 percent hydroelectric, mostly from the Aswan High Dam. All oil-fired plants have been converted to run on natural gas as their primary fuel. With electricity demand growing, Egypt is building several power plants and is considering limited privatization of the electric power sector. Egypt's power sector is currently comprised of seven regional state-owned power production and distribution companies, which were held by the Egyptian Electricity Authority (EEA) (Mbendi Information services, 2010).
Egypt has several privately-owned power plants currently under construction which were financed under Build, Own, Operate, and Transfer (BOOT) financing schemes. BOOT projects are used to fund large-scale public infrastructure without affecting the country's debt profile. Private developers are allowed to recover their costs of construction through ownership and operation of the plant for a fixed period before handing it over to the state. The first BOOT project was a gas-fired steam power plant with two 325-megawatt (MW) generating units, located at Sidi Kerir on the Gulf of Suez. The plant cost $450 million, and began commercial operation in late 2001. Electricity from the plant is priced at 2.54 cents per kilowatthour. This competitive price stems largely from the availability of cheap natural gas -- to be supplied by Egypt's EGAS -- as a feedstock. U.S.-based InterGen (a joint venture of Bechtel Enterprises and Shell Generating Ltd.), along with local partners Kato Investment and First Arabian Development and Investment, have the 20-year BOOT contract for Sidi Kerir. The second BOOT power project award went to Electricite de France (EDF), for two gas-fired plants to be located near the cities of Suez and Port Said. Each plant will have an installed capacity of 650 MW, and the project cost will total around $900 million. The price for power from the EDF plants will be 2.4 cents per kilowatt hour (Kwh), the lowest price yet offered for a BOOT plant. The plants both began commercial operation in 2003 (Mbendi Information services, 2010).
EEHC-owned projects currently under construction include the 1,500-MW plant planned at Nuberiya in the western Nile Delta near Alexandria. The first 750-MW generating unit at Nuberiya is scheduled to begin operation by the end of 2005. The 64-MW Nag Hammadi hydropower project is under construction, with European Investment Bank financing, and is scheduled for completion in 2006. After several years of delays, the 1,500-MW capacity expansion at the Cairo North power complex came online in mid-2004. A contract has been awarded to Russia's Power Machines Group for the refurbishment of the turbines at the Aswan High Dam. The project will extend the operational life of the turbines by about 40 years and increase generating capacity at the dam from 2,100 MW to 2,400 MW (Mbendi Information services, 2010).
Egypt is also planning to build a part-solar power plant at Kureimat as a BOOT project, which will have 30 MW of solar capacity out of a total planned capacity of 150 MW. The World Bank will provide a financing package from its Global Environmental Facility which will offset the cost difference between the solar capacity and thermal capacity. A Netherlands-funded project is building 60 MW of wind power units in the Suez Canal area. Egypt also has a 22-MW nuclear research reactor at Inshas in the Nile Delta, built by INVAP S.A. of Argentina, which began operation in 1997.
Work has been completed on the interconnection of Egypt's electric transmission grid with other countries in the region. The Five-Country interconnection of Egypt's system with those of Jordan, Syria, and Turkey was completed by 2002. Egypt also activated a link to Libya's electric grid in December 1999 (Mbendi Information services, 2010).
From the Chinese and Egyptian cases, we can see that although there are some successful programs of privatization, but the governments still play a very important role in the energy market.
BOT, BOO and BOOT are three popular ways of privatization in energy market. In some level, it can reduce the financial pressure of the governments. The government can choose any of them depends on the governments need. The cases from three countries indicate that there is no "one size fits all" format of privatization in energy market (infrastructure construction). The government should choose the way of privatization based on the situation of country. Also, the governments should use these methods in a proper way, because even using the same method, the results may be different. And no matter what method the government chooses, it should maximum the benefits of public as the energy market is related to everyone. As the nature of the energy market, the governments will still play a very important role in some countries, especially in some developing countries.
Handleya. P, (1997) 'Critical View Of The Build-Operate-Transfer Privatization Process in Asia', Asian Journal of Public Administration Vol 19, No 2 (December 1997) 203-243
Hill. C, (1995), 'A Dam Too Far', Institutional Investor
Mcmullan (2010) Build own operate transfer (boot) projects
http://www.mcmullan.net/eclj/BOT.html
Mbendi Information services, (2010) 'Electrical Power in Egypt' Retrieved 23rd September 2010, from http://www.mbendi.com/indy/powr/af/eg/p0005.htm
Smith. D, (2010), 'Private ownership of electric power is more efficient and reliable than public-owned plants' Retrieved 23rd September 2010, from http://www.powergenworldwide.com/index/display/articledisplay/45943/articles/power-engineering-international/volume-3/issue-features/feature-article/private-ownership-of-electric-power-is-more-efficient-and-reliable-than-public-owned-plants.html
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