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.
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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.
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.
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 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
This is an excellent analysis by Tarron Khemraj. It demonstrates the Ali administration has not done their home work regarding the financing the Amalia Falls Hydro-Electric Project. It’s time to put a stop to the project in order to explore all possible alternatives.
The article never covered the burning question,Is it necessary? If Guyana wants to go “Industrial” a major dependable power source will be required, solar can’t cut it.What is the downside if the majority of consumers go solar, is the Guyana Electric Power not supposed to make a profit?
In Ontario Hydro Electric pays America border state/s to accept excess production, to maintain profit levels.
The point of lines causing/might fires in California is just Liberal seepage.
Amalia will out last oil/gas plants.
It would seem the major problem is fair financing, which actually looks like the Government’s Achilles tendon, in all large negotiations.
I think the Government still has time to reconsider, and they should use it, Chinese being their choice, always make me wonder,why can’t the Government cut that navel string, always problems and Guyanese end up on the wrong side.
Correct, but the author pointed out that he is focusing on the financial aspects of the planned project. He touches however briefly the environmental impact of the hydroelectric dam project.
If the product is not a priority, finances become moot? Liberals always find environmental short comings to make them sleep at night. After developed countries destroyed every thing green spaces, beach encroachment etc etc. now looking to save poor Guyana. Transition comes after we, complete our development, or we will consider the fear of environmental damage one year after China fix their destruction of our planet.
I think it is necessary,for the Government to stick to country first, at least for now, we lived in crap for a long time, time to fly.
We deserve a break.