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ЛНТУЛЛЬНЫЕ ПРОБЛЕМЫ госуллрствл И ПРЛВЛ
W.N. DUONG
WHAT ARE “BOT” (BUILD-OPERATE-TRANSFER) AND PROJECT FINANCING? AN EXAMINATION OF INFRASTRUCTURE DEVELOPMENT IN THE TRANSITIONAL ECONOMIES
ЧТО ПРЕДСТАВЛЯЕТ СОБОЙ СХЕМА «СЭП» (СТРОИТЕЛЬСТВО-ЭКСПЛУАТАЦИЯ-ПЕРЕДАЧА) И ФИНАНСИРОВАНИЕ ПРОЕКТА? ИССЛЕДОВАНИЕ РАЗВИТИЯ ИНФРАСТРУКТУРЫ В ПЕРЕХОДНЫХ ЭКОНОМИКАХ
Некоторые страны Центральной и Восточной Европы все еще находятся в состоянии развития. Поэтому такие понятия, как финансирование проекта и СЭП (строительство-эксплуатация-пе-редача), давно используемые в западных экономиках, могут быть интересны в этих регионах. Эти понятия являются частью процесса, который юристы, экономисты и законодатели определяют как «прямые иностранные инвестиции», т.е. непосредственный поток капитала, технологий и других ресурсов через границы государств. Также представляется возможным сравнение этих концепций с уже существующими практиками в Российской Федерации.
СЭП - это организационно-правовая форма, предназначенная для финансирования проектов.
INTRODUCTION
Part of central and eastern Europe is still developing. Accordingly, concepts such as project financing and the “BOT” (Build-Operate-Transfer) used in the West may be of interest to the region. These concepts are part of what lawyers, economists, and policymakers describe as “Foreign Direct Investment (FDI),” the direct trans-border flow of capital, technology and other resources. These concepts can also be compared to what already exists in the Russian Federation.
BOT is a legal structure suitable for a form of financing called “project finance.” The BOT structure has been used around the world and in the U.S. with varying degrees of success to build critically needed infrastructure such as power (electricity) plants, water treatment plants, and major transportation systems. BOT has also been used for projects that do not conventionally fit under “infrastructure,” but are crucial to nationbuilding and international economic development. Unregulated BOT can be problematic. This article
Такая схема используется во всем мире, включая США, с разной степенью успеха для построения жизненно важных инфраструктур, таких как электростанции, водоочистные сооружения и транспортные системы. СЭП используется также для проектов, которые не подпадают под традиционное определение «инфраструктуры», но являются неотъемлемым условием развития национальной и международной экономики. Нерегулируемые схемы СЭП могут быть достаточно проблематичны. Данная статья объясняет понятие СЭП и проектное финансирование, предоставляет критический анализ, необходимый законодателям, преподавателям высшей школы, студентам юридических и экономических направлений для оценки этих организационно-правовых структур.
explains BOT and project finance, and provides the critical analysis necessary for lawmakers, educators, and students of law and economics in the evaluation of these legal structures.
EXPLANATION OF PROJECT FINANCING
The term “project finance” refers to a method of longterm financing for infrastructure and industrial projects. In this method, the projected cash flows of the project is collateralized as the security for the loan, rather than the assets of the project sponsor(s). This means that assets owned by project sponsor(s) are not subject to the risks of project failure. Typically, a “special purpose entity” is incorporated to own the project and to shield the project sponsor(s) from direct liability. This special purpose entity sits locally and acts as the “project company” to apply for permits, to sign loans, and to contract for commodities and services. The entity typically has no assets other than the project itself. (Quite often, the project is not yet built at the time the loan is made, since loan proceeds are used for construction, which can take
years. Revenue generation used to pay off the loan must be planned and secured for decades).
Traditionally, project finance has been used in mining, transportation, telecommunication and public utility industries - the essence of nation-building. Project finance has also been seen frequently in international economic development, to enable the transitional economies to modernize.
Classic project finance is often described as «off-balance-sheet« or “non-recourse” financing. This means that project sponsors must disclosure their participation in the project as an investment, but they can exclude the debt from their financial statements (this is the meaning of “off-balance sheet”). Thus, lenders have no recourse to the sponsors’ assets listed on their financial statements (this is the meaning of “non-recourse”). In the US, eligibility for this “off-balance sheet” treatment is determined by, among others, the Financial Accounting Standards Board (FASB).
In international project financing, in order to secure the uninterrupted income stream to pay for the loan, project financiers often require performance bonds from project participants, because lenders can’t look to these companies’ assets as collaterals for the loans. Lenders will also look for and require “political risk” insurance for the project, which covers force majeure events such as wars, acts of hostile attack, derelict mines and torpedoes, and civil unrest (these are not generally included in «standard» insurance policies). Today, “political risk” policies may also include terrorism, under “terrorism insurance.”
Project finance can be traced back to the financing of maritime voyages in ancient Greece and Rome. Its use in infrastructure projects dated back to the development of the Panama Canal, and was widespread in the US oil-and-gas and related service sectors during most of the 20th century. Project finance for high-risk infrastructure schemes originated with the development of the North Sea oil fields and support infrastructures in the 1970s and 1980s. For these investments, Special Purpose Corporations (SPCs) were created for each project, with multiple owners or sponsors. Complex legal mechanisms distributed insurance, loans, project management and operations among participants.
International project finance in the developing nations peaked around the time of the Asian financial crisis of the late 1990s. It peaked again around the early 2000s, corresponding to the growth of the OECD countries (Organization for Economic Cooperation and Development). Russia is not a member state of the OECD.
The need for project finance has remained high throughout the world as more countries require increasing supplies of public utilities and infrastructure. In recent years, project finance has also become increasingly common in the Middle East, as part of “Islamic finance.”
Most project finance structures are exceedingly complex. The long-term income stream generated by the project becomes the source of loan payments and, hence, cannot be interrupted and must be legally secured for decades. Accordingly, at the time the project is envisioned, all risks to disruption of future revenue losses
must be identified. Those risks must be allocated or equitably spread between the various project participants to safeguard against losses. Each risk is usually assumed legally by the party that can most efficiently and cost-effectively control or handle the risk. This is the primary goal of lawyers and financiers, necessary for the financial and operational success of the project.
EXPLANATION OF BOT (BUILD-OPERATE- TRANS FER)
BOT financing (sometimes called BOOT (build-own/operate-transfer)) is a form of project finance, typically used for infrastructure building in the developing economies. Examples of countries that have used BOT financing include Taiwan, Israel, India, Iran, Croatia, Japan, China, Malaysia and the Philippines. BOT has also been used in the industrialized nations such as Canada, Australia and New Zealand. Recently, in the US, BOT strategies were considered for the construction of portions of Interstate highway 69, with groundbreaking on the Southern Indiana Toll Road segment planned for 2008. The same financing concept has also been used in the US to construct and operate various local infrastructures for cities and towns (self-governing municipalities).
The term BOT or BOOT conveys that the private investor-sponsor of the infrastructure project (typically a single company or a consortium of several companies from the private sector) will need to transfer ownership and/or operation of the infrastructure to the host government or local entities at the end of the project’s term. At that time, the sponsor-private investor will have adequately earned its profit, and will withdraw from the project. The host government or local entity will then own and operate the infrastructure, having obtained the technological know-how and training from the private sector.
Recently, more innovative BOT models have been used around the globe. For example, a company in India has modified BOT into the Build-Operate-Associate-Transfer (BOAT) model, denoting a period of strategic alliance between the country and the private sector. The BOT model has also been expanded to the public health, pharmaceutical and Information Technology (IT) sectors, thereby taking BOT out of the conventional “infrastructure” landscape.
Because BOT is typically funded with private project finance, a BOT project can bring about extensive economic development for the transitional economies without the need for, or use of, public funds. At the same time, an infrastructure project is also suitable for “multilateral funding” provided by the International Financial Institutions (IFIs). These IFIs specialize in infrastructure funding for the developing world. (Examples are the World Bank group and its counterparts, the Regional Development Banks established for various continents). IFI-funding is a form of international public financing, because the IFI shareholders are member nation-states. Thus, BOT projects can be funded with a combination of IFI public funding and private project finance.
CRITIQUE OF THE BOT STRUCTURE
Although this critique is based on an international BOT, the same concerns also apply to domestic projects.
International BOT project participants are typically multinational corporations who are technology producers suited to go abroad for business. They have incentives to do that because of IFI and project financing. These international corporate players are typically accountable to the taxing and corporate regulatory authorities of their home country. For example, the taxing authorities of the U.S. have laws against the illegal practice of “transfer pricing,” whereby a parent company deals with its subsidiary and manipulates the pricing of services or products in order to understate profit and avoid income tax. Further, the U.S. Securities and Exchange Commission requires certain corporate disclosures regarding project finance. However, these regulatory voices do not represent the intended beneficiaries of the BOT systems - the inhabitants of the developing nations or transitional economies where the infrastructure is needed.
Various BOT legal structures have frequently been used in Latin America and Asia, which, for the most part, have BOT laws and regulations. However, these regulatory schemes are often inconsistent, aimed generally at securing governmental approval. What’s more, national laws cannot impact what is beyond the borders. In other words, the only legal watchdog over privately negotiated BOT structures is the law of the host government where the infrastructure is built. If the national law is weak or under-developed, then there is no other regional or global safeguard. Yet, should the project fail, the loans will still have to be repaid, while the local community does not have the use of the critically needed infrastructure. This “loan default” scenario has indeed happened in the Philippines.
Accordingly, international BOT agreements may be plagued with the following problems:
1. De facto global monopoly
BOT structures are typically huge, bringing together multinational corporate participants that control the technology involved. These corporations have the incentive to partner with one another and with host governments to share risks and to occupy the largest share of the global market. Thus, BOT structures with the same players all around the world can create a state of de facto monopoly in the control of global infrastructure and economic development. This state of “monopoly” will make it extremely difficult for small private companies and newly emerging entrepreneurs to compete in the arena of infrastructure building. If there is to be true “free enterprise,, small local businesses should be allowed to develop and prosper independently.
2. Unregulated self-dealing
In a complex and large-scaled BOT structure, the sharing of risks and capital is actually good. Capital or equity sharing often secures the needed long-term partnership among the technology producers to minimize the risks of failure. For example, project participants can co-own the “special purpose entity” in order to satisfy capital or loan requirements. (As mentioned earlier, the “special purpose entity” is the project company set up to own the infrastructure to be built under the law of the host government.) Here, the BOT legal structure may have created an anomaly: the technology producers who
co-own the special purpose entity may each be selling their products and service to the very company they own.
Accordingly, other than the monopoly result of capital and risk sharing, the BOT legal structure may also create unchecked conflicts of interests - what is known in U.S. financial laws as “related-party transactions.” A parent company may sell or buy products to and from its own subsidiary in order to build or service the infrastructure project In other words, corporate affiliates deal with one another, with the same interest owner sitting on both sides of the “buy/sell” transactions. This is called “self-dealing” in the laws of many developed nations.
3. Faulty risk assessment in project finance
Because the BOT legal structure can combine both private project finance and IFI funding, the presence of the IFIs may create the illusion that the host nation is creditworthy, simply because the country or the project has received multilateral guarantees and support.
For example, the existence of World Bank guarantees in the country or the project can cause private project financiers to neglect sound and rigid risk-management principles in their evaluation of loans necessary to supplement the World Bank loan (typically made to the host government). The private bankers’ comfort lies largely in the fact that World Bank money has been poured into the host government. The private banks can become over-generous in evaluating the risk-assumption or allocation schemes undertaken by project participants. Yet, the corporate assets of project participants are not encumbered or subject to project risks, because of the project finance principles explained above.
4. Faulty or insufficient technology transfer
The benefit of BOT lies in the technology transfer and training to enable the local workforce to take over the operation and control of their own infrastructures. Whether there is real and beneficial technology transfer to the host country remains dubious despite the popularity of BOT in the 20th century. In fact, the rapid advancement of computer technology in the developed nations can result in the industrialization of sophisticated artificial intelligence that practically replaces humans in factory setting. This will practically minimize the need for technology transfer, training and upgrading the skill base for the local workforce. Further, the very long term of a BOT infrastructure project may likely result in the transfer of technology that has become obsolete elsewhere outside of the host jurisdiction.
5. Outdated concept of “infrastructure”
The traditional roles of the IFIs - institutions such as the World Bank group and other multilateral or bilateral credit support agencies that serve to stimulate Foreign Direct Investment - may have been out of date to meet the need of true and meaningful globalization for the 21st century. These IFIs were typically set up to deal with the reconstruction of Europe in the 20th century, in response to the West’s vision of a “New World Order” at that time. Although these institutions have supported ad hoc projects that fall outside the classic meaning of “infrastructures,” they have not formally redefined what their roles are, in terms of the needs for globalization today. Do “infrastructures” and economic reconstruction encompass projects such as the development of stock
exchanges, banking systems, a financial or capital market, tertiary education of the local workforce, or informational technology? Should these be part of nation-building or “infrastructure” as well? These international policy questions remain to be addressed by the community of nations.
CONCLUSION To ascertain the real impact of BOT and international project finance, one must raise the following questions:
• First, who makes money in these BOT structures? Answer: The technology producers and product/ service providers from the developed nations (loan proceeds from IFI-public funding and/or project finance are used to pay them.)
• Second, where does the loan money come from? Answer: The shareholder public of the developed nations. Project financed loans often come from the commercial banks of the developed nations. World Bank funding come from large member states such as the US or the OECD countries in the developed Europe.
• Third, who bears to loss, for example, if a powergeneration plant fails to produce the necessary electricity? Answer: The inhabitants and businesses of the local communities where the faulty infrastructure sits. They will not have the electricity needed and planned for years to come, yet loans must still be paid!
• Fourth, who really pays back those loans? Answer: The inhabitants of the transitional economies must take the loss. If the local “special purpose entity” defaults on a project- financed loan, the assets of the foreign corporate owners are not affected. If a World Bank loan is not paid, the borrowing country is responsible and must design recouping economic policies (even in any international bailout schemes implemented by the International Monetary Fund (IMF) as part of the Bretton Woods monetary regime, if the defaulting sovereign state is a member of the IMF). Ultimately, the people of the local community must belabor to help fulfill those debt-paying policies for their government, and to shoulder the loss of the “special purpose entity” as part of their corporate citizenry.
• Fifth, who ultimately suffers if infrastructure loans are defaulted? Answer: the poor citizens and laborers of the transitional economies, as explained above.
The analysis above leads to the following
observations:
1. Lawmakers and regulators who watch over BOT legal structures must distinguish BOT project participants (the corporations from the private sector that are responsible for building and implementing the BOT project) from BOT project beneficiaries (consumers and businesses of the local community where the contemplated infrastructure is located). These project beneficiaries are typically not represented at the BOT negotiating table, unless the host government is a direct participant in the BOT negotiation and not just a licensing authority. Either as a participant or licensor, the host government must watch out for its citizens’ interest. Corrupt government officials, bad lawmakers, and short-
sighted policymakers directly undermine this representation.
2. Large BOT loans in complex deals, if massively defaulted, potentially can trigger or contribute to regional (and global) economic crises. When this happens, it is the BOT intended beneficiaries that must eventually labor under extreme economic austerity in order to pay the international debts of their countries. In fact, these concerns are not just limited to BOT structures. They exist anytime there is a need to balance the leveraging powers between multinational corporations and the transitional economies in international economic development.
3. Ideally, there should be regional and/or global regulation for international economic development projects, of which BOT deals are only one component. The need for regional and/or global regulatory oversight is integral to globalization and should be the emphasis for policymakers and advocates. For globalization to truly take effect, a regional and/or international regulatory body or legal regime must be established to provide oversight for Foreign Direct Investment (FDI) projects. This means countries must sit down to negotiate and formulate more efficient international economic laws that require, among other things, anti-monopoly measures, and certain mandatory disclosures or transparency in major trans-border economic deals. Project-financed BOT structures typify complex FDI projects, the failure of which can impact the economic stability of countries and regions. The BOT legal regime, therefore, must be part of any “global legalization” or “legal internationalization” movement supporting the new economic order for the 21st century.
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